# Comstock Inc.: Form 10-Q for the period ended Jun 30, 2011

- Company: [Comstock Inc.](/companies/lode.md) (CIK 1120970)
- Form: 10-Q
- Filed: 2011-08-12
- Accepted by EDGAR: Aug 12, 2011, 07:08 ET
- Period: 2011-06-30
- Accession: 0001144204-11-045842
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1120970/000114420411045842/v228987_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1120970/000114420411045842/

## Management's discussion and analysis

As filed, 27,737 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, 2010.

The following discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of and for the six months ended June 30, 2011, as well as our future results.

### Overview

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 and developing projects in the Comstock District in 2003. Since then, the Company has consolidated a substantial portion of the Comstock District, secured permits, built an infrastructure and brought the exploration project into test mining production. The Company produced over 12,000 ounces of gold and over 53,000 ounces of silver from 2004-2006 at our existing heap leach processing facilities. Our test mining activities were concluded in January 2007, when based on our longer-term production plans, we prioritized land consolidation and mine planning.

We continue acquiring additional properties in the Comstock District, expanding our footprint and creating opportunities for exploration and mining. The Company now owns or controls approximately 6,099 acres of mining claims in the Comstock District. The acreage is comprised of 999 acres of patented claims (private lands) and 5,100 acres of unpatented claims on land administered by the US Bureau of Land Management (“BLM”). The Company also owns a heap leach processing facility that is being redesigned and modified to accommodate our new production plans.

### Exploration and Mine Development

Our strategic plan calls for additional infill drilling and metallurgical testing prior to the resumption of mining. The information from these drill programs is being used in the development of a detailed mine design for reopening the mine, fine-tuning our mineral processing procedures to maximize gold and silver recovery and updating our global mineralized material estimates.

The most-recent drill program began October 25, 2010, and continued through July 15, 2011. During the second quarter of 2011: (i) infill drilling for mine planning was completed on the Hartford, Lucerne and Justice claims in the Lucerne Resource Area; (ii) the second phase of development drilling was completed in the Dayton Resource Area; and (iii) the first phase of development drilling was completed on the East-Side target in the Lucerne Resource Area. A total of 133 reverse circulation holes were completed using three drill rigs during the quarter totaling 48,375 feet. A total of 340 reverse circulation holes were completed since the drill program’s inception totaling 118,361 feet. Highlights of the results of this drilling are available on the Company website www.comstockmining.com.

A total of six core holes totaling 1,114 feet were drilled in the second quarter of 2011. A total of 15 core holes totaling 3,584 feet were drilled since the drill program’s inception. Two of the core holes were in the Dayton Resource Area, two were in the East-Side target, and eleven were in the Lucerne Resource Area starter pit. The core holes were drilled to meet three goals: (i) to twin and confirm the results of specific RC holes, (ii) to provide core for metallurgical testing, and (iii) to provide geotechnical information for finalizing the pit slope design.

Metallurgical testing is being conducted for the Company by McClelland Laboratories of Sparks, Nevada. A series of 20 column leach tests began December 9, 2010, and proceeded with daily readings of the recovered gold and silver. The column tests simulate the heap leaching process and provide information on recovery versus time which is needed to finalize the design of our updated heap leach facility. These tests are complete with final results expected in the third quarter.

The Company plans on publishing the cumulative results of exploration, metallurgical and mine development activities through its third National Instrument 43-101 technical report (the “NI Report”) delivered to the Company by Behre Dolbear & Company (USA) Ltd., during the third quarter of 2011.

### Production

During the second quarter, the Company hired a number of experienced mining professionals. These key additions to our staff brought demonstrated skills and experience, including safety, operations management, mine engineering and metallurgical experience, which will be invaluable as we prepare for mining production in 2011. On April 18, 2011, the Company announced that Mike Norred had joined the Company as Vice President of Strategic Resource Planning, Cliff Nelson joined the Company as Vice President of Operations, and Dr. Edouard Zoutomou joined the Company as Metallurgical Process Manager. Each of these professionals brings over 30 years of experience. On June 20, 2011, Randy Harris joined the Company as Directory of Safety. Randy is our twelfth new hire this year bringing us to a current total of 30 mining professionals. An additional 21 hospitality professionals and related staff are employed at our Gold Hill Hotel.

On May 11, 2011, the Company engaged the Goodfellow Corporation of Boulder City, Nevada to provide a new, two-stage crushing facility, complementing our existing heap leach processing facility in American Flat. The plant will include a primary jaw crusher and a secondary cone crusher, and will be installed by Goodfellow after the Company receives the necessary upgrades. The new crushing plant will provide the capacity for the Company’s initial permitted production rate of 720,000 tons per year, with substantial additional capacity for increased production in the future. The total cost for the crushing plant is approximately $2.1 million, paid in monthly installments with the final 15% payment due after the crusher is installed and operational.

On July 7, 2011, the Company signed an agreement with Scotia International of Nevada, Inc. to refurbish and upgrade our Merrill-Crowe processing plant and refinery. The upgraded plant will provide the capacity to meet our permitted initial production rate of 720,000 tons per year, with growth capacity for increased production rates in the future. Under the terms of the agreement, Scotia will transport existing components of the processing plant to their facility in Salt Lake City, where they will refurbish or upgrade each component, reassemble the plant, and test its operation. Once all required permits have been received by the Company, the complete plant will be reassembled by Scotia at our American Flat facility. The $1.4 million cost will be paid in installments, with the final 15% to be paid 30 days after the plant is operational at our site.

On July 13, 2011, the Company received a certificate of occupancy for a new, 34’x60’ office building, installed next to our existing office building in American Flat. The new building adds much-needed space for our growing professional mining staff.

On July 27, 2011, the Company received its Mercury Operating Permit #AP1041-2690, issued under a new air quality program that is administrated by the Nevada Division of Environmental Protection (NDEP) – Bureau of Air Quality that requires all gold mining companies that use thermal processes for gold recovery to monitor and manage, through engineering controls, any mercury fumes or liquid metal that is derived from the precious metal ore as a by-product. This air permit ensures employee and public safety during the final stages of precious metals recovery. The Comstock ore has very little naturally occurring mercury content relative to many other gold mining operations in Nevada. Issuance of this new permit allows for the construction of a Melt Furnace and a Mercury Retort. This permit is a critical prerequisite for recommencing production. For clarity, the Company does not *use* mercury at any time in the processing of gold and silver. All the equipment will be located at our American Flats processing location. The permit is now effective but was appealed on August 5, 2011. We do not expect the appeal to have any material impact on the issued permit.

The Company has also applied for an Air Quality Permit, primarily associated with our new crushing facilities. This permit, to be issued by the Nevada Division of Environmental Protection (NDEP), is required before mining and processing can recommence and will require a public notice period identical to our recently issued Mercury Operating to Construct Permit, making issuance most likely in October. However, certain preparatory activities can begin almost immediately with an operating permit for surface area disturbance (SAD). These activities include land clearing, excavation and leveling. The Company has submitted permit request and anticipates receiving the SAD permission in early September.

The Company’s near term production plans include expanding the existing heap leach to a capacity of approximately 4 million tons of capacity. We have accrued a long-term liability of approximately $1.4 million as of June 30, 2011, for our obligation to reclaim our mine facility based on our 2008 reclamation plan approved by the Nevada State Environmental Commission and Division of Environmental Protection. We are currently updating this three-year plan and anticipate the approval of our 2011 reclamation plan in the third quarter, including the associated increase in the reclamation bond requirement for the updated plan, including these expansions to be estimated at approximately $4-5 million.

### Corporate

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

On April 12, 2011, the Company announced that it had acquired the historic Gold Hill Hotel for $840,000 consisting of a $500,000 cash payment and a $340,000 seller’s note. The Gold Hill Hotel is a historic site and is recognized as one of Nevada’s oldest hotels established in 1861 during Nevada’s gold rush. The hotel boasts 17 rooms spread across five structures that include the original hotel and addition; and three original (lodge/bungalow) structures constructed circa 1860, with the most recent addition being constructed in 1988. The property consists of approximately 14,384 square feet of improvements situated on 2.63 acres of land located in Gold Hill, Storey County, Nevada.

On June 10, 2011, the Company’s common stock began trading on the NYSE Amex exchange, under the symbol LODE. The Company received its initial clearance letter on May 26, 2011, completed certain administrative tasks, including interviewing and selecting J. Streicher & Co., LLC as its Designated Market Maker, and received final acceptance for listing on June 8.

### Subsequent Events

From July 1, 2011 through August 9, 2011, the Company converted 926 shares of convertible preferred stock into 561,362 common shares. Common shares and convertible preferred shares outstanding at August 9, 2011, totaled 25,426,460 and 61,529, respectively.

On July 1, 2011, the Company declared and issued 786,114 of its common shares valued at $2,429,779 as a semi-annual dividend to the preferred shareholders.

### Comparative Financial Information

Below we set forth a summary of comparative financial information the three and six months ended June 30, 2011 and 2010.

### Comparative Financial Information

#### Three Months Ended June 30, 2011 and June 30, 2010:

|  | Quarter Ended June 30, 2011 | Quarter Ended June 30, 2010 | Difference |
| --- | ---: | ---: | ---: |
| Revenue | $(120,175) | $— | $(120,175) |
| Hotel operating costs | 99,995 | - | 99,995 |
| Depreciation and amortization | 42,324 | 38,820 | 3,504 |
| Reclamation, exploration and test mining expense | 3,039,582 | 1,269,929 | 1,769,653 |
| General and administration | 1,604,258 | 596,923 | 1,007,335 |
| Consulting and professional service fees | 648,075 | 234,543 | 413,532 |
| Loss from operations | 5,434,234 | 2,140,215 | 3,173,844 |
| Derivative change in fair value | (486,491) | 640,021 | (1,126,512) |
| Interest income | (14,846) | — | (14,846) |
| Interest expense | 11,785 | 1,060,930 | (1,049,145) |
| Other, net | — | 82,333 | (82,333) |
| Income tax benefit | (76,081) | — | (76,081) |
| Net loss | $4,748,426 | $3,923,499 | $824,927 |

On May 1, 2011, we acquired the historic Gold Hill Hotel and five related cottages. The hotel had revenues from the cottages, hotel rooms, restaurant and bar totaling $120,175 during the quarter ended June 30, 2011. We did not produce or sell any gold or silver at our Comstock project in Nevada during the three months ended June 30, 2011 and June 30, 2010.

Hotel operating costs were $99,995 for the quarter ended June 30, 2011. There were no hotel operating expenses for the same period in 2010. The $99,995 represents cost incurred for providing room, restaurant and bar services at the hotel during the quarter ended June 30, 2011.

Reclamation, exploration and test mining expenses increased by $1,769,653 in the second quarter of 2011 when compared to the same quarter in 2010. The increase was primarily caused by expenditures associated with increased reverse circulation development drilling and related metallurgical, assay and mine development activity in and for our Lucerne and Dayton Resource Areas in the second quarter 2011, including higher labor costs related to the expansion of the geological staff.

General and administrative expenses increased by $1,007,335 in the second quarter of 2011 as compared to the second quarter of 2010. This increase resulted from stock grants issued to our outside directors valued at $980,000, higher travel expenses related to trade shows, and the addition of the hotel.

Consulting and professional fees increased by $413,532 in the second quarter of 2011 as compared to the second quarter of 2010. This increase resulted from costs associated with our June 2011 annual shareholder meeting and additional professional service fees for accounting, valuation and legal.

Derivative changes in fair values decreased by $1,126,512 in the second quarter of 2011, as compared to the second quarter in 2010. This decrease includes $640,021 resulting from eliminating the embedded beneficial conversion feature and warrant derivative liabilities in the fourth quarter of 2010, when we exchanged all our convertible debt for equity and also includes a decrease of $486,491in the contingent dividend payment derivative resulting primarily from a decrease in the underlying convertible preferred stock outstanding during the three months ended June 30, 2011 and the passage of time since the issuance of the convertible preferred stock in October 2010. There was no contingent dividend payment derivative liability outstanding during the three month period ended June 30, 2010.

Interest income totaled $14,846 for the second quarter of 2011 as compared to $0 for the second quarter of 2010. Second quarter 2011 interest income originates from the cash and cash equivalents and available-for-sale securities that were purchased with the proceeds from the issuance of Series B Preferred Stock in the fourth quarter of 2010.

Interest expense decreased $1,049,145 in the second quarter of 2011 as compared to the second quarter of 2010. This decrease resulted from the extinguishment of our senior secured convertible indentures, promissory notes and associated interest obligations totaling $29.4 million during the fourth quarter of 2010.

Other, net decreased as a result of certain non-operating expenses not recurring in the second quarter of 2011 as compared to 2010.

The Company recorded a deferred tax benefit of $76,081 for the quarter ended June 30, 2011. After consideration of the tax allocation and the projected consolidated results and available taxable differences from the acquisition of Gold Hill Hotel the Company determined it would be able to realize approximately $76,000 of tax benefits from its deferred tax assets. The Company did not recognize any other net tax benefits from its losses because full valuation allowances are provided on the Company’s net deferred tax assets.

#### Six Months Ended June 30, 2011 and June 30, 2010:

|  | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 | Difference |
| --- | ---: | ---: | ---: |
| Revenue | $(120,175) | $— | $(120,175) |
| Hotel operating costs | 99,995 | — | 99,995 |
| Depreciation and amortization | 67,282 | 147,056 | (79,774) |
| Reclamation, exploration and test mining expense | 5,235,489 | 1,761,253 | 3,474,236 |
| General and administration | 2,294,524 | 952,347 | 1,342,177 |
| Consulting and professional service fees | 874,237 | 383,849 | 490,388 |
| Loss from operations | 8,451,352 | 3,244,505 | 5,206,847 |
| Gain on sale of mineral rights | — | (300,000) | (300,000) |
| Derivative change in fair value | (1,216,508) | 1,518,477 | (2,734,985) |
| Interest income | (54,050) | — | (54,050) |
| Interest expense | 24,375 | 1,920,577 | (1,896,202) |
| Other, net | — | 169,247 | (169,247) |
| Income tax benefit | (76,081) | — | (76,081) |
| Net loss | $7,129,088 | $6,552,806 | $576,282 |

On May 1, 2011, we acquired the historic Gold Hill Hotel and five related cottages. The hotel had revenues from the cottages, rooms, restaurant and bar totaling $120,175. We did not produce or sell any gold or silver at our Comstock project in Nevada during the six months ended June 30, 2011 and June 30, 2010.

Hotel operating costs were $99,995 for the six month period ended June 30, 2011. There were no hotel operating expenses for the same period in 2010. The $99,995 represents cost incurred for providing room, restaurant and bar services at the hotel during the quarter ended June 30, 2011.

Reclamation, exploration and test mining expenses increased by $3,474,236 in the first six months of 2011 when compared to the same six month period in 2010. The increase was primarily caused by expenditures associated with increased reverse circulation development drilling and related metallurgical, assay and mine development activity in and for our Lucerne and Dayton Resource Areas in the second quarter 2011, including higher labor costs related to the expansion of the geological staff.

General and administrative expenses increased by $1,342,177 in the first six months of 2011 as compared to the first six months of 2010. This increase resulted from stock grants issued to our outside directors valued at $980,000, labor from increased professional staff and higher travel costs and the addition of the hotel.

Consulting and professional fees increased by $490,388 in the first half of 2011 as compared to the first half of 2010. This increase resulted from costs associated with our June 2011 annual shareholder meeting and additional professional service fees for accounting, valuation and legal services.

Derivative changes in fair values decreased by $2,734,985 in the first six months of 2011, as compared to the same period in 2010. This decrease includes $1,518,477 resulting from eliminating the embedded beneficial conversion feature and warrant derivative liabilities in the fourth quarter of 2010, when we exchanged all our convertible debt for equity and also includes a decrease of $1,216,508 in the contingent dividend payment resulting primarily from a decrease in the underlying convertible preferred stock outstanding during the six months ended June 30, 2011 and the passage of time since the issuance of the convertible preferred stock in October 2010. There was no contingent dividend payment derivative liability outstanding during the six month period ended June 30, 2010.

Interest income totaled $54,050 during the first half of 2011 as compared to $0 for the same period of 2010. 2011 interest income originates from the cash and cash equivalents and available-for-sale securities that were purchased with the proceeds from the issuance of Series B Preferred Stock in the fourth quarter of 2010.

Interest expense decreased $1,896,202 in the first six months of 2011 as compared to the first six months of 2010. This decrease resulted from the extinguishment of our senior secured convertible indentures, promissory notes and associated interest obligations totaling $29.4 million during the fourth quarter of 2010.

Other, net decreased as a result of certain non-operating expenses not recurring in the first quarter of 2011 as compared to 2010.

The Company recorded a deferred tax benefit of $76,081 for the quarter ended June 30, 2011. After consideration of the tax allocation and the projected consolidated results and available taxable differences from the acquisition of Gold Hill Hotel, the Company determined it would be able to realize approximately $76,000 of tax benefits from its deferred tax assets. The Company did not recognize any other net tax benefits from its losses because full valuation allowances are provided on the Company’s net deferred tax assets.

### Liquidity and Capital Resources

On October 20, 2010, the Company raised approximately $35.75 million in gross proceeds (approximately $33.2 million, net of issuance costs) by issuing shares of a newly created Series B Preferred Stock to fund the Company’s business plan to accelerate mine development and production and enhance exploration and exchanging all of our $29.4 in senior secured convertible debentures, promissory notes and related interest obligations for shares of a newly created Series A Preferred Stock. This transaction also cured all defaults under the terms of the notes 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. Cash, cash equivalents and available-for-sale securities on hand at December 31, 2010, totaled $29.8 million. Cash, cash equivalents and available-for-sale securities on hand at June 30, 2011, totaled approximately $21.5 million. However, we did not generate operating cash flows and we have yet to realize an operating profit. Although the Company is still an exploration stage mine, it believes that its current positive working capital and cash investment positions are sufficient to fund the operations for the next 12 months. Management also believes it would be able to raise additional capital, if needed. Our recurring losses and negative cash flow from operations require ongoing assessment about our ability to continue as a going concern.

On October 20, 2010, the Company raised approximately $35.75 million. Through June 30, 2011, we have used approximately $11.1 million of those proceeds to advance our strategic operating plan. Specifically, we expended $6.0 for exploration and mine development, $2.0 million for mineral and other properties, $2.0 million for general corporate matters, including $1.1 million for legacy payables. We also spent $1.1 million towards the crushing facility and related production expenses. We also used $3.2 million for the direct transaction fees and related costs. Cash, cash equivalents and investments on hand at June 30, 2011, totaled approximately $21.5 million.

For the six-month period ended June 30, 2011, we used cash from operating activities of approximately $5.9 million compared to $3.7 million for the same period in 2010. Operating cash flow decreased approximately $2.2 million due to an increased net loss primarily as a result of increased 2011 drilling activities. We used cash in investing activities to purchase approximately $2.2 million of certificates of deposit and approximately $1.2 million to acquire additional mineral rights and properties, plant and equipment and $0.5 million to acquire the Gold Hill Hotel and related properties. We expended approximately $0.8 million in financing activities to primarily pay off early certain mortgage obligations.

During the remainder of 2011, the Company anticipates spending $5-6 million for the purchase or lease of capital items, including acquiring and installing the crushing facility, the expansion of the existing heap leach and Merrill Crowe processing facility and labs, and the purchase or lease of rolling stock for production. The Company also has near term production plans from an expanded starter mine plan for production that includes expanding the existing heap leach to a capacity of approximately 4 million. We are currently bonded for approximately $1.4 million for our obligation to reclaim our mine facility based on our prior reclamation plan. We are currently updating the reclamation plan and anticipate increasing the bond for these expansions by approximately $4-5 million in the latter half of 2011.

On July 1, 2011, the Company’s S-3 Registration Statement filed in June 2011 was declared effective by the Securities and Exchange Commission. The Registration Statement covers the offer and resale by certain stockholders of the Company of up to 6,325,691 shares of our common stock that are either presently outstanding or that are issuable upon the conversion of currently outstanding Series B Convertible Preferred Stock. The registration also allows the Company to issue common stock in payment of dividends on our presently issued and outstanding convertible preferred stock or for other offers or sale by us up to $25,000,000. The Company may offer and sell to the public any of such shares that are not issued in payment of such dividends. Such shares may be offered and sold from time to time, in one or more offerings, in amounts, at prices and on terms to be determined at the time of sale and set forth in an accompanying prospectus supplement and other offering materials.

On August 8, 2011, the Company entered into a Consent (the “Consent”) with the holders of the Series A-1 convertible preferred stock and DWC Resources, Inc. Pursuant to the terms of the Consent, the Company and the other parties agreed to extend the due dates by which a registration statement will be filed with respect to common shares underlying the Series A-1 convertible preferred stock, and waiving certain rights related thereto.

### Critical Accounting Policies and Estimates

A summary of our significant accounting policies and estimates is discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 2 of our Annual Report on Form 10-K for the year ended December 31, 2010. The preparation of the financial statements in accordance with U.S. generally accepted accounting principles requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities. Significant areas of uncertainty that require judgments, estimates and assumptions include the accounting for impairment of long-lived assets, reclamation and remediation obligations, stock-based compensation, derivative instruments, income taxes and other contingent liabilities. We use historical and other information that we consider to be relevant to make these judgments and estimates. However, actual results may differ from those estimates and assumptions that are used to prepare our financial statements.

## Controls and procedures

As filed, 5,062 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 certain procedures as of June 30, 2011 were not effective.

Description of Material Weaknesses at December 31, 2010

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.

Remediation Actions Relating to Material Weaknesses

Beginning in 2011, we initiated a quarterly process to review complex accounting matters with the Chief Executive Officer and the Chief Accounting Officer. We also engaged a third-party valuation specialist to calculate the fair value of all embedded derivatives and will engage other specialists as needed to address complex accounting matters. In addition, we have engaged a third-party consultant to review our financial reporting controls and procedures to ensure timely and accurate reporting. In July 2011, we hired an accountant to assist with the various monthly financial functions. In addition, we are actively recruiting for a controller which we hope to have in place prior to year end.

Conclusion

We believe the measures described above will facilitate remediation of the material weaknesses we have identified and will continue to strengthen our internal controls over financial reporting. We are committed to continually improving our internal control processes and will diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal controls over financial reporting, we may determine that additional measures are necessary to address control deficiencies. Moreover, we may decide to modify certain of the remediation measures described above.

### 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.*

Except as described above, there have been no changes during the quarter ended June 30, 2011 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, 1,116 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, 2010. For full comprehension of the risks affecting our Company, you are encouraged to review the risk factors set forth in our 2010 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 and our 2010 Annual Report on Form 10-K before making an investment decision. The risks referenced in these reports relating to our business, assets and operations 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.

Filed Aug 12, 2011.
Source: SEC EDGAR, the filing index for accession 0001144204-11-045842. Last ingested by Listed: Nov 4, 2026, 17:20 ET. No prices; not investment advice.