Prepaid Forward Gold Contract Liability

9 Months Ended

Sep. 30, 2022

Prepaid Forward Gold Contract Liability Abstract

NOTE 7 – PREPAID FORWARD GOLD CONTRACT LIABILITY

In 2019, the Company entered into and closed a Pre-Paid Forward Gold Purchase Agreement (the “Purchase Agreement”) with PDK for the sale and purchase by PDK of gold produced from the Company’s mining property. Under the terms of the Purchase Agreement, as amended, PDK agreed to purchase a total of 47,045 ounces of gold from the Company. The Company agreed to deliver ounces of gold produced from the Kiewit property to PDK and the Company would then receive proceeds from PDK at the then current spot price less a discount specified in the Purchase Agreement. The Company has the option of paying cash to PDK for the number of ounces scheduled to be delivered each month at a rate of $500 per ounce. The Company received a net amount of $13,600,000 in 2019 for the future delivery of these gold ounces. Under the terms of the Purchase Agreement, as amended, the Company is obligated to deliver gold in the following quantities:

Months	Gold Ounces per Month		Total Gold Ounces
December 2020		655		655
January 2021 to March 2021		896		2,688
April 2021 to March 2022		911		10,932
April 2022 to March 2023		1,396		16,752
April 2023 to December 2023		1,753		15,777
January 2024		241		241
				47,045

In addition, under the Purchase Agreement, PDK may reduce the required number of ounces to be sold in exchange for up to 8,000 common shares of the Company. To date, PDK has not elected this option.

As security for the obligations of the Company under the Purchase Agreement, the Company has granted PDK a security interest in all of the assets of the Company. The Purchase Agreement contains representations and warranties, as well as affirmative and negative covenants customary to a transaction of this nature.

To date, no gold has been delivered under the contract. As of September 30, 2022 and December 31, 2021, a cumulative of 22,651 and 11,542 ounces, respectively, were scheduled to be delivered to PDK under the terms of the Purchase Agreement. The ounces due but unpaid to PDK at September 30, 2022 have been reflected in “Due to PDK in lieu of gold deliveries” on the balance sheet based on the Company’s option to pay cash in lieu of delivery at $500 per ounce. The forward gold contract balance as of September 30, 2022 and December 21, 2021 is as follows:

	September 30,		December 31,
	2022		2021
Total ounces to be delivered		22,651		11,542
Contractual payment per ounce in lieu of delivery	$	500	$	500
Amount due to PDK	$	11,325,500	$	5,771,000

For the three and nine months ended September 30, 2022 and 2021, the expense related to the forward gold contract is as follows:

	For the three months ended September 30,
	2022			2021
Prepaid forward gold contract liability balance at beginning of period	$	8,262,715		$	11,843,550
Forward gold contract balance associated with ounces to be delivered during period		883,334			576,444
Reduction in prepaid forward gold contract liability balance		(2,094,000	)		(1,366,500	)
Prepaid forward gold contract liability balance at end of period	$	7,052,049		$	11,053,494

	For the nine months ended September 30,
	2022			2021
Prepaid forward gold contract liability balance at beginning of period	$	10,263,438		$	13,600,000
Forward gold contract balance associated with ounces to be delivered during period		2,343,111			1,857,994
Reduction in prepaid forward gold contract liability balance		(5,554,500	)		(4,404,500	)
Prepaid forward gold contract liability balance at end of period	$	7,052,049		$	11,053,494

As of September 30, 2022, and through the issuance of these financial statements, PDK has sent invoices to the Company for the deliveries and payments due. The failure to make gold deliveries and make additional payments as described below provides PDK with certain remedies, including termination of the agreement, demand for early payment of the entire delivery obligations, and enforcement of foreclosure rights against the assets pledged as security under the agreement. Due to the delinquent status of the deliveries and PDK’s rights under the default provisions of the Purchase Agreement, the Company has classified the entire liability balance owing as current on the balance sheets. The Company has received no notice of default on the Purchase Agreement from PDK.

In addition to the delivery of gold ounces, the Purchase Agreement contains a royalty provision whereby royalties of 4% are due to PDK on gold and silver recovered from mining operations at the Kiewit site and sold by the Company to a third party. Royalties are payable within 30 days following the end of each fiscal quarter. To date, none has been remitted to PDK. Under the Purchase Agreement, the Company also pays a 5% withholding tax to the state of Utah on the PDK royalty payments.

The Purchase Agreement contains a participation payment whereby PDK receives a portion of the proceeds from gold sold by the Company to a third party. The payment due to PDK is based upon a percentage of proceeds over a set gold price per ounce. The upside participation amounts are payable within four days following each sale. To date, none has been remitted to PDK.

The following is a summary of royalties and upside participation payable:

	September 30,		December 31,
	2022		2021
Royalties payable	$	567,982	$	403,388
Royalties withholding payable		29,896		23,396
Upside participation payable		2,171,219		1,550,849
Total	$	2,769,097	$	1,977,633

The Purchase Agreement provides for the Company to pay default interest (calculated at the rate of LIBOR plus 2%) on outstanding amounts due to PDK. The balance of accrued interest payable to PDK is $427,909 and $120,989 at September 30, 2022 and December 31, 2021, respectively.

Desert Hawk Gold Corp. 10-Q