SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB/A
Amendment
No. 3
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended December 31, 2004
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from __________ to __________
Commission
File No. 000-32429
GOLDSPRING,
INC.
(Exact
name of small business issuer as specified in its charter)
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FLORIDA
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7389
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65-0955118
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(State
or other jurisdiction of
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(Primary
Standard Industrial
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(I.R.S.
Employer
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incorporation
or organization)
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Classification
Code Number)
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Identification
No.)
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P.O.
Box
1118
Virginia
City, NV 89440
(775)
847-5272
(Address,
including zip code, and telephone number,
including
area code, of registrant's principal executive offices)
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the issuer was required to file such reports), and (2)has been
subject to such filing requirements for the past 90 days.
Yes
x
No o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB o
State
issuer's revenues for the most recent fiscal year: $955,380
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates based on the average bid and asked price as of March 31, 2005:
$11,756,450
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the last practicable date: 234,567,757 shares of Common Stock, $0.000666
Par Value, as of March 31, 2005.
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F-1
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Statement
Regarding Forward-Looking Statements
The
statements contained in this report on Form 10-KSB that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding our
“expectations,”“anticipation,”“intentions,”“beliefs,” or “strategies” regarding
the future. Forward looking statements also include statements regarding
fluctuations in the price of gold or certain other commodities, (such as silver,
copper, diesel fuel, and electricity); changes in national and local government
legislation, taxation, controls, regulations and political or economic changes
in the United States or other countries in which we may carry on business in
the
future; business opportunities that may be presented to or pursued by us; our
ability to integrate acquisitions successfully; operating or technical
difficulties in connection with exploration or mining activities; the
speculative nature of gold exploration, including risks of diminishing
quantities or grades of reserves; and contests over our title to properties.
All
forward-looking statements included in this report are based on information
available to us as of the filing date of this report, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from the forward-looking statements. Among the factors
that could cause actual results to differ materially are the factors discussed
in Item 1, “Business - Risk Factors.”
Overview
We
are a
North American natural resource company, focused on gold and other precious
metals. We are in the exploration stage, and our exploration program includes
conducting test mining at our Billie the Kid / Lucerne property in northern
Nevada. Our objective is to achieve growth and profitability through exploration
at our current properties and acquisitions of projects that we believe we can
bring into production within a short period of time.
The
following table sets forth certain information regarding our current
projects.
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Name
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Location
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Type
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Billie
the Kid/Lucerne
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Storey
and Lyon County, Nevada
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Gold
and silver - open pit test mining
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Como
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Lyon
County, Nevada
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Gold
and silver claims
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Gold
Canyon
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Lyon
County, Nevada
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Placer
gold claims
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Spring
Valley
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Lyon
County, Nevada
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Placer
gold claims
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Big
Mike
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Pershing
County, Nevada
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Lode
and Placer copper claims
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Alberta
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Alberta,
Canada
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Non-energy
mineral rights, including iron
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Our
Billy
the Kid/Lucerne claims, which we call our Plum exploration project, are located
between Carson City and Virginia City, Nevada, about 30 miles southeast of
Reno
in an area known as American Flat. Our Gold Canyon and Spring Valley projects
are located in Lyon County, Nevada, and our Big Mike Copper project is located
about two hours east of Reno in Winnemucca, Nevada.
Our
Plum
exploration activities include open pit gold and silver test mining. We have
not
yet established any proven or probable reserves meeting the requirements of
SEC
Industry Guide 7. Therefore, all of our activities are considered test mining
and exploratory in nature. Test mining commenced in the third quarter of 2004.
We have not as yet explored or developed our Como claims. We also have not
completed any exploratory activities on our Gold Canyon, Spring Valley, or
Big
Mike properties. We have not established reserves on any of these properties.
Therefore, there can be no assurance that we will be able to produce sufficient
gold to recover our investment and operating costs.
We
originally became a mineral company through an acquisition in June 2003. That
acquisition, which had an effectuation date of March 2003, provided us with
a
number of Nevada-based placer claims, including the Gold Canyon and Spring
Valley claims, and 17 unpatented lode claims called the Big Mike Copper
property. In November 2003, we acquired the Plum Mine facility as well as water
rights that are usable at Plum Mine and the Gold Canyon and Spring Valley placer
claims. In a separate transaction, we obtained mineral permits in Alberta,
Canada in May 2004.
Employees
We
have
18 employees, including our managers, administrative staff, engineers,
geologists, lab technicians, and process operators. We use consultants with
specific skills to assist with various aspects of our project evaluation, due
diligence, and acquisition initiatives. We also use subcontractors in our test
mining operations, which involve approximately 20 people, including a test
mining and screening foreman.
Principal
Markets
We
plan
to sell our production on world markets at prices established by market forces.
These prices are not within our control.
Government
Regulation
Mining
operations and exploration activities are subject to various national, state,
and local laws and regulations in the United States, which govern prospecting,
development, mining, production, exports, taxes, labor standards, occupational
health, waste disposal, protection of the environment, mine safety, hazardous
substances, and other matters. We have obtained or have pending applications
for
those licenses, permits, and other authorizations currently required to conduct
our exploration and other programs. We believe that we are in compliance in
all
material respects with applicable mining, health, safety, and environmental
statutes and regulations.
Reclamation
We
are
generally required to mitigate long-term environmental impacts by stabilizing,
contouring, resloping, and revegetating various portions of a site after mining
and mineral processing operations are completed. These reclamation efforts
are
conducted in accordance with detailed plans, which must be reviewed and approved
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 a surety bond to be posted
for mining projects to assure we will leave the site safe, stable and capable
of
providing for a productive post-mining land use. Pursuant to the approved
Reclamation Plan for Billie the Kid, we posted a surety bond in the amount
of
$553,000, of which $377,000 was in the form of a cash deposit and the balance
was secured from a surety agent.
Competition
We
compete with other mineral exploration and mining companies in connection with
the acquisition of gold and other mineral properties. There may be competition
for gold acquisition opportunities, some of which may involve other companies
having substantially greater financial resources than we do.
Officers
of our Company
Robert
T.
Faber, CPA*
has
served as President and Chief Executive Officer of our company since September
2004 and Chief Financial Officer since June 2003. Mr. Faber is an executive
with
20 years of diverse senior financial and operational management, business and
acquisition experience, including 10 years of international experience. Mr.
Faber was named Chief Executive Officer and President of GoldSpring in September
2004. Prior to his appointment, he had served as Chief Financial Officer since
June 2003. Mr. Faber served from 2002 until 2003 as Vice President of United
Site Services, Inc., a privately held service consolidator in the waste service
industry. Additionally, Mr. Faber served as an executive with Allied Waste
Industries from 2001 until 2002, overseeing a $1.2 billion multi-state area
and
served as Chief Financial Officer with Frontier Waste Services, LLC from 1999
until 2001. Prior to Frontier Waste, Mr. Faber spent 17 years with Waste
Management, Inc., a publicly traded environmental services company, during
which
time he served in senior positions both internationally and domestically. Mr.
Faber’s positions included Director of Finance of Waste Management’s $1.4
billion multi-country International operations based in London, England and
Vice
President and Controller for several $100 million plus multi-state market areas.
(*Not licensed to practice)
Lisa
S.
Boksenbaum has been Secretary of our company since April 2005 and the General
Counsel of our company since October 2003. Ms. Boksenbaum was a member of CBG
Law Group, PLLC in Bellevue, Washington from December 1998 until September
2003.
2004
Financing Events and Restructuring
In
2004,
we offered securities in a private placement transaction completed during
March 2004 (the “March Offering”). In connection with the offering, we
received gross proceeds of $10 million from a group of accredited institutional
and individual investors. Subsequent to the offering’s close, we failed to meet
certain requirements of the offering regarding filing an effective registration
statement with the Securities and Exchange Commission. Under the terms of the
March 2004 subscription agreement, failure to have an effective registration
statement by the required date resulted in liquidated damages in the amount
of
2% of the principal investment amount (i.e., $200,000) for each 30-day period
until the registration statement was declared effective. We accrued
approximately $1.1 million in liquidated damages through November 30, 2004
associated with our failure to cause our registration statement to be effective.
During
the SEC review process of the registration statement we filed in connection
with
the March Offering, we learned that our founder and former Chief Executive
Officer may have misrepresented the value of certain mineral properties that
his
company sold to us in a June 2003 transaction. Our discussions with the SEC
led
to our decision to restate our annual and quarterly SEC filings to reflect
our
reevaluation of the value of those mineral properties. This reevaluation led
to
an investigation into the activities of our founder. On November 9, 2004, we
filed a lawsuit in Maricopa County (Arizona) Superior Court against Stephen
B.
Parent and four other defendants, together with their spouses, and Ecovery,
Inc.
(See - Legal Proceedings). In essence, the complaint alleges that Stephen Parent
misrepresented the value of certain placer mining claims that his company,
Ecovery, sold to us in 2003 in exchange for approximately 99,000,000 shares
of
our stock; that Ecovery no longer had good title to the mining claims when
they
were sold to us; that Mr. Parent and the other named defendants conspired
to defraud us out of approximately 24,000,000 shares of our stock; and that
Mr.
Parent misappropriated more than $300,000 in company funds.
The
allegations made in our lawsuit raised questions about the representations
that
our founder made during the March 2004 Offering. The delay in effectiveness
of
our registration statement combined with the allegations raised in the lawsuit
caused concern among the investors in the March 2004 Offering. We worked with
the investors to address their concerns in a manner that would not force us
to
pay a large cash penalty or face a lawsuit, both of which would be detrimental
to our shareholders. In consideration for restructuring the original
transaction, the investors agreed to grant us a release for any
misrepresentations that may have been made, allowed us to capitalize the accrued
liquidated damages, and provided us with an additional 90 days to cause the
registration statement to become effective, thereby avoiding potential
liquidated damages of $600,000 if the registration statement were to be filed
before December 30, 2004.
As
a
result, and effective November 30, 2004, we restructured the private
placement transaction. In connection with the restructuring, we exchanged the
21,739,129 shares of common stock and the 21,739,129 warrants to purchase shares
of common stock issued to the investors in the March Offering for 8% convertible
notes in the aggregate principal amount of approximately $11.1 million
and
four-year warrants to purchase 27,750,000 shares of common stock at an exercise
price of $0.20 per share, subject to anti-dilution adjustments. The principal
amount of the convertible notes consists of the original $10.0 million
investment plus approximately $1.1 million of accrued penalties associated
with the delay in effectiveness of our registration statement covering the
resale of the shares of common stock held by the investors. The restructured
subscription agreement also permitted the convertible note holders to convert
their notes into common stock at a discounted conversion rate if they delivered
their notices of conversion within 20 trading days of the November 30, 2004
restructuring closing date.
On
or
about December 9, 2004, Mr. Parent and fellow directors Jerrie W. Gasch and
Purnendu K. Rana Medhi purportedly seized control of our company. They attempted
to remove the remaining seven members of our board and announced their intention
not to honor the restructured subscription agreement of November 30, 2004,
which
both Mr. Medhi and Mr. Gasch had approved. On December 21, 2004, Mr. Parent
caused our pending registration statement to be withdrawn from SEC
consideration, resulting in further delays to the registration process and
additional liquidated damages. Mr. Parent remained in control of our corporate
office until February 16, 2005 (See - Legal Proceedings). During his period
of
purported control of our company, Mr. Parent refused to honor our obligations
under either the March 2004 subscription agreement or the restructured November
2004 subscription agreement.
On
December 20, 2004, we received notice from holders of approximately $3.8 million
of convertible notes payable of their intention to convert into shares of our
common stock. As a result, we recorded the issuance of 33,817,594 shares on
December 20, 2004. We were required to deliver certificates representing
unrestricted, free-trading stock within three business days of our receipt
of
the notices of conversion. As discussed above, our former Chief Executive
Officer did not deliver the stock certificates within the required period,
resulting in material financial damages to our company.
Under
the
terms of the November 2004 subscription agreement, convertible note holders
have
the right to a mandatory redemption payment in the event we are prohibited
or
otherwise fail to deliver shares of our common stock to converting note holders.
The mandatory redemption payment is calculated as an amount equal to multiplying
the number of shares of common stock otherwise deliverable upon conversion
of
the note’s principal and interest multiplied by the highest price of our common
stock for the period beginning with the Deemed Conversion Date (the date the
holder elects to convert the note) and ending with the payment date. On March
7,
2005, we received a mandatory redemption payment demand relating to our failure
to deliver stock certificates representing 29,573,803 shares of our common
stock. Under the mandatory redemption payment provisions of the November 2004
subscription agreement, we repurchased the 29,573,803 shares of common stock
at
$0.23 per share, or $6,801,975. We issued a convertible note in the aggregate
amount of $6,885,184 for the 29,573,803 shares and accrued interest.
On
December 20, 2004, we received notice from holders of approximately $500,000
of
convertible notes payable of their intention to convert into shares of our
common stock. As a result, we recorded the issuance of 4,243,791 shares on
December 20, 2004. We were required to deliver certificates representing
unrestricted, free-trading stock within three business days of our receipt
of
the notices of conversion (the “Delivery Date”). The failure to deliver the
shares by the Delivery Date resulted in liquidated damages of 1% of the Note
principal amount being converted per business day after the Delivery Date.
Our
former Chief Executive Officer did not deliver the stock certificates within
the
required period. On March 18, 2005 we delivered the certificates representing
the shares of common stock to these converting note holders. The 84 -day delay
in delivering the shares resulted in liquidated damages of $403,175. We
recognized these damages during the fourth quarter of 2004 and the first quarter
of 2005. We issued convertible notes for the amount of liquidated damages
due.
Our
November 2004 subscription agreement required us to file a registration
statement with the Securities and Exchange Commission no later than December
30,
2004 and to cause the registration statement to be declared effective no later
than February 14, 2005. As discussed above, our former Chief Executive Officer
withdrew our pending registration statement and did not submit a new
registration statement during the period of his purported control of our
company. His failure to submit the registration statement to the SEC by December
30, 2004 triggered liquidated damages to accrue under the November 2004
subscription agreement. Pursuant to the terms of the Subscription Agreement,
the
damages may be paid in cash or in unrestricted common stock. If paid in stock,
we are required to pay 200% of the cash penalty. Because we do not have the
cash
or free-trading stock to pay the liquidated damages, we reached a settlement
agreement with the investors to pay the liquidated damages in restricted common
stock valued at $0.03 per share. The total liquidated damages accrued between
December 30, 2004 and April 27, 2005 was approximately $ 1,776,000. Pursuant
to
this settlement agreement, we issued approximately 59 million shares of
restricted common stock in April 2005.
During
the first quarter of 2005, we incurred approximately $1.9 million of liquidated
damages and other expenses related to our former Chief Executive Officer’s
decision to withdraw the SEC registration statement and his failure to deliver
common shares pursuant to the November 2004 restructuring agreement. We filed
the SB-2 registration statement in April of 2005 and have delivered the shares.
We are now in the process of trying to have the registration statement declared
effective by the SEC. Until the registration statement is declared effective,
we
continue to incur liquidated damages under the November 30, 2004 Subscription
Agreement (See Recent Financing Events and Restructuring for additional
information). Pursuant to the terms of the Subscription Agreement, the damages
may be paid in cash or in unrestricted common stock. If paid in stock, we are
required to pay 200% of the cash penalty. Because we do not have the cash or
stock which was issued in a registered transaction to pay the liquidated
damages, we have reached a settlement agreement with the investors to pay the
$1.2 million in liquidated damages in restricted common stock valued at $0.03
per share. We accrued $1.0 million in the second quarter of 2005 to reflect
this
obligation. Pursuant to this settlement agreement, we will be issuing
approximately 40 million shares of restricted common stock in the third quarter
of 2005.
Risk
Factors
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
The
report by the independent auditors on our financial statements indicates that
our financial statements have been prepared assuming that we will continue
as a
going concern. The report indicates that our recurring losses from operations
and working capital deficit raise substantial doubt about our ability to
continue as a going concern.
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 North America
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.
Our
corporate officers lack technical training and mining
experience.
Our
corporate officers lack technical training and experience in operating a mine.
With no direct training or experience in these areas, our corporate officers
may
not be fully aware of many of the specific requirements related to working
within the mining industry. The decisions of our corporate officers may not
take
into account standard engineering or managerial approaches that operating mining
companies commonly use. Consequently, our operations, earnings, and ultimate
financial success could suffer irreparable harm due to corporate officers’ lack
of experience in the mining industry.
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 are 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 not anticipate expending sums for additional drilling and
analysis to establish proven or probable reserves on our properties. We drill
in
connection with our mineral exploration activities and not with the purpose
of
establishing proven and probable reserves. Therefore, our activity must be
called exploration or test mining. 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 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 John Cook, Chairman of the Board, are important to our success. If either
of
them become unable or unwilling to continue in their present positions, 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 administrative 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, 2005, we had outstanding 234,567,757 shares of common stock. In addition,
we
had outstanding convertible notes and various common stock purchase warrants.
At
March 31, 2005, these notes and warrants were convertible into or exercisable
for a total of approximately 176 million 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.
Plum
(Billie the Kid/Lucerne)
Location,
Access, and Title to the Property
We
own
the following mineral exploration projects: Billie the Kid /Lucerne gold and
silver claims and the Como mineral Claims. The Billie the Kid/Lucerne claims
are
located in Storey and Lyon Counties, Nevada. The Billie the Kid/Lucerne
exploration project is physically situated roughly three miles south of Virginia
City, Nevada. Paved state highways from Reno, Carson City, and Virginia City
provide access to the property. The Como mineral Claims are located in Lyon
County, Nevada, approximately 15 miles east of Carson City, and have not been
explored or developed by us.
Our
property rights to the mineral properties consist of several mineral leases,
unpatented mineral claims, and fee ownership of real property. We have a mineral
exploration and mining lease agreement with Claire Obester and the Estate of
Dorothy Obester dated January 1, 1997 covering mineral rights to five patented
claims located in both Storey and Lyon Counties, including the Billie the Kid
and Lucerne patented lode claims. The lease has a primary term of eight years,
with an expiration date of January 1, 2005. The term may be extended for as
long
as exploration, development, mining, or processing operations are conducted
on a
continuous basis, without a lapse of activity for more than 180 days. We pay
monthly lease payments of $500 until the mineral claims are put into production.
Once production of minerals begins, we must pay a royalty to the lessor equal
to
the greater of $500 per month or a royalty percentage on the amount received
by
us on the sale of the mineral products less the costs incurred for marketing,
distribution, processing and sales, commonly referred to as a Net Smelter
Return. The royalty percentage varies based on the price of gold: 3% if gold
is
less than $400 per ounce, 4% if gold is at least $400 per ounce but less than
$500 per ounce, and 5% if gold is $500 or greater per ounce. We are also
responsible for payment and filing of annual maintenance fees, if any, and
taxes
for these claims.
We
have a
second mineral exploration and mining lease agreement with the Donovan Silver
Hills, LLC dated September 1, 1999 covering seven patented claims and 13
unpatented claims located in Storey and Lyon Counties. The lease has a primary
term of ten years, with an expiration date of September 1, 2009. The term may
be
extended as long as exploration, development, mining or processing operations
are conducted on a continuous basis, without a lapse of activity for more than
180 days. We must pay monthly lease payments of $250 until the mineral claims
are put into production. Once production of minerals begins, we must pay a
royalty to the lessor amounting to the greater of $500 per month or a royalty
percentage of the Net Smelter Returns. The royalty percentage varies based
on
the price of gold: 3% if gold is less than $400 per ounce, 4% if gold is at
least $400 per ounce but less than $500 per ounce, and 5% if gold is $500 or
greater per ounce. We are also responsible for payment and filing of annual
maintenance fees, if any, and taxes for these claims.
In
addition to the mineral leases, we hold 20 unpatented mineral claims in Storey
County, hold eight unpatented mineral claims in Lyon County, and own title
to 40
acres of land in Storey County. The W. Hughes Brockbank Living Trust has a
lien
against and a security interest in these unpatented mineral claims and the
40
acres of land pursuant to a Deed of Trust dated October 31, 2003, entered into
with W. Hughes Brockbank Living Trust. The Deed of Trust was granted to secure
a
promissory note, dated October 31, 2003, in the amount of $1 million for the
balance of the purchase price for the property. The non-interest bearing
promissory note requires ten quarterly payments of $100,000 each. As of March
31, 2005, five payments have been made.
Present
Condition of Property and Work Performed
We
have
not completed extensive characterization of mineralized material, geologic
analysis, metallurgical testing, mine planning, or economic analysis on the
Plum
mineral assets. We have not established reserves on this property. Therefore,
any activity we perform on the property is considered exploratory in nature.
Part of our exploration includes operating a test mine. The purpose of the
test
mine is to determine our capital and operating costs, metallurgical recoveries,
and other mining factors, and demonstrate that we can make a profit over and
above our capital and operating costs.
Description
of Equipment and other Infrastructure Facilities
We
use 50
ton Caterpillar 773 haul trucks to haul the mineralized materials from the
Billie the Kid/Lucerne open pit to the crushing and process facility located
in
the northeast corner of the property. The mineralized material is crushed,
screened, and agglomerated in a self-contained portable crushing plant. The
mineralized material is fed to an apron feeder by a front-end loader. The feeder
provides a steady feed to a Pioneer jaw crusher. The crushed material is then
conveyed to a Simplicity triple deck vibrating screen. The oversize material
from the screen is filtered in closed circuit to a Symons 4-1/4-foot standard
cone crusher where it is crushed and conveyed to the screen.
Prior
to
agglomeration, 10 pounds of Type II Portland Cement is added for every ton
of
mineralized material and metered on to the pugmill feed conveyor. All the
two-inch material from the screen is conveyed to a Davis 1500
pugmill-agglomerator. We use a load-out hopper to drop a preselected amount
of
agglomerated material into the Caterpillar 773 haul trucks, which is then
transported to and dumped on the test leach pads. A chemical solution is then
applied to the mineralized material on the test leach pads. Pregnant solution
is
accumulated from the leach pad and is then pumped to the Merrill-Crowe recovery
plant. The precipitate collected in the presses is collected, dried, and smelted
on the property using an electric furnace to produce gold dore.
Our
third-party contract mining company owns and provides the haul trucks, front
end
shovel, loaders, blade, dozer, hopper, crushers, screen, mobile crane, foot
roller, water truck, conveyors, and generators. We own the Merrill-Crowe gold
precipitation plant, the agglomerator, dozers, excavators, water truck, cement
silo with a screw feeder, and conveyors. The Merrill-Crowe gold precipitation
plant and the mineral processing equipment are less than a year old. Most of
the
other mining equipment we own that is located at the Billie the Kid/Lucerne
facility is approximately 10 to 12 years old but is good condition. The total
book value of our equipment associated with the Billie the Kid and the Lucerne
facilities is approximately $1,000,000.
Power
Utilization at the Plum Property:
We
completed the installation of the grid power line to the
crushing/screening/agglomeration system, replacing a Caterpillar 3516 (1000
kilowatt) diesel generator. The change has reduced our crushing costs and
directly attributed to expanding our permit for teons crushed.
Geology,
Structure and Mineralization
Several
large low angle brecciated structural zones (faults) dominate the geology of
the
Billie the Kid/Lucerne deposit. The thickness of these structural zones ranges
from 20 to 30 feet. Gold mineralization within the Billie the Kid/Lucerne
deposit is closely associated with dikes and sills that are composed of Alta
Andesite, a dark-colored, fine-grained volcanic rock, but these rocks are rarely
or weakly mineralized. Hartford Rhyolite, a fine-grained volcanic rock, hosts
approximately 70% to 80% of the gold mineralization and the remaining 20% to
30%
is associated with Alta Andesite.
Mineralized
Material
We
have
not established any proven or probable reserves that meet the requirements
of
SEC Industry Guide 7. Therefore, all of our activities are considered
exploratory in nature. Part of our exploration includes operating a test mine.
The purpose of the test mine is to determine our capital and operating costs,
metallurgical recoveries, and other mining factors, and demonstrate that we
can
make a profit over and above our capital and operating cost. These test mining
activities may provide us with sufficient data to prepare a formal mine plan
and
establish reserves. .
| |
|
|
|
Mineralized
material
|
|
|
|
| |
|
Tons
|
|
Avg.
Au opt
|
|
Waste
tons
|
|
|
Total
Mineralized Material *
|
|
|
4,283,000
|
|
|
0.056
|
|
|
7,922,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
* |
Tonnage
of mineralized material is undiluted and represents uncut values;
it does
not reflect waste dilution during mining or metal value losses in
processing.
|
The
mineralized material inventory established for cut value for $400 without moving
the road ** that overlies part of the mineralized material is:
|
|
· |
1,931,000
tons of ore @ 0.045 opt with 2,700,000 tons of waste
|
The
mineralized material inventory established for cut value for $400 if we move
the
road ** that overlies part of the mineralized material is:
|
|
· |
3,758,000
tons of ore @0.047 opt with 5,894,000 tons of
waste
|
|
|
** |
Note:
In accordance with our leases and Nevada law, we are permitted to
reroute
the road to pursue our mining of the property. We have not yet completed
a
feasibility study for rerouting the
road.
|
Future
Exploration Potential
We
are
conducting an exploration program to test surface mineral targets as well as
deep underground bonanza targets by using geological mapping,
geochemical/geophysical investigations and drilling.
Gold
Canyon and Spring Valley (Placer Projects)
We
own a
100% interest in the 25 federal unpatented placer claims located in Lyon County,
Nevada that comprise the Gold Canyon and Spring Valley projects. The 25
unpatented placer claims cover approximately 850 acres and are located about
30
miles southeast of Reno and four miles south of Virginia City, Nevada. We have
not completed any exploration activity on the Gold Canyon or Spring Valley
properties. The properties are undeveloped and do not contain any open-pit
or
underground mines. We have not established any proven or probable reserves
on
the mineral claims. All of our activities associated with these properties
are
exploratory in nature. We purchased an RMS-Ross processing plant in late 2003
for use on these properties. The processing plant is stored at our Plum Mining
property in American Flat, Nevada. We have no plans to begin test mining
operations on these properties in the near-term.
The
“Big Mike” Copper Project
We
own a
100% interest in the 17 unpatented lode claims and one placer claim covering
a
total of 310 acres in Pershing County, Nevada that comprise the Big Mike Copper
Project. The Big Mike Copper Project is located approximately 32 miles south
of
Winnemuca in Pershing County, Nevada. Access to this site is available by way
of
Grass Valley Road, a county maintained paved and gravel road, for 30 miles
and
then two miles on a BLM gravel road. The property is situated at an elevation
of
5,000 to 5,500 feet. We have not completed any exploration activity or
undertaken any geologic, engineering or economic studies on the Big Mike Copper
Project. The property includes an open pit, mineralized material in a stockpile,
and waste dumps. As the site was previously mined, there are also roads and
graded areas on the property. Two cased water wells with rights to two cubic
feet per second are also present on the property.
On
November 1, 2004, we announced the signing of a Memorandum of Understanding
with
MBMI Resources, Inc, of Vancouver, Canada, to form a 50-50 joint venture to
bring the Big Mike Copper Project into operation. As we have not established
any
proven or probable reserves on this property, any joint venture work would
be
exploratory in nature. The objective of the joint venture is to establish
commercial copper production using a vat leaching process. The negotiations
were
put on hold in December 2004 by the dispute over control of the company. We
continue to look for a business partner to develop this project. We are still
in
discussions with the party who executed the Memorandum of Understanding in
November 2004.
Mineral
Permits Acquired in Alberta, Canada
In
May
2004, the Alberta government granted us mineral permits for all non-energy
minerals on nearly 800 square miles of Alberta, Canada mining mineral property.
Sedimentary Oolitic iron bearing material was discovered in 1953 from oil and
gas drilling on the area of our mineral permits. We are in the process of
reviewing existing data and conducting a pre-feasibility study on the project.
This study will include new testwork to follow-up earlier testwork performed
on
the property. From 1995 through 1997, a series of tests were performed that
showed the mineralized material present was amenable to treatment to produce
enriched iron. We are in the final stages of acquiring the coal rights on this
property. We are also investigating the possible acquisition of the energy
minerals, gas and oil on this property.
This
is
an early stage project and our activities associated with this mineral area
are
exploratory in nature. We have not established any reserves on this property.
The scope and size of this potential project will require substantial capital,
time and outside assistance during both the pre- and post-feasibility stages.
We
are considering several financial alternatives, including a joint venture,
to
develop this project.
The
State Court Case
On
November 9, 2004, we filed a lawsuit in Maricopa County (Arizona) Superior
Court
against defendants Stephen B. Parent, Ron Haswell, Walter Doyle, Seth Shaw,
Antonio Treminio, together with their spouses, and Ecovery, Inc., a Nevada
corporation, or Ecovery.
The
12-count complaint alleges claims for violations of Arizona’s racketeering act,
state-law securities fraud (primary and secondary liability), common-law fraud,
negligent misrepresentation, breach of fiduciary duty, negligence/gross
negligence, breach of contract, unjust enrichment/restitution, theft/conversion,
conspiracy liability, and injunctive relief. In essence, the complaint alleges
that Stephen Parent misrepresented the value of certain placer mining claims
that his company, Ecovery, sold to us in 2003 in exchange for approximately
99,000,000 shares of our stock; that Ecovery no longer had good title to the
mining claims when they were sold to us; that Mr. Parent and the other
named defendants conspired to defraud us out of approximately 24,000,000 shares
of our stock; and that Mr. Parent misappropriated more than $300,000 in company
funds.
On
November 29, 2004, we moved for a temporary restraining order, or TRO,
prohibiting Mr. Parent and his spouse from selling, transferring, assigning,
or
otherwise disposing of up to approximately 123,000,000 shares of our stock
in
their possession. After a hearing, at which the Parents appeared through
counsel, the Honorable Anna M. Baca granted the motion, conditioned on the
posting of an $8 million bond. We did not post the bond, and the TRO was
subsequently dissolved.
On
or
about December 9, 2004, Mr. Parent and fellow GoldSpring directors Jerrie W.
Gasch and Purnendu K. Rana Medhi purportedly seized control of our company.
Afterward, the Parent-led GoldSpring purported to fire Greenberg Traurig, LLP,
or GT, as counsel for our company in this litigation and to hire Ronan &
Firestone, PLC, or Ronan, as substitute counsel. Thereafter, on December 22,
2004, Ronan filed a stipulation to dismiss the lawsuit, purportedly on behalf
of
our company. Also on December 22, 2004, the Parents filed their answer, in
which
they generally denied the allegations of the complaint.
On
December 29, 2004, GT filed a motion on behalf of our company to strike the
stipulation to dismiss that Ronan had filed. Judge Baca heard oral argument
on
the motion on February 2, 2005 and took the matter under advisement. Further
oral argument was heard on March 22, 2005. In light of the preliminary
injunction that was issued in a related shareholder action in federal district
court (discussed below), and the resolutions passed by our Board of Directors
on
February 22, 2005, Judge Baca granted the motion in an Order dated March 22,
2005 and struck Ronan’s purported stipulation to dismiss.
In
the
same ruling, Judge Baca said that “there are serious conflicts in the continued
representation of the Parents in this lawsuit by Gust Rosenfeld.” The Court was
referring to the fact that Parent had hired Gust Rosenfeld as our counsel after
purportedly taking over our company on December 9, 2004. The Court therefore
ordered further briefing on whether Gust Rosenfeld should be disqualified as
the
Parents’ counsel. Shortly thereafter, on March 28, 2005, Gust Rosenfeld
voluntarily withdrew as the Parents’ counsel. The Parents have since retained
new counsel. The discovery process is currently ongoing.
Mr.
Treminio has since been dismissed from the suit in accordance with the terms
of
a prior settlement agreement between Mr Treminio and GoldSpring, Inc..
Mr. Shaw filed an answer, in
pro per,
on
April 6, 2005, and generally denied the allegations of the complaint. Mr.
Haswell and Mr. Doyle have filed answers and generally denied the allegations
of
the complaint. Ecovery, Inc. has not yet responded to the complaint.
The
Federal Court Case
Background
Stephen
B. Parent and several others purporting to represent a majority of the
shareholders of our company adopted Consent Resolutions in Lieu of a Special
Meeting of Shareholder’s dated December 9, 2004, and Mr. Parent, Jerrie W.
Gasch, and Purnendu K. Rana Medhi, each of whom served as a director of our
company until Mr. Medhi’s resignation in April 2005, adopted Directors’ Consent
Resolutions (together the “December Consent Resolutions”) dated December 10,
2004. Taken together, the December Consent Resolutions, by their purported
terms, removed John F. Cook, Robert T. Faber, Leslie L. Cahan, Todd S. Brown,
Christopher L. Aguilar, Stanley A. Hirschman, and Phil E. Pearce as directors,
rescinded the restructuring of a $10 million financing transaction entered
into
in March 2004, removed Mr. Faber as President of our company, named Mr. Parent
as President of our company and his wife as Secretary of our company, designated
Mr. Parent as the sole signing officer of our company’s bank accounts, and
terminated our company’s legal counsel.
On
December 22, 2004, Robert T. Faber and Leslie L. Cahan (collectively, the
“plaintiffs”), who are shareholders and directors of our company, filed a
lawsuit in the United States District Court for the District of Arizona,
entitled Robert T. Faber, et al. v. Stephen B. Parent, et al., No.
CV04-2960-PHX-EHC (“the Litigation”). The plaintiffs asserted claims in both
their individual capacities and derivatively, on behalf of our company, against
directors Stephen B. Parent, Jerrie W. Gasch, and Purnendu K. Rana Medhi
(collectively, the “defendants”), alleging that, by adopting the Consent
Resolutions, the defendants had unlawfully orchestrated an illegal coup to
wrest
control of our company from its current officers and directors. As discussed
below, Messrs. Gasch and Medhi no longer support the Parent-led
board.
The
Temporary Restraining Order
Following
a hearing on December 22, 2004, at which the Court heard evidence and argument
of counsel, the Honorable Earl H. Carroll issued a December 23, 2004 Order
Granting Plaintiffs’ Motion for Temporary Restraining Order, or TRO. The TRO
precluded defendants and their agents from (1) making any withdrawals from
any
bank accounts of our company, other than reasonable withdrawals necessary to
the
daily operations of the business; (2) rescinding or interfering in any way
with
any transactions approved by our company’s Board of Directors prior to December
9, 2004; (3) entering into any contracts or agreements with third parties on
behalf of our company or disposing of or transferring any property or assets
of
our company; and (4) issuing or otherwise transferring any stock or debentures.
The
Court
subsequently continued the TRO through February 15, 2005 and confirmed that
none
of the defendants were to receive any payments from our company during the
pendency of the TRO. Despite the Court’s Order, the defendants have since
produced business records of our company demonstrating that, after adopting
the
December Consent Resolutions, the defendants arranged for our company to pay
them a collective total of $38,721, including $20,869 in payments to Stephen
Parent.
The
Preliminary Injunction and Notice of Appeal
Following
additional hearings in which the Court heard witness testimony and evidence,
the
Court issued an Order on February 15, 2005 granting plaintiffs’ Motion for a
Preliminary Injunction. The Preliminary Injunction ordered the reinstatement
of
our company’s Board of Directors as it existed prior to December 10, 2004. As a
result of the Court’s Order, John F. Cook, Robert T. Faber, Christopher L.
Aguilar, Todd S. Brown, Leslie L. Cahan, Stanley A. Hirschman, and Phil E.
Pearce have been reinstated as directors. Stephen B. Parent, Jerrie W. Gasch,
and Purnendu K. Rana Medhi remained directors until Mr. Medhi’s resignation in
April 2005. The Court’s February 15 Order also stayed the implementation of the
Consent Resolutions, and directed us to hold a special shareholders meeting
within 30 days.
In
concluding that the Preliminary Injunction should issue, the Court stated,
“The
Court is specifically concerned about the irreparable injury that would occur
to
GoldSpring and its shareholders and investors if Defendants [Mr. Parent, his
wife, Jerrie W. Gasch, and Purnendu K. Rana Medhi] are permitted to manage
the
corporation. There is substantial evidence of Parent’s wrongdoing in his former
position as CEO of GoldSpring, such as his misappropriation of corporate assets
for his personal use. The Defendants’ attempt to rescind the [financing]
transaction that was approved at the Board of Directors meeting on November
30,
2004 could adversely impact GoldSpring’s ability to meet its obligations under
the agreement. Rescission of the refinancing transaction would prove detrimental
for GoldSpring because the corporation would be forced to pay the $200,000.00
monthly penalty for failing to file the S-1 Registration with the SEC within
ninety (90) days of the March 22, 2004 agreement between GoldSpring and [various
investors]. This penalty had accrued to over $1,000,000.00 as of November 30,
2004.”
Thereafter,
the defendants filed a motion for reconsideration in which they asked that
the
Preliminary Injunction be dissolved or, alternatively, that the Court clarify
the injunction order and require the plaintiffs to post a bond. On February
25,
2005, the Court held a hearing on the defendants’ motion for reconsideration.
The Court denied the defendants’ requests to dissolve the Preliminary Injunction
and to require the posting of a bond. In response to defendants’ request for
clarification of the injunction order, the Court ordered that our company is
not
to issue additional shares prior to the special shareholders meeting, and that
the record date for the special shareholders meeting shall be December 9,
2004.
Our
company believed that this ruling would disenfranchise the investors that
participated in the November 30, 2004 restructuring transaction by preventing
them from receiving and voting the shares they are entitled to receive through
the conversion of their notes. A December 9, 2004 record date would also have
disenfranchised all shareholders that acquired their stock on the open market
after December 9, 2004.
Therefore,
on February 28, 2005, our company filed a legal memorandum with the Court
addressing these issues. In it, we pointed out that applicable federal
securities laws require us to provide shareholders with current financial
statements, which will not be available until March 31, 2005, and that Florida
law and our company’s bylaws require that a record date be fixed in advance
rather than in the past. On March 14, 2005, the Court held a hearing on these
issues. After hearing argument of counsel, the Court indicated that it agreed
with our position.
Accordingly,
on March 17, 2005, the Court vacated its earlier Order directing us to hold
a
special shareholders meeting and setting December 9, 2004 as the record date
for
purposes of that meeting. The Court also vacated the provision of its February
25 Order prohibiting us from issuing additional shares. Finally, the Court
reaffirmed its earlier Order reinstating our Board of Directors as it existed
prior to December 10, 2004. In doing so, the Court ordered that the reinstated
board shall remain in place until the Court orders otherwise.
On
April
13, 2005, a notice of appeal was filed on behalf of defendants (the Parents,
the
Gaschs, and the Medhis) seeking to reverse the Court’s March 17 Order. On April
21, 2005, the Gaschs moved to dismiss their appeal. On June 10, 2005, the
defendants (the Parents) filed their opening appellate brief. The plaintiffs
filed their response brief on August 16, 2005. The defendents’ response brief is
due on October 3, 2005.
The
Investors’ Motion to Intervene
On
March
2, 2005, Longview Fund LP, Longview Equity Fund, Longview International Equity
Fund, and Alpha Capital AG (collectively, the “Investors”) moved to intervene in
the litigation. In doing so, the Investors sought to dissolve the portion of
the
Court’s February 25, 2005 Order that prohibited our company from issuing stock
to them under the refinancing transaction.
In
their
motion to intervene, the Investors alleged that they are holders of more than
$3
million of Convertible Notes issued by us, which they received pursuant to
the
transaction in March 2004. The Investors further alleged that, under the terms
of the Convertible Notes, they are entitled to convert the notes, in whole
or in
part, into our stock at any time. The Investors contended that, by preventing
us
from issuing stock, the Court’s February 25 Order is a de facto preliminary
injunction in favor of the defendants, and effectively deprived the Investors
of
much of the benefits to which they are contractually entitled. Because the
defendants had not met the requirements for injunctive relief, the Investors
argued, that portion of the Court’s Order should be dissolved. Alternatively,
the Investors asked the Court to order the defendants to post a $3.5 million
bond to protect the Investors against any damages stemming from the de facto
injunction.
On
March
7, 2005, the defendants filed their response to the Investors’ motion. They
contended that Judge Carroll’s February 25 Order was not an injunction and, in
any event, that the Investors had failed to meet the requirements for
intervention. Accordingly, they argued that the motion should be denied.
On
March
18, 2005, the Court issued an Order denying the Investors’ motion as moot. The
Court reasoned that, since its March 17 Order lifted the prohibition on the
issuance of additional shares of our stock, the Investors had, in essence,
already received the relief they requested in their motion to intervene.
Therefore, the issues raised in that motion had become moot.
The
Company’s Motion Re: the Gust Rosenfeld Retainer
After
purportedly seizing control of our company on December 9, 2004, Stephen Parent,
acting as the putative president of GoldSpring, authorized the payment of a
$250,000 retainer to the law firm of Gust Rosenfeld using funds of our company.
On March 1, 2005, we filed a motion for an order requiring Gust Rosenfeld to
provide a detailed accounting of its use of these funds and to refund the unused
portion.
On
March
14, 2005, Gust Rosenfeld sent us a refund check for $83,903.38 and a “ledger”
showing how the firm spent the other $166,096.62. Among other things, the ledger
revealed that Gust Rosenfeld withdrew approximately $109,000 as payment for
its
attorneys’ fees and costs. The ledger also showed payments to other lawyers and
outside vendors totaling approximately $57,000. Included in this amount were
two
“refund” payments to Stephen Parent totaling $21,000.
We
have
filed a reply brief asking the Court to order Gust Rosenfeld to provide a more
detailed accounting of its expenditures, including billing invoices for legal
services it purportedly rendered to our company. We have also asked the Court
to
require Gust Rosenfeld to provide a written explanation for the payments to
other lawyers and outside vendors, as well as the so-called refund payments
to
Parent.
The
“New” Consent Resolutions
On
March
21, 2005, defendants Stephen and Judith Parent filed a “Motion for Order” asking
the Court to remove certain directors of our company’s Board of Directors.
Attached to the motion was a “Consent in Lieu of a Special Meeting of the
Shareholders of GoldSpring, Inc.,” dated March 18, 2005 (the “March Consent”).
The March Consent was nearly identical to the one adopted by the Parents and
others on December 9, 2004. It purported to remove directors Robert T. Faber,
John F. Cook, Leslie L. Cahan, Todd S. Brown, Christopher L. Aguilar, Stanley
A.
Hirschman, and Phillip E. Pierce as directors of our company. The March Consent
was signed by shareholders Stephen Parent; Judith Parent; Aztech Environmental
Industries, Inc.; Jasmine House, LLC; Frontline 2001, LLC; Jubilee Investment
Trust PLC; Ronald M. Haswell; Mark and Jennifer Ward; Walter T. Plummer; Lynn
Zollinger; Maia Ray; and Rita Hardy.
On
March
25, 2005, our company and the plaintiffs filed a joint response to the Parents’
Motion for Order. In it, we argued that (1) the shareholders who signed the
March Consent did not hold a majority of our company’s stock, which rendered the
Consent ineffective; (2) the Parents solicited more than ten shareholders,
and
therefore violated Securities and Exchange Commission Rule 14a; and (3) the
Parents cannot obtain the relief they seek because they have not asserted an
affirmative claim in court.
The
Parents filed a reply and supplemental reply on March 20, 2005, and April 11,
2005, respectively. In the reply, the Parents argued that the shareholders
who
signed the Consent do, in fact, hold a majority of the outstanding shares as
of
the date it was executed, and that any shares issued after that date are not
to
be counted. They also denied having solicited more than ten persons and denied
any obligation to state an affirmative claim before seeking the relief asked
for
in their motion. In their supplemental reply, the Parents referred to our
company’s recent Form 8-K filing (the “8-K”) with the Securities and Exchange
Commission. In the 8-K, we disclosed that our company had issued (1) 59,203,918
shares of restricted common stock in connection with the Settlement Agreement
Regarding Failure to File a Registration Statement; (2) six secured convertible
notes in an aggregate amount of $6,584,005 in connection with the Settlement
Agreement Regarding Mandatory Redemption Payment; and (3) convertible notes
in
the amount of $403,175 in connection with the Settlement Agreement Regarding
Failure to deliver shares due upon conversion. The Parents contended that the
transactions referred to in the 8-K constituted an unfair dilution of the
“non-Merriman shareholders’” stock holdings.
On
April
20, 2005, we filed a Supplemental Notice to inform the Court that Messrs. Gasch
and Medhi do not support the March Consent. In addition, we informed the Court
that Mr. Gasch had signed a Declaration that (1) Mr. Gasch never agreed to
serve
on the proposed board of directors contemplated by the March Consent, (2) that
Mr. Gasch does not support the March Consent and, if the March Consent
constituted a valid shareholder resolution (which we do not believe) Mr. Gasch
would immediately vote to reinstate the entire Board of Directors as it
currently exists, (3) Mr. Gasch denounces and rescinds the purported Director’s
Consent Resolutions dated December 10, 2004 and no longer supports any of the
resolutions or purported corporate actions contemplated in that purported
consent, and (4) Mr. Gasch has terminated Gust Rosenfeld as his counsel because
he no longer wishes to be associated with or jointed represented by Mr. Parent.
Mr. Medhi also informed us that he resigned as a director of our Board of
Directors as currently constituted and as a member of the board of directors
designated by earlier consent resolution. We informed the Court that these
developments constitute additional reasons to deny the Parents’
motion.
Not
applicable.
PRICE
RANGE OF COMMON STOCK
Our
common stock is currently traded on the OTC Bulletin Board under the symbol
“GSPG:OB”. The following table sets forth the high and low bid prices for our
common stock since we commenced trading on February 28, 2002.
|
Year
|
|
Quarter
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
First
|
|
|
1.05
|
|
|
0.06
|
|
|
2003
|
|
|
Second
|
|
|
0.16
|
|
|
0.01
|
|
|
2003
|
|
|
Third
|
|
|
0.49
|
|
|
0.05
|
|
|
2003
|
|
|
Fourth
|
|
|
0.84
|
|
|
0.27
|
|
|
2004
|
|
|
First
|
|
|
1.04
|
|
|
0.66
|
|
|
2004
|
|
|
Second
|
|
|
0.85
|
|
|
0.28
|
|
|
2004
|
|
|
Third
|
|
|
0.42
|
|
|
0.17
|
|
|
2004
|
|
|
Fourth
|
|
|
0.22
|
|
|
0.10
|
|
As
of
December 31, 2004, we had over 2,000 holders of our common stock. That does
not
include the number of beneficial holders whose stock is held in the name of
broker-dealers or banks. At December 31, 2004, we had 171,120,482 shares of
common stock outstanding. The above quotations reflect the inter-dealer prices
without retail mark-up, mark-down or commissions and may not represent actual
transactions.
We
have
never paid dividends and do not expect to pay any dividends in the foreseeable
future.
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.
The
following discussion addresses matters we consider important for an
understanding of our financial condition and results of operations as of and
for
the year ended December 31, 2004, as well as our future results.
Overview
We
are a
North American natural resource company, focused on gold and other precious
metals. We are in the exploration stage, and our exploration program includes
conducting test mining at our Billie the Kid / Lucerne property in northern
Nevada. Our objective is to achieve growth and profitability through exploration
at our current properties and acquisitions of projects that we believe we can
bring into production within a short period of time. We currently own mineral
property rights and conduct our primary exploration and test mining activities
in Storey County, Nevada, located about 30 miles southeast of Reno, Nevada.
This
exploration project consists of the Plum Mine facility. We also own mineral
permits in Alberta, Canada. We have no active operations in Canada.
The
year
2004 presented our company with numerous challenges that impacted our
performance in the form of financial and operational confusion as well as
management distraction. A legal dispute over control of our company, a resulting
series of disruptive management changes, their impact on operations and morale
and the resulting need for a significant financial restructuring effectively
slowed our progress toward both growth and profitability.
Results
for 2004 were further impacted by liquidated damages that resulted from our
inability to have an effective registration statement as required by our
financing agreements. Compounding this issue were legal and related expenses
incurred in a dispute over control of our company.
Our
current management team was reinstated in mid-February 2005 (see Part II, Item
1
- Legal Proceedings). One of our top priorities upon regaining control of the
company was to improve efficiencies and increase test mining production at
our
Plum Mine. To this end, we hired a new mine manager, who has significant
experience in gold mining, primarily in and around the area of our current
exploration project. We also implemented modifications to our plant and
equipment during the first half of 2005 to address our past difficulties and
increasing efficiency. In the spirit of maximizing overall operating performance
and reducing costs, effective August 1, 2005, the Company has consolidated
its
corporate office with the Plum Mine facility. The relocation will reduce costs
and allow for more effective utilization of our resources, both human and
capital.
We
believe that many of the non-operating issues that have plagued our company
since early-December 2004 are now being resolved. We are now focusing our
efforts on achieving positive cash flow and increased test mining production
in
2005. Our ability to maintain that focus will depend largely upon our
relationships with a number of our investors that are now note holders as the
result of our 2004 financial restructuring. Although this debt obligation is
substantial, we believe that we will be able to reach an arrangement with our
investors that will allow us to structure the repayments in a manageable
fashion.
During
the first quarter of 2005, we incurred approximately $1.9 million of liquidated
damages and other expenses related to our former Chief Executive Officer’s
decision to withdraw the SEC registration statement and his failure to deliver
common shares pursuant to the November 2004 restructuring agreement. We filed
the SB-2 registration statement in April of 2005 and have delivered the shares.
We are now in the process of trying to have the registration statement declared
effective by the SEC. Until the registration statement is declared effective,
we
continue to incur liquidated damages under the November 30, 2004 Subscription
Agreement (See Recent Financing Events and Restructuring for additional
information). Between April 28, 2005 and July 26, 2005, we incurred
approximately $600,000 in liquidated damages. Pursuant to the terms of the
Subscription Agreement, the damages may be paid in cash or in unrestricted
common stock. If paid in stock, we are required to pay 200% of the cash penalty,
or approximately $1.2 million. Because we do not have the cash or stock which
was issued in a registered transaction to pay the liquidated damages, we have
reached a settlement agreement with the investors to pay the $1.2 million in
liquidated damages in restricted common stock valued at $0.03 per share. We
accrued $1.0 million in the second quarter of 2005 to reflect this obligation.
Pursuant to this settlement agreement, we will be issuing approximately 40
million shares of restricted common stock in the third quarter of
2005.
The
Plum
Mine exploration project showed material improvements in efficiency and test
mining production in the second quarter of 2005. The crusher, which has been
the
primary source of setbacks in increasing test mining production, received
substantial mechanical improvements early in the quarter. Due to these
improvements, we crushed 144,000 tons of mineralized material in the second
quarter, representing an increase of 141% from the first quarter 2005. We are
in
the final stages of taking over the crushing operations. Our third-party
contractor has discontinued its crushing operations to allow for the set-up
of
our crushing equipment. We expect our crushing operations to commence in early
September 2005. This transition from a third-party crushing operator to an
in-house operation will bring immediate cost savings and should allow us to
reach our target of crushing 60,000 tons of material per month. We also made
significant improvements to the Merrill Crowe processing plant during the second
quarter. Through a change in pumps and the addition of a second clarifier,
we
increased capacity at the plant from 100 gallons per minute to 300 gallons
per
minute and we are now operating 24 hours per day, 7 days per week. We will
continue to focus on improving efficiency at the Plum Mine exploration project
through the remainder of 2005.
The
improvements at the Plum Mine have resulted in a steady increase in gold test
mining production during the second quarter. We produced 353 ounces of gold
in
April, 527 ounces in May, 1,126 ounces in June, and we are ramping up to our
target test mining production of 2,000 ounces of gold per month. Our primary
objectives in the third quarter of 2005 are to achieve positive cash-flow and
to
improve our overall test mine operation. While
we
may generate an operating profit above our operating costs in 2005, we may
not
recover our total costs of this exploration project.
We
continue to look for growth opportunities. This process consists of actively
conducting exploration to identify additional mineralized material. The
successful location of additional mineralized material on the existing property
would allow us to expand the size and the lifespan of the Plum mining project,
exclusive of new property acquisitions. It is our belief that we possess an
advantage with our status as likely the only heap leach gold mining permit
holder in the area. This permit is relatively difficult to obtain, and it is
one
that we can expand to include new areas in the event we locate and wish to
process new deposits.
We
also
seek growth through the acquisition of mining projects which have proven
in-ground reserves, advanced permitting, and solid exploration potential. We
seek to acquire proven projects whose business operations and business models
make those projects economically feasible for a company of our
size.
In
line
with this strategy, on May 4, 2005, we announced that we executed a Letter
of
Intent to acquire the leases on three patented mineral claims from Comstock
Gold, LLC. The Justice, Woodville, and Keystone claims are adjacent to our
existing operation at the Plum Mine. The Letter of Intent is subject only to
the
successful completion of our due diligence and our board’s approval. We expect
to complete our due diligence prior to September 30, 2005, after which time
we
plan to enter into a definitive purchase agreement. The proximity of these
claims should allow us to explore the property in a cost-effective manner and
likely increase the efficiency of our overall exploration activities. This
acquisition is important for our company for a number of other reasons as well.
First, the claims will expand our mining property by 40 acres, increasing our
mineralized material inventory. Second, the claims will contribute to the
enhancement of overall mine extraction and waste disposal efficiencies. Third,
these claims will enlarge our footprint and have the potential for expanding
the
life of our existing Plum Mine exploration project. Finally, the addition of
these properties will improve our geologic understanding of the entire physical
area and its trends.
Comparative
Financial Information:
| |
|
2004
|
|
2003
|
|
Difference
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
955,380
|
|
$
|
0.0
|
|
$
|
955,380
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Exploration
Expense
|
|
$
|
6,800,011
|
|
$
|
387,577
|
|
$
|
6,412,434
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Liquidated
Damages
|
|
$
|
1,627,308
|
|
$
|
0.0
|
|
$
|
1,627,308
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
($9,569,535
|
)
|
|
($2,601,741
|
)
|
|
($6,967,794
|
)
|
In
November 2003 we acquired The Plum Mining Company and immediately began building
the infrastructure necessary to begin “test mining”. Our Company is an
Exploration Stage enterprise and in accordance with Industry Guide 7
infrastructure expenditures such as haul roads, leach pads and start-up costs
were expensed. The majority of our infrastructure work was performed in 2004
accounting for the $6.4 million variance between 2003 and 2004.
During
the third quarter 2004 we sold our first shipment of gold from our “test mining”
operation. During 2004 we sold a total of 2,286 ounces of gold at an average
price of $419 per ounce.
In
March
2004 we completed a private placement which was subject to Non-Registration
Events Provisions (“Non-Registration Provisions”). The Non-Registration
Provisions required us to file and cause to become effective a registration
statement with the Securities and Exchange Commission so that investors may
sell
their shares of common stock without restriction. Pursuant to the Subscription
Agreement, liquidated damages accrue at a rate of percent (2%) of the investment
amount for each thirty day period or part thereof for not having an effective
Registration Statement. In November 2004 we capitalized 100% or $1.1 million
of
liquidated damages as part of the November 2004 restructuring. Our November
2004
subscription agreement also required us to file a registration statement with
the Securities and Exchange Commission no later than December 30, 2004 and
to
cause the registration statement to be declared effective no later than February
14, 2005. Our former Chief Executive Officer withdrew our pending registration
statement and did not submit a new registration statement. His failure to submit
the registration statement to the SEC by December 30, 2004 triggered liquidated
damages to accrue at a rate of percent (2%) of the principal amount of the
Debenture for each thirty day period or part thereof for not having an effective
Registration Statement.
Restatement
of Financial Statements
Upon
review of the standards for reporting mineral reserves as defined by SEC
Industry Guide 7 (“Guide 7”), we have concluded that we did not have sufficient
information to establish the existence of reserves as of December 31, 2004
and
that certain costs that we had incurred in the development of our mining
facility must be expensed as exploration or “test mining” costs. We have
restated our 2004 financial statements to classify all costs previously
capitalized (the recovery of which is dependent upon the economical extraction
of gold from the mineralized material we are currently processing), as test
mining expenses. These costs, which total approximately $4.5 million net of
accumulated depreciation, include our asset retirement obligation asset of
$453,786. In connection with our restatement of our mineral property assets,
we
have also reversed depletion taken on our mineral properties totaling $43,256.
We
have
also restated our shareholders’ equity. On December 20, 2004, we received notice
from holders of approximately $3.8 million of convertible notes of their
intention to convert into shares of our common stock. In connection with the
notice we reduced convertible notes payable by $3.8 million and recorded an
additional 33,817,594 shares (converted at approximately $0.11 per share) at
December 31, 2004. Upon further consideration, we have determined that since
the
shares had not been physically issued prior to year end, the liability and
stockholders’ equity accounts should not be adjusted until the shares have been
issued. Accordingly, we restated our convertible note and stock holder equity
accounts by approximately $3.8 million. The restatement has no affect on net
loss or cash flows as previously reported.
Pursuant
to our decision to make the above-referenced restatements, the financial
statements have been restated and are presented, as restated, within this
filing.
Results
of Operations and Operational Plan
Our
Plum
Mine, which is located in Storey County, Nevada, went into test mining
production in late third quarter 2004. We have not established reserves on
this
exploration project. Therefore, all of our activities on this property are
considered test mining or exploratory in nature. The region experienced record
level snowfalls at approximately the same time, continuing through the winter
of
2004/2005. While the unusually heavy precipitation did not interfere with the
overall recovery of mineralized material, it did impact our ability to mine
and
crush the mineralized material. As mentioned above, our mining operations
essentially shut down in January 2005 due to a combination of harsh weather,
equipment difficulties, and management disruption. Although test mining resumed
when the current management was reinstated in mid-February 2005, the equipment
difficulties continued throughout the first quarter. For example, between March
15, 2005 and April 1, 2005, we had no crusher output due to inoperable
equipment. We have since taken steps to remedy our equipment challenges,
including replacing the cone and screen plant on the crusher. Due to these
improvements, we crushed 144,000 tons of mineralized material in the second
quarter, representing an increase of 141% from the first quarter 2005.
We
have
made several other improvements to our equipment and test mining operations
during the second quarter of 2005 to increase test mining production and improve
efficiency. On the test mining side, we have added additional solution lines
to
the mineralized material on test leach pad number two, adjusted the amount
of
cement used during the agglomeration phase of processing, and added an
agglomeraid to our mineralized material. We believe these adjustments will
increase recovery results and minimize problems with the crusher. We have also
increased test production capacity at our Merrill Crowe processing plant by
adding a new clarifier, changing the pumps and raising the height of the vacuum
tower. With these changes, we increased capacity at the plant from 100 gallons
per minute to 300 gallons per minute and we are now operating 24 hours per
day,
7 days per week. We believe the combination of the equipment modifications,
operational improvements, and management changes made since late-February 2005
leaves us poised to reach our goals for 2005.
In
the
remainder of 2005, we plan to focus the bulk of our efforts on achieving
additional improvements in both test production and efficiency at our Plum
Mine
test mining project. We are continuing to pursue operational improvements
through enhancements to our existing processes. These enhancements are expected
to stem from increasing our volume of test production combined with lowering
the
cost of our processes. Our objective for operational performance in 2005 is
to
establish a stable and predictable level of gold and silver test production
at
the Plum Mine resulting in profitability and positive cash flow. While we may
generate an operating profit above our operating costs in 2005, we may not
recover our total costs of this exploration project.
Placer
Claims, Water Rights, and Mineral Permits
We
originally became a mineral company through an acquisition of unpatented placer
mineral claims and the Big Mike copper claims in June 2003 from Ecovery, Inc.
Specifically, that acquisition provided us with a number of Nevada-based placer
claims, including the Gold Canyon and Spring Valley claims, and 17 unpatented
lode claims called the Big Mike Copper Project. This acquisition did not include
any real property rights. In November 2003, we acquired the Plum mine facility
as well as water rights that are usable at Plum Mine and the Gold Canyon and
Spring Valley placer claims. In a separate transaction, we obtained mineral
permits in Alberta, Canada in May 2004.
The
Big
Mike Copper Project is located in Pershing County, Nevada. It covers a total
of
310 acres and consists of 17 unpatented lode claims and one placer claim. We
have not established any proven or probable reserves that meet the requirements
of SEC Industry Guide 7. We have not completed any exploration activity on
the
project. The property includes an open pit, mineralized material in a stockpile
and waste dumps. We believe the property has exploration potential for primary
and oxide copper. In November 2004, we entered into a Memorandum of
Understanding to form a joint venture to begin exploration activities on this
property. The negotiations were put on hold in December 2004 by the dispute
over
control of the company. We continue to look for a business partner to develop
this project. We are still in discussions with the party who executed the
Memorandum of Understanding in November 2004.
In
May
2004, the Alberta government granted us mineral permits for all non-energy
minerals on nearly 800 square miles of Alberta, Canada mineral property.
Sedimentary Oolitic iron bearing material was discovered in 1953 from oil and
gas drilling on the area of our mineral permits. We are in the process of
reviewing existing data and conducting a pre-feasibility study on the project.
The study will include new test work to follow-up earlier test work performed
on
the property. From 1995 through 1997, a series of tests were performed that
showed the mineralized material present was amenable to treatment to produce
iron pellets and pig iron. We are negotiating the acquisition of the coal rights
in this area. We are also investigating the possible acquisition of the rights
to the energy minerals, gas, and oil on this property.
This
is
an early stage project and our activities associated with this mineral area
are
exploratory in nature. We have not established any reserves on this property.
The scope and size of this potential project will require substantial capital,
time and outside assistance during both the pre- and post-feasibility stages.
We
are considering several financial alternatives, including a joint venture,
to
develop this project.
Liquidity
and Capital Resources
We
recognize that our cash resources are limited. Our continued existence and
plans
for future growth depend on our ability to obtain the capital necessary to
operate, through the generation of revenue or the issuance of additional debt
or
equity. In July 2005, we received $800,000 in financing (See Recent Financing
Events and Restructuring, below). While this additional funding will 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. As disclosed in the report of our
independent registered public accounting firm in our financial statements
provided in this filing, our recurring losses and negative cash flow from
operations raise substantial doubt about our ability to continue as a going
concern.
Under
the
terms of our November 2004 subscription agreement, we issued 8% convertible
notes to an investor group. Under the terms of the notes, our first principal
and interest repayment was scheduled for April 1, 2005. Prior to April 1, 2005,
knowing that we did not have sufficient cash available to meet these
obligations, we began negotiations with the major note holders in an effort
to
delay repayment of both the principal and interest amounts for a 12-month
period. Our negotiations with these note holders regarding the repayment delay
have so far been successful and we have reached a tentative agreement regarding
the 12-month payment deferral. We remain optimistic that we will reach a
definitive agreement. However, we are in default on these notes, and in the
event we are not successful in achieving a payment deferral, we will be unable
to meet the current note obligations. While failure to reach a resolution would
likely cause us to seek external funding in order to meet our obligation, it
is
possible that we would be unable to secure such funding.
We
have
yet to realize an operating profit at our Plum Mine location. However, we
believe that our Plum Mine operations will become profitable and generate
positive cash flow during the year 2005. While we may generate an operating
profit above our operating costs in 2005, we may not recover our total costs
of
this exploration project.
We
expect
to expand our existing test leach pads, which currently number three, to a
total
of either four or five test leach pads during 2005. The cost of this expansion
will be approximately $600,000. We are also in the process of taking over the
crushing operations from our third-party contractor. This transition requires
us
to acquire and assemble our own crushing equipment, at an approximate cost
of
$100,000. These expenditures represent our only major capital expenditures
currently planned for 2005. We intend to finance our crushing equipment, our
test leach pad expansion project and any other capital expenditures in 2005
through the issuance of debt and equity instruments to existing shareholders
and
other parties.
See
index
to Financial Statements and Financial Statements Schedules beginning on page
F-1
of this Form 10-KSB.
Not
applicable.
Based
on
the most recent evaluation, which was completed as of the end of the period
covered by this Form 10-KSB, we believe our company’s disclosure controls and
procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e) are
effective to ensure that information required to be disclosed by us in this
report is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate,
to
allow timely decisions regarding required disclosure. Our executive officers
have also concluded that our disclosure controls and procedures are also
effective to give reasonable assurance that the information required to be
disclosed in our filings is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC.
We
have
identified conditions as of December 31, 2004 that we believe are significant
deficiencies in internal controls that include: 1) a lack of segregation of
duties in accounting and financial reporting activities; and 2) the lack of
a
sufficient number of qualified accounting personnel.
In
December 2003 our CFO implemented a business expense reimbursement policy which
he reviewed with all employees who regularly traveled for business including
the
Company’s founder, CEO and Chairman. The CFO discussed the policy again with the
former CEO and Chairman in January 2004 due to his failure to comply with the
policy. The CEO’s continued failure to properly document business expenses led
the CFO to discuss the problem with the Company’s Board of Directors, the
Company’s outside auditor and legal counsel. In April / May 2004 the Company’s
outside auditor spoke with the CEO regarding his failure to document travel
and
entertainment expenses. In August 2004 the Company’s Board of Directors decided
to take firm measures to resolve this problem with the CEO. These steps led
to
the CEO’s resignation on September 3, 2004. The Board then appointed the CFO as
President and Chief Executive Officer.
In
response to this deficiency, five independent board members were added and
an
audit committee, composed of directors’ independent of the Company’s day-to-day
management function, was formed to oversee the financial reporting and to review
and approve executive expense account charges.
As
our
former CFO is assuming the duties of the CEO and the Company has presently
not
hired another individual to act as CFO, we believe we have a significant
deficiency with respect to the lack of qualified accounting personnel. We have
been able to mitigate this deficiency by engaging outside consultants to assist
the Company in its accounting activities, but acknowledge that the only
effective long-term solution to our accounting needs is to hire a qualified
CFO.
Due to our budgetary constraints and the small size of our company we are
uncertain as to when we will be able to accomplish this. We estimate that the
annual cost of a qualified individual to act as the Company’s CFO would be
between $75,000 and $100,000.
We
are in
the process of taking corrective measures to remedy the deficiencies in future
periods.
Not
applicable.
The
following table sets forth certain information regarding our directors and
officers:
|
Name
|
|
Age
|
|
Position
|
| |
|
|
|
|
|
John
F. Cook
|
|
65
|
|
Chairman
of the Board of Directors
|
|
Robert
T. Faber
|
|
45
|
|
President,
Chief Executive Officer, and acting- Chief Financial
Officer
|
|
Lisa
S. Boksenbaum
|
|
31
|
|
Secretary
and General Counsel
|
|
Christopher
L. Aguilar
|
|
42
|
|
Director
|
|
Todd
S. Brown
|
|
49
|
|
Director
|
|
Leslie
Lawrence Cahan (1)
|
|
79
|
|
Director
|
|
Jerrie
W. Gasch
|
|
72
|
|
Director
|
|
Stanley
A. Hirschman
|
|
58
|
|
Director
|
|
Stephen
B. Parent
|
|
59
|
|
Director
|
|
Phil
E. Pearce
|
|
74
|
|
Director
|
| |
|
|
|
|
| (1) |
Mr.
Cahan resigned as a Director on July 25, 2005. Mr. Cahan expressed
no
disagreements with the Company in tendering his
resignation.
|
John
F. Cook
has been
the Chairman of the Board of our company since September 2004. Mr. Cook served
as President and a director of our company from March 2003 until September
2004.
From 1999 until March 2003, Mr. Cook served as a President and a director of
Ecovery, Inc., a private Nevada corporation that sold its mining assets to
our
company in early 2003. For more than eight years, Mr. Cook has owned
and
operated Tormin Resources Limited, a privately held company incorporated in
Ontario, Canada, through which he has provided consulting services to junior
mining companies, including serving as an officer and/or director to the
following companies: Anaconda Gold Corporation (1999 to present), formerly
Anaconda Uranium Corporation, a TSX Venture Exchange company, where he currently
serves as Chairman and previously served as the President and a director;
Castlerock Resources (2002 to present), a TSX Venture exchange company with
mining development interests in Canada, where he serves as Chairman of the
Board
of Directors; MBMI Resources Inc. (2002 to the present), another TSX Venture
exchange company, where he serves as a director; GLR Resources, Inc. (1999
to
the present), a TSX company with exploration and development interests in
Canada, where he serves as a director; and Wolfden Resources, Inc. (1999 to
the
present), a TSX company with exploration and development interests in Canada,
where he serves as a director.
Robert
T. Faber
has
served as President and Chief Executive Officer of our company since September
2004 and Chief Financial Officer since June 2003. Mr. Faber served from 2002
until 2003 as Vice President of United Site Services, Inc., a privately held
service consolidator in the waste service industry. Additionally, Mr. Faber
served as an executive with Allied Waste Industries from 2001 until 2002,
overseeing a $1.2 billion multi-state area and served as Chief Financial Officer
with Frontier Waste Services, LLC from 1999 until 2001. Prior to joining
Frontier Waste, Mr. Faber spent 17 years with Waste Management, Inc., a publicly
traded environmental services company, during which time he served in senior
positions both internationally and domestically. Mr. Faber’s positions
included Director of Finance of Waste Management’s $1.4 billion multi-country
International operations based in London, England and Vice President and
Controller for several $100 million plus multi-state market areas. Mr. Faber
is
a certified public accountant.
Lisa
S. Boksenbaum
has been
Secretary of our company since April 2005 and the General Counsel of our company
since October 2003. Ms. Boksenbaum was a member of CBG Law Group, PLLC in
Bellevue, Washington from December 1998 until September 2003.
Christopher
L. Aguilar
has been
a director of our company since October. Mr. Aguilar has been the General
Counsel and Chief Compliance Officer of Merriman Curhan Ford & Co., a
securities brokerage and investment banking subsidiary of MCF Corporation since
March 2000. During the same period of time, he also served as General Counsel
and Secretary of MCF Corporation, the publicly traded financial services holding
company that provides institutional sales and trading, research, investment
banking, corporate services, and asset management services through its wholly
owned subsidiaries. From August 1995 to March 2000, Mr. Aguilar was a partner
at
Bradley, Curley & Asiano, a law firm located in San Francisco, California.
Mr. Aguilar is an adjunct professor at the University of California, Hastings
College of the Law.
Todd
S. Brown
has been
a director of our company since October. Mr. Brown has been a senior financial
executive with Brown Capital Advisors, Inc., an advisory services company
providing a wide range of services, including strategic planning, transactional
assistance, due diligence, and financial management. Prior to joining Brown
Capital Advisors, Mr. Brown was Senior Vice President, Chief Financial
Officer, and a director of the Phoenix Restaurant Group, Inc. from 1994 to
1999.
Mr. Brown previously was employed by an international accounting firm for 14
years, most recently as a senior manager.
Leslie
L. Cahan
has been
a director of our company since March 2003. Mr. Cahan has been directly involved
for more than 30 years. Mr. Cahan has served as President and Chief
Executive Officer of Harlesk Nevada Inc., the former owner of the Gold Canyon
and Spring Valley claims that were acquired by Ecovery, Inc. and ultimately
transferred to our company in March 2003. As former owner of the Gold Canyon
and
Spring Valley mining claims, Mr. Cahan managed exploration activities on the
properties, including carrying out geophysical, drilling and trenching
exploration activities. During this same time period, Mr. Cahan served as
President and Chief Executive Officer of Harlesk Management Inc., acting as
a
resort developer as well as a consultant to luxury resort developers, providing
concept, marketing and financial assistance. From 1999 to 2003, Mr. Cahan served
as President and Chief Executive Officer of Corporate Communications Inc.,
a
long-distance service provider. Previously, Mr. Cahan owned and operated Western
Land and Minerals Ltd., which specialized in gas and oil production. He was
also
a founding partner of Nanisivic, on Baffin Island, one of the world’s largest
zinc mines.
Jerrie
W. Gasch
has been
a director of our company since September 2004. Mr. Gasch is a Registered
Geophysicist and Geologist with over 40 years of experience. Mr. Gasch founded
Gasch & Associates of Sacramento, California in 1969 and currently serves as
President of the company, where he remains actively involved in planning field
strategies and data collection, as well as interpretation and application of
findings. Under his management, Gasch & Associates has performed over 3,000
geological and geophysical investigations throughout the continental United
States, Alaska and Central and South America. Mr. Gasch has managed such diverse
projects as higher resolution reflection and refraction seismic surveys,
electromagnetic and ground magnetic surveys, L.P. surveys, ground penetrating
radar, vibration and blast monitoring surveys for the mineral industry. He
has
worked on large gold mining projects such as Homestakes McLaughln Open Pit
Mine
in Lake County California, Valdese Creek Placer Mine in Alaska, Yana Coacha
Mine
in Peru South America and numerous other gold exploration projects in Nevada,
Idaho, Arizona, California and Costa Rica S.A. Prior to founding Gasch &
Associates in 1969, Mr. Gasch worked as a geologist and geophysicist for the
Department of Water Resources and the California Division of Mines and
Geology.
Stanley
A. Hirschman
has been
a director of our company since October. Mr. Hirschman has served since 1996
as
President of CPointe Associates, Inc., a Plano, Texas executive management
and
consulting firm that specializes in solutions for companies with emerging
technology-based products. He is Chairman of the Board of Bravo Foods
International, Director of 5G Wireless Communications, an advisor of Redwood
Grove Capital Management LLC, former Chairman of Mustang Software and former
director of Imaging Diagnostic Systems, Inc. While at Mustang Software, Mr.
Hirschman took a hands-on role in the planning and execution of the strategic
initiative to increase shareholder value resulting in the successful acquisition
of the company by Quintus Corporation. Mr. Hirschman is a member of the National
Association of Corporate Directors and the KMPG Audit Committee Roundtable
training program. Prior to that he held senior management positions with
Software Etc., T.J. Maxx and Banana Republic. Mr. Hirschman is active in
community affairs and serves on the Advisory Council of the Salvation Army
Adult
Rehabilitation Centers.
Stephen
B. Parent
has been
a director of our company since March 2004. Mr. Parent served as Chairman of
the
Board of Directors and Chief Executive Officer of our company from March 2004
until September 2004. From March 2003 until March 2004, Mr. Parent was our
Manager for our exploration and test mining operations. Prior to founding our
company, Mr. Parent worked in the automotive industry for Penske’s United Auto
Group (UAG) during 2002 and 2003. Mr. Parent served as Chief Executive Officer
of Ecovery, Inc., a private Nevada corporation from June 1998 to March 2003
when
it sold its mining assets to our company. Mr. Parent currently serves as
President and Chief Executive Officer of Ecovery. Since January 1995, Mr. Parent
has served as President and Chief Executive Officer of Aztech Environmental
Industries, Inc. Mr. Parent and his wife filed for Chapter 13 Bankruptcy
protection on September 26, 2002 and the bankruptcy was fully discharged on
March 5, 2004.
Phil
E. Pearce
has been
a director of our company since October. Mr. Pearce is an independent business
consultant with Phil E. Pearce & Associates, and a member of the Board of
Directors of a number of domestic and internationally headquartered companies.
Mr. Pearce was Senior Vice President and a director of E.F. Hutton, Chairman
of
the Board of Governors of the National Association of Securities Dealers, a
Governor of the New York Stock Exchange, and a member of the Advisory Council
to
the United States Securities and Exchange Commission on the Institutional Study
of the Stock Markets. Mr. Pearce has been a featured speaker to the European
Economic Committee in Belgium representing the United States on a symposium
on
public disclosures.
Information
Relating to Corporate Governance and the Board of
Directors
Our
Board
of Directors has determined, after considering all the relevant facts and
circumstances, that Messrs. Todd S. Brown, Stanley A. Hirschman and Phil E.
Pearce are independent directors, as “independence” is defined by Nasdaq,
because they have no relationship with us that would interfere with their
exercise of independent judgment. Mr. Faber is an officer of our company; Mr.
Cook is a consultant to our company; and Mr. Aguilar is an officer of our
principal investment banking firm. Jerrie Gasch, currently a director of our
company, is an independent director, and Stephen B. Parent, currently a director
of our company, is not considered independent since he formerly served as an
officer.
Our
Board
of Directors has established three standing committees: an Audit Committee,
a
Compensation Committee, and a Nominations and Corporate Governance Committee.
A
majority of the members of our Audit Committee, Compensation Committee, and
Nominations and Corporate Governance Committee consist of independent directors.
Our
Board
of Directors has adopted charters for the Audit, Compensation, and Nominations
and Corporate Governance Committees describing the authority and
responsibilities delegated to each committee by the board. Our Board of
Directors has also adopted Corporate Governance Guidelines, a Code of Conduct,
and a Code of Ethics for the CEO and Senior Financial Officers. The charters
of
our Audit, Compensation, and Nominations and Corporate Governance Committees;
our Corporate Governance Guidelines, Code of Conduct, and Code of Ethics for
the
CEO and Senior Financial Officers, and any amendments or waivers thereto; and
any other corporate governance materials contemplated by SEC or Nasdaq
regulations are available in print to any stockholder requesting a copy in
writing from our corporate secretary at our executive offices set forth in
this
filing.
We
regularly schedule executive sessions at which independent directors meet
without the presence or participation of management. The presiding director
of
such executive session rotates among the Chairs of the Audit Committee,
Compensation Committee, and the Nominations and Corporate Governance
Committee.
Interested
parties may communicate with our Board of Directors or specific members of
our
Board of Directors, including our independent directors and the members of
our
various board committees, by submitting a letter addressed to the Board of
Directors of GoldSpring, Inc. c/o any specified individual director or directors
at the address listed herein. Any such letters are sent to the indicated
directors.
The
Audit Committee
The
purpose of the Audit Committee is to oversee the financial and reporting
processes of our company and the audits of the financial statements of our
company and to provide assistance to our Board of Directors with respect to
the
oversight of the integrity of the financial statements of our company, our
company’s compliance with legal and regulatory matters, the independent
auditor’s qualifications and independence, and the performance of our company’s
independent auditor. The primary responsibilities of the Audit Committee are
set
forth in its charter and include various matters with respect to the oversight
of our company’s accounting and financial reporting process and audits of the
financial statements of our company on behalf of our Board of Directors. The
Audit Committee also selects the independent auditor to conduct the annual
audit
of the financial statements of our company; reviews the proposed scope of such
audit; reviews accounting and financial controls of our company with the
independent auditor and our financial accounting staff; and reviews and approves
transactions between us and our directors, officers, and their affiliates.
The
Audit
Committee currently consists of Messrs. Brown, Hirschman, and Pearce, each
of
whom is an independent director of our company under Nasdaq rules as well as
under rules adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002.
The
Board of Directors has determined that Mr. Brown (whose background is detailed
above) qualifies as an “audit committee financial expert” in accordance with
applicable rules and regulations of the SEC. Mr. Brown serves as the Chairman
of
the Audit Committee.
The
Compensation Committee
The
purpose of the Compensation Committee includes determining, or recommending
to
our Board of Directors for determination, the compensation of the Chief
Executive Officer and other executive officers of our company and discharging
the responsibilities of our Board of Directors relating to compensation programs
of our company. The Compensation Committee currently consists of Messrs. Brown,
Hirschman, and Pearce, with Mr. Hirschman serving as Chairman.
The
Nominations and Corporate Governance Committee
The
purposes of the Nominations and Corporate Governance Committee include the
selection or recommendation to the Board of Directors of nominees to stand
for
election as directors at each election of directors, the oversight of the
selection and composition of committees of the Board of Directors, the oversight
of the evaluations of the Board of Directors and management, and the development
and recommendation to the Board of Directors of a set of corporate governance
principles applicable to our company. The Nominations and Corporate Governance
Committee currently consists of Messrs. Aguilar, Brown, Hirschman, and Pearce,
with Mr. Aguilar serving as Chairman.
The
Nominations and Corporate Governance Committee will consider persons recommended
by stockholders for inclusion as nominees for election to our Board of Directors
if the names, biographical data, and qualifications of such persons are
submitted in writing in a timely manner addressed and delivered to our company’s
corporate secretary at the address listed herein. The Nominations and Corporate
Governance Committee identifies and evaluates nominees for our Board of
Directors, including nominees recommended by stockholders, based on numerous
factors it considers appropriate, some of which may include strength of
character, mature judgment, career specialization, relevant technical skills,
diversity, and the extent to which the nominee would fill a present need on
our
Board of Directors. As discussed above, the members of the Nominations and
Corporate Governance Committee are independent, as that term is defined by
Nasdaq.
The
Board
of Directors held a total of five meetings during the fiscal year ended December
31, 2004. The Audit Committee met separately at one meeting during the fiscal
year ended December 31, 2004. The Compensation Committee held a total of one
meeting during the fiscal year ended December 31, 2004. The Nominations and
Corporate Governance Committee did not meet during the fiscal year ended
December 31, 2004. Each of our directors attended at least 75% of the aggregate
of (1) the total number of meetings of our Board of Directors held during fiscal
2004, and (2) the total number of meetings held by all committees of our Board
of Directors on which such person served during fiscal 2004.
Compensation
of Directors
Independent
directors receive $3,000 a month, and the Chairman of the Audit Committee
receives $4,000 a month. We also reimburse the members of our Board of Directors
for actual expenses incurred in attending board meetings.
With
the
exception of the consulting services agreement for John F. Cook and employment
agreement for Robert T. Faber described below, our officers and directors do
not
have employment agreements or consulting agreements relating to termination
of
employment or change-in-control agreements.
The
following table sets forth, for the periods indicated, the total compensation
for services provided to us in all capacities by our Chief Executive Officer.
No
other executive officer received aggregate compensation exceeding $100,000
during 2004.
SUMMARY
COMPENSATION TABLE
| |
|
|
|
|
|
|
|
Long-Term
|
|
|
|
| |
|
|
|
|
|
|
|
Compensation
|
|
|
|
| |
|
|
|
|
|
|
|
Awards
|
|
|
|
| |
|
|
|
|
|
|
|
Securities
|
|
All
Other
|
|
| |
|
Annual
Compensation(1)
|
|
Underlying
|
|
Compensation
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Options
(#)(2)
|
|
($)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Robert
T. Faber(2)
|
|
|
2004
|
|
$
|
115,000
|
|
$
|
10,000
|
|
|
0
|
|
$
|
0
|
|
|
President
and Chief Executive Officer; Chief Financial Officer
|
|
|
2003
|
|
|
33,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(1)
|
Executive
officers received certain perquisites, the value of which did not
exceed
the lesser of $50,000 or 10% of that officer’s salary and bonus during
fiscal 2004.
|
| (2) |
Mr.
Faber has served as President and Chief Executive Officer since September
2004 and Chief Financial Officer since June
2003.
|
Stock
Options
We
did
not grant stock options to directors, officers, or employees in 2004. There
were
no shares of common stock underlying unexercised stock options at December
31,
2004.
Employment
Agreements
We
have
an employment agreement with Robert T. Faber extending through August 2009.
The
employment agreement provides for Mr. Faber to serve as our Chief Financial
Officer and was not modified after Mr. Faber was appointed President and Chief
Executive Officer. The employment agreement provides for base compensation
of
$120,000 per year, subject to increases to up to $200,000 per year if our
company achieves designated revenue levels. The employment agreement also
provides for incentive compensation as determined by our board of directors.
In
addition, the employment agreement provides for Mr. Faber to be granted options
to purchase shares of our common stock at prices ranging from $.50 to $2.00
per
share. Mr. Faber is entitled to a use of a company car, contributions to a
401(k) plan, and life insurance coverage.
The
employment agreement with Mr. Faber contains a covenant not to compete with
our
company for a period of two years immediately following termination of
employment. We may terminate Mr. Faber for “cause” as defined in the employment
agreement. We will be required to pay Mr. Faber’s compensation during the term
of the agreement if we terminate him without cause.
We
had an
employment agreement with Leslie Cahan extending through August 2005. The
employment agreement provided for Mr. Cahan to serve as Director of Human
Resources. The agreement provided for base compensation of $60,000 per year.
As
of August 1, 2005 Mr. Cahan is no longer an employee of our Company. Apart
from
his employment with the company, Mr. Cahan received $60,000 in consulting fees
from us in 2004 through his wholly-owned company, Harlesk Nevada.
The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 2005 by (1) each person who is
known by us to be the beneficial owner of more than five percent of our issued
and outstanding shares of common stock, (2) each of our directors and executive
officers, and (3) all directors and officers as a group.
| Name
of Beneficial Owner |
|
Shares
Beneficially Owned
|
|
| |
|
Number(1)
|
|
Percent(2)
|
|
| |
|
|
|
|
|
|
Directors
and Executive Officers(3):
|
|
|
|
|
|
|
John
F. Cook
|
|
|
6,750,000
|
|
|
2.9
|
%
|
|
Robert
T. Faber
|
|
|
1,990,000
|
|
|
0.8
|
%
|
|
Lisa
S. Boksenbaum
|
|
|
10,000
|
|
|
0.0
|
%
|
|
Christopher
L. Aguilar
|
|
|
157,775
|
|
|
0.1
|
%
|
|
Todd
S. Brown
|
|
|
―
|
|
|
0.0
|
%
|
|
Leslie
L. Cahan
|
|
|
9,000,000
|
|
|
3.8
|
%
|
|
Jerrie
W. Gasch
|
|
|
330,000
|
|
|
0.1
|
%
|
|
Stanley
A. Hirschman
|
|
|
―
|
|
|
0.0
|
%
|
|
Stephen
B. Parent
|
|
|
45,962,750
|
|
|
19.6
|
%
|
|
Phil
E. Pearce
|
|
|
―
|
|
|
0.0
|
%
|
| |
|
|
|
|
|
|
|
|
All
directors and executive officers as
a group (ten persons)
|
|
|
64,200,526
|
|
|
27.4
|
%
|
| |
|
|
|
|
|
|
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
|
John
W. Winfield(4)
|
|
|
87,694,050
|
|
|
34.56
|
%
|
|
Longview
Equity Fund and Longview International Equity Fund (5)
|
|
|
28,354,549
|
|
|
11.24
|
%
|
|
Capital
Ventures International (7)
|
|
|
18,903,020
|
|
|
7.46
|
%
|
|
Gamma
Opportunity Capital (8)
|
|
|
14,177,273
|
|
|
5.70
|
%
|
|
Longview
Fund, L.P. (9)
|
|
|
14,177,273
|
|
|
5.70
|
%
|
| |
|
|
|
|
|
|
|
| (1) |
Includes,
when applicable, shares owned of record by such person’s minor children
and spouse and by other related individuals and entities over whose
shares
of common stock such person has custody, voting control, or power
of
disposition. Also includes shares of common stock that the identified
person had the right to acquire within 60 days of May 1, 2005 by
the
exercise of vested stock options.
|
| (2) |
The
percentages shown include the shares of common stock that the person
will
have the right to acquire within 60 days of May 1, 2005. In calculating
the percentage of ownership, all shares of common stock which the
identified person will have the right to acquire within 60 days of
May 1,
2005 upon the conversion of convertible notes or the exercise of
warrants
or stock options are deemed to be outstanding for the purpose of
computing
the percentage of shares of common stock owned by such person, but
are not
deemed to be outstanding for the purpose of computing the percentage
of
shares of common stock owned by any other
person.
|
| (3) |
With
the exception of Messrs. Gasch and Parent, the directors and officers
can
be reached at our company’s offices at 8585 East Hartford Drive, Suite
400, Scottsdale, Arizona 85225. Mr. Gasch’s address is 3174 Luyung Drive,
#2, Rancho Cordova, CA 95742, and Mr. Parent’s address is 16706 N.
109th
Way, Scottsdale, AZ 85255.
|
| (4) |
Includes
shares beneficially owned by John W. Winfield, Santa Fe Financial
Corp.,
Portsmouth Square, Inc. and InterGroup Corporation. Mr. Winfield’s address
is 820 Moraga Drive, Los Angeles, California
90049.
|
| (5) |
The
address for Longview is c/o Redwood Grove Capital Management, 600
Montgomery Street, 44th
Floor, San Francisco, California
94111.
|
| (6) |
The
address for Jubliee Investment Trust and Pearl Corporate Finance
Limited
is One Great Cumberland Place, London W1H
7AL.
|
| (7) |
The
address for Capital Ventures International is c/o Heights Capital
Management, 101 California St., Suite 3250, San Francisco, CA
94111.
|
| (8) |
The
address for Gamma Opportunity Capital is 600 Montgomery Street,
44th
Floor, San Francisco, California
94111.
|
| (9) |
The
address for Longview Fund, L.P. is c/o Viking Asset Management, LLC,
600
Montgomery Street, 44th
Floor, San Francisco, California
94111.
|
John
F.
Cook, the Chairman of our Board of Directors, has a consulting agreement with
us. We pay Mr. Cook for his professional mining consulting services
at a
rate of $500 per day.
We
were a
party to a Consulting Agreement with Purnendu K. Rana Medhi from October 1,
2003
through September 30, 2004. The agreement required Mr. Medhi to perform such
services as we may reasonably request, including resource evaluation, analysis
of mining methods, metallurgical process, and project planning. We paid Mr.
Medhi $46,125 during fiscal 2004 and issued 50,000 shares of our common stock
to
him.
|
|
(a) |
The
following documents are filed as part of this
Report:
|
|
|
(1) |
Financial
statements filed as part of this
Report:
|
|
Report
of Independent Registered Public Accounting Firm
|
F
-
2
|
|
Consolidated
Balance Sheet as of December 31, 2004
|
F
-
3
|
|
Consolidated
Statements of Operations
for
the years ended December 31, 2004 and 2003
|
F
-
5
|
|
Consolidated
Statements of Changes in Stockholders' Equity
for
the year ended December 31, 2004 and 2003
|
F
-
6
|
|
Consolidated
Statements of Cash Flows
for
the year ended December 31, 2004 and 2003
|
F
-
7
|
|
Notes
to Consolidated Financial Statements
|
F-9-21
|
|
|
(2) |
Exhibits
filed as part of this Report:
|
| |
Exhibit
|
|
|
| |
Number
|
|
Exhibit
|
| |
|
|
|
| |
3.1
|
|
Certificate
of Incorporation of the Registrant, including all amendments to date
(1)
|
| |
3.2
|
|
Amended
and Restated Bylaws of the Registrant (1)
|
| |
10.5(a)
|
|
Subscription
Agreement dated as of March 23, 2004 by and among the Registrant
and the
subscriber parties thereto (1)
|
| |
10.5(b)
|
|
Subscription
Agreement dated as of November 30, 2004 by and among the Registrant
and
the subscriber parties thereto (2)
|
| |
10.6
|
|
Form
of Convertible Note, dated as of November 30, 2004 issued by the
Registrant to the subscribers (2)
|
| |
10.7(a)
|
|
Common
Stock Purchase Warrant A dated as of March 23, 2004 issued by the
Registrant to the subscribers (1)
|
| |
10.7(b)
|
|
Common
Stock Purchase Warrant (Green Shoe) dated as of March 23, 2004 issued
by
the Registrant to the subscribers (1)
|
| |
10.7(c)
|
|
Form
of Class B Common Stock Purchase Warrant, dated as of November 30,
2004
issued by the Registrant to the subscribers (2)
|
| |
10.8(a)
|
|
Funds
Escrow Agreement, dated as of March 23, 2004 among the Registrant,
the
subscriber parties thereto, and the escrow agent (1)
|
| |
10.8(b)
|
|
Funds
Escrow Agreement, dated as of November 30, 2004 among the Registrant,
the
subscriber parties thereto, and the escrow agent (2)
|
| |
21.1
|
|
List
of Subsidiaries (1)
|
| |
23.1
|
|
Consent
of Jewett, Schwartz & Associates
|
| |
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended.
|
| |
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended.
|
| |
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
| |
32.2
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
| |
|
|
|
|
|
(1) |
Incorporated
by Reference to Registration Statement on Form S-1 (Registration
333-114697)
|
|
|
(2) |
Incorporated
by Reference to Registrant’s Current Report on Form 8-K dated December 6,
2004, as filed on December 8, 2004.
|
|
|
(b) |
Reports
filed on Form 8-K during the quarter ended December 31,
2004:
|
| |
(1)
|
A
Report on Form 8-K was filed with the Securities and Exchange Commission
on October 6, 2004 relating to the election of four new
directors.
|
| |
(2)
|
A
Report on Form 8-K was filed with the Securities and Exchange Commission
on December 8, 2004 relating to the restructuring of securities issued
in
our March 2004 private placement
transaction.
|
| |
(3)
|
A
Report on Form 8-K was filed with the Securities and Exchange Commission
on December 14, 2004 relating to the removal of seven directors pursuant
to a purported shareholders’ consent
resolution.
|
| |
(4)
|
A
Report on Form 8-K was filed with the Securities and Exchange Commission
on December 21, 2004 relating to the termination of negotiations
with Bema
Gold Corporation for our acquisition of the Yarnell Mining
Company.
|
The
aggregate fees billed to our company by Jewett Schwartz, for the fiscal years
ended December 31, 2003 and December 31, 2004, are as follows:
| |
|
2003
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
Audit
fees
|
|
$
|
56,000
|
|
$
|
28,500
|
|
|
Audit-related
fees
|
|
|
0
|
|
|
0
|
|
|
Tax
fees
|
|
|
0
|
|
|
0
|
|
|
All
other fees
|
|
|
1,400
|
|
|
―
|
|
| |
|
|
|
|
|
|
|
Audit
Committee Pre-Approval Policies
The
charter of our Audit Committee provides that the duties and responsibilities
of
our Audit Committee include the pre-approval of all audit, audit-related, tax,
and other services permitted by law or applicable SEC regulations (including
fee
and cost ranges) to be performed by our independent auditor. Any pre-approved
services that will involve fees or costs exceeding pre-approved levels will
also
require specific pre-approval by the Audit Committee. Unless otherwise specified
by the Audit Committee in pre-approving a service, the pre-approval will be
effective for the 12-month period following pre-approval. The Audit Committee
will not approve any non-audit services prohibited by applicable SEC regulations
or any services in connection with a transaction initially recommended by the
independent auditor, the purpose of which may be tax avoidance and the tax
treatment of which may not be supported by the Internal Revenue Code and related
regulations.
To
the
extent deemed appropriate, the Audit Committee may delegate pre-approval
authority to the Chairman of the Audit Committee or any one or more other
members of the Audit Committee provided that any member of the Audit Committee
who has exercised any such delegation must report any such pre-approval decision
to the Audit Committee at its next scheduled meeting. The Audit Committee will
not delegate to management the pre-approval of services to be performed by
the
independent auditor.
Our
Audit
Committee requires that our independent auditor, in conjunction with our Chief
Financial Officer, be responsible for seeking pre-approval for providing
services to us and that any request for pre-approval must inform the Audit
Committee about each service to be provided and must provide detail as to the
particular service to be provided.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
| |
|
|
| |
GOLDSPRING,
INC. |
|
|
|
| Date: September
21, 2005 |
By: |
/s/ Robert
T. Faber |
| |
|
| |
Robert
T. Faber
President and Chief Executive
Officer
|
|
Signature
|
|
Capacity
|
|
Date
|
| |
|
|
|
|
|
/s/
John F. Cook
|
|
Chairman
of the Board
|
|
September
21, 2005
|
|
John
F. Cook
|
|
|
|
|
| |
|
|
|
|
|
/s/
Robert T. Faber
|
|
President,
Chief Executive Officer (Principal Executive Officer),
|
|
September
21, 2005
|
|
Robert
T. Faber
|
|
Chief
Financial
Officer (Principal Accounting and Financial |
|
|
| |
|
Officer),
and
Director |
|
|
| |
|
|
|
|
|
/s/
|
|
Director
|
|
__________,
2005
|
|
Stephen
B. Parent
|
|
|
|
|
| |
|
|
|
|
|
/s/
Christopher L. Aguilar
|
|
Director
|
|
September
21, 2005
|
|
Christopher
L. Aguilar
|
|
|
|
|
| |
|
|
|
|
|
/s/
Todd S. Brow
|
|
Director
|
|
September
21, 2005
|
|
Todd
S. Brown
|
|
|
|
|
| |
|
|
|
|
|
/s/
Stanley A. Hirschman
|
|
Director
|
|
September
21, 2005
|
|
Stanley
A. Hirschman
|
|
|
|
|
| |
|
|
|
|
|
/s/
Phil E. Pearce
|
|
Director
|
|
September
21, 2005
|
|
Phil
E. Pearce
|
|
|
|
|
| |
|
|
|
|
|
/s/
Jerrie Gasch
|
|
Director
|
|
September
21, 2005
|
|
Jerrie
Gasch
|
|
|
|
|
GOLDSPRING,
INC.
Page
| |
|
|
|
F-2
|
| |
|
|
|
F-3
|
| |
|
|
|
F-5
|
| |
|
|
|
F-6
|
| |
|
|
|
F-7
|
| |
|
|
|
F-8-24
|
| |
|
To
the
board of directors and shareholders of
Goldspring,
Inc.
We
have
audited the accompanying consolidated balance sheet of Goldspring, Inc. as
of
December 31, 2004 and the related consolidated statements of operations, changes
in shareholders’ deficiency and cash flows for the years ended December 31, 2004
and 2003. These consolidated financial statements are the responsibility of
the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Goldspring, Inc. as of December
31,
2004, and the results of its operations and its cash flows for the years then
ended 2004 and 2003 in conformity with accounting principles generally accepted
in the United States.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As more fully described in Note 1 to the
financial statements, the Company has incurred recurring operating losses and
has a working capital deficit at December 31, 2004. The Company is working
on
various alternatives to improve the Company’s financial resources which are also
described in Note 1. Absent the successful completion of one of these
alternatives, the Company’s operating results will increasingly become
uncertain. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern; however, the financial statements do not include
any adjustments to reflect the possible future effects on the recoverability
and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
The
financial statements as of and for the year ended December 31, 2004 have been
restated to account for certain costs incurred in the development of the mining
facility previously capitalized to exploration or test mining costs and
shareholders’ equity have been restated to reinstate the convertible notes
payable all further described in Note 1 to the financial
statements.
The
financial statements as of and for the year ended December 31, 2003 have been
restated to account for the acquisition of the mineral interests acquired from
Ecovery, Inc. as a reverse merger pursuant to the Plan of Reorganization, the
cancellation of preferred stock, and the full reservation of deferred tax assets
further described in Note 1 to the financial statements.
/a/
Jewett, Schwartz & Associates
Jewett,
Schwartz, & Associates
Hollywood,
Florida
March
31,
2005 except as to
Note
1 as
to which the date is August 29, 2005
GOLDSPRING,
INC.
| |
|
December
31, 2004
|
|
December
31, 2003
|
|
| |
|
(As
Restated)
|
|
(As
Restated)
|
|
|
ASSETS
|
|
|
|
|
|
| |
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,951,802
|
|
$
|
364,138
|
|
|
Prepaid
expenses and other current assets
|
|
|
149,795
|
|
|
440,155
|
|
|
Inventories
|
|
|
288,688
|
|
|
--
|
|
|
Total
Current Assets
|
|
|
2,390,285
|
|
|
804,293
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
PLANT,
EQUIPMENT, AND MINERAL PROPERTIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Mineral
properties
|
|
|
1,334,837
|
|
|
1,334,837
|
|
|
Plant
and Equipment
|
|
|
1,159,780
|
|
|
614,793
|
|
|
Total
Property and Equipment
|
|
|
2,494,617
|
|
|
1,949,360
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Reclamation
deposit
|
|
|
377,169
|
|
|
145,000
|
|
|
Equipment
purchase deposit
|
|
|
110,000
|
|
|
100,000
|
|
|
Total
Other Assets
|
|
|
487,169
|
|
|
245,000
|
|
|
Total
Assets
|
|
$
|
5,372,071
|
|
$
|
2,998,923
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
GOLDSPRING,
INC.
| |
|
December
31, 2004
|
|
December
31, 2003
|
|
| |
|
(As
Restated)
|
|
(As
Restated)
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
589,799
|
|
$
|
108,952
|
|
|
Accrued
Expenses
|
|
|
792,884
|
|
|
49,322
|
|
|
Short-Term
Lease Obligations
|
|
|
34,517
|
|
|
--
|
|
|
Current
portion of long-term debt
|
|
|
11,521,776
|
|
|
400,000
|
|
|
Total
Current Liabilities
|
|
|
12,938,976
|
|
|
558,274
|
|
| |
|
|
|
|
|
|
|
|
LONG-TERM
DEBT AND OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
243,858
|
|
|
600,000
|
|
|
Long-term
lease obligation, net of current portion
|
|
|
119,152
|
|
|
--
|
|
|
Long-term
reclamation liability
|
|
|
553,190
|
|
|
--
|
|
|
Total
Long-Term debt and other Long-term Liabilities
|
|
|
916,200
|
|
|
600,000
|
|
|
Total
Liabilities
|
|
$
|
13,855,176
|
|
$
|
1,158,274
|
|
| |
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (NOTE 8)
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
Common
stock, $.000666 par value, 500,000,000 shares authorized,
171,120,482
shares issued and outstanding
|
|
|
113,966
|
|
|
114,970
|
|
|
Treasury
Stock
|
|
|
(67
|
)
|
|
--
|
|
|
Additional
paid-in capital
|
|
|
3,574,272
|
|
|
4,327,420
|
|
|
Accumulated
deficit - Prior years
|
|
|
(2,601,741
|
)
|
|
--
|
|
|
Accumulated
deficit - Current year
|
|
|
(9,569,535
|
)
|
|
(2,601,741
|
)
|
|
Total
Stockholders’ Deficiency
|
|
|
(8,483,105
|
)
|
|
1,840,649
|
|
|
Total
Liabilities and Stockholders’ Deficiency
|
|
$
|
5,372,071
|
|
$
|
2,998,923
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
GOLDSPRING,
INC.
| |
|
Years
Ended
December
31,
(As
Restated)
|
|
| |
|
2004
|
|
2003
|
|
| |
|
|
|
|
|
|
Revenue
from gold sales, net
|
|
$
|
955,380
|
|
$
|
―
|
|
| |
|
|
|
|
|
|
|
|
Cost
and Expenses
|
|
|
|
|
|
|
|
|
Costs
applicable to sales (exclusive of depreciation and amortization
shown separately below)
|
|
|
--
|
|
|
―
|
|
|
Depreciation
and amortization
|
|
|
219,834
|
|
|
1,118
|
|
|
Reclamation,
Exploration and Test Mining Expenses
|
|
|
6,800,011
|
|
|
387,557
|
|
|
General
and Administrative
|
|
|
1,430,596
|
|
|
2,214,957
|
|
|
Other
|
|
|
659,931
|
|
|
―
|
|
| |
|
|
9,110,372
|
|
|
2,603,632
|
|
| |
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
Gain
on derivative investments, net
|
|
|
238,620
|
|
|
―
|
|
|
Liquidated
damages expense (See Note 11)
|
|
|
(1,627,308
|
)
|
|
―
|
|
|
Interest
income
|
|
|
40,142
|
|
|
―
|
|
|
Interest
expense
|
|
|
(65,997
|
)
|
|
1,891
|
|
| |
|
|
(1,414,543
|
)
|
|
1,891
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net
Loss:
|
|
|
(9,569,535
|
)
|
|
(2,601,741
|
)
|
|
Net
loss per common share - basic
|
|
$
|
(0.051
|
)
|
$
|
(0.019
|
)
|
|
Basic
weighted average common shares outstanding
|
|
|
186,800,478
|
|
|
135,138,181
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
GOLDSPRING,
INC.
For
the Years Ended December 31, 2004 and 2003
(Common
Stock Par value, $.000666 per share; 500,000,000 shares
authorized)
| |
|
Common
Stock
|
|
|
|
GOLDSPRING,
INC. f/k/a VISATOR, INC.
STATEMENT
OF CHANGES IN SHAREHOLDERS’ DEFICIENCY
|
|
| |
|
500,000,000
shares
authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares
Issued
|
|
Shares
Issued - Forward Stock Split
|
|
Total
Shares Issued After Forward Stock Split
|
|
Par
value $.000666 per share
|
|
Common
Stock Subscribed
|
|
Stock
Subscrip-tions Receivable
|
|
Treasury
Stock Subscrip-tions Payable
|
|
Additional
Paid-in
Capital
|
|
Treasury
Stock
(at
cost)
|
|
Accumulated
Deficit
|
|
Total
|
|
|
Balance,
December 31, 2002
|
|
|
83,699,081
|
|
|
|
|
|
|
|
$
|
55,745
|
|
|
52,947
|
|
|
(52,947
|
)
|
$
|
20,000
|
|
$
|
2,510,427
|
|
|
(20,000
|
)
|
|
(2,614,051
|
)
|
|
(47,879
|
)
|
|
Retirement
of common stock prior to stock split
|
|
|
(79,500,000
|
)
|
|
|
|
|
|
|
|
(52,947
|
)
|
|
(52,947
|
)
|
|
52,947
|
|
|
(20,000
|
)
|
|
52,947
|
|
|
20,000
|
|
|
|
|
|
|
|
|
Balance
after retirement of stock
|
|
|
4,199,081
|
|
|
|
|
|
|
|
|
2,798
|
|
|
|
|
|
|
|
|
|
|
|
2,563,374
|
|
|
|
|
|
(2,614,051
|
)
|
|
(47,879
|
)
|
|
Stock
Dividend Opening Balance Shares
|
|
|
4,199,081
|
|
|
419,908
|
|
|
4,618,989
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
Quasi-reorganization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,614,051
|
)
|
|
|
|
|
2,614,051
|
|
|
|
|
|
Common
stock issued to Ecovery for acquisition of mining
interests
|
|
|
90,000,000
|
|
|
9,000,000
|
|
|
99,000,000
|
|
|
65,934
|
|
|
|
|
|
|
|
|
|
|
|
53,204
|
|
|
|
|
|
|
|
|
119,138
|
|
|
Common
stock issued for consulting services in March 2003
|
|
|
24,000,000
|
|
|
2,400,000
|
|
|
26,400,000
|
|
|
17,582
|
|
|
|
|
|
|
|
|
|
|
|
2,062,418
|
|
|
|
|
|
|
|
|
2,080,000
|
|
|
Common
stock issued for consulting services in August 2003
|
|
|
289,000
|
|
|
28,900
|
|
|
317,900
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
39,918
|
|
|
|
|
|
|
|
|
40,130
|
|
|
Common
stock retired
|
|
|
(11,735
|
)
|
|
(1,154
|
)
|
|
(12,889
|
)
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
Common
stock issued for equipment deposit
|
|
|
800,000
|
|
|
80,000
|
|
|
880,000
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
99,414
|
|
|
|
|
|
|
|
|
100,000
|
|
|
Issuance
of common stock - private placement
|
|
|
1,000,000
|
|
|
100,000
|
|
|
1,100,000
|
|
|
733
|
|
|
|
|
|
|
|
|
|
|
|
124,267
|
|
|
|
|
|
|
|
|
125,000
|
|
|
Issuance
of common stock to Jubilee Investment Trust
|
|
|
36,000,000
|
|
|
3,600,000
|
|
|
39,600,000
|
|
|
26,374
|
|
|
|
|
|
|
|
|
|
|
|
1,758,634
|
|
|
|
|
|
|
|
|
1,785,008
|
|
|
Common
stock issued for acquisition of water rights, plant, equipment and
mineral
interests
|
|
|
723,149
|
|
|
|
|
|
723,149
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
240,518
|
|
|
|
|
|
|
|
|
241,000
|
|
|
Consulting
fees incurred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,601,741
|
)
|
|
(2,601,741
|
)
|
|
Balance
- December 31, 2003, Restated
|
|
|
161,198,576
|
|
|
15,627,654
|
|
|
172,627,149
|
|
|
114,970
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
4,327,420
|
|
|
--
|
|
|
(2,601,741
|
)
|
|
1,840,649
|
|
|
Issuance
of common stock for cash, net of issuance costs
|
|
|
|
|
|
|
|
|
22,182,462
|
|
|
14,773
|
|
|
|
|
|
|
|
|
|
|
|
9,414,008
|
|
|
|
|
|
|
|
|
9,428,781
|
|
|
Common
stock issued for consulting services
|
|
|
|
|
|
|
|
|
50,000
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
41,967
|
|
|
|
|
|
|
|
|
42,000
|
|
|
Repurchase
and retirement of common stock
|
|
|
|
|
|
|
|
|
(2,000,000
|
)
|
|
(1,332
|
)
|
|
|
|
|
|
|
|
|
|
|
(148,668
|
)
|
|
|
|
|
|
|
|
(150,000
|
)
|
|
Stock
buyback and return to treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,933
|
)
|
|
(67
|
)
|
|
|
|
|
(75,000
|
)
|
|
November
Restructuring
|
|
|
|
|
|
|
|
|
(21,739,129
|
)
|
|
(14,478
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,985,522
|
)
|
|
|
|
|
|
|
|
(10,000,000
|
)
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,569,535
|
)
|
|
(9,569,535
|
)
|
|
Balance,
December 31, 2004
|
|
|
|
|
|
|
|
|
171,120,482
|
|
|
113,966
|
|
$
|
―
|
|
$
|
―
|
|
$
|
―
|
|
$
|
3,574,272
|
|
|
(67
|
)
|
$
|
(12,171,276
|
)
|
$
|
(8,483,105
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
GOLDSPRING,
INC.
| |
|
Years
Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
| |
|
(As
Restated)
|
|
| |
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
|
(9,569,535
|
)
|
|
(2,601,741
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
219,834
|
|
|
1,118
|
|
|
Liquidated
damages from March 2004 financing and November 2004
restructuring
|
|
|
1,627,308
|
|
|
|
|
|
Consulting
services provided in exchange for common stock
|
|
|
42,000
|
|
|
2,120,130
|
|
| |
|
|
|
|
|
|
|
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(239,439
|
)
|
|
―
|
|
|
Prepaid
and other current assets
|
|
|
290,360
|
|
|
(440,155
|
)
|
|
Other
current assets
|
|
|
―
|
|
|
―
|
|
| |
|
|
|
|
|
|
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
480,847
|
|
|
108,952
|
|
|
Accrued
expenses
|
|
|
216,902
|
|
|
―
|
|
|
Reclamation
liability
|
|
|
553,190
|
|
|
―
|
|
|
Other
|
|
|
(13,934
|
)
|
|
|
|
|
Total
Adjustments to Reconcile Net Loss Used in Operating Activities
|
|
|
3,127,819
|
|
|
1,790,045
|
|
|
Net
cash used in operating activities
|
|
|
(6,441,716
|
)
|
|
(811,696
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Reclamation
bond deposit
|
|
|
(232,169
|
)
|
|
(145,000
|
)
|
|
Equipment
deposit
|
|
|
(10,000
|
)
|
|
―
|
|
|
Acquisition
of plant and equipment
|
|
|
(532,232
|
)
|
|
(1,589,492
|
)
|
|
Net
used in investing activities
|
|
|
(774,401
|
)
|
|
(1,734,492
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
proceeds from the issuance of common stock
|
|
|
9,428,781
|
|
|
1,910,008
|
|
|
Principal
payments on Note Payable
|
|
|
(400,000
|
)
|
|
―
|
|
|
Purchase
and cancellation of Company’s Common Stock
|
|
|
(150,000
|
)
|
|
―
|
|
|
Purchase
of Company’s Common Stock and returned to treasury
|
|
|
(75,000
|
)
|
|
―
|
|
|
Proceeds
from the issuance of note payable to related party
|
|
|
―
|
|
|
1,000,000
|
|
|
Net
cash provided by financing activities
|
|
|
8,803,781
|
|
|
2,910,008
|
|
| |
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
1,587,664
|
|
|
363,820
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
364,138
|
|
|
318
|
|
|
Cash
and cash equivalents, end of year
|
|
|
1,951,802
|
|
|
364,138
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Issuance
of common stock for the acquisitions of GoldSpring, LLC. and Ecovat,
LLC
|
|
|
―
|
|
|
119,138360,137
|
|
|
Issuance
of common stock for the acquisition of The Plum Mining
Company
|
|
|
|
|
|
200,000
|
|
|
Issuance
of common stock for an equipment deposit
|
|
|
―
|
|
|
100,000100,000
|
|
|
Issuance
of common stock for acquisition of water rights
|
|
|
|
|
|
41,000
|
|
|
Purchase
of assets under capital leases
|
|
|
168,202
|
|
|
―
|
|
|
Purchase
of assets by long-term debt
|
|
|
63,269
|
|
|
―
|
|
|
Convertible
notes issued in connection with November Restructuring
|
|
|
11,100,649
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
GOLDSPRING,
INC.
Years
Ended December 31, 2004 and 2003
Note
1 — Summary of Significant Accounting Policies
Summarized
below are the significant accounting policies of GoldSpring, Inc.
(“we,”“GoldSpring,” or the “Company”)
We
were
incorporated in the state of Florida effective October 19, 1999 under the name
of Click and Call, Inc.. On June 7, 2000, we filed an amendment to our Articles
of Incorporation changing our name to STARTCALL.COM, INC. On March 10, 2003,
we
changed our name to GoldSpring, Inc. Prior to December 31, 2002, we reported
according to the criteria of a Development Stage Enterprise and presented our
financial statements in accordance with Statements of Financial Accounting
Standards (“SFAS”) Number 7, Accounting and Reporting by Development Stage
Enterprises. However, we do not believe we now qualify for the criteria of
reporting in the development stage and do not report as such.
Currently
the primary nature of our business is the exploration and development of mineral
producing properties.
The
financial statements are presented on the basis that our company is a going
concern, which contemplates the realization of assets and the satisfaction
of
liabilities in the normal course of business over a reasonable length of time.
We have incurred operating losses since its inception. This condition raises
substantial doubt as to our ability to continue as a going concern.
Our
plans
for the continuation of our company as a going concern include developing our
Plum Mine into a profitable operation and potentially supplementing financing
of
our operations through sales of our unregistered common stock. There are no
assurances, however, with respect to the future success of these plans. The
financial statements do not contain any adjustments, which might be necessary,
if we are unable to continue as a going concern.
Unless
otherwise indicated, amounts provided in these notes to the financial statements
pertain to continuing operations.
Restatement
of Financial Statements
Our
2004
financial statements have been restated as follows:
Upon
review of the standards for reporting mineral reserves as defined by SEC
Industry Guide 7 (“Guide 7”), we have concluded that we did not have sufficient
information to establish the existence of reserves as of December 31, 2004
and
that certain costs that we had incurred in the development of our mining
facility must be expensed as exploration or “test mining” costs. We have
restated our 2004 financial statements to classify all costs previously
capitalized (the recovery of which is dependent upon the economical extraction
of gold from the mineralized material we are currently processing), as test
mining expenses. These costs, which total approximately $4.5 million net of
accumulated depreciation, include our asset retirement obligation asset of
$453,786. In connection with our restatement of our mineral property assets,
we
have also reversed depletion taken on our mineral properties totaling $43,256.
|
The
effect of the restatements on the December 31, 2004 consolidated
statement
of operations is as follows
|
| |
|
As
Previously
|
|
Effect
of
|
|
As
|
|
| |
|
Reported
|
|
Restatement
|
|
Restated
|
|
| |
|
|
|
|
|
|
|
|
Mineral
Properties
|
|
$
|
1,729,885
|
|
|
($395,048
|
)
|
$
|
1,334,837
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Plant,
Property and Equipment
|
|
$
|
5,171,863
|
|
$
|
(4,012,083
|
)
|
$
|
1,159,780
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
ARO/Reclamation
Liability
|
|
$
|
470,803
|
|
$
|
82,387
|
|
$
|
553,190
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
($5,080,016
|
)
|
|
($4,489,519
|
)
|
|
($9,569,535
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss per share
|
|
|
($0.3
|
)
|
|
($0.02
|
)
|
|
($0.05
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
| · |
We
have also restated our shareholders’ equity. On December 20, 2004, we
received notice from holders of approximately $3.8 million of convertible
notes of their intention to convert into shares of our common stock.
In
connection with the notice we reduced convertible notes payable by
$3.8
million and recorded an additional 33,817,594 shares (converted at
approximately $0.11 per share) at December 31, 2004. Upon further
consideration, we have concluded that since the shares had not been
physically issued prior to year end the liability and stockholders’ equity
accounts should not be adjusted until the shares have been issued.
Accordingly, we restated our convertible note and stock holder equity
accounts by approximately $3.8 million. The restatement has no affect
on
net loss or cash flows as previously
reported.
|
Our
2003
financial statements have been restated as follows:
| · |
In
June 2003, we acquired the Spring Valley and Gold Canyon Placer claims
and
the unpatented copper mineral rights at Big Mike from Ecovery, Inc
for 90
million shares of our Company’s common stock and $100,000... We did not
acquire any real property rights in this transaction. The transaction
had
an effective date of March 11, 2003. The transaction between us and
Ecovery was originally accounted for as a business combination that
resulted in recording goodwill, an intangible asset, of approximately
$8.9
million. After further investigation and consideration, we concluded
that
accounting for this transaction as a recapitalization more accurately
reflects its nature. Three primary factors influenced the accounting
treatment change for this transaction: (1) the change in control
of our
company based on the number of our shares issued to the 128 Ecovery
shareholders in the transaction; (2) the sole officer and director
of our
company resigned effective the date of the transaction; and (3) we
had no
operations prior to the transaction. The accounting impact of treating
this transaction as a recapitalization instead of a business combination
is an elimination of $8.9 million of goodwill and a reduction of
Additional Paid-in Capital by the same amount. Furthermore, because
Ecovery was considered the control group following the close of the
recapitalization transaction, we have recorded a book value for the
assets
we acquired from Ecovery equal to Ecovery’s historical book value.
Specifically, the Gold Canyon and Spring Valley placer claims are
carried
at a value of $100,000, and the Big Mike copper claims are carried
at a
value of $119,138.
|
| · |
In
connection with our review of the accounting treatment of the original
transaction with Ecovery, we reviewed the issuance of the 46,500
convertible redeemable preferred shares to the original owner of
the Gold
Canyon and Spring Valley placer claims. Specifically, we reevaluated
our
accounting for certain convertible, redeemable preferred stock issued
to
Harlesk Nevada, a company controlled by Leslie L. Cahan, a director
of our
company since 2003. The terms of the sale of the claims to Ecovery,
Inc.
had included contingent consideration of up to $4.65 million for
Harlesk
Nevada, the seller. The $4.65 million obligation to Harlesk Nevada
was
going to be represented by convertible redeemable preferred shares,
and
was entirely contingent on the placer claims being put into profitable
production. Since the substance of the economic arrangement between
Harlesk Nevada and us was to provide a maximum financial benefit
of $4.65
million to Harlesk Nevada by way of a 20% net proceeds royalty contingent
obligation (subject to a continuing 2% NSR royalty) when and if the
Gold
Canyon and Spring Valley properties were put into profitable commercial
production, we mutually agreed to cancel the preferred stock and
restate
the same obligation in a net proceeds royalty agreement between the
parties. Accordingly the Gold Canyon and Spring Valley assets have
been
adjusted to reflect the cancellation of the preferred stock. This
change
has been restated to reflect our company’s financial situation. These
changes in accounting treatment had no effect on our results of
operations.
|
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Note
1 — Summary of Significant Accounting Policies — Continued
Restatement
of Financial Statements, Continued
| · |
Prior
to the transaction with Ecovery, we had entered into various contractual
arrangements to issue common stock as consideration for investor
relations, business advisory, and related consulting services. We
issued a
total of 26,726,932 common shares of common stock valued at $4,123,278
for
consulting services during the period from February 2002 through
March 11,
2003. The entire amount was originally recorded as an expense in
2003.
Subsequent to the preparation of the financial statements, we reviewed
the
transaction and determined that $2,043,278 of the expense should
have been
recognized in fiscal 2002 to correspond with the 2,726,932 shares
of
restricted common stock issued during 2002 and that the remaining
$2,080,000, relating to the 24,000,000 shares issued during 2003
should be
recognized as an expense in 2003. Accordingly, the financial statements
have been restated to reflect the correct allocation of the consulting
services expense.
|
| · |
After
careful consideration and review of negative and positive evidence
regarding the realization of deferred tax assets, we have determined
that,
for the year ended December 31, 2003, it is more likely than not
that any
deferred tax asset arising from net operating loss carryforwards
or
temporary differences will not be recognized in the near term given
our
company’s current stage of evolution. Accordingly, the financial
statements have been restated to reflect a full reservation of deferred
tax assets with a corresponding adjustment to income tax benefit
shown in
the statement of operations.
|
|
The
effect of the restatements on the December 31, 2003 consolidated
statement
of operations is as follows
|
| |
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
As
Previously
|
|
Effect
of
|
|
As
|
|
| |
|
Reported
|
|
Restatement
|
|
Restated
|
|
| |
|
|
|
|
|
|
|
|
Consulting
Expense
|
|
$
|
4,123,278
|
|
|
($2,043,278
|
)
|
$
|
2,080,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Benefit
|
|
$
|
940,000
|
|
|
($940,000
|
)
|
$
|
0
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
($3,705,019
|
)
|
$
|
1,103,278
|
|
|
($2,601,741
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss per share
|
|
|
($0.027
|
)
|
$
|
0.008
|
|
|
($0.019
|
)
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of our company and its
wholly owned subsidiaries. All material inter-company transactions and balances
have been eliminated in consolidation.
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.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Note
1 — Summary of Significant Accounting Policies — Continued
Fair
Value of Financial Instruments
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair market value because of the
short
maturity of those instruments. Furthermore, notes payable amounts approximate
fair value at December 31, 2004.
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 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
In
August
2001, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment
or Disposal of Long-Lived Assets,” which supersedes both SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to
Be Disposed Of” and the accounting and reporting provisions of Accounting
Practice Bulletin (“APB”) Opinion No. 30, “Reporting the Results of Operations —
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions,” for the disposal of
a segment of a business (as previously defined in that opinion).
This
statement 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 statement 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. Therefore, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred.
SFAS
No.
144 retains the fundamental provisions of SFAS No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS No. 121. We adopted SFAS No. 144
in
our evaluation of the fair value of certain assets described in Notes 2 and
3.
Derivatives
We
may
use derivative financial instruments as part of an overall risk-management
strategy to hedge our exposure to changing metals prices. We recognize
derivatives as assets or liabilities based on a fair value measurement. Gains
or
losses resulting from changes in the fair value of derivatives in each period
are accounted for either in current earnings or other comprehensive income
depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in the
fair value or cash flows of the hedging instruments and the hedged items. At
December 31, 2004, we had no outstanding derivative instruments.
Inventories
We
state
inventories at the lower of average cost or net realizable value. At December
31, 2004, our inventories consisted of $239,944 of doré and bullion in our
accounts at refineries and $48,744 of supplies and reagents compared to $0
of
doré and $0 of supplies at December 31, 2003. We were unable to estimate our
in-process inventories at December 31, 2004, as our gold production processes
are still in their inception stage, and we do not yet have sufficient data
available to accurately calculate in-process inventory. We value inventories
at
the lower of full cost of production or net realizable value based on current
metals prices. We determine net realizable value by estimating value based
on
current metals prices, less cost to convert stockpiled and in-process
inventories to finished products.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Note
1 — Summary of Significant Accounting Policies — Continued
Revenue
Recognition
Sales
of
gold and silver dore are recorded when title and risk of loss transfer to the
refiner at current spot metals prices. Sales are calculated based upon assay
of
the dore’s precious metal content and its weight. Recorded values are adjusted
upon final settlement from the refiner that usually occurs within 24 days of
delivery. If we have reason to believe that the final settlement will materially
affect our recognition of revenue because of a difference between the refiner’s
assay of precious metals contained in the dore and ours, we establish a reserve
against the sale.
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 or our estimate of the fair value of the services received,
whichever is more reliably measurable.
Plant
and Equipment
We
state
plant and equipment at cost. We provide depreciation and amortization in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives or productive value.
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 7 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
Properties
We
defer
acquisition costs until we determine the viability of the property. Since we
do
not have proven and probable reserves as defined by 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 property on a quarterly basis to
determine whether an impairment has incurred in accordance with the Financial
Accounting Standards Board (FASB) 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.
We
carry
our property acquisition and capitalized plant and equipment costs at cost
less
accumulated amortization and write-downs.
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 be related to asset retirements we recognize the obligations in
accordance with Statement of Position No. 96-1.
In
August
2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting
for Asset Retirement Obligations.”
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Note
1 — Summary of Significant Accounting Policies — Continued
SFAS
143
established a uniform methodology for accounting for estimating reclamation
and
abandonment costs. The Standard requires that the fair value of a liability
for
an asset retirement obligation be recognized in the period in which it is
incurred. FASB No. 143 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. In our
case, the long-lived asset is directly related to the mining infrastructure
costs being expensed by our Company. Since we do not yet have proven or probable
reserves as defined by Industry Guide 7, and in accordance with FASB No. 143
our
asset retirement obligation was expensed directly to reclamation expense.
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 years ended
December 31, 2004 and 2003, we had net losses for which the affect of common
stock equivalents would be anti-dilutive, accordingly only basic loss per share
is presented.
Recent
Authoritative Pronouncements
On
December 16, 2004, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards, or Statement, No. 123 (revised
2004), Share-Based Payment ("Statement 123(R)"), which is a revision of FASB
Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123").
Statement 123(R) supersedes Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees, and amends FASB Statement No.
95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. Statement 123(R) requires
that all share-based payments to employees, including grants of employee stock
options, be recognized in the income statement based on their fair values.
Pro
forma disclosure is no longer permitted. Statement 123(R) is effective for
small
business issuers at the beginning of the first interim or annual period
beginning after December 15, 2005. As permitted by Statement 123, we currently
account for share-based payments to employees using APB 25's intrinsic value
method. We expect to adopt Statement 123(R) on January 1, 2006 using the
modified prospective method.
In
December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS
153”). The amendments made by SFAS 153 are based on the principle that exchanges
of nonmonetary assets should be based on the fair value of the assets exchanged.
Further, the amendments eliminate the narrow exception for nonmonetary exchanges
of similar productive assets and replace it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. The
statement is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005 with earlier adoption permitted. The
provisions of this statement must be applied prospectively. Our adoption of
SFAS
153 is not expected to have a material impact on our results of operations,
financial position, or cash flows.
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.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Note
1 — Summary of Significant Accounting Policies — Continued
Income
Taxes
We
recognize deferred tax assets and liabilities based on differences between
the
financial reporting and tax bases of assets
and
liabilities using the enacted tax rates and laws that are expected to be
recovered. We provide a valuation allowance for deferred tax assets for which
we
do not consider realization of such assets to be more likely than not.
Note
2 — Mineral Properties
At
December 31, 2004 and December 31, 2003, our mineral properties consisted of
the
following:
|
MINERAL
PROPERTIES:
|
|
Dec.
31, 2004
|
|
Dec.
31, 2003
|
|
|
|
|
|
|
|
|
|
Placer Gold Properties
|
|
$
|
100,000
|
|
|
100,000
|
|
|
Big Mike Copper Property
|
|
|
119,138
|
|
|
119,138
|
|
|
Plum Gold Properties (1)
|
|
|
1,025,699
|
|
|
1,025,699
|
|
|
Water rights
|
|
|
90,000
|
|
|
90,000
|
|
|
Less
Accumulated Depreciation and Amortization
|
|
|
--
|
|
|
--
|
|
|
Balance
at 12/31/04
|
|
$
|
1,334,837
|
|
|
1,334,837
|
|
| |
|
|
|
|
|
|
|
Placer
Gold Properties and Big Mike Copper Property
In
June
2003, we acquired GoldSpring, LLC (the Placer Gold properties) and Ecovat Copper
Nevada, LLC (the Big Mike Copper property). Total consideration paid for the
Placer Gold mineral properties and Big Mike Copper property was $100,000 cash
and the issuance of 90,000,000 shares of common stock to Ecovery’s 128
shareholders, valued at $119,138 (Ecovery’s book value for the Big Mike Copper
property), respectively.
We
are
required to pay a 2% net smelter royalty for gold production at the Placer
Gold
properties once the $4,650,000 20% net proceeds contingent production royalty
obligation has been satisfied.
Plum
Gold Properties
We
acquired the Plum Mining Company, LLC (“Plum LLC”) in November of 2003 for a
total of $1,400,000, consisting of a cash payment of $200,000, 549,177
restricted common shares valued at $200,000, and a non-interest bearing
promissory note payable (See Note 5) for $1,000,000. The Plum LLC’s primary
assets were the Plum Gold Properties.
We
are
required to pay royalties to the two lessors of our Billie the Kid/Lucerne
project, totaling the greater of $1,000 per month or a percentage of the Net
Smelter Returns. The percentage varies based on the price of gold: 3% if gold
is
less than $400 per ounce, 4% if gold is in the $400’s per ounce, and 5% if gold
is $500 or greater per ounce.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Note
3 — Plant, Property and Equipment
At
December 31, 2004 and December 31, 2003, plant, property and equipment consisted
of the following (See Note 1):
|
|
|
At
Dec. 31, 2004
|
|
At
Dec. 31, 2003
|
|
| |
|
|
|
|
|
|
|
|
Plant,
Property and Equipment at Plum Mine location
|
|
$
|
1,364,789
|
|
$
|
611,411
|
|
|
Equipment,
Corporate
|
|
|
14,825
|
|
|
4,500
|
|
|
Less
Accumulated Depreciation
|
|
|
(219,834
|
)
|
|
(1,118
|
)
|
|
Balance
at 12/31/04
|
|
$
|
1,159,780
|
|
|
614,793
|
|
Included
in plant, property and equipment at our Plum Mine location at December 31,
2004,
is equipment under capital lease of $168,202. Future minimum lease payments
for
the related obligation under capital lease are $38,986 for 2005, $32,422 for
2006 and 2007, and $38,889 for 2008. We recorded depreciation expense on
equipment under capital lease totaling $17,380 during the year ended December
31, 2004.
Note
4 — Reclamation Liability
The
Nevada Revised Statutes and regulations promulgated by the Nevada State
Environmental Commission and Division of Environmental Protection require a
surety bond to be posted for mining projects to assure that a site is left
safe,
stable, and capable of providing for a productive post-mining land use. Pursuant
to the approved Reclamation Plan for Billie the Kid, we posted a surety bond
in
the amount of $553,000, of which $377,000 was in the form of a cash deposit
and
the balance was secured from a surety agent.
At
December 31, 2003, we were not subject to reclamation or closure liabilities
and
therefore had not accrued any amounts related thereto. During the third quarter
of 2004, we assessed future closure costs at our Plum Mine properties in
connection with an approved reclamation plan submitted to the Nevada Division
of
Environmental Protection. Accordingly, we recognized a reclamation liability
based upon the undiscounted future cash flows estimated to be incurred in
fulfilling our reclamation plan’s obligations.
Note
5 — Note Payable — Shareholder
We
have a
non-interest bearing note payable to a shareholder related to our purchase
of
the Plum Mining property. The note is payable in ten quarterly payments through
June 2006. At December 31, 2004 and December 31, 2003, our balance owing was
as
follows:
| |
|
Dec.
31, 2004
|
|
Dec.
31, 2003
|
|
|
Balance
|
|
$ |
600,000
|
|
|
-0-
|
|
|
Less
current portion
|
|
|
(400,000
|
)
|
|
-0-
|
|
|
Non-current
portion
|
|
$
|
200,000
|
|
|
-0-
|
|
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Note
6 — Convertible Notes Payable
We
completed a private placement of securities transaction during March 2004
(the “March Offering”). In connection with the offering, we received gross
proceeds of $10 million from a group of accredited institutional and individual
investors. Subsequent to the closing of the March Offering, we failed to meet
certain provisions of the offering that required for us to provide for an
effective registration statement with the Securities and Exchange
Commission.
As
a
result, and effective November 30, 2004, we restructured the private
placement transaction and entered into a new subscription agreement. In
connection with the restructuring, we exchanged 8% convertible notes in the
aggregate principal amount of approximately $11.1 million and four-year
warrants to purchase approximately 27.8 million shares of common stock
at
an exercise price of $0.20 per share, subject to anti-dilution adjustments,
for
21,739,129 shares of common stock and 21,739,129 warrants to purchase shares
of
common stock issued in the March Offering. The principal amount of the
convertible notes consist of the original $10.0 million investment plus
approximately $1.1 million of accrued penalties associated with the
delay
in effectiveness of our registration statement covering the resale of the shares
of common stock held by the investors. (See Notes 8 and 11).
The
8%
convertible notes mature in November 2006. We must make monthly payments
of
102% of 1/20th
of the
initial principal amount, together with accrued interest. We have the option
to
repay such amounts in shares of our common stock at a conversion rate equal
to
85% of the average of the five lowest closing bid prices of our common stock
during the 20 trading days preceding each payment date. We may prepay the
outstanding principal amount by paying the holders of the notes 115% of the
then-outstanding principal amount. Each holder of notes may convert the notes
into shares of common stock at an initial conversion price of $0.20 per share,
which is subject to anti-dilution adjustments. During the first 20 days
following the closing date, the conversion price may be reduced to a price
equal
to 70% of the average of the five lowest closing prices of our common stock
during the 20 trading days preceding the closing date.
On
April
1, 2005, we failed to make our first payment on the notes and were in default
of
the terms of the convertible notes. Accordingly, at December 31, 2004 and
December 31, 2003, we classified the entire amount outstanding as
follows:
| |
|
Dec.
31, 2004
|
|
Dec.
31, 2003
|
|
|
Convertible
Notes Payable-Current
|
|
$
|
11,100,649
|
|
|
-0-
|
|
|
Convertible
Notes Payable-Non-current
|
|
|
-0-
|
|
|
-0-
|
|
|
Total
|
|
$
|
11,100,649
|
|
|
-0-
|
|
On
December 20, 2004, we received notice from holders of approximately $3.8 million
of convertible notes of their intention to convert into shares of our common
stock. The applicable conversion rate was approximately $0.11 per share, and
we
were obligated to issue 33,817,594 shares of our common stock. Under the terms
of the subscription agreement, we had three business days following receipt
of
the notice of conversion of notes to deliver to the note holders free-trading
common stock certificates (the “Delivery Date”). Although the shares were due to
be delivered in December 2004, they were not delivered until 2005. Our
Consolidated Statements of Changes in Stockholders’ Deficiency for the years
ended December 31, 2004 and 2003 do not reflect the issuance of the conversion
shares until 2005.
The
failure to deliver the shares by the Delivery Date resulted in liquidated
damages of 1% of the note principal amount being converted per business day
after the Delivery Date. We did not deliver the share certificates within the
period required in the subscription agreement and as a result, in March of
2005,
one note holder elected to demand payment of $6,854,005 pursuant to the
mandatory redemption payment provisions of the subscription agreement and
forfeit his right to receive the shares in favor of the payment. (See Note
13).
Holders
wishing to convert approximately $480,000 of convertible notes did not elect
to
demand payment pursuant to the mandatory redemption payment provisions of the
subscription agreement. In March of 2005, we issued approximately 4.2 million
shares (converted at approximately $0.11 per share) of our common stock to
these
converting note holders.
At
December 31, 2004, we had accrued $304,644 in liquidated damages relating to
our
failure to deliver the shares to converting note holders.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Note
7 — Other Long-term Debt
During
2004, we purchased certain equipment and financed our purchases through GMAC
and
Ford Motor Company credit agencies. Aggregated principal and interest due
pursuant to the financings is due monthly in equal installments of $1,054,
at an
averaged interest rate of 7.2%. The equipment purchased is pledged as collateral
for the debt. At December 31, 2004 and December 31, 2003, we had the following
amounts due under the financings as follows:
| |
|
Dec.
31, 2004
|
|
Dec.
31, 2003
|
|
| |
|
|
|
|
|
|
|
|
Other
Long-term Debt-Current
|
|
$
|
8,501
|
|
|
-0-
|
|
|
Other
Long-term Debt -Non-current
|
|
|
43,858
|
|
|
-0-
|
|
|
Total
|
|
$
|
52,359
|
|
|
-0-
|
|
Principal
payments on other long-term debt for the next five years are as
follows:
| |
|
|
|
|
|
2005
|
|
$
|
9,302
|
|
|
2006
|
|
|
9,964
|
|
|
2007
|
|
|
10,676
|
|
|
2008
|
|
|
11,441
|
|
|
2009
|
|
|
10,976
|
|
|
2010
and thereafter
|
|
|
0
|
|
Note
8 — Commitments and Contingencies
Our
March
2004 private placement, as restructured in November 2004, is subject to
Non-Registration Events Provisions (“Non-Registration Provisions”) for the
investors’ common stock that may be converted from convertible notes principal
and interest and the exercise of common stock purchase warrants (see Notes
7 and
12). The Non-Registration Provisions generally require us to file and cause
to
become effective a registration statement with the Securities and Exchange
Commission so that investors may sell their shares of common stock without
restriction. To date, we have not been able to do so. Our November 2004
subscription agreement required us to file a registration statement with the
Securities and Exchange Commission no later than December 30, 2004 and to cause
the registration statement to be declared effective no later than February
14,
2005. As discussed above, our former Chief Executive Officer withdrew our
pending registration statement and did not submit a new registration statement.
His failure to submit the registration statement to the SEC by December 30,
2004
triggered liquidated damages to accrue under the November 2004 subscription
agreement. Pursuant to the terms of the Subscription Agreement, liquidated
damages accrue at a rate of percent (2%) of the principal amount of the
Debenture for each thirty day period or part thereof for not having our
Registration Statement declared effective. Furthermore, the damages may be
paid
in cash or in unrestricted common stock. If paid in stock, we are required
to
pay 200% of the cash penalty. Because we do not have the cash or free-trading
stock to pay the liquidated damages, we reached a settlement agreement with
the
investors to pay the liquidated damages in restricted common stock valued at
$0.03 per share. The total liquidated damages accrued between December 30,
2004
and April 27, 2005 was approximately $ 1,776,000. Pursuant to this settlement
agreement, we issued approximately 59 million shares of restricted common stock
in April 2005.
During
the first quarter of 2005, we incurred approximately $1.9 million of liquidated
damages and other expenses related to our former Chief Executive Officer’s
decision to withdraw the SEC registration statement and his failure to deliver
common shares pursuant to the November 2004 restructuring agreement. We filed
the SB-2 registration statement in April of 2005 and have delivered the shares.
We are now in the process of trying to get the registration statement declared
effective by the SEC. Until the registration statement is declared effective,
we
continue to incur liquidated damages under the November 30, 2004 Subscription
Agreement (See Recent Financing Events and Restructuring for additional
information). Pursuant to the terms of the Subscription Agreement, the damages
may be paid in cash or in unrestricted common stock. If paid in stock, we are
required to pay 200% of the cash penalty. Because we do not have the cash or
free-trading stock to pay the liquidated damages, we have reached a settlement
agreement with the investors to pay the liquidated damages in restricted common
stock valued at $0.03 per share. The total liquidated damages accrued between
April 28, 2005 and July 26, 2005, was approximately $ 1.0 million. Pursuant
to
this settlement agreement, we will be issuing approximately 40 million shares
of
restricted common stock in the third quarter 2005.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
We
recorded liquidated damages and other related expenses due to investors of
our
March 2004 offering and subsequent November 30, 2004 restructuring at December
31, 2003, December 31, 2004, first quarter 2005 and second quarter 2005 as
follows:
|
Liquidated
damages relating to:
|
|
2003
|
|
2004
|
|
Q1
2005
|
|
Q2
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
30, 2004 Non-Registration Provisions
|
|
$
|
-0-
|
|
|
1,100,651
|
|
|
--
|
|
|
--
|
|
|
November
30, 2004 Non-Registration Provisions
|
|
|
-0-
|
|
|
222,013
|
|
|
1,776,104
|
|
|
985,835
|
|
|
Failure
to timely deliver shares upon notice of converting note
holders
|
|
|
-0-
|
|
|
304,644
|
|
|
98,529
|
|
|
--
|
|
| |
|
$
|
-0-
|
|
|
1,627,308
|
|
|
1,874,633
|
|
|
985,835
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
In
connection with our settlement of liquidated damages, we have agreed to continue
to pursue registration of securities with our investors and may be subject
to
additional liquidated damages if we are unable to file or make effective a
registration statement in accordance with the terms of the settlement (See
Note
13).
Note
9 — Income Taxes
We
did
not provide any current or deferred US federal or state income tax provision
or
benefit through the years ended December 31, 2004 and 2003, because we have
experienced operating losses since our inception. We have provided a full
valuation allowance on the deferred tax asset, consisting primarily of a net
operating loss, because of the uncertainty regarding its being realizable.
..
At
December 31, 2004 and 2003, we had a net operating loss carry forwards of
approximately $4.7 million and $9.8 million, respectively. Utilization of our
net operating losses, which begin to expire in year 2024, may be subject to
certain limitations under section 382 of the Internal Revenue Code of 1986,
as
amended, and other limitations under state tax laws. Due to the change in the
nature of our operations and the expected likelihood that the net operating
loss
carry forwards may be utilized, we have elected to recognize a deferred tax
benefit offset by an equal valuation allowance of approximately $3.4 million
and
$1.9 million, respectively, for the years ended December 31, 2004 and 2003,
respectively.
Note
10 - Related Party Transactions
In
addition to the related party transactions discussed in Notes 1 and 10, we
had
the following transactions with related parties:
On
November 9, 2004, we filed a lawsuit in Maricopa County (Arizona) Superior
Court
against Stephen B. Parent, our former CEO and one of our directors. The
complaint alleges that the director misrepresented the value of certain placer
mining claims that his company sold to us in 2003 in exchange for approximately
99,000,000 shares of our stock; that his company no longer had good title to
the
claims when they were sold to us; and that the director incurred $307,190 in
accountable expenses. We have asked, and given the director the opportunity,
to
provide appropriate documentation for any portion of the $307,190 that he
believes to be legitimate business expenses. The $307,190 includes debit card
withdrawals, credit card charges using the company’s accounts, a retainer to the
director’s personal attorney and two laptop computers that the director has not
returned to the company. As of April 14, 2005, we have received documentation
from the director and are in the process of reviewing the material to evaluate
whether the documentation is sufficient to support the expenses as legitimate
business expenses. We are seeking the return of the portion of the funds that
cannot be documented as legitimate business expenses and a return of the
approximately 45 million shares of our common stock that the director received
in 2003 in exchange for the mining claims.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
As
of
December 31, 2004, the outcome of the litigation was uncertain. We have recorded
a receivable from the director in the amount of $307,190. Due to uncertainties
regarding collectability, we have fully reserved the amount of $307,190. We
have
not adjusted any accrual for a gain contingency regarding the potential return
of the director’s shares of our common stock.
Note
11 - Liquidated Damages
At
December 31, 2004, we had recorded liquidated damages expenses due to investors
of our March 2004 offering and subsequent November 30, 2004 restructuring as
follows:
|
Liquidated
damages relating to:
|
|
2004
|
|
2003
|
|
| |
|
|
|
|
|
|
|
|
March
30, 2004 Non-Registration Provisions
|
|
$
|
1,100,651
|
|
|
-0-
|
|
|
November
30, 2004 Non-Registration Provisions
|
|
|
222,013
|
|
|
-0-
|
|
|
Failure
to timely deliver shares upon notice of converting note
holders
|
|
|
304,644
|
|
|
-0-
|
|
| |
|
$
|
1,627,308
|
|
|
-0-
|
|
Note
12 — Stockholders’ Equity
Retirement
of Common Stock
Before
we
became GoldSpring, Inc., our Company, then known as Startcall, planned on
operating as an Application Service Provider, or ASP, and offering real-time
interaction technology as an outsource service. In December 2002 management
entered into a Stock Purchase Agreement and Share Exchange with Web Intelligence
Technology ApS and ARN Invest ApS (both Denmark Corporations) in consideration
for the issuance of 79,500,000 shares of Startcall to ARN. The Company
subsequently filed a Certificate of Amendment in the State of Florida changing
its name to Visator, Inc. However, in February 2003 the parties to this
agreement entered into a termination agreement and mutual release in which
the
parties agreed to terminate and deem null and void the Stock Purchase Agreement
and Share Exchange. Pursuant to this agreement, ARN Invest returned the
79,500,000 shares of stock in consideration for the payment of $20,000 by the
Company to Web Intelligence. The Company’s Management, upon termination of this
agreement, determined that it was in the best interest of the shareholders
to
seek other business opportunities for the Company.
Cancellation
of Shareholder Debt:
In
March
2003, in consideration for the issuance of 1,198,726 restricted shares of common
stock, certain shareholders of the Company canceled all of the debt and
promissory notes and accrued interest owed to them by the Company. At December
31, 2002, these shares were recorded in stockholders equity as shares issued
at
an aggregate amount of $203,897.
Common
Stock
In
March
2003, we amended our articles of incorporation, to increase the authorized
number of shares of common stock to 500,000,000.
Common
Stock issued for Consulting Services
In
March
2003, prior to the Ecovery transaction, we entered into three consulting
agreements under which we issued an aggregate of 24,000,000 shares of common
stock, with an aggregate offering price of $2,080,000 (fair market value at
the
time of the contracts) in exchange for consulting services. Such consulting
services were expensed during 2003 (See Note 1).
In
2003,
we issued 89,000 shares of common stock valued at $.17 per share, with an
aggregate price of $15,130 for consulting services. Also in 2003, we issued
200,000 shares of common stock for geological services provided by a director
of
our company.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Common
Stock issued in Connection with Ecovery Transaction
In
June
2003, in connection with the Ecovery transaction, we issued 90,000,000 shares
of
common stock, valued at $119,138, to the 128 shareholders of Ecovery, Inc.
in
consideration for the acquisition of mining assets owned by Ecovery. This
valuation represents Ecovery’s book value of the assets acquired, less the
$100,000 cash paid to Ecovery. In this transaction, we acquired the Gold Canyon
and Spring Valley gold placer claims in Lyon County, Nevada and the Big Mike
lode and placer copper claims in Pershing County, Nevada.
Recapitalization:
As
of
June 30, 2003, the Company had disposed of all of its operating assets and
was
in the process of settling all of its outstanding liabilities and seeking a
merger partner. Accordingly, the Company changed its business focus. In
connection with our acquisition of assets from Ecovery, Inc. described above,
we
restated the balance sheet to reflect a recapitalization and the prior retained
deficit was eliminated by charging paid-in capital. In effect, this gives the
balance sheet a “fresh-start.” Beginning July 1, 2003 and continuing forward, we
have credited net income and charged net losses to retained
earnings.
Forward
Stock Split
In
September 2003, the Board of Directors approved a 10-for-11 forward split of
our
outstanding common stock. As a result of the stock split on September 15, 2003,
15,627,654 shares were issued, resulting in an increase of our outstanding
share
balance as of September 15, 2003 from 156,276,346 shares of common stock to
171,904,000 shares of common stock.
Common
Stock issued for Plant, Equipment and Mineral Interests
In
2003,
we issued 800,000 shares of our common stock valued at $.125 per share for
a
deposit on equipment to be purchased. We issued an additional 90,000,000 shares
in connection with the Ecovery transaction and another 1,500,000 shares for
the
acquisition of the Plum Mining Company, LLC and the associated water
rights.
Common
Stock issued for Cash
In
September 2003, we issued 36,000,000 shares of common stock at a price of
$0.0496 per share, for an aggregate offering of $1,785,008. In addition, we
issued 1,000,000 of our shares of common stock for $0.125 per share or
$125,000.
March
2004 Offering
We
completed a private placement of securities transaction during March 2004.
In connection with the offering, we received gross proceeds of $10 million
from
a group of accredited institutional and individual investors through the
issuance of 21,739,129 shares of unregistered restricted common stock at a
price
of $0.46 per share. The investors also received two forms of warrants in this
transaction. The Green Shoe Warrants allowed the investor group to purchase
an
additional 10,869,575 shares of common stock under the same terms and conditions
at a price of $0.46 per share. The Green Shoe Warrants are exercisable for
a
period of 180 days from the effective date of the registration statement. The
series A warrants allow the investor group to purchase 10,869,575 shares of
common stock at an exercise price of $0.86 per share and are exercisable during
the four-year period ending March 2008. Subsequent to the completion of the
offering, we failed to meet certain provisions of the offering that required
us
to provide for an effective registration statement with the Securities and
Exchange Commission.
As
a
result, and effective November 30, 2004, we restructured our
$10.0 million private placement transaction. In connection with the
restructuring, we exchanged 8% convertible notes in the aggregate principal
amount of approximately $11.1 million and four-year warrants to purchase
approximately 27,800,000 shares of common stock at an exercise price of $0.20
per share subject to anti-dilution adjustments for 21,739,129 shares of common
stock and 21,739,129 warrants to purchase shares of common stock issued in
the
March Offering. The principal amount of the convertible notes consist of the
original $10.0 million investment plus approximately $1.1 million
of
accrued penalties associated with the delay in effectiveness of our registration
statement covering the resale of the shares of common stock held by the
investors. (See Note 6).
We
have
agreed to file a registration statement to cover the resale of shares of common
stock issuable upon conversion of the notes and issuable upon exercise of the
warrants.
We
exchanged the securities in reliance upon the exemptions provided by
(a) Section 3(a)(9) of the Securities Act of 1933, as amended
(the
“Securities Act”) as securities exchanged by the issuer with its existing
security holders exclusively where no commission or other remuneration is paid
or given directly or indirectly for soliciting such exchange; and
(b) Section 4(2) of the Securities Act as a transaction by an
issuer
not involving a public offering.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Stock
Purchase Warrants
In
connection with our November 30, 2004 restructuring agreement, we agreed to
issue (detachable) 50 Class B Stock Purchase Warrants (“the Warrants”) for each
one-hundred shares that the convertible notes could be converted into, assuming
they were converted immediately after closing of the restructuring agreement.
The Warrants are exercisable at $0.20 within four years of their issue date
and
are subject to registration rights. We estimated the fair value of the warrants
at the time of issuance as nil and have not reflected any discount on the
convertible notes relating to them.
Common
Stock Issued to Related Party for Services
During
2004, we issued 50,000 shares of our restricted common stock to a director
in
exchange for services. The value of the common stock issued approximated the
expense of the services we recognized.
Common
Stock Issued for Cash
During
2004, we issued 22,182,462 shares of our common stock for cash totaling
$9,428,781, net of direct issuance costs.
Common
Stock Purchased
During
2004, we purchased 2,000,000 shares of our common stock for $150,000 and
cancelled the shares.
Common
Stock Retired to Treasury
During
2004, we purchased 100,000 shares of our common stock for $75,000 and returned
them to the treasury.
Note
13 - Subsequent Events
Settlement
of Mandatory Redemption Payment Payable
During
December 2004, we received notice from a holder of approximately
$3.8 million of convertible notes of their intention to convert into
shares
of our common stock. We did not issue or deliver the common stock within the
period required in the subscription agreement and as a result, one note holder
elected to demand payment pursuant to the mandatory redemption payment
provisions of the subscription agreement. On March 31, 2005, we entered into
a
Settlement Agreement (“Settlement”) with the holder of the $6,854,005 liability
and agreed to convert the liability into six Convertible Debentures (“the
Debentures”). The Debentures are subject to various covenants and conditions,
including, but not limited to anti-dilution rights and protective rights.
Secured
Convertible Debentures
The
Debentures accrue interest at 12% per annum and are 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 March 31, 2007. The
debentures are subject to the following terms:
Conversion
Rights
The
Debentures are convertible, in all or in part, into shares of our common stock
(“Conversion Shares”) at any time. The conversion price shall is equal to the
lesser of: (i) 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
mandatory redemption Payment; and (ii) 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 of any such
conversion; provided,
however,
until
the effective date of the registration statement (see below), the conversion
price shall be fifty-percent (50%) 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 of any such conversion. In no event shall the
conversion price be higher than (i) $0.1131 and (ii) the conversion price of
the
convertible notes (See Note 6), as adjusted from time to time, whichever is
lower.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2004 and 2003
Security
Agreement
Pursuant
to the terms of the Settlement Agreement, the Debentures are granted a priority
collateralized position, second only to our note payable to a shareholder (See
Note 5) in substantially all of our assets.
Mandatory
Registration Rights
The
terms
of the Debenture agreement require that we must file with the Securities and
Exchange Commission on a Form SB-2 registration statement, or such other form
that we are eligible to use, to register the Conversion Shares, together with
any other shares of Common stock issuable hereunder for resale and distribution
under the 1933 and cause to be filed not later than April 30, 2005 and declared
effective not later than June 30, 2005. If we fail to make effective a
registration statement we are subject to liquidated damages, an amount equal
to
two percent (2%) for each thirty (30) days or part thereof, thereafter of the
principal amount of the Debenture remaining unconverted and purchase price
of
Conversion Shares issued upon conversion of the Debenture owned of record by
the
holder. The Company must pay the liquidated damages in cash or an
amount equal
to
two hundred percent of such cash liquidated damages if paid in additional shares
of registered un-legended free trading
shares of common stock.