Dakota Gold Corp.: Form 10-Q for the period ended Mar 31, 2023

You should read the following discussion and analysis of the Company's financial condition and results of operations together with the Company's financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related footnotes included in our Transition Report on Form 10-KT for the nine-month transition period ended December 31, 2022.

Forward-Looking Statements

This Quarterly Report on Form 10-Q and the exhibits attached hereto contain "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including statements concerning our anticipated results and developments of our operations in future periods, planned exploration and development of our properties, plans related to our business and other matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as "expects", "anticipates", "plans", "estimates" or "intends", the negatives thereof, variations thereon and similar expressions, or stating that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements in this transition report include, but are not limited to:

• the progress, potential and uncertainties of the Company's exploration program at its properties located in the Homestake District of South Dakota;
• our assessment that the Homestake District is a safe, low-cost jurisdiction in a favorable regulatory environment;
• our planned exploration activities across our portfolio of exploration targets;
• proposed expenditures for exploration and general and administrative costs;
• the success of getting the necessary permits for future drill programs and future project exploration;
• expectations regarding the sufficiency of the Company's existing funds for the remainder of the current fiscal year and the Company's ability to raise capital and to continue the Company's exploration plans on the Company's properties in the future; and
• plans regarding anticipated expenditures at the Black Hills Property.

Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:

• risks associated with lack of defined mineral resources pursuant to S-K 1300,
• risks associated with the failure to successfully execute management's strategy,
• risks associated with the Company's history of losses and need for additional financing,
• risks associated with its limited operating history,
• risks associated with its properties all being in the exploration stage,
• risks associated with its lack of history in producing metals from its properties,
• risks associated with its need for additional financing to develop a producing mine, if warranted,
• risks associated with its exploration activities not being commercially successful,
• risks associated with ownership of surface rights at its Black Hills Property,
• risks associated with increased costs affecting its financial condition,
• risks associated with a shortage of equipment and supplies adversely affecting its ability to operate,
• risks associated with mining and mineral exploration being inherently dangerous,
• risks associated with mineralization estimates,
• risks associated with changes in mineralization estimates affecting the economic viability of its properties,
• risks associated with uninsured perils,
• risks associated with mineral operations being subject to market forces beyond its control,
• risks associated with fluctuations in commodity prices,
• risks associated with permitting, licenses and approval processes,
• risks associated with governmental and environmental regulations,
• risks associated with future legislation regarding the mining industry and climate change,
• risks associated with potential environmental lawsuits,
• risks associated with its land reclamation requirements,
• risks associated with gold mining presenting potential health risks,
• risks associated with possible amendments to mining laws, mineral withdrawals of similar actions,
• risks associated with any weaknesses that have been identified in our internal controls over financial reporting,
• risks associated with pandemics,
• risks associated with cybersecurity and cyber-attacks,
• risks related to title in its properties,
• risks related to competition in the gold and silver mining industries,
• risks related to economic conditions,
• risks related to its ability to manage growth,
• risks related to the potential difficulty of attracting and retaining qualified personnel, both employees and skilled contractors,
• risks related to its dependence on key personnel,
• risks related to its SEC filing history, and
• risks related to its securities.

This list is not exhaustive of the factors that may affect the Company's forward-looking statements. Although the Company has attempted to identify important factors that could cause actual results to differ materially from those described in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. 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. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by law, the Company disclaims 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. The Company qualifies all the forward-looking statements contained in this Quarterly Report on Form 10-Q by the foregoing cautionary statements.

This management's discussion and analysis should be read in conjunction with the Company's financial statements and notes thereto as set forth herein. Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the factors which affect its business, including without limitation, the disclosures made under "Risk Factors" of its most recent Form 10-KT.

The Company's unaudited financial statements are stated in United States dollars and are prepared in accordance with U.S. GAAP.

Since the Company is an exploration stage company and has not generated revenues to date, its business is subject to numerous contingencies and risk factors beyond its control, including exploration and development risks, competition from well-funded competitors, and its ability to manage growth.

Overview

The Company's goal is to create stockholder value through the acquisition, responsible exploration, and future development of high caliber gold properties in the Homestake District of South Dakota. Management and the technical teams cumulatively have several hundred years of international mining and exploration experience and key personnel have more than 50 combined years in the Homestake District, mostly with the Homestake Mining Company, as well as other exploration companies that have operated in the region. The Company believes this experience uniquely positions the Company and will allow it to leverage its direct experience and knowledge of past exploration and mining activities in the District. Combined with the use of modern exploration and mining techniques, and new geologic understanding from experience in other mines, new research and information extracted from its new geophysical surveys, the Company hopes to focus its programs and build upon dominance where the historic Homestake Mining Company left off in the 1990's.

The Homestake District has yielded approximately 44.6 million ounces of gold production with most of it coming from within a small area. The production ledges of the old mine define a cumulative surface projection area of much less than 3 square miles. Homestake Mining Company's historic gold production and exploration in the District was overwhelmingly focused on the underground mine. Modern statistical studies of ore deposit trends and understanding of the distribution of large gold camps around the world identifies that large gold deposits generally form in distinct camps and normally occur in clusters that show predictable distributions (Zipf's Law Applied to Ore Deposits). The Company believes this might be true for the Homestake District. Outside of the mine area, the District has been underexplored and lacks the modern exploration efforts required to search for other deposits especially under the cover of younger rocks that dominate the surface.

Since 2012, the Company has consistently pursued a strategy of expanding its portfolio of brownfield properties located exclusively within the Homestake District to build a dominant land position with the goal of consolidating possible mineral potential. Property acquisitions are focused and based on (i) past exploration, (ii) access to proprietary data sets the Company has assembled over the years, and (iii) new research and remote data acquisition (Magnetics, Gravity and Radiometric) that was recently conducted over the district that hosts the Homestake gold deposit.

The Company has not established that any of its projects or properties contain mineral resources or mineral reserves under S-K 1300 nor do they guarantee their exploration work will ever establish an economic gold deposit. The Company believes the Homestake District is in a safe, low-cost jurisdiction with well-developed infrastructure and is in a favorable regulatory environment in which authorities have consistently demonstrated a willingness to work with responsible operators to permit well-planned compliant projects.

Drill Programs and Results

Permitting and site preparations were initiated for the first drilling program on the iron-formation target and other Tertiary-age replacement targets in the Maitland area and drilling commenced in early 2022. There are now four drill rigs operating, with two drills at Maitland and two at Richmond Hill. Dakota Gold has completed permit applications and environmental field work for exploration on three target areas and currently has eight active permits in place. An eighth permit application is also in progress with the South Dakota Department of Agriculture and Natural Resources (SDDANR). Permitting activities and environmental field work for the Blind Gold and Tinton project areas have also been initiated. Targets in some of the other brownfield areas may also be identified and advanced for drilling as exploration activities continue throughout the year. Dakota Gold completed 77,994 feet (23,773 meters) of core drilling on three projects in the three months ended March 31, 2023. The areas drilled were the Maitland project, the Richmond Hill project, and the Cambrian Unconformity project.

On February 8, 2023, the Company announced the discovery of the Unionville Zone, a Tertiary replacement style gold system hosted in Precambrian rocks located below known Cambrian hosted replacement mineralization located in the Maitland Mine area.

On May 4, 2023, the Company announced it discovered the JB Gold Zone at the Maitland Gold Project with drill hole MA23C-017 Intersecting 0.365 oz/ton Au over 15.3 Feet (12.51 grams/tonne over 4.7 meters). The intersection is in the same high-grade quartz-carbonate vein, chlorite-arsenopyrite-pyrrhotite mineralization style as the Homestake Mine.

Planned Activities

The Company's planned activities in fiscal 2023 will be focused on advancing exploration drilling on its Maitland and Richmond Hill projects. In addition, work is planned to continue exploration on all its projects with permitting studies and targeting activities on its Blind Gold and Tinton projects to bring them to a drilling stage.

The Company's technical group and consultants are continuously modeling and evaluating data acquired through its regional high-definition airborne magnetic survey, supplemented by other geophysical surveys completed in 2021 and 2022, to enhance possible drill targets, as well as to screen targets on other brownfields areas of interest within the district. Field sampling and mapping programs have been initiated at the Richmond Hill, City Creek, and the Barrick Option property. The Company continues to locate, evaluate, and add to the historic information in its regional and project level data sets much of which is from the 145-year-old Homestake Mining Company files acquired in the Barrick Option agreement but also from other private and public sources.

With four drill rigs operating at the project, the Company anticipates expenditures of approximately $30 million during the calendar year ending December 31, 2023. In order to fund expenditures at the $30 million dollar level, the Company will be required to raise further capital. Should we be unable to raise capital, the Company can scale down the exploration program in order to maintain greater than 12 months of funding as of December 31, 2023.

The Company's projects are all at the exploration stage and do not generate revenues. The Company has not established that any of its properties or projects contain mineral resources or mineral reserves as defined under S-K 1300. Expenditure projections are subject to numerous contingencies and risk factors beyond the Company's control, including exploration and development risks, competition from well-funded competitors, and the Company's ability to manage growth and assessments of ongoing exploration activities and results. The Company cannot offer assurance that its expenses will either meet or exceed its projections.

Liquidity and Capital Resources

The Company is in the exploration-stage and does not generate revenues. As such, the Company finances its operations and the acquisition and exploration of its mineral properties through the issuance of common stock, and the Company could be materially adversely affected if it is unable to raise capital because of market or other factors.

As of March 31, 2023, the Company had working capital of approximately $18.8 million and a retained deficit of approximately $15.8 million. The Company had a net loss for the three months ended March 31, 2023 of approximately $9.5 million.

During the three months ended March 31, 2023, the Company issued a total of 1,886,800 shares of common stock under the ATM program for net proceeds of approximately $4.9 million, another 37,500 shares of common stock for the exercise of stock options for proceeds of $12,000 and 9,018 shares of common stock for the exercise of share purchase warrants for proceeds of $18,757.

Subsequent to March 31, 2023, the Company utilized its ATM to raise gross proceeds of approximately $77,000. During the twelve months ending December 31, 2023, the Company anticipates cash expenditures of approximately $30 million.

Results of Operations

Comparison of Three Month Periods ended March 31, 2023 and 2022

We had losses from operations for the three months ended March 31, 2023 and 2022, totaling approximately $9.58 million and $7.64 million respectively, losses before income tax of approximately $9.54 million and $7.50 million respectively, and deferred tax benefits of approximately $0.27 million and $5.30 million respectively, leading to net losses of approximately $9.27 million and $2.19 million.

Revenue

We had no operating revenues during the three months ended March 31, 2023 and 2022. We are not currently profitable.

Exploration Expenses

During the three months ended March 31, 2023 and 2022, our exploration expenses totaled approximately $6.8 million and $1.2 million, respectively. The increase year over year primarily related to the level of activity associated with drilling, where there are currently four drills operating on the Black Hills property, compared to only one in the prior year. Included in these costs were non-cash exploration-related stock-based compensation expenses of approximately $202,000 and $514,000 for the three months ended March 31, 2023 and 2022, respectively.

General and Administrative

Our general and administrative expenses for the three months ended March 31, 2023 and 2022, were approximately $2.74 million and $6.42 million, respectively. These expenditures were primarily for legal, accounting, and professional fees, investor relations, as well as other general and administrative expenses necessary for our operations. The decrease was primarily due to stock-based compensation allocated to administration expenses of $1.09 million for the three months ended March 31, 2023 (compared to approximately $2.32 million for the three months ended March 31, 2022, largely relating to a one-time grant associated with the acquisition of Dakota Territory), professional fees of approximately $92,000 for the three months ended March 31, 2023 (compared to approximately $322,000 for the three months ended March 31, 2022, largely relating to the acquisition of Dakota Territory), investor relations expenses of approximately $26,000 for the three months ended March 31, 2023 (compared to approximately $181,000 for the three months ended March 31, 2022, when there were higher costs related to the DTRC Merger and listing on the NYSE American) and consulting expenses of approximately $17,000 for the three months ended March 31, 2023 (compared to approximately $238,000 for the three months ended March 31, 2022, largely relating to the acquisition of Dakota Territory). The organization has grown to over thirty employees, which resulted in increased support costs included in general and administrative costs of approximately $1.45 million (the expense for the three months ended March 31, 2022 totaled $3.33 million).

We earned interest income from bank accounts for the three months ended March 31, 2023 and 2022 of approximately $54,000 and $8,000, respectively, which was higher as a result of a higher interest rates.

The effective tax rate for the three months ended March 31, 2023 is less than the statutory rate, due a change in our valuation allowance related to our net operating losses.

Cash flows used in operating activities

During the three months ended March 31, 2023 and 2022, the Company's cash flows used in operating activities were approximately $8.5 million and $2.8 million, respectively. Cash used in operations for three months ended March 31, 2023 increased year over year, primarily as a result of increasing number of drills from one in January 2022 to four in the period ending March 31, 2023.

Cash flows used in investing activities

During the three months ended March 31, 2023 and 2022, cash flow used in investing activities were approximately $65,000 and $2.6 million, respectively. In the three months ended March 31, 2023, the cash used in investing activities consisted of approximately $20,000 for acquisition of mineral properties and $45,000 for property and equipment. In the three months ended March 31, 2022, the cash used in investing activities consisted of approximately $2.5 million for acquisition of mineral properties and $138,000 for property and equipment. The decrease in property acquisition costs was due to having completed strategic acquisitions by the end of March 2022. The higher acquisition of property and equipment in the three months ended March 31, 2022 related to start-up costs required to initiate the drilling program in January 2022.

Cash flows from financing activities

During the three months ended March 31, 2023 and 2022, cash flows from financing activities were approximately $4.9 million and $0 respectively. During the three months ended March 31, 2023, the Company issued 1,886,800 shares of common stock under the ATM program for net proceeds of approximately $4.9 million; 37,500 shares of common stock for the exercise of stock options for proceeds of $12,000; as well as 9,018 shares of common stock for the exercise of share purchase warrants for proceeds of $18,757. In addition, the Company paid withholding taxes related to vested PSUs totaling $38,000 on behalf of the employees.

Critical Accounting Estimates

Management's discussion and analysis of financial condition and results of operations is based on the Company's consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Preparation of financial statements requires management to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and the related disclosures of contingencies. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that the Company's consolidated financial statements are fairly presented in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from the Company's assumptions and estimates, and such differences could be material. Management believes that the following critical accounting estimates and judgments have a significant impact on the Company's consolidated financial statements; valuation of options granted to directors and officers using the Black-Scholes option pricing model and valuation of PSUs granted to officers using Monte Carlo simulation. The Company's accounting policies are described in greater detail in Note 2 to the Company's audited annual consolidated financial statements for the nine months ended December 31, 2022. There have been no material changes to the Company's critical accounting policies and estimates as compared to the Company's critical accounting policies and estimates described in the Form 10-KT for the nine months ended December 31, 2022.

Disclosure Controls and Procedures

At the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision of and with the participation of the Company's management, including its chief executive officer ("CEO") and chief financial officer ("CFO"), of the effectiveness of the design and operations of its disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based on that evaluation, the CEO and the CFO have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company's disclosure controls and procedures were effective as of March 31, 2023.

Changes to Internal Controls and Procedures over Financial Reporting

Management, with the participation of the CEO and CFO, concluded that there were no changes in our internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

There have been no material changes from the risk factors as previously disclosed in the Company's Transition Report on Form 10-KT for the nine months ended December 31, 2022.