# Comstock Inc.: Form 10-Q/A for the period ended Mar 31, 2009

- Company: [Comstock Inc.](/companies/lode.md) (CIK 1120970)
- Form: 10-Q/A
- Filed: 2009-05-19
- Accepted by EDGAR: May 19, 2009, 14:16 ET
- Period: 2009-03-31
- Accession: 0001144204-09-028219
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1120970/000114420409028219/v150245_10qa.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1120970/000114420409028219/

## Management's discussion and analysis

As filed, 21,428 characters.

The following discussion provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of our company. It should be read in conjunction with the Consolidated Financial Statements and accompanying Notes also included in this 10-Q.

The following discussion addresses matters we consider important for an understanding of our financial condition and results of operations for the three months ended March 31, 2009, as well as our future results.

#### Overview

GoldSpring, Inc. (Company) is a North American precious metals mining company, focused in Nevada, with an extensive land position of 334 claims that controls 4,300 acres comprised of 590 acres of patented claims (private lands) and 3,710 acres unpatented claims subject to various underlying royalties, in the historic Silver City and Comstock mining districts, Storey County and Lyon County, Nevada, USA. The Company was formed in mid-2003, and during that year acquired two properties in the Comstock Lode District. The Company deployed several million dollars securing permits, building an infrastructure and bringing the exploration project into test mining production within a year of its acquisition.

The Company, in 2005, began consolidating the Comstock Lode District by acquiring additional properties. The Company successfully expanded our footprint and creating additional opportunities for exploration and mining. The Company's objectives are to create reserves through exploration, resume mining, optimize its production, and maximize shareholder value.

From September 2004 through 2006 the Company operated its Plum Mine open pit gold and silver operation located on the patented Billie the Kid claims in the Comstock District. During this period, the Plum Mine operation produced 11,550 ounces of gold and 45,376 ounces of silver. The average recoverable grade for gold was 0.034 ounces per ton and for silver was 0.13 ounces per ton. In early 2007 the Company decided to suspend mining operations and to go into voluntary temporary closure in order to focus on our footprint in the Comstock,, study the geology of the District, delineate minerlization and create a drilling strategy and plan. The focus shifted from mine operations to exploration and developmental drilling in order to define mineralization. In addition, a comprehensive metallurgical testing program was initiated to ensure optimum precious metal recovery from future production.

The majority of 2007 was focused on collecting and analyzing geological information from our Comstock project in Nevada, the Hartford / Lucerne Complex provided a unique opportunity to identify significant precious metals mineralization that would lead us to open pit mine production in a short period of time.

The Company’s goal is to reopen The Plum Mine during 2010 by commencing open pit mining at the Hartford / Lucerne Complex. To achieve this goal, the Company contracted Techbase to create a computerized mine modeling and mineralization estimate and commissioned an in house scoping study. The scoping study includes a complete comprehensive mine plan and mining schedule. Construction of the new milling facility and new process ponds as well as the expansion of the processing facilities will require a diligent, efficient and fully funded effort to achieve production by early 2010. A mine truck and shovel fleet, and ancillary mine production equipment will need to be acquired and placed in service by the mine production team. The mine production team will supply the ore to the mill and heap leach pad for processing. . Our ability to resume mining is dependent upon securing sufficient funds to procure the mining fleet and related assets..

### Results of Operations and Operational Plan

The Hartford / Lucerne complex area was the focus of the 2008 - January 2009 development drilling program. The ultimate economic pit currently being planned trends onto public lands administered by the Bureau of Land Management (BLM), US Dept of the Interior. The existing production facility is located on private land. The Nevada Division of Environmental Protection -Bureau of Mine Regulation and Reclamation (BMRR) is the lead agency in the regulation of the operation of the Plum Mine. The planned starter pit is located on patented lands.

Exploration, developmental and in-fill drilling since our decision to suspend mining operation has resulted in definition of new mineable precious metal mineral reserves (as per SME Guidelines 2007). The Plum Mine has a State issued Mine Reclamation Permit (Permit No. NEV 0196) and an Operating Permit (NEV 2000109). The Mine Reclamation Permit was updated in 2008 pursuant to a required three year review and modification program. Pursuant to the 2008 approved Reclamation Plans, we have posted surety bonds for the Comstock Mine Project in the amount of $1,106,882 of which $766,768 was in the form of a cash deposit and the balance was secured from a surety bond with the Nevada Division of Minerals – Nevada Bond Pool Program. This reclamation bond allows mining and processing at the currently permitted heap leach facility in the Comstock District of Storey County.

Modification to the State permits is underway to add changes to the processing system that will optimize precious metals recovery. The Air Quality permit requires modification reflecting equipment modifications, additions and changes. The Storey County Special Use Permit must be revisited before the commencement of mining. Expected completion of permitting should allow re-opening of the mine in 2010.

A significant part of our success can be attributed to the tier-one team of experienced mining professionals that has been assembled since late 2007. This team created a drill campaign based on the results of the geological model they created from analyzing data for mineralization in the Comstock Mining District. We launched this developmental surface drill program at the Hartford / Lucerne Complex in December 2007 to delineate the zones of mineralization. The drill hole depth of this reverse circulation drill program typically ranged from 600 to 1000 feet.

Our fifteen month drill program, which ended in February 2009, consisted of 182 Reverse Circulation (RC) drill holes. The majority of the 182 drill holes were planned and methodically located to drill Hartford / Lucerne Complex on adequate spacing to define continuity and grade . A small fraction of the allocated budget was used to drill holes on lease properties that required annual work commitments. Several of these exploration drill holes intersected favorable mineralized zones and will be followed by additional offset drilling.

During this program the Company contracted two drilling companies: Orbit Garant Drilling and George Delong Construction and Drilling. The drill rigs were reverse circulation track rigs and one truck mounted drill rig that performed the exploration and developmental drilling at the Comstock project. Several experienced mining professionals and consultants with proven success were added in 2008 to further strengthen and augment all facets of mining, including metallurgy. In order to fund these exploration efforts, the Company raised $5,120,000 in 2008 and $950,000 in the first fiscal quarter 2009 to finance this developmental and exploratory drill campaign.

Third-party consultant Mike Norred, Principle Engineer of Techbase International, modeled the results of this Hartford / Lucerne Complex drill program combined with the historic drill results to estimate gold and silver mineralization. This statistical model confirmed that the drill spacing selection was correct. The model independently confirmed many geologic attributes which control this mineralized material deposit.

Our procedures to ensure accurate reporting include: 1.) Surface collars of the individual drill holes were surveyed and drill holes completed after October 7, 2008 were surveyed down the hole. 2.) Samples of drilling were collected every five feet and duplicate samples every 100 feet. 3.) Drill samples were kept in secured containers until pickup by American Assay Labs in Sparks, Nevada. 4.) American Assay Labs was the principle certified commercial laboratory used by the Company for assay analysis. 5. Check assay analysis was conducted by ALS-Chemex Laboratories in Reno, Nevada 6.) Specific selected samples were assayed by the Company’s in-house analytical lab.

In 2008, the Company began to execute a mineral exploration and mine development business model with all activities focused on resumption of mine production in 2010. The most relevant steps taken are as follows:

¨ Expanding our footprint in the Comstock Region and other acquisition opportunities through the entry into of two letters of intent to purchase rights, which upon consummation, may allow the Company to amass one of the largest land positions in the Comstock District.

¨ Further exploration in the Comstock Region to accomplish the above, including a decision to review the geology of the Hartford / Lucerne complex in a more detailed manner

¨ Complete reserve report for the Hartford / Lucerne complex through a focus on infill drilling

¨ Expanded the permitted drilling area

¨ Updated the mine reclamation bond

¨ Secured $3.0 million in financing from a major shareholder to fund our on-going drilling program in 2008

¨ Secured $1,520,000 in 2008 and $950,000 in the first fiscal quarter 2009 through various private placements to accredited investors to advance our drilling, permitting and mine design programs

In addition to our drilling activities ,, we expanded our mineral claim portfolio in the Comstock District through acquisition and the staking of mineral claims . We now control over 4,300 acres of patented and unpatented mining claims in the Comstock District of Nevada. Approximately 2,000 acres of these holdings had been added through the staking new mineral claims. We continue remains focused on expanding its portfolio of land and mineral holdings in the Comstock District.

Our exploration staff is currently planning additional surface geochemical sampling, detailed geologic mapping and rock chip sampling on previously identified favorable targets and expanding onto additional targets areas. We have consolidated historic exploration and production records using Techbase software to generate a computer model of the Comstock Mining District with the objective of delineating additional geologic targets that were previously untested.

### 2009 Developments

In the first quarter of 2009, a modification application to the Water Pollution Control Permit was submitted to the Nevada Division of Environmental Protection. The permit modifications highlight the Company’s newly designed processing facilities that will optimize recovery of the recently discovered mill-grade gold and silver ore at the Hartford Complex.

The major improvements to the processing facilities include the:

- Construction and operation of two new crushed ore storage areas;
- Implementation of a high-grade ore milling circuit in a contained area;
- Expansion of the leach solution pumping systems;
- Formation of a new pregnant solution pond; and
- Expansion of the Merrill Crowe processing plant.

The Nevada Division of Environmental Protection, Bureau of Mining Regulations and Reclamation, has begun its review of the application. Major modification applications typically take nearly 180 days to complete. Under the modified permit, the Company initially plans to mine and process at a rate of 720,000 tons of gold and silver ore per year. The majority of the ore that will be processed in the milling circuit will have a high percentage of the contained precious metals recovered because of efficiencies afforded by the milling process.

Several other operating permits are also being updated to allow operations to begin in 2010. Dennis Anderson, Professional Mine Engineer, leads the mine permitting efforts and is supported by the engineering consultants at Telesto Nevada, LLC of Reno, Nevada.

In anticipation of mining resumption, the Company has procured a 300 ton per day ball mill and related equipment. The ball mill is being added to process the high grade gold and silver mineralization, optimizing gold and silver recovery. Precious metal recovery using the ball mill and grinding to 100 Mesh should be around 95% versus 75% for heap leaching.

Assuming sufficient funds are raised in a timely manner, the Company’s goal would be to reopen the Mine during in 2010. In order to resume production, the Company must complete complete a comprehensive mine plan; and complete a mining schedule, all of which are dependent upon ability to secure sufficient funds to procure the mining fleet and related assets. In addition, we will need to construct the milling facility, process ponds and expand the existing processing facilities. A haul truck and shovel fleet, and ancillary mine production equipment will need to be acquired and placed in service by the mine production team.

There are also risks involved in the fact that one individual and his affiliates, as of March 31, 2009, beneficially own in excess of 24% of our voting stock. Pursuant to financing agreements, this convertible debt holder and his affiliates with a 61 day notice can waive the 4.9% ownership restriction, allowing him to convert 100% of his convertible debt and related interest, which totals $11,639,508 at March 31, 200, into our common shares. This group, if they waive the ownership restriction and convert all convertible debt and related interest into our voting common stock, may take actions that could conflict with your interests. This includes the election of Company directors, approval of actions generally requiring the approval of the holders of our voting stock, including adopting amendments to our articles of incorporation and bylaws and approving mergers, certain acquisitions or sales of all or substantially all of our assets, which could delay or prevent someone from acquiring or merging with us or limit the ability of our other stockholders to approve transactions that they may deem to be in their best interests.

#### DWC Resources Letter of Intent

On August 13, 2008, Goldspring, Inc. (the “Company”) entered into a binding letter of intent to purchase certain property owned by DWC Resources, Inc. in Storey County, Nevada. The purchase price is $7,500,000, but is subject to adjustment pursuant to the results of a fairness opinion and/or appraisal to be obtained by the Company. The purchase price will be paid through issuance of a $7,500,000 promissory note which shall bear interest at the rate of 9% per year with quarterly interest payments due throughout the term of the note which is 5 years. The purchased assets include patented and unpatented lode mining claims owned by DWC Resources, Inc. in the Comstock Lode district. The letter of intent also provides for the payment of royalties ranging from 2% - 6% of “net smelter returns” based upon the price of gold per ounce and a 1% royalty to be paid to the party which sold the subject property to DWC Resources in 2007. There is also a commitment to expend a minimum of $250,000 per year on exploration by the Company for five years.

#### Sutro Tunnel Sublease

The Company simultaneously entered into a binding letter of intent to sublease the Sutro Tunnel Lease dated January 1, 2008 between Sutro Tunnel Co. and John Winfield or his nominee. The purchase price for the sublease is $2,000,000 (which is subject to adjustment upon receipt of a third party fairness opinion/appraisal) payable pursuant to the issuance of a $2,000,000 promissory note which shall bear interest at the rate of 9%per year with quarterly interest payments due throughout the term of the note which is 5 years. The letter of intent also provides for the payment of royalties ranging from 6% - 8% of “net smelter returns” based upon the price of gold per ounce and a 1% royalty to be paid to Winfield if Winfield provides an acceptable buyout of the Sutro property. The Company is also required to fulfill lessee’s obligations under the Sutro Tunnel Lease with regard to payment of royalties and exploration expenditures.

### Comparative Financial Information

Below we set forth a summary of comparative financial information the three months ended March 31, 2009 and 2008.

### Comparative Financial Information

#### Three Months Ended March 31, 2009

|  | Quarter ended March 31, 2009 | Quarter ended March 31, 2008 | Difference |
| --- | ---: | ---: | ---: |
| Revenue | $— | $— | $— |
| Depletion and amortization | 38,866 | 60,000 | (21,134) |
| Reclamation, Exploration and Test Mining Expense | 1,450,316 | 649,093 | 801,223 |
| General and Administration | 382,554 | 300,202 | 82,352 |
| Consulting and Professional Service | 70,406 | 31,109 | 39,297 |
| Financing cost – warrant issuances | 1,326,862 | — | 1,362,862 |
| Other, net | — | (744,385) | 744,385 |
| Interest Expense | 781,100 | 741,191 | 39,909 |
| Net Loss | $(4,050,104) | (1,037,120) | $3,012,984 |

We did not produce or sell any gold or silver at our Comstock project in Nevada during the three months ended March 31, 2009 and March 31, 2008. In February 2007, we shifted our focus to geology and developmental / in-fill drilling and suspended mining activities.

Reclamation, Exploration and Test Mining Expenses were $ 801,223 greater for the three month period ended March 31, 2009 compared to the three month period ended March 31, 2008. The variance reflects the suspension of mining activities in 2007and the commencement of our developmental / in-fill drilling program at our Comstock project in December 2007.

The first calendar quarter 2009 General and administrative expenses increased by $82,352 from the first calendar quarter 2008. The variance reflects increased labor costs from the hiring of additional employees and $21,000 of stock based compensation from a stock grant to an employee.

Consulting and professional expenses for the three month period ended 2009 were $70,406 compared to $31,109 for the three month ended March 31, 2008, amounting to $39,297 quarter over quarter increase. The increase in expenses reflects higher fees from our outside auditors and a negotiated reduction in legal fees during the first quarter 2008.

The first calendar quarter 2009 Financing cost – warrant issuance expense represents the fair value calculation for the 95 million warrants issued in conjunction with six (6) private placements during the quarter. The fair value of each warrant was estimated at the date of the grant using the Black-Scholes option pricing model. Black-Scholes utilizes assumptions related to volatility, the risk free interest rate, the dividend yield (which is assumed to be zero, as the Company has not paid, nor anticipates paying any, cash dividends and employee exercise behavior. Expected volatilities utilized in the model are based mainly on the historical volatility of the Company’s stock price and other factors.

Other, net of $744,385 in the first calendar quarter 2008 reflects an accrual adjustment to liquidated damages resulting from the extinguishment of debt.

Interest expense for the three month period ended March 31, 2009 increased by $39,909 from March 31, 2008. This variance reflects the issuance of additional interest bearing notes.

Our Company is a Development Stage enterprise as defined by SEC Industry Guide 7, and, in accordance with SEC Industry Guide 7, infrastructure expenditures such as haul roads, leach pads and start-up costs and all drilling were expensed.

### Liquidity and Capital Resources

We recognize that our cash resources are limited. Our continued existence and plans for mining production depend on our ability to obtain the capital necessary to operate, through the issuance of additional debt, royalty financing or equity. In the first calendar quarter 2009, we raised an aggregate of $950,000 through six private placements. In May 2009, we secured formal commitments for additional debt financing up to $2 million (See Note 17). While this additional funding may meet our immediate working capital needs, if we are not able to generate sufficient revenues and cash flows or obtain additional or alternative funding, we will be unable to continue as a going concern. We have yet to realize an operating profit at our Company. As disclosed in the report of our independent registered public accounting firm in our financial statements Form 10-K for the year ended December 31, 2008, our recurring losses and negative cash flow from operations raise substantial doubt about our ability to continue as a going concern.

As of March 31, 2009, the Company is in default of the terms on several outstanding notes payable with the Winfield Group totaling $11,869,986 of principal and $3,624,023 of interest. The Winfield Group consists of Mr. Winfield, Sante Fe Financial Corporation, Portsmouth Square and InterGroup Corporation, Combined, the Winfield Group represent the Company’s largest creditor and a significant stockholder. Mr. Winfield is affiliated with these Companies through a direct controlling interest and/or as their Chairman of the Board. Because we are in default, the entire note balances of the defaulted notes have been recorded as current liabilities.

## Market risk

As filed, 625 characters.

An investment in our common stock involves risk. You should carefully consider the following risk factors.

Our exposure to market risk for changes in interest rates relates primarily to the market-driven increase or decrease in interest rates, and the impact of those changes on the Company’s ability to realize a return on invested or available funds. We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in short term high-credit investment grade securities and/or commercial checking and savings accounts.

## Controls and procedures

As filed, 3,441 characters.

### A. Disclosure

As of the end of the period covered by this Annual Report on Form 10-Q, management performed, with the participation of our Chief Executive Officer and Chief 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 Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation as described above, our internal control over disclosure controls and procedures as of March 31, 2009 are effective.

### B. Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized transactions.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control - Integrated Framework* and *Internal Control over Financial Reporting-Guidance for Smaller Public Companies.*

We believe that internal control over financial reporting is effective as of December 31, 2008. This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.

There have been no changes during the quarter ended March 31, 2009 in our Company's internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and 15d-15(d) that have material affected, or are reasonably likely to materially affect, our internal controls over our financial reporting.

## Risk factors

As filed, 23,702 characters.

An investment in our common stock involves risk. You should carefully consider the following risk factors, in addition to those discussed elsewhere in this report, in evaluating our company, its business, and prospects. The following risks could cause our business, financial condition, and operating results to be materially and adversely affected.

***We have limited resources and our inability to obtain additional financing could negatively affect our growth and success.***

We have incurred substantial losses since our inception, and we are currently experiencing a cash flow deficiency from operations. Our current cash flow and capital resources are limited, and we may require additional funds to pursue our business. We may not be able to secure further financing in the future. If we are not able to obtain additional financing on reasonable terms, we may not be able to execute our business strategy, conduct our operations at the level desired, or even to continue business.

### We have received a qualified report from our independent auditors

Our independent auditors report on our financial statements indicates that our recurring losses from operations and working capital deficit raise substantial doubt about our ability to continue as a going concern

### Inability to raise sufficient funds to increase growth

Our recent financings have only provided capital to continue existing operations but not to continue significant exploration and growth. Without the ability to attract sufficient amounts of capital at any one time, it is unlikely that we can achieve profitability in the foreseeable future.

***We have invested capital in high-risk mineral projects where we have not conducted sufficient exploration and engineering studies.***

We have invested capital in various mineral properties and projects in Nevada where we may not have conducted sufficient exploration and engineering studies to minimize the risk of project failure to the extent that is typical in the mining industry. Our mineral projects involve high risks because we have not invested substantial sums in the characterization of mineralized material, geologic analysis, metallurgical testing, mine planning, and economic analysis to the same extent that other mining companies might deem reasonable. Standard industry practice calls for a mining company to prepare a formal mine plan and mining schedule and have these documents reviewed by a third party specialist. We do not have a formal mine plan that has been reviewed by a third party specialist. Because we have not established proven or probable reserves, there can be no assurance that we will be able to produce sufficient gold to recover our investment and operating costs.

***We will not be successful unless we recover precious metals and sell them for a profit.***

Our success depends on our ability to recover precious metals, process them, and successfully sell them for more than the cost of production. The success of this process depends on the market prices of metals in relation to our costs of production. We may not always be able to generate a profit on the sale of gold or other minerals because we can only maintain a level of control over our costs and have no ability to control the market prices. The total cash costs of production at any location are frequently subject to great variation from year to year as a result of a number of factors, such as the changing composition of ore grade or mineralized material production, and metallurgy and exploration activities in response to the physical shape and location of the ore body or deposit. In addition costs are affected by the price of commodities, such as fuel and electricity. Such commodities are at times subject to volatile price movements, including increases that could make production at certain operations less profitable. A material increase in production costs or a decrease in the price of gold or other minerals could adversely affect our ability to earn a profit on the sale of gold or other minerals.

***We do not have proven or probable reserves, and there is no assurance that the quantities of precious metals we produce will be sufficient to recover our investment and operating costs.***

Our success depends on our ability to produce sufficient quantities of precious metals to recover our investment and operating costs. We do not have proven or probable reserves. There can be no assurance that our exploration activities will result in the discovery of sufficient quantities of mineralized material to lead to a commercially successful operation.

***The cost of our exploration and acquisition activities is substantial, and there is no assurance that the quantities of minerals we discover or acquire will justify commercial operations or replace reserves established in the future.***

Mineral exploration, particularly for gold and other precious metals, is highly speculative in nature, involves many risks, and frequently is nonproductive. There can be no assurance that our exploration and acquisition activities will be commercially successful. Once gold mineralization is discovered, it may take a number of years from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change. Substantial expenditures are required to acquire existing gold properties, to establish ore reserves through drilling and analysis, to develop metallurgical processes to extract metal from the ore, and in the case of new properties, to develop the processing facilities and infrastructure at any site chosen for mineral exploration. There can be no assurance that any gold reserves or mineralized material that may be discovered or acquired in the future will be in sufficient quantities or of adequate grade to justify commercial operations or that the funds required for mineral production operation can be obtained on a timely or reasonable basis. Mineral exploration companies must continually replace mineralized material or reserves depleted by production. As a result, there can be no assurance that we will be successful in replacing any reserves or mineralized material acquired or established in the future.

***The price of gold fluctuates on a regular basis and a downturn in price could negatively impact our operations and cash flow.***

Our operations are significantly affected by changes in the market price of gold. Gold prices can fluctuate widely and may be affected by numerous factors, such as expectations for inflation, levels of interest rates, currency exchange rates, central bank sales, forward selling or other hedging activities, demand for precious metals, global or regional political and economic crises, and production costs in major gold-producing regions, such as South Africa and the former Soviet Union. The aggregate effect of these factors, all of which are beyond our control, is impossible for us to predict. The demand for and supply of gold affect gold prices, but not necessarily in the same manner as supply and demand affect the prices of other commodities. The supply of gold consists of a combination of new mineral production and existing stocks of bullion and fabricated gold held by governments, public and private financial institutions, industrial organizations, and private individuals. As the amount produced in any single year constitutes a small portion of the total potential supply of gold, normal variations in current production do not have a significant impact on the supply of gold or on its price. If gold prices decline substantially, it could adversely affect the realizable value of our assets and potential future results of operations and cash flow.

***The use of hedging instruments may not prevent losses being realized on subsequent price decreases or may prevent gains being realized from subsequent price increases.***

We may from time to time sell some future production of gold pursuant to hedge positions. If the gold price rises above the price at which future production has been committed under these hedge instruments, we will have an opportunity loss. However, if the gold price falls below that committed price, our revenues will be protected to the extent of such committed production. In addition, we may experience losses if a hedge counterparty defaults under a contract when the contract price exceeds the gold price. As of the date of filing of this report, we have no open hedge positions.

***Since our business consists of exploring for or acquiring gold prospects, the drop in the price of gold will negatively affect our asset values, cash flows, potential revenues and profits.***

We plan to pursue opportunities to acquire properties with gold mineralized material or reserves with exploration potential. The price that we pay to acquire these properties will be influenced, in large part, by the price of gold at the time of the acquisition. Our potential future revenues are expected to be derived from the production and sale of gold from these properties or from the sale of some of these properties. The value of any gold reserves and other mineralized material, and the value of any potential mineral production therefrom, will vary in direct proportion to variations in those mineral prices. The price of gold has fluctuated widely as a result of numerous factors beyond our control. The effect of these factors on the price of gold, and therefore the economic viability of any of our projects, cannot accurately be predicted. Any drop in the price of gold would negatively affect our asset values, cash flows, potential revenues, and profits.

### We compete with other mineral exploration and mining companies

We compete with other mineral exploration and mining companies or individuals, including large, established mining companies with substantial capabilities and financial resources, to acquire rights to mineral properties containing gold and other minerals. There is a limited supply of desirable mineral lands available for claim staking, lease, or other acquisition. There can be no assurance that we will be able to acquire mineral properties against competitors with substantially greater financial resources than we have.

***Our activities are inherently hazardous and any exposure may exceed our insurance limits or may not be insurable.***

Mineral exploration and operating activities are inherently hazardous. Operations in which we have direct or indirect interests will be subject to all the hazards and risks normally incidental to exploration and production of gold and other metals, any of which could result in work stoppages, damage to property, and possible environmental damage. The nature of these risks is such that liabilities might exceed any liability insurance policy limits. It is also possible that the liabilities and hazards might not be insurable, or we could elect not to insure ourselves against such liabilities because of the high premium costs, in which event, we could incur significant costs that could have a material adverse effect on our financial condition.

***We do not have proven or probable reserves, and our mineral calculations are only estimates; any material change may negatively affect the economic viability of our properties.***

Substantial expenditures are required to acquire existing gold properties with established reserves or to establish proven or probable reserves through drilling and analysis. We do anticipate expending sums for additional drilling and analysis to establish proven or probable reserves on our properties. While we estimate the amount of mineralized material we believe exists on our properties, our calculations are estimates only, subject to uncertainty due to factors, including the quantity and grade of ore, metal prices, and recoverability of minerals in the mineral recovery process. There is a great degree of uncertainty attributable to the calculation of any mineralized material, particularly where there has not been significant drilling, mining, and processing. Until the mineralized material located on our properties is actually mined and processed, the quantity and quality of the mineralized material must be considered as an estimate only. In addition, the quantity of mineralized material may vary depending on metal prices. Any material change in the quantity of mineralized material may negatively affect the economic viability of our properties. In addition, there can be no assurance that we will achieve the same recoveries of metals contained in the mineralized material as in small-scale laboratory tests or that we will be able to duplicate such results in larger scale tests under on-site conditions or during production.

***Our operations are subject to strict environmental regulations, which result in added costs of operations and operational delays.***

Our operations are subject to environmental regulations, which could result in additional costs and operational delays. All phases of our operations are subject to environmental regulation. Environmental legislation is evolving in some countries and jurisdictions in a manner that may require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors, and employees. There is no assurance that any future changes in environmental regulation will not negatively affect our projects.

### We have no insurance for environmental problems.

Insurance against environmental risks, including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from exploration and production, has not been available generally in the mining industry. We have no insurance coverage for most environmental risks. In the event of a problem, the payment of environmental liabilities and costs would reduce the funds available to us for future operations. If we are unable to fund fully the cost of remedying an environmental problem, we might be required to enter into an interim compliance measure pending completion of the required remedy.

***We are subject to federal laws that require environmental assessments and the posting of bonds, which may add significant costs to our operations and delays in our projects.***

The Bureau of Land Management requires that mining operations on lands subject to its regulation obtain an approved plan of operations subject to environmental impact evaluation under the National Environmental Policy Act. Any significant modifications to the plan of operations may require the completion of an environmental assessment or Environmental Impact Statement prior to approval. Mining companies must post a bond or other surety to guarantee the cost of post-mining reclamation. These requirements could add significant additional cost and delays to any mining project undertaken by us. Our mineral exploration operations are required to be covered by reclamation bonds deemed adequate by regulators to cover these risks. We believe we currently maintain adequate reclamation bonds for our operations.

***Changes in state laws, which are already strict and costly, can negatively affect our operations by becoming stricter and costlier.***

At the state level, mining operations in Nevada are regulated by the Nevada Division of Environmental Protection, or NDEP. Nevada state law requires our Nevada projects to hold Nevada Water Pollution Control Permits, which dictate operating controls and closure and post-closure requirements directed at protecting surface and ground water. In addition, we are required to hold Nevada Reclamation Permits required under Nevada law. These permits mandate concurrent and post-mining reclamation of mines and require the posting of reclamation bonds sufficient to guarantee the cost of mine reclamation. Other Nevada regulations govern operating and design standards for the construction and operation of any source of air contamination and landfill operations. Any changes to these laws and regulations could have a negative impact on our financial performance and results of operations by, for example, requiring changes to operating constraints, technical criteria, fees or surety requirements.

***Title claims against our properties could require us to compensate parties, if successful, and divert management’s time from operations.***

There may be challenges to our title in the properties in which we hold material interests. If there are title defects with respect to any of our properties, we might be required to compensate other persons or perhaps reduce our interest in the effected property. The validity of unpatented mineral claims, which constitute most of our holdings in the United States, is often uncertain and may be contested by the federal government and other parties. The validity of an unpatented mineral claim, in terms of both its location and its maintenance, depends on strict compliance with a complex body of federal and state statutory and decisional law. Although we have attempted to acquire satisfactory title to our properties, we have not obtained title opinions or title insurance with respect to the acquisition of the unpatented mineral claims. While we have no pending claims or litigation pending contesting title to any of our properties, there is nothing to prevent parties from challenging our title to any of our properties. While we believe we have satisfactory title to our properties, some risk exists that some titles may be defective or subject to challenge. Also, in any such case, the investigation and resolution of title issues would divert management’s time from ongoing exploration programs.

***We have never paid a cash dividend on our common stock and do not expect to pay cash dividends in the foreseeable future.***

We have never paid cash dividends, and we do not plan to pay cash dividends in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment in us will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no assurance that the price of our common stock that will prevail in the market after this offering will ever exceed the price that you pay.

***Our business depends on a limited number of key personnel, the loss of whom could negatively affect us.***

Robert Faber, Chief Executive Officer, President and acting-Chief Financial Officer and Jim Golden, our COO, are important to our success. If either becomes unable or unwilling to continue in his present position, our business and financial results could be materially negatively affected.

***If we fail to adequately manage our growth, we may not be successful in growing our business and becoming profitable.***

We plan to expand our business and the number of employees over the next 12 months. In particular, we intend to hire additional operational personnel. Our inability to hire and retain additional qualified employees could have a negative impact on our chances of success.

***The issuance of securities by us may not have complied with or violated federal and state securities laws and, as a result, the holders of these shares and warrants may have rescission rights.***

Securities issued by us may not have complied with applicable federal and state securities laws, the result of which is that the holders of these securities may have rescission rights that could require us to reacquire the securities.

***Outstanding convertible securities and warrants may result in substantial dilution.***

At March 31, 2009 we had outstanding 3, 487,847,312 shares of common stock. In addition, we had outstanding convertible notes and related interest plus various common stock purchase warrants. At March 31, 2009, these notes, related interest and warrants were convertible into or exercisable for a total of approximately 1.9 billion additional shares of our common stock, subject to further anti-dilution provisions.

***Our stock is a penny stock and trading of our stock may be restricted by the SEC’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.***

Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9, which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers that sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock. NASD sales practice requirements may also limit a stockbroker’s ability to buy or sell our stock.

In addition to the “penny stock” rules promulgated by the Securities and Exchange Commission, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretation of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy or sell our stock and have an adverse effect on the market for our shares.

Filed May 19, 2009.
Source: SEC EDGAR, the filing index for accession 0001144204-09-028219. Last ingested by Listed: Nov 4, 2026, 17:20 ET. No prices; not investment advice.