Comstock Inc.: Form 10-Q/A for the period ended Sep 30, 2010

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 and nine months ended September 30, 2010, as well as our future results. The amounts have been updated to reflect the effects of the restatement disclosed in Note 5 of the condensed consolidated financial statements in Part 1, Item 1.

Overview

Comstock Mining Inc. (the “Company”) is a Nevada-based, gold and silver mining company with extensive, contiguous property in the historic Comstock district. The Company began acquiring properties in the Comstock in 2003. Since then, the Company has consolidated a substantial potion of the Comstock district, secured permits, built an infrastructure and brought the exploration project into test mining production. We continue acquiring additional properties in the Comstock 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. The Dayton Project is located in Lyon County Nevada, approximately 6 miles south of Virginia City. Access to the properties 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 and its world class bonanza of precious metal grades, the geology is well known and extensively studied by the Company, our advisors and many independent researchers. We have amassed the largest known library of historical data and detailed surface mapping. In conjunction with current drilling programs designed to expand the known historical data base, we have invested in our understanding of the Comstock’s structural geology as well as its broader geological footprint.

The Company’s Comstock Mine Project now consists of approximately 6,412 acres of active lode mining claims in the Comstock district. The acreage is comprised of 892 acres of patented claims (private lands) and 5,520 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 over 12,000 ounces of gold and over 53,000 ounces of silver from 2004-2006, at our Comstock Lode test mining operation and existing heap leach processing facilities. Our test mining activities were concluded in January 2007, when we prioritized land consolidation and mine planning as our critical prerequisites for our longer-term production plans.

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 included a reverse stock split, a debt-for-equity exchange, the securing of certain critical mineral rights and 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 2011, with annual production rates of 20,000 gold equivalent ounces.

On June 4, 2010, we received approval from the Financial Industry Regulatory Authority (“FINRA”) clearing the one-for-two hundred reverse stock split of our common stock previously approved by our stockholders. The reverse stock split took effect on Monday, June 7, 2010

On October 20, 2010, the Company completed the three principal features of its previously announced restructuring and recapitalization plan. The completed features of the plan include (i) exchanging all of the Company’s previously defaulted senior secured debt and related obligations for new equity, (ii) raising $35.75 million of new equity, and (iii) securing integral land mineral rights.

Debt for Equity Exchange

The Company exchanged substantially all of its senior secured convertible and senior indebtedness for shares of its newly created Series A pursuant to the Series A Purchase Agreement. Each share of the Series A is convertible at the holder’s election into 1,536 shares of common stock, therefore converting into common stock at a conversion price per share of $0.6510. The common stock underlying the Series A is issuable at a fixed conversion rate (subject to anti-dilution adjustments) currently equal to 45.1 million shares of common stock. The Company has approximately 20.9 million shares of common stock outstanding.

The notes and related interest exchanged for equity are as follows:

Debt Exchanged for Series A Preferred Convertible Stock

New Equity Raise of $35.75 million

The Company raised $35.75 million in gross proceeds ($32.6 million, net of commissions and transaction related expenses) by issuing newly created Series B pursuant to a the Series B Purchase Agreement. Each share of the Series B is convertible at the holder’s election into 606.0606 shares of common stock, therefore converting into common stock at a conversion price per share of $1.6500. The common stock underlying the Series B is issuable at a fixed conversion rate (subject to anti-dilution adjustments) currently equal to 21.7 million shares of common stock.

The net proceeds the Company received from the sale of the Series B Preferred Stock was approximately $32.6 million after deducting commissions and the estimated expenses of the offering payable by the Company. The Company intends to use the net proceeds to meet its initial capital and operating needs for the first three years of its strategic plan to accelerate mine development and production and continue exploration. This includes approximately $8 million of capital expenditures associated with its leach pad expansion, new crushing unit and lab refurbishment and rolling stock, approximately $19 million for mine development, exploration and production start up costs and approximately $4 million for land acquisitions. The remaining $1.75 million is reserved for general corporate purposes, including remaining feasibility studies.

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Pending the use of the proceeds described above, the Company may invest all or a portion of the proceeds of the offering in short-term deposits, including banker acceptances and short- term, high quality, interest bearing corporate, government-issued or government-guaranteed securities.

Automatic conversion of Series A-2 and Series B

If the daily volume weighted average price exceeds $4.50 for any 20 Trading Days during any 30 consecutive Trading Day period starting on or after the Effective Date (Effective Date means the date that all common stock underlying the Series A and Series B have been registered for resale or may be sold without volume or manner of sale restrictions under Rule 144), then all outstanding shares of Series A-2 and Series B will be forced to convert into shares of common stock, based on the then-effective conversion price. The Company will provide each holder with notice within one trading day of meeting the requirements specifying the shares of preferred stock held by each holder and the date three trading days later when the conversion will take effect.

Securing Integral Land Mineral Rights.

On October 21, 2010, the Company also announced its entry into an operating agreement to form an operating joint venture. Consistent with the Company’s strategic plan, the Company will obtain the exclusive rights of production and exploration the DWC Property, the Sutro Property and the VCV Property. Pursuant to the terms of the Operating Agreement for Northern Comstock, DWC Resources, Inc. will contribute the DWC Property to Northern Comstock, Mr. Winfield will contribute his rights to the Sutro Property and the VCV Property to Northern Comstock and the Company will contribute 862.5 shares of Series A-1 and its services in the area of mine exploration, development and production to Northern Comstock. The terms of the Operating Agreement will provide that on each anniversary of the Operating Agreement, up to and including the thirty-ninth (39th) anniversary, the Company will make additional capital contributions in the amount of $862,500.00, in the form of shares of Series A-1 or cash upon request of Northern Comstock (which request can be denied by the Company in certain circumstances). Under certain circumstances, the additional capital contributions can be accelerated. The Company had previously entered into letters of intent with respect to the DWC Property and Sutro Property on August 13, 2008, the terms of which are expressly superseded by the Operating Agreement. The Operating Agreement further provides the Company with the exclusive rights of development, production, mining and exploration on the respective properties and requires the Company to make certain capital expenditures toward that end. Under the terms of the Operating Agreement all cash flows from the bullion or other minerals recovered from the ore mined out of the ground but untreated and minerals produced from the milling or reduction of ore to a higher grade produced from the DWC Property, Sutro Property or VCV Property, as applicable, or finished products produced from any such property, will be distributed to the Company.

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 published our updated global resource report in August 2010.

The Company announced on November 8, 2010that it has begun a new drilling program at its Comstock Mine Project, under the direction of Mr. Larry Martin, Comstock Mining’s Chief Geologist. The program includes over 100,000 feet of reverse circulation (RC) drilling, and has a planned duration of about seven months. It includes development drilling in the Lucerne and Dayton Resource Areas, exploration drilling on certain high priority targets within the Company’s extensive Comstock district land holdings, and condemnation drilling in the areas designated for possible heap leach pad expansion.

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 reporting 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. The Company believes it has since complied with these reporting requirements and does not believe this action or any possible penalties would be material.

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.

On October 14, 2010, we acquired 26 unpatented lode-mining claims along the southern extension of the Occidental Lode structure in Storey County, Nevada. The historic Occidental Lode, also referred to as the Brunswick Lode, is located 1.5 miles due east of and sub-parallel to the veins of the main Comstock Lode. These claims adjoin and extend the Company’s previous holdings of six patented and six unpatented claims, significantly expanding the Company’s position on the Occidental Lode. The Lease has an initial term of 3 years and, in the event we determine that exploration results warrant further development, then the term can be extended initially for two additional six-year terms and then continuously thereafter as long as we are producing on property adjacent to or in the vicinity of these new claims. The agreement includes a 3% Net Smelter Return (NSR) royalty from production with the gold price capped at $2,000 per ounce.

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 nine months ended September 30, 2010 and 2009.

Comparative Financial Information

Three Months Ended September 30, 2010 and September 30, 2009:

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

Reclamation, Exploration and Test Mining Expenses were $ 85,186 greater for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The increase in expenses during the third quarter 2010 reflects additional cost related to our 43-101 technical report that was published by Behre Dolbear.

Our third quarter 2010 General and Administrative expenses increased by $252,703 compared to the third quarter 2009. This increase reflects higher labor costs, a land purchase option payment for our Comstock Project and related expenses incurred in conjunction with our recapitalization, including raising new equity capital. .

Consulting and professional expenses for the three month period ended September 30, 2010 were $471,824 compared to $32,204 for the three month ended September 30, 2009, amounting to $439,620 quarter over quarter increase. This increase reflects higher legal fees associated restructuring and recapitalization, including raising new equity capital.

Derivative change in Fair Value increased in the third calendar quarter 2010 when compared to the same period in 2009 by $17,289,096. This negative variance reflects the quarter over quarter 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 September 30, 2010 decreased by $600,163 when compared to the same fiscal quarter in 2009. This net decrease reflects the issuance of additional interest bearing notes offset by a $712,603 reduction of debt discount amortization.

Nine Months Ended September 30, 2010 and September 30, 2009:

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We did not produce or sell any gold or silver during the nine month period ended September 30, 2010 and September 30, 2009.

Reclamation, Exploration and Test Mining Expenses were $ 245,952 less for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. This decrease reflects the change in drilling activity in 2010 versus 2009.

General and administrative expenses increased by $512,833 in the third quarter of 2010 from the third quarter 2009. This increase reflects the costs associated with the reverse stock-split proxy process, the restructuring and related expenses incurred in conjunction with our recapitalization, including raising new equity capital and higher labor costs.

Consulting and professional expenses for the nine month period ended September 30, 2010 were $855,673 compared to $177,610 for the nine month period ended September 30, 2009. The $678,063 increase in consulting and professional expenses reflects higher legal fees associated with affecting the reverse stock-split proxy process, the restructuring and recapitalization, including raising new equity capital.

The Financing costs in the nine-month period September 30, 2010 were $85,747 higher compared to the nine-month period ended September 30, 2009. This increase reflects financing fees associated with our 2010 financing activities.

Derivative change in Fair Value increased in the nine month period ended September 30, 2010 when compared to the same period in 2009 by $16,951,378. 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 nine month period ended September 30, 2010 decreased by $281,737 when compared to the same nine month period in 2009. This debt decrease reflects the issuance of additional interest bearing notes offset by a $597,131 reduction of debt discount amortization.

Liquidity and Capital Resources

On October 20, 2010, the Company raised $35.75 million in gross proceeds ($32.6 million, net of commissions and transaction related expenses) by issuing shares of a newly created Series B to fund the Company’s business plan to accelerate mine development and production and enhance exploration and exchanged all $29.4 million of its defaulted senior secured convertible notes and related obligations for shares of a newly created Series A. This transaction also cures all defaults under the terms of the notes being converted. This funding meets our capital and working capital needs for production start up in 2011, exploration drilling under our three-year strategic plan and certain, additional land purchases. However, we did not generate revenues or cash flows and we have yet to realize an operating profit at our Company. Although we previously had substantial doubt about our ability to continue as a going concern, 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, and we believe this substantial doubt may no longer be applicable, our recurring losses and negative cash flow from operations require ongoing assessment about our ability to continue as a going concern.

The net proceeds the Company received from the sale of the Series B was approximately $32.6 million after deducting commissions and the estimated expenses of the offering payable by the Company. The Company intends to use the net proceeds to meet its initial capital and operating needs for the first three years of its strategic plan to accelerate mine development and production and continue exploration. This includes approximately $8 million of capital expenditures associated with its leach pad expansion, new crushing unit and lab refurbishment and rolling stock, approximately $19 million for mine development, exploration and production start up costs and approximately $4 million for land acquisitions. The remaining $1.75 million is reserved for general corporate purposes, including remaining feasibility studies.

Pending the use of the proceeds described above, the Company may invest all or a portion of the proceeds of the offering in short-term deposits, including banker acceptances and short-term, high quality, interest bearing corporate, government-issued or government-guaranteed securities.

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.

A. Disclosure

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, with the participation of our Principal Executive Officer and 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 reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Exchange Act and SEC’s rules, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Accounting 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. Our Principal Executive Officer and our Principal Accounting Officer concluded that, as of September 30, 2010, certain procedures were not effective at the reasonable assurance level due to a material weakness described below.

The Company did not maintain effective monitoring controls over the calculation of complex accounting transactions. The Company did not accurately calculate the derivative liability associated with embedded beneficial conversion features on the debentures and notes at September 30, 2010 and did not classify certain defaulted debt as current. Our financial statements as of, and for the three and nine-month-periods ended, September 30, 2010 were restated to reflect the correction of this error. The consolidated financial statements contained in this 10-Q also reflect such adjustment.

B. Management’s Quarterly Report on 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 and 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 transactions and dispositions of assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the board of directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the company that could have a material effect on its financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Management has evaluated the effectiveness of the Company’s internal control over financial reporting as of September 30, 2010. Management based its assessment on the framework set forth in Committee of Sponsoring Organizations of the Treadway Commission’s “Internal Control – Integrated Framework.”

As a result of the error in calculating the derivative liability associated with embedded beneficial conversion features on the debentures at September 30, 2010, management concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2010.

Remediation of Material Weakness

Since identification of the error described above, management has been actively engaged in the planning for, and implementation of, remediation efforts. During the quarter ended March 31, 2011, the Company implemented a more formalized process for reviewing complex transactions and validating the accuracy of related calculations. This process includes use of external resources when deemed necessary.

Management believes the measures described above will remediate the material weakness that existed as of September 30, 2010, and strengthen its internal control over financial reporting.

Management is committed to continuous improvement of the Company’s internal control processes. Under the direction of the Audit Committee, management will continue to review and make changes it deems necessary to the overall design of the Company’s internal control over financial reporting, including implementing further improvements in policies and procedures and taking additional measures to address any control deficiencies.

Changes in Internal Control over Financial Reporting

Except as described above, there have been no changes during the quarter ended September 30, 2010 in the 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.

Officer Certifications

We have attached as exhibits to this Annual Report the certifications of our Principal Executive Officer and Principal Accounting Officer, which are required in compliance with the Exchange Act.

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 September 30, 2010, we had current notes, convertible notes and debentures payable of $24,042,778 million in addition to $7,027,569 million of current accrued interest payable. For the nine months ended September 30, 2010, we had a deficit of cash flows from operating activities of $4,529,475 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 September 30, 2010, we had outstanding 19,406,382 shares of common stock. In addition, we had outstanding convertible notes and related interest plus various common stock purchase warrants. At September 30, 2010, these notes, related interest and warrants were convertible into or exercisable for a total of approximately 27.4 million additional shares of our common stock, subject to further anti-dilution provisions.