Unassociated Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2010
 
OR

 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ______________
 
Commission File No. 000-32429

COMSTOCK MINING INC.
 (Exact name of small business issuer as specified in its charter)

NEVADA
  
1040
  
65-0955118
(State or other jurisdiction of
  
(Primary Standard Industrial
  
(I.R.S. Employer
incorporation or organization)
  
Classification Code Number)
  
Identification No.)

P.O. Box 1118
Virginia City, NV 89440
(Address of principal executive offices)
(775) 847-5272
(Registrant’s telephone number, including area code) 

N/A
(Former Name or Former Address, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No  ¨

 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨        Accelerated filer ¨
¨ Non-accelerated filer       x Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
 
The number of shares of Common Stock, $0.000666 par value, of the registrant outstanding at November 11, 2010 was 20,996,234. 

 
 
 

TABLE OF CONTENTS

PART I.
  
Item 1. Financial Statements.
 4 
CONDENSED CONSOLIDATED BALANCE SHEETS
 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 8
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 33
Item 4. Controls and Procedures.
 42
   
PART II.
  
Item 1. Legal Proceedings.
 43
Item 1A. Risk Factors.
 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 43
Item 3. Defaults Upon Senior Securities.
 44
Item 5. Other Information.
 44
Item 6. Exhibits.
 44
SIGNATURES
 45
   
EXHIBIT INDEX
   
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 15d-14(a)
  
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 1350
  

Statement Regarding Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. All statements contained in this report on Form 10-Q, other than statements of historical facts, are forward-looking statements within the meaning of applicable securities laws. Forward-looking statements include statements about matters such as: future prices and sales of and demand for our products; future industry market conditions; future changes in our exploration activities, production capacity and operations; future exploration, production, operating and overhead costs; operational and management restructuring activities (including implementation of methodologies and changes in the board of directors); future employment and contributions of personnel; tax and interest rates; capital expenditures and their impact on us; nature, timing and accounting for restructuring charges, gains or loses on debt extinguishment,  derivative liabilities and the impact thereof; productivity, business process, rationalization, restructuring, investment, acquisition, consulting, operational, tax, financial and capital projects and initiatives; contingencies; environmental compliance and changes in the regulatory environment; offerings, sales and other actions regarding debt or equity securities; and future working capital, costs, revenues, business opportunities, debt levels, cash flows, margins, earnings and growth.  The words "believe," "expect," "anticipate," "estimate," "project," "plan," "should," "intend," "may," "will," "would," "potential" and similar expressions identify forward-looking statements, but are not the exclusive means of doing so.
 
 
2
 
 
These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical and current trends, current conditions, possible future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees, representations or warranties and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements.  Some of those risks and uncertainties include the risk factors set forth in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and the following: the current global economic and capital markets uncertainties; the speculative  nature of gold or mineral exploration, including risks of diminishing quantities or grades of qualified resources and reserves; operational or technical difficulties in connection with  exploration or mining activities; contests over our title to properties; potential inability to continue to comply with government regulations; adoption of or changes in legislation or regulation adversely  affecting our business opportunities that my be presented to or pursued by us; changes in the United States or other monetary o fiscal policies o regulations in response to the recent capital markets and economic crises; interruptions in our production capabilities due to unexpected equipment failures; fluctuation of  prices for gold or certain other commodities (such as silver, copper, diesel fuel and electricity);changes in generally accepted accounting principles; geopolitical events; potential inability to implement our business strategies;  potential inability to grow revenues organically; potential inability to attract and retain key personnel; interruptions in delivery of critical supplies and equipment, raw materials due to credit or other limitations imposed by vendors; assertion of claims, lawsuits and proceedings against us; potential inability to list our securities on any securities exchange or market; and work stoppages or other labor difficulties.  Occurrence of such events or circumstances could have a material adverse effect on our business, financial condition, results of operations or cash flows or the market price of our securities.  All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors.  All forward-looking statements included in this report are based on information available to us as of the filing date of this report. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise.

 
3
 

PART I.
Item 1. Financial Statements. 

COMSTOCK MINING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
  
  
Sept. 30,
2010
  
  
December 31,
2009
  
  
  
(Unaudited)
        
ASSETS
            
CURRENT ASSETS
            
Cash and cash equivalents
  
$
102,634
    
$
246,214
  
Prepaid expenses
    
91,764
      
―
  
Total Current Assets
    
194,398
      
246,214
  
                 
MINERAL RIGHTS, PLANT AND EQUIPMENT
                
Mineral rights
    
981,409
      
1,270,547
  
Plant and equipment, net
    
3,292,459
      
2,301,466
  
Total Mineral Rights, Plant and Equipment
    
4,273,868
      
3,572,013
  
                 
RECLAMATION BOND DEPOSIT
    
766,768
      
766,768
  
LONG-LIVED DEFERRED RECLAMATION EXPENSE
    
351,973
      
340,159
  
                 
TOTAL ASSETS
  
$
5,587,007
    
$
4,925,154
  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4
 

COMSTOCK MINING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
 
  
  
Sept. 30,
2010
  
  
December 31,
2009
  
  
  
(Unaudited)
  
  
  
  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
CURRENT LIABILITIES
            
Accounts payable
  
$
1,635,552
    
$
1,608,493
  
Accrued expenses
    
369,505
      
271,054
  
Accrued interest payable
    
7,027,569
      
4,870,713
  
Notes, convertible notes, and debentures payable
    
17,092,778
      
15,145,698
  
Other debt obligations
    
1,021,061
      
1,000,000
  
Total Current Liabilities
    
27,146,465
      
22,895,958
  
                 
LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES
                
Notes, convertible notes, and debentures payable, net of current portion
    
3,871,382
      
3,025,325
  
Long-term debt obligation, net of current portion
    
688,941
      
490,000
  
Derivative liability
    
13,548,862
      
4,500,189
  
Long-term reclamation liability
    
1,309,528
      
1,186,966
  
Total Long-Term Debt and Other Long-Term Liabilities
    
19,418,713
      
9,202,480
  
                 
Total Liabilities
    
46,565,178
      
32,098,438
  
                 
COMMITMENTS AND CONTINGENCIES
                
                 
STOCKHOLDERS’ DEFICIT
                
Common stock, $.000666 par value 3,950,000,000 shares authorized, shares issued and outstanding were 19,406,382 (Sept.  30, 2010) and 18,310,339 (Dec. 31, 2009)
    
12,925
      
12,195
  
Additional paid-in capital
    
29,195,009
      
27,742,913
  
Accumulated deficit
    
(70,186,105
)
    
(54,928,392
)
Total Stockholders’ Deficit
    
(40,978,171
)
    
(27,173,284
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  
$
5,587,007
    
$
4,925,154
  

On June 4, 2010, we received approval from the Financial Industry Regulatory Authority (“FINRA”) clearing the one-for-two hundred reverse stock split of our common stock previously approved by our stockholders and announced on May 10, 2010.   The reverse stock split took effect on Monday, June 7, 2010 (“Effective Date”).  Accordingly, the consolidated balance sheet above and the following consolidated financial statements reflect post reverse split common shares.

See accompanying notes to the condensed consolidated financial statements.

 
5
 

COMSTOCK MINING INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
  
  
Three Months Ended Sept. 30,
  
  
  
2010
  
  
2009
  
             
REVENUE FROM GOLD SALES, Net
  
$
―
    
$
―
  
COST AND EXPENSES
                
Depletion, depreciation and amortization
    
31,828
      
37,604
  
Reclamation, exploration and test mining expenses
    
570,616
      
485,430
  
General and administrative
    
583,156
      
330,453
  
Consultants and professional fees
    
471,824
      
32,204
  
Total Cost and Expenses
    
1,657,424
      
885,691
  
LOSS FROM OPERATIONS
    
(1,657,424
)
    
(885,691
)
                 
OTHER INCOME (EXPENSE):
                
Financing cost
    
―
      
(111,160
) 
Gain on sale of royalty
    
―
      
―
  
Derivative change in fair value
    
(5,953,651
)
    
(42,643
)
Interest expense
    
(1,093,831
)
    
(1,693,994
)
Total Other Expense
    
(7,047,482
)
    
(1,847,797
)
                 
NET LOSS
  
$
(8,704,906
)
  
$
(2,733,488
)
                 
Net loss per common share – basic and diluted
  
$
(0.45
)
  
$
(0.15
)
                 
Basic and diluted weighted average common shares outstanding
    
19,169,218
      
18,079,535
  

See accompanying notes to the condensed consolidated financial statements.

 
6
 

COMSTOCK MINING INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
  
  
Nine Months Ended
September 30,
  
  
  
2010
  
  
2009
  
             
REVENUE FROM GOLD SALES, Net
  
$
―
    
$
―
  
COST AND EXPENSES
                
Depletion, depreciation and amortization
    
178,884
      
114,073
  
Reclamation, exploration and test mining expenses
    
2,331,869
      
2,577,821
  
General and administrative
    
1,535,503
      
1,022,670
  
Consultants and professional fees
    
855,673
      
177,610
  
Total Cost and Expenses
    
4,901,929
      
3,892,174
  
LOSS FROM OPERATIONS
    
(4,901,929
)
    
(3,892,174
)
                 
OTHER INCOME (EXPENSE):
                
Financing cost
    
(169,247
)
    
(83,500
) 
Gain on sale
    
300,000
      
25,000
  
Derivative change in fair value
    
(7,472,128
)
    
(1,898,838
)
Interest expense
    
(3,014,408
)
    
(3,296,145
)
Total Other Expense
    
(10,355,783
)
    
(5,253,483
)
                 
NET LOSS
  
$
15,257,712
)
  
$
(9,145,657
)
                 
Net loss per common share – basic and diluted
  
$
(0.81
)
  
$
(0.52
)
                 
Basic and diluted weighted average common shares outstanding
    
18,907,926
      
17,691,078
  

See accompanying notes to the condensed consolidated financial statements.

 
7
 

COMSTOCK MINING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  
  
Nine
month Period Ended
September 30,
  
  
  
2010
  
  
2009
  
             
OPERATING ACTIVITIES:
            
Net loss
  
$
(15,257,712
)
  
$
(9,145,657
)
Adjustments to reconcile net loss to net cash used in operating activities:
                
    Depreciation and amortization
    
178,884
      
114,073
  
    Stock warrants and stock based compensation
    
117,183
      
2,025,152
  
G Gain of sale of royalty interest
    
(300,000
)
    
―
  
    Interest paid through the issuance of stock
    
446,913
      
1,342,979
  
    Accretion and debt discount interest
    
419,280
      
1,013,513
  
    Payments through the issuance of company stock
    
34,000
      
36,000
  
     Financing costs
    
169,247
      
52,500
  
    Derivative change fair value
    
7,472,128
      
42,643
  
Net loss adjusted for non-cash operating activities
    
(6720,077
)
    
(4,518,797
) 
Changes in operating assets and liabilities:
                
    Prepaid and other current assets
    
(91,764
) 
    
―
  
Accounts payable
    
27,059
      
410,423
  
Accrued expenses
    
2,255,307
      
1,150,945
  
    Other, net
    
―
      
―
  
NET CASH USED IN OPERATING ACTIVITIES
    
(4,529,475
)
    
(2,957,429
)
                 
INVESTING ACTIVITIES:
                
Proceeds received from sale of royalty less acquisition of mineral claims
    
520,000
      
―
  
Acquisition  of plant and equipment
    
(329,107
) 
    
(128,880
) 
NET PROVIDED BY (CASH USED) IN INVESTING ACTIVITIES
    
190,893
      
(128,880
) 
                 
FINANCING ACTIVITIES:
                
Principal payments on other debt obligations
    
(504,998
)
    
(37,040
)
Net proceeds from the issuance of company stock
    
―
      
902,500
  
Proceeds from the issuance of convertible debentures, net of financing cost
    
4,700,000
      
1,995,000
  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    
4,195,002
      
2,860,460
  
                 
DECREASE IN CASH AND CASH EQUIVALENTS
    
(143,580
) 
    
(225,849
) 
CASH AND CASH EQUIVALENTS, BEGINNING OF QUARTER
    
246,214
      
322,938
  
CASH AND CASH EQUIVALENTS, END OF QUARTER
  
$
102,634
    
$
97,089
  
SUPPLEMENTAL CASH FLOW INFORMATION:
                
INCOME TAXES 
  
$
―
    
$
―
  
INTEREST PAID
  
$
55,475
    
$
8,917
  
 
 
8
 

COMSTOCK MINING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

   
Nine
month Period Ended
September 30,
  
   
2010
    
2009
  
Supplemental disclosure of non-cash investing and financing activities:
            
             
Issuance of company stock for interest
  
$
446,913
    
$
1,342,979
  
Conversion of convertible debenture principal into company’s common shares
  
$
835,483
    
$
―
  
Seller note for acquisition of land
  
$
725,000
    
$
120,000
  

See accompanying notes to the condensed consolidated financial statements.

 
9
 

COMSTOCK MINING INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Nine months Period Ended September 30, 2010

(Common Stock Par value $.000666 per share; 3,950,000,000 shares authorized
Preferred Stock Par Value $.000666 per share; 50,000,000 shares authorized)

  
  
Common
Shares Issued
  
  
Par value
$.000666
per share
  
  
Additional
Paid-in
Capital
  
  
Accumulated
Deficit
  
  
Total
  
                               
December 31, 2008
    
16,904,742
    
$
11,259
    
$
24,961,957
    
$
(48,863,723
)
  
$
(23,890,507
)
                                         
Common stock issued for:
                                        
Debenture principal
    
133,264
      
89
      
192,179
      
—
      
192,268
  
Debenture interest
    
751,833
      
501
      
1,477,096
      
—
      
1,477,597
  
Employees
    
27,500
      
19
      
67,231
      
—
      
67,250
  
Private placement
    
493,000
      
327
      
902,173
      
—
      
902,500
  
Subtotal
    
1,405,597
      
936
      
2,638,679
      
—
      
2,639,615
  
                                         
Warrant cost and stock based option compensation
                    
142,277
              
142,277
  
                                         
Net loss
    
—
      
—
      
—
      
(6,064,669
)
    
(6,064,669
)
                                         
December 31, 2009
    
18,310,339
    
$
12,195
    
$
27,742,913
    
$
(54,928,392
)
  
$
(27,173,284
)
Common stock issued for:
                                        
Debenture principal
    
703,770
      
468
      
835,015
      
—
      
835,483
  
Debenture interest
    
359,630
      
240
      
446,673
      
—
      
446,913
  
Employees
    
7,500
      
5
      
10,470
      
—
      
10,475
  
Consultant
    
25,000
      
17
      
33,983
      
—
      
34,000
  
Subtotal
    
1,095,900
      
730
      
1,326,141
      
—
      
1,326,871
  
                                         
Stock based option compensation and other, net
                    
125,955
      
—
      
125,955
  
                                         
Other, net
    
143
      
—
      
—
      
(1
) 
    
142
  
                                         
Net loss
    
—
      
—
      
—
      
(15,257,712
)
    
(15,257,712
) 
                                         
September 30, 2010
    
19,406,382
    
$
12,925
    
$
29,195,009
    
$
(70,186,105
)
  
$
(40,978,171
)

See accompanying notes to the condensed consolidated financial statements.

 
10
 

COMSTOCK MINING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010 and 2009

 
Note 1 - Basis of Presentation
 
COMSTOCK MINING Inc. is a Nevada-based gold and silver mining company with extensive, contiguous property in the Comstock Lode Mining District. The Comstock Mine Project is located in Storey County, Nevada, approximately 3 miles south of Virginia City and 30 miles southeast of Reno, Nevada. Access to the property is by State Route 342, a paved highway. The Comstock District is located within the western portion of the Basin and Range Province of Nevada, between Reno and Carson City. The majority of our activities occur in three major structural zones: (1) the northeast striking, (2) the east dipping Comstock and Occidental fault zones and (3) the northwest striking, east dipping Silver City fault zone.

On June 4, 2010, we received approval from the Financial Industry Regulatory Authority (“FINRA”) clearing the one-for-two hundred reverse stock split of our common stock previously approved by our stockholders and announced on May 10, 2010.   The reverse stock split took effect on Monday, June 7, 2010 (“Effective Date”).  Accordingly, the consolidated balance sheet above and the following consolidated financial statements reflect post reverse split common shares.

On July 21, 2010, we changed our name from “GoldSpring, Inc.” to “Comstock Mining Inc.,” by way of a merger with a wholly owned subsidiary Comstock Mining Inc. that was formed solely for the purpose of changing our name.  Pursuant to Section 92A.180 of the Nevada Revised Statutes, the merger did not require stockholder approval.  An OTC Equity Issuer Notification Form was filed with the Financial Industry Regulatory Authority (“FINRA”) on July 9, 2010, and the name change was approved by FINRA, effective July 21, 2010.  On the effective date, the name changed with the Over-the-Counter Bulletin Board and the Company’s shares of common stock began trading under the ticker symbol “LODE.”

Our Company began acquiring properties in the Comstock district in 2003. Since then, we have secured permits, built an infrastructure and brought the exploration project into test mining production. We began further consolidating the Comstock district in 2005, by acquiring additional properties in the district, expanding our footprint and creating opportunities for exploration and mining. Because of the Comstock district’s historic significance and its world class bonanza precious metal grades, the geology is well known and extensively studied in detail by our Company, our advisors and many independent researchers. We have amassed the largest known library of historical data and detailed surface mapping and, in conjunction with drilling programs designed to expand the known historical data base, we have invested in our understanding of the Comstock’s structural geology and its broader geological footprint.

Our Company now owns or controls 6,412 acres of active lode mining claims in the Comstock district. The acreage is comprised of 892 acres of patented claims (private lands) and 5,520 acres of unpatented claims, Bureau of Land Management (BLM) administered. The project includes a heap leach processing facility that we will upgrade to accommodate our current production plans.

 
11
 

Note 2 — Interim Financial Statements
 
The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.
  
Note 3 — Going Concern

The accompanying consolidating financial statements have been prepared on a going concern basis, which assumes the Company will realize its assets and discharge its liabilities in the normal course of business. As reflected in the accompanying financial statements, the Company has losses from operations and has no revenues from operations during the nine months ended September 30, 2010. During the nine months ended September 30, 2010, the Company incurred a net loss of $15,257,712. For the nine months ended September 30, 2010 the net cash used in operating activities was $4,529,475. The Shareholders’ deficit at September 30, 2010, totaled $40,978,171.
 
On October 20, 2010, the Company exchanged $29.4 million of note principal and related obligations, representing substantially all of its senior secured convertible and senior indebtedness, for shares of its newly created Series A Preferred Convertible Stock. This transaction cured all defaults under the terms of the notes being converted. On the same day, the Company received gross proceeds of $35.75 million ($32.6 million, net of transaction expenses) in conjunction with an equity raise to fund its working capital, exploration and capital requirements to commence mine production. The Company’s believes that it has sufficient funds to maintain and develop its operations beyond the next twelve months. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations to meet its obligations and repay its liabilities arising from normal business operations when they come due.
 
Note 4 — Summary of Significant Accounting Policies
 
Terms and Definitions
 
Company
  
COMSTOCK MINING Inc. and Subsidiaries
APB
  
Accounting Principles Board
ARB
  
Accounting Review Board
ASC
  
Accounting Standards Codification Topic
ASU
  
Accounting Standards Update
EITF
  
Emerging Issues Task Force
FASB
  
Financial Accounting Standards Board
FSP
  
FASB Staff Position
Plum LLC
  
Plum Mining Company, LLC
SAB
  
SEC Staff Accounting Bulletin
SEC
  
Securities Exchange Commission
SOP
  
Statement of Position
 
Summarized below are the significant accounting policies of COMSTOCK MINING Inc.

Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: GoldSpring, LLC, The Plum Mining Company, LLC, and the Plum Mine Special Purpose Company LLC. All material inter-company transactions and balances have been eliminated in consolidation.

 
12
 

Cash and Cash Equivalents
 
We consider all highly liquid debt securities purchased with original or remaining maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.
 
Fair Value of Financial Instruments
 
The carrying amounts of cash and cash equivalents, accounts payable, and accrued expenses approximate fair market value because of the short maturity of those instruments. Furthermore, convertible debenture, other notes obligations, and long-term debt and other liabilities payable amounts approximate fair value at September 30, 2010 and December 31, 2009.
 
Credit Risk
 
It is our practice to place our cash equivalents in high-quality money market securities with a major banking institution. Certain amounts of such funds in excess of limits are not insured by the Federal Deposit Insurance Corporation. However, we consider our credit risk associated with cash and cash equivalents to be minimal.

Impairment of Long Lived Assets and Long Lived Assets to be Disposed Of
 
The Company accounts for impairment and disposal of long-lived assets in accordance with ASC 360 Property, Plant, and Equipment. ASC 360 establishes the accounting model for long-lived assets to be disposed of by sale and applies to all long-lived assets, including discontinued operations. This standard requires those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations.
 
We implemented ASC 360 in our evaluation of the fair value of certain assets described in Notes 5 and 6.
 
Revenue Recognition
 
The Company recognizes revenue in accordance with the provisions of ASC 605 Revenue, which states that revenue is realized or realizable and earned when all of the following four criteria are met:
 
 
1)
Persuasive evidence of an arrangement exists,
 
2)
Delivery has occurred or services have been rendered,
 
3)
The seller’s price to the buyer is fixed or determinable, and
 
4)
Collectability is reasonably assured.

Specifically, when we are in operational status, sales of gold and silver Dore are recorded when we issue a sell order instruction to our refiner, Johnson Matthey, to sell a specified quantity of metals. Sales orders are typically executed within 48 hours of receipt. Upon receipt of the sale order, Johnson-Matthey confirms quantities available and executes the sale at the current market price of the metals on the day and time of the sales order. We record revenues on the day the sales order is issued based on the confirmed quantity of metal at the confirmed market price. Proceeds from the sale of metals are typically wired to our bank within twenty-four hours.

 Stock Issued For Services
 
We base the value of stock issued for services on the market value of our common stock at the date of issue and our estimate of the fair value of the services received.
 
 Plant and Equipment
 
We state plant and equipment at cost. We provide depreciation and amortization in amounts sufficient to recognize the expense of depreciable assets to operations over their estimated service lives.

 
13
 

We capitalize expenditures for renewals and improvements that significantly extend the useful life of an asset. We charge expenditures for maintenance and repairs to operations when incurred. When assets are sold or retired, the cost of the asset and the related accumulated depreciation are removed from the accounts and any gain or loss is recognized at such time. We use the straight-line method of depreciation for financial reporting purposes, depreciating assets over useful lives ranging from 3 to 15 years.
 
We review the carrying value of our plant and equipment assets on a quarterly basis. Where information and conditions suggest impairment, we write-down these assets to net recoverable amount, based on estimated future cash flows that may be attained from them.
 
Mineral Rights
 
We defer acquisition costs until we determine the viability of the property. Since we do not have proven and probable reserves as defined by SEC Industry Guide 7, exploration expenditures are expensed as incurred.
 
We expense holding costs to maintain a property on a care and maintenance basis as incurred.
 
We review the carrying value of our interest in each mineral claim on a quarterly basis to determine whether impairment has incurred in accordance with ASC 360 (formerly SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”).
 
Where information and conditions suggest impairment, we write-down these properties to net recoverable amount, based on estimated future cash flows. Our estimate of gold price, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties affecting the recoverability of our investment in property, plant, and equipment. Although we have made our best estimate of these factors based on current conditions, it is possible that changes could occur in the near term that could adversely affect our estimate of net cash flows expected to be generated from our operating properties and the need for possible asset impairment write-downs.
 
Where estimates of future net operating cash flows are not available and where other conditions suggest impairment, we assess if carrying value can be recovered from net cash flows generated by the sale of the asset or other means.
 
Reclamation Liabilities and Asset Retirement Obligations
 
Minimum standards for site reclamation and closure have been established by various government agencies that affect certain of our operations. We calculate our estimates of reclamation liability based on current laws and regulations and the expected undiscounted future cash flows to be incurred in reclaiming, restoring, and closing our operating mine sites. When we incur reclamation liabilities that are not related to asset retirements we recognize the obligations in accordance with ASC 410-30 (formerly SOP No. 96-1).
 
The Company accounts for its reclamation liabilities and asset retirement obligations in accordance with ASC 410 Asset Retirement and Environmental Obligations (ASC 410). ASC 410 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. ASC 410 requires us to record a liability for the present value of our estimated environmental remediation costs and the related asset created with it when a recoverable asset (long-lived asset) can be realized.

Stock Based Compensation

The Company accounts for share based compensation in accordance with ASC 718 Compensation – Stock Compensation. Accordingly, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award and recognizes cost over the requisite service period.

 
14
 

Earnings Per Common Share
 
In calculating earnings per common share, we compute basic earnings per share by dividing net loss by the weighted average number of common shares outstanding, excluding the dilutive effects of common stock equivalents. For the three months ended September 30, 2010 and 2009, we had net losses for which the effect of common stock equivalents would be anti-dilutive. Accordingly only basic loss per share is presented.
 
Use of Estimates
 
In preparing financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to the estimated useful lives of property and equipment and software, determining the estimated net realizable value of receivables, and the realization of deferred tax assets.
 
Risks and Uncertainties
 
We regularly evaluate risks and uncertainties and, when probable that a loss or expense will be incurred, record a charge to current period operations.
 
Income Taxes
 
We recognize deferred tax assets and liabilities based on differences between the condensed consolidated financial statement carrying amounts and tax bases of assets and liabilities (using the applicable enacted tax rates and laws). We provide a valuation allowance for deferred tax assets for which we do not consider realization of such assets to be likely.
 
ACCOUNTING STANDARDS UPDATES (ASU’s)
 
We do not expect any significant impact on our Company’s consolidated financial position or results of operations from other ASU’s issued but not effective until after September 30, 2010,
 
Note 4 — Mineral Rights
 
Mineral rights at September 30, 2010 and December 31, 2009, consisted of the following:
 
  
  
Sept. 30,
2010
  
  
December 31,
2009
  
Comstock Placer Claims
  
$
100,000
    
$
100,000
  
Big Mike Copper Claims
    
—
      
69,138
  
Comstock Lode Claims
    
791,409
      
1,011,409
  
Water rights
    
90,000
      
90,000
  
 Total Mineral Rights
  
$
981,409
    
$
1,270,547
  
 
In January 2010, we sold a 0.61% net smelter royalty on our Obester Property for $550,000 to Precious Royalties, LLC, resulting in a gain of $300,000. Accordingly, we adjusted our mining claim values to reflect the impact of the net smelter royalty.

We determined the Big Mike copper project in Northern Nevada to be impaired and to have no fair value. In accordance with ASC 360, we recorded an impairment expense of $69,138, which is included in the depreciation, depletion and amortization expense on the Statement of Operations.

During the third quarter 2010, we acquired additional mineral claims that totaled $30,000.

 
15
 

Note 5 — Property and Equipment, net
 
Plant and equipment at September 30, 2010 and December 31, 2009, consisted of the following:
 
  
  
Sept 30,
2010
  
  
December 31,
2009
  
Land and Building
  
$
3,352,443
    
$
2,327,443
  
Vehicle and Equipment
    
314,094
      
302,094
  
Processing and Lab
    
719,528
      
704,528
  
Furniture and Fixtures
    
51,496
      
49,390
  
Property and Equipment
    
4,437,561
      
3,383,455
  
Less accumulated depreciation
    
(1,145,102
)
    
(1,081,989
)
 Total Property and Equipment, net
  
$
3,292,459
    
$
2,301,466
  

On July 1, 2010, the Company obtained an exclusive 180-day exploration license with option to purchase four patented lode claims totaling 95 acres known as the Dayton property for $70,000.  This property is contiguous with the Company’s Spring Valley Dondero holdings.  Under the purchase option, the price for the property is $3,000,000 plus a 3% Net Smelter Return (NSR).  The Company will receive credit for the full purchase price through a reduction in the NSR by 75% until such time as the full $3,000,000 purchase price has been credited back.  The purchase price will be paid through an initial payment of $500,000, with the balance payable in 20 equal, quarterly installments of $125,000, with no interest.

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

During the nine month period ended September 30, 2010, we purchased additional equipment totaling $24,105.  The property and equipment additions include $10,000 for processing equipment, $12,000 for a used pickup truck and $2,105 for computers.

Depreciation expense for the nine months ended September 30, 2010 and 2009 was $63,114 and $63,049, respectively.  We use the straight-line method of depreciation for financial reporting purposes, depreciating buildings over 15 years and other assets over useful lives ranging from 3 to 10 years.
 
Note 6 – Reclamation Bond Deposit

We are generally required to mitigate long-term environmental 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 detailed plans that require review and approval by the appropriate regulatory agencies.
 
The Nevada Revised Statutes and regulations promulgated thereunder by the Nevada State Environmental Commission and the Nevada Division of Environmental Protection, Bureau of Mining and Reclamation require posted bonds for mining projects that assure safe, stable and productive post-mining land use. We secured a $1,106,882 mine reclamation financial assurance instrument through the Nevada Division of Minerals' Bond Pool Program pursuant to the approved Reclamation Plan, including a required cash deposit of $766,768.

 
16
 

Note 7 — Long-term Reclamation Liability and Deferred Reclamation Expense

Our long-term reclamation liability was $1,323,131 and $1,186,966 as of September 30, 2010 and December 31, 2009, respectively. This obligation provides reclamation for our Comstock Mine facility reclamation plan.  Our plan was submitted and approved by the Nevada State Environmental Commission and Division of Environmental Protection. We also recorded a deferred reclamation expense of which the value is being amortized over the period of the anticipated land disturbance. Costs of future expenditures for environmental remediation are discounted to their present value. Such costs are based on management’s current estimate of amounts expected to be incurred when the remediation work is performed within current laws and regulations. It is reasonably possible that, due to uncertainties associated with the application of laws and regulations by regulatory authorities and changes in reclamation or remediation technology, the ultimate cost of reclamation and remediation could change in the future. We periodically review accrued liabilities for such reclamation and remediation costs as evidence becomes available indicating that our liabilities have potentially changed. The reclamation expense and the amortization of defined reclamation expense for the nine month period ended September 30, 2010 and 2009 were $110,748 and $112,242, respectively.

Following is a reconciliation of the aggregate retirement liability associated with our reclamation plan for our Comstock Project:
 
  
  
9/30/10
    
12/31/09
  
Long-term reclamation liability beginning of period
  
$
1,186,966
    
$
1,105,342
  
Additional obligations incurred
    
58,447
      
―
  
Liabilities settled during the period
    
―
      
―
  
Increase in present value of the reclamation obligation (accretion expense)
    
64,115
      
81,624
  
Long-term asset reclamation liability
  
$
1,309,528
    
$
1,186,966
  

Following is a reconciliation of the aggregate long-lived deferred reclamation expense associated with on our reclamation plan for our Comstock Project:
 
  
  
9/30/10
    
12/31/09
  
Net long-lived deferred reclamation expense beginning of period
  
$
340,159
    
$
408,190
  
Additional obligations incurred
    
58,447
      
―
  
Amortization of deferred reclamation expense
    
(46,633
)
    
(68,031
) 
Long-lived deferred reclamation expense
  
$
351,973
    
$
340,159
  
 
Note 8 - Notes, Convertible Notes and Debentures Payable
 
The following is a summary of the Notes, Convertible Notes and Debentures Payable as of September 30, 2010 and December 31, 2009:
 
  
  
9/30/10
  
  
12/31/09
  
Convertible Debentures Payable – 2004 through August 2009
  
$
14,442,778
    
$
15,278,261
  
Promissory Notes Payable - 2005 through 2008
    
2,650,000
      
2,650,000
  
Convertible Notes Payable – December 2009 through June 2010, net
    
3,064,533
      
242,762
  
Convertible Notes Payable – June 2010, net
    
806,849
      
―
  
Subtotal
    
20,964,160
      
18,171,023
  
Less current portion
    
(17,092,778
)
    
(15,145,698
)
Long term portion
  
$
3,871,382
    
$
3,025,325
  
 
The following is a detailed presentation of each line item presented in the above table as of September 30, 2010 and December 31, 2009.
 
Convertible Debentures Payable - 2004 through August 2009.
 
  
  
9/30/10
  
  
12/31/09
  
Convertible Debentures Payable – Investors
  
$
1,078,157
    
$
1,105,908
  
Convertible Debentures Payable - Mandatory Redemption payment
    
4,412,058
      
4,412,058
  
Convertible Notes Payable - 2006 & 2007
    
2,170,000
      
2,170,000
  
Convertible Notes Payable:  June – November 2008
    
2,500,000
      
2,500,000
  
Convertible Notes Payable – July 2008 Longview Amended and Restated
    
2,782,563
      
2,782,563
  
Convertible Notes Payable – December 2008
    
500,000
      
500,000
  
Convertible Notes Payable – May – August 2009
    
1,000,000
      
1,807,732
  
Total
    
14,442,778
      
15,278,261
  
  
 
17
 

The terms of the convertible debentures payable included above are as follows:
 
Convertible Debentures Payable – Investors

During March 2004, we completed a private placement of securities (the “March Offering”), to a group of accredited institutional and individual investors ,which generated $10 million in gross proceeds . On November 30, 2004, we restructured the March Offering and entered into a new agreement (the “Subscription Agreement”) whereby we exchanged 108,696 shares of common stock and 108,696 warrants issued for convertible notes. These notes accrue interest at 15% per annum.  The principal amount of the note and related interest is convertible into Comstock Mining Common Stock at the lesser of (A) $2.00 per share, or (B) eighty-five percent (85%) of the average of the five (5) lowest closing bid prices of the common stock as reported by Bloomberg L.P. for the twenty (20) trading days preceding the date the Company was obligated to pay the debentures.  These notes and related interest are currently due and payable.

 Convertible Debentures Payable – Mandatory Redemption Payment
 
 On March 31, 2005, the Winfield Group entered into a Settlement Agreement with the Company whereby the Winfield Group agreed to convert the $6.9 million obligation into Convertible Debentures (“the Debentures”).  These Debentures accrue interest at 18% per annum.  The principal amount of the Debentures and related interest is convertible into Comstock Mining Common Stock at the lesser of (A) $2.00 per share, or (B) eighty-five percent (85%) of the average of the five (5) lowest closing bid prices of the common stock as reported by Bloomberg L.P. for the twenty (20) trading days preceding the date the Company was obligated to pay the Debentures.  These Debentures and related interest are currently due and payable. 
 
Convertible Notes Payable – 2006 & 2007
 
In August 2006, the Company entered into a loan agreement with the Winfield Group and Longview LP whereby they agreed to loan up to $2,200,000 in exchange for convertible debt and warrants.  A total of $2,170,000 was funded under this loan agreement. These notes accrue interest at 18% per annum.  The principal amount of the notes and related interest is convertible into Comstock Mining Common Stock at the lesser of (A) $2.00 per share, or (B) eighty-five percent (85%) of the average of the five (5) lowest closing bid prices of the common stock as reported by Bloomberg L.P. for the twenty (20) trading days preceding the date the Company was obligated to pay the debentures.  These notes and related interest are currently due and payable. 

Convertible Notes Payable: June – November 2008
 
In June 2008, the Company entered into a Loan Agreement with Winfield Group pursuant to which Winfield Group agreed to loan the Company $2,500,000 no later than December 31, 2008 through issuance of a series of secured notes (the “Notes”). These Notes accrue interest at 9% per annum.  The principal amount of the Notes and related interest is convertible into Comstock Mining Common Stock at the lesser of (A) $2.00 per share, or (B) .85 multiplied by the “Volume Weighted Average Price” for the Borrower’s Common Stock for the five trading days immediately prior to the Conversion Date.  These Notes have been in default since late 2008 because we failed to make any monthly payment on the Notes. Pursuant to the terms and conditions of this Loan Agreement, the Notes become immediately payable upon default and thus the note balance has been recorded as a current liability.  

 
18
 

Convertible Notes Payable – July 2008 (Longview Amended and Restated Note)
 
On July 10, 2008, the Company amended $2,175,000 principal amount of unsecured promissory notes issued to Longview Fund, L.P. through the issuance of an Amended and Restated $2,782.563 Promissory Note issued by the Company in favor of Longview Fund, L.P. This note accrues interest at 11% per annum and is due and payable on July 10, 2011.  The principal amount of the note and related interest is convertible into Comstock Mining Common Stock at the lesser of (A) $2.00 per share, or (B) .85 multiplied by the “Volume Weighted Average Price” for the Borrower’s Common Stock for the five trading days immediately prior to the Conversion Date.
 
Convertible Notes Payable –December 2008

On December 8, 2008, we completed a $500,000 financing transaction with Winfield Group. In conjunction with this financing we issued to the Winfield Group notes that accrue interest at 9% per annum.  The principal amount of these notes and related interest is convertible into Comstock Mining Common Stock at the lesser of (A) $2.00 per share, or (B) .85 multiplied by the “Volume Weighted Average Price” for the Borrower’s Common Stock for the five trading days immediately prior to the Conversion Date.  Pursuant to the terms and conditions of the note agreement, the notes became immediately payable upon default and thus the note balance has been recorded as a current liability since December 31, 2009.

Convertible Notes Payable – May 2009- August 2009
 
On May 1, 2009, the Company secured a $2,000,000 commitment for additional convertible debt financing. The agreement, upon 30 days prior written notice, permitted the Company to request financing in tranches between $250,000 and $500,000 per request. Funding requests were permitted at any time between May 1, 2009 and August 28, 2009. The Company requested and received $2,000,000 from this financing.  These notes accrue interest at 9% per annum.  The principal amount of these notes and related interest is convertible into Comstock Mining Common Stock at the lesser of (A) $4.00 per share, or (B) .85 multiplied by the “Volume Weighted Average Price” for the Borrower’s Common Stock for the five trading days immediately prior to the Conversion Date. Pursuant to the terms and conditions of the loan agreement, the notes became immediately payable upon default and thus the note balance has been recorded as a current liability.

The following summarizes the activity for Convertible Notes Payable: 

   
Note Balance
9/30/10
    
Note Balance
12/31/09
  
             
Balances beginning of period
  
$
1.807,732
    
$
—
  
Convertible Note
    
—
      
2,000,000
  
Principal Payments
    
(807,732
)
    
(192,268
)
Note Balance
    
1,000,000
      
1,807,732
  

Promissory Notes Payable –2005 through 2008

The Company has the following promissory notes payable as of September 30, 2010 and December 31, 2009:

   
9/30/10
    
12/31/09
  
Promissory Notes Payable-July 2005 Financing
  
$
1,200,000
    
$
1,200,000
  
Promissory Notes Payable-December 2007 Financing
    
600,000
      
600,000
  
Promissory Notes Payable-January 2008 Financing
    
600,000
      
600,000
  
Promissory Notes Payable-January 2008 Financing
    
250,000
      
250,000
  
   
$
2,650,000
    
$
2,650,000
  
 
19
 

Promissory Notes Payable - July 2005 Financing

In July of 2005, we borrowed $1.2 million from companies controlled by the Winfield Group. Proceeds from the notes were reduced by a 33.3% original issue discount and other origination fees. Net proceeds received by the Company from the borrowing were $740,000. The notes accrued interest at 17% per annum and were payable in monthly installments of principal and interest over a 24 month period with the remaining entire balance of unpaid principal and interest due on July 15, 2007.  The notes are collateralized by substantially all of the Company’s assets subject to the security interest of the Brockbank Trust. We failed to make any payments on the notes; hence, they are in default and the original issue discount is fully amortized.

Promissory Notes Payable – December 2007 Financing

In December 2007, we completed a financing transaction with the Winfield Group. The notes evidencing the loan bear interest at the rate of 18% per annum, payable on or prior to the one year anniversary of the respective loan date. We failed to make any payments on the notes; hence, they are in default and the original issue discount is fully amortized.

Promissory Notes Payable – January 2008 Financing

On January 31, 2008, we completed a financing transaction with the Winfield Group. The notes evidencing the loan bear interest at the rate of 18% per annum, payable on or prior to the one year anniversary of the respective loan date.  We failed to make any payments on the notes; hence, they are in default and the original issue discount is fully amortized.

Promissory Notes Payable – Plum Mine

We have a 5% interest bearing note payable note related to our purchase of the Plum Mining property. The note was payable on June 2006 and we are in default on this note. As of June 30, 2010 and December 31, 2009, we still had a $250,000 note balance due.  There is a first security interest on the assets of Plum Mining Property for this note.
 
Convertible Notes Payable– December 2009 through June 2010, net
 
On December 10, 2009, we secured a $4,500,000 commitment for additional convertible debt financing. This $4,500,000 convertible debt financing commitment was fully funded by the end of June 2010. These notes bear interest at a rate of 8% per annum and are payable on or prior to the three (3) year anniversary of the respective Loan Dates.  The terms of the notes provide a security interest in all of the assets of the Company and required the issuance of 1,125,000 warrants shares with an exercise price of $3.50 and a three (3) year term.   In addition, the Warrant Agreements contain anti-dilution protection provisions.   The principal amount of the notes and related interest amounts is convertible into Comstock Mining Common Stock at the lesser of (A) $2.00 per share, or (B) .85 multiplied by the “Volume Weighted Average Price” for the Borrower’s Common Stock for the five trading days immediately prior to the Conversion Date.
 
The following summarizes the activity for Convertible Notes Payable:  
 
   
Note Balance
as of
9/30/10
    
Note Balance
as of
12/31/09
  
             
Beginning of period
  
$
242,762
    
$
—
  
Convertible Note
    
3,750,000
      
750,000
  
Debt Discount, net
    
(928,229
) 
    
(507,238
)
End of period
  
$
3,064,533
    
$
242,762
  
 
 
20
 

Note Principal
    
Debt Discount
    
Conversion
Price per
Share
    
Number of
Shares
Underlying
Convertible
Note
    
Effective
Interest Rate
    
Earnings per
Share Impact
  
$
750,000
    
$
518,030
    
$
1.34
      
559,701
      
23.0
%
    
0.03
  
 
1,750,000
      
498,720
      
1.34
      
1,305,970
      
9.5
%
    
0.07
  
 
2,000,000
      
753,105
      
1.34
      
1,492,537
      
12.6
%
    
0.08
  
                                             
$
4,500,000
    
$
1,769,855
    
$
1.34
      
3,358,208
      
13.1
%
    
0.18
  

The debt discount consists of the initial fair value of the warrant liability of ($541,741) and the embedded conversion option liability of ($1,228,114), for a total of ($1,769,855).  (See Note 11)

Debt Discount at September 30, 2010 and December 31, 2009:
 
   
9/30/10
    
12/31/09
  
Debt discount beginning balance – beginning of period
  
$
(507,238
)
  
$
—
  
Debt discount – embedded conversion feature
    
(911,512
)
    
(316,602
)
Debt discount – detachable warrants
    
(340,313
) 
    
(201,428
)
Less amortization of debt discount
    
323,596
      
10,792
  
Unamortized debt discount
  
$
(1,435,467
)
  
$
(507,238
)

Convertible Notes Payable– June 2010, net
 
On June 15, 2010 we completed a financing transaction through the issuance of convertible notes which provided us with $1,100,000 in funding.  The notes bear interest at a rate of 8% per annum and are payable on or prior to the three (3) year anniversary of the respective Loan Dates.  The terms of the notes provide a security interest in all of the assets of the Company and required the issuance of 275,000 warrants shares with an exercise price of $3.50 and a three (3) year term.   In addition, the Warrant Agreements contain anti-dilution protection provisions.   The principal amount of the notes and related interest amounts is convertible into Comstock Mining Common Stock at the lesser of (A) $2.00 per share, or (B) .85 multiplied by the “Volume Weighted Average Price” for the Borrower’s Common Stock for the five trading days immediately prior to the Conversion Date.     

The following summarizes the activity for Convertible Notes Payable:  

   
Note Balance
as of 9/30/10
    
Note Balance
as of 12/31/09
  
             
Beginning of period
  
$
—
    
$
—
  
Convertible Note
    
1,100,000
      
—
  
Debt Discount, net
    
(293,151
) 
    
—
  
End of period
  
$
806,849
    
$
—
  

Note Principal
    
Debt Discount
    
Conversion
Price per
Share
    
Number of
Shares
Underlying
Convertible
Note
    
Effective
Interest Rate
    
Earnings per
Share Impact
  
$
1,100,000
    
$
324,721
    
$
1.34
      
783,582
      
10.3
%
    
0.04
  
 
 
21
 

The debt discount consists of the fair value of the warrant liability of ($104,054) and the embedded conversion option of ($220,667), for a total of $(324,721). (See Note 11)

Debt Discount at September 30, 2010 and December 31, 2009:
 
   
9/30/10
    
12/31/09
  
Debt discount beginning balance – beginning of period
  
$
—
    
$
—
  
Debt discount – embedded conversion feature
    
(220,667
)
    
—
  
Debt discount – detachable warrants
    
(104,054
)
    
—
  
Less amortization of debt discount
    
31,570
      
—
  
Unamortized debt discount
  
$
(293,151
)
  
$
—
  

Note 9 - Debt Concentration

The Winfield Group is the largest lender to the Company.  At September 30, 2010, we had approximately $23.0 million of outstanding note principal of which $15.1 million or 66% was held by the Winfield Group.  In addition to the $15.1 principal owed to the Winfield Group, $6.0 million of unpaid interest was also due.  Had the Winfield Group converted all of its convertible principal and interest of $16.3 million into our common stock at September 30, 2010, we would have been obligated to issue the Winfield Group 10.1 million of our common shares representing 34.3% of our then outstanding common shares.   The amounts listed below have been reflected in the schedules presented in Note 8 and Note 10. Also, see Note 15 – Subsequent Events.

Debt Position with the Winfield Group
  
   
At September 30, 2010
  
Note Descriptions (Winfield Group)
  
Principal
    
Unpaid
Interest
    
Total
  
                   
15% Convertible Notes Payable – Investors
  
$
687,928
    
$
67,862
    
$
755,790
  
18% Convertible Debentures Payable - Mandatory Redemption Payment
    
4,412,058
      
1,592,889
      
6,004,947
  
18% Convertible Notes Payable - 2006 – 2007
    
1,620,000
      
1,151,338
      
2,771,338
  
11% Convertible Notes Payable - June - November 2008
    
2,500,000
      
675,076
      
3,175,076
  
11% Convertible Notes Payable - December 2008
    
500,000
      
114,837
      
614,837
  
9% Convertible Notes Payable - May - August 2009
    
1,000,000
      
120,754
      
1,120,754
  
8% Convertible Notes Payable - December 2009
    
1,500,000
      
58,779
      
1,558,779
  
8% Convertible Notes Payable – June 2010
    
250,000
      
5,453
      
255,453
  
17% Promissory Note Payable - July 2005
    
1,200,000
      
1,671,915
      
2,871,915
  
18% Promissory Note Payable - December 2007 Financing
    
600,000
      
263,921
      
863,921
  
18% Promissory Note Payable - January 2008 Financing
    
600,000
      
248,612
      
848,612
  
5% Debt Seller Note (Plum Mine)
    
250,000
      
65,625
      
315,625
  
                         
Total at September 30, 2010
  
$
15,119,986
    
$
6,037,061
    
$
21,157,047
  

Note 10—Other Debt Obligation

Our other debt obligations as of September 30, 2010 and December 31, 2009 include the following:
 
   
9/30/10
    
12/31/09
  
Debt –Note (Obester Property)
    
900,000
      
1,400,000
  
Debt  - Note (Petrini)
    
90,000
      
90,000
  
Debt  - Note (Donavan Property)
    
720,002
      
—
  
Subtotal
    
1,710,002
      
1,490,000
  
Less current portion
    
(1,021,061
) 
    
(1,000,000
)
Long term portion of debt obligations
  
$
688,941
    
$
490,000
  
 
22
 

 
 The terms of the other debt obligations listed above are as follows;
 
Debt - Note (Obester Property)

In December 2009, we completed the acquisition of mineral properties, which we had been leasing, from Claire Obester, Jim Obester, Alan Obester, and Julian Smith (“sellers”) for $1,650,000 plus a 1% royalty.  Pursuant to the purchase agreement, we made initial payments of $250,000 and we issued a note to the “sellers” for $1,400,000.  The note bears interest of six percent (6%) per annum. Interest and principal payments shall be made in quarterly installments of $250,000 with the first payment due on or before April 1, 2010 and continuing on the first day of each quarter, until July 1, 2011, when the then unpaid principal and accrued interest is due and payable. 

 Debt – Note (Obester Property) at September 30, 2010 and December 31, 2009:
 
   
9/30/10
    
12/31/09
  
Beginning balance – beginning of period
  
$
1,400,000
    
$
—
  
Seller Note
    
—
      
1,400,000
  
Payments
    
(500,000
)
    
—
  
Note balance
  
$
900,000
    
$
1,400,000
  

Debt - Note (Petrini Property)

On February 17, 2009 we purchased 4.79 acres in the Comstock District for $130,000.  We paid $40,000 in cash and financed the balance of $90,000 through a first deed of trust.  The note is interest only for two years and bears interest at 16% per annum. We have made our scheduled interest payments to date.  The note is due and payable on February 17, 2011.

Debt - Note (Donovan Property)

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

 Debt – Note (Donovan Property) at September 30, 2010 and December 31, 2009:
 
   
9/30/10
    
12/31/09
  
Beginning balance – beginning of period
  
$
—
    
$
—
  
Seller Note
    
725,000
      
—
  
Payments
    
(4,998
)
    
—
  
Note balance
  
$
720,002
    
$
—
  

Note 11 – Financial Instruments and Derivatives

The Company issues various note instruments with various terms but they are typically convertible into the Company’s common stock and issued with detachable warrants.  The following sections discuss in general those conversion features and warrants.

 
23
 
 
Conversion Features

The terms of the conversion feature of our debt instruments will differ between specific notes but their typical terms contain the following characteristics.  Specific terms for each note are discussed in Notes 8 – 10 as appropriate.

 
·
The conversion feature is an embedded beneficial conversion feature, whereby debt is convertible into Comstock Mining’s Common Stock at approximately the lesser of (a) a fixed price or (b) 85% of market price (based on a “lookback” formula),
 
·
The embedded beneficial conversion feature is immediately exercisable,
 
·
Exercising the embedded beneficial conversion feature is not contingent on a future event,
 
·
The embedded beneficial conversion feature may be converted into cash or stock at the discretion of the issuer (Comstock Mining), and
 
·
The variable component of the conversion price is a fixed discount, there is no stated price floor or shares issued to cap to the potential number of conversion shares.

Although such conversion features are typically considered equity instruments, because the conversion feature has a component which is a fixed discount from our traded stock price without a limit to the number of shares that may be issued, the Company cannot be assured that it has sufficient authorized shares to execute the conversion if presented.  Accordingly, the Company is not “in control” of the conversion and recognition of the value of the conversion feature is deemed a derivative liability for financial reporting purposes under the guidance offered in ASC 815.  As liabilities related to financial instruments, we therefore apply fair value measurement to each conversion feature liability at each reporting period.  See Note 12 for a discussion of fair value measurement.

Warrants

The terms of the warrants attached to our debt instruments will differ between specific notes but their typical terms contain the following characteristics.  Specific terms for each note are discussed in Notes 8 – 10 as appropriate.

 
·
Detachable warrants are included with the debt offering, as debt “sweeteners,” that generally provide for exercise at a fixed price,
 
·
The warrants have anti-dilution protection,
 
·
There is no active trading market for our warrants, and
 
·
Comstock Mining may lack sufficient authorized shares to satisfy all conversion options if presented.

Although such warrants are typically considered equity instruments, the Company cannot be assured that it has sufficient authorized shares to execute the exercise if presented.  Accordingly, the Company is not “in control” of the exercise and recognition of the value of the conversion feature is deemed a liability for financial reporting purposes under the guidance offered in ASC 815.  In addition, the guidance offered in ASC 815, indicates that “if share settlement is not within the control of the Company an asset or liability classification is required.”  Consequently, we classified our warrants as liabilities and began to measure them at fair value in each subsequent reporting period.  See Note 12 for a discussion of fair value measurement.

A summary of the embedded conversion option liability and warrant liability is as follows:

 
24
 

  
  
Embedded 
Conversion 
Option
Liability
  
  
Warrant
Liability
  
  
Total
  
                   
Beginning balance Dec. 31, 2008
  
$ 
5,088,333
    
$
280,000
    
$
5,368,333
  
                         
Initial issuance note liability of new convertible notes and warrants
    
1,214,469
      
 746,832
      
 1,961,301
  
Change in Fair Value of liability during 2009
    
(3,558,743
) 
    
729,298
      
(2,829,445
) 
Liability at Dec. 31, 2009
    
2,744,059
      
1,756,130
      
4,500,189
  
                         
Initial issuance note liability of new convertible notes
    
 1,132,178
      
 444,367
      
1,576,545
  
Change in Fair Value of liability during 2010
    
5,415,679
      
2,056,449
      
7,472,128
  
Liability at Sept. 30, 2010
    
9,291,916
    
$
4,256,946
    
$
13,548,862
  
 
Note 12 – Fair Value Measurements

ASC 820 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in principal or most advantageous market for that asset or liability.  The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.  In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

In addition to defining fair value, ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs.  The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market.  Each fair value measurement is reported in one of three levels, which is determined by the lowest level input that is significant to the fair value measurement in its entirety.  These levels are:
 
 
·
Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
 
·
Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
·
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.  The fair values are therefore determined using model-based techniques that include option pricing models, discontinued cash flow models, and similar techniques.

The following describes the valuation methodologies the Company uses to measure financial assets and liabilities at fair value.

Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our liabilities at September 30, 2010 and December 31, 2009, which are measured at fair value on a recurring basis:

         
Fair Value Measurements at September 30, 2010
  
   
Total
    
Level 1
    
Level 2
    
Level 3
  
                         
Liabilities:
                        
Convertible features and warrants
  
$
13,548,862
    
$
—
    
$
—
    
$
13,548,862
  
Total Liabilities
  
$
13,548,862
    
$
—
    
$
—
    
$
13,548,862
  
 
25
 

         
Fair Value Measurements at December 31, 2009
  
   
Total
    
Level 1
    
Level 2
    
Level 3
  
                         
Liabilities:
                        
Convertible features and warrants
  
$
4,500,189
    
$
—
    
$
—
    
$
4,500,189
  
Total Liabilities
  
$
4,500,189
    
$
—
    
$
—
    
$
4,500,189
  

As discussed in Note 11, the conversion feature liability represents the derivative component of convertible notes proceeds associated with the fair value of the embedded conversion features of our notes.  Warrant liabilities represent detachable warrants issued in association with various notes payable.

The fair values for the conversion feature and warrant liabilities included in Level 3 are estimated using industry standard valuation models, such as the Black-Scholes-Merton model.  

 Gains (losses) from changes in fair values of the conversion feature and warrant liabilities that are not designated as hedges are recognized in other income (expense).   The amounts recognized during the fiscal quarter ended September 30, 2010 and the year ended December 31, 2009 are as follows:

   
Liabilities
  
   
As of September 30, 2010
  
As of December 31, 2009
  
   
Balance Sheet
Location
  
Fair Value
  
Balance Sheet
Location
  
Fair Value
  
Derivative not designated as hedging Instruments under ASC 815
                  
                   
Convertible features and warrants
  
Long-term liabilities
  
$
13,548,862
  
Long-term liabilities
  
$
4,500,189
  
                       
Total Instruments not designated as hedging instruments under ASC 815
      
$
13,548,862
      
$
4,500,189
  
 
       
Amount of Loss Recognized in Income on
Derivative
  
Derivatives Not
Designated as Hedging
Instruments under ASC
815