# Comstock Inc.: Form 10-Q for the period ended Jun 30, 2012

- Company: [Comstock Inc.](/companies/lode.md) (CIK 1120970)
- Form: 10-Q
- Filed: 2012-08-14
- Accepted by EDGAR: Aug 14, 2012, 14:30 ET
- Period: 2012-06-30
- Accession: 0001144204-12-045494
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1120970/000114420412045494/v318549_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1120970/000114420412045494/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-04-01 to 2012-06-30 | $182.5k | us-gaap:Revenues |
| Revenue | 6 months, 2012-01-01 to 2012-06-30 | $294.2k | us-gaap:Revenues |
| Operating income | 3 months, 2012-04-01 to 2012-06-30 | −$9.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2012-01-01 to 2012-06-30 | −$16.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-04-01 to 2012-06-30 | $52.7k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2012-01-01 to 2012-06-30 | $97.9k | us-gaap:InterestExpense |
| Net income | 3 months, 2012-04-01 to 2012-06-30 | −$9.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2012-01-01 to 2012-06-30 | −$16.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-04-01 to 2012-06-30 | −$0.26 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2012-01-01 to 2012-06-30 | −$0.50 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-04-01 to 2012-06-30 | −$0.26 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2012-01-01 to 2012-06-30 | −$0.50 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-04-01 to 2012-06-30 | 39,503,340 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2012-01-01 to 2012-06-30 | 37,136,759 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2012-01-01 to 2012-06-30 | −$10.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2012-01-01 to 2012-06-30 | $8.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-06-30 | $4.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-06-30 | $6.3m | us-gaap:AssetsCurrent |
| Total assets | at 2012-06-30 | $35.4m | us-gaap:Assets |
| Current liabilities | at 2012-06-30 | $10.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-06-30 | $16.5m | us-gaap:Liabilities |
| Long-term debt | at 2012-06-30 | $3.8m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-06-30 | $391.6k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2012-06-30 | $18.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 28,276 characters.

The following discussion provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. It should be read in conjunction with the condensed 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 ended December 31, 2011.

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 and six month periods ended June 30, 2012, 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 and Silver City mining districts (collectively, the “Comstock District”). The Comstock District is located within the western portion of the Basin and Range Province of Nevada, between Reno and Carson City. 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 its initial exploration projects into test mining production. The Company produced over 12,000 ounces of gold and over 53,000 ounces of silver in 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. The Company is expected to commence production in 2012.

The goal of our strategic plan is to deliver stockholder value by validating qualified resources (measured and indicated) and reserves (probable and proven) of at least 3,250,000 gold equivalent ounces in 2013, and commence commercial mining and processing operations with annual production rates of approximately 20,000 gold equivalent ounces.

Because of the Comstock District’s historical significance, the geology is well known and has been extensively studied by the Company, our advisors and many independent researchers. We believe that we have amassed the largest known library of historical and current data and detailed surface mapping of Comstock District properties. We use such data in conjunction with our drilling programs to expand our understanding of the Comstock District’s structural geology as well as its broader geological footprint.

The Company has 1,276 RC and core holes, representing over 373,000 feet of drill data in the Lucerne Resource Area. This data has furthered our knowledge of the Lucerne’s mineralization and provided the information used to develop the mine plan for commencing production on the west side of the Lucerne. We also have 323 RC and core holes, representing over 59,000 feet of drill data in our Dayton Resource Area. In 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.

Our Lucerne Resource Area is located in Storey County, Nevada, approximately three miles south of Virginia City and 30 miles southeast of Reno. Our Dayton Resource Area, the proposed site for our second commercial mining activities, is located in Lyon County, Nevada, approximately six miles south of Virginia City. Access to the properties is by State Route 342, a paved highway.

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 5,869 acres of mining claims in the Comstock District. The acreage is comprised of 1,336 acres of patented claims (private lands) and surface parcels (private lands) and 4,533 acres of unpatented mining claims, which the BLM administers.

### Exploration

The goal of our strategic plan includes validating qualified resources (measured and indicated) and reserves (probable and proven) of 3,250,000 gold equivalent ounces in 2013, requiring execution of planned exploration and development drilling. Mr. Larry Martin, our Vice President of Exploration and Mine Development and a Certified Professional Geologist (CPG), manages these drill programs.

In January 2012, the Company launched its 2012-2013, exploration drilling program, with the initial drilling activities in its Spring Valley Area. The program is anticipated to be the Company's largest drilling program, significantly exceeding the aggregate depths of the program from October 2010 through August 2011, which was comprised of 128,671 feet of reverse circulation drilling and 3,583 feet of core drilling. The Company anticipates about 300,000 feet of reverse circulation and 13,000 feet of core drilling, at a total cost of approximately $12 million. This drilling is scheduled to last approximately 21 months.

The Spring Valley drilling began January 24, 2012, and was completed March 22, 2012. The initial Spring Valley drilling was designed as a follow up of the Company’s successful 2009 Spring Valley discovery and to verify the continuity of the Dayton geological model southward beyond State Route 341 into this predominantly unexplored area. Two drill rigs were used in this initial phase, completing14 reverse circulation (RC) holes, totaling 10,235 feet, and two core holes totaling 1,627 feet.

Spring Valley assay results have been received for all of the RC drilling, showing that all 14 RC holes encountered intervals of significant mineralization (gold grades greater than 0.010 ounces per ton or silver grades greater than 0.100 ounces per ton, and length of at least ten feet). Of special interest is hole SV12-05, which encountered a total of 215 feet of significant mineralization in three zones: 90 feet grading 0.027 ounces of gold and 0.148 ounces of silver per ton, 30 feet grading 0.028 ounces of gold and 0.050 ounces of silver per ton, and 95 feet grading 0.041 ounces of gold and 0.093 ounces of silver per ton. Also of note are hole SV12-07, with 180 feet of significant mineralization in seven zones, and hole SV12-11, which encountered 100 feet of significant mineralization in six zones, including 35 feet grading 0.181 ounces of gold and 0.250 ounces of silver per ton.

Following the initial drilling in Spring Valley, the Company began definition drilling in the Lucerne mine in March 2012. The definition drilling in the Lucerne mine will provide required information to optimize and expand the mine plan and extend its life. The Lucerne mine, on patented mining claims west of State Route 342, is permitted and scheduled to begin production in 2012.

The 2012-2013 drilling program will then continue with three significant objectives: 1) infill drilling in the Dayton Resource Area 2) step-out and infill drilling in the east-side of the Lucerne Resource Area and 3) exploration drilling on high priority targets, including Spring Valley.

The infill drilling in the Dayton Resource Area will provide detailed information needed to create a preliminary mine plan for the proposed Dayton mine, to be developed in parallel with the expanded Lucerne mine. With that plan, the Company will complete a feasibility study, a prerequisite before commencing the permitting for the second mine.

The step-out drilling phase in the east-side of the Lucerne Resource Area will test the continuity of mineralization to the north and south, and at greater depths to the east. The infill-drilling phase will then provide the detailed information needed to develop an expanded mine plan for the Lucerne mine. That mine plan will position the Company to complete an economic feasibility study, a prerequisite before any permitting for the expanded mine becomes foreseeable.

### Production Outlook

Our strategic plan calls for a return to mine production during the third quarter of 2012. Some of the remaining objectives on the Company’s production schedule include hiring experienced processing staff and commissioning the expanded Merrill Crowe processing facility.

We have hired twenty-three of our planned additional thirty mine and processing staff. The first nine employees started in April 2012, augmenting the existing mine operations team, including all of our heavy equipment operators, plus quality and safety managers. The remaining seven employees scheduled to start in August 2012 represent Merrill Crowe, laboratory and metallurgical process staff.

During the quarter, we completed the expansion of the heap leach pad from its three existing cells to five cells. We also received and installed the new Merrill Crowe facility.

We have installed the crushing facility, including the jaw and cone crusher, the super stacker, conveyors and related components on site. In July 2012, we commissioned the crushing facility including successful calibration and testing. The crushing facility is now ready to begin production.

The sequence of the remaining activities includes; commencing the haulage of ore from the mine to the crushing facility, commissioning the Merrill Crowe processing facility, and crushing and stacking material. Once material is stacked, we will commence processing with an expectation of pouring doré within sixty days of stacking the first material.

The Company has completed a financial analysis for the Lucerne mine and anticipates annual operating expenses, including mining, processing, royalties and mine administration costs of approximately $13 million per annum, with a production schedule that commences processing at a rate of one million tons per annum. The Company anticipates temporary, higher haulage costs of $1.5 million for the six months of operations, associated with hauling on an alternative route until a new Right of Way permit is issued to us by the BLM. These mining, processing and related costs do not include corporate administration or other general and administrative costs, nor do they include exploration and mine development costs.

### Land and Mineral Right Acquisitions

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. The following acquisitions were completed in 2012.

On January 4, 2012, we completed the purchase of four patented lode claims totaling 95 acres known as the “Dayton”. These mineral claims are contiguous with our Spring Valley mineral holdings. The purchase price was $3,000,000. The purchase included a $500,000 upfront payment. We issued a $2,500,000, 0% interest note to finance the balance of the purchase price. The note is payable in equal quarterly installments of $50,000 increasing to $125,000 in October 2013 with a balloon payment for the remaining principle due in five years. At June 30, 2012, the note payable was net of imputed interest of $353,130.

On February 15, 2012, we purchased a property in Storey County, Nevada near existing claims. The purchase price was $25,000 paid in cash.

On February 22, 2012, we completed the purchase of the Diez Senores property, adjacent to our Dayton properties, which includes 100% of surface rights and 50% of mineral rights on 18 patented acres in Lyon County, Nevada. The purchase price was $237,500 paid in cash.

On March 9, 2012, we completed the purchase of the 38 acres known as the Railroad and Gold property. The purchase price was $400,000 comprised of $160,000 paid upfront ($60,000 in cash and $100,000 in Company stock) and a $240,000 note at 4.5% interest per annum maturing in three years.

In April 2012, we purchased the White House property. The purchase price consisted of a $100,000 cash payment and the issuance of a $300,000 note payable. The note bears interest at 4.5% and is payable in monthly installments of $1,520 with a final remaining principal payment due on April 1, 2017. The note is secured by a first deed of trust on the land.

In the six months ended June 30, 2012, we purchased additional property, plant and equipment and mineral rights and properties of which $150,900 was paid via the issuance of debt obligations.

### Comparative Financial Information

Below we set forth a summary of comparative financial information for the three and six months ended June 30, 2012 and 2011.

#### Three Months Ended June 30, 2012 and June 30, 2011:

|  | 2012 | 2011 | Difference |
| --- | ---: | ---: | ---: |
| Revenue - Hotel | $182,523 | $120,175 | $62,348 |
| Hotel operating costs | 195,972 | 99,995 | 95,977 |
| Depreciation and amortization | 408,360 | 42,324 | 366,036 |
| Reclamation, exploration and test mining expense | 5,125,426 | 3,039,582 | 2,085,844 |
| General and administration | 2,723,697 | 1,604,258 | 1,119,439 |
| Consulting and professional fees | 782,290 | 648,075 | 134,215 |
| Loss from operations | 9,053,222 | 5,314,059 | 3,739,163 |
| OTHER INCOME (EXPENSE) |  |  |  |
| Change in fair value of contingent dividend payment | 117,900 | 486,491 | (368,591) |
| Interest expense | (52,738) | (11,785) | (40,953) |
| Interest income | 7,714 | 14,846 | (7,132) |
| Income tax benefit | - | 76,081 | (76,081) |
| Net loss | $8,980,346 | $4,748,426 | $4,231,920 |

On May 1, 2011, we acquired the historic Gold Hill Hotel and five related cottages. The hotel revenues from the cottages, hotel rooms, restaurant and bar increased $62,348 for the three months ended June 30, 2012, compared to the same quarter in 2011. The increase is the result of the hotel being owned for only two months of the quarter in 2011. We did not produce or sell any gold or silver during the three months ended June 30, 2012 and June 30, 2011.

Hotel operating costs increased $95,977 for the quarter ended June 30, 2012, compared with the same quarter in 2011. The increase is primarily due to the hotel being owned for the full three month period in 2012 compared to being owned for only two months of the quarter in 2011. The hotel operating costs represents costs incurred for providing room, restaurant and bar services at the hotel.

Depreciation and amortization increased $366,036 for the quarter ended June 30, 2012, compared to the same quarter in 2011. The increase is primarily related to the increase in depreciable building and mining equipment.

Reclamation, exploration and test mining expenses increased by $2,085,843 for the quarter ended June 30, 2012, compared to the same quarter in 2011. The increase is primarily the result of $853,070 associated with required soil sampling and $550,933 expense related to stock-based compensation expense. The remainder of the increase is associated with permitting and related mine development costs for our Lucerne Resource Area in the first quarter of 2012, including higher labor costs related to the expansion of the geological, mine development and mining staff.

General and administrative expenses increased by approximately $1,119,439 for the quarter ended June 30, 2012, compared to the same quarter in 2011. The increase is primarily the result of $988,206 expense related to stock-based compensation expense and, to a lesser extent, increases in director’s fees, travel, insurance and other administrative costs.

Consulting and professional fees increased by $134,215 for the quarter ended June 30, 2012, compared to the same quarter in 2011. This increase results primarily from increased legal fees associated with permitting and related appeals, preparation of our sampling and analysis plan and related environmental compliance and, to a lesser extent, fees associated with internal control compliance and related business process improvement activities.

Change in fair value of contingent dividend payment decreased $368,591 for the quarter ended June 30, 2012, compared to the same quarter in 2011. This decrease resulted from the change in the fair value calculation of the contingent dividend payment derivative liability associated with our convertible preferred stock. The change in fair value resulted primarily from the shorter time remaining on the contingent dividend feature and from a decrease in outstanding convertible preferred shares with this contingent dividend feature, partially offset by the increase in the value of common stock.

Interest expense increased by $40,953 for the quarter ended June 30, 2012, compared to the same quarter in 2011. This increase resulted from an increase in promissory notes issued to acquire additional properties.

Interest income decreased $7,132 for the quarter ended June 30, 2012, compared to the same quarter in 2011. This decrease resulted from an overall decrease in income generating cash and cash equivalents, and available-for-sale securities during the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

#### Six Months Ended June 30, 2012 and June 30, 2011:

|  | 2012 | 2011 | Difference |
| --- | ---: | ---: | ---: |
| Revenue - Hotel | $294,245 | $120,175 | $174,070 |
| Hotel operating costs | 348,023 | 99,995 | 248,028 |
| Depreciation and amortization | 589,013 | 67,282 | 521,731 |
| Reclamation, exploration and test mining expense | 9,714,278 | 5,235,489 | 4,478,789 |
| General and administration | 4,918,218 | 2,294,524 | 2,623,694 |
| Consulting and professional fees | 1,438,750 | 874,237 | 564,513 |
| Loss from operations | 16,714,037 | 8,451,352 | 8,262,685 |
| OTHER INCOME (EXPENSE) |  |  |  |
| Change in fair value of contingent dividend payment | 484,700 | 1,216,508 | (731,808) |
| Interest expense | (97,948) | (24,375) | (73,573) |
| Interest income | 14,342 | 54,050 | (39,708) |
| Income tax benefit | - | 76,081 | (76,081) |
| Net loss | $16,312,943 | $7,129,088 | $9,183,855 |

On May 1, 2011, we acquired the historic Gold Hill Hotel and five related cottages. The hotel revenues from the cottages, hotel rooms, restaurant and bar increased $174,070 for the six months ended June 30, 2012, compared to the same period in 2011. The increase is the result of the hotel being owned for only two months of the six month period in 2011. We did not produce or sell any gold or silver during the six months ended June 30, 2012 and June 30, 2011.

Hotel operating costs increased $248,028 for the six months ended June 30, 2012, compared with the same period in 2011. The increase is primarily due to the hotel being owned for the full six month period in 2012 compared to being owned for only two months of the six month period in 2011. The hotel operating costs represents costs incurred for providing room, restaurant and bar services at the hotel.

Depreciation and amortization increased $521,731 for the six months ended June 30, 2012, compared to the same period in 2011. The increase is primarily related to the increase in depreciable building and mining equipment and, to a lesser extent, representing a full six months depreciation for the hotel, as compared to two months for the comparable period in 2011.

Reclamation, exploration and test mining expenses increased by $4,478,789 for the six months ended June 30, 2012, compared to the same quarter in 2011. The increase is primarily the result of $1,741,854 associated with required soil sampling, $1,079,707 expense related to stock-based compensation expense and $1,282,484 related to higher labor resulting from the expansion of the geological, mine development and mining staff. The remainder of the increase is associated with permitting and related mine development costs for our Lucerne Resource Area.

General and administrative expenses increased by approximately $2,623,694 for the six months ended June 30, 2012, compared to the same quarter in 2011. The increase is primarily the result of $2,087,568 expense related to stock-based compensation expense and, to a lesser extent, increases in director’s fees, travel, insurance and other administrative costs.

Consulting and professional fees increased by $564,513 for the six months ended June 30, 2012, compared to the same period in 2011. This increase results primarily from increased legal fees associated with permitting and related appeals, preparation of our sampling and analysis plan and related environmental compliance and, to a lesser extent, fees associated with internal control compliance and related business process improvement activities.

Change in fair value of contingent dividend payment decreased $731,808 for the six months ended June 30, 2012, compared to the same period in 2011. This decrease resulted from the change in the fair value calculation of the contingent dividend payment derivative liability associated with our convertible preferred stock. The change in fair value resulted primarily from the shorter time remaining on the contingent dividend feature and from a decrease in outstanding convertible preferred shares with this contingent dividend feature, partially offset by the increase in the value of common stock.

Interest expense increased by $73,573 for the six months ended June 30, 2012, compared to the same period in 2011. This increase resulted from an increase in promissory notes issued to acquire additional properties.

Interest income decreased $39,708 for the six months ended June 30, 2012, compared to the same period in 2011. This decrease resulted from an overall decrease in income generating cash and cash equivalents, and available-for-sale securities during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

### Liquidity and Capital Resources

Cash, cash equivalents and available-for-sale securities on hand at June 30, 2012, totaled $5,307,032.

For the six months ended June 30, 2012, we used cash from operating activities of approximately $10.1 million compared to $5.9 million in the same period of 2011. The increased use of operating cash flow of approximately $4.2 million was primarily as a result of increased use of cash for exploration and mine development expenses of $4.4 million, general administrative expenses of $0.4 million and, consulting and professional fees of $0.6, partially offset by a $1.3 million increase in cash provided in operating activities from changes in working capital.

Net cash used in investing activities included $7.4 million for the purchase of mineral rights and properties, plant and equipment, including approximately $1.2 million for mining vehicles and equipment, $2.3 million for processing equipment $1.7 million for land and buildings and $2.2 million for work in process primarily related to processing and laboratory equipment. Additionally, the Company paid approximately $0.7 million to increase its reclamation bond deposit.

The Company has recurring net losses from operations, an accumulated deficit of $143 million as of June 30, 2012, and has had no significant mining revenues since 2006. For the six months ended June 30, 2012, the Company incurred a net loss of $16,312,944 and had negative working capital (i.e. current liabilities in excess of current assets) of $3,758,994.

#### Surety Bond

In July 2012, the Company placed a $4.67 million reclamation surety bond, through the Lexon Surety Group (“Lexon”) with the State of Nevada's Bureau of Mining Regulation Reclamation (“BMRR”). The bond insures for the estimated costs required to safely reclaim the natural environment to the regulatory standards established by the State of Nevada's Division of Environmental Protection with the purposes of ensuring public safety, protecting the waters of the state, and providing for post mining land use.

#### Working Capital and Equipment Financings

In July 2012, the Company entered into a Master Loan and Security Agreement and other arrangements with Caterpillar Financial Services Corporation (the “Cat Equipment Facility”) pursuant to which the Company may borrow up to $5 million secured by certain equipment of the Company. On July 30, 2012, the Company borrowed $2 million under the Cat Equipment Facility. The Cat Equipment Facility will bear interest at a rate of 5.85% with a term of 30 months except in the event of a default, including the occurrence of certain liquidity events, the principal balance will bear interest at a rate of the lesser of 18% per annum or the highest applicable rate allowed by law.

In July 2012, the Company also entered into an agreement with Resource Income Fund ("RIF"), with Auramet Trading, LLC ("Auramet") acting as gold agent, pursuant to which the Company may borrow up to $5 million outstanding at any one time. The Company's obligations under the agreement are secured by a security interest in all personal property of the Company and the Subsidiary and certain real estate owned by the Company within the Company's starter mine (the "Starter Mine Patents"). The proceeds will be used for working capital and capital expenditures associated with the commencement of production. The proceeds will be repaid through the delivery of 3,720 ounces of gold payable in 12 semi-monthly deliveries of 310 ounces each beginning February 2013 and ending July 2013, or December 2013, if any amounts are redrawn under the agreement. The agreement is non-interest bearing except in the event of a default, whence the balance would then bear interest at the lesser rate of 15% per annum or the highest applicable rate allowed by law.

The Company also granted to RIF a call option to purchase 5,950 ounces of gold at a strike price of US$2,000 per ounce, exercisable on, and expiring on, July 24, 2013. In connection with entry into the agreement, the Company and the Subsidiary have also entered into a purchase and sale agreement with Auramet, and the Company entered into a trading agreement the terms of which will govern all transactions of metals between Auramet and the Company. The Company drew down $5 million under the agreement in July 2012.

During the six month period ended June 30, 2012, preferred shareholders converted 260 shares of Series B convertible preferred stock into 157,575 shares of common stock. Subsequent to June 30, 2012, through August 13, 2012, preferred shareholders converted 501.09 shares of Series A-2 convertible preferred stock into 769,729 shares of common stock.

On January 1, 2012 and July 1, 2012, the Company declared and issued 1,220,003 and 927,984 shares, respectively of common stock in payment of dividends on the convertible preferred stock.

We did not generate revenues or operating cash flows from mining. Revenues and operating cash flows from the hospitality segment were minimal. In August 2012, the Company began hauling ore from its Lucerne mine to its process area in American Flat. The Company's operating expenses are expected to significantly increase as it seeks to transition from initial start-up mode to future production. In addition, the Company will need to fund approximately $3.1 million for the remaining capital expenditures required for commencing production and for debt service requirements associated with existing credit facilities Although the Company estimates that the first gold and silver pour from this ore will occur in September 2012, no assurances can be given as to timing or future results, given the inherent speculative nature of start-up gold mining operations. Assuming that planned future revenues meet management's expectations, the Company believes that it would have sufficient liquidity to fund operations for the next twelve months through the use of current cash resources and existing financing arrangements. However, in the event that production results are delayed or otherwise fall below management's expectations, the Company would be required to obtain additional debt or equity financing to sustain operations, and the availability of such financing on acceptable terms, if at all, cannot be assured. Management believes it would be able to raise additional capital, if needed. Our recurring losses and negative cash flow from operations require ongoing assessment regarding our ability to continue as a going concern.

### Critical Accounting Policies And Estimates

There have not been any material changes to the critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

## Controls and procedures

As filed, 1,813 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 reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Exchange Act and SEC’s rules, 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. 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 June 30, 2012, our disclosure controls and procedures were effective.

### B. Internal Control over Financial Reporting

No change in our internal control over financial reporting, as such term is defined in Exchange Act Rule 13(a)-15 occurred during the fiscal quarter ended June 30, 2012, that materially affected or is reasonably likely to materially affect our internal control over financial reporting.

## Risk factors

As filed, 153 characters.

There have not been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Filed Aug 14, 2012.
Source: SEC EDGAR, the filing index for accession 0001144204-12-045494. Last ingested by Listed: Nov 4, 2026, 17:20 ET. No prices; not investment advice.