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- Quarterly Report (10-Q)

Date : 11/21/2011 @ 2:53PM
Source : Edgar (US Regulatory)
Stock : Dutch Gold Resources, Inc. (PL) (DGRI)
Quote : 0.0006  -0.0001 (-14.29%) @ 5:00PM
Dutch Gold Resources, Inc. (PL) share price Chart

- Quarterly Report (10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
 

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

For the quarterly period ended September 30, 2011

Commission file number:   333-72163

DUTCH GOLD RESOURCES, INC.
 
Nevada
58-2550089
(State of Incorporation)
(I.R.S. Employer Identification No.)

3500 Lenox Road, NE
Suite 1500
Atlanta, Georgia  30326
(Address of principal executive offices)

(404) 419-2440
(Issuer’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 o

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 x No o

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

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

Transitional Small Business Disclosure Format:
Yes o
No 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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
Class
 
Outstanding at November 15, 2011
Common Stock, par value $0.001 per share
 
499,250,000
 

 
 

 

DUTCH GOLD RESOURCES, INC.

FOR THE QUARTER ENDED SEPTEMBER 30,  2011
TABLE OF CONTENTS

INDEX
 
Page
     
PART I - FINANCIAL INFORMATION
   
     
ITEM 1 – Financial Statements – Unaudited
 
3
     
Condensed Consolidated Balance Sheets at September 30, 2011 (unaudited) and December 31, 2010
 
3
     
Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2011 (Unaudited) and 2010 Restated (Unaudited)
 
4
     
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 Restated (unaudited)
 
5
     
Notes to Condensed Consolidated Financial Statements (unaudited)
 
6
     
ITEM 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
23
     
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
 
27
     
ITEM 4 - Controls and Procedures
 
28
     
PART II- OTHER INFORMATION
   
     
ITEM 1 – Legal Proceedings
 
29
     
ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
29
     
ITEM 3 – Defaults Upon Senior Securities
 
30
     
ITEM 4 – Removed and Reserved
 
30
     
ITEM 5 – Other information
 
30
     
ITEM 6 – Exhibits
 
30
     
SIGNATURES
 
31
     
EXHIBITS
  
 

 
2

 

PART 1 – FINANCIAL INFORMATION

ITEM 1.  Financial Statements

DUTCH GOLD RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
    (Unaudited)        
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 10,057     $ 127,397  
Investments available for sale at fair value
    -       3,188,250  
Investments in trading securities at fair value
    9,333       -  
Deferred financing costs, net
    7,497       -  
Other current assets
    152,459       150,000  
                 
Total current assets
    179,346       3,465,647  
                 
LONG-TERM ASSETS:
               
Mineral properties
    2,581,155       2,581,155  
Property, plant and equipment at cost
    2,173,628       2,358,424  
Less accumulated depreciation
    (2,173,628 )     (2,112,009 )
                 
Net mineral properties and property, plant and equipment
    2,581,155       2,827,570  
                 
Other assets
    11,600       11,600  
                 
TOTAL ASSETS
  $ 2,772,101     $ 6,304,817  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 1,039,004     $ 957,626  
Accounts payable-related parties
    517,708       742,947  
Notes payable-related parties
    2,398,000       2,473,962  
Loans from shareholders
    141,907       150,000  
Convertible notes payable, net
    779,198       582,084  
Payroll liabilities
    602,612       658,112  
Deferred production royalty revenue
    15,000       -  
Accrued liabilities
    455,360       337,443  
                 
Total current liabilities
    5,948,789       5,902,174  
                 
LONG-TERM LIABILITIES:
               
Warrant liability
    1,357,348       1,661,163  
                 
TOTAL LIABILITIES
    7,306,137       7,563,337  
                 
Commitments and contingencies
               
                 
STOCKHOLDERS' DEFICIT
               
                 
Preferred stock, $.001 par value; 10,000,000 authorized, none issued or outstanding
    -       -  
Series A, Convertible Preferred Stock, $.001 par value; 2,000,000 shares authorized, issued and outstanding at September 30, 2011 and December 31, 2010
    2,000       2,000  
Series B, Convertible Preferred Stock, $.001 par value; 5,000,000 shares authorized,4,500,000 issued and outstanding at September 30, 2011;  none authorized, issued and outstanding at December 31, 2010
    4,500       -  
Series C, Convertible Preferred Stock, $.001 par value; 40,000 shares authorized, 25,000 issued and outstanding at September 30, 2011;  none authorized, issued and outstanding at December 31, 2010
    25       -  
Common stock, $.001 par value; 500,000,000 shares authorized, 499,250,000 issued and outstanding at September 30, 2011; 372,008,907 issued and outstanding at December 31, 2010
    499,250       372,009  
Additional paid-in-capital
    20,491,952       17,547,573  
Stock subscriptions
    104,058       104,058  
Accumulated deficit
    (25,635,821 )     (21,246,160 )
Accumulated other comprehensive (loss) income
    -       1,962,000  
                 
Total stockholders' deficit
    (4,534,036 )     (1,258,520 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 2,772,101     $ 6,304,817  

See accompanying Notes to Condensed Consolidated Financial Statements

 
3

 

DUTCH GOLD RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
         
(as restated)
         
(as restated)
 
                         
Revenue
                       
                         
Sales
  $ -     $ -     $ -     $ -  
Cost of sales
    -       -       -       -  
                                 
Gross profit
    -       -       -       -  
                                 
Operational Expenses
                               
                                 
Selling, general and administrative expenses
    222,064       393,510       1,092,580       737,744  
Professional fees
    75,201       52,175       554,931       1,698,063  
Rent and repairs and maintenance
    7,263       2,729       36,780       28,227  
Write-off of other assets
    -       -       -       110,000  
Gain from reversal of accruals
    -       -       -       (361,277 )
Gain from settlement of accounts payable
    -       -       -       (80,046 )
Gain from sale of equipment
    -       -       (55,500 )     -  
Depreciation
    6,537       119,939       246,415       359,817  
                                 
Total operating expenses
    311,065       568,353       1,875,206       2,492,528  
                                 
Operating loss
    (311,065 )     (568,353 )     (1,875,206 )     (2,492,528 )
                                 
Other income (expense)
                               
                                 
Interest expense, net
    (315,378 )     (3,378 )     (1,331,143 )     (3,378 )
Financial settlement income (expense)
    60,572       (25,000 )     6,391       (61,250 )
Change in fair value of warrants
    (143,676 )     (2,471 )     (152,908 )     (62,520 )
Gain from sale of Aultra investment
    -       -       -       217,177  
Unrealized loss on trading securities
    (190,667 )     -       (190,667 )     -  
Realized loss on sale of securities
    (884,697 )     -       (846,128 )     -  
                                 
Loss before income taxes
    (1,784,911 )     (599,202 )     (4,389,661 )     (2,402,499 )
                                 
Provision for income taxes
    -       -       -       -  
                                 
Net loss
    (1,784,911 )     (599,202 )     (4,389,661 )     (2,402,499 )
                                 
Basic and diluted loss per share
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )
Weighted average shares outstanding
    499,250,000       202,719,688       481,955,023       175,849,355  
 
See accompanying Notes to Condensed Consolidated Financial Statements

 
4

 

DUTCH GOLD RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
         
(as restated)
 
             
Operating activities:
           
             
Net loss
  $ (4,389,661 )   $ (2,402,499 )
Adjustments to reconcile net loss to cash used in operating activities
               
Gain from settlement of accounts payable
    -       (80,046 )
Gain from reversal of unrealized accruals
    (100,000 )     (361,277 )
Loss from write-off of other assets
    -       110,000  
Common stock issued for services
    -       1,384,324  
Common stock issued to extend certain convertible note maturity dates
    48,800       -  
Transfer of assets to extend certain convertible note maturity dates
    10,000       -  
Common stock issued for other settlements
    54,181       61,250  
Preferred stock issued in exchange for services
    122,000       -  
Preferred stock issued to extend certain convertible note maturity dates
    228,750       -  
Gain from sale of equipment applied to payroll liability
    (55,500 )     -  
Accretion of debt discount
    819,874       -  
Depreciation
    246,415       359,817  
Stock compensation expense for options granted
    52,017       -  
Change in fair value of warrants
    152,908       62,520  
Amortization of deferred financing costs
    19,053       -  
Gain on sale of Aultra Investment
    -       (217,177 )
Net realized loss on sale of securities
    846,128       -  
Unrealized loss on trading securities
    190,667       -  
Gain from debt settlement
    (61,572 )     -  
Changes in assets and liabilities
               
Prepaid and other current assets
    (459 )     -  
Accounts payable
    81,380       (81,951 )
Accounts payable-related parties
    (125,239 )     441,294  
Deferred production royalty revenue
    15,000       -  
Accrued liabilities
    196,346       (12,497 )
Net cash used in operating activities
    (1,648,912 )     (736,242 )
                 
Investing activities:
               
Proceeds from sale of available-for- sale securities
    413,744       -  
Purchases of available-for-sale securities
    (43,622 )     -  
Purchases under subscription agreement
    (100,000 )     -  
Investments in notes receivable
    (41,000 )     -  
                 
Net cash provided by investing activities
    229,122       -  
                 
Financing activities:
               
Deferred financing costs
    (26,550 )     -  
Proceeds from sale of common stock
    -       69,600  
Proceeds from sale of convertible preferred stock
    250,000       -  
Proceeds from stock subscriptions
    -       185,305  
Proceeds from loans from shareholders
    111,000       -  
Proceeds from notes payable-related parties
    550,000       150,000  
Proceeds from convertible notes payable
    418,000       310,000  
                 
Net cash provided by financing activities
    1,302,450       714,905  
                 
Net decrease in cash and cash equivalents
    (117,340 )     (21,337 )
                 
Cash and cash equivalents at beginning of period
    127,397       24,522  
                 
Cash and cash equivalents at end of period
  $ 10,057     $ 3,185  
                 
SUPPLEMENTAL CASH FLOW INFORMATION
               
                 
Cash paid during period for interest
  $ -     $ -  
                 
Non-cash Transactions:
               
Common stock issued to settle debt
  $ 1,057,483     $ 612,500  
Common stock issued to settle accrued expenses
    78,107       51,434  
Common stock issued for acquisition
    -       2,716,155  
Reduction of warrant liability due to expiration of warrants
    456,643       1,057,275  

See accompanying Notes to Condensed Consolidated Financial Statements

 
5

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—BASIS OF PRESENTATION

The condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q and should be read in conjunction with the Company's consolidated audited financial statements and notes thereto for the year ended December 31, 2010, included in the 2010 Annual Report on Form 10-K. All terms used but not defined elsewhere herein have the meaning ascribed to them in the Company’s 2010 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair statement of the results of the interim periods presented have been included. The 2010 year-end balance sheet data was derived from the audited financial statements but does not include all disclosures required by U.S. GAAP. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of the results expected for the full year.

The Company is restating its historical financial statements for the three and nine months ended September 30, 2010. The restatement primarily relates to certain errors in accounting for the change in the fair value of our warrants. Accordingly, the Company’s financial statements for the three and nine months ended September 30, 2010 have been restated to correct for these errors and are included in the accompanying condensed consolidated financial statements. For the three months ended September 30, 2010, these corrections in the aggregate increased the Company’s previously reported net loss by $2,471, or ($0.00) per share and for the nine months ended September 30, 2010, these corrections in the aggregate increased the Company’s previously reported net loss by $62,520 or ($0.00) per share. Note 15 provides the effect of the restatement on the September 30, 2010 condensed consolidated financial statements.

NATURE OF OPERATIONS

Dutch Gold Resources, Inc. is engaged in the acquisition and exploration of gold mining projects in the Americas. The Company is focused on developing its existing mining properties in North America and acquiring and developing new mines with the expectation that the properties can enter production within 12 to 24 months. The Company operates in one reporting segment.

PRINCIPLES OF CONSOLIDATION

We generally act as a sole proprietor, but may enter joint agreements with other companies in an effort to achieve our stated operating objectives. Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include our accounts and our wholly-owned subsidiaries’ accounts (collectively, the “Company”).  All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior period presentations have been reclassified to conform with the current period presentation.

USE OF ESTIMATES AND PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2 – ACQUISITION AND DISPOSITION OF AULTRA GOLD

Stock Purchase Agreement – Aultra Gold

Pursuant to a Stock Purchase Agreement by and among the Company, Rauno Perttu, Strategic Minerals Inc., a Nevada corporation, and Aultra Gold Capital Inc., a Turks and Caicos corporation, the Company acquired a 67% controlling interest of Aultra Gold, Inc. (“Aultra” or “Aultra Gold”) by acquiring 6,442,500 of Aultra’s existing common shares for a purchase price of one million newly-issued shares of the Company’s common stock, par value $0.001 per share. The transaction closed on January 6, 2010. The total value of the one million shares issued based on the Dutch Gold Resources, Inc. common share closing price of $0.135 per share was $135,000.

In addition, in accordance with the Stock Purchase Agreement, in 2010 the Company forgave $269,919 in advances that the Company previously made to Aultra Gold which were secured by a promissory note and recorded as an Other Current Asset by the Company as of December 31, 2009. As the forgiveness of the advances occurred resulting from the execution of the Stock Purchase Agreement, management determined that the amount forgiven should be included in the overall value of the controlling interest acquired; therefore, the Company determined that the fair value of the Aultra controlling interest was $404,919.

 
6

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – ACQUISITION AND DISPOSITION OF AULTRA GOLD (CONTINUED)

Stock Purchase Agreement – Aultra Gold (continued)

Asset Purchase Agreement – Aultra Gold

On January 6, 2010, Dutch Gold Resources, Inc. entered into an Asset Purchase Agreement with DGRI ADGI Acquisition Corporation (the “Purchaser” and a Dutch Gold Resources, Inc. wholly owned subsidiary) and Aultra Gold, Inc. Pursuant to the agreement, the Company acquired all of Aultra Gold’s assets, which primarily consisted of the mining rights to a project in Montana and a project in Nevada. As consideration for these assets, the Company issued 9,614,667 shares of its common stock, par value $0.001 per share, to Aultra Gold for a total value of $1,297,980 based on the $0.135 per share market price of Dutch Gold’s common stock. In addition, in connection with the Asset Purchase Agreement, the Company issued a Dutch Gold Resources, Inc. executive and an Aultra Gold executive collectively 9,505,000 Dutch Gold common shares for a total value of $1,283,175 based on the $0.135 per share market price of Dutch Gold’s common stock. The purpose for issuing these shares was to incentivize these executives that were instrumental in the transaction and to ensure that these key executives would continue to be involved with the acquired projects. The Company does not believe the substance of the issuance of shares to the executives was to provide compensation for these executives and therefore have accounted for the consideration in accordance with the acquisition method. Based on these transactions, the Company determined that the consideration paid resulting from the Asset Purchase Agreement was $2,581,155 and has accounted for the transaction using the acquisition method of accounting with the purchase price assigned to the net assets acquired based on the fair value of such assets at the date of acquisition.

In accordance with the transaction, the Company acquired substantially all of the assets related to Aultra Gold’s gold and mineral business. Management determined that the value of the assets obtained primarily relate to the mineral rights associated with the property in Basin Gulch, Montana. Dutch Gold was granted an assignment of the Basin Gulch Mine lease between Aultra Gold and Strategic Minerals as a result of the acquisition.

In order to determine fair value the mineral rights acquired, management utilized a compilation and review report prepared by a third-party which documented the estimated mineralization related to the Basin Gulch Mine property. Based on these findings, management estimated the value beyond estimated mineralization (VBEM) and the Company determined that the fair value of the total consideration paid of $2,581,155 resulting from the Asset Purchase Agreement should be allocated to the mineral rights acquired. The Company has recorded the acquired mineral rights fair value as Mineral properties on the condensed consolidated balance sheets as a separate component of property, plant and equipment. As the mineral rights represent a tangible asset, the assigned fair value should be amortized over the useful life of the mineral right based on the units of production method. Management will begin the amortization of the asset once development of the site commences in accordance with the units of production method.

Summary of Stock Purchase Agreement and Asset Purchase Agreement – Aultra Gold

As a result of the Stock Purchase Agreement and Asset Purchase Agreement dated January 6, 2010, Dutch Gold Resources, Inc. owned 67% of the common shares of publicly traded Aultra and the assets of Aultra Gold which primarily related to mineral rights. Subsequent to these transactions, Aultra was basically a public shell consisting of liabilities that were not assumed by the Company and a deficit.

Aultra Gold is engaged in the business of acquiring and exploring gold and mineral properties, with the objective of identifying gold and mineralized deposits economically worthy of continued production and/or subsequent development, mining or sale.

Dutch Gold pursued the transactions with Aultra as the Company’s mission is to become a recognized gold producer within two years with a key to this objective being the acquisition of late stage exploration projects that can be quickly advanced to production. Based on the assets that Aultra controlled, specifically the rights to the Basin Gulch Mine property, the Company determined that the acquisition met its strategic objectives and management believed that it had the financial resources to produce and realize the mineral rights related to the property.

 
7

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – ACQUISITION AND DISPOSITION OF AULTRA GOLD (CONTINUED)

Summary of Stock Purchase Agreement and Asset Purchase Agreement – Aultra Gold (continued)

Except as noted in the preceding paragraphs and as disclosed in the Stock Purchase Agreement and Asset Purchase Agreement, there were no material relationships among the Company and Aultra or any of their respective affiliates. It is the policy of the Company to segregate each of its mining projects into separate, wholly owned special purpose vehicles, for the purposes of risk mitigation and financing. The acquisition of the controlling interest in Aultra Gold was made as an investment to be held either for a spin-off or other value creation event. The Asset Purchase Agreement was executed as the Company believes that it has the resources to develop the mineral rights related to the projects acquired.

Shamika Transaction

On March 26, 2010, Aultra Gold, Inc., which had been a 67% owned subsidiary of Dutch Gold since the January 6th transactions discussed previously, entered into an Agreement and Plan of Share Exchange with Shamika 2 Gold Inc., a Nevada Corporation (“Shamika”).   In general terms, Aultra was a public shell with limited assets and Shamika was a private company that acquired the Aultra public shell in a reverse acquisition allowing Shamika, after the transaction, to be a registrant.

Pursuant to the agreement, Aultra acquired all of the outstanding shares (the “Shamika Shares”) from the Shamika Holders in exchange for an aggregate of 25,500,000 newly issues shares of Aultra’s common stock, par value $0.001 per share (the “Exchange”). As a result of the acquisition and other concurrent transactions in Aultra’s shares, Aultra Gold, Inc. (now publically traded as Shamika 2 Gold) had 50,000,000 million shares outstanding with 967,467 pertaining to the reversed Aultra shell. Accordingly, the Exchange represented a change in control.

For financial accounting purposes, the acquisition was a reverse acquisition of Aultra by Shamika, under the purchase method of accounting, and was treated as a recapitalization with Shamika as the acquirer. Upon consummation of the Exchange, Aultra adopted the business plan of Shamika.

The business purpose of this transaction was that Shamika wanted to be a publicly traded company in order to have access to the capital markets which would provide access to funding for mining development opportunities.  As Aultra had no operations subsequent to the Asset Purchase agreement noted above, issuing shares that would result in Shamika having a controlling interest allowed Aultra (and Dutch Gold) to retain shares in a company that had the financial resources to pursue and develop new mining opportunities.

In connection with the Reverse Acquisition and on the same date, Shamika issued 23,546,067 shares of its common stock in order to satisfy certain liabilities in the amount of $301,512. As part of this transaction Dutch Gold Resources, Inc. was issued 4,950,000 shares (9.9%) of Shamika Gold Inc. The Company determined the fair value of the 4,950,000 common shares received as $1,237,500 which approximated the value of the shares on the first day that Shamika’s common shares were publicly traded. As a result of the reverse acquisition by Shamika, Dutch Gold retained the remaining Aultra liabilities not acquired of $616,154 which represents amounts owed to a former officer of Aultra (now a Dutch Gold executive), Rauno Perttu. Dutch Gold issued 10,000,000 shares to Rauno Perttu in July 2010 which reduced this liability by $200,000 ($200,000 represented the fair value of the shares on the date of issuance). Therefore, the Company has a remaining liability related to this obligation recorded in our consolidated balance sheet as of September 30, 2011 and December 31, 2010 within the Accounts payable-related parties account line.

At March 26, 2010, resulting from the Shamika transaction, the Aultra Board of Directors and Officers was reconstituted by the resignation of: Rauno Perttu from his role as President, Secretary and Director, Daniel Hollis from his role as Chief Executive Officer and Director, Lance Rosmarin from his role as Director, and the appointment of Robert Vivian as President and Chief Executive Officer and Terence Orstlan as Secretary and Director. The Company owns less than 5% of the issued and outstanding shares of Shamika as of September 30, 2011. Subsequent to the transaction date, Dutch Gold no longer has a controlling interest in Aultra nor does management have the ability to exercise significant influence over Shamika’s operating and financial policies. The Company has classified the fair value of its remaining investment in Shamika as an investment in trading securities as of September 30, 2011. Refer to Note 4 for additional discussion on this investment.

Management viewed its initial controlling interest in Aultra as substantive during the period from January 6, 2010 through March 26, 2010 as the Company’s involvement and expertise was needed in order to execute an agreement with Shamika. In addition, during this interim period Aultra’s board of directors consisted of two directors from Dutch Gold. These directors were instrumental in the Shamika transaction.

 
8

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – ACQUISITION AND DISPOSITION OF AULTRA GOLD (CONTINUED)

Shamika Transaction (continued)

Although the controlling interest was obtained on January 6, 2010 and subsequently sold on March 26, 2010, the Company did not consolidate the financial results of Aultra for this interim period as Aultra’s results were not material to the consolidated financial statements of the Company. In addition, pro-forma financials related to Aultra’s operations have not been provided as we deem this information not to be beneficial to our shareholders as Aultra’s operating activity was minimal and would not have a material effect on our operations.We recorded our $404,169 investment in Aultra resulting from the Stock Purchase Agreement under the equity method. As stated above, we effectively sold Aultra through a reverse acquisition by Shamika on March 26, 2010. A gain on the disposition of the controlling interest of Aultra resulted from the sale to Shamika. Management determined that the gain recorded would be the difference in our initial fair value investment in Aultra ($404,169) less the $621,346 fair value of the consideration received from the Shamika transaction ($621,346 calculated as the fair value of the Shamika shares received of $1,237,500 less Aultra debt assumed of $616,154). Thus, the Company recorded in our statement of operations a $217,177 gain on sale of our Aultra investment for the nine month period ended September 30, 2010.

NOTE 3—FAIR VALUE MEASUREMENT

The Company measures its investments based on a fair value hierarchy disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of asset or liability and their characteristics. This hierarchy prioritizes the inputs into three broad levels as follows:

 
Level 1—Quoted prices in active markets for identical instruments.

 
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 
Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The Company categorizes its investments as either trading, available for sale, or held to maturity.  The Company does not hold any securities that we believe would be considered held to maturity.  Prior to third quarter 2011, the Company’s investments were comprised of available-for-sale securities carried at fair value with unrealized gains and losses, net of applicable income taxes, recorded within accumulated other comprehensive income.  As of September 30, 2011, as discussed in Note 4, these investments which consist of Shamika 2 Gold common stock, are classified as trading securities with any unrealized gains and losses recorded in earnings. The Company reviews its investments quarterly for declines in market value that are other than temporary in addition to re-evaluating the investment classification.

The Company’s financial instruments consist of cash and cash equivalents, investments, accounts payable, notes payables, loans from shareholders and accrued expenses.  The Company considers the carrying values of its financial instruments in the financial statements to approximate their fair value due to the short term nature of such items. The fair values of the Company's debt instruments are calculated based on debt with similar maturities, credit quality and current market rates of interest. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest risks arising from these financial instruments.

NOTE 4—INVESTMENTS IN SECURITIES

As disclosed in Note 2, resulting from the Shamika Gold transaction, in 2010 the Company acquired 4,950,000 shares of common stock of Shamika 2 Gold with an investment value of $1,237,500.  Securities to be held for indefinite periods of time, but not necessarily to be held to maturity or on a long-term basis, are classified as available for sale and carried at fair value with unrealized gains or losses reported as a separate component of shareholders' deficit in accumulated other comprehensive (loss) income in the condensed consolidated balance sheets.  As of December 31, 2010, the Company held 4,905,000 Shamika 2 Gold shares and recorded a fair value of $3,188,250 as investments available for sale in the condensed consolidated balance sheet. Through June 30, 2011, based on management’s  intent of holding the majority of the shares in Shamika 2 Gold equity security, the investment was classified as a short term investment in available for sale securities.

 
9

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—INVESTMENTS IN SECURITIES (CONTINUED)

During third quarter 2011, due to difficulties experienced in raising capital to fund operations and due to capital needed to pursue and develop current projects, along with the fact that the Shamika 2 Gold shares had continued to decrease in fair value over the period that the Company has held the shares, management made the decision to liquidate the majority of its investment in Shamika 2 Gold. 3,437,836 shares were liquidated during the quarter which resulted in cash proceeds of $147,508. In addition, during third quarter 2011 as discussed in Note 7, 600,000 shares of Shamika 2 Gold were transferred to certain noteholders for consideration to extend these noteholders forbearance rights to covert notes into shares of common stock.  This disposition and transfer of shares resulted in a realized loss on the previously classified available for sale securities of $884,697 and all amounts previously recorded through accumulated other comprehensive income were realized.  For the nine months ended September 30, 2011, the Company has recorded a $844,697 realized loss on the sale of common stock and has received $413,744 in proceeds from the sale of the securities.

As of September 30, 2011, the Company holds  666,672 remaining shares of Shamika 2 Gold. These shares were received during third quarter 2011 resulting from purchases made previously under subscription agreements as disclosed in Note 5. As management does not intend to hold its remaining shares in Shamika 2 Gold due to the aforementioned reasons that transpired during third quarter 2011, management has classified its remaining investment as a trading security as of September 30, 2011. Thus, as of September 30, 201,1 the $9,333 fair value of these shares has been classified as an Investment in trading securities at fair value on the condensed consolidated balance sheets and the unrealized loss in the investment of $190,667 is presented in earnings on the condensed consolidated statements of operations.

The common stock of Shamika 2 Gold is quoted on the Over-the-Counter Bulletin Board under the symbol “SHMX” and is, therefore, considered a Level 1 investment in the fair value hierarchy.

NOTE 5—OTHER CURRENT ASSETS

Other current assets are comprised of:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
Subscription payment for Shamika 2 Gold shares
  $ -     $ 100,000  
Performance Bond
    50,000       50,000  
Note Receivable - Trellis Corporation
    41,459       -  
Pre-paid management fees
    61,000       -  
                 
Total other current assets
  $ 152,459     $ 150,000  

As a result of subscription agreements that were executed with Shamika 2 Gold, the Company had remitted $100,000 and $200,000 in payments as of December 31, 2010 and as of June 30, 2011, respectively, to acquire additional common shares of Shamika 2 Gold. The Company received 666,672 common shares in third quarter 2011 in satisfaction of this subscription and the related shares acquired are recorded as an investment in trading securities at a fair value amount of $9,333 as of September 30, 2011 on the Company’s consolidated balance sheets.

In March, 2011, the Company issued an unsecured promissory note to Trellis Corporation in the amount of $41,000 as an advance to Trellis pertaining to their mining operations.  The note bears an annual interest rate of 8% and is due upon demand and interest income has been recorded for the period ending September 30, 2011. Management believes this note is collectible.

Refer to Note 8 for discussion on the $61,000 other current asset recorded as of September 30, 2011.

 
10

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6—MINERAL PROPERTIES AND PROPERTIES, PLANT AND EQUIPMENT

   
September  30,
   
December  31,
 
   
2011
   
2010
 
             
Mine and Mill Equipment
  $ 2,173,628     $ 2,358,424  
Mineral Properties
    2,581,155       2,581,155  
    $ 4,754,783     $ 4,939,579  
Less: accumulated depreciation, depletion and amortization
    2,173,628       2,112,009  
Net carrying value
  $ 2,581,155     $ 2,827,570  

There was $246,415 and $359,817 charged to operations for depreciation expense for the nine month periods ended September 30, 2011 and September 30, 2010, respectively.

The Internal Revenue Service has a Federal lien on the Company’s subsidiary Dutch Mining, LLC’s equipment, real property and leases in the amount of $567,062 as of September 30, 2011. The State of Oregon Department of Revenue has a lien on the Company’s subsidiary Dutch Mining, LLC’s personal and real property in the amount of $35,550 as of September 30, 2011. These liens arose from unpaid Federal and state payroll taxes from the closed Benton Mine operation in Oregon. The unpaid taxes aggregating $602,612 as of September 30, 2011 and $658,112 as of December 31, 2010, respectively, are recorded as Payroll Liabilities, under Current Liabilities in the Company’s condensed consolidated financial statements. For the nine months ended September 30, 2011, the Company sold certain fully depreciated equipment and applied the $55,000 in proceeds received against the Company’s State of Oregon Department of Revenue payroll liability lien. Dutch Gold Resources, Inc. has not accrued for penalties and interest associated with these liens as management believes it is more likely than not that the Company will not be liable for such amounts.

NOTE 7—CONVERTIBLE NOTES PAYABLE

Convertible Notes Payable is comprised of:

   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Convertible Promissory Notes
  $ 554,920     $ 577,060  
Convertible Debentures
    355,000       200,000  
    $ 909,920     $ 777,060  
Less: unamortized debt discount
    130,722       194,976  
Net carrying value
  $ 779,198     $ 582,084  

The Company had convertible promissory notes outstanding at September 30, 2011 and December 31, 2010 in the amount of $554,920 and $577,060 respectively. These notes bear interest at rates ranging from 8% to 21% per annum and mature within the next twelve months. Under the convertibility terms of the convertible promissory notes, the principal, plus accrued interest can be converted immediately upon maturity, at the option of the holder, either in whole, or in part, into fully paid common shares of the Company.

The Company had convertible debentures outstanding at September 30, 2011 and December 31, 2010 in the amount of $355,000 and $200,000 respectively. The debentures bear interest at rates ranging from 8% to 12% per annum. Under the convertibility terms of the debenture, the principal, plus accrued interest can be converted immediately, at the option of the holder, either in whole, or in part, into fully paid common shares of the Company.

The convertible promissory notes and the convertible debenture contain a beneficial conversion feature which allows the holder of the note to convert the note into common shares of the Company at a price less than market. The Company has computed and recorded a $1,012,120 and $293,046 value at September 30, 2011 and December 31, 2010, for the beneficial conversion feature pertaining to the convertible notes. This amount is recorded as a discount to the principal amount of the note and is amortized to interest expense utilizing the straight-line method over the term of the related note as the results are not materially different from those which would result from the interest method.

 
11

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7—CONVERTIBLE NOTES PAYABLE (CONTINUED)

As of September 30, 2011 and December 31, 2010, $130,722 and $194,976, respectively, in unamortized discount remained associated with convertible notes outstanding. Deferred financing costs of $26,550 were incurred and capitalized as of September 30, 2011 related to obtaining the convertible notes executed in fiscal 2011. The deferred financing fees are amortized to interest expense over the term of the related convertible note agreement.

On April 8, 2011, the Company entered into a forbearance agreement with two convertible promissory noteholders which resulted in the issuance of 4,000,000 common shares and 2,500,000 in Series B Convertible Preferred stock. As a result of the forbearance agreement and the consideration provided by the Company to these noteholders, the noteholders agreed to defer their conversion rights for an additional 90 days pertaining to $195,810 in convertible notes payable. The common share issuance was valued at $48,800 based on the market price of the Company’s common stock on the date of issuance. In addition, the Series B Convertible Preferred stock issuance was valued at $228,750 based on utilizing the market value (the price of the last reported trade) of the DGRI stock on the date of issue, application of a preference premium as well as factoring in a liquidity discount. These fair value amounts have been recorded as interest expense.
 
During third quarter 2011, the Company entered into an extension agreement with the two aforementioned convertible promissory noteholders whereby the Company transferred the rights of 600,000 shares of its Shamika 2 Gold shares to these noteholders which approximated a $10,000 fair value, which has been recorded as interest expense. As a result of this transaction, the noteholders extended the forbearance of their rights to convert the notes into shares of common stock to fourth quarter 2011. These forbearance agreements were executed as the Company does not have sufficient shares of common stock to satisfy the conversion terms of the notes.

NOTE 8—CAPITAL STOCK

Preferred Stock

As of September 30, 2011, the Company had 2,000,000 shares of its $0.001 par value Series A Convertible Preferred stock issued and outstanding. During 2010, 1,000,000 shares were issued each to two executives in order to compensate these executives for compensation owed to them in accordance with their employment agreements. The value of the stock issued approximated the fair value of the services performed which was $250,000. The Series A Convertible Preferred stock provides the conversion right to common shares along with voting rights over common shareholders. There have been no Series A Convertible Preferred stock issuances in 2011.

On April 8, 2011, in addition to the 2,500,000 Series B Convertible Preferred share issuance discussed in Note 7, 1,000,000 in Series B Convertible Preferred shares were issued each to two executives in order to compensate these executives for their services.  The $183,000 total fair value of the stock issued was computed based on utilizing the market value (the price of the last reported trade) of the DGRI stock on the date of issue, application of a preference premium as well as factoring in a liquidity discount. A total of $122,000 was expensed for the nine months ended September 30, 2011 and is reflected within Selling, general and administrative expense in the Company’s Condensed Consolidated Statement of Operations at September 30, 2011. The balance of the total valuation in the amount of $61,000, is reflected as another current asset in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2011 and will be amortized to Selling, general and administrative expense over the service period. The Series B Convertible Preferred stock provides the conversion right to common shares along with voting rights over common shareholders.

On August 15, 2011, the Company agreed to issue 25,000 shares of Series C Convertible Preferred Stock for $250,000 in cash to an investor. The Series C Convertible Preferred stock provides the conversion right to common shares along with voting rights over common shareholders. In addition to the Series C Convertible Preferred stock, the investor acquired 12,500,000 warrants at an exercise price of $0.02 per share. The fair value of the 12,500,000 warrants granted of $118,686  is included in the Company’s total warrants liability outstanding at September 30, 2011.

 
12

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8—CAPITAL STOCK (CONTINUED)

Common Stock

As of September 30, 2011, the Company had 499,250,000 shares of its $0.001 par value common stock issued and outstanding. Common Stock was issued during the nine months ended September 30, 2011, to retire various debt and payable obligations of the Company based upon the actual balance and any accrued interest.  The consideration for settlement amounts for payments from the Company’s common shares was arrived at by utilizing the market value (the price of the last reported trade) of the DGRI stock on the date of issue. Warrants

As of September 30, 2011, the Company had the following warrants for the purchase of shares of common stock issued and outstanding:

         
Weighted
       
         
Average
   
Aggregate
 
         
Exercise
   
Intrinsic
 
   
Warrants Outstanding
   
Price
   
Value
 
                   
Outstanding, December 31, 2010
    11,635,833     $ 0.48       -  
Granted
    15,000,000       0.02       -  
Forfeited/Expired
    (3,333,333 )     (0.50 )     -  
Exercised
    -       -       -  
Outstanding, September 30, 2011
    23,302,500     $ 0.09     $ 0  

Purchase Warrants amounting to 15,000,000 shares with a weighted average price of $0.02 were issued for the period ending September 30, 2011. 12,500,000 of these warrants were issued at an exercise of $0.02 as noted above. An additional 2,500,000 warrants were issued to the Chief Financial Officer during third quarter 2011 at an exercise price of $0.0125 per share. These common share purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model as of the issuance date. The 15,000,000 warrants granted in third quarter 2011 were valued using the Black-Scholes option pricing model based on the following assumptions: 1.7% risk-free rate, 3 year expected life, 410% expected volatility and 0% dividend yield. These warrants resulted in a $143,676 fair value which has been recorded in the change in fair value of warrants account line in the condensed consolidated financial statements for the three and nine month periods ended September 30, 2011. Some of the warrants provide that in the event the Company is unable to issue registered shares upon exercise, the warrant holders are entitled, under securities laws, to receive freely tradable shares pursuant to a "cashless exercise" provision. However, based on interpretation of ASC 815, there is a required presumption of net cash settlement.

We determined that these warrants issued create a related liability in accordance with ASC 480-10-55-29 & 30 due to the fact that some of the warrants could be settled for cash.  In our estimation of the value of this liability, we interpreted and applied the concept of "Fair Value" from ASC 820. We took into account the remote probability of the occurrence of a fundamental transaction triggering a right to cash settlement as a probability factor in applying a Black-Scholes valuation of the warrants. The warrants have been recorded at their relative fair values at issuance and will continue to be recorded at fair value each subsequent balance sheet date.  Any change in value between reporting periods is recorded as Other Income (expense) each reporting date.  The warrants are reported as a liability rather than as equity.  The fair value of the warrants is estimated using the Black-Scholes option-pricing model.

As of September 30, 2011 and December 31, 2010, the fair value of the warrants was determined to be $1,357,348 and $1,661,163, respectively. We recorded $152,908 for the nine months ended September 30, 2011 in losses resulting from the revaluation of the warrant liability which includes $143,676 in fair value recorded resulting from the third quarter 2011 warrant issuances. The 3,333,333 warrants issued in 2009, expired in the period ended March 31, 2011, with $456,643 being reclassified from liabilities to stockholders' deficit in the accompanying condensed consolidated balance sheet. The outstanding warrants as of September 30, 2011 have exercise prices ranging from $0.02 to $1.15 with expiration dates ranging from June 9, 2012 to December 9, 2014. The remaining weighted average contractual life of warrants outstanding as of September 30, 2011 is 2.46 years.

 
13

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9—STOCK BASED COMPENSATION

Effective April 1, 2011, the Board of Directors approved a 4,000,000 nonqualified stock option grant to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board, pursuant to the Company's Amended and Restated 2010 Stock Incentive Plan. The options granted were immediately vested and exercisable on the grant date, expire two years from the grant date, and were issued to compensate Embassy International, LLC for entering into previous lending arrangements which has allowed the Company to fund operations and to continue its development activities. The grant date fair value of these options was $52,017 with an exercise price of $0.005. The Company has recorded stock-based compensation expense of $52,017 within Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations related to this option grant during the three and nine months ended September 30, 2011.
The Company estimated the fair value of its 2011 stock option grant to Embassy International, LLC utilizing the Black-Scholes option pricing model based on the following assumptions:

Risk-free interest rate
    0.80 %
Expected life
 
2.0 years
 
Expected volatility
    355.0 %
Dividend yield
    0.00 %

The risk-free interest rate is based on the zero-coupon U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on historical daily volatility of the Company’s stock. As the option was awarded to a nonemployee, the expected life is estimated as the contractual term of the option agreement.

In addition, as disclosed in Note 14, 10,500,000 options (two separate grants of 5,250,000 options) were granted on September 27, 2011 related to the Minnie Moore agreement at an exercise price of $2,000 ($1,000 per grant or the equivalent of $0.000190476 per option). These options were valued using the binomial lattice model with an estimated fair value approximating $70,000.  Expense related to these options be recorded commencing in fourth quarter 2011.

No stock options were granted or outstanding in 2010. In addition, no options were exercised in 2011. As of September 30, 2011, the Company has 14,500,000 stock options outstanding with approximately $70,000 in unvested expense that will be recognized in future reporting periods. For the options outstanding as of September 30, 2011, the weighted average exercise price is $0.0015 with 4,000,000 vested and exercisable at a $0.005 exercise price.

NOTE 10—PER SHARE DATA

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to warrants, convertible notes and convertible preferred stock.

The Company has excluded all common equivalent shares outstanding for warrants, convertible notes and convertible preferred stock to purchase common stock from the calculation of diluted net loss per share because all such securities are antidilutive for the periods presented. As of September 30, 2011, the Company had 23,302,500 warrants, 175,086,445 potential shares which may be issued resulting from the provisions of convertible notes and 6,525,000 in convertible preferred stock to purchase common stock were outstanding. As of December 31, 2010, 11,635,833 warrants, 75,454,246 potential shares which may be issued resulting from the provisions of convertible notes and 2,000,000 in convertible preferred stock to purchase common stock were outstanding.

NOTE 11—RELATED PARTY TRANSACTIONS

Notes Payable-related parties

The Company assumed a note that was issued by Dutch Mining, LLC in the amount of $1,214,926 to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board, Ewald Dienhart. This is a demand note with $900,000 secured by the mill equipment with a 0% interest rate. The balance outstanding at September 30, 2011 and December 31, 2010 was $0 and $650,962, respectively. During the nine months ended September 30, 2011, the balance was settled through the issuance of stock.

The Company assumed a note that was issued by Dutch Mining, LLC in the amount of $250,000 to Gabriela Dienhart-Engel, who is the daughter of the former Chairman of the Board, Ewald Dienhart.

 
14

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11—RELATED PARTY TRANSACTIONS (CONTINUED)

Notes Payable-related parties (continued)

The note is dated July 31, 2006 and carries an interest rate of 6.0%. The note is partially secured by the title to the Gold Bug mine. The balance outstanding at September 30, 2011 and December 31, 2010 was $250,000.

The Company assumed a note that was issued by Dutch Mining, LLC in the amount of $100,000 to Caruso-Dienhart TBE Family Trust, LLC., a Company related to the former Chairman of the Board, Ewald Dienhart. The note is dated July 31, 2006 and carries an interest rate of 6.0%. The note is partially secured by the Gold Bug mine and certain equipment used by the Company.  The balance outstanding at September 30, 2011 and December 31, 2010 was $50,000 and $100,000, respectively.

The Company assumed a note that was issued by Dutch Mining LLC in the amount of $950,000 to Josef Bauer for working capital.  The note is guaranteed by Ewald Dienhart and carries an interest rate of 8.0%. The balance outstanding at September 30, 2011 and December 31, 2010 was $950,000.

All notes listed above are due on demand.

The Company owes $129,000 and $129,000 at an interest rate of 7% for a short term note at September 30, 2011 and December 31, 2010, respectively, to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board. This note matured on November 10, 2011 and remains unpaid.
The Company owes $136,000 and $136,000 at an interest rate of 7% for a short term note at September 30, 2011 and December 31, 2010, respectively, to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board. This note matured on November 10, 2011 and remains unpaid.

The Company owes $258,000 and $258,000 at an interest rate of 6% for a short term note at September 30, 2011 and December 31, 2010, respectively, to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board. This note matures on February 16, 2012.

The Company owes in aggregate $300,000 and $0 at an interest rate of 7% for four short term notes at September 30, 2011 and December 31, 2010, respectively, to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board. These notes mature on February 15, 2012.

The Company owes $82,500 and $0 at an interest rate of 6% for a short term note at September 30, 2011 and December 31, 2010, respectively, to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board. This note matures in twelve months from March 31, 2011.The Company owes $117,500 and $0 at an interest rate of 7% for a short term note at September 30, 2011 and December 31, 2010, respectively, to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board. This note matures in twelve months from April 1, 2011.

The Company owes $35,000 and $0 at an interest rate of 7% for a short term note at September 30, 2011 and December 31, 2010, respectively, to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board. This note matures in twelve months from May 5, 2011.

The Company owes $90,000 and $0 at an interest rate of 6% for a short term note at September 30, 2011 and December 31, 2010, respectively, to Embassy International, LLC, a Florida limited liability company controlled by the family of the former Chairman of the Board. This note matures in twelve months from May 26, 2011.

Accounts Payable-related parties

Daniel W. Hollis, CEO of Dutch Gold Resources, Inc. has advanced a total of $213,999 and $265,934 as of September 30, 2011 and December 31, 2010, respectively.  The cash was used for general corporate purposes by the Company.

Rauno Perttu, COO of Dutch Gold Resources, Inc. has a balance owing to him of $294,704 and $477,013 at September 30, 2011 and December 31, 2010, respectively. Management during a recent review discovered an accounting error from the prior period resulting in an over accrual of $100,000 in compensation due to Mr. Perttu.

 
15

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11—RELATED PARTY TRANSACTIONS (CONTINUED)

Accounts Payable-related parties (continued)

This error has been corrected in the current period and is reflected in the Company’s Condensed Consolidated Statement of Operations as of September 30, 2011 within selling, general and administrative expenses. As this error does not materially change the net loss or loss per share during the current period or in the period when the error originated, management has not restated the prior period financial statements. In 2010, Dutch Gold retained the remaining Aultra liabilities not acquired of $616,154 which represents amounts owed to the now former officer of Aultra, Rauno Perttu. Dutch Gold issued 10,000,000 shares to Rauno Perttu in July 2010 which reduced this liability by $200,000 ($200,000 represented the fair value of the shares on the date of issuance). The remaining liability owed to Rauno Perttu as of September 30, 2011 primarily relates to management fees owed for services performed and remaining amounts owed resulting from the Aultra transaction.

Tom Leahey, CFO of Dutch Gold Resources, Inc. has a balance owing to him of $9,005 as of September 30, 2011 related to unpaid management fees.

NOTE 12—FINANCIAL CONDITION AND GOING CONCERN

As of September 30, 2011, the Company had cash on hand of $10,057, investments in trading securities of $9,333, a working capital deficit of approximately $5.8 million and has incurred a loss from operations for the nine months ended September 30, 2011. In addition, as of September 30, 2011, the Company does not have the authorized shares available for issuance in order to satisfy the conversion features related to its financial instruments or equity awards granted. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company's continuance is dependent on raising capital and generating revenues sufficient to sustain operations. The Company believes that the necessary capital will be raised and has entered into discussions to do so with certain individuals and companies. However, as of the date of these condensed consolidated financial statements, no formal agreement exists.

The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to secure the necessary capital and continue as a going concern.

NOTE 13—COMMITMENTS AND CONTINGENCIES

The Company leases office space in Atlanta, Georgia under a one-year renewable contract presently at approximately $2,500 per month.

NOTE 14 – MINING LEASE AND OPTION TO PURCHASE

BASIN GULCH

Dutch Gold Resources, Inc. was granted an assignment of the Basin Gulch Mine lease between Aultra Gold, Inc. and Strategic Minerals, Inc. in 2010 as a result of the Asset Purchase agreement with Aultra as discussed in Note 2.

On May 31, 2006, AGDI entered into a Mining Lease Agreement with Strategic Minerals, Inc. (“Strategic”) whereby Strategic granted AGDI the exclusive right to explore, evaluate, develop, and mine the Basin Gulch Property, Montana. The advanced exploration and test mining project consists of eleven patented mineral claims, surrounded by the Deer Lodge National Forest, totaling about 217.9 acres. The claims are all located at the head of Basin Gulch, on the northern slopes of the West Fork Buttes, within the Sapphire Range of the Western Montana Rocky Mountains. The three-stage Mining Lease Agreement for Basin Gulch is structured as follows:

Stage 1 initial payment:

AGDI paid its initial cash payment of $10,000 and prior to July 30, 2006 satisfied its reporting obligations to Strategic regarding all the exploration and studies conducted on the premises of Basin Gulch Property. This initial payment was expensed when paid.

 
16

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 – MINING LEASE AND OPTION TO PURCHASE (CONTINUED)

BASIN GULCH (CONTINUED)

Stage 2 advance production royalties:

To further evaluate and develop the minerals, AGDI fulfilled the following obligations:

i) By June 10, 2006, it paid a cash payment of $15,000 directly to the underlying property owner;

ii) By September 10, 2006 made cash payment of $25,000 directly to the underlying property owner, and at the end of each following
nine month period to date.

iii) Since 2008, Dutch Gold Resources, Inc. made such payments under an agreement with Aultra Gold, which granted a security interest in all the claims to the AGDI.   Since 2008, DGRI has made semi- annual cash payments of $25,000 to the underlying land owner. No further payments have been or will be made to Strategic based on subsequent agreements between Strategic and the Company.

Stage 3 production royalties:

Upon commencement of production, the Company must pay the greater of:

i) A twice annual cash payment of $25,000 due on March 10 and September 10 of each year; or

ii) 3% of the gross sales receipts of the gold and silver sold, due semi-annually on March 10 and September 10 of each year;

Should production be suspended for a period of 6 months or longer, the twice annual advance production royalty of $25,000 listed above resumes. Upon the completion of payments totaling $8,000,000, the Company will have purchased the mineral rights to this property. As of September 30, 2011, production had not commenced and, therefore, the Stage 3 related production royalties were not owed.

JUNGO

On June 1, 2007, the Company entered into a formal binding Agreement of Purchase and Sale (the "Agreement") with W.R. Hansen, an individual (the “Seller”), pursuant to which the Company acquired from the Seller certain mining claims together with all improvements and all equipment owned by the Seller located thereon, located in Humboldt County, State of Nevada (the “Property”). In consideration of the purchase of the Property, the Company agreed to: (i) reimburse the Seller for all staking and filing costs related to the Property, (ii) issue to the Seller 50,000 restricted shares of the Company’s common stock, $0.001 par value per share (the “Common Stock”), valued at $0.50 per share, (iii) upon its sole determination of sufficient mineralization to place the Property in production, to further issue to the Seller an additional 50,000 restricted shares of the Company’s Common Stock, such that the Company shall make such a determination not later than 30 days following the acquisition of the data contemplated by paragraph 3.3 of the Agreement, (iv) not later than 10 days following the date the Property is placed into development for production of metals, to issue to the Seller an additional 100,000 restricted shares of the Company’s Common Stock, and (v) as further consideration after the Property is placed in production, to direct to the Seller a monthly Net Smelter Royalty of 2% upon all gold, silver, copper, or other metals (the “Metals”) produced and sold from the Property (each royalty payment shall be paid not later than 30 days following the last day of the month in which the metals were produced and sold). Closing of the sale and purchase of the Property occurred on the same date, as under the Agreement both the Company and the Seller have performed their mutual obligations under paragraph 2.2 and Section 4 thereof. As of September 30, 2011, the Jungo property was not in production.

On August 29, 2011, the Company entered into a definitive agreement to lease out the Jungo Project. The Company entered into a lease agreement with Avidian Gold US, Inc. (Avidian). Avidian, which has a portfolio of projects in Nevada, expects to conduct additional drilling on the property in 2012. The agreement calls for Avidian to pay an advance royalty to the Company and to grant an industry standard Net Smelter Return to the Company.  The Company received the initial royalty payment in the amount of $15,000.  Production had not commenced therefore the amount received is reflected as Deferred production royalty revenue on the Company’s Condensed Consolidated Balance Sheets at September 30, 2011. The Company will also receive 150,000 common shares in Avidian which will be accounted for under the cost method. This ownership in Avidian is less than 5% and the Company’s initial value of its investment is $0 as Avidian is a start up company.

 
17

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 – MINING LEASE AND OPTION TO PURCHASE (CONTINUED)

MINNIE MOORE

Effective September 27, 2011, the Company executed a mining lease agreement with Bilbray Trust and Johnston Trust (the “Trusts”) related to a mining lease agreement for certain property located in Blaine County, Idaho (the “Property”). This mining lease is referred to as the Minnie Moore Mine lease (“MM lease”). The lease is for an initial period of 10 years commencing September 27, 2011 with the right to extend the lease agreement for two successive 10 year terms.

The lease grants the Company the right to use the Property for the purpose of exploring, evaluating, developing, mining and all necessary associated activities commensurate with such exploration and mining in return for annual lease payments.  The Company is also required to make advance production payments of $10,000 per month (“Advance Production Payments”).  Upon commencement of the production of ore from the Property, in addition to the Advance Production Payment, the Company shall pay to the Trusts the greater of $10,000 to be paid monthly, or a net smelter royalty of 4.00% of the funds paid from the smelter to the Company (the “Royalties”). The Company will also pay to the Trusts, a profit participation fee of 14.00% of the net profits of production of ore from the Property (“Profit Participation”).  In consideration of the lease, the Company also granted options to each of the Trusts to purchase 5,250,000 shares of the Registrant’s common stock at an exercise price of $1,000.00.  The options shall vest when operations from the mine have generated net revenues of $10,000,000. In addition, the Company was also granted the right to purchase the Property for the purchase price of $15,000,000 (the “Purchase Price”).  Any payments made to the Trusts from the production of ore at the Property, including Advance Profit Payments, Net Smelter Royalties and/or Profit Participation would be applied against the Purchase Price.

Also, on September 27, 2011, the Company entered into a Consulting Agreement with Carl Johnston for services to the Company related to the exploration, development and production of precious metals from the Property.  The agreement provides for compensation in the amount of $5,000 per month and the term of the consulting agreement is for one year and is automatically renewed unless cancelled by either party.

Lease Term for property

The lease term is for an initial 10 year period with an option for 2 successive extended terms of 10 years. The lease payments owed by the Company to the Trusts are as follows:
   
Obligated 10 Year Period
  
Years 1–5:
$50,000 per year
Years 6-10:
$100,000 per year

First Renewal 10 Year Period

Years 10-15:
$125,000 per year
Years 16-20:
$150,000 per year

Second Renewal 10 Year Period

Years 21-25:
$175,000 per year
Years 26-30:
$200,000 per year
 
Management has analyzed the lease terms and related accounting in accordance with ASC 840, Leases-Operating and Capital, and has classified the lease as an operating lease. In addition, management has determined the lease term to be 10 years and has excluded the two successive 10 year renewal periods from the lease term. These renewal periods have been excluded as the lease agreement does not contain an economic penalty to the Company that would make the renewal of the lease reasonably assured and there is no guarantee by the Company of the lessors (Trusts) debt during the renewal periods. Therefore, the Company concludes that the fixed, non-concealable term of the lease is 10 years.

Management analyzed the annual rental payments for the 10 year lease term in accordance with ASC 840-20-25-2 (Nonlevel rents). Management has determined that the increase in lease payments do qualify as scheduled rent increases and therefore straight-line recognition of the lease expense should be recognized.

 
18

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 – MINING LEASE AND OPTION TO PURCHASE (CONTINUED)

MINNIE MOORE (CONTINUED)

Lease Term for property (continued)

The Company will record rent expense over the lease term with a deferred liability or asset reported on the balance sheet for the difference between the straight-line rent expense and the annual cash outlay. No amounts were recorded as it relates to the operating lease during the third quarter 2011 as the rent expense and related deferred rent liability for the remaining four days of the third quarter were not material to the condensed consolidated financial statements.

Options Issued

Upon execution of the lease agreement, Dutch Gold issued to each of the Trusts 5,250,000 options of the Company’s common stock at an exercise price of $1,000.00. The options shall vest when the operations on the Property have generated net revenues of $10,000,000.

The Company has valued the options issued to the Trusts (non-employees) using the binomial lattice model. The exercise price of $1,000 translates to a per share exercise price of $0.000190476. The market price of the Company’s common stock on the effective date of the MM agreement was $0.0064. Therefore, the options were issued at an exercise price lower than market price. The expected term for the option grant equals the contractual term as these options were issued to nonemployees. As stated above, there are no performance criteria that the option holders (Trusts) have to satisfy in order to receive the award. However, in order for the options to vest, the Property must generated net revenues of $10 million over the ten year term of the arrangement.

As these option terms contain market conditions and/or performance metric requirements, the options were valued using the lattice valuation model.  Based on the lattice model, the fair value of the options granted approximates $70,000. However, due to the low probability vesting assessment of reaching $10 million in revenue based on the date the options were granted (production has not commenced; low likelihood on day one that options will vest), and considering the options were granted at the end of third quarter 2011, no expense was recorded for the nine months ended September 30, 2011 related to this option grant.

NOTE 15 –RESTAMENT OF FINANCIAL STATEMENTS
 
The Company is restating its historical financial statements for the three and nine months ended September 30, 2010. The restatement primarily relates to certain errors in accounting for the change in the fair value of our warrants. Accordingly, the Company’s financial statements for the three and nine months ended September 30, 2010 have been restated to correct for these errors and are included in the accompanying condensed consolidated financial statements. For the three months ended September 30, 2010, these corrections in the aggregate increased the Company’s previously reported net loss by $2,471, or ($0.00) per share and for the nine months ended September 30, 2010, these corrections in the aggregate increased the Company’s previously reported net loss by $62,520 or ($0.00) per share. Note 15 provides the effect of the restatement on the September 30, 2010 condensed consolidated financial statements.
 
 
19

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 –RESTAMENT OF FINANCIAL STATEMENTS

The restatement effect on the condensed consolidated statement of operations for the three and nine months ended September 30, 2010 is reflected below.
 
     
Three Months Ended September 30, 2010 (unaudited)
   
Nine Months Ended September 30, 2010 (unaudited)
 
   
As previously
               
As previously
             
   
reported
   
Adjustments
   
As restated
   
reported
   
Adjustments
   
As restated
 
                                     
Revenue
                                   
                                     
Sales
  $ -     $ -     $ -     $ -     $ -     $ -  
Cost of sales
    -       -       -       -       -       -  
                                                 
Gross profit
    -       -       -       -       -       -  
                                                 
Operational Expenses
                                               
                                                 
Selling, general and administrative expenses
    393,510       -       393,510       737,744       -       737,744  
Professional fees
    52,175       -       52,175       1,698,063       -       1,698,063  
Rent and repairs and maintenance
    2,729       -       2,729       28,227       -       28,227  
Write-off of other assets
    -       -       -       110,000       -       110,000  
Gain from reversal of accruals
    -       -       -       (361,277 )     -       (361,277 )
Gain from settlement of accounts payable
    -       -       -       (80,046 )     -       (80,046 )
Depreciation
    119,939       -       119,939       359,817       -       359,817  
                                                 
Total operating expenses
    568,353       -       568,353       2,492,528       -       2,492,528  
                                                 
Operating loss
    (568,353 )     -       (568,353 )     (2,492,528 )     -       (2,492,528 )
                                                 
Other income (expense)
                                               
                                                 
Interest expense, net
    (3,378 )     -       (3,378 )     (3,378 )     -       (3,378 )
Financial settlement expense
    (25,000 )     -       (25,000 )     (61,250 )     -       (61,250 )
Change in fair value of warrants
    -       2,471       (2,471 )     -       (62,520 )     (62,520 )
Gain from sale of Aultra investment
    -       -       -       217,177       -       217,177  
                                                 
Loss before income taxes
    (596,731 )     2,471       (599,202 )     (2,339,979 )     (62,520 )     (2,402,499 )
                                                 
Provision for income taxes
    -       -       -       -       -       -  
                                                 
Net loss
    (596,731 )     2,471       (599,202 )     (2,339,979 )     (62,520 )     (2,402,499 )
                                                 
Basic and diluted loss per share
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.01 )   $ 0.00     $ (0.01 )
Weighted average shares outstanding
    235,981,334       (33,261,646 )     202,719,688       235,981,334       (60,131,980 )     175,849,355  

 
20

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 –RESTAMENT OF FINANCIAL STATEMENTS (CONTINUED)

The restatement effect on the condensed consolidated statement of cash flows for the nine months ended September 30, 2010 is reflected below   

 
   
Nine Months Ended September 30, 2010 (unaudited)
 
   
As previously
             
   
reported
   
Adjustments
   
As restated
 
                   
Operating activities:
                 
                   
Net loss
  $ (2,339,979 )   $ (62,520 )   $ (2,402,499 )
Adjustments to reconcile net loss to cash used in operating activities
                       
Gain from settlement of accounts payable
    (80,046 )     -       (80,046 )
Gain from reversal of unrealized accruals
    (361,277 )     -       (361,277 )
Loss from write-off of other assets
    110,000       -       110,000  
Common stock issued for services
    1,384,324       -       1,384,324  
Common stock issued for other settlements
    61,250       -       61,250  
Depreciation
    359,817       -       359,817  
Change in fair value of warrants
    -       62,520       62,520  
Gain on sale of Aultra Investment
    (217,177 )     -       (217,177 )
Changes in assets and liabilities
                       
Accounts payable
    (81,951 )     -       (81,951 )
Accounts payable-related parties
    441,294       -       441,294  
Accrued liabilities
    (12,497 )     -       (12,497 )
                         
Net cash used in operating activities
    (736,242 )     -       (736,242 )
                         
Financing activities:
                       
Proceeds from loans from sale of common stock
    69,600       -       69,600  
Proceeds from stock subscriptions
    185,305       -       185,305  
Proceeds from notes payable-related parties
    150,000       -       150,000  
Proceeds from loans from convertible notes payable
    310,000       -       310,000  
                         
Net cash provided by financing activities
    714,905       -       714,905  
                         
Net increase in cash and cash equivalents
    (21,337 )     -       (21,337 )
                         
Cash and cash equivalents at beginning of period
    24,522       -       24,522  
                         
Cash and cash equivalents at end of period
  $ 3,185     $ -     $ 3,185  
                         
SUPPLEMENTAL CASH FLOW INFORMATION
                       
                         
Cash paid during year for interest
  $ -     $ -     $ -  
                         
Non-cash Transactions:
                       
Common stock issued to settle debt
  $ 612,500     $ -     $ 612,500  
Common stock issued to settle accrued expenses
    51,434       -       51,434  
Common stock issued for acquisition
    2,716,155       -       2,716,155  
Reduction of warrant liability due to expiration of warrants
    -       1,057,275       1,057,275  

 
21

 

DUTCH GOLD RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 – SUBSEQUENT EVENTS:

On November 14, 2011 the Company filed a Definitive Information Statement (SEC DEF 14C) to amend the Company’s Articles of Incorporation based on the April 11, 2011 authorization of the Company’s Board of Directors and shareholders holding a majority of the Company’s outstanding voting capital stock to increase the number of the Company’s authorized shares of capital stock from 510,000,000 consisting of 500,000,000 shares of common stock par value $0.001 per share and 10,000,000 shares of preferred stock, par value $0.001 per share to 770,000,000 shares of which 750,000,000 shares will be Common Stock and 20,000,000 shares will be Preferred Stock. This amendment will be effective December 6, 2011.

 
22

 

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

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.   These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions.  We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
 
 
unexpected changes in business and economic conditions;
 
significant increases or decreases in gold prices;
 
unanticipated grade changes;
 
metallurgy, processing, access, availability of materials, equipment, supplies and water;
 
results of current and future exploration activities;
 
results of pending and future feasibility studies;
 
joint venture relationships;
 
local and community impacts and issues;
 
timing of receipt of government approvals;
 
accidents and labor disputes;
 
environmental costs and risks;
 
competitive factors, including competition for property acquisitions; and
 
availability of external financing at reasonable rates or at all.

This list is not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the sections titled “Risk Factors and Uncertainties”, “Description of the Business” and “Management’s Discussion and Analysis” in our 2010 Form 10-K.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected.  We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law.

Stockholders and other users of this Quarterly Report on Form 10-Q are urged to carefully consider these factors in connection with the forward-looking statements. We do not intend to publicly release any revisions to any forward-looking statements contained herein to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

Overview and Results of Operations

Our objective is to increase the value of our shares through the exploration, development and extraction of gold, silver and other valuable minerals. We generally conduct our business as sole operator, but we may enter into arrangements with other companies through joint venture or similar agreements in an effort to achieve our strategic objectives. We own or lease our mineral interests and properties and operate our business through various subsidiary companies, each of which is owned entirely, directly or indirectly, by us.

We own a leasehold interest in a property near Philipsburg, Montana which is of 217 acres of patented land and approximately 900 acres of Bureau of Land Management (BLM) land, referred to as Basin Gulch. We acquired the property in 2010 and commenced a regional exploration program in 2010. Over the next two years, we estimate we will spend approximately $4 million on exploration and development at the Basin Gulch Project, which will mainly consist of drilling and test mining.

The Jungo gold exploration project is located approximately 50 miles northwest of the town of Winnemucca in Humboldt County, Nevada. The property is situated on the eastern margin of the Jackson Mountains.

 
23

 

Overview and Results of Operations (continued)

The property is on BLM land and is held by 95 unpatented lode mining claims.  Twenty five of the claims have a two percent net smelter return royalty to William (Bill) Hansen.  The other 70 claims are owned by DGRI.

The property was acquired by DGRI by the transaction with Aultra Gold in January 2010.  Mr. Hansen originally showed the property to Aultra Gold, which acquired it and staked additional claims.

Effective August 29, 2011, the Company entered into a definitive agreement to lease out the Jungo project to Avidian Gold US, Inc. for planned development in 2012.

The Company on September 27, 2011, entered into a definitive agreement to lease the Minnie Moore Mine property, near the town of Bellevue, in southern central Idaho. The historic Minnie Moore Mine is located immediately west of Bellevue, in the Mineral Hill mining district in Blaine County. The Company entered into a lease agreement with the current owners and was granted an option to Purchase the property.

Principal Executive Offices

Our principal executive office is located at 3500 Lenox Road, Suite 1500, Atlanta, Georgia 30326.  Our phone number is 404-419-2440. Our website is www.DutchGold.com. We currently lease office space for our corporate office and operations under a one-year renewable contract with monthly rental charges approximately $2,500 per month. We believe that these offices adequately meet the current needs of the Company. We make available periodic reports and press releases on our website. Our common shares trade on the Over the Counter market under the symbol "DGRI."

General Government Regulations

United States

Mining in the State of Nevada and in the State of Montana is subject to Federal, state and local law. Three types of laws are of particular importance to our U.S. mineral properties: those affecting land ownership and mining rights; those regulating mining operations; and those dealing with the environment.

Land Ownership and Mining Rights

The Jungo Project in Nevada is situated on lands owned by the United States (Federal Lands). On Federal Lands, mining rights are governed by the General Mining Law of 1872 (General Mining Law) as amended, 30 U.S.C. §§ 21-161 (various sections), which allows the location of mining claims on certain Federal Lands upon the discovery of a valuable mineral deposit and proper compliance with claim location requirements. A valid mining claim provides the holder with the right to conduct mining operations for the removal of locatable minerals, subject to compliance with the General Mining Law and Nevada state law governing the staking and registration of mining claims, as well as compliance with various federal, state and local operating and environmental laws, regulations and ordinances. As the owner or lessee of the unpatented mining claims, we have the right to conduct mining operations on the lands subject to the prior procurement of required operating permits and approvals, compliance with the terms and conditions of any applicable mining lease, and compliance with applicable Federal, state, and local laws, regulations and ordinances.

Mining Operations

The exploration of mining properties and operation of mines is governed by both federal and state laws. The Jungo property is administered by the United States Department of the Interior, Bureau of Land Management, which we refer to as the "BLM." In general, the Federal laws that govern mining claim location and maintenance and mining operations on Federal Lands, including the Tonkin Springs property, are administered by the BLM. Additional Federal laws, such as those governing the purchase, transport or storage of explosives and those governing mine safety and health, also apply.

The State of Nevada, likewise, requires various permits and approvals before mining operations can begin, although the state and Federal regulatory agencies usually cooperate to minimize duplication of permitting efforts. Among other things, a detailed reclamation plan must be prepared and approved, with bonding in the amount of projected reclamation costs.

The bond is used to ensure that proper reclamation takes place, and the bond will not be released until this is completed. The Nevada Department of  Environmental Protection, which we refer to as the NDEP, is the state agency that administers the reclamation permits, mine permits and related closure plans on our Nevada property. Local jurisdictions (such as Humboldt County) may also impose permitting requirements (such as conditional use permits or zoning approvals).

 
24

 

Environmental Law

The exploration, operation, closure and reclamation of mining projects in the United States requires numerous notifications, permits, authorizations and public agency decisions. Compliance with environmental and related laws and regulations requires us to obtain permits issued by regulatory agencies, and to file various reports and keep records of our operations. Certain of these permits require periodic renewal or review of their conditions and may be subject to a public review process during which opposition to our proposed operations may be encountered. We are currently operating under various permits for activities connected to mineral exploration, reclamation and environmental considerations. Unless and until a mineral resource is proved, it is unlikely our operations will move beyond the exploration stage. If in the future we decide to proceed beyond exploration, there will be numerous notifications, permit applications and other decisions to be addressed at that time.

The State of Montana likewise requires various permits and approvals before mining operations can begin, although the state and Federal regulatory agencies usually cooperate to minimize duplication of permitting efforts. Among other things, a detailed reclamation plan must be prepared and approved, with bonding in the amount of projected reclamation costs. The bond is used to ensure that proper reclamation takes place, and the bond will not be released until this is completed. The Montana Department of Environmental Quality, which we refer to as the MDEQ, is the state agency that administers the reclamation permits, mine permits and related closure plans on our Montana property. Local jurisdictions (such as Humboldt County) may also impose permitting requirements (such as conditional use permits or zoning approvals). Both the states of Montana and Idaho have similar regulations.

The Company is engaged solely in exploration activities and is not engaged in any production operations.

Gold Uses

Gold is generally used for fabrication or investment. Fabricated gold has a variety of end uses including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors buy gold bullion, official coins and jewelry.

Gold Supply

A combination of current mine production and draw-down of existing gold stocks held by governments, financial institutions, industrial organizations and private individuals make up the annual gold supply. Based on public information available for the years 2008 through 2010, on average, current mine production has accounted for approximately 61% of the annual gold supply.

On November 15, 2011, the afternoon fixing gold price on the London Bullion Market was $1,785 per ounce and the spot market gold price on the New York Commodity Exchange was $1,782 per ounce.

Gold Price History

The price of gold is volatile and is affected by numerous factors all of which are beyond our control such as the sale or purchase of gold by various central banks and financial institutions, inflation, recession, fluctuation in the relative values of the US dollar and foreign currencies, changes in global and regional gold demand, and the political and economic conditions of major gold-producing countries throughout the world.

The following table presents the high, low and average afternoon fixed prices in U.S. dollars for gold per ounce on the London Bullion Market over the past nine years:
 
Year
 
High
   
Low
   
Average
 
2002
   
349
     
278
     
310
 
2003
   
416
     
320
     
363
 
2004
   
454
     
375
     
410
 
2005
   
537
     
411
     
445
 
2006
   
725
     
525
     
603
 
2007
   
841
     
608
     
695
 
2008
   
1,011
     
713
     
872
 
2009
   
1,146
     
810
     
978
 
2010
   
1,421
     
1,058
     
1,225
 

 
25

 

Competition

We compete with major mining companies and other mining companies in the acquisition, exploration, financing and development of new projects.   Many of these companies have more established human and materials resources, and are better capitalized than the Company.  There is significant competition for the limited number of gold acquisition and exploration opportunities. Our competitive position depends upon our ability to successfully and economically explore, acquire and develop new and existing mineral prospects. Factors that allow producers to remain competitive over the long-term include the quality and size of ore bodies, costs of operation, and the acquisition and retention of qualified employees. The Company competes with mining companies for skilled mining engineers, mine and processing plant operators and mechanics, geologists, geophysicists and other technical personnel. This competition could result in higher employee turnover and may result in higher labor costs.

Seasonality

Seasonality is not a material factor to the Company for its projects.  Certain surface exploration work may need to be conducted when there is no snow but it is not a significant issue for the Company.

Employees

As of September 30, 2011, we had 5 employees. Our employees in the U.S. include geologists, environmentalists, information technologists and office administrators. The Company believes we have good relations with our employees. We also engage independent contractors in connection with the exploration of our properties, such as drillers, geophysicists, geologists and other technical disciplines.

Results of Operations

During the three and nine month period ended September 30, 2011, the Company incurred operating expenses of $311,065 and $1,875,206 respectively, as compared to $568,353 and $2,492,528 for the three and nine month period ended September 30, 2010, respectively.

Selling, general and administrative expenses decreased by $171,446 for the three month period and increased by $354,836 for the nine month period ended September 30, 2011 when compared to the same period in the prior year. This decrease in the three month period ended September 30, 2011, resulted primarily from a $100,000 reversal of a prior period compensation expense error that was accrued in error but will not be paid. The increase in selling, general and administrative expense for the year to date period results primarily from the following: general and administrative expense recorded in 2011 pertaining to Series B Convertible Preferred stock issued in Q2 2011 with no comparable issuance in 2011; options granted in 2011 with no comparable option grants in 2010; a $200,000 reversal of a reserve related to a contingent liability in 2010 which reduced selling, general and administrative expense for 2010 as management determined that payment of the liability no longer was probable during the quarter with there being no similar adjustment recorded in the current year comparable periods and an increase in other general and administrative related expenditures including but not limited to expenditures incurred related to current exploration activities.

The increase in selling, general and administrative expenses was offset by a reduction in professional fees for the nine months ended September 30, 2011 of $1,143,132. A large portion of the 2010 professional fees were related to stock issued to financial consultants in connection with assisting the Company in raising funds and pursuing possible acquisitions. In 2011, as the Company still incurred related expenditures, management was able to rely less on outside consultants and raise additional funds internally through previously established relationships.

The Company reported interest expense of $315,378 and $1,331,143 for the three and nine month period ended September 30, 2011. Interest expense of $3,378 was reported for the comparable prior year periods. As a result of the fiscal 2010 audit, management determined that interest expense of $115,683 should have been recorded for the nine month period ended September 30, 2010. The interest error related to the 2010 quarterly periods was corrected and properly stated in the Company’s fiscal 2010 audited financial statements. However, the Company has not restated its 2010 quarterly results to correct the interest expense error on the respective quarters as management has determined that the uncorrected error on the 2010 quarterly periods is not material to the quarterly financial statement results when analyzing the error on both a qualitative and quantitative basis. An increase in interest expense for the three and nine month period ended September 30, 2011 results from interest recorded on  a large number of convertible notes that were issued in late 2010 and during the three and nine month period ended September 30, 2011. The accretion of the related debt discount and amortization of the related deferred financing costs incurred in obtaining these convertible notes has resulted in an increase in interest expense reported in 2011. In addition, $10,000 and $287,550 in interest expense was recorded for the three and nine month period September 30, 2011 respectively, related to forbearance agreements executed with two noteholders.

 
26

 

Results of Operations (continued)

The net loss for the three and nine months ended September 30, 2011 was $1,784,911 and $4,389,661 respectively, as compared to a net loss of $599,202 and $2,402,499 for three and nine months ended September 30, 2010, respectively. Net loss increased for these periods resulting from an increase in selling, general and administrative expenditures along with an increase in interest expense incurred resulting from the convertible notes issuances as discussed above. In addition, the Company incurred losses in the amount of $884,697 and $846,198 for three and nine months ended September 30, 2011, respectively, related to the realized loss on the sale of securities. Similar transactions did not occur for the comparable period in fiscal 2010.

Twelve-Month Business Outlook

In order to act upon our operating plan discussed herein, we must be able to raise sufficient funds from (i) debt financing; or, (ii) new investments from private investors.

Operating Expenses and Capital Expenditures

Operating Expenses

Assuming that the Company is successful raising funds, we anticipate incurring operating expenses of approximately $3.2 million during the next twelve months to fund the costs relating to the development of our properties and the identification of new acquisitions.

Source of Revenue

When produced, the Company expects to sell gold concentrates and ore to brokers and/or refineries. The Company has not produced any revenue since 2008. The Company cannot predict with certainty, when, if ever, revenues will be produced.

Liquidity and Capital Resources

We currently have limited sources of capital, including the public and private placement of equity securities and the possibility of debt. With limited liquid assets and depreciating fixed assets, the availability of funds from traditional sources of debt will be limited and we cannot assure that there will be a source of funds in the future. The Company will take sufficient action to raise additional debt and or equity as the markets will allow. In addition, as of September 30, 2011, the Company does not have the authorized shares available for issuance in order to satisfy the conversion features related to its financial instruments or equity awards granted.

As of September 30, 2011, we had a cash balance of $10,057. We estimate that, based upon our current business, we will require up to $4 million over the next two years. However, the Company cannot properly anticipate the capital expenditures and working capital needed in connection with its operations and development.  Although not certain or guaranteed, the Company believes it has access to sufficient funding for the next twelve months.

Critical Accounting Policies and Estimates

In the third quarter of 2011, there were no significant changes to our critical accounting policies and estimates from those disclosed in the section “Management’s Discussion and Analysis of Plan of Operation and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2010.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

 
27

 

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Based upon an evaluation of the effectiveness of disclosure controls and procedures, our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) were not effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC and is accumulated and communicated to management, including the CEO and CFO, as appropriate to -allow timely decisions regarding required disclosure.  Disclosure controls and procedures are defined as those controls and other procedures of an issuer that are designed to ensure that the information required to be disclosed by the issuer in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As reported in our Annual Report on Form 10-K for the year ended December 31, 2010, based upon an evaluation of the effectiveness of disclosure controls and procedures, the Company’s chief executive and chief financial officer has determined that there are material weaknesses in our disclosure controls and procedures.  It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

The material weaknesses in our disclosure control procedures are as follows:

1.             Lack of formal policies and procedures necessary to adequately review significant accounting transactions.

The Company utilizes a third party independent contractor for the preparation of its financial statements. Although the financial statements and footnotes are reviewed by our management, we do not have a formal policy to review significant accounting transactions and the accounting treatment of such transactions. The third party independent contractor is not involved in the day to day operations of the Company and may not be provided information from management on a timely basis to allow for adequate reporting/consideration of certain transactions.

2.             Audit Committee and Financial Expert.

The Company has recently established a formal audit committee with a financial expert. However, the audit committee has not been in effect for a substantial time that would provide the needed board oversight role within the financial reporting process.

We intend to initiate measures to remediate the identified material weaknesses including, but not necessarily limited to, the following:

1.Establishing a formal review process of significant accounting transactions including the appropriate segregation of duties that includes participation of the Chief Executive Officer, the Chief Financial Officer and the Company’s corporate legal counsel; and

2. Establishing policies and procedures that will provide the Board of Directors with a formal review process that will, among other things, assure that management controls and procedures are in place and being maintained consistently.

(b) Changes in Internal Control over Financial Reporting

As reported in our Annual Report on Form 10-K for the year ended December 31, 2010, management is aware that there a significant deficiency and a material weakness in our internal control over financial reporting and therefore has concluded that the Company’s internal controls over financial reporting were not effective as of December 31, 2010. The significant deficiency relates to a lack of segregation of duties due to the small number of employees involvement with general administrative and financial matters.  The material weakness relates to a lack of formal policies and procedures necessary to adequately review significant accounting transactions.

 
28

 

There have not been any changes in the Company's internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.    Legal Proceedings

From time to time, we are involved in claims and suits that arise in the ordinary course of our business. Although management currently believes that resolving any such claims against us will not have a material adverse impact on our business, financial position or results of operations, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. In addition to any such claims and suits, we are involved in the following legal proceedings.

On April 8, 2010, the Company was advised that the Securities and Exchange Commission is conducting an investigation in the Company in the matter identified as Dutch Gold Resources, Inc, Case No. A-03222.  In accordance with the investigation, the Company and its Chief Executive Officer, Daniel W. Hollis, received subpoenas to produce documents and testify before the Commission.  Neither the Company nor Mr. Hollis have been notified of the nature of the investigation.  The Company has fully cooperated with the investigation supplying both documentation and testimony in response to the request for information.

We are not aware of any other pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

Item 1A.   Risk Factors

Not required for smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On August 15, 2011, the Company authorized the issuance of 25,000 shares of Series C Convertible Preferred Stock for $250,000 in cash to an investor. The Series C Convertible Preferred stock provides the conversion right to common shares along with voting rights over common shareholders. In addition to the Series C Convertible Preferred stock, the investor acquired 12,500,000 warrants at an exercise price of $0.02 per share.

The securities described above were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act and Rule 506 of Regulation D promulgated thereunder. The agreements executed in connection with this sale contain representations to support the Registrant’s reasonable belief that the Investor had access to information concerning the Registrant’s operations and financial condition, the Investor acquired the securities for their own account and not with a view to the distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and that the Investor are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors” (as defined by Rule 501 under the Securities Act). In addition, the issuances did not involve any public offering; the Registrant made no solicitation in connection with the sale other than communications with the Investor; the Registrant obtained representations from the Investor regarding their investment intent, experience and sophistication; and the Investor either received or had access to adequate information about the Registrant in order to make an informed investment decision.

 
29

 

PART II — OTHER INFORMATION (CONTINUED)

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    (Removed and Reserved)

Item 5.    Other Information

None.

Item 6.    Exhibits and Reports on Form 8-K

Exhibits .

Exhibit
 
Description of Exhibit
31.1
 
Chief Executive Officer Certification pursuant to Rule 13a(14a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Chief Financial Officer Certification pursuant to Rule 13a(14a)/15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1
 
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2
 
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Reports on Form 8-K. During the fiscal quarter ended September 30, 2011, the Company filed the following Current Reports on Form 8-K:

The Company filed a Form 8-K/A on September 9, 2011 : Amends the Form 8-K, originally filed on February 1, 2010, to disclose the reserve report attached thereto, does not comply with the requirements of National Instrument 43-101 (NI43-101).
The Company filed a Form 8-K on October 5, 2011: Entry into a Material Definitive Agreement
The Company filed a Form 8-K/A on October 28, 2011: Changes in Registrant's Certifying Accountant - Amendment No. 2 to the Current Report on Form 8-K originally filed on March 21, 2011
The Company filed a Form 8-K/A on November 3, 2 011: Changes in Registrant's Certifying Accountant - Amendment No. 3 to the Current Report on Form 8-K originally filed on March 21, 2011
The Company filed a Form 8-K/A on November 3, 2011: Entry into a Material Definitive Agreement, Completion of Acquisition or Disposition of Assets, Departure of Directors or Certain Officers, Election of Directors, Appointment of Certain Officers, Compensatory Arrangements of Certain Officers
The Company filed a Form 8-K/A November 9, 2011 : Changes in Registrant's Certifying Accountant - Amendment No. 5 to the Current Report on Form 8-K originally filed on March 21, 2011

 
30

 

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
DUTCH GOLD RESOURCES, INC.
 
       
 
By:
/s/Daniel W. Hollis
 
   
Daniel W. Hollis, Chief Executive Officer, Director
 
   
(principal executive officer)
 
       
 
By:
/s/ Tom Leahey
 
   
Tom Leahey , Chief Financial Officer
 
   
(principal accounting officer)
 
       
 
By:
/s/ Lance Rosmarin
 
   
Lance Rosemarin, Director
 

Date: November 18, 2011

 
31

 

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