Attached files

file filename
EX-95 - MINE SAFETY DISCLOSURE - Desert Hawk Gold Corp.f10k2017ex95_deserthawk.htm
EX-32.2 - CERTIFICATION - Desert Hawk Gold Corp.f10k2017ex32-2_deserthawk.htm
EX-32.1 - CERTIFICATION - Desert Hawk Gold Corp.f10k2017ex32-1_deserthawk.htm
EX-31.2 - CERTIFICATION - Desert Hawk Gold Corp.f10k2017ex31-2_deserthawk.htm
EX-31.1 - CERTIFICATION - Desert Hawk Gold Corp.f10k2017ex31-1_deserthawk.htm
EX-10.51 - AGENCY AGREEMENT DATED EFFECTIVE MARCH 29, 2018 BETWEEN THE COMPANY AND H&H META - Desert Hawk Gold Corp.f10k2017ex10-51_deserthawk.htm
EX-10.50 - STOCK PURCHASE AGREEMENT DATED EFFECTIVE FEBRUARY 28, 2018 BY, BETWEEN, AND AMON - Desert Hawk Gold Corp.f10k2017ex10-50_deserthawk.htm
EX-10.49 - AMENDMENT NO. 1 TO 10% SENIOR SECURED CONVERTIBLE PROMISSORY NOTE DATED EFFECTIV - Desert Hawk Gold Corp.f10k2017ex10-49_deserthawk.htm
EX-10.48 - AMENDMENT NO. 1 TO 10% SENIOR SECURED CONVERTIBLE PROMISSORY NOTE DATED EFFECTIV - Desert Hawk Gold Corp.f10k2017ex10-48_deserthawk.htm
EX-10.47 - SUBORDINATION AGREEMENT DATED AUGUST 7, 2017 BY AND AMONG THE COMPANY, PLATINUM - Desert Hawk Gold Corp.f10k2017ex10-47_deserthawk.htm
EX-10.46 - SECURITY AGREEMENT DATED EFFECTIVE AUGUST 7, 2017 BY, BETWEEN, AND AMONG THE COM - Desert Hawk Gold Corp.f10k2017ex10-46_deserthawk.htm
EX-10.45 - 10% SENIOR SECURED CONVERTIBLE PROMISSORY NOTE DATED AUGUST 7, 2017 ISSUED TO IB - Desert Hawk Gold Corp.f10k2017ex10-45_deserthawk.htm
EX-10.44 - 10% SENIOR SECURED CONVERTIBLE PROMISSORY NOTE DATED AUGUST 7, 2017 ISSUED TO WE - Desert Hawk Gold Corp.f10k2017ex10-44_deserthawk.htm
EX-10.43 - NOTE PURCHASE AGREEMENT DATED AUGUST 7, 2017 WITH WEST C STREET, LLC AND IBEARHO - Desert Hawk Gold Corp.f10k2017ex10-43_deserthawk.htm
EX-10.42 - AMENDMENT NO. 1 TO 10% SECURED CONVERTIBLE PROMISSORY NOTE DATED EFFECTIVE FEBRU - Desert Hawk Gold Corp.f10k2017ex10-42_deserthawk.htm
EX-10.41 - AMENDMENT NO. 1 TO 10% SECURED CONVERTIBLE PROMISSORY NOTE DATED EFFECTIVE FEBRU - Desert Hawk Gold Corp.f10k2017ex10-41_deserthawk.htm
EX-10.40 - AMENDMENT TO AMENDED AND RESTATED 15% CONVERTIBLE PROMISSORY NOTE DATED EFFECTIV - Desert Hawk Gold Corp.f10k2017ex10-40_deserthawk.htm
EX-10.39 - AMENDMENT TO AMENDED AND RESTATED 15% CONVERTIBLE PROMISSORY NOTE DATED EFFECTIV - Desert Hawk Gold Corp.f10k2017ex10-39_deserthawk.htm
EX-10.31 - ASSIGNMENT AND ASSUMPTION AGREEMENT DATED FEBRUARY 13, 2018 - Desert Hawk Gold Corp.f10k2017ex10-31_deserthawk.htm
EX-4.2 - 2018 STOCK INCENTIVE PLAN - Desert Hawk Gold Corp.f10k2017ex4-2_deserthawk.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, 2017

 

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 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 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 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, or a smaller reporting company. See 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 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 $3,784,537.

 

The number of shares outstanding of the registrant’s common stock on October 19, 2018, was 20,581,603.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

 

 

 

 

 

Table of Contents

 

PART I   1
ITEM 1. BUSINESS 1
ITEM 1A. RISK FACTORS 5
ITEM 1B. UNRESOLVED STAFF COMMENTS 10
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. MINE SAFETY DISCLOSURES 16
PART II   17
ITEM 5. MARKET FOR Registrant’s COMMON EQUITY, RELATED STOCKHOLDER MATTERS and Issuer Purchases of Equity Securities 17
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 19
ITEM 9A. CONTROLS AND PROCEDURES 19
ITEM 9B. OTHER INFORMATION 20
PART III   21
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 21
ITEM 11. EXECUTIVE COMPENSATION 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 25
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 27
PART IV   28
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES 28

 

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.

 

 

 

 

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, 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 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;
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.

 

 

 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

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, we merged with our 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, 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, we 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, we dissolved our sole subsidiary, Blue Fin Capital, Inc. As a result, we have no subsidiaries.

 

We never successfully generated any revenue and eventually abandoned the mining business, remaining dormant until we recommenced our mining activities and entered the exploration stage on May 1, 2009.

 

During the year ended December 31, 2009, we entered into Joint Venture Agreements with the Clifton Mining Company (“Clifton Mining”), the Woodman Mining Company (“Woodman Mining”) and the Moeller Family Trust for the lease of certain of their property interests in the Gold Hill Mining District of Utah. In 2011, we entered into an agreement with DMRJ Group I, LLC, a Delaware limited liability company (“DMRJ Group”), which has subsequently been amended and eventually terminated by us, which allowed for long-term funding of the Kiewit project and helped to provide cash flow for operations during the period from 2009 until the agreement was assigned, assumed, and terminated by us in March 2018, while the permitting process was ongoing, and to fund operations since that time. 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 completed and revenue from this heap leach operation began in October 2014 with the first sales of gold and silver.

 

Production commenced and revenues of $6,000,000 from sales of gold concentrate have been received through the period ended December 31, 2017. Ongoing undercapitalization has continued to hamper our ability to operate. We were working towards a reorganization and recapitalization with the trustees of the two major funds (Platinum Partners Value Arbitrage Fund L.P., a Delaware limited partnership (“PPVA”) and Platinum Partners Credit Opportunities Master Fund, LP, a Delaware limited partnership (“PPCO”)) and finalized an agreement which closed on March 8, 2018. We have temporarily ceased operations due to this development since third quarter of 2017, and are currently seeking further capitalization to be able to resume production in spring 2019.

 

Acquisition of Utah Mining Claims and Leases

 

Clifton Mining Company and Woodman Mining Company Lease Agreement

 

On July 24, 2009, we entered into a Joint Venture Agreement with the Clifton Mining and Woodman Mining 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. These combined interests included 419 unpatented load and placer mining claims, including an unpatented mill site claim, 38 patented claims, and seven Utah state mineral leases located on state trust lands. Under the terms of the agreement, we paid $250,000 to Clifton Mining on or about July 15, 2009. Additionally, we issued 500,000 shares of our common stock to Clifton Mining for the rights on the Kiewit gold property included in the Joint Venture Agreement.

 

In June 2010, the parties to the Joint Venture Agreement entered into an Amended and Restated Lease and Sublease Agreement effective as of the date of the original Joint Venture Agreement. The Amended and Restated Lease and Sublease Agreement restated and replaced the original Joint Venture Agreement. The amended and restated agreement provides for the lease to us of the patented and unpatented claims, including the mill site, and the sublease of the state mineral leases. The amended agreement also grants to us the right to enter onto the land to conduct our exploration activities, the right to make reasonable use of the surface of the properties for these activities, the right to transport on and across the surface of the properties any mineralized material, and the right to destroy so much of the surface and subsurface as may be reasonably necessary to carry out the purposes of the agreement. The term of the amended agreement is for 20 years from its effective date and for so long as we continue to produce and sell mineralized material or mineral resources from the property, unless sooner terminated as provided in the amended agreement. We do not have the right to assign, sublease or otherwise transfer our interest in the amended agreement without the prior written consent of Clifton Mining as to the properties owned by it and without the prior written consent of Woodman Mining as to the properties owned by it. Nevertheless, we may mortgage or pledge our leasehold interest in the Kiewit Claims and the Cactus Mill Property for purposes of financing exploration, development and mining operations, but we cannot otherwise encumber the property without the written consent of Clifton Mining.

 

Under the terms of the amended and restated agreement we are 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.  We are also required to pay a 6% net smelter return on any production from the Kiewit gold property.  Additionally, if we do not place the Kiewit property, the Clifton Shears-Smelter Tunnel property, and the Cane Springs property into commercial production within a three-year period, we will be required to make annual non-performance payments to Clifton Mining in the amount of $50,000 per location.  

 

On June 30, 2012, we entered into an arrangement with Clifton Mining Company and Woodman Mining to delay certain payments required pursuant to the terms of the amended and restated agreement and to extend the declaration date for claims to be voluntarily released under the agreement.

 

 1 

 

 

The Kiewit property was in production in 2015 and 2016 so the holding fee payment did not apply to this property. Royalty expense of $9,785 was recognized during the year ended December 31, 2017. Royalties were fully paid in 2017.

 

Non-performance payments for the Clifton Shears-Smelter Tunnel property were not made by the due dates in 2015 or 2016. 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 of $128,868 and the $50,000 non-performance payments for each of 2015 and 2016 on the Clifton Shears-Smelter Tunnel property were paid to Clifton Mining, who then acknowledged the cure of default. The penalty payment of $50,000 for 2017 was made on August 15, 2017.

 

Moeller Family Trust Lease Agreement

 

On July 24, 2009, we entered into a Joint Venture Agreement with the Jeneane C. Moeller Family Trust (the “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 properties are known as the Yellow Hammer claims. Under the terms of the agreement, we issued 250,000 shares of our common stock for the rights granted to us in the agreement.

 

In June 2010, the parties to the Joint Venture Agreement entered into an Amended and Restated Lease Agreement effective as of the date of the original Joint Venture Agreement. The Amended and Restated Lease Agreement restated and replaced the original Joint Venture Agreement. The amended and restated agreement provides for the lease to us of the patented Yellow Hammer claims. The amended and restated agreement also grants us the right to enter onto the land to conduct our exploration activities, the right to make reasonable use of the surface of the properties for these activities, the right to transport on and across the surface of the properties any mineralized material, and the right to destroy so much of the surface and subsurface as may be reasonably necessary to carry out the purposes of the agreement. The term of the amended and restated agreement is for 20 years from its effective date and for so long as we continue to produce and sell mineralized material or mineral resources from the property, unless sooner terminated as provided in the amended and restated agreement. We do not have the right to assign, sublease or otherwise transfer our interest in the amended and restated agreement without the prior written consent of the Trust. Nevertheless, we may mortgage or pledge our leasehold interest in the Yellow Hammer claims for purposes of financing exploration, development and mining operations, but we cannot otherwise encumber the property without the written consent of the Trust.

 

A letter of default was received from the Trust in September 2016 demanding the past due non-performance payment for the Yellow Hammer property. The payment was not made and the property was returned to the Trust. The mineral property lease, in the amount of $175,000, less accumulated amortization of $37,214, was recognized as a loss on abandonment in the amount of $137,766 at December 31, 2016. The Yellow Hammer site was reclaimed with completion and acceptance by DOGM, early in 2017.

 

DMRJ Group Investment Agreement

 

On July 14, 2010, we entered into an Investment Agreement (the “Investment Agreement”) with DMRJ Group. Under the terms of the Investment Agreement, DMRJ Group committed to loan us up to $6,500,000 under certain terms and conditions. These terms and conditions have been modified several times over the course of the loan. Initially, these loan advances could only be used by us to pay transaction fees and expenses incurred in connection with the loan transaction, to purchase certain mining equipment, and as working capital to advance our Yellow Hammer and Kiewit mining activities. The maximum amounts originally allocable to our Yellow Hammer and Kiewit projects were $2,500,000 and $2,750,000, respectively, and were subject to meeting certain milestones on the projects. The balance of the funds borrowed from DMRJ Group could be used for capital and operating expenses. Under the original loan agreement, we received five loan advances from DMRJ Group for $500,000 each for an aggregate of $2,500,000, plus an aggregate of $441,176 in prepaid interest paid to DMRJ Group. From the date of the Investment Agreement until termination, we entered into a total of 14 separate amendments to the Investment Agreement which included advances to us totaling an aggregate $14,089,060.

 

Pursuant to a Security Agreement with DMRJ Group dated July 14, 2010 (the “Security Agreement”), we secured the repayment of any advances made by DMRJ Group with all of our assets. As the secured party, DMRJ Group was appointed as attorney in fact to foreclose on and deal with our assets in the event of default.

 

As additional consideration for DMRJ Group entering into the original Investment Agreement with us, we issued 958,033 shares of our Series A Preferred Stock to the lender and entered into a Registration Rights Agreement dated July 14, 2010 (the “Registration Rights Agreement”), to register, either upon demand or by piggyback, the resale of the common shares issuable upon conversion of the Series A shares.

 

In connection with the loan transaction, two of our prior lenders, West C Street, LLC (“West C Street”) and Ibearhouse, LLC (“Ibearhouse”), each of whom had loaned $300,000 to us in 2009, agreed to subordinate their debt to DMRJ Group. In consideration for their agreement to subordinate their loans, we reduced the conversion price of the loans from $1.50 to $0.70 per share. On July 14, 2010, we issued amended and restated promissory notes to West C Street and Ibearhouse reflecting the reduced conversion price and acknowledging the subordination to the DMRJ Group financing.

 

On May 3, 2011, we issued 100,000 shares of our Series A-2 Preferred Stock to DMRJ Group as consideration for entering into the Fourth Amendment to the Investment Agreement.

 

On February 19, 2014, we issued to DMRJ Group 249,603 shares of Series B Preferred Stock as consideration for entering into the Tenth Amendment to the Investment Agreement. Each Series B share is convertible into 100 shares of common stock. We 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.

 

 2 

 

 

On August 31, 2015, we agreed to the terms of the Thirteenth Amendment to the Investment Agreement with DMRJ Group. As part of this amendment, we agreed to an anti-dilution provision to the Certificate of Designations for the Series B Preferred Stock which would allow for the issuance of additional shares of Series B Preferred Stock in the event we issue any Common or Preferred Stock, which would keep the DMRJ Group’s beneficial ownership of the Company the same as it was prior to the issuance. We also amended the Certificate of Designations for the Series B Preferred Stock to allow us to issue up to 550,000 shares of Series B Preferred Stock.

 

As part of the Thirteenth Amendment to the Investment Agreement with DMRJ Group, we were required to issue DMRJ Group 185,194 shares of Series B Preferred Stock.

 

Effective November 30, 2015, to satisfy the requirements of the anti-dilution provision, we also issued to DMRJ Group 9,237 shares of Series B Preferred Stock in relation to the convertible debt common stock issuance.

 

Effective December 22, 2016, we agreed to the terms of the Fourteenth Amendment to the Investment Agreement with DMRJ Group. The amendment provided for an additional term loan advance in the amount of $600,000. As part of the amendment, upon receipt of the entire term loan advance of $600,000, DMRJ Group agreed to transfer to PPCO shares of our Series B Convertible Preferred Stock in the aggregate amount that, when converted, equal twenty 20% of the fully diluted capital stock of the Company. In the event that we paid back the $600,000 by March 22, 2017, PPCO would keep all of the transferred Preferred Stock; however, since we were unable to pay the $600,000 by March 22, 2017, an amount representing one half of the transferred Series B Convertible Preferred Stock (10% of the fully diluted capital stock of the Company) was to be returned to DMRJ Group.

 

On October 14, 2016, we issued 10% Senior Secured Convertible Promissory Notes to Ibearhouse and West C Street in the amount of $125,000 each, which mature on September 30, 2018. Interest was payable on September 30, 2017 and is payable quarterly thereafter. As part of the issuance of these notes, DMRJ Group, PPVA, and PPCO collectively agreed to subordinate to these debt holders their collective collateral interest in the notes, the principal and accrued but unpaid interest on the existing convertible debt and the amounts due to the convertible debt holders under the provisions of the gold loan redemption program.

 

In the third quarter of 2016, control of the management of DMRJ Group was given to court appointed trustees of the two major funds of Platinum Partners, PPVA and PPCO. 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. At the time, DMRJ Group effectively owned 77% of stock of the Company (on a fully diluted basis). Funds in the amount of $944,060 were drawn from the trustees 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. Pursuant to this agreement, all of the debt owed by us to DMRJ Group and its related affiliates was assigned to and was assumed by us and the debt was terminated. All of the equity of the Company owned by DMRJ Group and its related affiliates was returned to us (and subsequently cancelled) in exchange for $625,000. Ibearhouse and West C Street 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 spring of 2019.

 

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 February 2014. Construction at the site was funded with a total of $5,500,000 in loan advances pursuant to the Investment Agreement with DMRJ Group, which was under the budgeted amount of $5,700,000. Revenue from this heap leach operation began in October 2014 with the first sales of gold and silver. Revenues of approximately $6,000,000 have been received by us from sales of gold concentrate through the period ended December 31, 2017. Due to financial constraints, we are currently leaching and processing but not mining or crushing. If funding is secured, we plan to recommence full mining operations and exploration activities in spring 2019.

 

All production functions of the heap leach mining operation and the carbon column process system are performed by us, including mining and crushing. Final metals refining is performed by others at off-site locations.

 

 3 

 

 

Distribution, Sales, and Raw Materials

 

We currently sell our products solely to Asahi through a sales agent. 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 copper, gold 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. As discussed below under Permits, North American Exploration, Inc. and JBR Environmental Consultants, Inc. were retained to assist us in obtaining the necessary mining and environmental permits and clearances. Meeting these regulatory requirements necessitated significant capital outlay. In addition, obtaining these environmental permits does not eliminate liability of the owner and operator of the property for damages that may result from specific operations or from contamination of the environment.

 

Our Cactus Mill pilot plant and the 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 2017 annual maintenance fees and mineral lease fees payable to the BLM on our unpatented claims were $53,771 and this amount was paid in full by the end of 2017. The required affidavit was filed with the Tooele County Recorder on August 21, 2017. 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 have been assessed and are due at December 31, 2107 in the amount of $24,859 for 2017 and $162,581 including interest and penalties for 2016 and prior years, and were payable on November 30 of each year. These amounts have not yet been paid and continue to accrue interest and penalties. We anticipate that the annual maintenance fees and personal property taxes will not significantly increase in 2018 over the 2017 amounts. The property may be subject to tax sale if these amounts are not paid by November 30, 2020 and we could lose the property.

 

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.

 

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 October 23, 2018, we had two full-time and three part-time employees, including our President, Rick Havenstrite, who devotes approximately 90% of his time or 50 hours per week for this business. We also engage Marianne Havenstrite, wife of Rick Havenstrite, on a part-time basis, as our Treasurer and Principal Financial and Accounting Officer. Mr. and Mrs. Havenstrite have accrued all of their wages throughout part of 2012, all of 2013 and the first month of 2014. In 2015, wages for these two were partially paid and partially accrued. Wages in 2016 and 2017 were also accrued and unpaid. At December 31, 2016 and 2017, respectively, accrued officer wages totaled $486,577 and $665,577, respectively. 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.

 

 4 

 

 

ITEM 1A. RISK FACTORS

 

The following risks and uncertainties, together with the other information set forth in this Annual Report on Form 10-K, 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

 

Because of our continued losses, there is substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

 

Our financial statements as of and for the years ended December 31, 2017 and 2016 were prepared assuming that we would continue as a going concern. Our significant cumulative losses from operations as of December 31, 2017, raise substantial doubt about our ability to continue as a going concern. If the going concern assumption were 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. Since December 31, 2017, we have continued to experience losses from operations. We have continued to fund operations through minimal revenues from operations, the sale of equity securities, and issuance of debt. Nevertheless, we will require additional funding to complete much of our planned mining 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.

 

We have debt which is secured by all of our assets. If there is an occurrence of an uncured event of default, the lenders can foreclose on all of our assets, which would make any stock in the Company worthless.

 

We have entered into several secured loan transactions with West C Street and Ibearhouse (as disclosed herein), pursuant to which the outstanding debt was secured by all of our assets. In the event we are unable to make payments, when due, on our secured debt, the lenders may foreclose on all of our assets. In the event the lenders foreclose on our assets, any stock in the Company would have no value. Our ability to make payments on secured debt, when due, will depend upon our ability to make profit from operations and to raise additional funds through equity or debt financings. At the moment, we have no funding commitments and we may not obtain any in the future.

 

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. If that happens, 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.

 

To continue our operations, we will need to obtain additional financing from outside sources.

 

We have no firm commitments or agreements to provide additional funding to have sufficient capital to fund our operations as it is 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.

 

 5 

 

 

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. We do not consider any of these other companies to be our direct competitors. 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 have adopted a Code of Ethics for the review and approval of any transactions that cause a conflict of interest.

 

We do not know if our properties contain any copper, gold, silver, 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, as explained below, which will make our ability to operate profitably more difficult.

 

We are a junior mining company with limited operating mining activities and we may never 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 any potential 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.

 

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. We have already lost money due to the expenses we have incurred in acquiring the rights to explore on our property and starting our exploration and operating activities. 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 and debt.

 

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.

 

 6 

 

 

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 impassible 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.

 

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.

 

Possible amendments to the General Mining Law could make it more difficult or impossible for us to execute our business plan.

 

The United States Congress has considered proposals to amend the General Mining Law of 1872 that would have, among other things, permanently banned the sale of public land for mining. The proposed amendment would have expanded the environmental regulations to which we are subject and would have given Indian tribes the ability to hinder or prohibit mining operations near tribal lands. The proposed amendment would also have imposed a royalty of 4% of gross revenue on new mining operations located on federal public land, which would have applied to part of our property. The proposed amendment would have made it more expensive or perhaps too expensive to recover any otherwise commercially exploitable gold deposits which we may find on our property. While at this time the proposed amendment is no longer pending, this or similar changes to the law in the future could have a significant impact on our business or results of operations.

 

 7 

 

 

Market forces or unforeseen developments may prevent us from obtaining the supplies and equipment 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 and supplies 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 effect 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.

 

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 convertible securities they may hold or 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.

 

 8 

 

 

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 2018 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.

 

Our stock price 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.

 

 9 

 

 

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.

 

Exercise of options or warrants or conversion of convertible notes may have a dilutive effect on our common stock.

 

If the price per share of our common stock at the time of exercise of any options or warrants or conversion of any 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.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Gold Hill Projects

 

Overview

 

We hold leasehold interests within the Gold Hill Mining District in Tooele County, Utah, consisting of 247 unpatented mining claims, of which 246 are lode claims, and one is an unpatented mill site claim. This includes 42 patented claims, and three Utah state mineral leases located on state trust lands, all covering approximately 12 square miles. We also hold two Utah state mineral leases located on state trust lands. We have assembled all our claims and leases in this district to create a sizeable, contiguous property package on which to conduct regional-scale exploration. Therefore, we intend to maintain our leasehold interest in the remaining mining claims for future exploration, if warranted.

 

During the year ended December 31, 2009, we entered into a Joint Venture Agreement with the Trust for the lease of the Trust’s Yellow Hammer property in the Gold Hill Mining District of Utah. Pursuant to the agreement, if we did not place the Yellow Hammer property into commercial production within a three-year period we would be required to make annual penalty payments to the Trust of $50,000. The Yellow Hammer property operated for several months in 2011. Under the terms of the Joint Venture Agreement, we were required to pay a 6% net smelter royalty on the production of base metals and a net smelter royalty on gold and silver based on a sliding scale of between 2% and 15% based on the price of gold and silver, as applicable. There were no sales and no royalty expense on this property in 2017 or in 2016. This property has been fully reclaimed with reclamation approval received by the State of Utah and the property has been released back to the Trust.

 

 10 

 

 

Also, during the year ended December 31, 2009, we entered into a Joint Venture Agreement with Clifton Mining and Woodman Mining for the lease of their property interests in the Gold Hill Mining District of Utah. Under the terms of the agreement, we are 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. We are also required to pay a 6% net smelter return on any production from the Kiewit gold property. Additionally, if we do not place the Kiewit property, the Clifton Shears-Smelter Tunnel property, and the Cane Springs property into commercial production within a three-year period, we will be required to make annual penalty payments to Clifton Mining in the amount of $50,000 per location. The Cane Springs property penalty payment was not made in 2013 and this claim was released back to Clifton Mining at that time. Non-performance payments in the amount of $50,000 per year for the Clifton Shears-Smelter Tunnel property were not made by the due dates in 2015 or 2016 but were later paid (in 2016) for each of the two years for that property. The Kiewit property began production in 2014 and no penalty payments were due on that property for 2015 – 2017.

 

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. We constructed a 750,000 square foot heap leach facility and a carbon column process plant near the Kiewit site to accommodate the disseminated gold material from the Kiewit project. Construction was substantially complete by September 2014. On July 7, 2016, we 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, which is expensed as a financing fee. Total reclamation bonds posted at December 31, 2017 and December 31, 2016 are $753,054 and $752,754, 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.  Subsequent to year end, the Company became aware that the bonding company had inappropriately released the escrowed funds to another unrelated company. On September 28, 2018, the bonding company redeposited the $674,000 in escrow for the benefit of the Company.

 

We have commenced extraction of mineralized material from the Kiewit lode claims and we earned gross revenue in 2017 in the amount of $162,762 with limited production. Royalties and mining severance tax based on production were due to Clifton Mining Company and the State of Utah, respectively, beginning in November 2014 and initial payments have been made. Severance tax and royalties have been paid on revenue through December 2017. Our first metal sales from the Kiewit property occurred in October 2014. Due to ongoing financial problems associated with our lender, DMRJ Group, we suspended operations in the fall of 2017. After terminating our agreement with DMRJ Group in March of 2018, we are working towards restarting operations later in 2018.

 

We do not have any current plans to conduct material exploration activity on the remaining Utah claims until and unless we are able to generate revenue from planned activities on our Kiewit project claims. At this time, we do not consider these additional claims to be material to our current operating plan.

 

Project Location and Access

 

The Gold Hill Mining District is located in the Gold Hill and the Clifton 7½ minute quadrangles in western Utah. 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. Each of the claims and the mill site are accessible by dirt roads maintained year-round by us and Tooele County. Access to the property is maintained all year and we likewise intend to maintain roadways between the mining claims, the mill site and paved roads all year.

 

Mineral extraction activities on the property at this time will be open-pit with heap leach processing. We anticipate conducting underground exploration in the future.

 

History

 

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 reestablished.

 

 11 

 

 

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.

 

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 dissolved and terminated.

 

Climate and Vegetation

 

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 semiarid climate. The area is composed of a highly dissected group of hills of relatively low relief. The elevation of Gold Hill village is 5,321 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.

 

 12 

 

 

Title to the Claims

 

There are significant differences between the ownership rights associated with patented mining claims and those associated with unpatented mining claims. The granting of a patent is a relinquishment by the United States of its ownership of the land patented, and is the origin of private ownership of such land. Thus, the owner of a patented mining claim has a fee simple title to the mining claim so patented. The original locator and each subsequent owner of an unpatented mining claim, on the other hand, has only “possessory” title which is dependent upon maintaining possession and is subject to a paramount title of the United States. A mining claim locator’s possessory right is established by the physical act of “location” of an unpatented mining claim for minerals such as gold and silver on un-appropriated public land that is open to mineral location and remains valid so long as the unpatented mining claim is maintained in compliance with the Mining Law of 1872, as amended, and other federal and state laws and regulations. Such laws and regulations require a mineral discovery, the making of the mining claim on the ground in a specific way, and the making of annual payments to the U.S. Department of the Interior, Bureau of Land Management, referred to herein as the BLM, in order to maintain the unpatented mining claim. Because possessory title is dependent upon the factual basis of these requirements, a determination that appropriate documents have been recorded in the county in which the mining claim is located and filed with the BLM does not ensure valid possessory title.

 

A valid unpatented mining claim may be held indefinitely, and the mineral deposit mined without obtaining a patent from the United States. There is no requirement that royalties be paid to the United States for minerals produced from unpatented mining claims. However, proposals repeatedly have been introduced into Congress that would substantially modify the Mining Law of 1872 which could require, among other things, the payment of royalties to the United States.

 

We believe that we hold valid leasehold interests in all of our Utah mining claims and state leases, in particular, the seven unpatented lode mining claims known as the Kiewit claims, and the unpatented mill site on the Cactus Mill property. Nevertheless, there may exist conflicting interests in these claims. In 1996 Clifton Mining obtained possessory title to the Cactus Mill site under a quitclaim deed from American Consolidated Mining Co., which had previously quitclaimed the site to another entity which recorded the deed after Clifton Mining. Because Utah has a race notice recording statute and the Clifton Mining deed was recorded first, management believes Clifton Mining holds valid possessory title to the site which has been leased to us. In addition, a quitclaim deed recorded in 2009 from International Minerals & Metals Inc. and IMM-Dworkin Holdings, LLC to Clifton Mining references a royalty agreement granting a 0.5% royalty in favor of the grantors over a portion of the claims including the Kiewit claims. No royalty deed has been recorded and management has been unable to locate the royalty deed. Nevertheless, this royalty obligation may exist in favor of the original grantors. Management does not believe that any of the exceptions to clear possessory title to the claims raises a material risk to planned operations and Clifton Mining has agreed to indemnify and hold us harmless from certain potential encumbrances.

 

Glossary

 

Development: A development project is one which is undergoing preparation of an established commercially mineable deposit for its extraction, but which is not yet in production. This stage occurs after completion of a feasibility study.

 

Exploration: An exploration prospect is one which is not in either the development or production stage.

 

Fault: A break in the continuity of a body of rock. It is accompanied by a movement on one side of the break or the other so that what were once parts of one continuous rock stratum or vein are now separated. The amount of displacement of the parts may range from a few inches to thousands of feet.

 

Fold: A curve or bend of a planar structure such as rock strata, bedding planes, foliation, or cleavage.

 

Formation: A distinct layer of sedimentary rock of similar composition.

 

Heap Leach: A mineral processing method involving the crushing and stacking of an ore on an impermeable liner upon which solutions are sprayed that dissolve metals such as gold and copper; the solutions containing the metals are then collected and treated to recover the metals.

 

Mapped or Geological: The recording of geologic information such as the distribution and nature of rock.

 

Mapping: Units and the occurrence of structural features, mineral deposits, and fossil localities.

 

Mineral: A naturally formed chemical element or compound having a definite chemical composition and, usually, a characteristic crystal form.

 

Mineralization: A natural occurrence in rocks or soil of one or more metal yielding minerals.

 

 13 

 

 

Mineralized Material: The term “mineralized material” refers to material that is not included in the reserve as it does not meet all of the criteria for adequate demonstration for economic or legal extraction.

 

Mining: Mining is the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product. Exploration continues during the mining process and, in many cases, mineral reserves are expanded during the life of the mine operations as the exploration potential of the deposit is realized.

 

Production Stage: A “production stage” project is actively engaged in the process of extraction and beneficiation of mineral reserves to produce a marketable metal or mineral product.

 

Sedimentary: Formed by the deposition of sediment.

 

Shear: A form of strain resulting from stresses that cause or tend to cause contiguous parts of a body of rock to slide relatively to each other in a direction parallel to their plane of contact.

 

Vein: A thin, sheet-like crosscutting body of hydrothermal mineralization, principally quartz.

 

Geology

 

Our Gold Hill project is underlain by Carboniferous limestone and shale units of the Ochre Mountain Limestone, Manning Canyon, and Ochre Formations. Two distinctly separate igneous plutons intrude the sediments: a Jurassic granodiorite in the north and an Oliglocene quartz-monzonite in the south. Intense structural preparation is exhibited in different forms throughout the property with extensive primary north south fracturing exhibited in most areas. Considerable east-west fracturing exists in the center of the project area and appears to control and/or host mineral occurrences. Generally, economic mineralization exhibits a close special relation to the Jurassic granodiorite with economic mineralization occurring both along the sediment contacts and the fractures within the intrusive. Nevertheless, there are no proven or probable reserves which would substantiate an established commercially minable deposit for extraction. The close, special relationship of the granodiorite to many of the mineral occurrences suggests it is the primary source of the mineralization. The Nolan Report described several separate faulting, folding, and mineralizing events in the district.

 

The Kiewit occurrence has been characterized as a hydrothermal disseminated gold zone in a highly fractured granodiorite intrusion. A specific horizon or low angle fault structure manifests itself as an anomalous gold blanket within the intrusion. We believe it may be part of an IOGC (Iron Oxide Copper Gold) System.

 

Exploration Activities

 

Systematic exploration is ongoing at the Kiewit site on a limited basis. In addition, several other prospects including Oquirrh Springs the Frankie, the Lucy L and the Rustler have previously been sampled and evaluated. We do not have any current plans to conduct material exploration activities on the remaining Utah claims until and unless we are able to generate revenue from planned activities on our Kiewit project claims.

 

In the Kiewit area, based upon our calculation of mineralized material based on drill results from prior drilling performed by Dumont Nickel Inc. from 2004 to 2006 and recent metallurgical test work by McClellan Laboratories, we concluded that sufficient mineralized material was present to justify removing the material by open pit and processing it by leaching at a facility to be constructed near the Kiewit claims. McClellan Laboratories completed a column leach test which resulted in 70% gold recovery on minus 1/8th material and with modest reagent consumptions due to the nature of the deposit (granodiorite).

 

In 2011 we completed a 43-101 compliant resource calculation for the Kiewit deposit. The report included historical resource estimates as well as a general project summary.

 

Mineralization in the project area is manifested as: contact-metasomatic in and around limestone-granodiorite contacts (skarns), as fissure quartz-carbonate-adularia veins within the intrusive body itself, and as copper-gold replacement deposits within both the limestone and the intrusion. The report concluded that together these styles of mineralization are indicative of epithermal and related porphyry systems. Underlying thrust faults such as the Ochre Mountain thrust fault and the North Pass thrust fault along with numerous Mesazoic cross-cutting low-angle faults would have allowed magmatic or hydrothermal fluids emanating from the intrusion to migrate far from the intrusion and deep into surrounding wall rock. Clastic shale units within the property may have acted to form traps where migrating fluids would have deposited metals. More recent work tends to instead indicate the deposits could be related to an IOGC System.

 

 14 

 

 

Exploration Plans

 

Development of processing activities on the Kiewit Claims was completed in 2014. Set forth below is a brief discussion of the material plans relating to these projects:

 

Kiewit Gold Claims. Based on prior exploration work performed by Dumont Nickel between 2004 and 2006, management believes that mineralized material located on the Kiewit claims is a highly oxidized, highly fractured, highly disseminated and cyanide amenable hydrothermal gold deposit, with very minimal silver occurrences with the gold. Independent metallurgical testing by McClelland Laboratories in Reno, Nevada, has shown recoveries of 70% of gold are achievable with very low reagent consumptions but with the need for very fine crushing. We are mining and crushing material and are using a cyanide heap leach operation to recover gold and silver. Mining, haulage operations, and placement of the material on the leach pad are performed in-house as is crushing. The claims are located approximately 3,000 feet northeast of the leaching facility. Permitting for this project was received in January 2014 and the reclamation bond was posted in February 2014. Development of the heap leach pad and process facility is complete with production of gold realized beginning in fourth quarter of 2014.

 

Kiewit Heap Leach Facility. We process mineralized material extracted from the Kiewit claims through a heap leach facility constructed approximately 3,000 feet to the southwest of the Kiewit claims on patented claims we currently lease. The project included the construction of a 750,000 square foot clay and plastic lined pad and pond and a 650 gallon per minute capacity carbon column recovery facility.

 

Permits

 

Utah regulations stipulate that, as long as any exploration projects on state lands are limited to an area within ten acres, there are no requirements to perform an extensive environmental assessment or compose a Plan of Operation. Larger projects would require a Plan of Operation which would consist of a reclamation plan and bond. The Bureau of Land Management (“BLM”) has shifted some of its land management and authority to state agencies, such as the Utah Division of Oil, Gas and Mining (“DOGM”) which regulates mining activities on state and private lands. DOGM also shares authority with the BLM to stipulate and enforce environmental protection measures which are generally regulated by the Utah Department of Environmental Quality. Our proposed exploration activities are located in the State of Utah and therefore require various filings with DOGM. DOGM requires all large mining operations to have an approved notice of intention and an approved reclamation contract in place and a surety bond posted. All small mining operations and exploration projects must have a complete notice of intention filed with the Division.

 

After retaining North American Exploration, Inc. of Kaysville, Utah and JBR Environmental Consultants, Inc. of Sandy, Utah to assist us we obtained the final permit necessary to commence construction and development for operations. This permit was received in first quarter 2014 and the reclamation bond was posted in February 2014. Development of the project used funding provided by DMRJ Group. The property is located in an 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. Management believes that no previous work by any operator has been contested by regulators or others. On March 20, 2013, the Confederated Tribes of the Goshute Reservation outlined in a letter to the BLM their review of the Kiewit Mine Project Draft Environmental Assessment. The letter alleged the Environmental Assessment is flawed in the development and analysis of alternatives, conformance with applicable BLM land use plans, and disclosure, analysis and mitigation of impacts on cultural resources, Native American values and many other environmental resources. On January 6, 2014 the permit was issued by the BLM and on February 6, 2014 the Tribes filed an appeal to the issuance of the permit. The appeal remains in place but a request for a stay was denied.

 

Set forth below is a summary of the status of the permitting process for the various segments of the project:

 

Cactus Mill Site: We currently hold a Large Mining Operations Permit from DOGM for the pilot plant which allows flotation and gravity concentration. This permit was granted in October 1995 to Ivanhoe Joint Venture and was ultimately assigned to us on April 6, 2009. We have also entered into a Reclamation Contract with the Division which was originally effective August 9, 2002 and transferred to us on April 6, 2010. We have also posted a reclamation bond in the amount of $42,802 for this project with DOGM. Mineralized material for this pilot plant was generated exclusively from the Yellow Hammer claims under the above–referenced Small Mining Operations Permit. Operations at this plant are currently suspended. This mill is suitable for processing of other ores in the district including those of the Clifton Shears-Smelter Tunnel property.

 

Kiewit Project: This deposit exists entirely on BLM unpatented mining claims from which an environmental assessment was previously completed by Dumont Nickel, a predecessor operator, on the affected area. The heap leach pad and process area are located on patented mining claims approximately 3,000 feet to the southwest of the Kiewit claims.

 

 15 

 

 

In February 2010 we filed an application with DOGM 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 and the approval is currently being appealed, as indicated above. 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 (“NEPA”). 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. The bond has since been replaced with a surety bond in the same amount, a condition of which was the deposit of $674,000 (50% of the bond amount) into escrow with the bonding company.

 

Yellow Hammer Small Mining Operations Permit: This permit was absorbed into the new Kiewit Large Mine permit.

 

Yellow Hammer Exploration: This permit was absorbed into the Kiewit Large Mine permit.

 

Kiewit Exploration Permit: This permit was originally transferred from Dumont Nickel. It covers approximately 1,500 acres around the Kiewit pit. A $27,120 bond is in place to cover existing disturbance.

 

Water and Power

 

Pursuant to our lease agreement with Clifton Mining, we have access to Cane Springs, a natural flowing spring approximately 1,000 feet southwest of the Cactus Mill site, as well as the Cane Springs mine shaft located approximately ¼ mile south of the Cactus Mill. We have reconstructed pipe lines from Cane Springs and the Cane Springs shaft to the Cactus Mill pilot plant. Management believes the water from these two sources will be sufficient to operate the pilot plant and limited operations at the Kiewit heap leach, if needed. We have been granted a one cubic foot per second water right from the Utah Division of Water Rights to provide water to the proposed Kiewit heap leach facility, which management believes will be sufficient to operate the proposed facility. We have constructed a well adjacent to the facility to provide this water. We are exploring additional alternatives for power to the property.

 

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 $1,000. 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. Because of limited cash resources, these rents accrued in 2013 and the first two months of 2014 rather than being paid. Beginning March of 2014 through December 31, 2017, the rents were paid as charged with the exception of four months. Total accrued and unpaid rent for office space in Reno, Nevada at December 31, 2017 is $16,750, which includes $3,000 in unpaid rent from 2016 and $13,750 due from prior years.

 

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.

 

ITEM 3. LEGAL PROCEEDINGS

 

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.

 

 16 

 

 

PART II

 

ITEM 5. MARKET FOR Registrant’s COMMON EQUITY, RELATED STOCKHOLDER MATTERS and Issuer Purchases of Equity Securities

 

Market Information

 

There is currently no public market for our common stock and it is not currently quoted or traded on any established public trading market.

 

Unregistered Sales of Securities

 

On August 7, 2017, we entered into 10% Senior Secured Convertible Promissory Notes with each of West C Street and Ibearhouse in the principal amounts of $250,000. The notes are senior and secured by all of the assets of the Company. As a provision of these notes, the due date of all three notes, for each debt holder, and the accrued interest for each was extended to May 31, 2019. In addition, the interest rate for the Amended and Restated 15% Convertible Promissory Notes entered into on July 14, 2012 was reduced from 15% to 10%.

 

Effective November 30, 2017, pursuant to the terms of the amendments to the Amended and Restated 15% Convertible Promissory Notes entered into on July 14, 2012, as corrected, between the Company and West C Street and Ibearhouse, we extended the maturity date of the notes to November 30, 2018 through the issuance of 150,000 shares of our Common Stock to each of the note holders.

 

Sales of all of these securities were made pursuant to Rule 506(b) of Regulation D promulgated by the SEC under the Act. Management reasonably believed that at the time of sale each investor was an “accredited investor” as defined in Rule 501(a) of Regulation D. Each investor acknowledged appropriate investment representations with respect to the sales of the notes and shares. Each investor had a preexisting, substantive relationship with us prior to each of the transactions and did not purchase the notes or shares from us as a result of any general solicitation. Each investor was afforded the opportunity to ask questions of our management and to receive answers concerning the terms and conditions of the investment. No selling commissions or other remuneration was paid in connection with the sales of these securities.

 

Holders

 

At September 12, 2018, we had 645 holders of our common stock. The number of record holders was determined from the records of our transfer agent and our internal records and does not include beneficial owners of our common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. We have appointed Pacific Stock Transfer Co., 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. We do not anticipate paying any cash dividends to stockholders of our common stock in the foreseeable future. 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.

 

 17 

 

 

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 247 unpatented mining claims, including an unpatented mill site claim, 42 patented claims; and two Utah state mineral leases located on state trust lands, all covering approximately 12 square miles. From these claims we have centered our exploration activities on the Kiewit, the Rainbow Hill, the Lucy L, Oquirrh Springs, the Rustler and the Frankie sites. We are currently seeking funding to re-commence our mining operations.

 

Results of Operations for the Years Ended December 31, 2017 and 2016

 

During the years ended December 31, 2017 and 2016, we had net losses of $3,960,634 and $4,054,273, respectively. This represents a decreased net loss of $93,639 for the year ended December 31, 2017. The decrease in net loss for the year ended December 31, 2017 is generally attributable to a reduction in operations due to insufficient working capital.

 

Liquidity and Cash Flow

 

Net cash used by operating activities was $1,074,188 during the year ended December 31, 2017, compared with $1,364,261 cash used during the year ended December 31, 2016. The decrease in cash used by operating activities of $290,073 is primarily attributable to the reduction in operating revenues and a reduction in inventories through sales.

 

Net cash used by investing activities was $30,976 during the year ended December 31, 2017, compared to cash provided by investing activities of $613,620 during the year ended December 31, 2016. The decrease in cash of $644,596 used by investing activities is attributable to the refund received in 2016 when the cash reclamation bond was partially traded for a surety bond. Net cash provided by financing activities was $451,432 during the year ended December 31, 2017, compared with $1,276,076 during the year ended December 31, 2016. This decrease of $824,644 is primarily a result of decreased borrowing from DMRJ Group.

 

As a result, cash decreased by $653,732 during the year ended December 31, 2017, leaving us a cash balance of $4,212 as of December 31, 2017, as compared to an ending cash balance of $657,944 as of December 31, 2016.

 

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.

 

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. We record ore on leach pad, solution in carbon columns in process and gold doré (fully processed gold held at a refinery), 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. 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 December 31, 2017, we had a limited operating history and actual results only over a short period of time. Due to this, estimates of recoverable gold are based primarily on initial tests with limited refinements based on actual results.

 

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 18 months.

 

 18 

 

 

Mineral Exploration and Development Costs

 

We account for mineral exploration costs in accordance with ASC 932 Extractive Activities. All exploration expenditures are expensed as incurred, previously capitalized costs are expensed in the period the property is abandoned. Expenditures to explore new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a units-of-production basis over proven and probable reserves. Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines are capitalized and will be amortized on units of production basis over proven and probable reserves. We do not have proven and probable reserves at this time.

 

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.

 

Revenue

 

Revenue is recognized when title and risk of ownership of metals or metal bearing concentrate have passed and collection is reasonably assured. Revenue from the sale of metals may be subject to adjustment upon final settlement of estimated metal prices, weights and assays, and are recorded as adjustments to revenue in the period of final settlement of prices, weights and assays; such adjustments are typically not material in relation to the initial invoice amounts.

 

Reclamation and Remediation

 

Remediation, reclamation and mine closure costs are based principally on legal and regulatory requirements. Management estimates costs associated with reclamation of mining properties as well as remediation costs for inactive properties. 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. In calculating the present value of the asset retirement obligation, we used a credit adjusted risk-free interest rate of 8% - 10% and projected mine lives of 5 - 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. At December 31, 2017 and 2016, Asset Retirement Obligations total $1,046,621 and $974,109, respectively, for all of our Gold Hill properties.

 

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.

 

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, 2017, 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. However, due to financial considerations, we were unable to timely file this annual report on Form 10-K 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 SEC rules and forms.

 

 19 

 

 

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, 2017, 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 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.

 

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, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

On March 13, 2017, John P. Ryan resigned as Chief Financial Officer of the Company. In connection with the resignation of Mr. Ryan, there were no disagreements with the Company, known to an executive officer of the Company, on any matter relating to the Company’s operations, policies or practices.

 

Effective November 30, 2017, pursuant to the terms of the amendments to the Amended and Restated 15% Convertible Promissory Notes entered into on July 14, 2012, as corrected, between the Company and West C Street and Ibearhouse, we extended the maturity date of the notes to November 30, 2018 through the issuance of 150,000 shares of our Common Stock to each of the note holders.

 

 20 

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Current Management

 

The following table sets forth as of October 1, 2018 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.

 

Name   Age   Positions  

Director

Since

  Employment Background
Howard Crosby   65   Director, Chairman   2016   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., an SEC reporting issuer. 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   60   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 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, a 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 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, as the mine manager and superintendent on the Alta Gold Buckskin Mine and the Robison Mine in Nevada; and from 1980 until 1983 he was employed by Utah International, a large diversified mining company, as 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.
                 
John P. Ryan   56   Director   2017   Mr. Ryan has been an active entrepreneur in the resources sector for over twenty years. He has extensive experience in the natural resource sector having served as an officer and/or director of companies such as Cadence Resources. High Plains Uranium, U.S. Silver Corporation, and Western Goldfields, Inc. He is also a director of Mineral Mountain Mining and Milling Company which is a reporting company with the SEC.  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 as detailed further in this filing.  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.

 

 21 

 

 

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, 2017, 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

 

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 PPVA and PPCO. On December 19th, 2016, the SEC filed the complaint against defendants Platinum Management, PPCO, and management of the DMRJ Group, charging the defendants with a complex, multi-pronged, fraudulent scheme to inflate returns to investors, and cover up massive losses and liquidity problems. DMRJ Group owned approximately 77% of stock of the Company (on a fully diluted basis).

 

We were working towards a reorganization and recapitalization with the trustees of the two funds and finalized an agreement which closed on March 8, 2018. Pursuant to this agreement, all of the debt owed by us to DMRJ Group and its related affiliates was assigned to and was assumed by us and the debt was terminated. All of the equity of the Company owned by DMRJ Group and its related affiliates was returned to us (and subsequently cancelled) in exchange for $625,000. Ibearhouse and West C Street 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.

 

John P. Ryan was formerly the Chief Executive Officer and a Director of Independence Resources Plc, a United Kingdom Plc. Mr. Ryan served in these capacities from May 2009 until November 2016. Independence Resources had been inactive since 2013 and has been low on funding. Although Independence Resources filed an audit report for the period ended December 31, 2013, the company had insufficient funds to pay its auditor for the audit that had been completed in 2013. As a result, in June, 2015, Independence Resources was unable to complete and file its audit that was due for December 31, 2014. In May, 2016, Mr. Ryan was personally prosecuted in the United Kingdom for failure to file the report for the period ended December 31, 2014. Mr. Ryan pled guilty to the charge, as there was no defense since, in fact, the statements had not been filed. In January, 2017, after having raised sufficient funds to pay the auditor its past balance owing and a retainer for additional work, Independence Resources was able to file the annual audited financial statements for the periods ended December 31, 2014 and December 31, 2015. Because Mr. Ryan left Independence prior to the end of 2016 Mr. Ryan believes he has no further personal responsibility for preparation of any additional financial reports of Independence as required by United Kingdom law.

 

Mr. Ryan joined the Board of Directors and assumed the offices of President and CEO of Sterling Mining Company in January, 2009. Sterling Mining, at that time, was in severe financial distress. Mr. Ryan had joined Sterling Mining with the intent to turn Sterling around and keep it from having to file a bankruptcy petition; however, severe pressure from existing creditors including a receivership petition in Idaho State Court led Sterling Mining to file Chapter 11 bankruptcy in March, 2009. Subsequently Mr. Ryan assisted the newly appointed Debtor-in-Possession Trustee with finding a buyer for the Sunshine Mine, the main asset of Sterling Mining, which resulted in full or substantial payments to all creditors and former employees of Sterling.

 

Mr. Ryan joined Premium Exploration, Inc. in September, 2013. At the time Mr. Ryan joined Premium Exploration, it was in financial distress. Premium Exploration filed a Chapter 11 bankruptcy in August, 2015. Mr. Ryan was successful as a Debtor in Possession Trustee in finding a buyer for a portion of the assets of Premium which resulted in the case being dismissed from bankruptcy in April, 2016.

 

Mr. Ryan joined the board of directors of Northstar Offshore Group LLC in September, 2016. At the time of joining the Northstar Board, Northstar was in distress and was in an involuntary bankruptcy which had been pursued by two of the primary creditors of the company. Northstar filed a voluntary Chapter 11 reorganization in October, 2016 and undertook an asset sale and successful reorganization which was confirmed by the bankruptcy court in August, 2017.

 

 22 

 

 

Other than the disclosure above, 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 our directors or executive officers.

 

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.

 

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 officers for all services rendered in all capacities to our company for the years ended December 31, 2017 and 2016:

 

SUMMARY COMPENSATION TABLE

 

Name & Principal Position  Year 

Salary and Fees

$

  

All Other Compensation

$

  

Total

$

 
Howard Crosby, former CEO(1)  2017   60,000    -0-    60,000 
   2016   20,000    -0-    20,000 
Rick Havenstrite, President and CEO  2017   120,000(2)   12,000(3)   132,000 
   2016   120,000(2)   12,000(3)   132,000 

 

(1) Mr. Crosby served as our CEO until April 6, 2017, upon which time he was replaced by Rick Havenstrite.
(2) Mr. Havenstrite’s 2017 compensation consists of $120,000 in base salary (of which $120,000 was accrued and unpaid, other than $1,000, as of December 31, 2017). Mr. Havenstrite’s 2016 compensation consisted of $120,000 in base salary, which was also accrued and unpaid.
(3) Mr. Havenstrite received $12,000 in 2017 and 2016, respectively (paid to RMH Overhead, a company owned by Mr. Havenstrite), as rent paid by us for office space in Reno, Nevada. The total accrued and unpaid rent for office space at December 31, 2017 for RMH Overhead (Mr. Havenstrite) is $16,750.

 

In September 2010 we entered into an employment agreement with Mr. Havenstrite as President of our company. The term of the agreement is for four years, expiring September 1, 2014, with automatic one-year extensions unless notice is given by either party. 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). In the event we terminate the agreement without cause or if the agreement is constructively terminated by us, we have agreed to pay Mr. Havenstrite a severance package equal to three times the initial base salary if such termination occurs on or before August 31, 2011, and one and one-half times the largest annual base salary plus the largest annual performance compensation received by Mr. Havenstrite under the Agreement if such termination occurs after August 31, 2011, payable 75% within 30 days and the balance within 30 days of the first anniversary of the termination.

 

 23 

 

 

During 2017 and 2016 we paid Mr. Havenstrite a salary of $10,000 per month, all except $1,000 of which was accrued rather than paid. At December 31, 2017, accrued wages payable to Mr. Havenstrite are $491,692.

 

We have agreed to pay Mr. Crosby $5,000 per month for director fees, all of which has been accrued and unpaid.

 

Equity Awards

 

As of December 31, 2017, there were no unexercised options, stock that had not vested, or equity incentive plan awards for the named executive officers.

 

Compensation of Directors

 

During the year ended December 31, 2017, no compensation was paid to our directors, excluding the named executive officer whose total compensation is set forth in the Summary Compensation Table above.

 

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 September 12, 2018, 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
   5,162,066(2)   23.92%
Howard Crosby
1290 Holcomb Ave.
Reno, NV 89502
   1,000,000(3)   4.63%
John P. Ryan
1290 Holcomb Ave.
Reno, NV 89502
   600,000(4)   3.74%
Executive Officers and Directors as a Group
(3 Persons)
   6,962,066    29.76%
Eric Moe
8305 N. Colton Place
Spokane, WA 99208
   1,080,400    5.25%
H&H Metals Corp.
509 Madison Ave., Ste. 1902
New York City, NY 10022
   1,250,000    6.07%

Ibearhouse, LLC

Kelley Price

7806 NE 10th Street

Medina, WA 98039

   5,293,949(5)   23.78%

West C Street, LLC

Richard Meadows

21838 NE 102nd Street

Redmond, WA 98053

   5,293,949(6)   23.78%

 

(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 September 12, 2018, 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. At September 12, 2018, we had 20,581,603 shares outstanding.

 

 24 

 

 

(2)Includes 25,000 shares held by Mr. Havenstrite’s wife, Marianne Havenstrite. Also includes options to purchase 1,000,000 shares of the Company’s Common Stock exercisable at $0.40 per share which terminates February 23, 2023.
  
(3)Includes options to purchase 1,000,000 shares of the Company’s Common Stock exercisable at $0.40 per share which terminates February 23, 2023.
  
(4)Includes options to purchase 200,000 shares of the Company’s Common Stock exercisable at $0.40 per share which terminates February 23, 2023.
  
(5)Kelley Price has sole voting and investment power over these shares. Includes 1,683,596 shares issuable upon the conversion of outstanding notes.
  
(6)Richard Meadows has sole voting and investment power over these shares. Includes 1,683,596 shares issuable upon the conversion of outstanding notes.

 

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

 

As of December 31, 2017, there are no equity Compensation Plans in effect.

 

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”), an agreement was made with the Note Holders to begin paying the monthly interest pursuant to the Notes in stock rather than cash. 150,000 shares were issued 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 two, one-year periods. Effective December 1, 2014, interest is to be paid in cash and is currently accruing. Accrued interest payable for the Notes at December 31, 2017 is $277,502. Per the terms of these notes, interest on these notes is not convertible.

 

Effective February 28, 2018, we entered into amendments to the Notes pursuant to which no interest is payable until May 31, 2019, 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.

 

Effective February 28, 2018, we entered into a Stock Purchase Agreement (the “SPA”) with Ibearhouse and West C Street pursuant to which we sold 2,250,000 shares of our Common Stock to each of Ibearhouse and West C Street for an aggregate of $625,000. In addition to the payment of an aggregate of $625,000, the purchasers each waived conversion rights on the Notes so that the Notes are no longer convertible into shares of our Common Stock. In addition, the purchasers each waived acceleration of the Notes until May 31, 2019.

 

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 are 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. Accrued interest payable for the Notes at December 31, 2017 is $30,342. Per the terms of the notes, interest on these notes is convertible to common stock.

 

On August 7, 2017, the each of 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. Accrued interest payable for the Notes at December 31, 2017 is $9,592. Per the terms of the notes, interest on these notes is convertible to common stock.

 

 25 

 

 

On November 15, 2016, the Company entered into 10% Promissory Note with West C Street in the principal amount of $25,000. All unpaid principal, together with the balance of unpaid and accrued interest and other amounts payable under the note were due and payable on or before December 31, 2016. On January 18, 2017, the principal and interest on the note was paid in full.

 

On June 20, 2016, the Company 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 the Company. The terms of the lease are 24 monthly payments of $9,212.46 which include interest at 15%. At the conclusion of the lease term, the equipment may be purchased by the Company for a nominal fee.

 

On July 14, 2010, we entered into an Investment Agreement with DMRJ Group under which they agreed to provide loans of up to $6,500,000. This agreement has been amended several times and was eventually terminated. As part of these agreements, DMRJ Group had the right to place two individuals on our Board of Directors and, as a result of the issuance of Preferred Shares to DMRJ Group, DMRJ Group could have controlled a majority of the outstanding votes of the Company.

 

Effective December 22, 2016, we agreed to the terms of the Fourteenth Amendment to the Investment Agreement with DMRJ Group. The Amendment provided for an additional term loan advance in the amount of $600,000. As part of the Amendment, upon receipt of the entire term loan advance of $600,000, DMRJ Group agreed to transfer to Platinum Partners Credit Opportunities Master Fund, LP, a Delaware limited partnership (“PPCO”), shares of Company’s Series B Convertible Preferred Stock in the aggregate amount that, when converted, equal to 20% of the fully diluted capital stock of the Company. In the event that we did not pay back the $600,000 by March 22, 2017, PPCO would keep all of the Preferred Stock. The loan advance was not repaid so PPCO retained 20% of the fully diluted capital stock of the Company.

 

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 SEC filed the complaint against defendants Platinum Management, PPCO, 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 owned 77% of stock of the Company (on a fully diluted basis). Funds in the amount of $944,060 were drawn from the trustees 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. Pursuant to this agreement, all of the debt owed by us to DMRJ Group and its related affiliates was assigned to and was assumed by us and the debt was terminated. All of the equity of the Company owned by DMRJ Group and its related affiliates was returned to us (and subsequently cancelled) in exchange for $625,000. Ibearhouse and West C Street 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.

 

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.

 

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 and those directors serving on our committees. 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.

 

 26 

 

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

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, 2017 and 2016 by our independent registered public accounting firms are as follows:

 

Fiscal Year  Amount 
2017  $34,703 
2016  $33,343 

 

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 such fees.

 

Tax fees are comprised of amounts billed for the preparation of our federal and state income tax returns. In 2017 and 2016, we were billed $-0- and $-0- for income tax preparation work for federal and state tax returns for 2014. Income tax returns have not yet been filed for 2014, 2015, 2016 or 2017. 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 2017 and 2016 we were not billed for other services.

 

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.

 

 27 

 

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES

 

The following exhibits are included with this report:

 

        Incorporated by Reference    
Exhibit Number   Exhibit Description   Form   File No.   Exhibit   Filing Date   Filed Herewith
2.1 & 10.1   Agreement and Plan of Merger dated December 30, 2009, with Blue Fin Capital, Inc.   S-1   333-169701   2.1/10.1   9/30/10    
3.1   Amended and Restated Articles of Incorporation   S-1   333-169701   3.1   9/30/10    
3.2   Certificate of Designation for Series A Preferred Stock   S-1   333-169701   3.2   9/30/10    
3.3   Amendment to Certificate of Designation for Series A Preferred Stock   8-K   333-169701   4.2   2/25/14    
3.4   Certificate of Designations for Series A-1 and A-2 Preferred Stock   8-K   333-169701   3.1   5/9/11    
3.5   Amendment to Certificate of Designations for Series A-1 and A-2 Preferred Stock   8-K   333-169701   4.3   2/25/14    
3.6   Certificate of Designations for Series B Preferred Stock   8-K   333-169701   4.1   2/25/14    
3.7   Amendment No. 1 to the Certificate of Designations for the Series B Preferred Stock   8-K   333-169701   3.1   9/16/15    
3.8   Amended and Restated Bylaws dated May 3, 2011   8-K   333-169701   3.2   5/9/11    
4.1   Registration Rights Agreement dated May 3, 2011   8-K   333-169701   4.1   5/9/11    
4.2   2018 Stock Incentive Plan                   X
10.2   Amended and Restated Lease and Sublease Agreement effective July 24, 2009, with Clifton Mining Company and Woodman Mining Company   S-1   333-169701   10.3   9/30/10    
10.3   Contract Assignment and Surety Transfer Agreement dated September 30, 2009, with Clifton Mining Company   S-1   333-169701   10.4   9/30/10    
10.4   Amended and Restated Lease Agreement effective July 24, 2009, with Moeller Family Trust   S-1   333-169701   10.5   9/30/10    
10.5   Security Agreement dated July 14, 2010, with DMRJ Group I, LLC   S-1   333-169701   10.8   9/30/10    
10.6   Amended Loan Agreement dated July 14, 2010, with West C Street LLC and Ibearhouse, LLC   S-1   333-169701   10.11   9/30/10    
10.7   Amended and Restated 15% Convertible Promissory Note dated July 14, 2010 with Ibearhouse, LLC, as corrected   8-K   333-169701   99.2   12/28/12    
10.8   Ibearhouse Amendment to Amended and Restated Convertible Promissory Note, as corrected   8-K   333-169701   99.2   1/8/14    
10.9   Share Conversion Agreement dated September 11, 2013   10-K   333-169701   10.15   4/16/13    
10.10   Employment Agreement dated September 1, 2010, with Rick Havenstrite*   S-1   333-169701   10.15   9/30/10    
10.11   Consulting Agreement dated December 28, 2009 with Stuart Havenstrite   S-1   333-169701   10.17   9/30/10    
10.12   Investment Agreement dated July 14, 2010, with DMRJ Group I, LLC   S-1A   333-169701   10.6   11/12/10    
10.13   Rental Agreement effective October 1, 2009, with RMH Overhead, LLC   S-1A   333-169701   10.19   11/12/10    
10.14   Amendment dated November 8, 2010 to Investment Agreement dated July 14, 2010, with DMRJ Group I, LLC   S-1A   333-169701   10.20   11/12/10    
10.15   Second Amendment to Investment Agreement dated February 25, 2011   8-K   333-169701   99.1   3/3/11    
10.15   Forbearance Agreement dated March 6, 2011   8-K   333-169701   99.2   3/15/11    
10.17   Third Amendment to Investment Agreement dated March 11, 2011   8-K   333-169701   99.1   3/15/11    
10.18   Fourth Amendment to Investment Agreement dated May 3, 2011   8-K   333-169701   99.1   5/9/11    
10.19   Forbearance Agreement dated June 29, 2012   10-K   333-169701   10.30   4/16/13    
10.20   Fifth Amendment to Investment Agreement dated October 16, 2012   8-K   333-169701   99.1   10/18/12    
10.21   Sixth Amendment to Investment Agreement dated January 29, 2013   8-K   333-169701   99.1   2/7/13    
10.22   Seventh Amendment to Investment Agreement   10-K   333-169701   10.32   4/14/14    
10.23   Eighth Amendment to Investment Agreement   8-K   333-169701   99.1   7/30/13    
10.24   Ninth Amendment dated October 24, 2013 to Investment Agreement   10-Q   333-169701   10.1   11/14/13    
10.25   Tenth Amendment to Investment Agreement, including Note   8-K   333-169701   99.1   2/25/14    
10.26   Addendum to Tenth Amendment to Investment Agreement, dated January 16, 2015   8-K   333-169701   99.1   1/22/15    

 

 28 

 

 

        Incorporated by Reference    
Exhibit Number   Exhibit Description   Form   File No.   Exhibit   Filing Date   Filed Herewith
10.27   Eleventh Amendment to Investment Agreement, dated March 17, 2015   8-K   333-169701   99.1   3/20/15    
10.28   Twelfth Amendment to Investment Agreement, dated June 5, 2015   8-K   333-169701   99.1   6/11/15    
10.29   Thirteenth Amendment to Investment Agreement effective August 31, 2015   8-K   333-169701   99.1   9/16/15    
10.30   Fourteenth Amendment to Investment Agreement effective December 22, 2016   10-K   333-169701   10.30   6/29/18    
10.31   Assignment and Assumption Agreement dated February 13, 2018                   X
10.32   10% Secured Convertible Promissory Note with West C. Street LLC dated October 14, 2016   10-K   333-169701   10.31   6/29/18    
10.33   10% Secured Convertible Promissory Note with Ibearhouse, LLC dated October 14, 2016   10-K   333-169701   10.32   6/29/18    
10.34   Note Purchase Agreement dated October 14, 2016 with West C. Street LLC and Ibearhouse, LLC   10-K   333-169701   10.33   6/29/18    
10.35   Security Agreement dated October 14, 2016 with West C. Street LLC and Ibearhouse, LLC   10-K   333-169701   10.34   6/29/18    
10.36   Note Purchase Agreement dated October 14, 2016 with West C. Street LLC and Ibearhouse, LLC   10-K   333-169701   10.33   6/29/18    
10.37   10% Promissory Note with West C. Street LLC dated November 15, 2016   10-K   333-169701   10.35   6/29/18    
10.38   Equipment Lease Agreement dated June 20, 2016 with RMH Overhead, LLC   10-K   333-169701   10.36   6/29/18    
10.39   Amendment to Amended and Restated 15% Convertible Promissory Note dated effective February 28, 2018 with Ibearhouse, LLC                   X
10.40   Amendment to Amended and Restated 15% Convertible Promissory Note dated effective February 28, 2018 with West C Street, LLC                   X
10.41   Amendment No. 1 to 10% Secured Convertible Promissory Note dated effective February 28, 2018 with Ibearhouse, LLC                   X
10.42   Amendment No. 1 to 10% Secured Convertible Promissory Note dated effective February 28, 2018 with West C Street, LLC                   X
10.43   Note Purchase Agreement dated August 7, 2017 with West C Street, LLC and Ibearhouse, LLC                   X
10.44   10% Senior Secured Convertible Promissory Note dated August 7, 2017 issued to West C Street, LLC                   X
10.45   10% Senior Secured Convertible Promissory Note dated August 7, 2017 issued to Ibearhouse, LLC                   X
10.46   Security Agreement dated effective August 7, 2017 by, between, and among the Company, West C Street, LLC and Ibearhouse, LLC                   X
10.47   Subordination Agreement dated August 7, 2017 by and among the Company, Platinum Partners Credit Opportunities Master Fund, LP, Ibearhouse, LLC, and West C Street, LLC                   X
10.48   Amendment No. 1 to 10% Senior Secured Convertible Promissory Note dated effective February 28, 2018 with West C Street, LLC                   X

 

 29 

 

 

        Incorporated by Reference    
Exhibit Number   Exhibit Description   Form   File No.   Exhibit   Filing Date   Filed Herewith
10.49   Amendment No. 1 to 10% Senior Secured Convertible Promissory Note dated effective February 28, 2018 with Ibearhouse, LLC                   X
10.50   Stock Purchase Agreement dated effective February 28, 2018 by, between, and among Ibearhouse, LLC and West C Street, LLC                   X
10.51   Agency Agreement dated effective March 29, 2018 between the Company and H&H Metals Corp.                   X
14.1   Code of Ethics adopted on March 21, 2011   10-K   333-169701   14.1   4/5/12    
31.1   Rule 15d-14(a) Certification by Principal Executive Officer                   X
31.2   Rule 15d-14(a) Certification by Principal Financial Officer                   X
32.1   Section 1350 Certification of Principal Executive Officer                   X
32.2   Section 1350 Certification of Principal Financial Officer                   X
95   Mine Safety Disclosure                   X
101.INS   XBRL Instance Document                   X
101.SCH   XBRL Taxonomy Extension Schema Document                   X
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document                   X
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document                   X
101.LAB   XBRL Taxonomy Extension Label Linkbase Document                   X
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document                   X

 

*Management contract, or compensatory plan or arrangement, required to be filed as an exhibit.

 

Financial Statements Index   Page
     
Report of Independent Registered Public Accounting firm   F-1
Balance Sheets, December 31, 2017 and 2016   F-2
Statements of Operations, for the years ended December 31, 2017 and 2016   F-3
Statements of Stockholders’ Equity (Deficit), for the years ended December 31, 2017 and 2016   F-4
Statements of Cash Flows, for the years ended December 31, 2017 and 2016   F-5
Notes to Financial Statements, December 31, 2017 and 2016   F-6

 

ITEM 16. FORM 10-K SUMMARY

 

None.

 

[SIGNATURE PAGE FOLLOWS]

 

 30 

 

 

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: October 25, 2018 By: /s/ Rick Havenstrite
    Rick Havenstrite, Chief Executive Officer and Principal Executive Officer
     
Date: October 25, 2018 By: /s/ Marianne Havenstrite
    Marianne Havenstrite, Treasurer and Principal Financial and Accounting 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/ Rick Havenstrite

  President, CEO, and Director   October 25, 2018
Rick Havenstrite        
         

/s/ John P. Ryan

  Director   October 25, 2018
John P. Ryan        

 

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, 2017.

 

 31 

 

 

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, 2017 and 2016, the related statements of operations, changes in stockholders’ (deficit) 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, 2017 and 2016, 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 minimal revenues, negative working capital and an accumulated deficit. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are 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 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.

 

/s/ DeCoria, Maichel & Teague, P.S.  
 
DeCoria, Maichel & Teague, P.S.
We have served as the Company’s independent auditor since 2011
Spokane, Washington
October 18, 2018

 

 F-1 

 

 

DESERT HAWK GOLD CORP

BALANCE SHEETS

 

 

   December 31,   December 31, 
   2017   2016 
ASSETS        
CURRENT ASSETS        
Cash  $4,212   $657,944 
Inventories, current (Note 4)   600,000    142,921 
Prepaid expenses and other current assets   102,251    132,747 
Total Current Assets   706,463    933,612 
           
INVENTORIES, non-current, (Note 4)   2,721,936    2,951,011 
PROPERTY AND EQUIPMENT, net (Note 5)   3,621,436    4,039,887 
MINERAL PROPERTIES AND INTERESTS, net (Note 6)   1,114,675    1,096,482 
RECLAMATION BONDS (Note 6)   753,054    752,754 
           
TOTAL ASSETS  $8,917,564   $9,773,746 
           
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)          
           
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $679,580   $744,943 
Accrued liabilities - officer and other wages (Note 14)   709,577    495,808 
Interest payable - related parties (Note 7)   317,436    192,842 
Short-term notes payable - related party (Note 13)   -    34,500 
Convertible debt - related parties (Note 7)   1,278,000    850,000 
Obligation under capital lease - related party, current portion (Note 8)   84,110    120,461 
Notes payable - equipment, current portion (Note 9)   452,214    813,818 
Note payable - related party (Note 10)   625,000    625,000 
Total Current Liabilities   4,145,917    3,877,372 
           
LONG-TERM LIABILITIES          
Asset retirement obligation (Note 11)   1,046,621    974,109 
Obligation under capital lease - related party (Note 8)   -    51,714 
Note and interest payable - related party (Note 10)   24,464,670    21,225,102 
Notes payable - equipment (Note 9)   16,817    453,276 
    25,528,108    22,704,201 
           
TOTAL LIABILITIES   29,674,025    26,581,573 
           
COMMITMENTS AND CONTINGENCIES (Notes 12, 13, 14, and 15)          
           
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; 13,956,603 and 13,656,603 shares issued and outstanding, respectively   13,828    13,528 
Additional paid-in capital   9,143,418    9,131,718 
Accumulated deficit   (29,915,289)   (25,954,655)
Total Stockholders’ (Deficit)   (20,756,461)   (16,807,827)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)  $8,917,564   $9,773,746 

 

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

 

 F-2 

 

 

DESERT HAWK GOLD CORP

STATEMENTS OF OPERATIONS

 

 

   Year Ended 
   December 31,   December 31, 
   2017   2016 
         
REVENUE        
Concentrate sales  $162,762   $1,278,726 
           
EXPENSES          
General production costs   591,725    1,620,841 
Exploration expense   1,300    18,640 
Officers and directors fees   252,000    180,000 
Legal and professional   71,349    57,640 
General and administrative   241,744    346,184 
Abandonment of mineral property   -    137,766 
Loss on exchange of equipment   -    53,665 
Loss on impairment of equipment   -    147,214 
Depreciation and amortization   430,934    576,000 
    1,589,052    3,137,950 
           
OPERATING LOSS   (1,426,290)   (1,859,224)
           
OTHER INCOME (EXPENSE)          
Interest  and other income   167    8,726 
Interest and financing expense   (93,312)   (99,602)
Interest expense - related parties   (145,691)   (95,342)
Interest expense - related party   (2,295,508)   (2,008,831)
    (2,534,344)   (2,195,049)
           
LOSS BEFORE INCOME TAXES   (3,960,634)   (4,054,273)
INCOME TAXES   -    - 
           
NET LOSS  $(3,960,634)  $(4,054,273)
           
BASIC AND DILUTED NET LOSS PER SHARE  $(0.29)  $(0.30)
           
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED   13,682,082    13,432,219 

 

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

 

 F-3 

 

 

DESERT HAWK GOLD CORP

STATEMENTS OF STOCKHOLDERS’ (DEFICIT)

 

 

                   Additional       Total 
   Preferred Stock   Common Stock   Paid-in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
                             
Balance, December 31, 2015   1,582,563   $1,582    13,356,603   $13,228   $9,120,018   $(21,900,382)  $(12,765,554)
                                    
Common stock issued in connection with extension of convertible debt (Note 3)             300,000    300    11,700         12,000 
                                    
Net loss for the year ended December 31, 2016                            (4,054,273)   (4,054,273)
                                    
Balance, December 31, 2016   1,582,563   $1,582    13,656,603   $13,528   $9,131,718   $(25,954,655)  $(16,807,827)
                                    
Common stock issued in connection with extension of convertible debt (Note 3)             300,000    300    11,700         12,000 
                                    
Net loss for the year ended December 31, 2017                            (3,960,634)   (3,960,634)
                                    
Balance, December 31, 2017   1,582,563   $1,582    13,956,603   $13,828   $9,143,418   $(29,915,289)  $(20,756,461)

 

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

 

 F-4 

 

 

DESERT HAWK GOLD CORP

STATEMENTS OF CASH FLOWS

 

 

   Year Ended 
   December 31,   December 31, 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(3,960,634)  $(4,054,273)
Adjustments to reconcile net loss to net cash used by operating activities:          
Depreciation and amortization   430,934    576,000 
Common stock issued for financing expense   12,000    12,000 
Accretion of asset retirement obligation   72,512    72,512 
Abandonment of mineral property   -    137,766 
Loss on exchange of equipment   -    53,665 
Loss on impairment of equipment   -    147,214 
Changes in operating assets and liabilities:          
Inventories   (228,004)   (540,125)
Prepaid expenses and other current assets   30,496    (86,995)
Accounts payable and accrued expenses   (65,363)   26,879 
Accrued liabilities - officer and other wages   213,769    186,923 
Interest payable - related parties   124,594    95,342 
Interest payable - related party   2,295,508    2,008,831 
Net cash (used) by operating activities   (1,074,188)   (1,364,261)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Additions to property and equipment   (30,676)   (51,696)
Additions to reclamation bonds   (300)   (682,684)
Refund of reclamation bonds   -    1,348,000 
Net cash provided (used) by investing activities   (30,976)   613,620 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from short-term notes payable - related parties   -    89,500 
Proceeds from convertible debt - related parties   428,000    250,000 
Proceeds from note payable - related party   944,060    2,470,000 
Payment of note payable - related party   -    (900,000)
Payment of short term notes payable - related parties   (34,500)   (55,000)
Payment of notes payable - equipment   (798,063)   (563,981)
Payment of obligation under capital lease - related party   (88,065)   (14,443)
Net cash provided by financing activities   451,432    1,276,076 
           
NET INCREASE (DECREASE) IN CASH   (653,732)   525,435 
CASH, BEGINNING OF YEAR   657,944    132,509 
           
CASH, END OF YEAR  $4,212   $657,944 
           
SUPPLEMENTAL CASH FLOW INFORMATION          
Cash paid for interest, net of amount capitalized  $93,312   $104,944 
Noncash investing and financing activities:          
Equipment acquired with notes payable - equipment  $-   $28,992 
Equipment acquired with obligation under capital lease  $-   $186,618 
Accounts payable paid with exchange of equipment  $-   $36,000 
Equipment note revised through repossession of equipment  $-   $78,692 

 

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

 

 F-5 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

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, 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), 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.

 

Production commenced and revenues of approximately $6,000,000 from sales of gold concentrate have been received through December 31, 2017. Ongoing undercapitalization has continued to hamper the Company’s ability to operate. Subsequent to year end, on March 8, 2018, the Company successfully finalized an agreement with the trustees of DMRJ Group which eliminated the note and interest payable to DMRJ in exchange for $625,000. In addition, all outstanding shares of preferred stock were retired and cancelled. See Notes10 and 15. The Company has been temporarily shut down due to this development since third quarter of 2017 and is seeking further capitalization to be able to resume production in 2018.

 

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 accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America.

 

Accounting for Stock Options and Stock Awards Granted to Employees and Nonemployees

 

The Company accounts for stock-based compensation to employees as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 Compensation-Stock Compensation and stock-based compensation to nonemployees as required by ASC Topic 505-50 Equity-Based Payments to Non-Employees. In accordance with these standards, stock-based awards are valued at fair value on the date of grant. Options and warrants are valued using the Black-Scholes pricing model.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates used in preparing these financial statements include those assumed in estimating gold ounces in inventories, the recoverability of the cost of mining claims, asset retirement obligation, stock-based compensation, determination of the fair value of common stock issued, deferred tax assets and related valuation allowances. Actual results could differ from those estimates.

 

 F-6 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

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’ deficit, and cash flows 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.

 

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 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; 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 December 31, 2017, the Company had a limited operating history and actual results only over a short period of time. Due to this, estimates of recoverable gold are based primarily on initial tests with 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 to 18 months. See Note 4.

 

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. The Company evaluates the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. The Company determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. 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 reserves of assets sold or retired are removed from the accounts and any resulting gain or loss is reflected in results of operations. See Note 5.

 

 F-7 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

Mineral Properties and Leases

 

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 reserves. Mineral properties are periodically assessed for impairment of value, and any subsequent losses are charged to operations at the time of impairment. If a property is abandoned or sold, its capitalized costs are charged to operations. Mine property costs include the building of infrastructure of the processing facility including the heap leach pad and the carbon in column process plant along with water wells, roads and fencing. These costs are capitalized until ready for their intended use at which time they are amortized using the units of production method based on projected units of production which approximates the estimated life of the facility. Additionally, interest is capitalized to mine development until such assets are ready for their intended use. The Company does not have proven and probable reserves at this time. See Note 6.

 

Mineral Exploration and Development Costs

 

The Company accounts for mineral exploration and development costs in accordance with ASC Topic 930 Extractive Activities - Mining. Until proven and probable reserves (as defined by SEC Guide 7) are established, all exploration expenditures are expensed as incurred. Previously capitalized costs are expensed in the period the property is abandoned. Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and will be amortized on units of production basis over proven and probable reserves.

 

Provision for Taxes

 

Income taxes are provided based upon the liability method of accounting pursuant to ASC Topic 740- Income. 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. 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. The Company had no accruals for interest and penalties at December 31, 2017 or 2016. See Note 12.

 

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, 2017 and December 31, 2016, common stock equivalents outstanding are as follows:

 

   December 31, 2017   December 31, 2016 
         
Convertible debt   3,728,886    1,878,511 
Convertible preferred stock   47,211,002    47,211,002 
           
Total   50,939,888    49,089,513 

 

However, the diluted earnings per share are not presented because its effect would be anti-dilutive.

 

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.

 

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 upon adoption is based upon numerous estimates and assumptions, including future retirement costs, future inflation rates and the credit-adjusted risk-free interest rates.

 

 F-8 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

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, reclamation bonds, short-term note payable – related parties, notes payable – equipment, obligation under capital lease – related party, notes payable – related party, and convertible debt – related parties. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at December 31, 2017 and December 31, 2016.

 

Fair Value Measurements

 

The Company discloses the following information for each class of assets and liabilities that are measured at fair value:

 

1.the fair value measurement;
2.the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3);
3.for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following:
   
a.total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earnings are reported in the statement of operations;
b.the amount of these gains or losses attributable to the change in unrealized gains or losses relating to those assets or liabilities still held at the reporting period date and a description of where those unrealized gains or losses are reported;
c.purchases, sales, issuances, and settlements (net); and
d.transfers into and/or out of Level 3.
   
4.the amount of the total gains or losses for the period 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 and a description of where those unrealized gains or losses are reported in the statement of operations; and
5.in annual periods only, the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period.

 

At December 31, 2017 and December 31, 2016, the Company has no assets nor liabilities that require measurement at fair value on a recurring basis.

 

Going Concern

 

As shown in the accompanying financial statements, the Company had an accumulated deficit incurred through December 31, 2017, which raises substantial doubt about the Company’s ability to continue as a going concern. In addition, current liabilities exceed current assets by $3,011,454 at December 31, 2017. 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. See Note 10 - Note and Interest Payable – Related Party.

 

Although production has begun, 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. Management intends to continue to seek new capital from equity securities issuances to provide funds needed to increase liquidity, fund internal growth, and fully implement its business plan.

 

If the going concern assumption were not appropriate for these 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.

 

 F-9 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

New Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 Revenue Recognition, replacing guidance currently codified in ASC 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. The Company has performed an assessment of the impact of implementation of ASU No. 2014-09, and concluded it will not change the timing of revenue recognition or amounts of revenue recognized compared to how revenue is recognized under current policies. ASU No. 2014-09 will require additional disclosures, where applicable, on (i) contracts with customers, (ii) significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts.

 

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.

 

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.

 

NOTE 3 – CAPITAL STOCK

 

Common Stock

 

The Company is authorized to issue 100,000,000 shares of common stock. All shares have equal voting rights and have one vote per share. Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of the directors of the Company.

 

2017 Activity

 

The Company failed to repay the convertible debt loan in full on the November 30, 2017 maturity date. Under the terms of debt agreements (See Note 7), the Company issued a total of 300,000 shares of common stock to the note holders and these shares have been recorded as issued as of November 30, 2017. This issuance was valued at an estimated $0.04 per share ($12,000) which was determined by management to be the fair value of a share of common stock based upon a third-party valuation performed in 2014. The issuance was accounted for as financing expense.

 

2016 Activity

 

The Company failed to repay the convertible debt loan in full on the November 30, 2016 maturity date. Under the terms of debt agreements (See Note 7), the Company issued a total of 300,000 shares of common stock to the note holders on December 2, 2016. This issuance was valued at an estimated $0.04 per share ($12,000) which was determined by management to be the fair value of a share of common stock based upon a third-party valuation performed in 2014. The issuance was accounted for as financing expense.

 

 F-10 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

Preferred Stock

 

The Company’s Articles of Incorporation authorize 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.

 

Series A

 

Each share of Series A Preferred Stock is convertible into shares of the Company’s common stock at the rate of one common share for each preferred share converted, subject to adjustment in the event the Company effects a reverse or forward split of its outstanding shares or a reclassification of its common stock. At December 31, 2017 and 2016, 958,033 shares of Series A Preferred Stock are issued and outstanding. These shares can be converted into 958,033 shares of common stock. The Company has the right to mandate conversion if its stock has traded on the OTC Bulletin Board or on an exchange at a volume weighted average price per share of not less than $1.40 for each day over a period of 30 consecutive days with average trading volume per day of not less than 50,000 shares. The conversion ratio of the Series A Preferred Stock is determined according to a formula computed by dividing the stated value of the preferred stock, which is designated as $0.70 per share, by the conversion price of the preferred stock, which is $0.70 per share, subject to the following limitations and conditions:

 

If the Company issues or sells shares of its common stock, or grants options or other convertible securities which are exercisable or convertible into its common shares, at prices less than the conversion price of its Series A shares, then the conversion price of the Series A shares will be reduced to this lower sale or conversion price.
The Series A shares may not be converted into common shares if the beneficial owner of such shares would thereafter exceed 4.9% of the outstanding common shares.

 

The Series A shares have the following rights and preferences:

 

The holders of the Series A shares are entitled to any dividends declared by the Company.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, or a change of control transaction or the sale or lease of all or substantially all of the Company’s assets without the majority consent of the holders of the Series A shares, the holders of the Series A shares will be entitled to receive ratably an amount of the funds available for liquidation equal to the issue price of the Series A shares plus any accrued and unpaid dividends. Any remaining funds available for distribution will be distributed pro rata among the holders of the common stock and the Series A shares assuming conversion of the Series A shares.
The holders of the Series A shares are entitled to the number of votes equal to the number of whole shares of common stock into which the Series A shares are convertible. The Series A shares vote together with the holders of the common stock, except as provided by law. In addition, so long as the principal or accrued interest on any DMRJ Group loan is outstanding, the Company is prohibited from taking the certain corporate actions without the separate consent of persons owning a majority of the Series A preferred shares.
The Company has the right to create and issue additional classes or series of preferred shares so long as the new class or series does not have preferences, limitations, or relative rights which are superior or senior to the preferences, limitations and relative rights granted the holders of the Series A shares.
The holders of the Series A shares have preemptive rights to purchase shares of common stock in any offering by the Company.
There are no redemption or sinking fund provisions applicable to the Series A shares.

 

 F-11 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

Series A-1 and A-2

 

Each share of Series A-1 Preferred Stock and Series A-2 Preferred Stock is convertible at the option of the holder at any time into that number of shares of common stock equal to (i) for the Series A-1 Preferred Stock, ten times the Series A-1 issue price ($0.70) divided by the conversion price for Series A-1 Preferred and (ii) for the Series A-2 Preferred Stock, ten times the Series A-2 issue price ($1.00) divided by the conversion price for such Series A-2 Preferred Stock.  The initial conversion price of the Series A-1 Preferred Stock is $0.70 per share and the initial conversion price of the Series A-2 Preferred Stock is $1.00. At December 31, 2017 and 2016, there are no shares of Series A-1 Preferred Stock outstanding and 180,000 shares of Series A-2 Preferred Stock outstanding. The Series A-2 Preferred Stock outstanding can be converted into 1,800,000 shares of common stock. The Series A-1 and A-2 shares have the following additional rights and preferences:

 

The holders of the Series A-1 and A-2 shares have no preference as to any dividends declared by the Company.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, or a change of control transaction or the sale or lease of all or substantially all of the Company’s assets without the majority consent of the holders of the Series A-1 and A-2 shares, the holders of the Series A shares will be entitled to receive ratably an amount of the funds available for liquidation equal to the issue price of the Series A shares plus any accrued and unpaid dividends. Any remaining funds available for distribution will be distributed pro rata among the holders of the common stock and the Series A, A-1 and A-2.
The holders of the Series A-1 and A-2 shares are entitled to the number of votes equal to the number of whole shares of common stock into which the Series A-1 or A-2 shares are convertible. The Series A-1 and A-2 shares vote together with the holders of the common stock, except as provided by law. In addition, the Company is prohibited from taking the certain actions without the separate consent of persons owning a majority of the Series A-1 and A-2 preferred shares.
The holders of record of the Series A-1 and Series A-2 shares, voting together as a single class, have the right to elect two directors of the Board, to remove any such directors elected by them and to fill any vacancy caused by the death, resignation or removal of such directors.
The conversion prices of the Series A-1 and Series A-2 shares are subject to the following limitations and conditions:

 

oIf the Company issues or sells shares of its common stock, or grants options or other convertible securities which are exercisable or convertible into the Company’s common shares, at prices less than the conversion price of our Series A- or A-2 shares, except in certain exempted situations, then the conversion price of the Series A-1 and A-2 shares will be reduced to this lower sale or conversion price.
oThe Series A-1 and A-2 shares may not be converted into common shares if the beneficial owner of such shares would thereafter exceed 4.9% of the outstanding common shares.

 

The holders of the Series A-1 and A-2 shares have preemptive rights to purchase shares of the Company’s common stock in any offering by the Company.
There are no redemption or sinking fund provisions applicable to the Series A-1 or A-2 shares.

 

Series B

 

Each share of Series B Preferred Stock is convertible at the option of the holder at any time into that number of shares of common stock equal to 100 shares of common stock. At December 31, 2017 and 2016, there are 444,530 shares of Series B Preferred Stock outstanding. These shares can be converted into 44,452,969 shares of common stock. The Certificate of Designations for the Series B Preferred Stock allows for the issuance of additional shares of Series B Preferred Stock in the event the Company issues any common or preferred stock, which would keep the holder’s beneficial ownership of the Company the same as it was prior to the issuance. The Series B shares have the following additional rights and preferences:

 

The holders of the Series B shares have rights to any dividends declared by us on an as converted basis.
In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary the available assets of the Company shall be distributed subject to the following priority:

 

oFirst, the holders of each share of Series A Preferred Stock, Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series B Preferred Stock then outstanding shall receive out of the available assets and prior and in preference to any payment or distribution (or any setting apart of any payment or distribution) of any available assets on any junior securities, an amount per share equal to the Series A, A-1, A-2 and B liquidation preferences. If upon any liquidation, such available assets shall be insufficient to permit the holders of the Series A, A-1, A-2, and B Preferred Stock to receive their full liquidation preference, then such available assets shall be distributed ratably among the preferred holders in proportion to their full liquidation preference each holder is otherwise entitled to receive.
oAfter distribution to the preferred holders of their full liquidation preference, the remaining available assets, if any, shall be distributed ratably among the preferred holders and Common Stock, based on the number of shares of Common Stock held (or deemed held) by each holder assuming all preferred shares had been converted into shares of Common Stock immediately prior to such liquidation.

 

 F-12 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

The holders of the Series B shares are entitled to the number of votes equal to the number of whole shares of common stock into which the Series B shares are convertible.  The Series B shares vote together with the holders of the Common Stock, except as provided by law.
The conversion price of the Series B preferred stock is subject to the following limitations and conditions:

 

oIf the Company issues or sells shares of common stock, implement a stock split, or declare a dividend, then the conversion price of the Series B shares will be adjusted.
oThe conversion price of the Series B shares will be adjusted in the event of a reclassification, exchange, substitution, merger, or consolidation.

 

The Company has the right to create and issue additional classes or series of preferred shares so long as the new class or series does not have preferences, limitations, or relative rights which are superior or senior to the preferences, limitations and relative rights granted the holders of the Series B shares.
The Series B shares also have anti-dilution protection in the case of issuance of any additional shares of common stock or common stock equivalents. DMRJ Group agreed to waive this anti-dilution clause for the shares issued to the convertible debt holders on December 2, 2016. In addition, DMRJ Group agreed to waive its senior secured status on all debt owned by the convertible debt holders. See Note 10.

 

At December 31, 2017 and 2016 DMRJ Group beneficially owns 75% of the Company on a fully diluted basis with total preferred shares convertible into 47,211,002 shares of common stock. Subsequent to year end, on March 8, 2018, all of the outstanding preferred shares were retired and cancelled. See Note 15.

 

NOTE 4 – INVENTORIES

 

The following table provides the components of inventories:

 

   December 31, 
   2017   2016 
Ore on leach pad  $3,321,936   $3,051,766 
Carbon column in process   -    31,214 
Dore finished goods   -    10,952 
Total   3,321,936    3,093,932 
           
Less: current portion   (600,000)   (142,921)
           
Non-current inventories  $2,721,936   $2,951,011 

 

Inventories at December 31, 2017 and 2016 are allocated between current and non-current based on estimated expected sales for the subsequent fiscal year. Inventories are valued at the lower of cost or net realizable value which was cost at December 31, 2017 and December 31, 2016.

 

NOTE 5 – PROPERTY AND EQUIPMENT

 

The following is a summary of property, equipment, and accumulated depreciation at December 31, 2017 and December 31, 2016:

 

   December 31, 
   2017   2016 
Equipment  $3,077,482   $3,046,803 
Furniture and fixtures   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   (1,593,238)   (1,144,108)
    1,611,214    2,029,665 
           
Kiewit property facilities   2,497,436    2,497,436 
Less accumulated amortization   (487,214)   (487,214)
    2,010,222    2,010,222 
           
Total  $3,621,436   $4,039,887 


 

In November 2016, five pieces of mining equipment financed by CAT Financial were returned to CAT. See Note 9.

 

 F-13 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

NOTE 6 – MINERAL PROPERTIES, INTERESTS AND RECLAMATION BONDS

 

Mineral properties and interests as of December 31, 2017 and December 31, 2016 are as follows:

 

   December 31, 
   2017   2016 
Initial lease fee        
         
Kiewit, Cactus Mill and all other sites   600,000    600,000 
    600,000    600,000 
Asset retirement costs          
Kiewit Site   789,026    789,026 
Kiewit Exploration   10,780    10,780 
Cactus Mill   16,133    16,133 
    815,939    815,939 
    1,415,939    1,415,939 
Accumulated amortization   (301,264)   (319,457)
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, the Company 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 (DOGM).  This bond amount included bonding for the Yellow Hammer Small Mine and the Yellow Hammer Exploration sites along with the Herat Exploration site.  As such, the reclamation obligation for these sites was absorbed by the new bond. 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 ($674,000) into an escrow account with the bonding company. The surety bond carries an annual bonding fee of $40,400 which is expensed as a financing fee.  Total reclamation bonds posted at December 31, 2017 and 2016 are $753,054 and $752,754, 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. Subsequent to December 31, 2017, the Company became aware that the bonding company had inappropriately released the escrowed funds to another unrelated company. On September 28, 2018, the bonding company redeposited the $674,000 in escrow for the benefit of the Company.

 

Also, during the year ended December 31, 2009, the Company entered into a Joint Venture Agreement with the Clifton Mining Company and the Woodman Mining Company for the 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 is required to make annual non-performance 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. Non-performance payments in the amount of $50,000 per year for the Clifton Shears-Smelter Tunnel property were not made by the due dates in 2016 or 2017, but were later paid (in 2017) for each of the two years for the Clifton Shears-Smelter Tunnel property. The Cane Springs property non-performance 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 $9,785 and $75,838 was recognized during the years ended December 31, 2017 and 2016.

 

 F-14 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

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 of $128,868 and the $50,000 non-performance payments for each of 2015 and 2016 on the Clifton Shears-Smelter Tunnel property were paid to Clifton Mining, who then acknowledged the cure of default.

 

NOTE 7 – CONVERTIBLE DEBT – RELATED PARTIES

 

On November 18, 2009, the Company issued convertible promissory notes, to two of its minority shareholders, for a total of $600,000. The notes bore interest at 15% per annum. Interest-only was payable in equal monthly installments of $7,500. The notes are convertible at a rate of $0.70 per share.

 

The Company failed to repay the notes in full on the November 30, 2012 through the 2017 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, 2016 and 2017, the annual issuance of shares of common stock was valued at an estimated $0.04 (total $12,000) each and was accounted for as financing expense. The due date of the note was extended each year and has now been extended to November 30, 2018. Interest has not been paid since November 2014 and accrued interest payable on these notes at December 31, 2017 and 2016 is $277,500 and $187,500, respectively. Per the terms of the notes, interest on these notes is not convertible to common stock.

 

On October 14, 2016, the Company issued convertible promissory notes, convertible in shares of the Company’s common stock at $0.25 per share, to its two existing convertible debt holders in the amount of $125,000 each, at 10% interest, due in full on September 30, 2018. These notes were amended in February 2018 to extend the due date of the notes and the accrued interest to May 31, 2019. Accrued interest payable on these notes at December 31, 2017 and 2016 is $30,344 and $5,342, respectively. Interest on these notes is convertible to common stock.

 

On August 7, 2017, the convertible debt holders agreed to fund up to an additional aggregate of $500,000 under terms similar to existing convertible debt agreements. These funds were to be used to sustain minimum operations of the Company until resolution of the DMRJ Group debt with its trustees (Note 10). At December 31, 2017, $428,000 of these funds had been advanced. The remaining $72,000 was advanced in 2018 with the final advance on February 9, 2018. Accrued interest payable on these notes at December 31, 2017 and December 31, 2016 is $9,592 and $0, respectively. On February 28, 2018, these notes were amended to postpone the maturity date and interest payment date to May 31, 2019.

 

At December 31, 2017, total due to the convertible debt holders is $1,278,000 of which $428,000 is classified as long term and $850,000 is classified as current. Accrued interest payable at December 31, 2017 and December 31, 2016 of $317,436 and $192,842, respectively.

 

In addition, the Company entered into a short-term loan with one of the convertible debt holders on September 29, 2016 in the amount of $50,000. This short-term loan was repaid in full to the investor, with no interest paid, on October 14, 2016.

 

At December 31, 2017, the number of shares to be issued upon conversion of notes is 3,728,886 shares.

 

NOTE 8 – 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, some of which had been previously owned by the Company. RMH Overhead, LLC is an entity owned by the Company’s president, Rick Havenstrite. For the years ended December 31, 2017 and 2016, equipment includes assets under capital lease amounting to $185,618 and $185,618, respectively. The lease is being amortized over the estimated useful life of the equipment. Accumulated amortization at December 31, 2017 and 2016 was $39,775 and $13,258. At December 31, 2017, the estimated future minimum lease payments under the capital lease was $90,000 of which $5,890 is implied interest.

 

 F-15 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

NOTE 9 – NOTES PAYABLE – EQUIPMENT

 

The following is a summary of the equipment notes payable:

 

   December 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%.  $47,154   $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 used mining equipment due in 36 monthly installments of varying amounts including interest at 4.68%. The equipment has been returned to CAT.  See below.   266,675    881,894 
           
Note payable to Komatsu Financial, collateralized by a Komatsu D275 dozer, due in monthly installments of $11,674 including interest at 2.99%.   149,687    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%.   5,515    19,654 
           
   $469,031   $1,267,094 
Current portion   (452,214)   (813,818)
Long term portion  $16,817   $453,276 

 

Principal payments are as follows:    
     
2018   452,214 
2019   16,817 
   $469,031 

 

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 $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. 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 October 18, 2018, seven 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 10 – NOTE PAYABLE – RELATED PARTY

 

At December 31, 2017 and 2016, DMRJ Group beneficially owned approximately 75% of the Company (on a fully-diluted basis) with Series A, A-2 and B preferred stock 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 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.

 

 F-16 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

The total due to DMRJ Group at December 31, 2017 and December 31, 2016 is as follows:

 

   December 31,   December 31, 
   2017   2016 
         
Principal  $15,554,552   $14,610,492 
Interest payable   9,535,118    7,239,610 
   $25,089,670   $21,850,102 

 

On March 8, 2018, the note and interest payable owed to DMRJ Group was settled for payment of $625,000. See Note 15.

 

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;
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.

 

2017 Activity

 

At December 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. See Note 15.

 

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. See Note 15.

 

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 Group on July 8, 2016. The advances bear interest at 15% per annum and became 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.

 

DMRJ Trustees

 

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 the management of the DMRJ Group. At December 31, 2017, the DMRJ Group continued to operate through the direction of its court appointed trustees. See Note 15.

 

 F-17 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

NOTE 11 – ASSET RETIREMENT OBLIGATION

 

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 asset retirement obligation for the years ended December 31, 2017 and 2016 are as follows:

 

   2017   2016 
Asset retirement obligation, beginning of year  $974,109   $901,597 
           
Accretion expense   72,512    72,512 
Asset retirement obligation, end of year  $1,046,621   $974,109 

 

NOTE 12 – INCOME TAXES

 

There was no income tax provision (benefit) for the years ended December 31, 2017 and 2016.  

 

The components of the Company’s net deferred tax assets are as follows:

 

   2017   2016 
Deferred tax asset:        
Net operating loss carryforward  $5,482,000   $7,742,000 
Equipment impairment   37,000    61,000 
Exploration costs   113,000    233,000 
Financing costs   1,000    (16,000)
Other   76,000    107,000 
Total deferred tax assets   5,709,000    8,127,000 
Valuation allowance   (5,709,000)   (8,127,000)
Net deferred tax assets  $-   $- 

 

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, 2017 and 2016.

 

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) resulting in significant modifications to existing law. The Company did not incur any net income tax benefit or provision for the year ended December 31, 2017 as a result of the changes to tax laws and tax rates under the Act. The Company’s net deferred tax asset was reduced by approximately $3.8 million during the year ended December 31, 2017, which consisted primarily of the re-measurement of federal deferred tax assets from 35% to 21%.

 

 F-18 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

A reconciliation between the statutory federal income tax rate and the Company’s tax provision (benefit) is as follows:

 

   December 31,
2017
   December 31,
2016
 
Amount computed using the statutory rate  $(1,387,000)   (35)%  $(1,419,000)   (35)%
Other   -    -    900    - 
Impact of change in statutory tax rate   3,805,000    96%   -    - 
Change in valuation allowance   (2,418,000)   (61)%   1,418,100    35%
Total income tax provision (benefit)  $-    -%   $-    -% 

 

At December 31, 2017, the Company had federal net operating loss carry forwards of approximately $26.1 million which expire in fiscal years ending 2028 through 2037.

 

During the years ended December 31, 2017 and 2016, 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, 2017 and 2016.  The Company’s federal income tax returns for fiscal years 2014 through 2017 remain open and subject to examination.

 

NOTE 13 – RELATED PARTY TRANSACTIONS

 

In addition to transactions disclosed in Note 7, 8 and 10, the Company had the following related party transactions.

 

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. 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.

 

The Company recognized rent expense for rental of office space of $12,000 each for the years ended December 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 $12,000 and $8,000 during the years ended December 31, 2017 and 2016, respectively, leaving a total of $16,750 and $17,750 remaining in accounts payable at December 31, 2017 and 2016, respectively, including amounts from prior years.

 

As of December 31, 2017 and December 31, 2016, accrued compensation of $709,577 and $495,808 was due to directors and officers. Of the amounts accrued at December 31, 2017 and December 31, 2016, accrued compensation of $491,692 and $372,692 is due to Rick Havenstrite and $173,885 and $113,885 is due to Marianne Havenstrite, Treasurer and Principal Financial Officer. In addition, $44,000 and $9,231 was due to other directors and employees at December 31, 2017 and December 31, 2016, respectively.

 

During the years ended December 31, 2017 and 2016, the Company recognized general project cost expense of $-0- and $10,627, respectively, for geological services provided by Stuart Havenstrite, the father of Rick Havenstrite. $39,367 remains unpaid to Mr. Havenstrite at both December 31, 2017 and December 31, 2016. These amounts are included in accounts payable at those dates.

 

NOTE 14 – COMMITMENTS AND CONTINGENCIES

 

In addition to commitments disclosed in Notes 6, 7, 8, 9, 10, 11 and 12 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, 2017, $24,859 was due for 2017, $76,279 was due for 2016 and $86,302 was due for 2015, including interest and penalties, for a total of $187,440 due to Tooele County at December 31, 2017. These amounts remain unpaid and are included in Accounts payable and accrued expenses on the balance sheet.

 

Proceeds of $130,000 were raised in 2012 from the sale of stock, with shares redeemable for cash generated from the sale of gold. Based on gold prices during the conversion period in 2014, conversion amounts due to shareholders is $151,406. At December 31, 2017 this amount remains unpaid and is included in Accounts payable and accrued expenses on the balance sheet.

 

 F-19 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

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.

 

NOTE 15 – SUBSEQUENT EVENTS

 

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 seven equal monthly payments of $39,009 were to be made.  As of October 18, 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 – Related Parties

 

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. 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 and Interest Payable – Related Party


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. The Company worked 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 existing convertible debt holders agreed to fund this payment in full, and agreed 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 concentrate 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 a total of $625,000 in exchange for the issuance of a total 4,500,000 shares of the Company’s common stock and various concessions on existing convertible debt agreements.

 

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. As of October 18, 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. H and H Metals Corp. purchased 1,250,000 shares of the stock and have become a related party based on number of shares owned.

 

 F-20 

 

 

Desert Hawk Gold Corp.

Notes to Financial Statements

Years Ended December 31, 2017 and 2016

 

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. Options to purchase shares of common stock issued under this plan will fully vest upon grant. The aggregate fair value of the common stock options becoming exercisable for the first time during any calendar year cannot 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, 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

 

 F-21