# Comstock Inc.: Form 10-Q for the period ended Mar 31, 2010

- Company: [Comstock Inc.](/companies/lode.md) (CIK 1120970)
- Form: 10-Q
- Filed: 2010-05-13
- Accepted by EDGAR: May 13, 2010, 13:32 ET
- Period: 2010-03-31
- Accession: 0001144204-10-026791
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1120970/000114420410026791/v184722_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1120970/000114420410026791/

## Management's discussion and analysis

As filed, 22,921 characters.

The following discussion provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of our company. It should be read in conjunction with the Consolidated Financial Statements and accompanying Notes also included in this 10-Q and our Annual Report on Form 10-K as of and for the fiscal year ending December 31, 2009.

The following discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of and for the three months ended March 31, 2010, as well as our future results.

Overview

GoldSpring, Inc. is a North American precious metals mining company, focused on a Comstock Mine Project in Nevada, with extensive, contiguous property in the Comstock Lode 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.

The Company began acquiring properties in the Comstock in 2003. Since then, the Company has secured permits, built an infrastructure and brought the exploration project into test mining production. We began further consolidating the Comstock Lode 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 during the American Civil War and its world- class bonanza precious metal grades, the geology is well known and has been studied in detail by the Company and many independent researchers. We have accumulated a vast library of historical data and detailed surface mapping and, in conjunction with drilling programs designed for expanding the known historical data base, we have invested in our understanding of the Comstock’s broader geological footprint.

The Comstock Mine Project now consists of 4,238 acres of active lode mining claims in the Comstock Lode Mining District. The acreage is comprised of 590 acres of patented claims (private lands) and 3,648 acres of unpatented claims, Bureau of Land Management (BLM) administered. The Project includes the Comstock Mine heap leach processing facility, which will be redesigned and constructed to accommodate our new production plans. Nearly 700 Reverse Circulation (RC) holes, drilled by GoldSpring and our predecessors, have further defined our mine plan at the Lucerne and Billie the Kid open pits together with those along strike and down- dip. For our exploration and development campaigns, all drilling, surface and down-hole surveying, hole abandonment, geologic logging, sampling, and assays were performed to industry-recognized standards.

We produced 11,550 ounces of gold and 68,514 ounces of silver from 2004-2006, at our Comstock Lode test mining operation and existing heap leach processing facilities. Our test mining activities were suspended in 2007, and we began an exploration and drilling program to gather the detailed information to allow us to restart mining with a high degree of confidence.

In November, 2009, we retained Moelis & Company to serve as our exclusive financial advisor. Moelis & Company is a global investment bank that provides financial advisory services and capital raising solutions to a broad client base, through its offices in New York, Boston, Chicago, Los Angeles, London, and Sydney. We believe that the relationship improves the likelihood of better financing our Comstock Lode project on more favorable terms.

In December, 2009, we engaged Behre Dolbear, a mining consulting firm based in Denver, Colorado, to review our mine model, and to produce a technical report compliant with the Canadian NI 43-101 standard. The 43-101 standard is not recognized by SEC Guide 7, but this report is expected to help us attract international mining investors, who are accustomed to evaluating projects through this standard. The report is expected to be complete in the second quarter of 2010.

In December, 2009, we entered into a definitive agreement to obtain $4.5 million in new debt financing for our Comstock Lode project. The financing is being provided through a consortium led by an existing shareholder, who is an accredited investor. The funding will be provided through convertible debentures, in six monthly increments of $750,000, which commenced December 10th, 2009. Each debenture has a term of three years, carries an interest rate of 8%, and is convertible to restricted common stock, at $.01 per share through maturity. The debentures also include warrants for 50% of the face amount, exercisable at $.0175, a 100% premium to the current stock price, for three years.

Our cash resources remain 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 or equity-linked instruments. If we are unable to raise additional working and or permanent capital through outside financing, it is unlikely that our existing financing will be sufficient for the liquidity necessary for anticipated working capital requirements associated with existing exploration activities and plans for restarting production, including capital expenditure requirements and interest payments associated with our indebtedness and existing lease obligations.

Furthermore, it is unlikely that the cash generated, if any, from our internal operations will suffice as a primary source of the liquidity necessary for anticipated working capital requirements, capital expenditure requirements and interest payments associated with our lease obligations and indebtedness. There is no assurance that the Company’s initiatives to improve its liquidity and financial position will be successful. Accordingly, there is substantial risk that the Company will be unable to continue as a going concern. In the event of insolvency, liquidation, reorganization, dissolution or other winding up of the Company, the Company’s creditors would be entitled to payment in full out of the Company’s assets before stockholders would be entitled to any payment, and it is unlikely that the value of such assets would exceed the claims on such assets.

There are also risks involved in the fact that one individual and his affiliates, as of March 31, 2010, beneficially own in excess of 40% 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 them to convert 100% of their convertible debt and related interest, which totals $13,921,754 at March 31, 2010, into shares of our common stock. In addition, if the proposed recapitalization and balance sheet restructuring plan is implemented, this individual and his affiliates would own a significant percentage of the Company’s common stock. This group, if the ownership restriction is waived and all convertible debt and related interest is converted into our common stock may take actions that could conflict with the interests of the other stockholders including the election of Company directors and approval of actions generally requiring the approval of the stockholders 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 a third party from acquiring or merging with the Company or limit the ability of the other remaining stockholders to approve transactions that they may deem to be in their best interests.

Strategic Plan and Management Reorganization

The Board has approved a strategic plan designed to restructure and recapitalize the Company, accelerate mine development and production and continue exploration. The principal features of the plan encompass a recapitalization and balance sheet restructuring (which includes a reverse stock split, a debt-for-equity exchange, a land-for-debt exchange and a new capital raise to fund gold mine operations, exploration and development) and an operational and management restructuring. The goal of the plan is to deliver stockholder value by validating \[qualified resources (at least measured and indicated) and reserves (probable and proven) of 3,250,000 gold equivalent ounces by 2013\], and commencing commercial mining and processing operations by early 2011, respectively, with annual production rates of 20,000 gold equivalent ounces. Mr. De Gasperis, our Chief Executive Officer, will lead implementation of the plan.

The Company has received stockholder approval to effect a one-for-two hundred reverse stock split of its common stock, whereby each block of two hundred shares of common stock registered in the name of each stockholder will be converted into one share of the Company's common stock. The reverse stock split was approved by the Company's stockholders pursuant to a written consent in lieu of a special meeting of the stockholders solicited under a Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission ("SEC") on March 24, 2010. Over 91% of the written consents received were voted in favor of the reverse stock split, with less than 8% of the written consents cast against. The Company's Board of Directors approved the immediate implementation of the reverse stock split and all necessary documents and notifications to the appropriate regulatory agencies, including the required notification to FINRA, to effectuate the reverse stock split, have been filed. The Board has also established the effective date for the reverse stock split to be the day next following the receipt from FINRA that the notification has been approved, which is expected to be no later than May 18, 2010.

The approval of the reverse stock split is the first step in the Company's strategic plan designed to restructure and recapitalize the Company. The recapitalization and balance sheet restructuring phase of the strategic plan, in addition to accomplishing the reverse stock split, is currently expected to include:

- A debt-for-equity exchange with the holders of its convertible indebtedness, thereby eliminating the substantial majority of the Company's indebtedness;
- The consummation of the transaction for the rights to two integral parcels of land for exploration and to facilitate operations on the Company's existing parcels; and
- The raising of new equity capital, possibly in the form of one or more equity transactions.

The Company anticipates completing these recapitalization and balance sheet restructuring transactions around mid-year 2010. In connection therewith, the Board has agreed to pursue listing of the common shares on an appropriate securities exchange in due course. The strategic plan has scheduled the exploration and development drilling intended to validate mine design and increased \[qualified resources and reserves in the latter half of 2010 through 2013, with two intermediate objectives of 1,000,000 gold equivalent ounces and 2,000,000 of gold equivalent ounces\] with the long term planned objective of 3,250,000 gold equivalent ounces. The plan has also scheduled the start of production operations in early 2011, initially from using existing heap leach operating assets, and then scaling to an annual run rate of at least 20,000 \[gold equivalent ounces\]. The commencement of production in early 2011 is dependent on the Company raising sufficient capital as part of its strategic plan.

Early 2010 Developments

Our strategic plan calls for additional infill drilling and metallurgical testing prior to the resumption of mining. Two drilling programs began late in the first quarter, 2010. These drilling programs are managed by Larry Martin, CPG, our Chief Geologist.

The first program is a reverse circulation drilling program that provides additional information for a detailed mine design. It includes approximately 60 infill holes in the Lucerne area and the historic Hartford and Justice areas. The drilling commenced using two drilling rigs and crews supplied by George DeLong Construction, Inc., of Winnemucca, Nevada.

The second drilling program includes drilling six core holes, using a diamond drilling rig and crews supplied by KB Drilling, of Moundhouse, Nevada. The core will be used for metallurgical testing, needed for final design of the processing flow design and for geotechnical testing, needed to finalize the slope stability calculations for the open pit walls.

The information from these drill programs will be used to develop a detailed mine design for reopening the mine, fine-tune our mineral processing procedures to maximize gold and silver recovery and update our global resource estimates. We continue to take all needed steps needed to resume production.

The Company is currently preparing an application for a major modification to our Air Quality Permit and an application for a new Mercury Emissions Permit scheduled for completion in the second quarter of 2010, under the direction of Dennis Anderson, PE, our Senior Engineer. These permits, to be issued by the Nevada Division of Environmental Protection (NDEP), are required before mining and processing can begin.

In mid-2009, the Company was contacted by the United State Environmental Protection Agency (EPA) regarding the selection of the Company’s Plum Mine to be audited under the EPA’s Toxic Release Inventory (TRI) program. The Company engaged Enviroscientists, Inc., to assist it in managing the EPA audit as well as the Company’s TRI reporting requirements. The audit may determine that the Company was not in compliance with the TRI requirements and, as a result, the EPA may take action against the Company, including the imposition of fines and penalties or other enforcement action, based on the results of the audit.

Additional activities planned for 2010:

A drilling program to evaluate what we have designated as the “northern extension” mineralization has been designed. This additional drilling will begin once the first program of infill holes has been completed and evaluated. Our strategic plan also calls for a program of exploration drilling on the 36 exploration targets already identified by our geologic team, throughout our extensive land holdings in the Comstock Lode district. Our geologic team will rank the targets so that we are leveraged for maximum success.

We will continue to increase our footprint in the Comstock Lode District by staking or leasing mining claims with potential for exploration success. We consider the historic Comstock Lode central to our growth strategy. We work collaboratively with Federal, State, and local regulatory agencies to ensure that we obtain all remaining permits needed to resume mining.

The Company will continue our program to catalog and digitize our library of historic mining maps and reports, so that our team can leverage the knowledge accumulated by over 150 years of mining experience in the Comstock Lode.

### Comparative Financial Information

Below we set forth a summary of comparative financial information the three and three months ended March 31, 2010 and 2009.

### Comparative Financial Information

#### Three Months Ended March 31, 2010 and March 31, 2009:

|  | Quarter ended March 31, 2010 | Quarter ended March 31, 2009 | Difference |
| --- | ---: | ---: | ---: |
| Revenue | $— | $— | $— |
| Depletion and amortization | 108,236 | 38,866 | 69,370 |
| Reclamation, Exploration and Test Mining Expense | 491,324 | 1,450,316 | (958,992) |
| General and Administration | 355,424 | 382,554 | (27,130) |
| Consulting and Professional Service | 149,306 | 70,406 | (78,900) |
| Financing cost | 86,914 | — | 86,914 |
| Derivative change in fair value | 878,456 | 1,326,862 | (448,406) |
| Other – Gain on sale of Royalty | (300,000) | — | (300,000) |
| Interest Expense | 859,647 | 781,100 | (78,547) |
| Net Loss | $(2,629,307) | (4,050,104) | 1,420,797 |

We did not produce or sell any gold or silver at our Comstock project in Nevada during the three months ended March 31, 2010 and March 31, 2009.

Reclamation, Exploration and Test Mining Expenses were $ 958,922 less for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. This variance reflects the suspension of drilling activities in mid first quarter 2009 allowing our team to focus on quantifying the drill assay information from the December 2007 through January 2009 drill campaign. The 2010 drill campaign did not start until the later part of March.

Consulting and professional expenses for the three month period ended March 31, 2010 were $149,306 compared to $70,406 for the three month ended March 31, 2009, amounting to $78,900 quarter over quarter increase. The increase in consulting and professional expenses reflects the engagement of Symmetry Advisors for strategic planning and scheduling and higher legal and accounting fees during the first calendar quarter 2010.

The Financing cost released in the first quarter 2010 represent fees associated with the $1,750,000 of funding received in the first quarter 2010.

Derivative change in Fair Value decreased in the first quarter 2010 when compared to the same period in 2009 by $448,406. This favorable variance reflects the year over year fair value calculation change for beneficial features (embedded derivatives) and detachable instrument (warrants) contained in various notes at each of the reporting periods.

In January 2010, we sold a 0.6% royalty interest in our Obester Property to Precious Royalties for $550,000. After adjusting our mineral claim value for the sale, a gain of $300,000 was realized.

Interest expense for the three month period ended March 31, 2010 increased by $78,547 when compared to the same calendar quarter in 2009. This variance reflects the issuance of additional interest bearing notes.

### 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. During the first three months of 2010, we raised an aggregate of $1,750,000 in financing. While this additional funding may meet our immediate working capital needs, we did not generate revenues or cash flows or obtain additional or alternative funding that would enable us 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 included in our Annual Report on Form 10-K for the year ended December 31, 2009, 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, 2010, the Company was in default of the terms on several outstanding notes payable with the Winfield Group (“Winfield Group”) totaling $13,369,986 of principal and $4,573,544 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.

The Winfield Group held various notes and debentures issued by the Company that are reported in several different liabilities accounts that are in default as of March 31, 2010. The notes are as follows:

*Debt in Technical Default with Winfield Group*

| Note Descriptions (Winfield Group) | At March 31, 2010 Principal | Unpaid Interest | Total |
| --- | ---: | ---: | ---: |
| 15% Convertible Notes Payable – Investors | $687,928 | $— | $687,929 |
| 18% Convertible Debentures Payable - Mandatory Redemption Payment | 4,412,058 | 1,067,824 | 5,479,882 |
| 18% Convertible Notes Payable - 2006 – 2007 | 1,620,000 | 1,005,538 | 2,625,538 |
| 11% Convertible Notes Payable - June - November 2008 | 2,500,000 | 471,128 | 2,971,128 |
| 11% Convertible Notes Payable - December 2008 | 500,000 | 77,196 | 577,196 |
| 9% Convertible Notes Payable - May - August 2009 | 1,000,000 | 70,681 | 1,070.681 |
| 8% Convertible Notes Payable - December 2009 | 500,000 | 9,401 | 509,401 |
| 17% Promissory Note Payable - July 2005 | 1,200,000 | 1,455,618 | 2,655,618 |
| 18% Promissory Note Payable - December 2007 Financing | 600,000 | 190,092 | 790,092 |
| 18% Promissory Note Payable - January 2008 Financing | 600,000 | 176,092 | 776,092 |
| 5% Debt Seller Note (Plum Mine) | 250,000 | 59375 | 309,375 |
| Total at March 31, 2010 | $13,369,986 | $4,573,544 | $17,943,530 |

Had the Winfield Group converted all of its convertible principal and interest of $13,921,754 into shares of our common stock at March 31, 2010, we would have been obligated to issue to the Winfield Group 2,027,000,000 shares representing 37% of our outstanding shares of common stock, resulting in substantial dilution.

As stated earlier, the board has approved a restructuring and recapitalization plan that includes a reverse stock-split, debt for equity exchange and a new capital raise. If we are unable, however, to raise additional working capital through outside financing, it is unlikely that we will achieve resumption of mining in early 2011. Furthermore, it is unlikely that the cash generated from our internal operations will suffice as a primary source of the liquidity necessary for anticipated working capital requirements, capital expenditure requirements and interest payments associated with our lease obligations and indebtedness. There is no assurance that the Company’s initiatives to improve its liquidity and financial position will be successful. Accordingly, there is substantial risk that the Company will be unable to continue as a going concern. In the event of insolvency, liquidation, reorganization, dissolution or other winding up of the Company, the Company’s creditors would be entitled to payment in full out of the Company’s assets before stockholders would be entitled to any payment, and it is unlikely that the value of such assets would exceed the claims on such assets.

## 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, 3,098 characters.

### A. Disclosure

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, management performed, with the participation of our Principal Executive Officer and Principal Financial Officer and our Principal Accounting Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Principal Executive Officer and Principal Financial Officer and our Principal Accounting Officer, to allow timely decisions regarding required disclosures. Based on the evaluation as described above, our internal control over disclosure controls and procedures as of March 31, 2010 were 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.*

There have been no changes during the quarter ended March 31, 2010 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, 3,187 characters.

Set forth below is an update to our risk factors as set forth in our Annual Report on Form 10-K for the year ended December 31, 2010. For full comprehension of the risks affecting our Company, you are encouraged to review the risk factors set forth in our 2009 Annual Report on Form 10-K, which are hereby incorporated herein in their entirety.

Investing in our common stock is very speculative and involves a high degree of risk. You should carefully consider all of the information in this report before making an investment decision. The following are among the risks we face related to our business, assets and operations. They are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also arise. Any of these risks could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of our common stock. You should not purchase our shares unless you can afford to lose your entire investment.

### Relative to our cash flows we have substantial indebtedness.

As of March 31, 2010, we had current indebtedness of $15,885,732 million in addition to $5,281,444 million of current accrued interest payable. For the fiscal quarter ended March 31, 2010, we had a deficit of cash flows from operating activities of $1,504,423 million. Our substantial indebtedness, and our ability to incur additional indebtedness, may further negatively affect our cash flow and our ability to operate our business and react to changes in the economy or our industry.

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

At March 31, 2010, we had outstanding 3,782,950,927 shares of common stock. In addition, we had outstanding convertible notes and related interest plus various common stock purchase warrants. At March 31, 2010, these notes, related interest and warrants were convertible into or exercisable for a total of approximately 3.65 billion additional shares of our common stock, subject to further anti-dilution provisions.

***If we are not able to obtain financing, it is unlikely that we will be able to continue as a going concern.***

If we are unable to raise additional working capital through outside financing, it is unlikely that the cash generated from our internal operations will suffice as a primary source of the liquidity necessary for anticipated working capital requirements, capital expenditure requirements and interest payments associated with our lease obligations and indebtedness. There is no assurance that the Company’s initiatives to improve its liquidity and financial position will be successful. Accordingly, there is substantial risk that the Company will be unable to continue as a going concern. In the event of insolvency, liquidation, reorganization, dissolution or other winding up of the Company, the Company’s creditors would be entitled to payment in full out of the Company’s assets before stockholders would be entitled to any payment, and it is unlikely that the value of such assets would exceed the claims on such assets.

Filed May 13, 2010.
Source: SEC EDGAR, the filing index for accession 0001144204-10-026791. Last ingested by Listed: Nov 4, 2026, 17:20 ET. No prices; not investment advice.