# Comstock Inc.: Form 10-Q for the period ended Jun 30, 2010

- Company: [Comstock Inc.](/companies/lode.md) (CIK 1120970)
- Form: 10-Q
- Filed: 2010-08-06
- Accepted by EDGAR: Aug 6, 2010, 11:45 ET
- Period: 2010-06-30
- Accession: 0001144204-10-041785
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1120970/000114420410041785/v192757_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1120970/000114420410041785/

## Management's discussion and analysis

As filed, 31,377 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 our company. It should be read in conjunction with the Consolidated Financial Statements and accompanying Notes also included in this 10-Q and our Annual Report on Form 10-K as of and for the fiscal year ending December 31, 2009.

The following discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of and for the three months ended June 30, 2010, as well as our future results.

Overview

Comstock Mining Inc., is a North American precious metals mining company, focused in Nevada, with extensive, contiguous property in the Comstock Lode District. The Company began acquiring properties in the Comstock in 2003. Since then, the Company has consolidated a substantial potion of the Comstock Lode District, secured permits, built an infrastructure and brought the exploration project into test mining production. We continue acquiring additional properties in the district, expanding our footprint and creating opportunities for exploration and mining. The goal of our strategic plan is to deliver stockholder value by validating qualified resources (measured and indicated) and reserves (probable and proven) of 3,250,000 gold equivalent ounces by 2013, and commencing commercial mining and processing operations by 2011, with annual production rates of 20,000 gold equivalent ounces.

The Lucerne Project is located in Storey County, Nevada, approximately 3 miles south of Virginia City and 30 miles southeast of Reno, Nevada. Access to the property is by State Route 342, a paved highway. The Comstock District is located within the western portion of the Basin and Range Province of Nevada, between Reno and Carson City. The majority of our activities occur in three major structural zones: (1) the northeast striking, (2) the east dipping Comstock and Occidental fault zones and (3) the northwest striking, east dipping Silver City fault zone.

Because of the Comstock District’s historic significance during the American Civil War and its world- class bonanza precious metal grades, the geology is well known and has been studied in detail by the Company and many independent researchers. We have amassed an unprecedented library of historical data and detailed surface mapping. In conjunction with current drilling programs designed for expanding the known historical data base, we have invested in our understanding of the Comstock’s broader geological footprint.

The Comstock Mine Project now consists of approximately 5,900 acres of active lode mining claims in the Comstock Lode Mining District. The acreage is comprised of 890 acres of patented claims (private lands) and 5,000 acres of unpatented claims, Bureau of Land Management (BLM) administered. The Project includes the Comstock Mine heap leach processing facility, which will be redesigned and constructed to accommodate our new production plans. In excess of 700 Reverse Circulation (RC) holes, drilled by the Company and our predecessors, have further defined our mine plan at the Lucerne and Billie the Kid open pits together with those along strike and down- dip. For our exploration and development campaigns, all drilling, surface and down-hole surveying, hole abandonment, geologic logging, sampling, and assays were performed to industry-recognized standards.

We produced 11,550 ounces of gold and 68,514 ounces of silver from 2004-2006, at our Comstock Lode test mining operation and existing heap leach processing facilities. Our test mining activities were suspended in 2007, and we began an exploration and drilling program to gather the detailed information to allow us to restart mining with a high degree of confidence.

### Strategic Plan and Management Reorganization

The Board approved a strategic plan in April, 2010, designed to restructure and recapitalize the Company, accelerate mine development and production and continue exploration. The principal features of the plan encompass a recapitalization and balance sheet restructuring (which includes a now completed reverse stock split, a near complete debt-for-equity exchange, the securing of certain critical mineral rights and anticipates a new capital raise to fund gold mine operations, exploration and development) and an operational and management restructuring. The goal of the plan is to deliver stockholder value by validating qualified resources (at least measured and indicated) and reserves (probable and proven) of 3,250,000 gold equivalent ounces by 2013, and commencing commercial mining and processing operations by early 2011, respectively, with annual production rates of 20,000 gold equivalent ounces. Mr. De Gasperis, our Chief Executive Officer, will lead implementation of the plan.

The completion of the aforementioned steps will allow us to focus our capacity on raising new equity capital. In connection therewith, the Board has agreed to pursue listing of the common shares on an appropriate securities exchange in due course. The strategic plan has scheduled the exploration and development drilling intended to validate mine design and increased qualified resources and reserves in the latter half of 2010 through 2013, with two intermediate objectives of 1,000,000 gold equivalent ounces and 2,000,000 of gold equivalent ounces with the long term planned objective of 3,250,000 gold equivalent ounces. The plan has also scheduled the start of production operations in 2011, initially from using existing heap leach operating assets, and then scaling to an annual run rate of at least 20,000 gold equivalent ounces. The commencement of production in 2011 is dependent on the Company raising sufficient capital as part of its strategic plan.

Our Team

Overall, the Company, as part of its restructuring efforts, has reorganized its management and the professional services firm it cooperates with in an effort to improve governance, effectiveness and transparency in its operations. We believe we have exceptional geological, geo-statistical, engineering, regulatory, environmental, financial and operating competencies on our senior team. In addition, we have strengthened our system through agreements and relationships with our most critical trading partners.

In November, 2009, we retained Moelis & Company to serve as our exclusive financial advisor. Moelis & Company is a global investment bank that provides financial advisory services and capital raising solutions to a broad client base, through its offices in New York, Boston, Chicago, Los Angeles, London, and Sydney. We have access to the most senior bankers in their metals and mining practice and support from the firm’s leadership and we believe this relationship improves the likelihood of better financing our Company on more favorable terms.

In December, 2009, we engaged Behre Dolbear, a mining consulting firm based in Denver, Colorado, to review our mine model, and to produce a technical report compliant with the Canadian National Instrument (“NI”) 43-101 standard. The report was published on May 17, 2010. We continue working with Behre Dolbear, in an ongoing strategic relationship that focuses on continuously expanding our knowledge of our resource base and expanding our qualified resources and, ultimately, reserves. We anticipate publishing an updated NI 43-101 in early August.

In May, 2010, we retained Kelley Drye and Warren to serve as our legal advisor. Kelley Drye and Warren is an international law firm founded in 1836, providing legal services in over 30 practice areas, including Corporate Finance and Securities law. We have access to the most senior securities partners in the firm and believe this relationship supports our recapitalization efforts and current financing activities and best corporate governance practices.

Recapitalization

In December, 2009, we entered into a definitive agreement to obtain $4.5 million in new debt financing. This financing was provided through a consortium led by the Company’s lead stakeholder, who is an accredited investor. On June 21, the Company announced a definitive agreement to increase its December 2009 $4.5 million debt financing to $5.6 million. The additional $1.1 million was provided through a consortium, again led by the Company’s lead stakeholder and provides sufficient funding for the continuation of our operating plan, primarily for completing our global resource estimate and finalizing our metallurgical testing prerequisite for finalizing our mine and production plans, while we secure permanent financing through our planned new equity capital raise.

We are focused on concluding on the terms of a debt for equity exchange with our lenders and planning and scheduling the activities for raising new equity. The plan contemplates exchanging substantially all of our existing convertible debt obligations, other debt obligations and related accrued interest, which total approximately $29.2 million at June 30, 2010, for equity. The transaction anticipates that the Company will raise new equity capital in 2010, for funding operations and continued exploration. In addition to the aforementioned debt and related obligations, we have approximately $1.2 million in mortgage indebtedness which is not considered in the recapitalization and restructuring.

*Summary of Principal and Interest*

| Note Descriptions | At June 30, 2010 Principal | Unpaid Interest | Total |
| --- | ---: | ---: | ---: |
| Convertible debentures (See Note 8) | $20,348,246 | $4,134,630 | $24,482,876 |
| Other debt obligations (See Note 9) | 3,890,000 | 2,087,564 | 5,977,564 |
| Total debt and related interest obligations at June 30, 2010 | 24,238,246 | 6,222,194 | 30,460,440 |
| Less mortgage indebtedness | (1,240,000) | (17,250) | (1,257,250) |
| Total principal and related interest excluding mortgage indebtedness at June 30, 2010 | $22,998,246 | $6,204,944 | $29,203,190 |

Total outstanding principal and interest as of July 31, 2010 was $31,184,498 of which $29,461,380 was total principal and interest excluding mortgage indebtedness.

There are also risks involved in the fact that one individual and his affiliates, as of June 30, 2010, beneficially own in excess of 40% of our voting stock. Pursuant to financing agreements, this convertible debt holder and his affiliates with a 61 day notice, can waive the 4.9% ownership restriction, allowing them to convert 100% of their convertible debt and related interest, which totals $15,726,660 at June 30, 2010, into shares of our common stock. In addition, if the proposed recapitalization and balance sheet restructuring plan is implemented, this individual and his affiliates would own a significant percentage of the Company’s common stock. This group, if the ownership restriction is waived and all convertible debt and related interest is converted into our common stock may take actions that could conflict with the interests of the other stockholders including the election of Company directors and approval of actions generally requiring the approval of the stockholders of our voting stock, including adopting amendments to our articles of incorporation and bylaws and approving mergers, certain acquisitions or sales of all or substantially all of our assets, which could delay or prevent a third party from acquiring or merging with the Company or limit the ability of the other remaining stockholders to approve transactions that they may deem to be in their best interests. The total Winfield Group outstanding principal and interest as of July 31, 2010 was $20,682,157. Total outstanding principal and interest as of July 31, 2010 was $31,184,498 of which $15,896,994 relates to the Winfield Group.

Our cash resources remain limited. Our continued existence and plans for mining production depend on our ability to obtain the capital necessary to operate, through the issuance of additional debt, royalty financing or equity or equity-linked instruments. If we are unable to raise additional working and/or permanent capital through outside financing, it is unlikely that our existing financing will be sufficient for the liquidity necessary for anticipated working capital requirements associated with existing exploration activities and plans for restarting production, including capital expenditure requirements, existing lease obligations and interest payments associated with our indebtedness.

Furthermore, it is unlikely that the cash generated, if any, from our internal operations will suffice as a primary source of the liquidity necessary for anticipated working capital requirements, capital expenditure requirements and interest payments associated with our lease obligations and indebtedness. There is no assurance that the Company’s initiatives to improve its liquidity and financial position will be successful. Accordingly, there is substantial risk that the Company will be unable to continue as a going concern. In the event of insolvency, liquidation, reorganization, dissolution or other winding up of the Company, the Company’s creditors would be entitled to payment in full out of the Company’s assets before stockholders would be entitled to any payment, and it is unlikely that the value of such assets would exceed the claims on such assets.

Early 2010 Developments

Our strategic plan calls for additional infill drilling and metallurgical testing prior to the resumption of mining. Two drilling programs began late in the first quarter 2010 and were complete in June. These drilling programs were managed by Larry Martin, CPG, our Chief Geologist.

The first program was a reverse circulation drilling program designed to provide additional information for a detailed mine design. It included 51 infill holes in the Lucerne area and the historic Hartford and Justice areas. The drilling consisted of two drilling rigs and crews supplied by George DeLong Construction, Inc., of Winnemucca, Nevada.

The second drilling program included drilling eight core holes, using a diamond drilling rig and crews supplied by KB Drilling, of Moundhouse, Nevada. The cores are being used for metallurgical testing required for final design of the processing flow design and for geotechnical testing to determine final slope stability calculations for the open pit walls.

The information from these drill programs are be used in the development of a detailed mine design for reopening the mine, fine-tune our mineral processing procedures to maximize gold and silver recovery and updating our global resource estimates. We continue to take all steps to resume production and we anticipate publishing our updated global resource report in August 2010.

The Company is currently preparing an application for a major modification to our Air Quality Permit and an application for a new Mercury Emissions Permit scheduled for completion in the second half of 2010, under the direction of Dennis Anderson, PE, our Senior Engineer. These permits, to be issued by the Nevada Division of Environmental Protection (NDEP), are required before mining and processing can begin.

In mid-2009, the Company was contacted by the United State Environmental Protection Agency (EPA) regarding the selection of the Company’s Plum Mine to be audited under the EPA’s Toxic Release Inventory (TRI) program. The Company engaged Enviroscientists, Inc., to assist it in managing the EPA audit as well as the Company’s TRI reporting requirements. We have submitted all required reports for all periods under audit and believe the reporting for these periods are now in compliance. The audit may determine that the Company was not in compliance with the TRI requirements and, as a result, the EPA may take action against the Company, including the imposition of fines and penalties or other enforcement action, based on the results of the audit.

Additional activities planned for 2010:

A drilling program to evaluate what we have designated as the “northern extension” mineralization has been designed. This additional drilling will begin once the results from the first program of infill holes have been evaluated. Our strategic plan also calls for a program of exploration drilling on the 36 exploration targets already identified by our geologic team, throughout our extensive land holdings in the Comstock Lode district. Our geologic team will rank the targets so that we are leveraged for maximum success.

Land and Mineral Right Acquisitions

We will continue to increase our footprint in the Comstock Lode District through strategic acquisitions. We consider the historic Comstock Lode central to our growth strategy. We work collaboratively with Federal, State, and local regulatory agencies to ensure that we obtain all remaining permits needed to resume mining.

On April 2, 2010, we completed the acquisition of 11 patented lode mining claims in Storey and Lyon counties, which we had been leasing, from Claire Obester, Jim Obester, Alan Obester, and Julian Smith (“sellers”) for $1,650,000 plus a 1% royalty. Pursuant to the purchase agreement, we made initial payments of $250,000 and we issued a note to the “sellers” for $1,400,000. The note bears interest of six percent (6%) per annum. Interest and principal payments shall be made in quarterly installments of $250,000 with the first payment due on or before April 1, 2010 and continuing on the same day of each consecutive quarter, until July 1, 2011, when the then unpaid principal and accrued interest is due and payable.

On June 2, 2010, we entered into Mineral Exploration and Mining Lease agreement with New Daney Company, Inc. covering 7 unpatented lode claims. These claims are located Lyon County and are contiguous with the company’s Spring Valley mineral holdings.

On July 1, 2010, we acquired a purchase option to acquire 4 patented lode claims totaling 95 acres known as the “Dayton.” These mineral claims are contiguous with our Spring Valley mineral holdings and the property has known historic mineral resources. The purchase price is $3,000,000 plus a 3% NSR. In addition, the NSR will be reduced by 75% until the company receives credit through the reduction of NSR for the $3,000,000 purchase price. The agreement calls for a $500,000 upfront payment and the seller will finance $2,500,000 with a 0% interest seller’s note. The note will be payable in 20 equal quarterly installments of $125,000.

On July 20, 2010, we acquired seven patented mining claims totaling 48 acres, surface rights to two additional patented mining claims totaling 15 acres, 12 unpatented lode claims, and 15 acre-feet of water rights, all located in Storey County, Nevada. The purchase price was $1,025,000, with an initial payment of $300,000. We financed the remaining $725,000 with an installment note bearing 6% interest, requiring 60 monthly payments of $6,178 and a final payment of then-unpaid principal and interest. The former owners of the parcel will retain a 1.5% NSR on all future mineral production from these claims.

On August 1, 2010 we purchased an exclusive 180 day option to acquire one patented lode claim known as the Metropolitan and two unpatented lode claims. These claims adjoin the “Dayton” claims where we secured an option to acquire 4 patented lode claims on July 1, 2010. The agreement allows us to acquire theses mineral claims for $100,000 plus a 2% net smelter return at any point during the option period.

We will continue our program to catalog and digitize our library of historic mining maps and reports, so that our team can leverage the knowledge accumulated by over 150 years of mining experience in the Comstock Lode.

### Comparative Financial Information

Below we set forth a summary of comparative financial information for the three and six months ended June 30, 2010 and 2009.

### Comparative Financial Information

#### Three Months Ended June 30, 2010 and June 30, 2009:

|  | Quarter ended June 30, 2010 | Quarter ended June 30, 2009 | Difference |
| --- | ---: | ---: | ---: |
| Revenue | $— | $— | $— |
| Depletion and amortization | 38,820 | 37,603 | 1,217 |
| Reclamation, Exploration and Test Mining Expense | 1,269,929 | 642,077 | 627,852 |
| General and Administration | 596,923 | 309,663 | 287,260 |
| Consulting and Professional Service | 234,543 | 75,000 | 159,543 |
| Financing cost | 82,333 | 83,500 | (1,167) |
| Derivative change in fair value | 640,021 | 418,173 | 221,848 |
| Other – Gain on sale | — | (25,000) | (25,000) |
| Interest Expense | 1,060,930 | 821,051 | 239,879 |
| Net Loss | $(3,923,499) | (2,362,067) | 1,561,432 |

We did not produce or sell any gold or silver at our Comstock project in Nevada during the three months ended June 30, 2010 and June 30, 2009.

Reclamation, Exploration and Test Mining Expenses were $ 627,852 greater for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in expenses during 2010 reflects the commencement of our 2010 spring drill campaign and the suspension of drilling activities in mid first quarter 2009. We paused our drilling activity in the first quarter 2009 to allow our team to focus on quantifying the drill assay information from the December 2007 through January 2009 drill campaign.

The second calendar quarter 2010 General and Administrative expenses increased by $287,260 from the second calendar quarter 2009. This increase reflects the costs associated with the 2010 proxy for the reverse stock-split and the recognition of severance costs for our former Chief Operating Officer.

Consulting and professional expenses for the three month period ended June 30, 2010 were $234,543 compared to $75,000 for the three month ended June 30, 2009, amounting to $159,543 quarter over quarter increase. The increase in consulting and professional expenses reflects higher legal fees as a result of the 2010 proxy and legal fees associated with the capital and legal restructuring.

Derivative change in Fair Value increased in the second calendar quarter 2010 when compared to the same period in 2009 by $221,848. This negative variance reflects the year over year fair value calculation change for beneficial features (embedded derivatives) and detachable instrument (warrants) contained in various notes at each of the reporting periods.

Interest expense for the three month period ended June 30, 2010 increased by $239,879 when compared to the same fiscal quarter in 2009. This variance reflects the issuance of additional interest bearing notes plus $120,439 of debt discount amortization.

#### Six Months Ended June 30, 2010 and June 30, 2009:

|  | Six months ended June 30, 2010 | Six months ended June 30, 2009 | Difference |
| --- | ---: | ---: | ---: |
| Revenue | $— | $— | $— |
| Depletion and amortization | 147,056 | 76,469 | 70,587 |
| Reclamation, Exploration and Test Mining Expense | 1,761,253 | 2,092,393 | (331,140) |
| General and Administration | 952,347 | 692,217 | 260,130 |
| Consulting and Professional Service | 383,849 | 145,406 | 238,443 |
| Financing cost | 169,247 | 83,500 | 85,747 |
| Derivative change in fair value | 1,518,477 | 1,745,035 | (226,558) |
| Other – Gain on sale | (300,000) | (25,000) | (275,000) |
| Interest Expense | 1,920,577 | 1,602,151 | 318,426 |
| Net Loss | $(6,552,806) | (6,412,171) | 140,635 |

We did not produce or sell any gold or silver during the two six moth periods shown at our Comstock project in Nevada.

Reclamation, Exploration and Test Mining Expenses were $ 331,140 less for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This variance reflects the change in drilling activity in 2010 versus 2009.

General and administrative expenses increased by $260,130 in the second quarter of 2010 from the second quarter 2009. This increase reflects the costs associated with the reverse stock-split proxy process and the recognition of severance costs for our former Chief Operating Officer.

Consulting and professional expenses for the six month period ended June 30, 2010 were $383,849 compared to $145,406 for the six month ended June 30, 2009, amounting to $238,443 quarter over quarter increase. The increase in consulting and professional expenses reflects the engagement of Symmetry Advisors for strategic planning and scheduling plus higher legal fees associated with affecting the reverse stock-split proxy process and the capital and legal restructuring.

The Financing costs in the six month period June 30, 2010 were $85,747 higher compared to the six month period ended June 30, 2009. The increase in 2010 resulted because of the fees associated with financing during 2010

Derivative change in Fair Value decreased in the six month period ended June 30, 2010 when compared to the same period in 2009 by $225,558. This variance reflects the year over year fair value calculation change for beneficial features (embedded derivatives) and detachable instrument (warrants) contained in various notes at each of the reporting periods.

In January 2010, we sold a 0.6% royalty interest in our Obester Property to Precious Royalties for $550,000. After adjusting our mineral claim value for the sale, a gain of $300,000 was realized.

Interest expense for the six month period ended June 30, 2010 increased by $318,426 when compared to the same six month period in 2009. This variance reflects the issuance of additional interest bearing notes plus $180,616 of debt discount amortization.

### Liquidity and Capital Resources

We recognize that our cash resources are limited. Our continued existence and plans for mining production depend on our ability to obtain the capital necessary to operate, through the issuance of additional debt, royalty financing or equity. During the first six months of 2010, we raised an aggregate of $4,800,000 in financing. While this additional funding may meet our immediate working capital needs, we did not generate revenues or cash flows or obtain additional or alternative funding that would enable us to continue as a going concern. We have yet to realize an operating profit at our Company. As disclosed in the report of our independent registered public accounting firm in our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, our recurring losses and negative cash flow from operations raise substantial doubt about our ability to continue as a going concern.

As of June 30, 2010, the Company was in default of the terms on several outstanding notes payable with the Winfield Group totaling $14,369,986 of principal and $5,5,326,543 of interest. The Winfield Group consists of John V. Winfield, Sante Fe Financial Corporation, Portsmouth Square and InterGroup Corporation, Combined, the Winfield Group represent the Company’s largest creditor and a significant stockholder. Mr. Winfield is affiliated with these Companies through a direct controlling interest and/or as their Chairman of the Board. Because we are in default, the entire note balances of the defaulted notes have been recorded as current liabilities.

The Winfield Group held various notes and debentures issued by the Company that are reported in several different liabilities accounts that are in default as of June 30, 2010. The notes are as follows:

*Debt in Technical Default with Winfield Group*

| Note Descriptions (Winfield Group) | At June 30, 2010 Principal | Unpaid Interest | Total |
| --- | ---: | ---: | ---: |
| 15% Convertible Notes Payable – Investors | $687,928 | $41,852 | $729,780 |
| 18% Convertible Debentures Payable - Mandatory Redemption Payment | 4,412,058 | 1,328,483 | 5,740,541 |
| 18% Convertible Notes Payable - 2006 – 2007 | 1,620,000 | 1,078,438 | 2,698,438 |
| 11% Convertible Notes Payable - June - November 2008 | 2,500,000 | 580,217 | 3,080,217 |
| 11% Convertible Notes Payable - December 2008 | 500,000 | 96,734 | 596,734 |
| 9% Convertible Notes Payable - May - August 2009 | 1,000,000 | 102,483 | 1,102,483 |
| 8% Convertible Notes Payable - December 2009 | 1,500,000 | 28,023 | 1,528,023 |
| 17% Promissory Note Payable - July 2005 | 1,200,000 | 1,570,088 | 2,770,088 |
| 18% Promissory Note Payable - December 2007 Financing | 600,000 | 226,183 | 826,183 |
| 18% Promissory Note Payable - January 2008 Financing | 600,000 | 211,542 | 811,542 |
| 5% Debt Seller Note (Plum Mine) | 250,000 | 62,500 | 312,500 |
| Total at June 30, 2010 | $14,369,986 | $5,326,543 | $19,696,529 |

40

Had the Winfield Group converted all of its convertible principal and interest of $15,726,660 into shares of our common stock at June 30, 2010, we would have been obligated to issue to the Winfield Group 11.7 million shares representing 38.2% of our then outstanding shares of common stock, resulting in substantial dilution. The total Winfield Group’s outstanding principal and interest as of July 31, 2010 was $20,682,157.

As stated earlier, the board has approved a restructuring and recapitalization plan that includes debt for equity exchange and a new capital raise. If we are unable, however, to raise additional working capital through outside financing, it is unlikely that we will achieve resumption of mining in 2011. Furthermore, it is unlikely that the cash generated from our internal operations will suffice as a primary source of the liquidity necessary for anticipated working capital requirements, capital expenditure requirements and interest payments associated with our lease obligations and indebtedness. There is no assurance that the Company’s initiatives to improve its liquidity and financial position will be successful. Accordingly, there is substantial risk that the Company will be unable to continue as a going concern. In the event of insolvency, liquidation, reorganization, dissolution or other winding up of the Company, the Company’s creditors would be entitled to payment in full out of the Company’s assets before stockholders would be entitled to any payment, and it is unlikely that the value of such assets would exceed the claims on such assets.

The recapitalization and restructuring plan contemplates exchanging substantially all of the Company’s existing convertible debt obligations, other debt obligations and related accrued interest which total approximately $29.2 million at June 30, 2010, for equity. In addition to the aforementioned debt and related obligations, we have approximately $1.2 million in mortgage indebtedness which is not considered in the recapitalization and restructuring.

*Summary of Principal and Interest*

| Note Descriptions | At June 30, 2010 Principal | Unpaid Interest | Total |
| --- | ---: | ---: | ---: |
| Convertible debentures (See Note 8) | $20,348,246 | $4,134,630 | $24,482,876 |
| Other debt obligations (See Note 9) | 3,890,000 | 2,087,564 | 5,977,564 |
| Total debt and related interest obligations at June 30, 2010 | 24,238,246 | 6,222,194 | 30,460,440 |
| Less mortgage indebtedness | (1,240,000) | (17,250) | (1,257,250) |
| Total principal and related interest excluding mortgage indebtedness at June 30, 2010 | $22,998,246 | $6,204,944 | $29,203,190 |

Total outstanding principal and interest as of July 31, 2010 was $31,184,498 of which $29,461,380 was total principal and interest excluding mortgage indebtedness.

## Market risk

As filed, 625 characters.

An investment in our common stock involves risk. You should carefully consider the following risk factors.

Our exposure to market risk for changes in interest rates relates primarily to the market-driven increase or decrease in interest rates, and the impact of those changes on the Company’s ability to realize a return on invested or available funds. We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in short term high-credit investment grade securities and/or commercial checking and savings accounts.

## Controls and procedures

As filed, 3,096 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 Principal Financial Officer and our Principal Accounting 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 Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Principal Executive Officer and Principal Financial Officer and our Principal Accounting Officer, to allow timely decisions regarding required disclosures. Based on the evaluation as described above, our internal control over disclosure controls and procedures as of June 30, 2010 were effective.

### B. Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized transactions.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control - Integrated Framework* and *Internal Control over Financial Reporting-Guidance for Smaller Public Companies.*

There have been no changes during the quarter ended June 30, 2010 in our Company's internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15(d) that have material affected, or are reasonably likely to materially affect, our internal controls over our financial reporting.

## Risk factors

As filed, 3,176 characters.

Set forth below is an update to our risk factors as set forth in our Annual Report on Form 10-K for the year ended December 31, 2009. For full comprehension of the risks affecting our Company, you are encouraged to review the risk factors set forth in our 2009 Annual Report on Form 10-K, which are hereby incorporated herein in their entirety.

Investing in our common stock is very speculative and involves a high degree of risk. You should carefully consider all of the information in this report before making an investment decision. The following are among the risks we face related to our business, assets and operations. They are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also arise. Any of these risks could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of our common stock. You should not purchase our shares unless you can afford to lose your entire investment.

### Relative to our cash flows we have substantial indebtedness.

As of June 30, 2010, we had current indebtedness of $24,238,246 million in addition to $6,222,194 million of current accrued interest payable. For the six months ended June 30, 2010, we had a deficit of cash flows from operating activities of $3,665,351 million. Our substantial indebtedness, and our ability to incur additional indebtedness, may further negatively affect our cash flow and our ability to operate our business and react to changes in the economy or our industry.

***Outstanding convertible securities and warrants may result in substantial dilution.***

At June 30, 2010, we had outstanding 19,002,653 shares of common stock. In addition, we had outstanding convertible notes and related interest plus various common stock purchase warrants. At June 30, 2010, these notes, related interest and warrants were convertible into or exercisable for a total of approximately 25.2 million additional shares of our common stock, subject to further anti-dilution provisions.

***If we are not able to obtain financing, it is unlikely that we will be able to continue as a going concern.***

If we are unable to raise additional working capital through outside financing, it is unlikely that the cash generated from our internal operations will suffice as a primary source of the liquidity necessary for anticipated working capital requirements, capital expenditure requirements and interest payments associated with our lease obligations and indebtedness. There is no assurance that the Company’s initiatives to improve its liquidity and financial position will be successful. Accordingly, there is substantial risk that the Company will be unable to continue as a going concern. In the event of insolvency, liquidation, reorganization, dissolution or other winding up of the Company, the Company’s creditors would be entitled to payment in full out of the Company’s assets before stockholders would be entitled to any payment, and it is unlikely that the value of such assets would exceed the claims on such assets.

Filed Aug 6, 2010.
Source: SEC EDGAR, the filing index for accession 0001144204-10-041785. Last ingested by Listed: Nov 4, 2026, 17:20 ET. No prices; not investment advice.