# Comstock Inc.: Form 10-Q for the period ended Sep 30, 2013

- Company: [Comstock Inc.](/companies/lode.md) (CIK 1120970)
- Form: 10-Q
- Filed: 2013-10-31
- Accepted by EDGAR: Oct 30, 2013, 18:01 ET
- Period: 2013-09-30
- Accession: 0001144204-13-057798
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1120970/000114420413057798/v357902_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1120970/000114420413057798/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-07-01 to 2013-09-30 | $6.8m | us-gaap:Revenues |
| Revenue | 9 months, 2013-01-01 to 2013-09-30 | $17.6m | us-gaap:Revenues |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | −$4.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2013-01-01 to 2013-09-30 | −$15.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-07-01 to 2013-09-30 | $100.9k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2013-01-01 to 2013-09-30 | $792.8k | us-gaap:InterestExpense |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | −$4.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-01-01 to 2013-09-30 | −$15.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-07-01 to 2013-09-30 | −$0.09 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2013-01-01 to 2013-09-30 | −$0.33 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-07-01 to 2013-09-30 | −$0.09 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2013-01-01 to 2013-09-30 | −$0.33 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-07-01 to 2013-09-30 | 63,981,943 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2013-01-01 to 2013-09-30 | 57,742,461 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2013-01-01 to 2013-09-30 | −$11.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2013-07-01 to 2013-09-30 | $6.6m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2013-01-01 to 2013-09-30 | $2.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-09-30 | $5.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-09-30 | $11.2m | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $46.5m | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $12.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-09-30 | $24.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2013-09-30 | $21.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,613 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 Form 10-Q and our Annual Report on Form 10-K as of and for the fiscal year ended December 31, 2012.

The following discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of September 30, 2013, and for the three and nine month periods ended September 30, 2013, as well as our future results.

### Overview

The Company is a producing 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 historic Comstock District, secured permits, built an infrastructure and brought exploration projects into production.

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 have expanded our understanding of the geology of the project area through vigorous surface mapping and drill hole logging. The volume of geologic data is immense, and thus far the reliability has been excellent, particularly in the various Lucerne Mine and Resource Areas. We have amassed a large library of historical and current geological and other data and detailed surface mapping of Comstock District properties. As we continue our detailed exploration mapping, close spaced drilling and initial mine production, new details emerge that significantly influence our understanding of the local and regional geology.

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 is located in Lyon County, Nevada, approximately nine miles south of Virginia City. Access to the properties is by State Route 342, a paved highway.

The near term goal of our business plan is to deliver stockholder value by: 1) validating qualified resources (measured and indicated) and reserves (proven and probable) of at least 3,250,000 gold equivalent ounces from our first two resource areas, Lucerne and Dayton; 2) achieving initial commercial mining and processing operations in the Lucerne Mine with annual production rates of approximately 20,000 gold equivalent ounces; and 3) growing production through the commercial development and expansions of both the Lucerne and Dayton Resource Areas.

As part of this plan, the Company has developed the exploration and development-drilling programs intended to validate and expand mine design for the existing Lucerne Mine and to validate a mine design for the Dayton Resource Area. The same plan is designed to identify and validate qualified resources and reserves, in just these two resource areas, containing at least 3,250,000 gold equivalent ounces. The Company has already validated measured and indicated resources in the Lucerne and Dayton Areas containing over 2,000,000 gold equivalent ounces.

We intend to continue to acquire additional properties in the Comstock District, expanding our footprint and creating opportunities for exploration and mining. The Company owns or controls approximately 5,900 acres of mining claims and parcels in the Comstock and Silver City Districts. The acreage is comprised of approximately 1,350 acres of patented claims (private lands) and surface parcels (private lands) and approximately 4,550 acres of unpatented mining claims, which the Bureau of Land Management (“BLM”) administers.

### Current Projects

The Company’s headquarters, mine operations and heap leach processing facility are in Storey County, Nevada, at 1200 American Flat Road, approximately three miles south of Virginia City, Nevada and 30 miles southeast of Reno, Nevada. The Company has focused development to date on the Lucerne Resource Area (including the east-side target within this area), the Dayton Resource Area and the Spring Valley exploration target. We also plan on focusing future exploration on the Northern Extension, Northern Targets, and Occidental Target Areas subsequent to the exploration and development of Lucerne, Dayton and Spring Valley. Production is currently active in the Lucerne Mine.

#### Exploration

The Comstock Mining district is a well-known, historic mining district, with over 150 years of production-based history. We have access to extensive reports and maps on various properties in the district, but to-date, we have only conducted detailed geologic exploration and resource modeling on approximately 10% of our approximate 5,900 acre land position. We plan on conducting ongoing exploration programs to locate and test surface mineral targets as well as deeper underground bonanza targets by using historic compilation, geological mapping, geochemical and geophysical investigations and drilling. The goal of our strategic plan includes validating qualified resources (measured and indicated) and reserves (proven and probable) of 3,250,000 gold equivalent ounces, from our first two resource areas, Lucerne and Dayton, requiring execution of planned exploration and development drilling. Overall, the Company has already validated measured and indicated resources in the Lucerne and Dayton areas containing over 2,000,000 gold equivalent ounces. Mr. Larry Martin, our Vice President of Exploration and Mine Development and a Certified Professional Geologist (CPG), manages these drill programs.

The Lucerne Resource Area has been the focus of the Company’s exploration and development efforts since 2007. It includes the previously mined Billie the Kid, Hartford and Lucerne mining claims, and extends northeasterly to the area of the historic Woodville bonanza, and north to the historic Justice and Keystone mines, plus the extension of these areas down-dip to the east. The Company has the key mining permits required and has resumed mining in the Billie the Kid, Hartford and Lucerne west-side mining claims. The Lucerne Resource Area is approximately 5,000 feet long, with an average width of 600 feet, representing less than three percent of the land holdings controlled by the Company. The east-side target within this area ranks as one of the Company’s top exploration and potential mine production expansion targets, including the recently discovered structurally bounded, wedge-like, zone hosting significant gold and silver. We call this structural intersection the ‘Chute Zone’. We believe that the structural intersection and geometric shape of the Chute Zone is similar to highly mineralized zones that were historically mined in the Comstock District as bonanzas. There were 33 mined bonanza ore zones located along the northern Comstock mineral belt.

The discovery of the Chute Zone is the result of drilling, analysis and interpretation by the Company’s geological team. The Company hopes to gain a deeper understanding of the controlling geologic attributes of the Chute Zone, allowing for even more efficient identification of such structures in future exploration programs along the Comstock. Based upon the structural controls of the higher-grade Chute Zone, the Company has recognized structural similarities in higher-grade zones at Dayton and other mineralized areas within the Company’s property position. Expectations are high that further drilling and development will allow for important extensions to these higher-grade zones. The Company is currently assessing how best to develop and ultimately mine this mineralized material, as it represents the first substantial opportunity for an underground mining development by the Company.

We believe that our consolidation of the Comstock District is substantial and has provided us with opportunities to utilize the historical information available to identify drilling targets efficiently and with significant potential. The next phases of our exploration, discovery and development program will continue with three significant intermediate objectives: 1) step-out, development and infill drilling in the east-side of the Lucerne Resource Area, including the Chute Zone, 2) step-out, development and infill drilling in the Dayton 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 mine plan for the proposed Dayton mine, to be developed in parallel with the expanded Lucerne mine.

The step-out, development and infill drilling phases 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, including the Chute Zone. The infill-drilling phase will then provide the detailed information needed to develop an expanded mine plan for the Lucerne mine.

#### Production

The Company has recently transitioned into production in the Lucerne Mine and ramped up to the targeted 20,000 gold-equivalent-ounce annual production rate and exceeded that rate during the second and third quarters of 2013, averaging over 400 gold-equivalent ounces per week for the quarter ended September 30, 2013, and over 500 ounces per week in September. This intermediate target was exceeded and sustained by maximizing existing permitting capacity constraints around our existing heap leach and processing facility. The Company’s existing heap leach is currently being expanded based on the recent receipt of all required permits and expects to increase production rates during the fourth quarter of 2013, based on this permitted expansion.

For the Lucerne Mine expansion, the Company filed the following permit modifications during the first half of the year: 1) an expanded Water Pollution Control Permit; 2) a proposed Engineering Design Change (EDR) for the construction of storm water diversion structures around our heap leach processing facility (both with the Nevada Division of Environmental Protection); and 3) an expanded Special Use Permit with Storey County, Nevada, that, all together, allow for expanded capacity and processing rates of our heap leach processing facility. The EDR Permit and Special Use Permit were approved in September and July, 2013, respectively, and the Water Pollution Control Permit was approved in October 2013. These approvals will now enable us to expand our heap leach pad, scheduled for completion in November, and expanded rates of production for the Lucerne Mine, starting in the fourth quarter of 2013.

During the second and third quarters of 2013, we completed the ramp up and stabilization activities of the production system, including significant improvements to the metal extraction processes, particularly the Merrill Crowe facility. We invested approximately $1.4 million for certain debottlenecking actions associated with pump and pipe capacities, ensuring the Merrill Crowe and heap leach facilities could operate at fluid processing rates of up to 1,000 gallons per minute. The previously constrained metal extraction processes contributed to the relatively lower shipments during the first quarter. Metal sales for the nine months ended September 30, 2013 totaled $19.8 million, with gold revenues of $17.1 million. We also sold $2.7 million of silver. Metal sales for the three months ended September 30, 2013 totaled $7.9 million, with gold revenues of $6.6 million. We also sold $1.3 million of silver in the third quarter. Silver is accounted for as a by-product credit in costs applicable to mining revenue for financial reporting purposes. For the three months ended September 30, 2013, the Company crushed and stacked over 288,000 dry tons of mineralized material and shipped 5,214 ounces of gold and 59,731 ounces of silver. Gold grades onto the pad averaged 0.025 ounces per ton in the third quarter. Material placed on the heap leach pad remains under solution, although not continuously, until the target recovery rates are achieved.

The Company continues ramping up its production and exceeded its targeted production rate of 400 ounces per week, initially targeted for the end of April, and has averaged over 400 gold-equivalent ounces per week, for the three months ended September 30, 2013, and over 500 per week in September. The Company aims to continuously adjust its operations to improve grade, maximize yields and increase tons crushed and stacked.

Bullion prices stabilized during the third quarter of 2013. Throughout the first nine months of 2013, the Company realized an average price of $1,387.44 price per ounce of gold and a $22.55 average sales price per ounce of silver. In comparison, commodity market prices in the first nine months of 2013 averaged $1,457.22 per ounce of gold and $24.85 per ounce of silver.

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

### Operating Costs

During the first nine months of 2013, actual Lucerne Mine costs applicable to mining revenue were approximately $21.1 million, $18.4 million net of silver credits. Cost applicable to mining revenue include mining and processing labor, maintenance, drilling and blasting and assaying costs associated with higher production rates and higher absorbed inventory costing associated with costs incurred in advance of achieving the targeted production rate, including the planned increases in the fourth quarter of 2013.

Costs applicable to mining revenue for the first nine months of 2013 include $1 million of higher hauling costs, including the previously incurred redundancy associated with our inability to use an existing haul road, for most of the first quarter that crosses Lot 51 and the transition costs associated with renting new haul vehicles while transitioning out of the existing, temporary vehicles. Costs applicable to mining revenue also include $2.4 million of depreciation and a $1 million write down of inventory to market value for the nine months ended September 30, 2013. Management believes the system is now capable of operating at twice the production rates of the first nine months and plans on ramping up operations to those higher levels now that final permits have been approved.

During the second and third quarters, once production had stabilized, the Company focused on stream-lining the organization and reducing general, administrative, consulting and other related costs. The Company is also focused on reducing costs applicable to mining and leveraging the existing fixed operating expenses for the production of higher ounces in the second half of 2013, as compared to the first half of 2013. Costs applicable to mining per ounces added to inventory during the quarter are lower than the previous quarter by approximately 12%.

### 2013 Outlook

The Company’s current financial analysis for the Lucerne Mine anticipates annual operating expenses, including all mining, processing, mine administration and support costs of approximately $26 - $28 million per annum with an anticipated production schedule currently processing at the rate of one million tons per annum, but also includes plans for ramping up to over 2 million tons per annum run rate. The Company currently anticipates production rates beyond the 400 gold-equivalent ounces per week in the next three months, and targeting 40,000 gold equivalent ounces for 2014.

#### Recent Developments

From October 1, 2013 through October 25, 2013, preferred shareholders converted 91 shares of convertible preferred stock into 55,151 common shares.

In October 2013, the Company issued 862.5 shares of Series A1 convertible preferred stock, to Northern Comstock LLC (“Northern Comstock”), a related party of the Company, in prepayment of an annual mineral rights lease pursuant to the Northern Comstock LLC operating agreement.

On August 16, 2013, the Company received a “stop order” from the Nevada Division of Environmental Protection (NDEP) with respect to the use of certain crushing and transfer systems of the Company because emissions controls, although effective, were not deemed to be compliant with an applicable permit. The Company was able to remedy the controls and the stop order was lifted on August 23, 2013. The Company did not experience any material delays or work stoppages as a result of the stop order, and therefore revenues were not materially affected.

As a follow up and in accordance with the Nevada Administrative Code, on September 6, 2013, NDEP requested that the Company submit certain information and documentation to NDEP to support NDEP’s determination as to the compliance of the Company’s facility with the conditions of the operating permit. The Company provided all such requested information and documentation on a timely basis in accordance with the request. The Company believes that it is in full compliance with its permits granted by NDEP and will diligently respond to further requests from NDEP, if any.

### Land and Mineral Right Acquisitions

We did not have any material land or mineral right acquisitions during the nine months ended September 30, 2013, and through the date of this report. We will continue to increase our footprint in the Comstock District through strategic acquisitions.

### Comparative Financial Information

Since the Company just recently commenced production, and correspondingly, did not recognize revenues from gold and silver production and sales until late fiscal 2012, certain results associated with the three and nine month periods ended September 30, 2013 may not be comparable with the three and nine months ended September 30, 2012. For these line items we have provided additional analysis as noted below.

Additionally, in periods prior to the commencement of our mining operations in late 2012, and while we increased production in the first half of 2013, the Company reported two operating segments; mining and hospitality. As we continue to focus on the increased productivity of our mining operations, our hospitality segment has become immaterial to our consolidated financial position, results of operations, and cash flows for three and nine months ended September 30, 2013.

The comparative financial information is reflected in the following table:

#### Three Months Ended:

|  | September 30, 2013 | September 30, 2012 | Change |
| --- | ---: | ---: | ---: |
| Revenue - Mining | $6,607,132 | $- | $6,607,132 |
| Revenue - Hospitality | 211,646 | 182,792 | $28,854 |
| Cost applicable to mining revenue | 6,371,224 | - | 6,371,224 |
| Hospitality operating costs | 313,653 | 232,875 | 80,778 |
| Reclamation and exploration | 1,839,832 | 4,384,530 | (2,544,698) |
| General and administrative | 2,348,857 | 2,494,662 | (145,805) |
| Consulting and professional fees | 387,957 | 876,603 | (488,646) |
| Loss from operations | (4,442,745) | (7,805,878) | (3,363,133) |
| OTHER INCOME (EXPENSE) |  |  |  |
| Change in fair value of derivatives | 25,080 | (884,556) | 909,636 |
| Interest expense | (100,896) | (332,286) | (231,390) |
| Interest income | 301 | 28,541 | (28,240) |
| Net loss | $(4,518,260) | $(8,994,179) | $(4,475,919) |

Mining revenue in the third quarter of 2013 was $6.6 million. We also produced and sold $1.3 million worth of silver in the third quarter of 2013. Silver is accounted for as a by-product credit in costs applicable to mining revenue for financial reporting purposes. We recorded our first mining revenue from gold sales in October 2012, and accordingly, we did not generate mining revenue during the three months ended September 30, 2012. The decrease from the second quarter resulted from decreases in the realized price of gold partially off-set by increased production of approximately 300 ounces. In addition, we entered into gold forward derivative contracts for future gold sales of 2,400 ounces resulting in the recognition of a gain on the change in the fair value of the derivatives of approximately $59 thousand through September 30, 2013.

During the first nine months of 2013, we completed the ramp up and stabilization activities of the production system, including improvements to the hauling, crushing and metal extraction processes.

Throughout the three months ended September 30, 2013, the Company realized an average price of $1,291.88 price per ounce of gold and a $21.23 average sales price per ounce of silver. In comparison, commodity market prices in the third quarter of 2013 averaged $1,327.54 per ounce of gold and $21.37 per ounce of silver. We intend to manage fluctuations in gold prices through the on-going use of gold forward derivative contracts and future gains and losses will be recognized based on our effectiveness.

The Company continues ramping up its production and exceeded its targeted production rate of 400 ounces per week, initially targeted for the end of April, 2013 and has averaged over 400 gold-equivalent ounces for the three months ended September 30, 2013. The Company aims to continuously adjust its operations to improve grade, maximize yields and increase tons crushed and stacked.

Costs applicable to mining revenue were approximately $6.4 million. The Company was not producing during the comparable prior period quarter. The decreases from the second quarter resulted from a decrease in hauling costs, primarily from the elimination of redundant costs associated with the temporary use of longer haul routes, and not incurring additional inventory write-downs.

Hospitality revenue from the cottages, hotel rooms, restaurant and bar was stable for the three months ended September 30, 2013, compared to the same quarter in 2012. Consistent with current economic conditions and seasonal variations experienced during these periods, we do not expect material changes in our hospitality operational results. We further expect our hospitality results to become less material to our overall operations as we continue to execute our mine development plans.

Hospitality operating costs increased approximately 35% to $313,653 for the quarter ended September 30, 2013 compared with the three months ended September 30, 2012. The hotel operating costs represents costs incurred for providing room, banquet, restaurant and bar services at the hotel. The increase was attributable to improvements and higher maintenance plus higher labor and food costs in the quarter.

Reclamation and exploration expenses decreased by $2.5 million or approximately 58% compared to the three-month period ended September 30, 2012. The decrease is primarily the result of the completion of our 2012 drilling program that commenced in January 2012 and completed in December 2012. Exploration activities in the third quarter primarily represented geological support, grade and metallurgical analysis and assessment.

General and administrative expenses, inclusive of professional and consulting fees, decreased by $0.6 million or approximately 19% compared to the period ended September 30, 2012. The decrease is primarily the result of lower stock-based compensation expense and lower legal and administrative costs.

During the three months ended September 30, 2013, our derivative liabilities expired resulting in a recognized a gain of $25,080.

Interest expense decreased by $231 thousand, or approximately 70% for the three months ended September 30, 2013 from the three months ended September 30, 2012, primarily due to reductions in debt obligations outstanding for the 2012 equipment financing (Caterpillar Equipment Facility) and revolving debt facility (Auramet Facility). The Auramet Facility was settled full in the second quarter of 2013. During the three months ended September 30, 2013, we reduced our outstanding debt balance by $0.5 million while incurring additional equipment financing obligations of approximately $4.3 million. We anticipate continued reductions in our debt balances through year end, effectively reducing our prospective borrowing costs.

#### Nine Months Ended:

|  | September 30, 2013 | September 30, 2012 | Change |
| --- | ---: | ---: | ---: |
| Revenue - Mining | $17,086,569 | $- | $17,086,569 |
| Revenue - Hospitality | 507,883 | 477,037 | 30,846 |
| Costs applicable to mining revenue | 18,441,139 | - | 18,441,139 |
| Hospitality operating costs | 773,577 | 633,705 | 139,872 |
| Reclamation and exploration | 6,265,644 | 14,629,761 | (8,364,117) |
| General and administrative | 6,587,151 | 7,412,880 | (825,729) |
| Consulting and professional fees | 1,372,802 | 2,320,606 | (947,804) |
| Loss from operations | (15,845,861) | (24,519,915) | (8,674,054) |
| OTHER INCOME (EXPENSE) |  |  |  |
| Change in fair value of derivatives | 544,681 | (399,856) | 944,537 |
| Interest expense | (792,842) | (430,234) | 362,608 |
| Interest income | 1,870 | 42,883 | (41,013) |
| Gain on settlement of debt obligations | 286,535 | - | 286,535 |
| Net loss | $(15,805,617) | $(25,307,122) | $(9,501,505) |

Revenue from mining for the first nine months of 2013 was $17.1 million. We also produced and sold $2.7 million worth of silver in the first nine months of 2013. Silver is accounted for as a by-product credit in costs applicable to mining revenue for financial reporting purposes. We recorded our first mining revenue from gold sales in October 2012, and accordingly, we did not generate mining revenue during the nine months ended September 30, 2012.

During the first nine months of 2013, we completed the ramp up and stabilization activities of the production system, including improvements to the hauling, crushing and metal extraction processes.

During the nine months ended September 30, 2013, the Company crushed and stacked approximately 900,000 dry tons of mineralized material and shipped 12,429 ounces of gold and 119,237 ounces of silver.

Throughout the nine months ended September 30, 2013, the Company realized an average price of $1,387.44 price per ounce of gold and a $22.55 average sales price per ounce of silver. In comparison, commodity market prices in the first nine months of 2013 averaged $1,457.22, per ounce of gold and $24.85 per ounce of silver.

Costs applicable to mining revenue for the first nine months of 2013 were approximately 108% of the recognized revenue during the period (the Company was not producing during the comparable prior year nine month period). Costs applicable to revenue include approximately $2.4 million for depreciation, amortization, and depletion and approximately $1 million from the write down in the value of our inventory caused by declining gold prices.

Hospitality revenue from the cottages, hotel rooms, restaurant and bar was stable for the nine months ended September 30, 2013 compared to the same period in 2012. Consistent with current economic conditions and seasonal variations experienced during these periods, we do not expect material changes in our hospitality operational results.

Hospitality operating costs increased approximately 22% to $770 thousand for the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012. The hotel operating costs represent costs incurred for providing room, banquet, restaurant and bar services at the hotel. The increase was attributable to improvements and higher maintenance plus higher labor and food costs in the period.

Reclamation and exploration expenses decreased by $8.4 million or approximately 57% compared to the nine-month period ended September 30, 2012. The decrease is primarily the result of the completion of our 2012 drilling program that commenced in January 2012 and completed in December 2012, and the transition of the Company from an exploration-based company to a production based company.

During the nine months ended September 30, 2013, we sold mining equipment and vehicles with a gross book value of $3,165,746 at a loss of $1,015,496. The loss is included in general and administrative expenses in the condensed consolidated statements of operations.

General and administrative expenses, inclusive of professional and consulting fees, decreased by $1.8 million or approximately 18% compared to the nine month period ended September 30, 2012. The decrease is primarily the result of lower stock based compensation, legal and administrative costs.

During the nine months ended September 30, 2013, we recognized a gain on the settlement of our Auramet Facility obligations of approximately $287 thousand that is not expected to be recurring.

Interest expense increased by $363 thousand, or approximately 84% for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, primarily due higher average principal obligations outstanding during 2013, as compared to 2012, from the new equipment financing (Caterpillar Equipment Facility) and revolving debt facility entered (Auramet Facility) into in 2012. The Auramet facility was settled in full in the second quarter of 2013.

### Liquidity and Capital Resources

Total current assets were $11.2 million at September 30, 2013. Cash and cash equivalents on hand at September 30, 2013 totaled $5.9 million. Inventories, stockpiles, and mineralized material on leach pad totaled $4.2 million. During the first nine months of 2013, the Company reduced its long-term debt by fully paying our $5 million revolving credit facility. The Company has also reduced its operating costs by entering into capital lease arrangements for mine haul trucks with total obligations inclusive of interest at September 30, 2013 of approximately $4.3 million ($3.8 million in principal inclusive of purchase options of $0.7 million). The Company believes it has the ability to make its debt payments within the normal course of business for at least the next twelve months.

Net cash used in operating activities for the nine months ended September 30, 2013 was approximately $11.6 million as compared to a use of $17.8 million for the nine months ended September 30, 2012. Our use of cash in the first nine months of 2013 was primarily from operating losses associated with ramping up production, including an increase of $456 thousand for inventory and an increase of $2.2 million in accounts receivable, net of $2.7 million of gold produced and directly transferred as payment on our Auramet Facility which we completely paid off.

Net cash used in investing activities for the nine months ended September 30, 2013 was $2.7 million, primarily as the result of $572 thousand of proceeds from the sale of equipment that was previously used in our mining development and production activities, net of capital asset purchases of $2.6 million and bond deposit increases of $582 thousand. Cash used in investing for the nine months ended September 30, 2012 was approximately $10.7 million, primarily $12.7 million for purchases of equipment used in our mining development and production activities, offset by $1.5 million in proceeds from sale of available-for-sale securities and a reduction in reclamation bond deposits of approximately $0.5 million.

Net cash provided by financing activities for the nine months ended September 30, 2013 was $14.1 million, comprised of net proceeds of approximately $18.3 million from the sale of securities in two public offerings totally 9,146,920 shares of our common stock at a prices of $2.00 and $2.11 per share, partially off-set by the pay-down of our long-term debt obligations of approximately $4.2 million. Net cash provided by financing activities for the nine months ended September 30, 2012, was $24.7 million, comprised of net proceeds from the sale of public securities through an underwritten public offering of 9,078,948 shares of common stock at a price of $1.90 per share and long-term debt obligations of approximately $9.7 million.

When pouring commenced in late 2012, the Company averaged approximately 200 gold-equivalent ounces poured per week. The Company aims to continuously adjust its operations to improve grade, maximize yields and increase tons crushed and stacked. The Company continues ramping up its production and exceeded its targeted production rate of 400 ounces per week for the three months ended September 30, 2013, averaging over 400 ounces per week during the third quarter ended 2013, and over 500 ounces per week during September. The Company currently anticipates production of 40,000 gold equivalent ounces for the full year 2014, resulting from improved grades and increased production resulting from expanded permitted capacity during the fourth quarter, 2014.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company was an exploration company for most of its existence and recently transitioned into production in the Lucerne Mine, and accordingly, has incurred net operating losses and negative cash flows from operations since inception. At September 30, 2013, the Company has cash and cash equivalents of $5.9 million. The Company incurred an operating loss of $15.8 million, used $11.6 million of cash in operations, and used $4.2 million for debt repayments, all for the nine months ended September 30, 2013. The Company continues its efforts to increase production, reduce costs and working capital needs, improve efficiencies, and maximize funds available for working capital. The Company’s current capital resources include cash and cash equivalents and other working capital resources, cash generated through operations, and existing financing arrangements. The Company’s certificate of incorporation permits it to incur indebtedness for money borrowed of up to $5 million at the discretion of the Board of Directors. The Company believes that it could access one or more other credit facilities on more favorable terms than in the past. The Company currently has no indebtedness for borrowed money.

The Company has financed its activities principally from the sale of equity securities and from debt financing. While the Company has been successful in the past in obtaining the necessary capital to support its operations, including registered equity financings from its existing shelf registration, borrowings, or other means, there is no assurance that the Company will be able to obtain additional equity capital or other financing, if needed.

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

The Company’s recurring losses and negative cash flow from operations require an ongoing assessment of our ability to continue as a going concern. The unaudited consolidated financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.

For the remainder of 2013, we plan on spending up to $2 million in capital expenditures, primarily to expand our heap leaching and related production capacity. We will also pay down an additional $0.7 million in debt obligations.

#### Contractual Obligations

Our contractual obligations at September 30, 2013 are summarized as follows:

| Contractual Obligations | Payments Due by Period Total | Less than 1 Year | 1 - 3 Years | 4 - 5 Years | More Than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Debt(1) | $7,825,025 | $1,216,326 | $4,359,798 | $2,201,555 | $47,346 |
| Operating Leases(2) | 32,375,275 | 701,475 | 2,811,300 | 1,866,000 | 26,996,500 |
| Capital Leases(3) | 4,238,126 | 803,319 | 1,825,735 | 1,609,072 |  |
| Reclamation and remediation obligations(4) | 4,816,775 | — | — | — | 4,816,775 |
| Other(5) | 1,100,000 | 900,000 | 200,000 | — | — |
|  | $50,355,201 | $3,621,120 | $9,196,833 | $5,676,627 | $31,860,621 |

(1) Amounts represent principal of $6,400,542 and estimated interest payments of $1,424,483, assuming no early extinguishment.

(2) The Company leases certain properties under operating leases expiring at various dates through 2049. Amounts include minimum rental and minimum advance royalty payments.

(3) The Company leases mining equipment under capital lease arrangements. The amounts represent principal of $3,824,297 (inclusive of purchase options totaling $732,720) and estimated interest payments of $413,829.

(4) We are required to mitigate long-term environment impacts by stabilizing, contouring, re-sloping, and re-vegetating various portions of a site after mining and mineral processing operations are completed. These reclamation efforts are conducted in accordance with plans reviewed and approved by the appropriate regulatory agencies. The estimated undiscounted cash outflows of these reclamation and remediation obligations are reflected here.

(5) 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 initial cash collateral percentage due to Lexon is approximately 50% of the total state bond amount of $4.82 million. At September 30, 2013, accrued expenses include $0.9 million and other liabilities include $0.2 million remaining due to Lexon for the initial cash collateral.

### 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, 2012.

## Market risk

As filed, 951 characters.

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

Gold Bullion prices stabilized during the third quarter, averaging approximately $1,327.54 per ounce, up from a yearly low close of $1,192 on June 28, 2013. Gold has fluctuated from that low to a high of $1,419.50 during the quarter. Silver also gained, from annual lows of $18.61 during the second quarter to a high of over $24 per ounce during the third quarter. The outlook for these markets remains mixed, driven primarily by uncertainty over U.S. fiscal and monetary policy.

With the exception of the above, there have been no material changes in the market risks discussed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

## Controls and procedures

As filed, 1,729 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 (who also serves as our Principal Financial Officer), an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Exchange Act and SEC’s rules, and that such information is accumulated and communicated to our management, including our Principal Executive, 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 concluded that, as of September 30, 2013, 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 September 30, 2013, 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, 2012.

Filed Oct 31, 2013.
Source: SEC EDGAR, the filing index for accession 0001144204-13-057798. Last ingested by Listed: Nov 4, 2026, 17:20 ET. No prices; not investment advice.