UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.20549





FORM 10-Q


(Mark One)





x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2011


or





TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _______________________to___________________________





Commission File Number: 333-169701





Desert Hawk Gold Corp.


(Exact name of registrant as specified in its charter)





Nevada
82-0230997(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)7723 N. Morton St., Spokane, WA
99208(Address of principal executive offices)
(Zip Code)





(509) 434-8161


(Registrant’s telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No x




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer
o
Accelerated filer
oNon-accelerated filer
o
Smaller reporting company
x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 2, 2011: 7,969,411.











DESERT HAWK GOLD CORP.


Form 10-Q


June 30, 2011





Table of Contents




PagePART I—FINANCIAL INFORMATION
4Item 1. Financial Statements
4Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
19Item 3. Quantitative and Qualitative Disclosures About Market Risk
22Item 4. Controls and Procedures
23PART II – OTHER INFORMATION
23Item 1A. Risk Factors
23Item 6.Exhibits
31SIGNATURES
32




2





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Consolidated Balance Sheets





PART I—FINANCIAL INFORMATION


Item 1. Financial Statements





June 30,


December 31,2011


2010(unaudited)


(Restated-Note 9)ASSETSCURRENT ASSETSCash

$
543,285


$
566,549Accounts receivable


439,519



-Concentrate inventory


16,900



-Prepaid expenses and other current assets


22,074



42,153Total Current Assets


1,021,778



608,702PROPERTY AND EQUIPMENT, net of depreciation of $55,025 and $22,770


382,524



404,819MINERAL LEASE (Note 6)


777,735



777,735RECLAMATION BONDS (Notes 4 and 6)


93,303



80,302TOTAL ASSETS

$
2,275,340


$
1,871,558LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIESAccounts payable

$
90,436


$
74,507Accrued expenses


70,626



33,115Accrued liabilities-officer wages (Note 6)


-



131,259Derivative liability-put option (Note 5)


14,421



26,396Derivative liability-conversion option (Note 8)


96,926



-Interest payable


147,353



-Convertible debt-net of discount (Note 5)


499,764



-Note payable-equipment


-



15,995Notes payable-net of discount, current portion (Note 8 )


829,411



1,623,531Interest on notes payable-net of prepaid portion (Note 8)


29,625



106,307Total Current Liabilities


1,778,562



2,011,110LONG-TERM LIABILITIESConvertible debt-net of discount (Note 5)


-



465,444Accrued repayment premium on note payable-net of prepaid portion (Note 8)


39,847



30,745Notes payable-net of discount (Note 8)


3,605,485



-3,645,332



496,189TOTAL LIABILITIES


5,423,894



2,507,299COMMITMENTS AND CONTINGENCIES (Note 6)





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





3





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Consolidated Balance Sheets





June 30,


December 31,2011


2010(unaudited)


(Restated-Note 9)STOCKHOLDERS' EQUITY (DEFICIT) (Note 3)Preferred Stock, $0.001 par value, 10,000,000 shares authorizedSeries A:  958,033 shares issued and outstanding


958



958Series A-1: No shares issued and outstanding


-



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


100



-Common stock,  $0.001 par value, 100,000,000  shares authorized; 7,969,411 and 7,586,411 shares issued and outstanding, respectively


7,969



7,587Additional paid-in capital


4,685,727



3,718,109Accumulated deficit prior to exploration stage


(1,016,591
)


(1,016,591
)Accumulated deficit during exploration stage


(6,826,717
)


(3,345,804
)Total Stockholders' Equity (Deficit)


(3,148,554
)


(635,741
)TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

$
2,275,340


$
1,871,558





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





4





Desert Hawk Gold Corp.


(An Exploration Stage Company)


CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)





Period fromMay 1, 2009(Inception of

Exploration Stage)Three Months Ended


Six Months Ended


to June 30,June 30,


June 30,


June 30,


June 30,


20112011


2010


2011


2010


(Restated-Note 9)INCOME EARNED DURING EXPLORATION STAGEConcentrate sales

$
669,580


$
-


$
884,580


$
-


$
884,580EXPENSESGeneral project costs


415,850



21,445



922,728



38,029



1,226,585Exploration expense


85,580



71,013



129,636



181,680



1,260,044Consulting


89,670



45,002



120,670



69,320



402,404Officers and directors fees


136,837



37,615



190,298



69,665



721,747Legal and professional


42,955



48,994



65,496



99,460



341,859General and administrative


38,196



22,985



107,418



45,714



363,255Depreciation


16,542



2,120



32,255



2,481



55,025825,630



249,174



1,568,501



506,349



4,370,919OPERATING LOSS


(156,050
)


(249,174
)


(683,921
)


(506,349
)


(3,486,339
)OTHER INCOME (EXPENSE)Interest income and other income (loss)


-



(129
)


15



3,833



59,072Change in derivative liabilities


23,328



-



23,328



-



23,328Loss on extinguishment of debt  (Note 8)


(2,149,404
)


-



(2,149,404
)


-



(2,149,404
)Financing expense


(44,842
)


-



(397,146
)


(33,000
)


(712,347
)Interest expense


(234,466
)


(39,343
)


(273,786
)


(78,662
)


(561,027
)(2,405,384
)


(39,472
)


(2,796,993
)


(107,829
)


(3,340,378
)LOSS BEFORE INCOME TAXES


(2,561,434
)


(288,646
)


(3,480,914
)


(614,178
)


(6,826,717
)INCOME TAXES


-



-



-



-



-NET LOSS


(2,561,434
)


(288,646
)


(3,480,914
)


(614,178
)


(6,826,717
)OTHER COMPREHENSIVE INCOMEUnrealized gain on available for sale securities


-



1,400



-



1,400



-COMPREHENSIVE LOSS

$
(2,561,434
)

$
(287,246
)

$
(3,480,914
)

$
(612,778
)

$
(6,826,717
)BASIC AND DILUTED NET LOSS PER SHARE

$
(0.33
)

$
(0.04
)

$
(0.45
)

$
(0.09
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED


7,827,960



7,074,744



7,719,002



7,074,744





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





5





Desert Hawk Gold Corp.


(An Exploration Stage Company)


CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)





Period fromMay 1, 2009(Inception ofSix Months Ended


Exploration Stage)June 30,


June 30,


to June 30,2011


2010


2011CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(3,480,914
)

$
(614,178
)

$
(6,826,717
)Adjustments to reconcile net loss to net cash used by operating activities:Depreciation


32,255



2,481



55,025Common stock issued for services


136,841



-



530,007Accretion of debt discounts


230,217



33,639



235,888Accretion of prepaid interest  liability


61,513



-



21,513Accretion of repayment obligation


200,250



-



200,250Derivative liability changes


(23,328
)


-



(23,328
)Loss on extinguishment of debt


2,149,404



-



2,149,404(Gain) loss on sale of marketable securities


-



129



(2,540
)Changes in operating assets and liabilities:










-(Increase) in deposits


-



-



(500
)(Increase) decrease in inventory


(16,900
)


-



(16,900
)(Increase) decrease in accounts receivable


(439,519
)


12,313



(439,519
)(Increase) decrease in prepaid expenses


20,079



(2,560
)


(21,573
)Increase (decrease) in accounts payable


15,929



30,141



87,261Increase (decrease) in accrued liabilities - officer wages


-



(2,500
)


(40,691
)Increase (decrease) in accrued expenses


37,511



(8,801
)


70,626Increase (decrease) in interest payable


147,353



(3,750
)


147,353Net cash used by operating activities


(929,309
)


(553,086
)


(3,874,441
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets


(9,960
)


(92,989
)


(421,554
)Purchase of mineral lease


-



(250
)


(250,250
)Acquisition of reclamation bond


(13,000
)


-



(50,500
)Notes receivable


-



-



27,500Proceeds from marketable securities


-



11,871



48,920Net cash used by investing activities


(22,960
)


(81,368
)


(645,884
)





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





6





Desert Hawk Gold Corp.


(An Exploration Stage Company)


CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)





Period fromMay 1, 2009(Inception ofSix Months Ended


Exploration Stage)June 30,


June 30,


to June 30,2011


2010


2011CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from convertible notes payable


-



-



600,000Proceeds from notes payable


1,000,000



-



3,500,000Payment of note payable - equipment


(15,995
)


-



(15,995
)Proceeds from issuance of common stock


-



2,590



1,008,000Proceeds from issuance of preferred stock


-



-



958Financing fees paid


(55,000
)


-



(55,000
)Net cash provided by financing activities


929,005



2,590



5,037,963NET INCREASE (DECREASE) IN CASH


(23,264
)


(631,864
)


517,638CASH, BEGINNING OF PERIOD


566,549



888,434



25,647CASH, END OF PERIOD

$
543,285


$
256,570


$
543,285NON-CASH FINANCING AND INVESTING ACTIVITIES:Common stock issued for mineral lease

$
-



-


$
525,000Common stock issued as incentive with convertible notes


-



-



210,000Common stock issued for reclamation bond


-



-



42,802Equipment acquired with note payable


-



-



15,995Preferred stock issued in connection with debt amendment


700,000



-



700,000Common stock issued for accrued liabilities-officer wages


131,259



-



131,259





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





7





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010





NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS





Desert Hawk Gold Corp. 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.





The Company was originally incorporated to pursue the Mining business through the acquisition of prospective mining claims in the Wallace and Kellogg mining districts of Northern Idaho.  The Company never successfully generated any revenue, or joint ventures from any of the activities it pursued, and abandoned the mining business as a viable business model when the commodity prices cycled downward. The Company remained dormant until it recommenced its mining activities and entered the exploration stage on May 1, 2009. The Company is considered an exploration stage company and its financial statements are presented in a manner similar to a development stage company as defined in ASC 915-10-05, and interpreted by the Securities and Exchange Commission for mining companies in Industry Guide 7.





On December 31, 2009 the Company acquired all of the outstanding stock of Blue Fin Capital, Inc. (“Blue Fin”), a Utah corporation owning mining claims in Arizona.  The Company issued a total of 2,713,636 shares of its common stock to the shareholders of Blue Fin for all of the outstanding shares of Blue Fin.  Blue Fin was acquired from a related party, so the acquisition was recorded at the historical cost of Blue Fin.  Blue Fin became a wholly-owned subsidiary of the Company and all inter-company accounts have been eliminated.





These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  These unaudited interim financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2010.  In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented. Operating results for the six month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.





NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Fair Value of Financial Instruments


The Company's financial instruments as defined by ASC 825-10-50, include cash, receivables, accounts payable and debt.  All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at June 30, 2011 and December 31, 2010. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:





Level 1.  Observable inputs such as quoted prices in active markets;





Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and





8





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010





NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:





Level 3.  Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.





The Company measures its derivative liabilities at fair value on a recurring basis using Level 2 inputs.





Mineral Exploration and Development Costs


The Company accounts for mineral exploration and development costs in accordance with ASC Topic 930 Extractive Activities.  All exploration expenditures are expensed as incurred, previously capitalized costs are expensed in the period the property is abandoned.  Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on units of production basis over proven and probable reserves.





Mineral Properties and Leases


The Company accounts for mineral properties in accordance with ASC Topic 930 Extractive Activities-Mining.  Costs of acquiring mineral properties and leases are capitalized by project area upon purchase of the associated claims (see Note 5).  Mineral properties are periodically assessed for impairment of value.





Inventories


Stockpiled ore inventory represents ore that has been mined, hauled to the surface and processed through our Cactus Mill.  This inventoried stockpile is ready for shipping for further processing by an outside source.  Stockpiles are measured by estimating the number of tons added and removed from the stockpile, the number of contained metal ounces or pounds (based on assay data) and the estimated metallurgical recovery rates (based on the expected processing method).





Revenue Recognition


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





Earnings Per Share


Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share.  At June 30, 2011, common stock equivalents outstanding are 1,249,143 and 1,958,033 shares of common stock into which the convertible debt (Note 5) and preferred stock (Note 3), respectively, can be converted.  However, the diluted earnings per share is not presented because its effect would be anti-dilutive due to the Company’s recurring losses.





Going Concern


As shown in the accompanying financial statements, the Company had an accumulated deficit incurred through June 30, 2011, 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.





9





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010





NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:





The Company will need significant funding to continue operations and increase development through the next fiscal year.  The timing and amount of capital requirements will depend on a number of factors, including demand for products and services and the availability of opportunities for expansion through affiliations and other business relationships.  Management intends to seek new capital from equity securities issuances to provide funds needed to increase liquidity, fund internal growth, and fully implement its business plan.





If the going concern assumption were not appropriate for these consolidated financial statements, then adjustments would be necessary to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.





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.





On February 15, 2011, the Company issued 25,000 shares of common stock valued at $0.70 per share or $17,500 in services.  The shares were issued to an employee under the Company’s 2008 Stock Option/Stock Issuance Plan pursuant to the terms of the employee’s employment agreement with the Company.





On May 3 and May 10, 2011, the Company issued a total of 220,000 shares of common stock valued at $0.70 per share or $154,000 in services and 138,000 shares valued at $0.70 or $96,600 to satisfy accrued expenses for prior services.  The shares were issued to non-employees under the Company’s 2008 Stock Option/Stock Issuance Plan.





Preferred Stock


In July 2010 the Company filed a Certificate of Designations with the State of Nevada to create 958,033 shares of Series A Preferred Stock.  The Series A Preferred Shares have voting rights with the common stock equal to the conversion value of the preferred shares into common shares.





In July 2010 the Company issued 958,033 shares of its Series A Preferred Stock to DMRJ Group in connection with financing (see Note 8). These preferred shares are convertible into shares of the Company’s common stock at the rate of one common share for each preferred share converted, subject to certain adjustments.





In connection with the Fourth Amendment to the DMRJ Group funding (See Note 8), on May 3, 2011, the Company created and designated 2,500,000 shares of its authorized preferred stock as Series A-1 Preferred Stock and 1,000,000 shares as Series A-2 Preferred Stock.





Each share of Series A-1 Preferred Stock and Series A-2 Preferred Stock is convertible at the option of the holder at any time into that number of shares of common stock equal to (i) for the Series A-1 Preferred Stock ten times the Series A-1 Issue Price ($0.70) divided by the conversion price for Series A-1 Preferred and (ii) for the Series A-2 Preferred Stock ten times the Series A-2 Issue Price ($1.00) divided by the conversion price for such Series A-2 Preferred Stock.  The initial conversion price of the Series A-1 preferred stock is $0.70 per share and the conversion price of the Series A-2 preferred stock is $1.00.  If the Company issues or sell shares of its common stock, or grant options or other convertible securities which are exercisable or convertible into common shares, at prices less than the conversion price of Series A-1 or A-2 shares, except in certain exempted situations, then the conversion price of the Series A-1 and A-2 shares will be reduced to this lower sale or conversion price.  The Series A-1 and A-2 shares may not be converted into common shares if the beneficial owner of such shares would thereafter exceed 4.9% of the outstanding common shares.


10





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010





NOTE 3 - CAPITAL STOCK, Continued:





The Series A-1 and A-2 shares have the following 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 its 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 various actions without the separate consent of persons owning a majority of the Series A-1 and A-2 preferred shares, including:


o
Amending the Articles of Incorporation or Bylaws of the Company or its subsidiary;


o
Entering into another business;


o
Adopting a new equity compensation plan or amending the current plan;


o
Redeeming, retiring or acquiring the Company’s own securities;


o
Entering into any merger transaction, selling, licensing or transferring any of the Company’s assets, or pledging or granting a security interest in its assets;


o
Entering into any agreement or arrangement for the purchase of capital stock or a substantial portion of the assets of another entity or any type of joint venture or strategic alliance;


o
Declaring or paying any dividends on the Company’s equity securities;


o
Issuing any debt or equity securities, except in certain limited circumstances;


o
Entering into any insider transactions, except for transactions in the normal course of business, the payment of customary salaries or other standard employee benefit programs available to all employees;


o
Creating any subsidiaries;


o
Dissolving, liquidating, or reorganizing the Company;


o
Creating any new indebtedness in excess of $500,000 other than trade payables and the indebtedness created under the DMRJ Group Investment Agreement;


o
Fix or change the number of directors set in any resolution of the Board;


o
Making any loans or advances to any person other than ordinary business expenses not to exceed in the aggregate $15,000;


o
Granting any registration, preemptive, anti-dilution, or redemption or repurchase rights with respect to any securities; and


o
Borrowing against, pledging, assigning, modifying, cancelling or surrendering any key man insurance policy maintained by or for the Company.


·
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.


11





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010


NOTE 3 - CAPITAL STOCK, Continued:


·
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-1 or A-2 shares.


·
The holders of the Series A-1 and A-2 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-1 or A-2 shares.





At June 30, 2011, 100,000 shares of Series A-2 Preferred Shares are outstanding that are convertible by the holder into 1,000,000 shares of the Company’s common stock.   These shares were issued during the quarter ended June 30, 2011 in connection with Amendment 4 of DMRJ financing (see Note 8).





NOTE 4 – MINERAL PROPERTIES





The Company holds operating interests within the Gold Hill Mining District in Tooele County, Utah, consisting originally of 419 unpatented mining claims, including an unpatented mill site claim, 42 patented claims, and seven Utah state mineral leases located on state trust lands, all covering approximately 33 square miles.  In August 2010, as a result of further evaluation, the Company allowed certain of the claims and leases to lapse back to Clifton Mining.  The Company has retained 334 unpatented claims, including the unpatented mill site claim, 42 patented claims, and five Utah state mineral leases located on state trust lands.   All but four of these mining claims and leases were obtained under the terms of the Amended and Restated Lease Agreement effective July 24, 2009, with Clifton Mining Company and Woodman Mining Company as lessors.    Rights to the four Yellow Hammer patented claims were obtained under the terms of the Amended and Restated Lease Agreement dated July 24, 2009, with the Jeneane C. Moeller Family Trust.  The properties are located approximately 190 miles west-southwest of Salt Lake City, Utah, and 56 miles south southeast of Wendover, Utah.  The Company intends to concentrate its exploration activities on the four patented Yellow Hammer claims, the Kiewit project consisting of seven of the unpatented Kiewit claims, and the Cactus Mill project consisting of an unpatented mill site.  Mineral extraction activities on the property will be open-pit and the Company does not anticipate conducting any underground mining activities.





Additionally, the Company, through its wholly-owned subsidiary, Blue Fin Capital, Inc., holds eight unpatented mining claims in Yavapai County, Arizona.  The Company has no current plans to explore these claims.




Kiewit Gold Project




The Company, through its lease agreement with Clifton Mining, has purchased all data, core samples and related reports from Dumont associated with the aforementioned properties.  In addition, the Company has access to all data and related information available and held by Clifton Mining. Desert Hawk has made application for a Large Mining Operations Permit to construct a heap leach facility and commence exploration activities on these claims.





In January 2010 the Company submitted a notice of intent to commence large mining operations for three surface mines and a heap leach gold operation on the Kiewit unpatented claims.  In February 2010 the Company submitted a Plan of Operation to the Bureau of Land Management and the Utah Division of Oil, Gas and Mining for exploratory drilling on the claims.





12





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010





NOTE 4 – MINERAL PROPERTIES, Continued:





Cactus Mill Plant





Located on the Cactus Mill site are two process facilities, a 150 ton per day mill built by Woodman Mining and operated until the 1980’s.  The mill has equipment used to process copper, gold, silver, and tungsten ores from the district.  In addition there is a second facility constructed in the 1990’s for custom milling precious metals concentrates.  Equipment from both mills was used to construct a 240 ton per day pilot mill capable of recovering copper, gold, silver and tungsten ores initially extracted from the Yellow Hammer claims.  In September 2010 the Company completed its rebuild of the pilot mill and testing of the pilot plan was conducted.  Commencement of processing activities began in fourth quarter 2010.  Pursuant to the Company’s lease agreement with Clifton Mining, it has access to Cane Springs, a natural flowing spring approximately 1,000 feet above the Cactus Mill site, as well as the Cane Springs mine shaft located approximately one-quarter mile south of the Cactus Mill property.  The Company holds a permit from the Utah Division of Oil, Gas and Mining for the pilot plant which allows flotation and gravity concentration.  The Company has filed an application to amend its permit to operate the pilot mill to allow construction of a heap leach facility near the mill to process mineralized material from the Yellow Hammer claims.





The Company commenced operation of the Cactus Mill pilot plant in November 2010, processed and sold concentrates on a pilot test basis through June of 2011.  Further processing of Yellow Hammer concentrates in ongoing at this time.





Yellow Hammer Claims





The Company holds a Small Mine Permit from the Utah Division of Oil, Gas and Mining and has posted a reclamation bond of $37,500.  This permit stipulates that the Company may conduct exploration or mining operations on these claims so long as such activities are limited to an area within five acres.





Exploration Expenditures





Exploration expenditures incurred by the Company during the six months ended June 30, 2011 and 2010 were as follows:





June 30, 2011


June 30, 2010Assaying

$
12,219


$
6,816Permitting


47,928



-Equipment rental


-



22,216Geological consulting fees


64,180



57,969Maps and miscellaneous


5,309



18,917Site development






75,762Total Exploration Expenditures

$
129,636


$
181,680




NOTE 5–CONVERTIBLE DEBT
 
 On November 18, 2009, the Company issued convertible promissory notes to two of its minority shareholders, for a total of $600,000.  The notes bear interest at 15% per annum.  Interest-only is payable in equal monthly installments of $7,500.  The notes were originally convertible at any time at a rate of $1.50 per share, but on July 14, 2010 the promissory notes were amended thereby reducing the conversion price to $.70 due to the note holders’ agreement to subordinate their debt to DMRJ Group (Note 8).  The notes are convertible into potentially 857,143 shares of common stock, and principal and interest are due May 31, 2012, or 30 months from the date of issuance.  The holders of the notes were issued 300,000 bonus shares at a rate of one share for each $2 loaned, resulting in a debt discount of $210,000 that is being accreted over the life of the loan.


13





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010





NOTE 5–CONVERTIBLE DEBT, Continued:




Subsequent to quarter end, on July 5, 2011 the Company entered into an agreement with the holders of the convertible debt to begin paying their monthly interest in stock rather than cash.  The note holders were each issued 10,716 shares of stock, valued at $.70, on July 5 to convert accrued interest for the months of May and  June 2011.





In the event the Company fails to repay the loan or interest thereon in full on the maturity date, the Company will be required to issue an additional 300,000 shares of common stock.





NOTE 6 – COMMITMENTS





Mining Properties


During the year ended December 31, 2009 the Company entered into a Joint Venture Agreement with the Moeller Family Trust for the leasing of the Trust’s Yellow Hammer property in the Gold Hill Mining District of Utah.  Pursuant to the agreement, Moeller Family Trust received 250,000 shares of the Company’s restricted common stock.  If the Company does not place the Yellow Hammer property into commercial production within a three year period it will be required to make annual payments to the Trust of $50,000.  Under the terms of the Joint Venture agreement, the Company will be required to pay a 6% net smelter royalty on the production of base metals and a net smelter royalty on gold and silver based on a sliding scale of between 2% and 15% based on the price of gold and silver, as applicable.  The Company has incurred  royalty expenses of approximately $80,000 as of June 30, 2011 associated with sales of concentrate during the six months ended June 30, 2011.





Also during the year ended December 31, 2009, the Company entered into a Joint Venture Agreement with the Clifton Mining Company and the Woodman Mining Company for the leasing of their property interests in the Gold Hill Mining District of Utah. Under the terms of the Joint Venture agreement, the Company will be required to pay a 4% net smelter royalty on base metals in all other areas except for production from the Kiewit gold property and a net smelter royalty on gold and silver, except for production from the Kiewit gold property, based on a sliding scale of between 2% and 15% based on the price of gold or silver, as applicable.  The Company will also be required to pay a 6% net smelter return on any production from the Kiewit gold property.  Additionally, if the Company does not place the Kiewit, Clifton Shears/smelter tunnel deposit, and the Cane Springs deposit into commercial production within a three year period, it will be required to make annual payments to Clifton in the amount of $50,000 per location.





In September 2009, the Company acquired all of the rights and interests of Clifton Mining in a $42,802 reclamation contract and cash surety deposit with the State of Utah Division of Oil, Gas and Mining for the property covered by the joint venture.  As consideration for Clifton Mining selling its interest in the reclamation contract and surety deposit, the Company issued 60,824 shares to Clifton Mining.  For a period of two years the Company has the right to repurchase the shares for $48,000, or during the 180-day period after this two year period, Clifton Mining will have the option to put the shares to the Company for $48,000.  In connection with the issuance of this put option, management concluded that the 60,824 shares should be recorded as a derivative liability, and not as equity.




Employment Agreements
 
 In September 2010, the Company entered into employment agreements with its Chief Executive Officer and its President and entered into a consulting agreement with one of its directors.  Each agreement is for an initial term of between 3 months and four years and provides for base salary or fees of $120,000 per year.  The Company owes the CEO $0 and $131,259 at June 30, 2011 and December 31, 2010, respectively, to satisfy wages due under the provisions of the September 2010 agreement and prior similar agreements.  On May 3, 2011, this payable was satisfied with the issuance of 138,000 shares of stock to the CEO.





14





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010




NOTE 7 – DERIVATIVE LIABILITIES





The Company currently does not use derivative instruments to manage its exposures to currency risk or interest rates. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. All derivative financial instruments are recognized in the balance sheet at fair value. Changes in fair value are recognized in earnings if they are not eligible for hedge accounting or other comprehensive income if they qualify for cash flow hedge accounting.  The fair value of outstanding derivative instruments not designed as hedging instruments on the accompanying Consolidated Balance Sheets was as follows:





Derivative Instruments

June 30, 2011


December 31, 2010Put option

$
14,421


$
26,396Conversion option

$
96,926


$
-





A Black-Scholes option-pricing model was used to estimate the fair value, using Level 2 inputs, of the Company’s derivatives using the following assumptions at June 30, 2011:





Number of

Shares


Volatility


Risk-

Free Rate


Expected

Life

(in years)


Stock

pricePut option


60,824



117.0
%


.40
%


.66


$
.70Conversion option


392,000



85.6
%


.40
%


1.14


$
.70





NOTE 8 – DMRJ GROUP FUNDING





On July 14, 2010, the Company entered into an Investment Agreement with DMRJ Group I, LLC (“DMRJ Group”).   According to the original terms of the agreement, DMRJ Group has committed to loan the Company up to $6,500,000 pursuant to certain terms and conditions as evidenced by a promissory note, under which advances made to the Company were due not later than July 14, 2012.  These loan advances could only be used by the Company to pay transaction fees and expenses incurred in connection with the loan transaction, to purchase certain mining equipment, and as working capital to advance our Yellow Hammer and Kiewit mining activities.  The maximum amounts allocable to the Yellow Hammer and Kiewit projects were $2,500,000 and $2,750,000, respectively, and were subject to meeting certain milestones on the projects.   Advances for operations on the Kiewit project are conditioned upon the Company’s ability to obtain and maintain all environmental and mining permits necessary to commence mining activities and the timely payment of the initial Yellow Hammer advances.  The Company received loan advances from DMRJ Group for total principal due of $3,500,000 and $2,500,000 at June 30, 2011 and December 31, 2010, respectively.





Each principal advance amount bears interest of 15% per annum from the date of borrowing.  The Company is required to prepay interest on any advance that would accrue during the first year following the advance, or a shorter period if the advance is less than one year prior to the maturity date of the promissory note.  This prepayment of interest is nonrefundable if the Company prepays the advance or goes into default.  In addition, at the time the Company repays or prepays the advance, it is required to pay an additional amount equal to 20% of the principal and interest amount being repaid or prepaid.




In July 2010, in connection with this agreement, the Company issued 958,033 shares of its Series A Preferred Stock to DMRJ Group at $.001 par value for $958 cash.  The Company recorded a discount to the loan proceeds in the amount of $669,664, which was valued based on the stock price of $.70 less the cash received for the preferred stock.





15





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010




NOTE 8 – DMRJ GROUP FUNDING, Continued:


Loan advances made for the Yellow Hammer and Kiewit projects were subject to mandatory prepayments by the Company.  Yellow Hammer advances were originally to be repaid, together with prepayment interest and any outstanding monthly interest, commencing on or before the fifth business day of the month beginning February 2011 and each month thereafter through September 2011.  Kiewit advances were to be repaid, together with prepayment interest and any outstanding monthly interest, beginning month seven after the initial advance on this project through month twelve.  However, the repayment dates have been deferred due to waivers, forbearances, and amendments to the initial Investment Agreement as stated in the following paragraphs.





Pursuant to a Security Agreement dated July 14, 2010, the Company has secured repayment of any advances made by DMRJ Group with all of its assets, including its shares of Blue Fin Capital, Inc., the Company’s wholly-owned subsidiary.





In connection with the DMRJ Group transaction, two of the Company’s convertible note holders, each of whom had loaned $300,000 to the Company on November 18, 2009, agreed to subordinate their debt to DMRJ Group.  In consideration for their agreement to subordinate their loans, the Company reduced the conversion price of the loans from $1.50 to $0.70 per share.  All other material terms of the loans remain unchanged.





On February 25, 2011, the Company entered into a Second Amendment to Investment Agreement with DMRJ Group I, LLC which amended the Investment Agreement, dated as of July 14, 2010, as amended by the First Amendment and Waiver dated as of November 8, 2010.  The Second Amendment allowed the Company to receive a term loan advance of up to $125,000.  This advance was made without satisfying the provisions requiring the Company to meet certain milestones in connection with its Kiewit properties and permitting the Company to use the funds for working capital and ordinary course general corporate purposes not inconsistent with or prohibited by the Investment Agreement.  The advance is not deemed to be a Kiewit Advance, which means that it was not subject to the mandatory prepayment requirements under the Investment Agreement.





On March 6, 2011, the Company entered into a Forbearance Agreement with DMRJ Group pursuant to which DMRJ Group agreed to forbear until April 6, 2011, from exercising its rights and remedies with respect to an event of default by virtue of the Company’s failure to make a mandatory prepayment as required under the Investment Agreement.  The Company failed to make the mandatory prepayment to DMRJ Group on March 7, 2011, as required in the Investment Agreement.  Pursuant to the Forbearance Agreement if the Company cured this prepayment default on or prior to April 6, 2011; no default interest will be due with respect to the period between the date of the prepayment default and April 6, 2011.





On March 11, 2011, the Company entered into a Third Amendment to Investment Agreement with DMRJ Group.  This amendment allows the Company to make a further request for a term loan advance under the Investment Agreement of up to $500,000 without satisfying the provisions requiring the Company to meet certain milestones in connection with the Kiewit properties and permitting the Company to use the funds for working capital and ordinary course general corporate purposes not inconsistent with or prohibited by the Investment Agreement.   The advance is not deemed to be a Kiewit Advance, which means that it is not subject to the mandatory prepayment requirements under the Investment Agreement.




The Company failed to make its mandatory prepayment of $1,011,616 to DMRJ Group on April 7, 2011, as required pursuant to the Investment Agreement with DMRJ Group, and thus entered into a Fourth Amendment.





16





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010




NOTE 8 – DMRJ GROUP FUNDING, Continued:





On April 21, 2011, the Company entered into a Fourth Amendment to Investment Agreement with DMRJ Group.  This amendment allows the Company to make a further request for a term loan advance under the Investment Agreement of up to $625,000 without satisfying the provisions requiring the Company to meet certain milestones in connection with the Kiewit properties and permitting the Company to use the funds for working capital and ordinary course general corporate purposes not inconsistent with or prohibited by the Investment Agreement.   The advance is not deemed to be a Kiewit Advance, which means that it is not subject to the mandatory prepayment requirements under the Investment Agreement.  The Amendment also eliminates the requirement of the Investment Agreement to make mandatory prepayments for the Yellow Hammer advances.





The Company has considered the impact of ASC 470-50 “Debt-Modifications and Extinguishments” on the accounting treatment of the Fourth Amendment.    ASC 470-50 states that a transaction resulting in a significant change in the nature of a debt instrument should be accounted for as an extinguishment of debt. The difference between the reacquisition price and the net carrying amount of the extinguished debt should be recognized currently in income of the period of extinguishment. The Company has concluded that the amendment constituted a substantial modification. During the quarter ended June 30, 2011, the Company recognized a loss on extinguishment of the DMRJ note of $2,149,404 representing the difference between the fair value of the amended note, including consideration and fees, and the carrying value of the original note, including related unamortized discount.





A summary of DMRJ Group-related amounts as of June 30, 2011 and December 31, 2010 is as follows:





June 30, 2011


December 31, 2010Yellow Hammer Advances

$
2,500,000


$
2,500,00020% accrued repayment obligation


588,235



588,23515% accrued prepaid interest obligation


441,176



441,1753,529,410



3,529,410Term Loan Advance Principal


1,000,00020% accrued repayment obligation


235,29415% accrued prepaid interest obligation


176,471



01,411,765



3,529,410Total


4,941,175Less related discounts and unamortized balances


436,807



1,768,827Carrying Value

$
4,504,368


$
1,760,583





Of these amounts, $1,005,882 ($859,036 net of discount) is due on June 30, 2012 and the remaining amount is due during the second half of the fiscal year ending December 31, 2012.




The Fourth Amendment contained provisions for DMRJ Group to elect to convert the outstanding payable balances to shares of Series A-1 preferred stock (for the Yellow Hammer Advances) and Series A-2 Preferred Stock (for the Term Loan Advances).  See description of the Preferred Stock in Note 3.





17





Desert Hawk Gold Corp.


(An Exploration Stage Company)


Notes to Unaudited Consolidated Financial Statements


For the Three and Six Months Ended June 30, 2011 and 2010




NOTE 8 – DMRJ GROUP FUNDING, Continued:





The Series A-1 and Series A-2 Preferred Stock are convertible into shares of the Company’s common stock.    The conversion rate of the Preferred Stock to shares of the Company’s common stock is adjustable based upon factors not found in a standard fixed-for-fixed pricing model. As such, the Company considered the provisions of ASC 815 “Derivatives and Hedging”, and recorded the fair value of $108,279 for the embedded conversion option liability associated with the amended agreement with an offset to the carrying value of the debt. The assumptions used in the Black-Scholes option pricing model at May 3, 2011 are as follows: (1) dividend yield of 0%; (2) expected volatility of 96.8%, (3) risk-free interest rate of 0.40%, and (4) expected life of 1.25 years.   The conversion option liability is adjusted to its fair value at the end of each reporting period with the change in fair value recognized in net loss.





Also in connection with entering this Fourth Amendment the Company issued 100,000 shares of Series A-2 Preferred Stock valued at $700,000 to DMRJ Group.   The value was determined by calculating the number of common shares into which the Series A-2 preferred shares are convertible (1,000,000 common shares) times the current fair value for shares of common stock ($0.70).  The Company recognized the amount in the loss on extinguishment of debt related to the Fourth Amendment.





In the event the Company completes an equity financing with net proceeds of more than $3,000,000, DMRJ Group will have the option to require the Company to pay 25% of the proceeds over $3,000,000 to satisfy our indebtedness to them.





NOTE 9- RESTATEMENT





On August 2, 2011, management of the Company concluded that the financial statements for the year ended December 31, 2010, contained an error relating to the recording of financing-related expenses incurred during 2010.   Financing expenses in the amount of $466,281 were expensed in total during the year ended December 31, 2010.   Management subsequently determined that the financing expenses should have been recorded as a discount to the associated note payable and amortized over the term of the related note.  As a result, the previously issued financial statements for the year ended December 31, 2010 have been restated to reflect the appropriate accounting.   The effect on the previously issued 2010 financial statement is summarized as follows:





AsAs


Correcting


Restated atInitially Reported


Entries


December 31, 2010Total Assets

$
1,871,558


$
-


$
1,871,558Current Liabilities

$
2,385,346


$
(374,236
)

$
2,011,110Long Term Liabilities


496,189



-



496,189Equity


(1,009,977
)


374,236



(635,741
)Total Liabilities and Shareholder’s Equity

$
1,871,558


$
-


$
1,871,558For the year ended December 31, 2010Operating Loss

$
(2,304,272
)

$
-


$
(2,304,272
)Other Income (Expense)


(929,574
)


374,236



(555,338
)Net Loss

$
(3,233,846
)

$
374,236


$
(2,859,610
)Basic and Diluted Loss Per Share

$
(0.44
)

$
0.05


$
(0.39
)





NOTE 10 – SUBSEQUENT EVENTS





In June 2011 the Company commenced a non-public offering of up to 4,000,000 shares of common stock at $1.15 per share.  The offering is scheduled to terminate not later than September 30, 2011.  No shares were sold prior to June 30, 2011.   As of August 5, 2011, the Company had raised $50,025 in gross proceeds from the offering and had issued 43,500 shares.





18





Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations





The following discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.





Forward-looking statements





The statements contained in this report that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information.  Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, need for financing, competitive position, potential growth opportunities, potential operating performance improvements, ability to retain and recruit personnel, the effects of competition and the effects of future legislation or regulations.  Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “intends,” “may,” “should,” “anticipates,” “expects,” “could,” “plans,” or comparable terminology or by discussions of strategy or trends.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct.  Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.





Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this quarterly report.  While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to, the following:


·
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).





19





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.





Overview





We are a mineral exploration company with proposed projects located in the Gold Hill Mining District in Tooele County, Utah.  We are currently focused on extracting mineralized material from the Yellow Hammer claims for processing at the Cactus Mill pilot plant, and completing the permitting process for our Kiewit claims and construction of a heap leach facility near these claims.  We are also in the process of seeking an amendment to our current mill site permit to allow us to construct and operate a heap leach facility near the pilot mill.  Concentrates from our mill site are processed at a smelter in Hayden, Arizona to extract any copper, gold, and silver from the mineralized material.  In addition, tungsten concentrates are processed at a refinery in Buffalo, NY.





We were originally incorporated in the State of Idaho on November 5, 1957.  For several years the Company bought and sold mining leases and claims, but in 1995 we ceased all principal business operations.  In 2008 we changed the domicile of the Company from the State of Idaho to the State of Nevada.  In May 2009 we raised funds to recommence mining activities.  In July 2009 we entered into agreements to commence exploration activities on mining claims in the Gold Hill Mining District located in Tooele County, Utah.  We hold leasehold interests within the Gold Hill Mining District consisting of 334 unpatented mining claims, including an unpatented mill site claim, 42 patented claims, and five Utah state mineral leases located on state trust lands, all covering approximately 33 square miles.  From these claims we have centered our activities on the Yellow Hammer project located on four of the patented claims, the Kiewit project consisting of seven of the unpatented Kiewit claims, and the Cactus Mill project consisting of an unpatented mill site.  We have no current exploration plans for the remaining claims.  We also hold eight unpatented lode mining claims in Yavapai County, Arizona, on which we have no current plans to conduct exploration.  We do not have any proven or probable reserves on any of our mineral claims or mining leases.





We have entered into an agreement with DMRJ Group, LLC through which we can borrow up to $6,500,000 for our mining operations and our general and administrative expenses.  Historically, we have incurred net losses for the years ended December 31, 2010 and 2009, and have also incurred losses for the six months ended June 30, 2011.  If we are unable to generate sufficient cash flow from the extraction and processing of mineralized material from our claims, we will not be able to meet our obligations to repay the loan advances to DMRJ Group and will likely lose our interest in all of our assets and mining claims.





Second Quarter Highlights





During the first and second quarters of 2011 we shipped concentrate from our mill to the smelter in Hayden, Arizona, pursuant to a contract with a customer for up to 200 tons of mineral concentrates.  The assays are currently being evaluated by an independent umpire who will determine the concentrates’ value.  This valuation will be completed in third quarter 2011.  Revenues from the shipments are recognized at the point that concentrates are shipped.  We estimate revenues approximating $835,000 from this contract. We are obligated to pay royalties to the Moeller Family Trust approximating $80,000 as a result of these anticipated revenues.





We also shipped tungsten concentrate to a refinery in Buffalo, New York during second quarter 2011.  Revenue from this first shipment was approximately $50,000, with royalties paid to the Moeller Family Trust in the amount of approximately $3,000.  Tungsten shipments will be ongoing during 2011 as concentrate is processed from our tailings.





20





On May 3, 2011, we entered into a Fourth Amendment to the Investment Agreement which restructures the repayment schedule of the prior loan advances to us. The Fourth Amendment allowed us to make a further request for a term loan advance under the Investment Agreement of up to $735,295, including $110,295 of prepaid interest, and any remaining amounts previously permitted under the Third Amendment, without satisfying the provisions requiring us to meet certain milestones in connection with our Kiewit properties and permitting us to use the funds for working capital and ordinary course general corporate purposes not inconsistent with or prohibited by the Investment Agreement.  Term loan advances under the terms of the Fourth Amendment, repayment of this and all prior advances are now due in three payments due on June 30, 2012, September 30, 2012, and December 31, 2012.  And in the event we complete an equity financing with net proceeds of more than $3,000,000, DMRJ Group will have the option to require us to pay 25% of the proceeds over $3,000,000 to satisfy our indebtedness to them.  We also created a Series A-1 and a Series A-2 Preferred Stocks which are convertible into our common stock.  The Yellow Hammer loans may be converted by the investor, from time to time, to Series A-1 Preferred Stock, and the April Term Loan advances may be converted by the investor, from time to time, to Series A-2 Preferred Stock.  We also issued 100,000 shares of the Series A-2 Preferred Stock to DMRJ Group for entering into the Fourth Amendment.





Results of Operations for the Six Months Ended June 30, 2011 and 2010





During the six month period ended June 30, 2011, the Company had a net loss of $3,480,914 compared to a net loss of $614,178 during the six month period ended June 30, 2010.  This represents an increased net loss of $2,866,736 during the six month period ended June 30, 2011.





On March 1, 2011, the Company entered into a contract with Asarco, LLC to process approximately 200 tons of copper concentrates with silver and gold by-product. These concentrates are processed at the Cactus Mill pilot plant.  Pursuant to this contract, the Company has delivered 193 tons of concentrate by the end of June 2011 and has billed $834,408 in accordance with the revenue contract. Both parties conduct assays to determine the value of the concentrates.  If there is a dispute, the assays undergo further analysis by an independent umpire who determines the settlement value of the concentrates.  At June 30, 2011, all of the concentrates under this contract had been delivered to the smelter and had been billed based on estimated assay results.  Final results and all proceeds are expected to be received within 90 days. The Company owes royalties to the Moeller Family Trust on revenues earned from concentrate sales pursuant to terms of a Joint Venture Agreement.  The Company estimates approximately $80,000 in royalties will be paid in connection with this concentrate sales contract.





In addition to the above contract, the Company has generated $50,172 in tungsten sales.  Concentrates are being produced at the Cactus Mill and future sales are anticipated but are not definable at this time.  Royalties in the amount of 6% are also due on tungsten sales.





Mining severance tax will be due to the State of Utah in connection with the mineral sales, and is calculated based upon receipt of the proceeds.  At June 30, 2011, mining severance tax is accrued in the amount of $3,081.  Future receipts based on the above proceeds will generate an additional accrual of approximately $3,400 in severance tax.





The increase in net loss is attributable to increases in exploration expense and general and administrative expense, and an increase in interest and financing expense related to the extinguishment of debt in regards to the investment agreement with DMRJ.





Total operating expenses increased to $1,568,501 during the six month period ended June 30, 2011, from $506,349 for the comparable period ended June 30, 2010.  The increase is primarily attributable to increased project costs including concentrate processing costs, and increased general and administrative expense over the respective six month period ended June 30, 2010.





21





Liquidity and Cash Flow





Net cash used by operating activities was $929,309 during the six month period ended June 30, 2011, compared with $553,086 during the six month period ended June 30, 2010.  The increase in the amount of cash used by operating activities is primarily attributable to the increase in accretion of debt discount and other repayment obligations related to the DMRJ Investment Agreement, to the loss on extinguishment of debt and to the increase in accounts receivable in relation to concentrate sales during the six months ended June 30, 2011.





Net cash used by investing activities was $22,960 during the six month period ended June 30, 2011, compared to $81,368 during the six month period ended June 30, 2010.  The decrease is attributable to a reduction in the purchase of fixed assets during the six month period ended June 30, 2011.





Net cash provided by financing activities was $929,005 during the six month period ended June 30, 2011, compared with $2,590 during the six month period ended June 30, 2010. The increase is a result of additional borrowings from DMRJ along with the associated debt discount during the six months ended June 30, 2011.





As a result, cash decreased by $23,264 during the six month period ended June 30, 2011, leaving the  Company with a cash balance of $543,285 as of June 30, 2011.





Critical Accounting Policies





The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have changed. Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing rules, and the use of judgment, to the specific set of circumstances existing in our business. Discussed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported. See Note 2, “Summary of Significant Accounting Policies,” in our attached unaudited consolidated financial statements for a discussion of those policies.





Mineral Exploration and Development Costs





We account for mineral exploration costs in accordance with ASC 932 Extractive Activities.  All exploration expenditures are expensed as incurred, previously capitalized costs are expensed in the period the property is abandoned.  Expenditures to explore new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a units of production basis over proven and probable reserves.





Mineral Properties





We account for mineral properties in accordance with ASC 930 Extractive Activities-Mining.  Costs of acquiring mineral properties are capitalized by project area upon purchase of the associated claims.  Mineral properties are periodically assessed for impairment of value and any diminution in value.





Revenue





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





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.





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Item 4. Controls and Procedures





Evaluation of Disclosure Controls and Procedures





Our CEO, who is also our principal financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), has concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to provide assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.





Changes in Internal Control Over Financial Reporting





There were no changes in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) that occurred during our most recent quarter ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





PART II – OTHER INFORMATION





Item 1A. Risk Factors





In addition to the other information described elsewhere in this report, you should carefully consider the following risk factors, which could materially adversely affect our business, financial condition and results of operations.





Risks Related to Our Company and its Business





If we fail to repay the loan advances from DMRJ Group in a timely manner or otherwise breach our agreement with this lender, we would likely lose our interest in our mining leases and other assets.





Our loan advances from DMRJ Group under the Investment Agreement are secured by all of our assets, including our mining leases and equipment.   Repayment of loan advances commences June 30, 2012.  The Investment Agreement also contains numerous affirmative and negative covenants which require us to perform certain obligations or refrain from certain actions so long as any amounts are owed to DMRJ Group under the Investment Agreement.  If we fail to meet all of our covenants under the agreement or if we fail to make any required payment of principal or interest when due, it is likely that DMRJ Group would call the full amount of the outstanding balances on our loans immediately due.  If we are unable to repay the outstanding balances at this time, we anticipate that DMRJ Group would foreclose on its security interest and would likely take control of or liquidate our mining leases and other assets.  Because the Investment Agreement limits our ability to raise outside funds during the effective period of the Investment Agreement, it is unlikely that we would be able to obtain alternate financing to satisfy the obligations owed to DMRJ Group in the event of foreclosure.  If we lose our mining leases and other assets to DMRJ Group in foreclosure, we would not be able to continue our business operations as currently planned and you would lose your entire investment in our common stock.





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Because of our historic losses from operations since the inception of our exploration stage on May 1, 2009, there is substantial doubt about our ability to continue as a going concern.





Our auditor’s report on our 2010 consolidated financial statements includes an additional explanatory paragraph that states that our recurring losses from operations raise substantial doubt about our ability to continue as a going concern.  These consolidated financial statements for the year ended December 31, 2010,were prepared on the basis that our company is a going concern, which contemplates the realization of its assets and the settlement of its liabilities in the normal course of operations.  Our ability to continue as a going concern is uncertain and dependent upon continuing to obtain the financing necessary to meet our financial commitments and to complete the exploration of our mining properties and/or realizing proceeds from the sale of mineralized material from the properties.  Our continuation as a going concern is primarily dependent upon the continued financing from DMRJ Group under the Investment Agreement and the attainment of profitable operations. As of June 30, 2011, we had cash in the amount of $543,285, negative working capital of $756,784, and accumulated losses of $6,826,717 since inception of our current exploration stage.  These factors raise substantial doubt regarding our ability to continue as a going concern.  Neither our 2010 audited financial statements nor our interim unaudited financial statements for the six months ended June 30, 2011, include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.





If we are unable to generate sufficient revenue from the sale of mineralized material from the Yellow Hammer claims, we will likely not be able to continue our operations.





We commenced producing metals from our properties during first quarter 2011. Nevertheless, our properties are all exploration stage properties in various stages of exploration and we have no proven or probable reserves on any of these properties.The first phase of our business plan is to process mineralized material from the Yellow Hammer claims at the pilot plant and continue to sell any concentrate produced by us from the Cactus Mill pilot plant.  We have not completed any feasibility study of the Yellow Hammer claims and there are no known or established commercially minable deposits for extraction on these claims and no known mineral deposit which could be economically extracted.  If the mineralized material from the Yellow Hammer claims fails to produce concentrate that can be sold at a profit for a sufficient period to repay our outstanding debt to DMRJ Group and others, it is unlikely that we would be able to continue any operations or explore our other mining properties and it is probable that our proposed business would fail.





We have a history of losses and are dependent upon revenue from our planned operations through our Cactus Mill pilot plant to continue our proposed operations.





In the fiscal year ended December 31, 2010, we had net losses of $2,859,610.  For the six months ended June 30, 2011, we had net losses of $3,480,914.  Since the commencement of our exploration stage on May 1, 2009, we have experienced accumulated losses of $6,826,717. We have commenced commercial production only on our Yellow Hammer claims. We have limited revenues from operations and anticipate we will have no significant operating revenues until we commence mineralized material processing operations on more of our properties.  All of our properties are in the exploration stage, and we have no known mineral reserves on our properties.  Even if we generate revenue from mineralized material on the other claims, we may not achieve or sustain profitability in the future.  If we do not begin to generate revenues before our current cash resources expire, we will either have to suspend or cease operations.





Although we have commenced the processing of mineralized material from the Yellow Hammer claims, we do not have any proven or probable reserves on this site.  As a result we may not be able to locate mineral deposits or reserves on this site which could be economically and legally extracted or produced.





Our first phase of proposed operations includes processing mineralized material from our Yellow Hammer claims at our pilot plant on our Cactus Hill property.  Nevertheless, we have not identified any proven or probable reserves on these claims which make these extraction operations on them very speculative.  If we are not able to continue to locate mineralized material which can be economically extracted and produced, the funds we spend on these claims may be lost, which could have a material negative impact on our ability to continue operations.





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Changes in the market prices of copper, gold and other metals, which in the past have fluctuated widely, will affect the profitability of our proposed operations and financial condition.





Our potential profitability and long-term viability depend, in large part, upon the market price of copper, gold and other metals and minerals which may be extracted from our mining claims and leases. The market price of copper, gold and other metals is volatile and is impacted by numerous factors beyond our control, including:


·
expectations with respect to the rate of inflation;


·
the relative strength of the U.S. dollar and certain other currencies;


·
interest rates;


·
global or regional political or economic conditions;


·
supply and demand for jewelry and industrial products containing metals; and


·
sales by central banks and other holders, speculators and producers of gold and other metals in response to any of the above factors.





We cannot predict the effect of these factors on metal prices.  In particular, gold and copper prices have fluctuated during the last several years. The price of copper (London Fix) has ranged from approximately $2.78 to approximately $4.41 per ounce during 2010 to close on December 31, 2010 at approximately $4.41 per ounce. During the first six months of 2011, the price has ranged from approximately $4.15 to $4.46 per ounce to close on june 27, 2011 at approximately $4.45.  The price of gold (London Fix) has ranged from  from $1,052 to $1,426 per ounce during 2010 to close on December 31, 2010 at $1,410 per ounce.  During the first six months of 2011, the price of gold has ranged from approximately $1,316 to $1,552 per ounce to close at approximately $1,552 per ounce on June 27, 2011.  A decrease in the market price of copper, gold and other metals could affect the commercial viability of our properties and our anticipated exploration of such properties in the future. Lower copper or gold prices could also adversely affect our ability to finance exploration of our properties.





In addition, the makeup of gold investors and users has changed significantly which has affected the price of gold in particular in recent years.  Historically, the demand for gold was driven by the needs of jewelers, dentists and electronics manufacturers who used gold in their businesses.  In 1998 investors in gold accounted for only 6.9% of demand.  During 2009 they accounted for 39% and in the second quarter of 2010, they accounted for 51%.  During the first quarter of 2009, when the stock market was at its lowest, investors accounted for 60% of the demand for gold.  This shift in demand for gold could mean that positive changes in the macro-economy could lead investors to sell gold in large quantities, which could result in dramatically decreased demand and lower prices for gold.  These lower prices could have a negative impact on our proposed business.





We have significant cash commitments under our lease agreements and if we fail to meet these obligations, we could lose our right to conduct mining activities on these claims.





Under our current lease agreements for our claims in the Gold Hill Mining District, we are obligated to commence operations of the claims within three years and pay annual maintenance costs on the claims.  The annual claim maintenance costs, including annual maintenance fees payable to the BLM for the unpatented claims, the annual state trust lands mineral lease fees, and property tax payments are substantial.  For 2010 and following years we are responsible for these costs.  If we fail to make these maintenance, tax and other payments, we may lose the right to continue mining activities on the claims.  In addition, pursuant to the terms of our lease agreements, if we fail to commence commercial scale operations on certain of the claims prior to July 2012, we will be required to pay $50,000 for an annual holding fee to retain rights to these claims.  We have paid the 2010 maintenance costs in the aggregate amount of $46,760 for the unpatented claims in the Gold Hill Mining District.  We also paid $6,890 for the 2010 mineral lease fees on the Utah mineral leases.  We also paid $6,024 for 2010 property taxes on the Utah patented claims.  We anticipate that future annual fees will be comparable, and if we are unable to pay these fees from DMRJ Group loan advances or revenue generated from our extraction activities in the future, we would lose our interest in all of our claims and leases.





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We may not be able to obtain all required permits and licenses to commence exploration activities on our properties, or the permitting process could be delayed, which could cause delays in our proposed plan of operations or increase the cost of those planned operations.





Our current proposed and future operations, including the initial extraction and processing of mineralized material from our Yellow Hammer claims, require permits from governmental authorities and such operations are and will be governed by laws and regulations governing exploration, taxes, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. Companies engaged in exploration of mining properties and related facilities generally experience increased costs, and delays in these activities and other schedules as a result of the need to comply with applicable laws, regulations and permits.  Our current Small Mining Operations Permit for the Yellow Hammer claims is limited to operations in an area within five acres.  Management anticipates that this permit will be sufficient for planned extraction activities on the Yellow Hammer claims for only one to three years and would not permit commencement of operations on the Kiewit claims.  We do not have in place the necessary permits to commence operations on the Kiewit claims.  A Large Mining Operations Permit for the Kiewit claims will require an extensive environmental assessment or preparation of a Plan of Operation.  We have a permit to operate our proposed pilot plant on the Cactus Mill property, but do not have the required permits to add a planned heap leach facility near this property or for the Kiewit claims.  We cannot predict if all permits which may be required for continued exploration activities or construction of facilities will be obtainable on reasonable terms or within the periods planned by us. Costs related to applying for and obtaining permits and licenses may be prohibitive and could delay our planned exploration activities. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions.





Our activities are subject to environmental laws and regulations that may increase our costs of doing business and restrict our planned mineral extraction and processing activities.





All phases of our planned mineral extraction and processing activities are subject to environmental regulation in the jurisdictions in which we operate, in particular Tooele County, Utah. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. These laws address emissions into the air, discharges into water, management of waste, management of hazardous substances, protection of natural resources, antiquities and endangered species and reclamation of lands disturbed by mining operations.  A Large Mining Operations Permit for our Kiewit claims will also require an extensive environmental assessment or preparation of a Plan of Operation.  Compliance with environmental laws and regulations and future changes in these laws and regulations may require significant capital outlays and may cause material changes or delays in our operations and future activities. It is possible that future changes in these laws or regulations could have a significant adverse impact on our properties or some portion of our business, causing us to re-evaluate those activities at that time.





Land reclamation requirements for our properties may be burdensome and expensive.





In addition to the current reclamation bonds posted by us, we will likely have additional reclamation requirements associated with our Large Mining Operations Permit for which we have applied for the Kiewit claims.  Reclamation requirements by governmental authorities are generally imposed on mineral exploration companies (as well as companies with mining operations) in order to minimize long-term effects of land disturbance.Reclamation may include requirements to control dispersion of potentially deleterious effluents andreasonably re-establish pre-disturbance land forms and vegetation.In order to carry out reclamation obligations imposed on us in connection with our potential exploration activities, we must allocate financial resources that might otherwise be spent on further exploration programs. If we are required to carry out unanticipated reclamation work, our financial position could be adversely affected.





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We are dependent upon the services of our President to provide the principal mining expertise for our proposed exploration activities.  The loss of Mr. Havenstrite could delay our business plan or increase the costs associated with our plan.





Other than our President, Rick Havenstrite, our officers and directors have no professional accreditation or formal training in the business of mineral exploration. With no direct training or experience these other members of our management team may not be fully aware of many of the specific requirements related to working within this industry. Decisions so made without this knowledge may not take into account standard engineering management approaches that experienced exploration corporations commonly make. Consequently, our business, earnings and ultimate financial success could suffer irreparable harm as a result of management’s lack of experience in the industry.  The loss of our President could adversely affect our business.  We have an employment agreement with Mr. Havenstrite for an initial period of four years until 2014.  However, we do not maintain key-man insurance on Mr. Havenstrite.  We may not be able to hire and retain personnel in the future, or the cost to retain replacement personnel may be excessive, in the event Mr. Havenstrite becomes unavailable for any reason.





Title to our properties may be subject to other claims, which could affect our property rights and claims.





There are risks that title to our properties may be challenged or impugned.  Our principal properties are located in Utah and may be subject to prior unrecorded transfer agreements and royalty rights and title may be affected by other undetected defects. There may be valid challenges to the title of our properties which, if successful, could impair exploration operations on the claims. This is particularly the case in respect of our properties through which we hold our interest solely pursuant to leases with the claim holders, as such interests are substantially based on contract as opposed to a direct interest in the property.





Several of the mineral rights to our properties consist of unpatented mining claims created and maintained in accordance with the U.S. General Mining Law. Unpatented mining claims are unique property interests, and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations under the U.S. General Mining Law, including the requirement of a proper physical discovery of valuable minerals within the boundaries of each claim and proper compliance with physical staking requirements. Also, unpatented mining claims are always subject to possible challenges by third parties or validity contests by the federal government. The validity of an unpatented mining or mill site claim, in terms of both its location and its maintenance, is dependent on strict compliance with a complex body of federal and state statutory and decisional law. In addition, there are few public records that definitively determine the issues of validity and ownership of unpatented mining claims. Should the federal government impose a royalty or additional tax burdens on the properties that lie within public lands, the resulting mining operations could be seriously impacted, depending upon the type and amount of the burden.





We do not maintain insurance with respect to certain high-risk activities, which exposes us to significant risk of loss.





Mining operations generally involve a high degree of risk. Hazards such as unusual or unexpected formations or other conditions are often encountered.  We may become subject to liability for pollution or hazards against which we cannot insure or against which we cannot maintain insurance at commercially reasonable premiums. Any significant claim would have a material adverse effect on our financial position and prospects.   We are not currently covered by any form of environmental liability insurance, since insurance against such risks, including liability for pollution, is prohibitively expensive.  We may have to suspend operations or take interim cost compliance measures if weare unable to fully fund the cost of remedying an environmental problem, if any of these uninsured events were to occur.





A shortage of equipment and supplies could adversely affect our ability to operate our business.





We are dependent on various supplies and equipment to carry out our exploration activities.  These include crushing services for mineralized material from our Yellow Hammer claims, road grading services, chemicals and maintenance equipment for our pilot plant, and parts and supplies for our extraction and hauling equipment.  We have no long-term agreements to provide these supplies or services.  The shortage of such supplies, equipment and parts could have a material adverse effect on our ability to carry out our operations and therefore limit or increase the cost of our exploration activities.





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Increased competition could adversely affect our ability to attract necessary capital funding or acquire suitable producing properties or prospects for mineral exploration in the future.





The mining industry is intensely competitive. Significant competition exists for the acquisition of properties producing or capable of producing gold or other metals. We may be at a competitive disadvantage in acquiring additional mining properties even in the Gold Hill Mining District because we must compete with other individuals and companies, many of which have greater financial resources, operational experience and technical capabilities than we have. We may also encounter increasing competition from other mining companies in our efforts to hire experienced mining professionals. Competition for exploration resources at all levels is currently very intense, particularly affecting the availability of manpower, drill rigs, mining equipment and production equipment. Increased competition could adversely affect our ability to attract future capital funding or acquire suitable producing properties or prospects for mineral exploration in the future.





We compete with larger, better capitalized competitors in the mining industry.





The mining industry is competitive in all of its phases, including financing, technical resources, personnel and property acquisition. It requires significant capital, technical resources, personnel and operational experience to effectively compete in the mining industry. Because of the high costs associated with exploration, the expertise required to analyze a project’s potential and the capital required to explore a mine, larger companies with significant resources may have a competitive advantage over us. We face strong competition from other mining companies, in particular Rio Tinto which operates a large copper mine in the area, some with greater financial resources, operational experience and technical capabilities than we have. As a result of this competition, we may be unable to maintain or acquire future financing, personnel, technical resources or attractive mining properties on terms we consider acceptable or at all.





Increased commodity and labor costs could affect our financial condition.





We anticipate that costs at our Gold Hill projects will frequently be subject to variation from one year to the next due to a number of factors, such as changing grades of mineralized material, metallurgy and revisions to mine plans, if any, in response to the physical shape and location of the mineral body. In addition, costs are affected by the price of commodities such as fuel, chemicals and electricity as well as labor costs. Such commodities are at times subject to volatile price movements, including increases that could make exploration activities at certain operations less profitable. We do not have firm contracts or commitments for the commodities or all labor in connection with the exploration or extraction activities on the mining claims.  A material increase in these costs could have a significant effect on our cost of operations and potential profitability.





Transportation difficulties and weather interruptions may affect and delay proposed activities and could impact our proposed business.





Our mining properties are accessible by road and there are no other means of transportation available such as rail or navigable water ways. The climate in the area is hot and dry in the summer but cold and subject to snow in the winter, which could at times hamper accessibility depending on the winter season precipitation levels.  Significant snowfall could make accessing our properties difficult or impossible by truck.  As a result, our exploration plans could be delayed for certain periods each year. These delays could affect our ability to process and transport mineralized material from the claims to the pilot plant which could have a material impact on our ability to generate revenue.





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Our directors and officers may have conflicts of interest as a result of their relationships with other companies.





Certain of our officers and directors are also directors, officers or shareholders of other companies that are similarly engaged in the business of acquiring, exploring and exploiting mining properties. For example, John Ryan, one of our directors, also serves as a director for Gold Crest Mines, Inc., Trend Mining Company, Lucky Friday Extension Mining Company, Inc., Mineral Mountain Mining and Milling Company, Tintic Standard Gold Mines, Inc., Consolidated Goldfields, Inc., and Silver Verde May Mining Company, Inc.  Consequently, there is a possibility that our directors and/or officers may be in a position of conflict in the future.  In addition, our President, Rick Havenstrite, dedicates part of his time to operating his overhead door business in Reno, Nevada, which means that he is not able to devote all of his business time to our company.





We do not have water currently available in sufficient quantity to operate our planned leaching facility near the Kiewit claims, and if we are unable to produce sufficient water, we may not be able to commence planned activities on these claims.





The Kiewit claims are located in an arid high desert climate with no other water source than may be provided through a well.  We have not tested the area near the claims for the proposed well or any other water source sufficient to operate the planned Kiewit leaching facility.  In addition, if the water table for the planned well is deeper than we estimate, the cost of constructing and maintaining the well may increase.  If we are unable to locate a suitable water source by means of the proposed well or otherwise, we may not be able to proceed with our proposed activities on the Kiewit claims, which could also affect our ability to secure necessary operating permits for the leaching facility and future loan advances from DMRJ.





Risks Related to Our Common Stock





There is currently no public trading market for our common stock which means that our shareholders must hold their shares in our company for an indefinite period.





Our common stock is not quoted on either the OTC Bulletin Board or the Pink Sheets and is not listed on any exchange.  Until the common stock is quoted on an electronic quotation service or listed on an exchange, it is unlikely that any public market for the common stock will be established.  It is possible that our company would not qualify for listing on a stock exchange in the near future, if ever.  Application for quotation on an electronic quotation service requires finding a market maker willing to make the application.  The application process entails review by FINRA, the self-regulated industry processer of these applications, and may take several months.  We have not identified any broker-dealers who may be willing to make application on our behalf.





Because our shares are designated as Penny Stock, broker-dealers will be less likely to trade in our stock in the future due to, among other items, the requirements for broker-dealers to disclose to investors the risks inherent in penny stocks and to make a determination that the investment is suitable for the purchaser.





Our shares are designated as “penny stock” as defined in Rule 3a51-1 promulgated under the Exchange Act and thus, if a public market for the stock develops in the future, may be more illiquid than shares not designated as penny stock.  The SEC has adopted rules which regulate broker-dealer practices in connection with transactions in “penny stocks.”  Penny stocks are defined generally as non-NASDAQ equity securities with a price of less than $5.00 per share; that are not traded on a “recognized” national exchange; or in issuers with net tangible assets less than $2,000,000, if the issuer has been in continuous operation for at least three years, or $10,000,000, if in continuous operation for less than three years, or with average revenues of less than $6,000,000 for the last three years.  The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer’s account, to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.  These disclosure requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a stock that is subject to the penny stock rules.  Since our securities are subject to the penny stock rules, investors in the shares may find it more difficult to sell their shares in any market which may develop in the future.  Many brokers have decided not to trade in 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.  The reduction in the number of available market makers and other broker-dealers willing to trade in penny stocks may limit the ability of purchasers in this offering to sell their stock in any secondary market which could develop in the future.  These penny stock regulations, and the restrictions imposed on the resale of penny stocks by these regulations, could adversely affect our stock price if a public trading market for our stock is established in the future.





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We have a significant number of shares of our preferred stock authorized which are convertible into shares of our common stock and which, if convertible, could adversely affect any public trading market for our shares which may develop in the future.





We have authorized 10,000,000 shares of Series A Preferred Stock, 958,033 shares are issued and outstanding, which are currently convertible into a like number of common shares.  We also have authorized 2,500,000 shares of Series A-1 Preferred Stock and 1,000,000 shares of Series A-2 Preferred Stock.  The Series A-1 Preferred Stock, none of which are outstanding, would be convertible into 25,000,000 common shares.  The Series A-2 Preferred Stock, 100,000 shares of which are issued and outstanding, would be convertible into 10,000,000 common shares.  The conversion of all or a significant amount of these preferred shares could have a material negative impact on the market price for our common stock if a public market for the stock is established in the future.





We have not paid, and do not intend to pay, dividends on our common shares and therefore, unless our common stock appreciates in value, our investors may not benefit from holding our common stock.





We have not paid any cash dividends since inception.  We do not anticipate paying any cash dividends on our common stock in the foreseeable future.  In addition, provisions in our Investment Agreement with DMRJ Group restrict our ability to declare and pay dividends on common stock as long as we have outstanding obligations to DMRJ Group.  Nevertheless, if our common stock is not quoted on the OTC Bulletin Board or listed on a senior exchange on or before July 13, 2011, and during any period we fail to maintain a quotation or listing for our common stock, the holders of the Series A Preferred Stock shares are entitled to quarterly dividends equal to 10% of our consolidated net income for each quarter commencing with the quarter beginning July 1, 2011.  In addition they are entitled to dividends or distributions made to the holders of our common stock to the same extent as if such holders of the Series A shares had converted their preferred shares into common stock.As a result, our common stock investors will not be able to benefit from owning our common stock unless a market for our common stock develops in the future and the market price of our common stock becomes greater than the price paid for the stock by these investors.





Any public trading market for our common stock which may develop in the future will likely be a volatile one and will generally result in higher spreads in stock prices.





If a public trading market for our common stock develops in the future, it would likely be in the over-the-counter market by means of the OTC Bulletin Board.  The over-the-counter market for securities has historically experienced extreme price and volume fluctuations during certain periods.  These broad market fluctuations and other factors, such as our ability to implement our business plan pertaining to the Gold Hill properties, as well as economic conditions and quarterly variations in our results of operations, may adversely affect the market price of our common stock.  In addition, the spreads on stock traded through the over-the-counter market are generally unregulated and higher than on the NASDAQ or other exchanges, which means that the difference between the price at which shares could be purchased by investors on the over-the-counter market compared to the price at which they could be subsequently sold would be greater than on these exchanges.  Significant spreads between the bid and asked prices of the stock could continue during any period in which a sufficient volume of trading is unavailable or if the stock is quoted by an insignificant number of market makers.  We cannot insure that our trading volume will be sufficient to significantly reduce this spread, or that we will have sufficient market makers to affect this spread.  These higher spreads could adversely affect investors who purchase the shares at the higher price at which the shares are sold, but subsequently sell the shares at the lower bid prices quoted by the brokers.  Unless the bid price for the stock increases and exceeds the price paid for the shares by the investor, plus brokerage commissions or charges, the investor could lose money on the sale.  For higher spreads such as those on over-the-counter stocks, this is likely a much greater percentage of the price of the stock than for exchange listed stocks.  There is no assurance that at the time the investor wishes to sell the shares, the bid price will have sufficiently increased to create a profit on the sale.





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Rule 144 will not be available for the outstanding shares acquired after 1995 until at least January 26, 2012, which means that these shareholders may not be able to sell their shares in the open market during this period.





Rule 144, as recently amended, does not permit reliance upon this rule for the resale of shares sold after the issuer first became a shell company, until the issuer meets certain requirements, including cessation as a shell company, the filing of a registration statement, and the filing for a period of one year periodic reports required under the Exchange Act.  Our registration statement on Form S-1 was declared effective by the Securities and Exchange Commission on January 26, 2011.  We have since filed a special report on Form 10-K to include our audited financial statements for the year ended December 31, 2010, and our first two quarter reports on Form 10-Q for the periods ended March 31, 2011 and June 30, 2011.  If we fail to continue to file our periodic reports with the Commission, our shareholders who acquire stock after 1995 may not be permitted to rely on Rule 144 for the resale of their shares.





Item 6.Exhibits





SEC Ref. No.

Title of Document31.1

Rule 15d-14(a) Certification by Principal Executive Officer and Principal Financial Officer32.1

Section 1350 Certification of Principal Executive Officer and Principal Financial Officer





Signature Page Follows





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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





Desert Hawk Gold Corp.Date: August 11, 2011
By
/s/ Robert E. JorgensenRobert E. Jorgensen, Chief Executive Officer(Principal Executive and Financial Officer)




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