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NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Desert Hawk Gold Corp. (the “Company”) was incorporated on November 5, 1957, in the State of Idaho as Lucky Joe Mining Company.  On July 17, 2008 the Company merged with its wholly-owned subsidiary, Lucky Joe Mining Company, a Nevada corporation, for the sole purpose of effecting a change in domicile from the State of Idaho to the State of Nevada.  Lucky Joe Mining Company (Nevada) was the continuing and surviving corporation, and each outstanding share of Lucky Joe Mining Company (Idaho) was converted into one outstanding share of Lucky Joe Mining Company (Nevada).  On April 3, 2009, the Company filed a Certificate of Amendment with the State of Nevada changing the name of the Company to Desert Hawk Gold Corp.

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 becameArizona, is 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, 2011. 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 periods presented.  Operating results for the nine month period ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 In the opinion of management, the accompanying unaudited interim consolidated balance sheets and consolidated statements of operations, and cash flows contain all adjustments, consisting of normal recurring items, necessary to present fairly, in all material respects, the financial position of the Company as of March 31, 2013, and the results of its operations and its cash flows for the three months ended March 31, 2013 and 2012. The operating and financial results for the Company for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013.

These unaudited interim financial statements have been prepared by management in accordance with generally accepted accounting principles used in the United States of America (U.S. GAAP) and are presented in U.S. dollars. These unaudited interim consolidated financial statements do not include all note disclosures required by U.S. GAAP on an annual basis, and therefore should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, 2012 filed with the Securities and Exchange Commission.

Mineral Exploration and Development Costs

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

Mineral Properties and Leases

The Company accountscapitalizes costs for mineral properties in accordance with ASC Topic 930Extractive Activities-Mining.  Costs of acquiring mineral properties and expenses costs to maintain mineral rights and leases areas incurred.  Should a property reach the production stage, these capitalized by project area upon purchasecosts would be amortized using the units-of-production method on the basis of the associated claims (see Note 4).periodic estimates of ore reserves.  Mineral properties are periodically assessed for impairment of value.value, and any subsequent losses are charged to operations at the time of impairment.  If a property is abandoned or sold, its capitalized costs are charged to operations.  See Note 4.

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.the Company.  At September 30,March 31, 2013 and March 31, 2012, common stock equivalents outstanding are 1,146,433857,143 shares into which the convertible debt (Note 5) can be converted and 2,758,033 shares of common stock into which the convertible debt (see Note 6) and 2,758,033 shares of  preferred stock into which the DMRJ debt (see Note 3)(Note 7) can be converted.  However, the diluted earnings per share are not presented because its effect would be anti-dilutive due to the Company’s net loss.recurring losses.

Going Concern

As shown in the accompanying financial statements, the Company hadis in default on its note payable and has an accumulated deficit incurred through September 30, 2012 and limited cash at September 30, 2012,March 31, 2013, 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.

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

If the going concern assumption were not appropriate for these 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.

Reclassifications

Certain reclassifications have been made to conform the prior period’speriods’ data to the current presentation.  These reclassifications have no effect on the results of reported operations or stockholders’ deficit.

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.

An2013 Activity

On March 29, 2013, 32,142 shares of stock with a value of $22,500 were issued to the holders of the convertible debt as interest on the debt for the months of January through March 2013.  See Note 5.

2012 Activity

In January 2012, an equity financing was completed with the sale of 17,522 shares of common stock in January providing $20,150 in proceeds.  

In September 2012 an equity financing was initiated which resulted in third quarter of 2011.  This financing raised $355,833 through sales of 309,420130,000 shares of common stock.  This offering concluded January 31, 2012.   A separate equity financing was initiated February 20,stock during the 4^th quarter of 2012, for the saleproviding proceeds of up to 2,000,000 shares of stock.  No sales were recorded in conjunction with this offering, which ended June 30, 2012.

An equity financing was initiated August 21, 2012 for the sale of up to 1,150,000 shares of common stock.  As of September 30, 2012 no sales had been recorded in conjunction with this offering.$130,000.  Under the terms of this offering, stock cancould be converted to cash generated from the sale of gold, for a period of 12 months after commencement of operations at the Kiewit project.  Proceeds from 5% of the gold produced during the first year of production will be allocated to fund this option.  Each investor will receive the right to convert a minimum of one-half and up to all of his shares (on a pro rata basis) into the value of the number of ounces represented by the total investment, determined using a base price of $1,000 per ounce.  AsSee Note 8 for further information on the accounting of November 6,this issuance.

On December 3, 2012, this offering had raised $110,000 through sales of 110,000321,428 shares of stock.common stock were issued to the two holders of the convertible debt, with 150,000 shares issued to each of the two debt holders as penalty shares for the extension of the due date of the notes.  The due date of the convertible debt was then extended for one year to November 30, 2013.  The remaining 21,348 shares of common stock were issued to the convertible debt note holders as interest for the months of October and November 2012.  The shares were valued at $.70 per share for interest expense.  See Note 5 for further information regarding this issuance.

During 2012, the Company issued a total of 160,710 shares of stock to the note holders of the convertible debt for interest expense for the quarters ending December 31, 2011 and for each quarter ending in 2012.  The shares were valued at $.70 per share.

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 (seefinancing.  See Note 8).7.  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. During the quarter ended June 30, 2011, 100,000 shares of Series A-2 Preferred Stock were issued. On June 29, 2012, an additional 80,000 shares of Series A-2 Preferred stock were issued in connection with this Fourth Amendment.the Forbearance Agreement of the DMRJ Group funding arrangement. These shares are convertible by the holder into 1,000,000800,000 shares of the Company’s common stock.  See Note 7 for further information on the accounting of this stock subjectissuance.  At December 31, 2012, a total of 180,000 shares of Series A-2 preferred stock were outstanding.

In addition, as part of the Fourth Amendment, beginning July 1, 2011, quarterly dividends in the amount of 10% of net income are due to all Series A-1 and A-2 preferred stockholders for each quarter that the beneficial ownership rules detailed below.Company has consolidated net income.  The Company also cannot pay any dividends on the common stock until the preferred dividends are paid.  As of December 31, 2012, no dividends have been paid by the Company because there has been no net income.  

Each share of Series A-1 Preferred Stock and Series A-2 Preferred Stock is convertible at the option of the holder at any time into that number of shares of common stock equal to (i) for the Series A-1 Preferred Stock ten times the Series A-1 Issue Price ($0.70) divided by the conversion price for Series A-1 Preferred and (ii) for the Series A-2 Preferred Stock ten times the Series A-2 Issue Price ($1.00) divided by the conversion price for such Series A-2 Preferred Stock.  The initial conversion price of the Series A-1 preferred stock is $0.70 per share and the initial conversion price of the Series A-2 preferred stock is $1.00.  If the Company issues or sellsells 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 of 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.  See Note 7 for further information on the accounting of this issuance.

In connection with the Forbearance Agreement of the DMRJ Group funding arrangement (see Note 8) dated June 29, 2012, an additional 80,000 shares of Series A-2 Preferred stock were issued.  These shares are convertible by the holder into 800,000 shares of the Company’s common stock, subject to the beneficial ownership rules mentioned above.  

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NOTE 4 – MINERAL PROPERTIES AND INTERESTSLEASES

Mineral properties and interestsleases as of September 30, 2012March 31, 2013 and December 31, 20112012 are as follows:

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 and 2011, as a result of further evaluation, the Company allowed certain of the claims and interests to lapse back to Clifton Mining.  The Company has retained 299296 unpatented claims, including the unpatented mill site claim, 42 patented claims, and three Utah state mineral leases located on state trust lands.  All but four of these mining claims and interestsleases 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 Kiewit project consisting of seven of the unpatented Kiewit claims, the Clifton Shears, Cane Springs, Oquirrh Springs, the Frankie, the Rustler, the Lion Vein, and the Lucy L sites.  Each of these is a potential near-term development target.  Mineral extraction activities on the property at this time will be open-pit and the Company anticipates conducting underground mining exploration in the future.  Annual lease fees are required on the 299296 claims that make up the Company’s Gold Hill property.  Of these, four claims are within the Yellow Hammer site.  Annual claims fees are currently $140 per claim plus administrative fees.  The Company renewed 299 of the above claims in August 2012, at a total cost of about $42,159.

Kiewit Gold Project

The Company, through its lease agreement with Clifton Mining, has purchased all data, core samples and related reports from Dumont Nickel Inc. (which in 2010 changed its name to DNI Metals Inc. and was the former owner of the leases) 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 production activities on these claims.  Tentative approval of the NOI was received from the Utah Division of Oil, Gas and Mining (DOGM) on September 28, 2012.  A 30 day public comment period closes November 13, 2012.  Conditional final approval will be issued if there are no substantive public comments.  The NOI is expected to be issued during fourth quarter 2012 after posting of the required reclamation bond in the approximate amount of $1,278,000.  

In January 2010 the Company submitted a Notice of Intent to Commence Large Mining Operations application to DOGM for three surface mines and a leach gold operation on the Kiewit unpatented claims.  In February 2010 the Company submitted a Plan of Operations to the Bureau of Land Management. The Plan of Operations is deemed to be substantially complete and along with the Environmental Assessment is expected to be issued by the BLM during fourth quarter 2012.

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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 using equipment 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 commenced operation of the Cactus Mill pilot plant in November 2010, and processed and sold concentrates on a pilot test basis through June of 2011.  Operations at the Cactus Mill pilot plant have been temporarily suspended.

Yellow Hammer Claims

The Company holds a Small Mine Permit for the Yellow Hammer site from the Utah Division of Oil, Gas and Mining and has posted reclamation bonds totaling $60,800.  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 nine acres.

Exploration Expenditures

Exploration expenditures incurred by the Company during the three and nine months ended September 30, 2012 and 2011 were as follows:

NOTE 5 – JOINT VENTURE

On February 7, 2012, we signed a letter of intent (“LOI”) with Shoshone Silver/Gold Mining Company (“Shoshone”) whereby Shoshone would acquirehave acquired a 50% interest in our mineral properties located in Tooele County, Utah.  The terms of the LOI were that Shoshone would contribute $10 million in project equity, as well as a $2 million project loan to have been used for the startup of the Kiewit gold heap leach operation.  Under the terms of the deal, Shoshone had a 120 day120-day exclusive right to provide the $10 million, for which $100,000 was advanced to us as a nonrefundable deposit.  Shoshone would also provide a $2 million, 10% interest loan, with a four year maturity, which bears a preferential payback from operational cash flow.  The two companies would have been 50-50 partners on the entire project with a four man operating committee consisting of two members from each company.  The proceeds of the Shoshone transaction, which was originally scheduled to close in June but had been extended to September 30, 2012, would have been used to retire the DMRJ Group debt as well as fund a portion of the heap leach operation.  The joint venture had not been finalized as of June 30, 2012 and an additional deposit of $100,000 had beenwas agreed to as of June 29, 2012 to extend the agreement to joint venture the property until September 30, 2012.  Although this additional deposit was received, other terms of the extension were not met and effective July 31,21, 2012, the joint venture agreement was terminated and the $200,000 received was recognized as gain on termination of a joint venture agreement.agreement in the third quarter of 2012.  

These joint venture transactions have resulted in an event of default in regard to the DMRJ Group note payable.  Negotiations regarding a future business relationship to fund the DMRJ Group note and provide equity for operations capital are currently ongoing.  See Note 8.Exploration Expenditures

11Exploration expenditures incurred by the Company during the three months ended March 31, 2013 and 2012 were as follows:

NOTE 65 – 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 (seeGroup.  See Note 8).7.  The notes are convertible into potentially 857,143 shares of common stock and principal and interest arewere due in full November 30, 2012.  On November 18, 2009, 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.

On July 5, 2011 the Company entered into an agreement with the two holders of the convertible debt to begin paying their monthly interest in stock rather than cash.  The note holders have beenwere issued 91,07164,284 shares of stock each valued at $.70,in 2012 to convertsettle accrued interest for 2012 and have been issued 16,071 shares of common stock each to settle accrued interest for the monthsfirst quarter of May 2011 through September 2012.2013.

In the event theThe Company failsfailed to repay the loan or interest thereon in full on the maturity date, of November 30, 2012,so the Company will bewas required to issue an additional 300,000 shares of common stock to these debt holders.  This stock was valued at $1.00, the holdersprice of recent stock sales, and was accounted for as financing expense in 2012.  As part of this agreement, the due date of the convertible debt.  Fundingnote was extended to November 30, 2013, with interest continuing to be paid with shares of these notes payable is under discussion as part of the negotiations with DMRJ Group regarding a future business relationship.  See Note 8.common stock each quarter.

NOTE 76 – DERIVATIVE LIABILITIES

The fair value of outstanding derivative instruments not designed as hedging instruments on the accompanying Consolidated Balance Sheets at March 31, 2013 and December 31, 2012 for the conversion option on the DMRJ Group debt was as follows:$293,545.

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 September 30, 2012March 31, 2013 and December 31, 2011:2012:

NOTE 87 – DMRJ GROUP FUNDING

2010 Activity

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 had 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 were 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 had received loan advances from DMRJ Group for total principal due of $3,500,000 at September 30, 2012 and December 31, 2011.

Each principal advance amount bears interest of 15% per annum from the date of borrowing.  The Company was also required to prepay one year’s interest on each loanany advance that would accrue during the first year following the advance, or on a shorter period if the advance was less than one year prior to the maturity date of the promissory note.  This prepayment of interest was nonrefundable if the Company prepaid the advance or went into default.  In addition, at the time the Company repays or prepaysrepaid the advance, it wasis required to pay an additional amount (the Repayment Obligation) equal to 20% of the principal and interest amount being repaid or prepaid.repaid.

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 DMRJ Group loan proceeds in the amount of $669,664,$669,644, which was valued based on the common stock price of $.70 less the cash received for the preferred stock.

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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 in month seven after the initial advance on this project and continuing 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 advancesAdvances made by DMRJ Group withare collateralized by all of its assets.

In connection with the DMRJ Group transaction, both of the Company’s convertible note holders, eachassets, including its shares of whom had loaned $300,000 toBlue Fin Capital, Inc., 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 (see Note 6).  All other material terms of the convertible loans remain unchanged.Company’s wholly-owned subsidiary.

2011 Activity

On February 25, 2011, the Company entered into a Second Amendment to Investment Agreement with DMRJ Group 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.Group.  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 was 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 would 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 allowed 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.  Two $125,000 term loan advances were received as part of this amendment.  These advances are not deemed to be Kiewit Advances, which means that they were 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.

On April 21, 2011, the Company entered into a Fourth Amendment to Investment Agreement with DMRJ Group.  This amendment allowed the Company to make a further request for a term loan advance under the Investment Agreement of up to $625,000 without satisfying$625,000.

The Company considered the provisions requiringimpact 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 year ended December 31, 2011, 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 was not deemed to berecognized a Kiewit Advance, which means that it was not subject to the mandatory prepayment requirements under the Investment Agreement.  The Amendment also eliminated the requirementloss on extinguishment of the Investment Agreement to make mandatory prepayments forDMRJ note of $2,149,404 representing the Yellow Hammer advances.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.

The Fourth Amendment also contained provisions for DMRJ Group to elect to convert the outstanding payable balances to shares of Series A-1 Preferred Stockpreferred 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.

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, were 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 income (loss).loss.  The conversion option derivative liability at September 30,March 31, 2013 and December 31, 2012 is recorded at $188,560 (see$293,545 and $140,798, respectively.  See Note 7).6.

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Also in connection with entering thethis Fourth Amendment, in 2011 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 Preferredpreferred shares wereare convertible (1,000,000 common shares) times the current fair value for shares of common stock on the date of issuance ($0.70).  The Company recognized the amount in the loss on extinguishment of debt related to the Fourth Amendment.

The Company 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 was recognized currently in income of the period of extinguishment.  The Company 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.2012 Activity

A summary of DMRJ Group-related amounts as of September 30, 2012 and December 31, 2011 is as follows:

This debt is all current in nature and was due in three installments (which include interest payable) of $1,550,000 on June 30, 2012, $2,945,000 on September 30, 2012 and $1,370,492 on December 31, 2012.  On June 29, 2012, a Forbearance Agreement was signed and the payment terms were changed to allow the Company three additional months to payentered into a forbearance agreement with DMRJ Group which extended the due date of the June 30, 2012 loan payment to September 30, 2012 in exchange for the issuance of 80,000 shares of Series A-2 Preferred Stock, carrying aStock.  The value to DMRJ Group of $920,000.  This valuethis issuance was determined by calculating the number of common shares into which the Series A-2 Preferredpreferred shares wereare convertible (800,000 common shares) times the current fair value (most recent sales price) for shares of common stock on the date of issuance ($1.15).  Financing expense in theThe Company recognized this amount of $920,000 was recognized for the quarter ended June 30, 2012 for this stock issuance pursuant to the Forbearance Agreement.as loss on extinguishment of debt.  Pursuant to the ForbearanceInvestment Agreement, DMRJ Group agreed to forbear from exercising its rights relating to a payment default if the payment due on June 30, 2012, was not paid.  Thethe Company failedhad been obligated to make the payment on June 30, 2012, and therefore an event of default occurred under the investment agreement, subject to DMRJ Group’s agreement to forbear exercise its rights because of this default.  Because additional termsrepay $1,550,000 of the Forbearance Agreement were not met, it terminated on July 31, 2012.funds previously loaned by DMRJ Group.  

The Company failed to make the loan payment of $4,495,000 on September 30, 2012, and therefore an event of default occurred under the Investment Agreement, subject to DMRJ Group’s agreement to forbear exercise its rights because of this default.  Under the Investment Agreement, DMRJ Group therefore has the right, at its option, to notify the Company and declare the full amount of all of the loans immediately due and payable, foreclose on the security for the loans, or exercise any other legal rights based upon breach of the agreement.  DMRJ Group has not notified the Company of its intent to exercise any of its rights based upon default of the Company under the agreement.  Negotiations regarding a future business relationship to fund the DMRJ Group note and provide equity for operations capital are currently ongoing.Agreement.