# Comstock Inc.: Form 10-Q for the period ended Sep 30, 2016

- Company: [Comstock Inc.](/companies/lode.md) (CIK 1120970)
- Form: 10-Q
- Filed: 2016-10-20
- Accepted by EDGAR: Oct 19, 2016, 20:45 ET
- Period: 2016-09-30
- Accession: 0001120970-16-000124
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1120970/000112097016000124/lode-2016930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1120970/000112097016000124/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $1.1m | us-gaap:Revenues |
| Revenue | 9 months, 2016-01-01 to 2016-09-30 | $4.6m | us-gaap:Revenues |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | −$1.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-01 to 2016-09-30 | −$7.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $165.2k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $603.3k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-01 to 2016-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | −$2.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2016-01-01 to 2016-09-30 | −$9.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | −$0.05 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | −$0.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 182,134,873 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 174,173,436 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2016-01-01 to 2016-09-30 | −$3.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2016-07-01 to 2016-09-30 | $3.2m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $150.3k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-09-30 | $446.6k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-09-30 | $10.0m | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $36.2m | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $7.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-09-30 | $18.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-09-30 | $17.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,315 characters.

The following discussion provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company as of and for the three and nine-month periods ended September 30, 2016, as well as our future results. It should be read in conjunction with the condensed consolidated financial statements and accompanying notes also included in this Form 10-Q and our Annual Report on Form 10-K as of, and for the fiscal year ended, December 31, 2015.

### Overview

Comstock Mining Inc. is a Nevada-based, gold and silver mining company with extensive, contiguous property in the historic Comstock and Silver City mining districts (collectively, the “Comstock District”). The Comstock District is located within the western portion of the Basin and Range Province of Nevada, between Reno and Carson City. We began acquiring properties and developing projects in the Comstock District in 2003. Since then, we have consolidated a substantial portion of the historic Comstock District, secured permits, built an infrastructure and brought exploration projects into production. We also received the 2015 Nevada Excellence in Mine Reclamation award, voted on unanimously by five participating Federal and State of Nevada agencies.

Because of the Comstock District’s historical significance, the geology is well known and has been extensively studied by us, our advisors and many independent researchers. We have expanded our understanding of the geology of the project area through vigorous surface mapping and drill hole logging. The volume of geologic data is immense, and thus far the reliability has been excellent, particularly in the various Lucerne Mine areas. We have amassed a large library of historic data and detailed surface mapping of Comstock District properties and continue to obtain historic information from private and public sources. We use such data in conjunction with information obtained from our current operations, to target geological prospective exploration areas and plan exploratory drilling programs, including expanded surface and underground drilling.

The Company continues evaluating and acquiring properties inside and outside the district expanding its footprint and exploring all of our existing and prospective opportunities for further exploration, development and mining. The near-term goal of our business plan is to maximize intrinsic stockholder value realized, per share, by continuing to acquire mineralized and potentially mineralized properties, exploring, developing and validating qualified resources and reserves (proven and probable) that enable the commercial development of our operations through extended, long-lived mine plans that are economically feasible and socially responsible, including both the Lucerne and Dayton Mine plans, with both surface and underground development opportunities. We also plan to develop longer-term exploration plans for the remaining areas, which include the Spring Valley, Occidental, Northern Extension and Northern Targets areas, subsequent to and in some cases concurrent with the exploration and development of Lucerne and Dayton.

We achieved initial production and held our first pour of gold and silver on September 29, 2012. We produced approximately 22,925 gold equivalent ounces in 2014 and 18,455 gold equivalent ounces in 2015. That is, we produced 19,601 ounces of gold and 222,416 ounces of silver in 2014 and 15,451 ounces of gold and 221,723 ounces of silver in 2015. During the first nine months ended September 30, 2016, the Company produced 3,810 ounces of gold and 69,079 ounces of silver, that is, approximately 4,731 gold equivalent ounces. The expected recovery rate for gold increased from an estimated 85% to an estimated 87.5% in the first quarter of 2016, and to an estimated 88.5% during the third quarter of 2016.

The Company’s headquarters, technical resources, mine operations and heap leach processing facility are located in Storey County, Nevada, at 1200 American Flat Road, approximately three miles south of Virginia City, Nevada and 30 miles southeast of Reno, Nevada. The Company now owns or controls approximately 8,630 acres of mining claims and parcels in the Comstock and Silver City Districts. The acreage is comprised of approximately 2,265 acres of patented claims (private lands) and surface parcels (private lands) and approximately 6,365 acres of unpatented mining claims, which the Bureau of Land Management (“BLM”) administers.

Our real estate segment owns significant non-mining properties, including the Gold Hill Hotel, the Daney Ranch, 98-acre Silver Springs property and other lands, homes and cottages. The Gold Hill Hotel consists of an operating hotel, restaurant and a bar. In 2015, we entered into an agreement to lease the Gold Hill Hotel to independent operators while retaining ownership. The initial term of the lease agreement was effective on April 1, 2015, and ends in March 2020. The tenant may renew the lease for two extended terms of five years each. Lease payments are due in monthly installments.

### Current Exploration Projects

#### District-wide

During the first half of 2016, the Company focused on exploration and development in the Lucerne Resource area, primarily underground core drilling, underground drift (tunnel) development, and underground sampling into the Quartz Porphyry (PQ) and Succor geological targets. The Company has also developed specific plans for further Lucerne exploration activities to define the extent of known mineralization in the Succor, Woodville and Chute target areas.

During the second quarter of 2016, the Company expanded its exploration planning to include longer-term exploration targets across the broader Comstock District where multiple miles of additional mineralized strike zones have been identified and added to the Company’s exploration planning activities. This includes the Company’s northeastern properties within the Occidental Group, the Northern properties referred to as the Gold Hill Group and the southern portion of the Dayton Resource Area, extending further south into the Spring Valley Group (refer to Figure 1).

During the third quarter of 2016, the exploration planning effort was focused on the Dayton Resource area. A draft plan has been designed for an expanded drilling program that would include Reverse Circulation (RC) and core drill holes to place the Dayton Resource into a mine planning stage. The mine planning would incorporate the existing data and would be expanded by the additional infill, geotechnical and definition drilling.

In addition, progressing southerly from the Dayton Resource area, drill targets have been identified based on our previous geophysical studies, prior drill holes and extended geological and structural controls into the Spring Valley, south of the Dayton. The Company plans on taking the Dayton Resource Area to full feasibility, with a production ready mine plan within the next two years. We also plan to further develop the remaining areas, which include the Spring Valley, Occidental, Northern Extension and Northern Targets areas, subsequent to and in some cases concurrent with the exploration and development of Lucerne and Dayton.

Figure 1 - General overview of priority surface and underground targets.

#### Lucerne Exploration Targets

The Company has designed additional exploration drilling programs within the Lucerne Group. This includes the Succor vein target, the Woodville area and the northern development of the PQ underground. During the first quarter, about 12,380 feet of HQ-3 and NQ core drilling was completed and samples produced from the Harris Drift. The drilling configuration is in the form of ‘fans’ that comprise a group of holes, with each drill bay having two or three fans of drill holes extending into the primary target. The core locations and orientations were specifically designed to infill and expand the areas of known, high-grade mineralization identified from previous surface drilling programs. (Figure 2)

Figure 2 - 3D representation of the Harris Drift showing drill bays, drill fans, and the Succor crosscut.

The Company encountered longer mineralized intercepts (10 to 40 feet thick) from bays 3 through 6 as it moved north of the Silver City/Succor structural intersection and within and bordering the PQ mass. The configuration of the longer and higher grade intercepts occur along the hanging wall contact of the PQ intrusive mass within both the Alta Andesite and PQ host rocks. The intervals show continuity laterally and vertically along the structural contact.

Throughout the PQ drill program, geologic cross sections oriented along the drill fans and level plans on 20 foot spacing were fashioned for the target area. With completion of drilling, core logging and assaying through Drill Bay 6, cross sections and level plans were prepared, reviewed, updated and digitized. The model was further refined as these sections were tied together to form a three-dimensional triangulation using Maptek Vulcan software.

Using the geologic model and assay data as a base, multiple grade shells were produced in the same manner. Starting with cross sections and level plans, the shells were digitized and then refined as they were tied together to form three-dimensional triangulations. These shells form the base of the block model used for internal planning and resource development. (Figure 3)

Figure 3 - Current grade shells: colored red for 0.12 opt Au cutoff (averaging 0.31 opt Au) and magenta 0.25 opt Au cutoff (averaging 0.61 opt Au), with PQ, Succor, and Woodville proposed drill programs.

Although the grade intercepts were promising, they have not yet yield sufficient continuity for mining. The Company considers the initial 800 feet of advance within the Harris Drift as a first phase of development toward a longer-term exploration and development objective targeting a three-quarter-mile long mineralized corridor that includes the Lucerne (including the PQ target), Succor, Woodville and Chute zone systems (see Figure 4). Most of these systems remain open to the north and east and particularly at depth. A second phase of development was completed by advancing a crosscut out of Drill Bay 2 to a total length of 450 feet toward the structural intersection of the Silver City fault zone and Succor vein zone. The design of the crosscut is geared toward favorable underground drilling position. The Succor represents an important target in conjunction with the PQ zone based on its location (perpendicular and adjacent to the PQ), past production history and the results from the Company’s 2011 and 2012 reverse circulation drill programs.

Figure 4 - Underground target areas highlighting the exploration drift and drill bays.

The Succor Vein Target has a strike length of greater than 1000 feet, an average true width of 15 feet and an average dip of 55 degrees. The structure has reported historic mining grades of approximately 0.620 ounces per ton of recovered gold equivalent grade and is open to the east and at depth, along the entire structure. The proposed drill holes shown in Figure 5 are designed to extend the depth of known mineralization identified by surface drilling.

Figure 5 - Woodville, PQ, and Succor target areas with proposed Succor target drilling.

Future drill programs are being developed with a phased approach to extend the PQ mineralization and scope the Succor and Woodville targets.

The remaining phases of the road realignment and drainage reestablishment, estimated at approximately $65,000, were completed during the third quarter of 2016. The remaining Lucerne reclamation activities, including the final waste dump removal and grading are scheduled for completion in 2017.

#### Dayton Resource Area

The Company plans to conduct definition drilling and geotechnical core programs within the Dayton Resource area, as explained above. The Dayton southern expansion program includes exploration and definition drilling of targets identified by the conventional percussion drill program, magnetic, IP and resistivity geophysical surveys (Figure 6).

Figure 6 - Dayton and Spring Valley Area

The geologic and engineering staff also completed underground mapping, sampling, and surveying in a number of historic mine tunnels on and near the Dayton Resource area. Several historic mines operated in the Dayton area, leaving access to multiple structures from underground. Some adits have remained open or have been uncovered by the Company. Where accessible, the workings were and are being inspected and mineralized material sampled. Geologic mapping is also done at this time. Once sampling is completed, the workings are surveyed to model the size and location of the openings as well as locate the samples. The samples are then assayed at the Company’s own metallurgical laboratory for gold and silver.

This underground sampling program has not only provided a wealth of assay information but it has also provided critical information for furthering the geologic understanding of the Dayton. In some cases structures identified on the surface can be traced underground and in other cases structures that do not have obvious surface expression are identified.

#### Spring Valley

Spring Valley is located south of State Route 341. Limited drilling has identified favorable mineralized zones (see Figure 4). The exploration of Spring Valley will include phased drilling programs that will continue southerly from SR341 to the historic Daney mine site (see Figure 1), with a total a strike length of approximately 8,000 feet.

#### Occidental Group

The Occidental vein (a sub parallel vein system to the Comstock) is considered by the Company to be underexplored and is considered a significant exploration target, with historic, high grade production mined near surface in localized pods. The Occidental vein system has a significant strike length of over 7,600 feet on land controlled by the Company. Detailed geologic assessment and mapping is ongoing to best define future drilling and development of this exploration target.

#### Gold Hill Group

The northern Comstock underground targets of the Gold Hill Group will be prioritized and exploration proposals will follow. Several locations in the Gold Hill Group have been selected to receive additional evaluation.

#### Production

The Company operates a heap leach based, gold and silver production system, including a zinc-precipitate based Merrill-Crowe processing plant. The Company, under the existing water pollution control permit with the State of Nevada, has the crushing and processing capacity to operate at a rate of up to 4.0 million tons of material crushed and stacked, per annum. The Merrill-Crowe system facilitates that capacity with an operating fluid processing rate of over 1,000 gallons per minute.

During 2014, the Company completed the transition from the Billie the Kid and Hartford patented claims in the Lucerne West-side Mine to the higher-grade Justice and Lucerne patents, also in the Lucerne West-side Mine. During the first and second quarters of 2015, the Company, in preparation for underground development, substantially completed mining of those Lucerne West-side surface patents. Substantially all of the operations for the second half of 2015 were focused on the extraction of the mineralized material contained in historic mine dumps while also completing the realignment of SR-342, establishing a drift into the higher-grade PQ and Woodville targets, and developing those targets towards the establishment of reserves for potential future mining.

The Company substantially completed the extraction and remediation of the historic dump materials during the third quarter of 2015, and stacked the material on the leach pads where the mineralized material continues under solution until the target gold and silver recovery rates have been achieved. The Company stacked over 13,000 tons of mineralized material during May 2016. This additional material, when combined with recent metallurgical yield estimates of approximately 88.5%, increases our estimated recoverable gold ounces remaining on the pad. The Company now expects that the leaching process and resulting gold and silver pours will continue into the fourth quarter of 2016.

The following table presents gold and silver production for the periods ended September 30, 2016 and 2015:

|  | 3Q 2016 | 2Q 2016 | 1Q 2016 | YTD 2016 | 3Q 2015 | 2Q 2015 | 1Q 2015 | YTD 2015 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Au Ounces Poured and Sold | 853 | 1,255 | 1,702 | 3,810 | 3,847 | 4,575 | 4,695 | 13,117 |
| Ag Ounces Poured and Sold | 17,510 | 22,131 | 29,438 | 69,079 | 62,480 | 60,112 | 56,482 | 179,074 |
| Au Equivalent\* Ounces Poured | 1,110 | 1,548 | 2,073 | 4,731 | 4,678 | 5,400 | 5,470 | 15,548 |
| \* Au Equivalent ounces = Au ounces (actual) + (Ag ounces (actual) ÷ the ratio of average gold to silver prices) | 68.05 | 75.09 | 79.68 | 74.27 | 75.27 | 72.73 | 72.91 | 73.63 |

The following table presents weighted average grades of gold and silver by quarter:

|  | Weighted Average per ton Gold | Weighted Average per ton Silver |
| --- | ---: | ---: |
| Q1, 2014 | 0.024 | 0.345 |
| Q2, 2014 | 0.034 | 0.546 |
| Q3, 2014 | 0.026 | 0.564 |
| Q4, 2014 | 0.039 | 0.680 |
| **2014 YTD** | **0.030** | **0.527** |
| Q1, 2015 | 0.039 | 0.734 |
| Q2, 2015 | 0.030 | 0.654 |
| Q3, 2015 | 0.021 | 0.573 |
| Q4, 2015 | 0.023 | 0.564 |
| **2015 YTD** | **0.031** | **0.659** |
| Q1, 2016 | — | — |
| Q2, 2016 | 0.025 | 0.436 |
| Q3, 2016 | — | — |
| **2016 YTD** | **0.025** | **0.436** |

During the third quarter of 2016, the Company poured 853 ounces of gold and 17,510 ounces of silver. During the nine months ended September 30, 2016, the Company poured 3,810 ounces of gold and 69,079 ounces of silver.

For the three months ended September 30, 2016, the Company realized a $1,327.27 average price per ounce of gold and a $19.24 average sales price per ounce of silver. In comparison, commodity market prices in the first three months of 2016 averaged $1,334.87 per ounce of gold and $19.62 per ounce of silver.

For the nine months ended September 30, 2016, the Company realized a $1,220.94 average price per ounce of gold and a $15.78 average sales price per ounce of silver. In comparison, commodity market prices in the first nine months of 2016 averaged $1,258.48 per ounce of gold and $17.07 per ounce of silver.

Our Comstock exploration activities include open pit gold and silver test mining. As defined by the Securities Exchange Commission (“SEC”) Industry Guide 7, we have not yet established any proven or probable reserves at our Comstock Lode Project.

### Operating Costs

During the first nine months of 2016, actual costs applicable to mining revenue were approximately $4.6 million, $3.5 million net of silver credits, as compared to $13.2 million, $10.4 million net of silver credits, during the first nine months of 2015. This 65% reduction of net costs applicable to mining revenue is primarily a result of significantly lower labor and processing costs due to the Company’s transition from surface mining to underground exploration and development and higher experienced metallurgical yields. Costs applicable to mining revenue include processing labor, processing maintenance, processing reagents and assaying costs, among others. Costs applicable to mining revenue for the first nine months of 2016 and 2015, also included depreciation of $1.9 million and $4.6 million, respectively.

During the first nine months of 2016, the Company focused on reducing non-mining costs. The Company has aggressively implemented organizational changes consistent with our transition from mining the Lucerne surface mine to growing our resource portfolio and related exploration and development activities toward production-ready mining projects. Accordingly, general and administrative costs and other non-mining costs, including mine claims and land costs, other real estate operating costs and environmental costs, have already declined $6 million as compared to 2015, and exceeding an annualized rate of approximately $8 million compared to 2014. In addition, the Company eliminated royalties on both the Dayton and Lucerne Resource areas and simplified the capital structure, saving an additional $5.5 million over 2015, in dividends and payments associated with the former preferred share structure. The Company incurred approximately $0.3 million in severance costs during the first nine months of 2016, in mining, mine support and general and administrative expenses, associated with organizational cost reductions.

### Outlook

Production during 2016 is currently limited to processing of existing leach pad materials. Considering the increased estimates of gold and silver recoveries, that is, 88.5% for gold and 59.5% for silver, the current leach cycle will continue well into the fourth quarter, likely through December 2016. All operating costs associated with hauling, crushing and other ancillary activities have been reduced or eliminated as we transition the full organizational focus toward the discovery, development and establishment of reserves from Lucerne and Dayton, for future mining, and the identification, assessment and acquisition of similarly situated gold and silver mining assets. The Company expects to operate with approximately 15 employees, including expert land, permitting, geology, engineering and metallurgical professionals. General and administrative costs, however, are expected to continue declining, from actions already taken.

The Company plans to sell non-mining related lands, buildings and water rights, valued at over $14 million, over the next twelve months resulting in net profit of over $8 million and expected net cash proceeds of over $7 million. These proceeds will eliminate current debt obligations and strengthen the financial position of the Company.

During the first quarter of 2017, the Company also plans limited core drilling in Dayton, sufficient to finalize the parameters of a mine plan and commence the permitting for the Dayton Mine. Infill drilling is expected to significantly expand the reserve potential for the Dayton mine plans. The Company has developed grade shells with higher average grades and believes the Dayton to have economically feasible potential and plans on developing those mine plans toward full feasibility during 2017, and production within the next two years. The Lucerne mine is fully permitted and requires additional drilling and development for advancing feasibility and establishing reserves.

The Company commenced the underground drift tunnel and drilling, associated with the first underground exploration phase of a PQ geological target, in September 2015, and completed drift-sampling, drilling and metallurgical test work of the PQ target during the first quarter. The Succor vein system is being considered as an easterly extension of the first phase of development beyond the high-grade PQ target. The drift tunnels are designed to conduct an underground exploration program directed at a series of geological targets in the Silver City Branch of the Comstock Lode, including the PQ target, the Succor vein systems and the historic Woodville Bonanza system. These initial targets represent the core of a broader geological corridor. Previous surface drilling in the area, including the Succor-Holman drilling from 2015 had suggested that a greater than 1,000 feet of mineralized strike in the Succor zone, lying generally adjacent to and below the Lucerne Cut, has the potential to yield high-grade gold and silver. The current program has been geared toward defining that potential.

Drill results from the PQ drilling continued yielding wider and longer high-grade intercepts. These results were published by press releases issued throughout the first quarter of 2016. The Company also completed a crosscut tunnel, drifting to the Succor vein system. This drift positions the Company for efficient scope drilling from an underground platform that compliments additional scope drilling from the surface, ultimately to confirm the extent of the length and depth of the Succor target. Ultimately, these efforts are designed to develop mine plans of sufficient grade and quantities for longer-lived production plans for the Lucerne mine.

The Company will report the results of the Lucerne and Dayton exploration and development programs as they become available.

We are actively pursuing and evaluating strategic business alternatives, including acquisitions, joint ventures, strategic alliances and/or strategic investments. There can be no assurance that we will, or will be able to, consummate any such transactions on acceptable terms or at all or as to the price, terms or conditions.

#### Recent Developments

On July 14, 2016 the Bureau of Land Management (BLM), Sierra Front Field Office, conveyed ownership of approximately 24 acres to Northern Comstock, LLC. The parcel known locally as “Lot 51” is located on the American Flat Road, in Storey County, Nevada. The parcel was established as a lot and patented during the historic mining heyday of the Comstock District. The BLM’s action legally recognizes Lot 51 as private property. This marks the successful completion of a multi-year process to acquire this land from the BLM. Lot 51 represents a strategic parcel of land that enables an expanded and efficient haul route from the Lucerne mine.

On July 25, 2016, a wholly-owned subsidiary of the Company purchased 98 acres of land and 257 acre-feet of senior priority water rights in Silver Springs, Nevada for $3.2 million and entered into a Loan Agreement (the “Loan Agreement”) of $3.3 million for the purpose of purchasing the real property and water rights. The loan agreement was made with GF Comstock 1 LP, a third party. Hard Rock Nevada Inc., an employee owned entity, participated in approximately $0.2 million of the loan through GF Comstock 1 LP. The indebtedness under the Loan Agreement is secured by a deed of trust on the property purchased.

The Loan Agreement has a term of two years. The indebtedness under the Loan Agreement accrues interest at a rate of 9% per annum for the first year post-closing, 12.5% per annum for the six months that follow the first anniversary of the Loan Agreement and 14% per annum thereafter until such indebtedness is paid in full. Proceeds from the sale of the property securing the loan must be used to repay the indebtedness under the Loan Agreement. In addition to customary remedies for secured indebtedness on real property, the Loan Agreement allows the lender thereunder to convert the principal amount of the indebtedness into common stock of the Company upon a default.

On August 1, 2016, the BLM approved a Right-of-Way Amendment for Comstock Mining LLC. In July 2012 Comstock Mining LLC submitted an application to the BLM to amend its existing Right-of-Way on the American Flat Road, located in Gold Hill, Storey County. Under the approved Right-of-Way Amendment, Comstock Mining LLC would be permitted to realign a portion of the American Flat Road to segregate public traffic from haul traffic for public safety. The Lucerne Haul Road, which Comstock Mining LLC has used since August 2012, would be used exclusively for haul purposes for public safety between the Lucerne Pit and American Flat where a processing facility exists. In order to approve the Right-of-Way Amendment, the BLM first had to complete compliance with the National Historic Preservation Act. This was done in February 2016 with the execution of a Memorandum of Agreement to resolve adverse effects to eight historic properties present. The BLM has also completed compliance with the National Environmental Policy Act by approving an environmental assessment.

### Equity Raises

In March and April 2016, the Company raised $4.0 million (approximately $3.5 million net of issuance costs) through an underwritten public offering of 11,500,000 shares of common stock at a price per share of $0.35.

During the third quarter of 2016, the Company issued 417,500 shares of common stock through the Company’s at-the-market offering program. Gross proceeds from the issuance of shares totaled approximately $0.2 million at an average price per share of $0.37.

### Comparative Financial Information

The Company had two operating segments as of September 30, 2016: mining and real estate.

The comparative financial information is reflected in the following table:

#### Three Months Ended:

|  | September 30, 2016 | September 30, 2015 | Change |
| --- | ---: | ---: | ---: |
| Revenue - mining | $1,106,196 | $4,301,169 | $(3,194,973) |
| Revenue - real estate | 28,599 | 43,904 | (15,305) |
| Costs applicable to mining revenue | 829,558 | 3,450,311 | (2,620,753) |
| Real estate operating costs | 31,367 | 42,549 | (11,182) |
| Exploration and mine development | 589,351 | 1,505,492 | (916,141) |
| Mine claims and costs | 358,886 | 327,352 | 31,534 |
| Environmental and reclamation | 296,493 | 533,240 | (236,747) |
| Land and road development | 56,424 | 818,474 | (762,050) |
| General and administrative | 640,162 | 1,637,313 | (997,151) |
| Loss from operations | (1,667,446) | (3,969,658) | 2,302,212 |
| OTHER INCOME (EXPENSE) |  |  |  |
| Interest expense | (165,212) | (337,700) | 172,488 |
| Other income (expense) | (360,543) | — | (360,543) |
| NET INCOME (LOSS) | $(2,193,201) | $(4,307,358) | $2,114,157 |

Mining revenue in the three months ended September 30, 2016, was $1.1 million. The decrease of $3.2 million resulted from lower production offset partially from higher average price per ounce of gold realized of $1,327.27 versus $1,262.91 for the three months ended September 30, 2016 and 2015, respectively. The Company produced 853 ounces of gold (and 17,510 ounces of silver), during the three-month period ended September 30, 2016, as compared to 3,847 ounces of gold (and 62,480 ounces of silver) in the three-month period of 2015.

Throughout the three months ended September 30, 2016, the Company realized an average price of $1,327.27 per ounce of gold and a $19.24 average sales price per ounce of silver. In comparison, commodity market prices in the third quarter of 2016 averaged $1,334.87 per ounce of gold and $19.62 per ounce of silver.

Costs applicable to mining revenue were $0.8 million for the three months ended September 30, 2016, including $0.3 million of silver credits, as compared to $3.5 million for the three months ended September 30, 2015, including $0.9 million of silver credits. The reduction of $2.6 million, of net costs applicable to mining revenue resulted from shifting of the Company’s focus from mining to exploration resulting in lower mining and processing costs and the reduction of mining and processing staff.

Exploration and mine development costs decreased by approximately $0.9 million during the three months ended September 30, 2016, as compared to the same period ended September 30, 2015. The decrease is a result of $0.7 million less spending from the third quarter of 2015 for exploration activities, including contact service fees associated with the Lucerne underground activities and the Dayton resource area in 2015.

Land and road development costs were $0.8 million in the third quarter of 2015, due to the road realignment project that was completed in 2015.

General and administrative costs decreased by $1.0 million third quarter of 2016, as compared to third quarter of 2015. The decrease is primarily the result of lower payroll costs, in line with targeted cost reduction efforts.

Net loss was $2.2 million for the three months ended September 30, 2016, as compared to a net loss of $4.3 million for the three months ended September 30, 2015. The $2.1 million decrease in net loss primarily resulted from a $3.2 million decrease in revenue, net of a $2.6 million decrease in mining and processing costs, $0.8 million reduction in land and road development costs and $1.0 million of lower general and administrative costs, and a $0.9 million decrease in development and exploration expenses.

#### Nine Months Ended:

|  | September 30, 2016 | September 30, 2015 | Change |
| --- | ---: | ---: | ---: |
| Revenue - mining | $4,544,951 | $15,670,371 | $(11,125,420) |
| Revenue - real estate | 101,641 | 200,411 | (98,770) |
| Costs applicable to mining revenue | 3,507,795 | 10,388,054 | (6,880,259) |
| Real estate operating costs | 176,120 | 303,843 | (127,723) |
| Exploration and mine development | 4,027,859 | 2,639,346 | 1,388,513 |
| Mine claims and costs | 929,196 | 1,041,580 | (112,384) |
| Environmental and reclamation | 1,026,427 | 1,545,184 | (518,757) |
| Land and road development | 77,328 | 1,680,720 | (1,603,392) |
| General and administrative | 2,667,298 | 5,095,306 | (2,428,008) |
| Loss from operations | (7,765,431) | (6,823,251) | (942,180) |
| OTHER INCOME (EXPENSE) |  |  |  |
| Interest expense | (603,307) | (891,824) | 288,517 |
| Other income (expense) | (730,642) | 3,187,385 | (3,918,027) |
| NET INCOME (LOSS) | $(9,099,380) | $(4,527,690) | $(4,571,690) |

Mining revenue in the nine months ended September 30, 2016 was $4.5 million. The decrease of $11.1 million resulted from lower production offset slightly by higher average price per ounce of gold realized of $1,220.94 versus $1,212.03 for the nine months ended September 30, 2016 and 2015, respectively. The Company produced 3,810 ounces of gold and 69,079 ounces of silver, during the nine-month period ended September 30, 2016, as compared to 13,117 ounces of gold and 179,074 ounces of silver in the nine-month period of 2015.

Throughout the nine months ended September 30, 2016, the Company realized an average price of $1,220.94 per ounce of gold and a $15.78 average sales price per ounce of silver. In comparison, commodity market prices in the nine months of 2016 averaged $1,258.48 per ounce of gold and $17.07 per ounce of silver.

Costs applicable to mining revenue were $3.5 million for the nine months ended September 30, 2016, including $1.1 million of silver credits, as compared to $10.4 million for the nine months ended June 30, 2015, including $2.9 million of silver credits. The reduction of $6.9 million of net costs applicable to mining revenue resulted from completion of the Company’s first phase of mining and a shift toward the next phase of exploration and mine development resulting in lower mining and processing costs and the reduction of mining and processing staff.

Exploration and mine development costs increased by approximately $1.4 million during the nine months ended September 30, 2016, as compared to the same period ended September 30, 2015. The increase is a result of costs related to underground exploration activities and the completion of the drift to the Succor vein system in early February 2016, and a $1.4 million classification of mining equipment depreciation expense that was used in development.

Land and road development costs were $1.7 million in 2015 due to the road realignment project that was undertaken and successfully completed in 2015.

General and administrative costs decreased by $2.4 million in the nine months ended September 30, 2016, as compared to the same period of 2015. The decrease is a result of lower payroll costs of approximately $1.1 million, a reduction of net proceeds tax liabilities of approximately $0.2 million and lower legal and consulting fees of approximately $0.7 million, among other reductions, all in line with the cost reduction programs.

Other income decreased approximately $3.9 million in the nine months ended September 30, 2016, as compared to the same period of 2015. The decrease primarily resulted from a reduction in a loss contingency of approximately $3.2 million that was included in other income in the condensed consolidated statements of operations in 2015, and did not recur in 2016.

Net loss was $9.1 million for the nine months ended September 30, 2016, as compared to a net loss of $4.5 million for the nine months ended September 30, 2015. The $4.6 million increase in net loss primarily resulted from a $11.1 million decrease in revenue, a $3.9 million decrease in other income, net of $6.9 million lower mining and processing costs and $2.4 million of lower general and administrative costs, offset by a $1.4 million increase in costs resulting from underground and surface exploration and development costs and approximately $0.8 million in other costs including environmental, mine claims and real estate costs.

### Liquidity and Capital Resources

The Company was an exploration and development company for most of its existence and accordingly has a history of net operating losses. The Company had net losses from operations since 2012, and an accumulated deficit of $208.2 million at September 30, 2016. For the three-month period ended September 30, 2016 the Company realized net loss of $2.2 million. For the nine-month period ended September 30, 2016 the Company used $3.2 million of cash in operating activities. As of September 30, 2016, the Company had current assets of $10.0 million (including cash and cash equivalents of $0.4 million) and current liabilities of $7.8 million.

The Company’s current capital resources include cash and cash equivalents and other working capital resources, cash generated through operations, certain planned, non-mining asset sales with expected net proceeds of over $7 million and existing financing arrangements, including an at-the-market offering program with International Assets Advisory LLC, as agent (“IAA”), whereby the Company may offer and sell shares of the Company’s common stock of up to $5 million and a revolving credit facility (the “Revolving Credit Facility”) with Auramet International, LLC (“Auramet”). While the Company has been successful in the past in obtaining the necessary capital to support its operations, including registered equity financings from its existing shelf registration, borrowings, or other means, there is no assurance that the Company will be able to obtain additional equity or other financing, if needed. The Company believes it will have sufficient funds to sustain operations during the next twelve months as a result of the sources of funding described above.

During the nine months ended September 30, 2016, the Company prioritized the continued reduction of non-mining costs including general and administrative, targeting $8.0 million of savings from reduced labor, legal, consulting and other general corporate expenditures, as compared to 2014. The Company incurred approximately $0.3 million in severance costs during the nine months ended September 30, 2016, in mining, mine support and general and administrative expenses, associated with organizational cost reductions.

The Company plans to sell non-mining related lands, buildings and water rights, valued at over $14 million, over the next twelve months resulting in net profit of over $8 million and expected net cash proceeds of over $7 million. These proceeds will eliminate current debt obligations and strengthen the financial position of the Company. In the second and third quarters of 2016 the Company sold surface mining equipment, no longer required in our mine plans, for approximately $2 million that was used to significantly reduce the financing obligations associated with Caterpillar Finance. These combined actions should eliminate all or substantially all of the Company’s debt obligations in the next twelve months. There is no assurance that the Company will be able to sell such assets on favorable terms, or at all.

On June 28, 2016, the Company entered into an agreement with IAA, pursuant to which the Company may offer and sell shares of the Company’s common stock, par value $0.000666 per share, having an aggregate offering price of up to $5 million. Any shares offered and sold will be issued pursuant to the Company’s shelf registration statement on Form S-3 (and the related prospectus) declared effective by the SEC on February 5, 2016. Under the agreement, IAA may sell shares by any method permitted by law and deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act, including sales made directly on the NYSE MKT or on any other existing trading market for the common stock, sales to or through a market maker or sales in privately negotiated transactions. The Company is not obligated to make any sales of shares under the agreement, and if it elects to make any sales, the Company may set a minimum sales price for the shares. The offering of shares pursuant to the Sales Agreement will terminate upon the termination of the Sales Agreement by IAA or the Company, as permitted therein. The Company will pay IAA a commission rate of up to 2.5% of the gross sales price per share sold, subject to an agreed-upon minimum per share commission, and has agreed to reimburse IAA for certain specified expenses in connection with entering into the agreement. The Company also agreed to provide indemnification and contribution to IAA with respect to certain liabilities, including liabilities under the Securities Act. As of September 30, 2016, the Company sold 417,500 shares of common stock under the agreement resulting in net proceeds of $0.2 million.

On March 31, 2016, and April 13, 2016, the Company completed an underwritten public offering totaling 11,500,000 shares of its common stock. Gross proceeds to the Company from this offering were approximately $4.0 million before deducting underwriting commissions and other offering expenses of $525,000 paid by the Company.

On March 6, 2015, the Company reached an agreement to draw on a restated $5 million revolving credit facility (the “Revolving Credit Facility”) with Auramet, pursuant to which the Company may borrow up to $5 million, subject to satisfying certain conditions and obtaining certain consents. On March 6, 2015, the Company drew $5 million representing cash proceeds of approximately $4.4 million, net of prepaid interest of approximately $0.4 million, and other fees of approximately $0.2 million. The proceeds from the Revolving Credit Facility were primarily used for an accelerated construction schedule for rerouting State Route 342, located in the Company’s Lucerne Resource Area, the first phase of which was completed in early June 2015, and the second phase was completed in November 2015. On December 28, 2015, the Company and Auramet agreed to increase the facility up to $10 million and extend the facility from the current maturity of February 6, 2017 to April 28, 2018. On April 1, 2016, the Company fully repaid the outstanding revolving credit facility with a payment of $1.2 million. As of September 30, 2016, there were no outstanding amounts related to the Revolving Credit Facility.

Net cash used in operating activities was $3.2 million for the nine months ended September 30, 2016, as compared to net cash generated by operating activities of $0.4 million for the nine months ended September 30, 2015. The Company’s use of cash in operating activities in the first nine months of 2016, was primarily driven by Company’s expenditures related to underground exploration, including the PQ and Succor targets and operating losses due to lower production. Our positive cash flow from operating activities in the first nine months of 2015, was primarily from operating income associated with lower labor, blasting, fuel and equipment rental costs relative to production of mineralized material.

Net cash provided by investing activities was $3.1 million for the nine months ended September 30, 2016, primarily from equipment sales of approximately $3.2 million, offset by land and properties deposits of approximately $0.1 million. Net cash used in investing activities for the nine months ended September 30, 2015, was $4.8 million, primarily relating to $2.8 million for strategic land purchases and $1.9 million for the design and construction of the heap leach expansion and related infrastructure.

Net cash used by financing activities for the nine months ended September 30, 2016, was $1.1 million, comprised of proceeds of $3.6 million from the sale of securities, $0.6 million proceeds from an amended agreement with Auramet and $0.3 million from proceeds from a short-term note, offset by the pay-down of long-term debt obligations of approximately $5.6 million. Net cash provided by financing activities for the nine months ended September 30, 2015 was $1.6 million, comprised of proceeds of $4.4 million from the revolving credit facility and $5.0 million from the Varilease agreement, offset by the pay-down of other long-term debt obligations of approximately $7.8 million.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which considers the realization of assets and discharge of liabilities in the normal course of business and does not include any adjustments that might result from the outcome of uncertainties noted below.

The Company’s success depends on its ability to recover precious metals, process them and successfully sell them for more than the cost of production. The Company has limited control over its costs and has no ability to control the market prices. The costs of exploration and production may fluctuate as a result of a number of factors, such as the changing composition of ore grade or mineralized material production, and metallurgy and exploration activities in response to the physical shape and location of the ore body or deposit. In addition, costs are affected by the price of commodities such as fuel and electricity. Such commodities are at times subject to volatile price movements, including increases that could make production unprofitable. A material increase in production costs or a decrease in the price of gold or other minerals could materially affect the Company’s ability to generate cash flow.

Mineral exploration, particularly for gold and other precious metals, is highly speculative in nature, involves many risks and frequently is nonproductive. If gold mineralization is discovered, it may take a number of years from the initial phases of drilling until production is possible, if ever, during which time the economic feasibility of production may change. Substantial expenditures are required to establish ore reserves through drilling and analysis, to develop metallurgical processes to extract metal from the ore, and (in the case of new properties) to develop the processing facilities and infrastructure at any site chosen for mineral exploration. There can be no assurance that gold reserves or mineralized material that may be discovered or acquired in the future, if any, will be in sufficient quantities or of adequate grade to justify commercial operations or that the funds required for mineral production operation can be obtained on a timely or reasonable basis, if at all. In addition, mineralized material or reserves that may be identified, if any, will be depleted by production.

The capital expenditures and time required to develop and explore our properties are considerable and changes in costs or construction schedules, delays in such construction or both can adversely affect project economics and expected production and profitability.

On March 28, 2016, the Company entered into a Drilling and Development Services for Common Stock Investment Agreement (the “Stock Investment Agreement”) between the Company and American Mining & Tunneling, LLC and American Drilling Corp, LLC (collectively “American”), pursuant to which the Company agreed to issue up to 9,000,000 shares of the Company’s common stock to AMT in exchange for $5.0 million in exchange for future drilling, mine development and underground mining services in connection with (but not limited to) the Company’s construction of an underground exploration portal, mining infrastructure and development of the Company’s Lucerne and Dayton Mine projects.

Future production rates and gold prices below management’s expectations, declines in the market value of properties held for sale, or declines in the share price of the Company’s common stock could adversely affect the Company’s results of operations, financial condition and cash flows. If the Company was unable to obtain any necessary additional funds, this could have an immediate material effect on liquidity and could raise substantial doubt about the Company’s ability to continue as a going concern. In such case, the Company could be required to limit or discontinue certain business plans, activities or operations, reduce or delay certain capital expenditures or sell certain assets or businesses. There can be no assurance that the Company would be able to take any of such actions on favorable terms, in a timely manner or at all.

### Critical Accounting Policies and Estimates

There have not been any material changes to the critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

## Market risk

As filed, 944 characters.

**Metal Price –** Changes in the market price of gold may significantly affect our profitability and cash flow. Gold prices fluctuate widely due to factors such as; demand, global mine production levels, investor sentiment, central bank reserves, and the value of the U.S. dollar.

In the third quarter of 2016, Gold Bullion prices averaged approximately $1,334.87 per ounce, up from a quarterly low close of $1,308.35 on September 16, 2016. Gold has fluctuated from that low to a high of $1,366.25 during the quarter. Silver prices averaged $19.62 per ounce, also gaining from a quarterly low of $18.50 on August 25, 2016 to a high of over $20.71 per ounce during the third quarter. The outlook for these markets remains mixed, driven primarily by uncertainty over U.S. fiscal and monetary policy.

With the exception of the above, there have been no material changes in the market risks discussed in Item 7A of our Annual Report on Form 10-K.

## Controls and procedures

As filed, 2,586 characters.

### A. Disclosure

### Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Principal Executive Officer and our Principal Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Exchange Act and the SEC’s rules, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Each of our Principal Executive Officer and Principal Financial Officer concluded that, as of September 30, 2016, our disclosure controls and procedures were effective.

#### Design and Evaluation of Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2016. In making this assessment, management used the criteria for effective internal control over financial reporting described in the “Internal Control-Integrated Framework” (2013) set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management concluded that, as of September 30, 2016, our internal control over financial reporting was effective based on those criteria.

### B. Internal Control over Financial Reporting

No change in our internal control over financial reporting, as such term is defined in Exchange Act Rule 13(a)-15, occurred during the fiscal quarter ended September 30, 2016, that materially affected or is reasonably likely to materially affect our internal control over financial reporting.

## Risk factors

As filed, 153 characters.

There have not been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

Filed Oct 20, 2016.
Source: SEC EDGAR, the filing index for accession 0001120970-16-000124. Last ingested by Listed: Nov 4, 2026, 17:20 ET. No prices; not investment advice.