UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from _______________________to___________________________
Commission File Number:
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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.
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| ☒ | 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. ☐
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DESERT HAWK GOLD CORP.
Form 10-Q
September 30, 2022
TABLE OF CONTENTS
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
DESERT HAWK GOLD CORP.
CONDENSED INTERIM BALANCE SHEETS (UNAUDITED)
| September 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventories (NOTE 4) | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| INVENTORIES (NOTE 4) | ||||||||
| PROPERTY AND EQUIPMENT, net (NOTE 5) | ||||||||
| MINERAL PROPERTIES AND INTERESTS, net (NOTE 6) | ||||||||
| RECLAMATION BONDS (NOTE 3) | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Royalties and upside participation payable (NOTE 7) | ||||||||
| Accrued interest, prepaid forward gold contract (NOTE 7) | ||||||||
| Accrued liabilities – officers and other wages (NOTES 11 and 12) | ||||||||
| Notes payable, current portion (NOTE 8) | ||||||||
| Settlement of consulting contract payable (NOTE 10) | ||||||||
| Prepaid forward gold contract liability (NOTE 7) | ||||||||
| Due to PDK in lieu of gold deliveries (NOTE 7) | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Notes payable, net of current portion (NOTE 8) | - | |||||||
| Asset retirement obligation (NOTE 9) | ||||||||
| TOTAL LONG-TERM LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES (NOTES 3, 6 AND 12) | ||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Preferred Stock, $ | ||||||||
| Common Stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
1
DESERT HAWK GOLD CORP.
CONDENSED INTERIM STATEMENTS OF OPERATIONS (UNAUDITED)
For the three and nine months ended September 30, 2022 and 2021
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUE | ||||||||||||||||
| Concentrate sales | $ | $ | $ | $ | ||||||||||||
| Contract processing income | ||||||||||||||||
| Total revenue | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| General production and project costs | ||||||||||||||||
| Contract processing costs | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Other operating costs | ||||||||||||||||
| Exploration expense | - | - | ||||||||||||||
| Legal and professional | ||||||||||||||||
| Officers and directors’ fees | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Loss on disposal of equipment | ||||||||||||||||
| Forward gold contract expense (NOTE 7) | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest and other income | ||||||||||||||||
| Interest expense – equipment financing | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| TOTAL OTHER INCOME (EXPENSE) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS BEFORE INCOME TAX | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision (benefit) for income tax | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these financial statements.
2
DESERT HAWK GOLD CORP.
CONDENSED INTERIM STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
For the three and nine months ended September 30, 2022 and 2021
| Common Stock | ||||||||||||||||||||
| Shares Issued | Par Value $.001 per share | Additional Paid in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||
| BALANCE, December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| BALANCE, March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||
| BALANCE, June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| BALANCE, September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| BALANCE, December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| BALANCE, March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||
| BALANCE, June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||
| BALANCE, September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these financial statements.
3
DESERT HAWK GOLD CORP.
CONDENSED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED)
| Nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided (used) by operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Accretion of asset retirement obligation | ||||||||
| Write down of inventory to net realizable value | ||||||||
| Loss on disposal of equipment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
| Royalties and upside participation payable (NOTE 7) | ||||||||
| Accrued interest, prepaid forward gold contract (NOTE 7) | - | |||||||
| Accrued liabilities – officer and other wages | ||||||||
| Due to PDK in lieu of gold deliveries (NOTE 7) | ||||||||
| Prepaid forward gold contract liability (NOTE 7) | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Additions to property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of equipment | ||||||||
| Payments on reclamation bonds | ( | ) | ( | ) | ||||
| Net cash used by investing activities | ( | ) | ( | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payment of notes payable | ( | ) | ( | ) | ||||
| Net cash used by financing activities | ( | ) | ( | ) | ||||
| Net increase in cash and cash equivalents | ||||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||
| NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||
| Equipment acquired with notes payable – equipment | $ | $ | ||||||
| Land and building purchased with note payable and accrued rent | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
4
DESERT HAWK GOLD CORP.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS (unaudited)
SEPTEMBER 30, 2022
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Desert Hawk Gold Corp. (the “Company”), a Nevada Corporation, was incorporated on November 5, 1957. The Company commenced its current mining activities on May 1, 2009.
During the year ended December 31, 2009, the Company entered into Joint Venture Agreements with the Clifton Mining Company (“Clifton”), the Woodman Mining Company and the Moeller Family Trust for the lease of certain of their property interests in the Gold Hill Mining District of Utah. In 2011, the Company entered into an agreement with DMRJ Group, (a Platinum Partners related entity), which allowed for long term funding of the Kiewit project and helped to provide cash flow for operations during the period from 2009 until 2014 while the permitting process was ongoing. The final permit needed to begin development of the Kiewit property was received in January 2014 and development began in February 2014. Construction at the site was substantially complete on September 30, 2014. Revenue from the heap leach operation began in October 2014 with the first sales of gold concentrate.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods reported. The condensed balance sheet at December 31, 2021 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. Operating results for the three- and nine-month period ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.
These unaudited condensed interim financial statements have been prepared by management in accordance with generally accepted accounting principles used in the United States of America (“U.S. GAAP”). These unaudited condensed interim financial statements should be read in conjunction with the annual audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on March 31, 2022.
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 U.S. GAAP and have been consistently applied in the preparation of the financial statements.
Reclassifications
Certain reclassifications have been made to conform prior periods’ amounts to the current presentation. These reclassifications have no effect on the results of operations, stockholders’ equity (deficit), and cash flows as previously reported.
Earnings (Loss) Per Share
Basic earnings (loss) per share includes no dilution and is computed by dividing net earnings (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.
For the three and nine months ended September
30, 2022 and 2021, common stock equivalents of
5
Going Concern
As shown in the accompanying financial statements,
the Company had an accumulated deficit of $
Although production restarted in 2019, it has not yet reached optimum levels. The timing and amount of capital requirements will depend on a number of factors, including demand for products, metals market pricing, and the availability of opportunities for expansion through affiliations and other business relationships. Management continues to seek new capital from equity securities issuances or other business arrangements to provide funds needed to increase liquidity, fund internal growth, and fully implement its business plan. The ability of the Company to continue as a going concern is dependent on the Company’s ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they are due.
COVID -19
The Company’s operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic spreading throughout the United States and elsewhere, causing disruptions to the Company’s business operations and management. These disruptions are most evident in the Company’s ability to retain and house employees and properly manage them while maintaining proper social distancing and with delays in obtaining materials and supplies. There has also been a reduction in the availability of equipment financing. These disruptions continue to hamper operations. It is management’s belief that disruptions relating to COVID will be mitigated in the future as a large percent of the population becomes vaccinated.
The effects of the continued outbreak of COVID-19 and related government responses could also include extended disruptions to supply chains and capital markets, reduced availability of contractors and a prolonged reduction in economic activity. These effects could have a variety of adverse impacts on the Company, including its ability to conduct operations.
The Company has taken steps to mitigate the potential risks to suppliers and employees posed by the spread of COVID-19, including work from home policies where appropriate. The Company will continue to monitor developments affecting both its workforce and contractors and will take additional precautions as necessary. The ultimate impact of COVID-19 depends on factors beyond management’s knowledge or control, including its duration and third-party actions to contain its spread and mitigate its public health effects. Therefore, the Company cannot estimate the potential future impact to its financial position, results of operations and cash flows, but the impacts could be material.
New Accounting Pronouncements
Accounting standards that have been issued or proposed by the Financial Accounting Standards Board (“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 – RECLAMATION BONDS
At September 30, 2022 and December 31, 2021, the
Company has a surety bond of $
On March 31, 2022, the Company’s bond was
increased $
Total reclamation bonds posted at September 30,
2022 and December 31, 2021 are $
6
NOTE 4 – INVENTORIES
Inventories at September 30, 2022 and December 31, 2021 consists of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Ore on leach pad | $ | $ | ||||||
| Carbon column in process | ||||||||
| Finished goods | ||||||||
| Less long-term portion | ( | ) | ||||||
| Total | $ | $ | ||||||
Inventories at September 30, 2022 and December 31, 2021 were valued at net realizable value because production costs were greater than the amount the Company expected to receive on the sale of the estimated gold ounces contained in inventories.
The adjustment to inventory was $
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at September 30, 2022 and December 31, 2021:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Electronic and computer equipment | ||||||||
| Vehicles | ||||||||
| Buildings | ||||||||
| Land and improvements | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Kiewit property facilities | ||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
For the Kiewit property facilities, amortization
based on total units of production was $ and $
Depreciation expense on property and equipment
for the three months ended September 30, 2022 and 2021 was $
During the nine months ended September 30, 2021,
the Company was required to return a CAT 740 Haul truck to Wheeler Machinery because the Company was 5 payments delinquent in its obligation
on this note payable. The net carrying value of the equipment was $
During the nine months ended September 30, 2021,
the Company acquired a new HP4 crushing system in exchange for its HP3 crushing system which was returned to ICM Solutions, Inc.(“ICM”).
Prior to the acquisition, the Company had been renting the HP4 crushing system from ICM and had an accrued rent payable of $
7
NOTE 6 – MINERAL PROPERTIES AND INTERESTS
Mineral properties and interests as of September 30, 2022 and December 31, 2021 are as follows:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Kiewit and all other sites | $ | $ | ||||||
| JJS property | ||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Asset retirement obligation assets | ||||||||
| Kiewit Site | ||||||||
| Kiewit Exploration | ||||||||
| JJS property | ||||||||
| Total | ||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Amortization of the mineral properties and interests
based on total units of production was $ and $
There was no production during the three months ended September 30, 2022 as the Company awaits approval of permits.
NOTE 7 – PREPAID FORWARD GOLD CONTRACT LIABILITY
In 2019, the Company entered into and closed a
Pre-Paid Forward Gold Purchase Agreement (the “Purchase Agreement”) with PDK for the sale and purchase by PDK of gold produced
from the Company’s mining property.
Months | Gold Ounces per Month | Total Gold Ounces | ||||||
| December 2020 | ||||||||
| January 2021 to March 2021 | ||||||||
| April 2021 to March 2022 | ||||||||
| April 2022 to March 2023 | ||||||||
| April 2023 to December 2023 | ||||||||
| January 2024 | ||||||||
8
In addition, under the Purchase Agreement, PDK
may reduce the required number of ounces to be sold in exchange for up to
As security for the obligations of the Company under the Purchase Agreement, the Company has granted PDK a security interest in all of the assets of the Company. The Purchase Agreement contains representations and warranties, as well as affirmative and negative covenants customary to a transaction of this nature.
To date, no gold has been delivered under the
contract. As of September 30, 2022 and December 31, 2021, a cumulative of
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Total ounces to be delivered | ||||||||
| Contractual payment per ounce in lieu of delivery | $ | $ | ||||||
| Amount due to PDK | $ | $ | ||||||
For the three and nine months ended September 30, 2022 and 2021, the expense related to the forward gold contract is as follows:
| For the three months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Prepaid forward gold contract liability balance at beginning of period | $ | $ | ||||||
| Forward gold contract balance associated with ounces to be delivered during period | ||||||||
| Reduction in prepaid forward gold contract liability balance | ( | ) | ( | ) | ||||
| Prepaid forward gold contract liability balance at end of period | $ | $ | ||||||
| For the nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Prepaid forward gold contract liability balance at beginning of period | $ | $ | ||||||
| Forward gold contract balance associated with ounces to be delivered during period | ||||||||
| Reduction in prepaid forward gold contract liability balance | ( | ) | ( | ) | ||||
| Prepaid forward gold contract liability balance at end of period | $ | $ | ||||||
9
As of September 30, 2022, and through the issuance of these financial statements, PDK has sent invoices to the Company for the deliveries and payments due. The failure to make gold deliveries and make additional payments as described below provides PDK with certain remedies, including termination of the agreement, demand for early payment of the entire delivery obligations, and enforcement of foreclosure rights against the assets pledged as security under the agreement. Due to the delinquent status of the deliveries and PDK’s rights under the default provisions of the Purchase Agreement, the Company has classified the entire liability balance owing as current on the balance sheets. The Company has received no notice of default on the Purchase Agreement from PDK.
In addition to the delivery of gold ounces, the Purchase Agreement contains a royalty provision whereby royalties of 4% are due to PDK on gold and silver recovered from mining operations at the Kiewit site and sold by the Company to a third party. Royalties are payable within 30 days following the end of each fiscal quarter. To date, none has been remitted to PDK. Under the Purchase Agreement, the Company also pays a 5% withholding tax to the state of Utah on the PDK royalty payments.
The Purchase Agreement contains a participation payment whereby PDK receives a portion of the proceeds from gold sold by the Company to a third party. The payment due to PDK is based upon a percentage of proceeds over a set gold price per ounce. The upside participation amounts are payable within four days following each sale. To date, none has been remitted to PDK.
The following is a summary of royalties and upside participation payable:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Royalties payable | $ | $ | ||||||
| Royalties withholding payable | ||||||||
| Upside participation payable | ||||||||
| Total | $ | $ | ||||||
The Purchase Agreement provides for the Company
to pay default interest (calculated at the rate of LIBOR plus
10
NOTE 8 – NOTES PAYABLE
The following is a summary of the notes payable:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Note payable to Miller, collateralized by land and two buildings, due in | $ | $ | ||||||
| Note payable to Epiroc, collateralized by a used Epiroc drill due in | ||||||||
| Note payable to Wheeler Machinery, collateralized by a used D8T dozer, due in monthly installments of $ | ||||||||
| - | ||||||||
| - | ||||||||
| Current portion | ( | ) | ( | ) | ||||
| Long term portion | $ | - | $ | |||||
In February 2021, Wheeler CAT requested the return of the CAT 740 Haul truck (SN2293) because the Company was five payments delinquent in its obligation on the related note payable. This truck was then purchased from Wheeler CAT by a related party who in February began leasing the truck to the Company on a month-to-month rental. This arrangement relieved the Company of any other financial obligation on this note.
The current portion of debt of $
NOTE 9 –ASSET RETIREMENT OBLIGATION
Changes in the asset retirement obligation for the three and nine months ended September 30, 2022 and 2021 are as follows:
| Three months ended | ||||||||
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Asset retirement obligation, beginning of period | $ | $ | ||||||
| Accretion expense | ||||||||
| Asset retirement obligation, end of period | $ | $ | ||||||
| Nine months ended | ||||||||
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Asset retirement obligation, beginning of period | $ | $ | ||||||
| Obligation incurred: Kiewit properties | ||||||||
| Accretion expense | ||||||||
| Asset retirement obligation, end of period | $ | $ | ||||||
11
NOTE 10 – SETTLEMENT OF CONSULTING CONTRACT
On March 29, 2018, the Company entered into a
five-year Agency Agreement (the “Agency Agreement”) with H&H Metals Corp., a New York corporation (“H&H”).
Under the terms of the Agency Agreement, H&H agreed to provide certain advisory services in regard to natural resources activities
and to assist in securing purchasers for minerals produced from its mining properties. The Company negotiated a settlement in 2019 with
H&H resulting in the Company owing a balance of $
NOTE 11 – RELATED PARTY TRANSACTIONS
The Company has a month-to-month lease agreement
for its office space with RMH Overhead, LLC, a company owned by Rick Havenstrite, the Company’s President and a director. The Company
recognized rent expense of $
On February 1, 2021, RMH Overhead, LLC. (“RMH”)
an entity owned by Rick Havenstrite, President of the Company, purchased a CAT 740B Articulated Haul Truck from Wheeler CAT.
Employment Agreements
The Company has an employment agreement with Mr.
Havenstrite as President of the Company, which is ongoing. The agreement, as amended, requires Mr. Havenstrite to meet certain time requirements
and limits the number of other board member obligations in which he can participate. The agreement allows for a base annual salary of
$
For the three months ended September 30, 2022
and 2021, the Company paid Mr. Havenstrite $
The amounts accrued at September 30, 2022 and December 31, 2021, is due to the officers of the Company as follows:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Rick Havenstrite, President | $ | $ | ||||||
| Marianne Havenstrite, Treasurer and Principal Financial Officer | ||||||||
| Total | $ | $ | ||||||
12
Directors’ fees
The Company compensates independent directors
for their contributions to the management of the Company, with one director receiving fees of $
NOTE 12– COMMITMENTS AND CONTINGENCIES
Mining Leases
Annual claims’ fees are currently $
NOTE 13 - CAPITAL STOCK
Common Stock
The Company is authorized to issue
During the nine months ended September 30, 2022 and 2021, the Company had no transactions relating to common stock.
Preferred Stock
The Company’s Articles of Incorporation authorized
NOTE 14 - STOCK OPTIONS
The Company has reserved
Outstanding and vested options at September 30,
2022 and December 31, 2021 were
13
NOTE 15 – REVENUE
Product sales for the three- and nine- months ended September 30, 2022 and 2021 are shown below:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Concentrate sales | ||||||||||||||||
| Gold | $ | $ | $ | $ | ||||||||||||
| Silver | ||||||||||||||||
| Total concentrate sales | ||||||||||||||||
| Less: deductions to concentrate sales | ||||||||||||||||
| Royalties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Upside participation payments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Outside processing | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Subtotal – deductions to concentrate sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net concentrate sales | ||||||||||||||||
| Net processing income | ||||||||||||||||
| TOTAL REVENUE | $ | $ | $ | $ | ||||||||||||
For the three- and nine- months ended September
30, 2022 and 2021, all revenue from Concentrate sales was from concentrate sold to Asahi Refining. At September 30, 2022 and December
31, 2021, the balance due from Asahi Refining is $ and $
For the three- and nine- months ended September
30, 2022 and 2021, all revenue from Contract processing income was received from the outside company whose concentrate sales are to Asahi
Refining. As of September 30, 2022 and December 31, 2021, the balance due from contract processing income was $
NOTE 16– SUBSEQUENT EVENTS
The Company anticipates modification to its operating
permit in Winter 2022 which will require an increase in our bond deposit of $
The contract agreement with the outside company for which we were processing material was terminated in October 2022.
14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, and with the unaudited financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.
Forward-looking statements
The statements contained in this report that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, competitive position, potential growth opportunities, potential operating performance improvements, ability to retain and recruit personnel, and the effects of competition. 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 10-Q. While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to, the following:
| ● | environmental hazards; | |
| ● | metallurgical and other processing problems; | |
| ● | unusual or unexpected geological formations; | |
| ● | need for additional funding to continue operations; | |
| ● | global economic and political conditions; | |
| ● | staffing considerations in remote locations; | |
| ● | disruptions in credit and financial markets; | |
| ● | global productive capacity | |
| ● | changes in existing mining laws or regulations; | |
| ● | changes in product costing; | |
| ● | 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); and | |
| ● | disruptions due to global pandemics, supply chain delays, foreign wars or conflicts, or civil unrest. |
Mining operations are subject to a variety of existing laws and regulations relating to exploration, permitting procedures, safety precautions, property reclamation, employee health and safety, air and water quality standards, pollution and other environmental protection controls, all of which are subject to change and are becoming more stringent, and costly to comply with. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those expected. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.
These risk factors could cause our results to differ materially from those expressed in forward-looking statements.
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Overview
We are a mineral exploration company located in the Gold Hill Mining District in Tooele County, Utah. We are currently focused on exploration and development of our Kiewit claims and operation of a heap leach processing facility.
We hold leasehold interests within the Gold Hill Mining District consisting of 66 unpatented mining claims and 30 patented claims. From these claims we have centered our exploration activities on the Kiewit site.
During 2018 we settled our outstanding debt with DMRJ Group I, LLC and repurchased and retired all outstanding preferred shares issued to them under the 2010 Investment Agreement with them.
During 2019 we secured net funding of $13,600,000 from PDK Utah Holdings LP under the terms of the Pre-Paid Forward Gold Purchase Agreement dated March 7, 2019. We also renegotiated our lease with Clifton Mining and released all but the current unpatented and patented mining claims. We also reacquired the existing royalties from Clifton and its affiliates and issued a royalty to PDK equal to 4% of the net smelter returns from our mine. An additional 20 claims, known as the JJS Property, were also acquired.
In June 2022 we paused our mining operations on the Kiewit claims and ceased our ore crushing due to a delay in the issuance of a permit modification which would allow us to expand our pit area, which is currently at the boundaries of the existing permit. Utah Division of Oil, Gas and Mining has provided conditional approval for the permit modification contingent on the approval by the BLM. The modification is currently in the 30-day public comment period and permit approval is expected prior to the end of 2022. Further delays could be caused by adverse public comments which could require additional response from the BLM. In anticipation of receiving the permit modification, on November 1, 2022 we posted the required bond for the permit modification in the amount of $555,000. We have curtailed operating expenses to the extent possible while keeping a minimum staff employed, working on continued processing and equipment maintenance.
During 2022 through September 2022, we crushed 82,900 tons of mineralized material and hauled 183,900 tons of waste from the open-pit Kiewit Pit - Using the funds from the PDK transaction, in January 2020 we commenced a drilling program on the Kiewit and JJS mining claims to determine the definition of the mineralized body and resource classification of the resources in connection with the proposed completion of a technical report on the claims. Our drilling plan included drilling 30 holes for a total footage of 7,500 feet. Although drilling has commenced on the JJS property, permitting has not been completed and production has not yet begun. We intend to continue our drilling program in the future. We also intend to continue extraction of mineralized material and to upgrade and expand the current facilities, as resource expansion dictates.
Since securing funding in March 2019, and recommencing mining operations, we have generated gross revenues of approximately $18,582,400 through September 30, 2022, from sales of gold and other metals, bringing total revenue from metals sales from the inception of the processing in 2014 to $24,793,990.
During 2022, we continued to process material from an outside company resulting in contract processing income of $1,130,186 for the nine months ending September 30, 2022. The outside company stopped delivering material to us in March 2022. The contract agreement with this company was terminated in October 2022.
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Results of Operations for the three and nine months ended September 30, 2022 and 2021.
| Three months ended September 30, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| REVENUE | $ | 1,251,611 | $ | 2,129,790 | $ | (878,179 | ) | (41.2 | )% | |||||||
| EXPENSES | ||||||||||||||||
| General production and project costs | 1,747,388 | 1,155,365 | 592,023 | 51.2 | % | |||||||||||
| Processing costs | 32,411 | 56,345 | (23,934 | ) | (42.5 | )% | ||||||||||
| Depreciation and amortization | 160,619 | 287,662 | (127,043 | ) | (44.2 | )% | ||||||||||
| Other operating costs | 116,701 | 128,412 | (11,711 | ) | (9.1 | )% | ||||||||||
| Exploration expense | - | 4,086 | (4,086 | ) | (100.0 | )% | ||||||||||
| Legal and professional | 26,085 | 36,679 | (10,594 | ) | (28.9 | )% | ||||||||||
| Officers and directors fees | 89,102 | 89,761 | (659 | ) | (0.7 | )% | ||||||||||
| General and administrative | 63,773 | 81,502 | (17,729 | ) | (21.8 | )% | ||||||||||
| (Gain) loss on disposal of equipment | 4,453 | 5,487 | (1,034 | ) | (18.8 | )% | ||||||||||
| Forward gold contract expense | 883,334 | 576,444 | 306,890 | 53.2 | % | |||||||||||
| 3,123,866 | 2,421,743 | 702,123 | 29.0 | % | ||||||||||||
| OPERATING LOSS | (1,872,255 | ) | (291,953 | ) | (1,580,302 | ) | 541.3 | % | ||||||||
| OTHER INCOME (EXPENSE) | (73,282 | ) | (39,992 | ) | (33,290 | ) | 83.2 | % | ||||||||
| NET LOSS | (1,945,537 | ) | (331,945 | ) | $ | (1,613,592 | ) | 486.1 | % | |||||||
| Nine months ended September 30, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| REVENUE | $ | 4,258,069 | $ | 5,877,566 | $ | (1,619,497 | ) | (27.6 | )% | |||||||
| EXPENSES | ||||||||||||||||
| General production and project costs | 4,397,526 | 4,115,107 | 282,419 | 6.9 | % | |||||||||||
| Processing costs | 103,625 | 199,489 | (95,864 | ) | (48.1 | )% | ||||||||||
| Depreciation and amortization | 654,740 | 781,892 | (127,152 | ) | (16.3 | )% | ||||||||||
| Other operating costs | 380,431 | 263,573 | 116,858 | 44.3 | % | |||||||||||
| Exploration expense | - | 9,083 | (9,083 | ) | (100.0 | )% | ||||||||||
| Legal and professional | 117,006 | 150,115 | (33,109 | ) | (22.1 | )% | ||||||||||
| Officers and directors fees | 261,649 | 257,426 | 4,223 | 1.6 | % | |||||||||||
| General and administrative | 244,674 | 277,047 | (32,373 | ) | (11.7 | )% | ||||||||||
| (Gain) loss on disposal of equipment | 22,921 | 239,651 | (216,730 | ) | (90.4 | )% | ||||||||||
| Forward gold contract expense | 2,343,111 | 1,857,994 | 485,117 | 26.1 | % | |||||||||||
| 8,525,683 | 8,151,377 | 374,306 | 4.6 | % | ||||||||||||
| OPERATING LOSS | (4,267,614 | ) | (2,273,811 | ) | (1,993,803 | ) | 87.7 | % | ||||||||
| OTHER INCOME (EXPENSE) | (317,715 | ) | (127,675 | ) | (190,040 | ) | 148.8 | % | ||||||||
| NET LOSS | (4,585,329 | ) | (2,401,486 | ) | $ | (2,183,843 | ) | 90.9 | % | |||||||
During the quarters ended September 30, 2022 and 2021, we had net losses of $1,945,537 and $331,945 respectively. This represents an increase in net loss of $1,613,592 for the quarter ended September 30, 2022, over the quarter ended September 30, 2021. For the nine months ended September 30, 2022 and 2021, the Company had net losses of $4,585,329 and $2,401,486, respectively.
The operating loss of $1,872,255 for the three months ended September 30, 2022, as compared with the operating loss of $291,953 for the three months ended September 30, 2021, represents increased operating loss of $1,580,302 for the period. The operating loss of $4,267,614 for the nine months ended September 30, 2022, as compared with the operating loss of $2,273,811 for the nine months ended September 2021 represents increased operating losses in the amount of $1,993,803. Increased losses are primarily due to the increase in forward gold contract expense.
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Liquidity and Cash Flow
| September 30, | December 31, | |||||||
| WORKING CAPITAL | 2022 | 2021 | ||||||
| Current assets | $ | 5,301,502 | $ | 5,413,909 | ||||
| Current liabilities | 22,132,356 | 19,126,642 | ||||||
| Working capital deficit | $ | (16,830,854 | ) | $ | (13,712,733 | ) | ||
| Nine months ended September 30, | ||||||||
| CASH FLOWS | 2022 | 2021 | ||||||
| Cash flow provided by operating activities | $ | 1,922,661 | $ | 1,577,284 | ||||
| Cash flow used by investing activities | (276,387 | ) | (374,444 | ) | ||||
| Cash flow used by financing activities | (442,584 | ) | (904,284 | ) | ||||
| Net increase in cash | $ | 1,203,690 | $ | 298,556 | ||||
Net cash provided by operating activities of $1,922,661 during the nine-month period ended September 30, 2022, compared with cash provided by operating activities of $1,577,284 during the nine-month period ended September 30, 2021, represented a $345,377 increase in cash and is primarily attributable to the decrease in inventories and the increase in the amount due to PDK in lieu of gold deliveries during the nine months ended September 30, 2022.
Net cash used by investing activities was $276,387 during the nine-month period ended September 30, 2022, compared with $374,444 cash used during the nine-month period ended September 30, 2021. This decrease of cash used of $98,057 during the nine-month period ended September 30, 2022, was due to the reduction in payments on reclamation bonds.
Net cash used by financing activities was $442,584 during the nine-month period ended September 30, 2022, compared with $904,284 cash used by financing activities during the nine-month period ended September 30, 2021. The decrease of $461,700 was due primarily to the decrease in payments made on notes payable.
As a result of the above, cash increased by $1,203,690 during the nine-month period ended September 30, 2022 over the cash balance at December 31, 2021, leaving us with a cash balance of $1,628,319 as of September 30, 2022.
Going Concern
As shown in the accompanying financial statements, the Company had an accumulated deficit of $18,833,089 and negative working capital of $16,830,854 at September 30, 2022, which raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
Although production restarted in 2019, it has not yet reached optimum levels. The timing and amount of capital requirements will depend on a number of factors, including demand for products, metals market pricing, and the availability of opportunities for expansion through affiliations and other business relationships. Management continues to seek new capital from equity securities issuances or other business arrangements to provide funds needed to increase liquidity, fund internal growth, and fully implement its business plan. The ability of the Company to continue as a going concern is dependent on the Company’s ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they are due.
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.
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Critical Accounting Policies
There have been no significant changes to the critical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Form 10-K.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, result of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we have elected not to provide the disclosure required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Control and Procedures
Our Chief Executive Officer, who serves as our principal executive officer; and our Treasurer, who serves as our principal financial officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The Chief Executive Officer and Treasurer have concluded that as of the Evaluation Date, due to the existence of material weaknesses, 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 accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II – OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
During the first quarter of 2019, the Company entered into and closed a Prepaid Forward Gold Purchase Agreement (the “Purchase Agreement”) with PDK Utah Holdings L.P. (“PDK”) for the purchase by PDK of gold produced from the Company’s mining property. On October 31, 2019, the Company and PDK amended the Purchase Agreement and entered into the Amended Prepaid Forward Agreement (the “Amended Agreement”) to reduce the total number of ounces of gold subject to the Purchase Agreement and to revise other provisions therein. The first gold delivery under the Amended Agreement was due on December 24, 2020, and recurring deliveries are due on the fourth business day prior to the last calendar day of each scheduled delivery month thereafter. We have failed to make any of the monthly gold deliveries through the filing date of this report and anticipate that we will be unable to make deliveries until at least the beginning of the next fiscal year. The failure to make gold deliveries under the Amended Agreement provides PDK with certain remedies, including termination of the agreement, demand for early payment of the entire delivery obligations, and enforcement of foreclosure rights against the assets pledged as security under the agreement. As of the filing date of this report, we are obligated to deliver to PDK 24,047 ounces of gold, plus default interest of approximately $495,000 (calculated at the rate of LIBOR plus 2%), under the Amended Agreement. We are involved in ongoing discussions with representatives of PDK in an attempt to resolve these late payments and to renegotiate the gold delivery agreement.
Item 4. Mine Safety Disclosures
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in exhibit 95 to this quarterly report.
Item 6. Exhibits
| Exhibit No. | Description | |
| 31.1 | Rule 15d-14(a) Certification by Principal Executive Officer | |
| 31.2 | Rule 15d-14(a) Certification by Principal Financial Officer | |
| 32.1 | Section 1350 Certification of Principal Executive Officer | |
| 32.2 | Section 1350 Certification of Principal Financial Officer | |
| 95 | Mine Safety Disclosure | |
| 101.INS | Inline XBRL Instance Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
In accordance with Rule 402 of Regulation S-T, the XBRL information included in Exhibit 101 to this Form 10-Q shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Desert Hawk Gold Corp. | ||
| Date: November 14, 2022 | By: | /s/ Rick Havenstrite |
| Rick Havenstrite, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November 14, 2022 | By: | /s/ Marianne Havenstrite |
| Marianne Havenstrite, Treasurer | ||
| (Principal Accounting and Financial Officer) | ||
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