SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For
the
fiscal year ended December 31, 2005
OR
[
]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
transition period from to
Commission
File No. 000-32429
GOLDSPRING,
INC.
(Exact
name of small business issuer as specified in its charter)
|
FLORIDA
|
7389
|
65-0955118
|
|
(State
or other jurisdiction
ofincorporation or organization)
|
(Primary
Standard Industrial
|
(I.R.S.
Employer Identification
No.)
|
| |
Classification
Code
Number)
|
|
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 [ ]
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 [ ]
State
issuer's revenues for the most recent fiscal year: $ 2,632,112
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, 2006:
$
8,600,000
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the last practicable date: 537,197,775 shares of Common Stock, $0.000666
Par Value, as of March 31, 2006.
TABLE
OF
CONTENTS
PART
I
|
ITEM
1
|
|
DESCRIPTION
OF BUSINESS
|
|
3
|
|
|
ITEM
2
|
|
DESCRIPTION
OF PROPERTY
|
|
11
|
|
|
ITEM
3
|
|
LEGAL
PROCEEDINGS
|
|
14
|
|
|
ITEM
4
|
|
SUBMISSION
OF MATTERS TO VOTE OF SECURITY HOLDERS
|
|
16
|
|
| |
|
|
|
|
|
|
PART
II
|
| |
|
|
|
|
|
|
ITEM
5
|
|
MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
|
17
|
|
|
ITEM
6
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
|
|
17
|
|
|
ITEM
7
|
|
FINANCIAL
STATEMENTS
|
|
20
|
|
|
ITEM
8
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
|
20
|
|
|
ITEM
8A
|
|
CONTROLS
AND PROCEDURES
|
|
20
|
|
|
ITEM
8B
|
|
OTHER
INFORMATION
|
|
20
|
|
| |
|
|
|
|
|
|
PART
III
|
| |
|
|
|
|
|
|
ITEM
9
|
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
|
20
|
|
|
ITEM
10
|
|
EXECUTIVE
COMPENSATION
|
|
20
|
|
|
ITEM
11
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
|
20
|
|
|
ITEM
12
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
|
21
|
|
|
ITEM
13
|
|
EXHIBITS
AND REPORTS ON FORM 8-K
|
|
21
|
|
|
ITEM
14
|
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
|
22
|
|
|
|
|
SIGNATURES |
|
23
|
|
|
|
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
F-1
|
|
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.”
PART
I
We
are a
North American precious metals mining company with an operating gold and silver
test mine in northern Nevada. Our Company was formed in mid-2003, and we
acquired the Plum property in November 2003. In our relatively short history,
we
secured permits, built an infrastructure and brought the Plum exploration
project into test mining production. During 2005, we acquired additional
properties around the Plum project in Northern Nevada, expanding our footprint
and creating opportunities for exploration. We are an emerging company, looking
to build on our success through the acquisition of other mineral properties
in
North America with reserves and exploration potential that can be efficiently
put into near-term production. Our objectives are to increase production;
increase reserves through exploration and acquisitions; expand our footprint
at
the Plum mine; and maximize cash flow and the return for our
shareholders.
2005
has
been a year filled with challenges for our Company. In addition to trying to
bring our Plum Mine operation into profitable production, we have continued
to
experience the costs and distractions of the litigation between the Company
and
its founder that has impacted our Company since December 2004. The litigation
has been a drain on our scarce capital and human resources. (See Part I, Item
3,
“Legal Proceedings” for a detailed discussion.) We are committed to finding a
resolution to our pending legal matters that will allow our management to focus
on building a successful, profitable operation. We are actively seeking
financing to meet our working capital needs and fuel our growth. If we are
unable to secure such financing, we may be unable to continue as a going
concern.
In
March
2005, we initiated a program to improve the operational efficiency of our mining
operation. As part of this program, we consolidated our corporate office with
the Plum Mine office. We also made improvements to our processing plant and
took
over crushing operations from our third-party contractor, reducing costs and
increasing our control over the crushing process. Our improvement program
continued throughout the year. In November 2005, we retained licensed mining
engineer Jim Golden to conduct a comprehensive review of all aspects of the
Plum
Mine operation, including the overall mine plan, with the objective of further
improving efficiency, increasing production, and reducing costs. Mr. Golden
has
over twenty years of experience in the mining industry, including ten years
with
Peter Kiewit’s mining division, where he was a district manager. Since 1990, Mr.
Golden has owned his own consulting firm, where he has provided consulting
services throughout the world for over fifty mining companies. We have also
assembled a team of professional mining consultants, who are recognized experts
in their respective disciplines, to assist in the process of reviewing the
operation. The team includes Jeff Butwell, a metallurgist; John Esser, an
electrical engineer; Dennis Anderson, a geologic, soils and environmental
engineer; and Stephen Russell, a geologist with twenty-five years of
comprehensive mining experience. Furthermore we have retained Mine Development
and Associates of Reno, Nevada to update our mine plan and model. Recent changes
have included revising the mine plan to reflect the current higher gold prices;
adding various efficiencies in the processing area; and re-positioning personnel
to maximize overall performance. We believe that these improvements will result
in increased gold production and reduced production costs. As we move into
2006,
we continue to move forward with the operational improvement plan and the
implementation of the various process modifications.
The
following table sets forth certain information regarding our current
projects.
| Name |
Location |
Type |
| Plum Mine |
Storey and Lyon County, Nevada |
Gold and silver lode claims- open pit
test
mining |
| Como |
Lyon County, Nevada |
Gold
and silver lode claims |
| Gold Canyon |
Lyon County, Nevada |
Placer gold claims |
| Spring Valley |
Lyon
County, Nevada |
Placer
gold claims |
| Big Mike |
Pershing County, Nevada |
Lode
and Placer copper claims |
Our
Plum
exploration project is 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 placer claims are located five miles south of our
Plum
property, in Lyon County, Nevada. Our Big Mike Copper property is located
approximately two hours east of Reno near Winnemucca, Nevada.
Our
Plum
exploration activities include open pit gold and silver test mining. As defined
by SEC Industry Guide 7, we have not yet established any proven or probable
reserves at this project. Therefore, all of our activities are considered test
mining and exploratory in nature. Test mining at Plum 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.
Employees
We
have
20 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 operation, including
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.
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.
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.
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)
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 and $100,000 in cash; 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 contractual 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
unrestricted common stock, we were required to pay 200% of the cash penalty.
During 2005, we incurred approximately $4.5 million of liquidated damages
related to our failure to have an effective registration statement. Because
we
did 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. During 2005, we paid
liquidated damages totaling $3 million for the period from December 30, 2004
through July 26, 2005 through the issuance of approximately 99 million shares
common stock. We filed the SB-2 registration statement in April 2005. The
registration statement was declared effective on October 3, 2005. For the period
from July 27, 2005 until October 3, 2005, we incurred liquidated damages of
$880,000. Because we anticipate paying these damages through the issuance of
stock, we have recognized an additional expense of $880,000, reflecting the
200%
stock payment provision of the subscription agreement.
On
July
15, 2005, we completed a financing transaction, which provided us with $800,000
in funding. In consideration for the financing, we issued promissory notes
with
a face value of $1.2 million, reflecting an original issue discount of
thirty-three and one-third (33.3%) percent. The term of the notes is two years,
with an optional extension of one year at the option of the investor. The annual
interest rate on the notes is 15% of the face value and is payable monthly.
The
funds were used for working capital and general corporate purposes.
On
September 28, 2005, we completed another financing transaction under the same
terms and conditions as the July 2005 financing. The September 2005 financing
provided us with $200,000 in funding. The funds were used for working capital
and general corporate purposes.
During
the fourth quarter of 2005, we completed three financing transactions, which
provided us with a total of $575,000 in funding. In consideration for the
financing, we issued promissory notes with a term of ninety (90) days and an
interest rate of sixteen percent (16%) per annum. The default interest rate
on
the notes is twenty-two percent (22%). The funds were used for working capital
and general corporate purposes.
The
aggregate total of 2005 financing transactions was $1,575,000.
In
February 2006, we completed an additional financing transaction, which provided
us with $250,000 in funding. In consideration for the funding, we issued a
promissory note with a term of ninety (90) days and an interest rate of sixteen
percent (16%) per annum. The default interest rate on the note is twenty-two
percent (22%). The funds were used for working capital and general corporate
purposes. In March 2006, we completed an additional financing transaction,
which
provided us with $150,000 in funding under the same terms and conditions as
the
February 2006 financing.
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
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.
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.
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.
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 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.
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 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.
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.
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.
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.
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.
Robert
Faber, Chief Executive Officer, President and acting-Chief Financial Officer
is
important to our success. If he becomes unable or unwilling to continue in
his
present position, our business and financial results could be materially
negatively affected.
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
December 31, 2005, we had outstanding 325,047,122 shares of common stock. In
addition, we had outstanding convertible notes and various common stock purchase
warrants. At December 31, 2005, these notes and warrants were convertible into
or exercisable for a total of approximately 762 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.
Item
2. Description
of Property
We
own
the following mineral exploration projects: The Plum Mine gold and silver
exploration and test mining project and the Como mineral Claims. The Plum
project is located in Storey and Lyon Counties, Nevada. The Plum property 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 remains in effect 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
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 remains in
effect 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 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 December
31, 2005, the outstanding balance of the note was $450,000.
Present
Condition of Property and Work Performed
Description
of Equipment and other Infrastructure Facilities
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, cement silo with a screw feeder,
and conveyors. The Merrill-Crowe gold precipitation plant and the mineral
processing equipment are less than two years old. The total book value of our
equipment associated with the Billie the Kid and the Lucerne facilities is
approximately $1,800,000.
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 tons crushed.
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.
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. .
As
evidenced by the 213 reverse circulation drill holes drilled between 1990 and
1993, and aided by surface geological mapping, sampling, mine modeling and
metallurgical testing, we believe the present Lucerne Pit contains estimated
gold-bearing mineralized material of approximately 910,000 tons at 0.043 opt
gold with a potential strip ratio of 0.6:1. The Billie the Kid pit contains
134,000 tons grading 0.047 opt gold with a potential stripping ratio of 1.5:1.
It
should
also be noted that the above-stated tonnage of mineralized material does not
reflect waste dilution during test mining or metal value losses in processing.
Nor do the above numbers reflect the drilling and exploration work performed
in
2004 and 2005. We have established procedures to recalculate and update our
mineral inventory annually, and we plan do so in 2006. Our year-end mineral
inventory calculations will incorporate test mining depletions and addition
to
inventory based on results of mine optimization and exploration work performed
during 2004 and 2005.
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.
We
own a
100% interest in the 25 federal unpatented placer claims located in Lyon County,
Nevada known as the Gold Canyon and Spring Valley claims. 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.
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
property. The Big Mike Copper property is located approximately 32 miles south
of Winnemucca 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 property. 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.
We
are
seeking a partner to develop this project. Because we have not established
reserves on this property, any work that will be conducted on the property
would
be considered exploratory in nature.
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. From 1995 through 1997, a
series of tests were performed that showed the mineralized material present
was
amenable to treatment to produce enriched iron. 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.
In
February 2006, we executed a Letter of Intent to sell these mineral rights
for
CDN$1,100,000. CDN$100,000 of the sales price is to be paid in cash and CDN$1
million is to be paid through a 3% Net Smelter Royalty on Production of Iron
Pellets or Ingots. We closed this transaction in March 2006.
Item
3. Legal
Proceedings
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, Mr. Doyle and Ecovery, Inc. have filed answers and generally denied
the
allegations of 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 defendants’ response brief
was filed on October 3, 2005. The 9th Circuit Court of Appeals held oral
arguments on the appeal on January 12, 2006.
On
January 23, 2006, the United States Court of Appeals for the Ninth Circuit
issued a Memorandum disposition in the matter of Faber
v. Parent,
stating, “We reverse the district court’s decision to grant the preliminary
injunction for failure to comply with the requirements of Rule 52(a). However,
the injunction shall remain intact for a reasonable time not to exceed 90 days
from the date on which this disposition is filed or until an earlier date on
which the district court enters a succeeding preliminary injunction. During
this
time, the district court may issue a new preliminary injunction if, after
undertaking the required analysis and making the necessary findings, it deems
such an injunction appropriate.” The preliminary injunction, issued by the
district court on February 15, 2005, had reinstated GoldSpring’s Board of
Directors as it existed prior to Mr. Parent’s takeover of GoldSpring on December
10, 2004. The Memorandum disposition also stated that, “If, after further
proceedings, the district court does not order a new preliminary injunction,
we
leave it to the district court to restore, as near as possible, the situation
that would have existed if the preliminary injunction had never been granted.”
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.
Item
4. Submission
of Matters to a Vote of Security Holders
The
2005
Annual Meeting of Stockholders of GoldSpring, Inc. was held on October 26,
2005.
At the meeting, the slate of directors nominated by management—consisting of
Christopher L. Aguilar, Todd S. Brown, Stanley A. Hirschman, Bill Nance and
Rex
Outzen—was elected. Each director was elected to serve until the next annual
meeting or until his successor is appointed, unless his office is earlier
vacated in accordance with the By-laws of the Corporation.
The
matters voted upon and passed at the meeting were: (1) the election of the
above-listed directors; (2)
the
approval of the Company’s 2005 Stock Option and Incentive Plan; (3) the approval
of the proposal to authorize Serial Preferred Stock; (4) the approval of the
authorization of additional common stock; and (5) the ratification of the
Company’s selection of Jewett, Schwartz & Associates as the Company’s
Independent Auditor.
The
results of the voting on those matters are outlined in the following table:
(1) Election
of directors:
| |
VOTES
FOR
|
AGAINST
|
ABSTAIN
|
| |
|
|
|
|
Christopher
L. Aguilar
|
192,612,585
|
45,957,250
|
53,831,289
|
| |
|
|
|
|
Todd
S. Brown
|
192,584,865
|
45,957,250
|
53,859,009
|
| |
|
|
|
|
Stanley
A. Hirschman
|
184,615,285
|
45,957,250
|
61,828,589
|
| |
|
|
|
|
Bill
Nance
|
192,586,585
|
45,957,250
|
53,857,289
|
| |
|
|
|
|
Rex
L. Outzen
|
192,876,365
|
45,957,250
|
53,567,509
|
| |
VOTES
FOR
|
AGAINST
|
ABSTAIN
|
| |
|
|
|
|
(2)
The approval of the Company’s 2005 Stock Option and Incentive
Plan:
|
147,022,455
|
105,060,941
|
20,950
|
| |
|
|
|
|
(3)
The approval of the proposal to authorize Serial Preferred
Stock
|
145,058,501
|
105,995,765
|
1,050,080
|
| |
|
|
|
|
(4)
The approval of the authorization of additional common
stock
|
184,922,191
|
107,383,603
|
95,330
|
| |
|
|
|
|
(5)
The ratification of the Company’s selection of Jewett, Schwartz &
Associates as the Company’s Independent Auditor
|
190,524,562
|
96,341,516
|
5,535,046
|
| |
|
|
|
PART
II
Item
5. Market
for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
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 for the last three years.
|
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
|
|
2005
|
|
First
|
0.23
|
0.06
|
|
2005
|
|
Second
|
0.10
|
0.03
|
|
2005
|
|
Third
|
0.11
|
0.05
|
|
2005
|
|
Fourth
|
0.06
|
0.02
|
As
of
December 31, 2005, 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, 2005, we had 325,047,122 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.
Item
6. Management’s
Discussion and Analysis or Plan of Operations
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, 2005, as well as our future results.
Overview
We
are
a
North
American precious metals mining company with an operating gold and silver test
mine in northern Nevada. Our Company was formed in mid-2003, and we acquired
the
Plum property in November 2003. In our relatively short history, we secured
permits, built an infrastructure and brought the Plum exploration project into
test mining production. During 2005, we acquired additional properties around
the Plum project in Northern Nevada, expanding our footprint and creating
opportunities for exploration. We are an emerging company, looking to build
on
our success through the acquisition of other mineral properties in North America
with reserves and exploration potential that can be efficiently put into
near-term production. Our objectives are to increase production; increase
reserves through exploration and acquisitions; expand our footprint at the
Plum
mine; and maximize cash flow and the return for our shareholders.
2005
has
been a year filled with challenges for our Company. In addition to trying to
bring our Plum Mine operation into profitable production, we have continued
to
experience the costs and distractions of the litigation between the Company
and
its founder that has impacted our Company since late 2004. The litigation has
been a drain on our scarce capital and human resources. (See Part I, Item 3,
“Legal Proceedings” for a detailed discussion.) We are committed to finding a
resolution to our pending legal matters that will allow our management to focus
on building a successful, profitable operation. We are actively seeking
financing to meet our working capital needs and fuel our growth. If we are
unable to secure such financing, we may be unable to continue as a going
concern.
In
2005,
we continued to look for growth opportunities to expand our footprint at the
Plum Mine as well as to add additional properties to our portfolio. During
September and October of 2005, we acquired twenty-two mining claims from
Comstock Gold, LLC. These claims included the Justice, Woodville and Keystone
patented claims, which are adjacent to our operations at the Plum Mine. We
also
acquired an additional twelve claims in the Comstock Lode, known as the
Vindicator claims, in November of 2005. We intend to continue to pursue growth
opportunities in 2006.
On
October 3, 2005, the SEC declared our SB-2 Registration Statement effective,
ceasing the liquidated damages we had incurred since the March 2004 financing.
Pursuant to the March 2004 subscription agreement, our Company was
obligated
to pay
damages of two percent per month on the outstanding principal balance. These
damages totaled $290,000 per month.
In
March
2005, we initiated a program to improve the operational efficiency of our mining
operation. As part of this program, we consolidated our corporate office with
the Plum Mine office. We also made improvements to our processing plant and
took
over crushing operations from our third-party contractor, reducing costs and
increasing our control over the crushing process. Our improvement program
continued throughout the year. In November 2005, we retained licensed mining
engineer Jim Golden to conduct a comprehensive review of all aspects of the
Plum
Mine operation, including the overall mine plan, with the objective of further
improving efficiency, increasing production, and reducing costs. Mr. Golden
has
over twenty years of experience in the mining industry, including ten years
with
Peter Kiewit’s mining division, where he was a district manager. Since 1990, Mr.
Golden has owned his own consulting firm, where he has provided consulting
services throughout the world for over fifty mining companies. We have also
assembled a team of professional mining consultants, who are recognized experts
in their respective disciplines, to assist in the process of reviewing the
operation. The team includes Jeff Butwell, a metallurgist; John Esser, an
electrical engineer; Dennis Anderson, a geologic, soils and environmental
engineer; and Stephen Russell, a geologist with twenty-five years of
comprehensive mining experience. Furthermore we have retained Mine Development
and Associates of Reno, Nevada to update our mine plan and model. Recent changes
have included revising the mine plan to reflect the current higher gold prices;
adding various efficiencies in the processing area; and re-positioning personnel
to maximize overall performance. We believe that these improvements will result
in increased gold production and reduced production costs. As we move into
2006,
we continue to move forward with the operational improvement plan and the
implementation of the various process modifications.
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. One of our top priorities
in
2005 was to improve efficiencies and increase test mining production at our
Plum
Mine. In
March
2005, we initiated a program to improve the operational efficiency of our mining
operation. As part of this program, we consolidated our corporate office with
the Plum Mine office. We also made improvements to our processing plant and
took
over crushing operations from our third-party contractor, reducing costs and
increasing our control over the crushing process. Our improvement program
continued throughout the year. In November 2005, we retained licensed mining
engineer Jim Golden to conduct a comprehensive review of all aspects of the
Plum
Mine operation, including the overall mine plan, with the objective of further
improving efficiency, increasing production, and reducing costs. Mr. Golden
has
over twenty years of experience in the mining industry, including ten years
with
Peter Kiewit’s mining division, where he was a district manager. Since 1990, Mr.
Golden has owned his own consulting firm, where he has provided consulting
services throughout the world for over fifty mining companies. We have also
assembled a team of professional mining consultants, who are recognized experts
in their respective disciplines, to assist in the process of reviewing the
operation. The team includes Jeff Butwell, a metallurgist; John Esser, an
electrical engineer; Dennis Anderson, a geologic, soils and environmental
engineer; and Stephen Russell, a geologist with twenty-five years of
comprehensive mining experience. Furthermore Mine Development and Associates
of
Reno, Nevada is expected to complete a detailed mine plan and a reserve report
for the Plum Mine by the end of May 2006. Recent changes have included revising
the mine plan to reflect the current higher gold prices; adding various
efficiencies in the processing area; and re-positioning personnel to maximize
overall performance. The mine plan and reserve report are the culmination of
a
twelve-month undertaking by our Company and Mine Development & Associates.
We believe that these improvements, including the updated mine plan, will
improve our overall performance at the Plum Mine.
Inclement
weather in northern Nevada in late 2005 and early 2006 presented a challenge
to
our Plum Mine operation. The mine received twelve inches of rain between
mid-December and mid-January, filling our leach ponds nearly to capacity. This
situation impacted our ability to mine and to process at our normal capacity,
thus decreasing production. Our team at the mine did an excellent job, in a
challenging situation, to insure the environmental integrity of our operation.
The team worked closely with the regulatory authorities throughout this process.
In mid-January, we ceased mining operations to allow time for our crew to
stabilize the leach ponds and the processing plant. We anticipate our mining
operations to resume May 1, 2006. During this interruption from mining, we
took
steps to implement additional process modifications identified through our
operational improvement plan.
We
also
plan to continue our exploration program in 2006. In March 2006, we retained
Larry Martin, a registered geologist, to oversee our exploration program at
the
Plum Mine and in the Comstock Lode district. Mr. Martin has over twenty-five
years of diverse geological and exploration experience in the mining industry.
He has worked for several major mining enterprises, including Peter Kiewit,
where he served as manager of geological services. We have allocated a budget
of
$500,000 to explore and develop our claims at the Plum Mine. We expect to begin
exploration in late spring or early summer of 2006. We intend to target our
exploration toward replenishing and expanding our mineralized material inventory
at our existing mine and toward developing new mineral properties. 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
held
our Annual Shareholders’ Meeting on October 26, 2005 in Carson City, Nevada. At
that meeting, our shareholders elected the following slate of five independent
directors: Christopher L. Aguilar, Todd S. Brown, Stanley A. Hirschman, Bill
Nance and Rex L. Outzen. The new Board of Directors elected Mr. Aguilar to
serve
as Chairman of the Board. The Board also re-elected Robert Faber to serve as
our
Company’s President and Chief Executive Officer and elected Lisa Boksenbaum to
serve as our Company’s Secretary and Treasurer. Lisa Boksenbaum resigned from
her position with our company in February 2006.
In
December 2005, we initiated a review of the invoices of our mining contractor.
Specifically, we sought to reconcile the volume of material for which we were
billed with the volume of material that was actually mined. We used an outside
surveyor to conduct a comprehensive analysis of bank cubic yards mined. The
results of the survey indicated that we had been over-billed by over $400,000.
We met with the mining contractor in early 2006 to discuss this issue and
presented our proposed billing adjustment. The mining contractor has contracted
an engineering firm to perform an independent analysis of the data generated
from our surveys to determine the accuracy of our calculations. We anticipate
a
resolution of this issue by June of 2006.
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.
The transaction had an effectuation date of March 11, 2003. 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 property. 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 property 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 are actively exploring opportunities to bring this project
into production. The options being considered include finding a joint venture
partner or selling the property and retaining a production royalty.
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. Iron
bearing material was discovered in the area covered by our mineral permits
in
1953 from oil and gas drilling. 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 have reviewed the existing data and
conducted a preliminary pre-feasibility study on the property. We have not
established any reserves on this property. In February 2006, we executed a
Letter of Intent to sell these mineral rights for CDN$1,135,000. CDN$135,000
of
the sales price is to be paid in cash and CDN$1 million is to be paid through
a
3% Net Smelter Royalty on Production of Iron Pellets or Ingots.
Comparative
Financial Information
|
|
|
|
Twelve
Months ended
December 31, 2005
|
|
|
Twelve
Months ended
December 31,
2004
|
|
|
Difference
|
|
|
Revenue
|
|
$
|
2,632,112
|
|
$
|
955,380
|
|
$
|
1,676,732
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Reclamation,
Exploration and Test Mining Expenses
|
|
|
4,419,353
|
|
|
6,800,011
|
|
|
(2,380,658
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Consulting
& professional
|
|
|
773,390
|
|
|
659,931
|
|
|
113,459
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Liquidated
Damages
|
|
|
4,619,144
|
|
|
1,627,308
|
|
|
2,991,836
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
2,309,479
|
|
|
65,997
|
|
|
2,243,482
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(11,353,026
|
)
|
$ |
(9,569,535
|
)
|
$ |
(1,783,491
|
)
|
We
sold
6,073 ounces of gold at an average price of $ 433 per ounce during the
twelve-month period ended December 31, 2005 compared to gold sales of
2,836
ounces at an average price of $ 351 per ounce during the same period of 2004.
We
spent the first six months of 2004 completing the required infrastructure to
complete our “test mine” and did not sell any gold until the third quarter of
2004.
Reclamation,
Exploration and Test Mining Expenses were $ 2,380,658 less for the year ended
December 31, 2005 than for the year ended December 31, 2004. This 2005 expense
decrease reflects the transition to full-time “test mining” in 2005. During the
first nine months of 2004, our focus was on building the infrastructure for
our
mining operation, and the cost of building the infrastructure was included
in
our test mining expenses for 2004. The third quarter of 2004 was the first
quarter in which we conducted full-scale test mining. Our Company is an
Exploration Stage enterprise as defined by SEC Industry Guide 7, and, in
accordance with SEC Industry Guide 7, infrastructure expenditures such as haul
roads, leach pads and start-up costs were expensed.
|
|
|
|
Quarter
ended December 31, 2005
|
|
|
Quarter
ended December 31,
2004
|
|
|
Difference
|
|
|
Revenue
|
|
$
|
476,574
|
|
$
|
505,128
|
|
$ |
(28,509
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Reclamation,
Exploration and Test Mining Expense
|
|
|
549,037
|
|
|
6,109,155
|
|
|
(5,560,118
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Liquidated
Damages
|
|
|
-0-
|
|
|
1,627,308
|
|
|
(1,627,308
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
703,892
|
|
|
98,743
|
|
|
605,149
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(1,700,313
|
)
|
$ |
(8,217,932
|
)
|
$ |
(6,517,619
|
)
|
During
the
fourth
quarter
of 2005 we sold 875 ounces of gold at an average price of $ 545 per ounce
compared to gold sales of 1,183 ounces at an average price of $ 426 per ounce
during the same period of 2004. Our “test mine” became operational in late third
quarter 2004, which was our first quarter of selling gold. The fourth quarter
of
2004 was our first full quarter of test mining.
Reclamation,
Exploration and Test Mining Expenses in the fourth quarter of 2005 were $
5,560,118
less than the fourth quarter of 2004. This variance reflects the exploration
drilling performed during the fourth quarter of 2005 offset by the shift from
infrastructure construction to “test mining.” As detailed above, 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
liquidated damages included in the tables above stemmed from Non-Registration
Events Provisions in our November 2004 Subscription Agreement (“Non-Registration
Provisions”). The Non-Registration Provisions 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 be incurred at a rate of two percent (2%) of
the
principal amount of the Debenture for each thirty day period or part thereof
for
not having an effective Registration Statement. We have the option to pay the
liquidated damages in cash or common stock. If we choose to pay in stock, we
are
required to pay 200% of the liquidated damages amount. Because our Company
does
not currently have sufficient funds to pay in cash, we intend to meet this
obligation by issuing common shares. Thus, the total amount of liquidated
damages recorded for the third quarter represents 200% of the cash total. The
liquidated damages ceased when our registration statement became effective
on
October 3, 2005.
At
December 31, 2005, our Company had approximately $16,197,000 of outstanding
debt
bearing an average interest rate of 15% of which $13,462,000 originated from
our
November 2004 restructuring of the March 2004 private placement. (See “Recent
Financing Events and Restructuring,” above) Prior to November 2004, our Company
had no outstanding interest-bearing debt.
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 restated our asset retirement obligation liability, classifying it
as
an environmental reclamation liability and not an asset retirement obligation
as
described by Financial Accounting Standards Board Statement No.
143.
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.
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 2005, we raised an aggregate of $1,575,000 through five financing
transactions. In February 2006, we completed an additional financing
transaction, which provided us with $250,000 in funding. While this additional
funding may meet our immediate working capital needs, if we are not able to
generate sufficient revenues and cash flows or obtain additional or alternative
funding, we will be unable to continue as a going concern. We have yet to
realize an operating profit at our Plum Mine location. As disclosed in the
report of our independent registered public accounting firm in our financial
statements included in this Form 10-KSB for the year ended December 31, 2005,
our recurring losses and negative cash flow from operations raise substantial
doubt about our ability to continue as a going concern.
Furthermore,
the litigation in which our Company has been involved since late 2004 has
strained the Company’s financial resources. (See Part I, Item 3, “Legal
Proceedings,” for a detailed discussion.) If we are unable to resolve the
litigation in the near future, the ongoing legal costs may impact our ability
to
continue as a going concern.
In
connection with our acquisition of the Plum Mining Company, LLC, we issued
a
promissory note to the seller for $1 million (the balance of the purchase
price). At September 30, 2005, the outstanding balance on the Note was $400,000.
We are in default on this Note.
Under
the
terms of our November 2004 subscription agreement, we issued 8% convertible
notes in the aggregate principal amount of $11.1 million to an investor group.
Under the terms of the notes, our first principal and interest repayment was
scheduled for April 1, 2005. We are in default on these notes. The default
interest rate is 12%.
In
March
2005, we issued a secured convertible note in the aggregate amount of $6,885,184
with a 12% interest rate for the 29,573,803 shares and accrued interest due
under the mandatory redemption payment provisions of our November 2004
subscription agreement. Payments on this note were scheduled to begin on April
1, 2005. We are in default on this note, causing the interest rate to increase
to the default rate of 18%.
On
July
15, 2005, we completed a financing transaction, which provided us with $800,000
in funding. In consideration for the financing, we issued promissory notes
with
a face value of $1.2 million, reflecting an original issue discount of
thirty-three and one-third (33.3%) percent. The term of the notes is two years,
with an optional extension of one year at the option of the investor. The annual
interest rate on the notes is 15% of the face value and is payable monthly.
On
September 28, 2005, we completed another financing transaction under the same
terms and conditions as the July 2005 financing. The September 2005 financing
provided us with $200,000 in funding. We have not made the monthly interest
payments on these notes, and thus we are in default. The default interest rate
on these notes is 22%.
We
are
working with the above-referenced note holders to cure the defaults. The above
referenced notes have a total value of approximately $14,680,000 at December
31,
2005. The total principal and interest arrearage related to these notes was
approximately $6,441,000 as of December 31, 2005. While failure to reach a
resolution would likely cause us to seek external funding in order to meet
our
obligations, there can be no assurance that such funding would be available.
During
the fourth quarter of 2005, we completed three financing transactions, which
provided us with a total of $575,000 in funding. In consideration for the
financing, we issued promissory notes with a term of ninety (90) days and an
interest rate of sixteen percent (16%) per annum. The default interest rate
on
the notes is twenty-two percent (22%). These notes had a maturity date of May
15, 2006, at which time all outstanding principal and interest became due.
The
aggregate proceeds from 2005 financing transactions totaled
$1,575,000.
In
the
first quarter of 2006, we completed additional financing transactions, which
provided us with $400,000 in funding. In consideration for the funding, we
issued promissory notes with a term of ninety (90) days and an interest rate
of
sixteen percent (16%) per annum. The default interest rate on the note is
twenty-two percent (22%). The funds were used for working capital and general
corporate purposes.
We
expect
to expand our existing leach pads, which currently number three, to a total
of
five leach pads during 2006. The cost of this expansion will be approximately
$600,000. We intend to finance our leach pad expansion project and any other
capital expenditures in 2006 through the issuance of debt or equity instruments
to existing shareholders and other parties. There can be no assurance that
such
financing will be available.
Item
7. Financial
Statements
See
index
to Financial Statements and Financial Statements Schedules beginning on page
F-1
of this Form 10-KSB.
Item
8. Changes
and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
Item
8A. Controls
and Procedures
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, 2005 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. We have taken corrective
measures to remedy these deficiencies. These measures include our consolidation
of the corporate office with the office at the Plum Mine operation. This
consolidation has provided the corporate office with additional accounting
personnel. We believe that the presence of additional qualified accounting
personnel will allow us to effectively correct the lack of segregation of duties
in accounting and financial reporting activities.
Our
former
Chief Financial Officer became our Chief Executive Officer in September 2004.
Our Company has not hired another individual to act as Chief Financial Officer.
We believe the absence of a full-time Chief Financial Officer or Chief
Accounting Officer has resulted in 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 believe 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
are in
the process of taking additional corrective measures to remedy the deficiencies
in future periods.
Item
8B. Other
Information
Not
applicable.
The
following table sets forth certain information regarding our directors and
officers:
|
Name
|
Age
|
Position
|
| |
|
|
|
Christopher
L. Aguilar
|
43
|
Chairman
of the Board of Directors
|
|
Todd
S. Brown
|
49
|
Director,
Audit Committee Chair
|
|
Stanley
A. Hirschman
|
59
|
Director,
Compensation Committee Chair
|
|
William
J. Nance
|
62
|
Director
|
|
Rex
L. Outzen
|
52
|
Director
|
|
Robert
T. Faber
|
46
|
President,
Chief Executive Officer, and acting- Chief Financial
Officer
|
Christopher
L. Aguilar
has been
a director of our Company since October 2004. 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 2004. 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
since 1999. 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.
Stanley
A. Hirschman
has been
a director of our Company since October 2004. Mr. Hirschman has served
since 1996 as President of CPointe Associates, Inc., an executive management
consulting firm that specializes in solutions for companies with emerging
technology-based products. He is Chairman of the Board of Bravo Foods
International, a director of 5G Wireless Communications and iWorld Projects
& Systems, an advisor to Redwood Grove Capital Management, LLP, and former
chairman of Mustang Software, Inc. Prior to establishing CPointe Associates
in
1996, he was Vice President Operations of Software Etc., Inc., a 396 retail
store software chain. He also held senior management positions with T.J. Maxx,
Gap Stores, and Banana Republic.
William
J. Nance
has been
a director of our Company since October 2005. Mr. Nance is a Certified
Public Accountant and private consultant to the real estate and banking
industries. He is also President of Century Plaza Printers, Inc. Mr. Nance
is also a Director of Intergroup Corporation, Santa Fe and
Portsmouth.
Rex
L. Outzen
has been
a director of our Company since October 2005. Mr. Outzen is a
metallurgical engineer with over 25 years of experience in the mining industry.
Since 1999, he has been an independent consultant providing metallurgical
engineering advice and services to the mining industry. Prior to 1999,
Mr. Outzen held senior management positions, both domestically and
internationally with Dayton Mining Corp., MinVen Gold Corp., Tenneco Minerals
Company, ASARCO INC. and Metallica Resources. Mr. Outxen holds a B. Sc. In
Metallurgical Engineering from the University of Utah.
Executive
Officers
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.
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, William J.
Nance and Rex L. Outzen 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. Aguilar is an officer of our
principal investment banking firm.
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, Nance, and Outzen, 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.
Hirschman, Aguilar and Outzen, 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, Hirschman and Nance, 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 eight meetings during the fiscal year ended
December 31, 2005. The Audit Committee met separately at three meetings during
the fiscal year ended December 31, 2005. The Compensation Committee held a
total
of two meeting during the fiscal year ended December 31, 2005. The Nominations
and Corporate Governance Committee held a total of two meetings during the
fiscal year ended December 31, 2005. 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 2005, and (2) the total number of meetings held by all
committees of our Board of Directors on which such person served during fiscal
2005.
Compensation
of Directors
Prior
to
the election of a new slate of directors on October 26, 2005, we had an
arrangement to pay our independent directors $3,000 a month, and the Chairman
of
the Audit Committee $4,000 a month. We are in arrears on these payments. The
arrearage totals $52,500. We have not entered into a compensation agreement
with
the current slate of directors. We reimburse the members of our Board of
Directors for actual expenses incurred in attending board meetings.
With
the
exception of the 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 $100,000
during 2005.
SUMMARY
COMPENSATION TABLE
| |
|
|
|
|
|
|
|
Long-Term
|
|
|
| |
|
|
|
|
|
|
|
Compensation
|
|
|
| |
|
|
|
|
|
|
|
Awards
|
|
|
| |
|
|
|
|
|
|
|
Securities
|
|
All
Other
|
| |
|
Annual
Compensation(1)
|
|
Underlying
|
|
Compensation
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Options
(#)(2)
|
|
($)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Robert
T. Faber(2) (3)
President
and Chief Executive Officer; Chief Financial Officer
|
|
2005
2004
2003
|
|
$120,000
$115,000
$33,000
|
|
$0
$10,000
$0
|
|
0
0
0
|
|
$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.
|
| (3) |
$25,000
of Mr. Faber’s 2005 salary has not yet been paid. We intend to pay this
amount in 2006.
|
Stock
Options
We
did
not grant stock options to directors, officers, or employees in 2005. There
were
no shares of common stock underlying unexercised stock options at December
31,
2005.
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.
Item
11.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 2006 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.
| |
|
|
Shares
Beneficially Owned
|
|
|
Name
of Beneficial Owner
|
|
|
Number(1)
|
|
|
Percent(2)
|
|
| |
|
|
|
|
|
|
|
|
Directors
and Executive Officers:
|
|
|
|
|
|
|
|
|
Robert
T. Faber (1) (2)
|
|
|
2,054,683
|
|
|
0.4
|
%
|
|
Christopher
L. Aguilar
|
|
|
157,775
|
|
|
0.01
|
%
|
|
Todd
S. Brown
|
|
|
―
|
|
|
0.0
|
%
|
|
Stanley
A. Hirschman
|
|
|
―
|
|
|
0.0
|
%
|
|
Bill
Nance
|
|
|
―
|
|
|
0.0
|
%
|
|
Rex
Outzen
|
|
|
―
|
|
|
0.0
|
%
|
| |
|
|
|
|
|
|
|
|
All
directors and executive officers as
a group (six persons)
|
|
|
2,212,458
|
|
|
0.4
|
%
|
| |
|
|
|
|
|
|
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
|
John
W. Winfield(4)
|
|
|
464,876,252
|
|
|
46.6
|
%
|
|
Stephen
B. Parent (1)
|
|
|
45,962,750
|
|
|
8.6
|
%
|
|
Longview
Equity Fund and Longview International Equity Fund (5)
|
|
|
75,108,939
|
|
|
12.4
|
%
|
|
Jubilee
Investment Trust (6)
|
|
|
39,500,000
|
|
|
7.4
|
%
|
|
Capital
Ventures International (7)
|
|
|
49,118,642
|
|
|
8.5
|
%
|
|
Longview
Fund, L.P. (8)
|
|
|
54,513,526
|
|
|
9.3
|
%
|
| |
|
|
|
|
|
|
|
_______________
| (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, 2006 by the
exercise of vested stock options.
|
| (2) |
Mr.
Faber has purchased additional shares through a Section 10(b)(5) share
purchase program. This program is still in place, and Mr. Faber continues
to purchase shares on a monthly basis
|
| (3) |
The
percentages shown include the shares of common stock that the person
will
have the right to acquire within 60 days of March 31, 2006. 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
March
31, 2006 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.
|
| (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 Longview Fund, L.P. is c/o Viking Asset Management, LLC,
600
Montgomery Street, 44th
Floor, San Francisco, California 94111.
|
Item
12.
Certain Relationships and Related Transactions
Not
applicable.
Item
13.
Exhibits and Reports on Form 8-K.
| (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, 2005
|
|
F
-
3
|
|
Consolidated
Statements of Operations for the years ended December 31,
2005 and
2004
|
|
F
-
5
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the year
ended December
31, 2005 and 2004
|
F
-
6
|
|
|
Consolidated
Statements of Cash Flows for the year ended December 31, 2005 and
2004
|
|
F
-
7
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-9-21
|
|
| (2) |
Exhibits
filed as part of this Report:
|
| Exhibit Number |
Exhibit |
| 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 |
(b)
Reports filed on Form 8-K during the quarter ended December 31,
2005:
None.
Item
14. Principal
Accountants Fees and Services
The
aggregate fees billed to our company by Jewett Schwartz, for the fiscal years
ended December 31, 2004 and December 31, 2005, are as follows:
| |
|
|
2004
|
|
|
2005
|
|
|
Audit
fees
|
|
$
|
28,500
|
|
$
|
32,000
|
|
|
Audit-related
fees
|
|
|
0
|
|
$
|
14,000
|
|
|
Tax
fees
|
|
|
0
|
|
|
0
|
|
|
All
other fees
|
|
|
0
|
|
|
0
|
|
| |
|
|
|
|
|
|
|
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. Our Audit Committee Chair and Audit Committee
Financial Expert is Todd Brown.
SIGNATURES
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. |
|
|
|
| |
By: |
/s/
Robert T.
Faber
|
| |
Robert T. Faber |
| |
President
and
Chief Executive Officer |
|
Signature
|
Capacity
|
Date
|
| |
|
|
|
/s/
Christopher L. Aguilar
|
Chairman
of the Board
|
__________,
2006
|
|
Christopher
L. Aguilar
|
| |
|
|
|
/s/
Robert T. Faber
|
President,
Chief Executive Officer (Principal Executive Officer), and Chief
Financial
Officer (Principal Accounting and Financial Officer)
|
__________,
2006
|
|
Robert
T. Faber
|
| |
|
|
|
/s/
Todd S. Brow
|
Director
|
__________,
2006
|
|
Todd
S. Brown
|
| |
|
|
|
/s/
Stanley A. Hirschman
|
Director
|
__________,
2006
|
|
Stanley
A. Hirschman
|
|
|
| |
|
|
|
/s/
William J. Nance
|
Director
|
__________,
2006
|
|
William
J. Nance
|
|
|
| |
|
|
|
/s/
Rex L. Outzen
|
Director
|
__________,
2006
|
|
Rex
L. Outzen
|
|
|
| |
|
|
GOLDSPRING,
INC.
INDEX
TO FINANCIAL STATEMENTS
| |
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
| |
|
|
Consolidated
Balance Sheet as of December 31, 2005
|
F-3
|
| |
|
|
Consolidated
Statements of Operations for the years ended December 31, 2005 and
2004
|
F-5
|
| |
|
|
Consolidated
Statements of Changes in Stockholders’ Deficiency for the years ended
December 31, 2005 and 2004
|
F-6
|
| |
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2005 and
2004
|
F-7
|
| |
|
|
Notes
to Consolidated Financial Statements
|
F-8-24
|
| |
|
Report
of
Independent Registered Public Accounting Firm
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, 2005 and the related consolidated statements of operations, changes
in shareholders’ deficiency and cash flows for the years ended December 31, 2005
and 2004. 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,
2005, and the results of its operations and its cash flows for the years then
ended 2005 and 2004 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, 2005. 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.
/s/
Jewett, Schwartz & Associates
Jewett,
Schwartz, & Associates
Hollywood,
Florida
March
23,
2006
GOLDSPRING,
INC.
CONSOLIDATED
BALANCE
SHEETS
| |
|
|
December
31,
2005
|
|
|
ASSETS
|
|
|
|
|
| |
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
26,865
|
|
|
Prepaid
expenses and other current assets
|
|
|
27,500
|
|
|
Inventories
|
|
|
52,000
|
|
|
Deferred
financing fees, net
|
|
|
476,150
|
|
|
Total
Current Assets
|
|
|
582,515
|
|
| |
|
|
|
|
|
PLANT,
EQUIPMENT, AND MINERAL PROPERTIES
|
|
|
|
|
| |
|
|
|
|
|
Mineral
properties
|
|
|
1,669,837
|
|
|
Plant
and Equipment
|
|
|
1,007,416
|
|
|
Total
Property and Equipment
|
|
|
2,677,253
|
|
| |
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
| |
|
|
|
|
|
Reclamation
deposit
|
|
|
377,169
|
|
|
Equipment
purchase deposit
|
|
|
―
|
|
|
Other
|
|
|
70,000
|
|
|
Total
Other Assets
|
|
|
447,169
|
|
|
Total
Assets
|
|
$
|
3,706,937
|
|
The
accompanying notes are an integral part of these financial
statements.
GOLDSPRING,
INC.
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
December
31,
2005
|
|
| |
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Accounts
payable
|
|
|
1,270,074
|
|
|
Accrued
expenses
|
|
|
360,886
|
|
|
Accrued
liquidated damages
|
|
|
1,913,418
|
|
|
Accrued
interest payable
|
|
|
1,321,919
|
|
|
Short-term
lease obligations
|
|
|
28,870
|
|
|
Convertible
debentures
|
|
|
13,461,941
|
|
|
Promissory
Notes
|
|
|
2,075,000
|
|
|
Other
notes payable & current portion of long-term debt
|
|
|
423,108
|
|
| |
|
|
|
|
|
Total
Current Liabilities
|
|
|
20,855,216
|
|
| |
|
|
|
|
|
LONG-TERM
DEBT AND OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
130,243
|
|
|
Long-term
lease obligation, net of current portion
|
|
|
77,846
|
|
|
Long-term
reclamation liability
|
|
|
553,190
|
|
|
Total
long-term debt and other Long-term Liabilities
|
|
|
761,279
|
|
| |
|
|
|
|
|
Total
Liabilities
|
|
|
21,616,495
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
|
STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
Common
stock, $.000666 par value, 500,000,000 shares authorized,
325,047,122
and 171,120,482 shares issued and outstanding
|
|
|
216,481
|
|
|
Treasury
Stock
|
|
|
(67
|
)
|
|
Additional
paid-in capital
|
|
|
5,398,330
|
|
|
Accumulated
deficit - Prior years
|
|
|
(12,171,276
|
)
|
|
Accumulated
deficit - Current year
|
|
|
(11,353,026
|
)
|
|
Total
Stockholders’ Deficiency
|
|
|
(17,909,558
|
)
|
| |
|
|
|
|
|
Total
Liabilities and Stockholders’ Deficiency
|
|
$
|
3,706,937
|
|
The
accompanying notes are an integral part of these financial
statements.
GOLDSPRING,
INC.
CONSOLIDATED
STATEMENTS
OF OPERATIONS
| |
|
|
Years
Ended
December 31,
|
|
| |
|
|
|
|
|
(As
Restated)
|
|
| |
|
|
2005
|
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
Revenue
from gold sales, net
|
|
$
|
2,632,112
|
|
$
|
955,380
|
|
| |
|
|
|
|
|
|
|
|
Cost
and Expenses
|
|
|
|
|
|
|
|
|
Costs
applicable to sales (exclusive of depreciation and
amortization
shown separately below)
|
|
|
―
|
|
|
―
|
|
|
Depreciation
and amortization
|
|
|
302,753
|
|
|
219,834
|
|
|
Reclamation,
Exploration and Test Mining Expenses
|
|
|
4,810,643
|
|
|
6,800,011
|
|
|
General
and Administrative
|
|
|
1,183,255
|
|
|
1,430,596
|
|
|
Consultants
and Professional Fees
|
|
|
773,390
|
|
|
659,931
|
|
| |
|
|
7,070,041
|
|
|
9,110,372
|
|
| |
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
Liquidated
damages expense (See Note 11)
|
|
|
(4,619,144
|
)
|
|
(1,627,308
|
)
|
|
Gain
on derivative investments, net
|
|
|
---
|
|
|
238,620
|
|
|
Interest
income
|
|
|
13,526
|
|
|
40,142
|
|
|
Interest
expense
|
|
|
(2,309,479
|
)
|
|
(65,997
|
)
|
| |
|
|
(6,915,097
|
)
|
|
(1,414,543
|
)
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net
Loss:
|
|
|
(11,353,026
|
)
|
|
(9,569,535
|
)
|
| |
|
|
|
|
|
|
|
|
Net
loss per common share - basic
|
|
|
(0.045
|
)
|
$
|
(0.051
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
252,930,064
|
|
|
186,800,478
|
|
The
accompanying notes are an integral part of these financial
statements.
GOLDSPRING,
INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
For
the Years Ended December 31, 2005 and 2004
(Common
Stock Par value, $.000666 per share; 800,000,000 shares
authorized)
| |
|
|
Shares
Issued
|
|
|
Shares
Issued -Forward
Stock Split
|
|
|
Total
Shares Issued After Forward Stock Split
|
|
|
Par
value $.000666 per
share
|
|
|
Additional
Paid-in Capital
|
|
|
Treasury
Stock (at cost)
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
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, Restated
|
|
|
155,492,828
|
|
|
15,627,654
|
|
|
171,120,482
|
|
|
113,966
|
|
|
3,574,272
|
|
|
(67
|
)
|
|
(12,171,276
|
)
|
|
(8,483,105
|
)
|
|
Mandatory
redemption
|
|
|
|
|
|
|
|
|
-0-
|
|
|
-0-
|
|
|
(3,457,182
|
)
|
|
|
|
|
|
|
|
(3,457,182
|
)
|
|
March
2005 liquidated damages
|
|
|
|
|
|
|
|
|
59,203,484
|
|
|
39,430
|
|
|
1,736,674
|
|
|
|
|
|
|
|
|
1,776,104
|
|
|
August
2005 liquidated damages
|
|
|
|
|
|
|
|
|
35,103,534
|
|
|
23,379
|
|
|
1,029,727
|
|
|
|
|
|
|
|
|
1,053,106
|
|
|
Common
Stock issued for mining property
|
|
|
|
|
|
|
|
|
3,444,444
|
|
|
2,294
|
|
|
167,706
|
|
|
|
|
|
|
|
|
170,000
|
|
|
Common
stock issued for debenture principal
|
|
|
|
|
|
|
|
|
28,201,478
|
|
|
18,782
|
|
|
1,100,212
|
|
|
|
|
|
|
|
|
1,118,994
|
|
|
Common
stock issued for debenture interest
|
|
|
|
|
|
|
|
|
23,729,909
|
|
|
15,804
|
|
|
771,871
|
|
|
|
|
|
|
|
|
787,675
|
|
|
December
2004 conversion shares issued in 2005
|
|
|
|
|
|
|
|
|
4,243,791
|
|
|
2,826
|
|
|
475,050
|
|
|
|
|
|
|
|
|
477,876
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,353,026
|
)
|
|
(11,353,026
|
)
|
|
Balance,
December 31, 2005
|
|
|
|
|
|
|
|
|
325,047,122
|
|
|
216,481
|
|
$
|
5,398,330
|
|
|
(67
|
)
|
$
|
(23,524,302
|
)
|
$
|
(17,909,558
|
)
|
The
accompanying notes are an integral part of these financial
statements.
GOLDSPRING,
INC.
CONSOLIDATED
STATEMENTS
OF CASH FLOWS
| |
|
|
Years
Ended December 31,
|
|
|
|
|
|
2005
|
|
|
2004
|
|
| |
|
|
|
|
|
(As
Restated)
|
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,353,026
|
)
|
$
|
(9,569,535
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
445,193
|
|
|
219,834
|
|
|
Liquidated
damages from March 2004 financing and November 2004
restructuring
|
|
|
4,619,144
|
|
|
1,627,308
|
|
|
Consulting
services provided in exchange for common stock
|
|
|
―
|
|
|
42,000
|
|
| |
|
|
|
|
|
|
|
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
236,688
|
|
|
(288,688
|
)
|
|
Prepaid
and other current assets
|
|
|
7,705
|
|
|
290,360
|
|
|
Other
current assets
|
|
|
100,000
|
|
|
―
|
|
| |
|
|
|
|
|
|
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
677,275
|
|
|
480,847
|
|
|
Accrued
expenses
|
|
|
2,803,339
|
|
|
216,902
|
|
|
Reclamation
liability
|
|
|
―
|
|
|
553,190
|
|
|
Other
|
|
|
(541,472
|
)
|
|
(13,934
|
)
|
|
Total
Adjustments to Reconcile Net Loss Used in Operating
Activities
|
|
|
8,347,872
|
|
|
3,127,819
|
|
|
Net
cash used in operating activities
|
|
|
(3,005,154
|
)
|
|
(6,441,716
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Reclamation
bond deposit
|
|
|
―
|
|
|
(232,169
|
)
|
|
Equipment
/ acquisition deposit
|
|
|
(50,000
|
)
|
|
(10,000
|
)
|
|
Acquisition
of plant and equipment
|
|
|
(150,390
|
)
|
|
(532,232
|
)
|
|
Net
used in investing activities
|
|
|
(200,390
|
)
|
|
(774,401
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
proceeds from the issuance of common stock
|
|
|
―
|
|
|
9,428,781
|
|
|
Principal
payments on Note Payable
|
|
|
(294,393
|
)
|
|
(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
|
|
|
1,575,000
|
|
|
―
|
|
|
Net
cash provided by financing activities
|
|
|
1,280,607
|
|
|
8,803,781
|
|
| |
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
(1,924,937
|
)
|
|
1,587,664
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
1,951,802
|
|
|
364,138
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
26,865
|
|
$
|
1,951,802
|
|
|
Supplemental
disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Issuance
of notes for liquidated damages for failure to deliver
shares
|
|
$
|
403,175
|
|
$
|
-
|
|
|
Issuance
of notes for mandatory redemption payment plus accrued interest
|
|
$
|
6,885,184
|
|
$
|
-
|
|
|
Issuance
of company stock for acquisition of mining claims
|
|
$
|
170,000
|
|
$
|
-
|
|
|
Issuance
of company stock for interest
|
|
$
|
787,675
|
|
$
|
-
|
|
|
Issuance
of company stock for liquidated damages
|
|
$
|
2,829,210
|
|
$
|
-
|
|
|
Issuance
of note for acquisition of mining claims
|
|
$
|
160,000
|
|
$
|
-
|
|
|
Conversion
of debt into company’s common shares
|
|
$
|
1,118,994
|
|
$
|
-
|
|
|
Purchase
of assets under capital leases
|
|
$
|
-
|
|
$
|
168,202
|
|
|
Purchase
of assets by long-term debt
|
|
$
|
-
|
|
$
|
63,269
|
|
|
Convertible
notes issued in connection with the Nov. 2004
restructuring
|
|
$
|
-
|
|
$
|
11,100,649
|
|
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. 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 and borrowings
from affiliates and other shareholders. 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.
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
|
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
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
Note
1 — Summary of Significant Accounting Policies - Continued
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.
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, convertible debenture and other
notes payable amounts approximate fair value at December 31, 2005 and 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.
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
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.
Inventories
We
state
inventories at the lower of average cost or net realizable value. At December
31, 2005 and 2004, our inventories consisted of $52,000 and $239,943,
respectively, of doré and bullion in our accounts at refineries. At December 31,
2004 we had $48,744 of supplies and reagents compared to $0 at December 31,
2005. 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.
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.
Deferred
Financing Charges
During
2005 we recorded deferred financing charges associated with the issue of
promissory notes payable totaling $614,590. We amortize the charges over the
respective lives of the promissory notes payable as interest expense. During
the
year ended December 31, 2005 we recognized $142,400 of interest expense related
to the amortization of deferred financing fees.
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.
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
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.”
Note
1 — Summary of Significant Accounting Policies — Continued
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.
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.”
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. SFAS 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.
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
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, 2005 and 2004, 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
Note
1 — Summary of Significant Accounting Policies — Continued
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
November 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4." SFAS
151
seeks to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material (spoilage) in the determination
of
inventory carrying costs. The statement requires such costs to be treated as
a
current period expense. This statement is effective November 1, 2005 for the
Company. The Company does not believe that the adoption of SFAS 151 will have
a
significant impact on its consolidated financial statements.
In
May
2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections -
a
Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires
retrospective application to prior period financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 also
redefines "restatement" as the revising of previously issued financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005 (or fiscal 2007 for the Company). The Company does
not
believe that the adoption of SFAS 154 will have a significant impact on its
consolidated financial statements.
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.
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
Risks
and Uncertainties
We
regularly evaluate risks and uncertainties and, when probable that a loss or
expense will be incurred, record a charge
to
current period operations.
Income
Taxes
We
recognize deferred tax assets and liabilities based on differences between
the
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, 2005 and December 31, 2004, our mineral properties consisted of
the
following:
|
MINERAL
PROPERTIES:
|
|
|
Dec.
31, 2005
|
|
|
Dec.
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
Placer Gold Properties
|
|
$
|
100,000
|
|
|
100,000
|
|
|
Big Mike Copper Property
|
|
|
119,138
|
|
|
119,138
|
|
|
Plum Gold Properties
|
|
|
1,360,699
|
|
|
1,025,699
|
|
|
Water rights
|
|
|
90,000
|
|
|
90,000
|
|
|
Balance
|
|
$
|
1,669,837
|
|
|
1,334,837
|
|
| |
|
|
|
|
|
|
|
Note
2 — Mineral Properties - Continued
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. In 2005, we acquired the Keystone,
Justice, Vindicator and Woodville mining claims and 19 other mineral leases
that
are near or contiguous to our existing Plum Gold property for
$335,000.
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.
Note
3 — Plant, Property and Equipment
At
December 31, 2005 and December 31, 2004, plant, property and equipment consisted
of the following (See Note 1):
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
|
|
|
|
Dec.
31, 2005
|
|
|
Dec.
31, 2004
|
|
|
Plant,
Property and Equipment at Plum Mine location
|
|
$
|
1,504,309
|
|
$
|
1,364,789
|
|
|
Equipment,
Corporate
|
|
|
18,195
|
|
|
14,825
|
|
|
Less
Accumulated Depreciation
|
|
|
(515,087
|
)
|
|
(219,834
|
)
|
|
Balance
at 12/31/05
|
|
$
|
1,007,417
|
|
$
|
1,159,780
|
|
Included
in plant, property and equipment at our Plum Mine location at December 31,
2005,
is equipment under capital lease of $167,636. Future minimum lease payments
for
the related obligation under capital lease are $34,772 for 2006, $32,772 for
2007, and $43,210 for 2008. We recorded depreciation expense on equipment under
capital lease totaling $33,527 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.
We
have
accrued a long-term liability of $553,000 as of December 31, 2005, with regard
to our obligations to reclaim our Plum Mine facility based on our reclamation
plan submitted and approved by the Nevada State Environmental Commission and
Division of Environmental Protection. Costs of future expenditures for
environmental remediation are not discounted to their present value unless
subject to a contractually obligated fixed payment schedule. Such costs are
based on management’s current estimate of amounts expected to be incurred when
the remediation work is performed within current laws and regulations. It is
reasonably possible that, due to uncertainties associated with the application
of laws and regulations by regulatory authorities and changes in reclamation
or
remediation technology, the ultimate cost of reclamation and remediation could
change in the future. We periodically review accrued liabilities for such
reclamation and remediation costs as evidence becomes available indicating
that
our liabilities have potentially changed.
Note
5 — Notes Payable — Mineral Property Purchases
We
have a
non-interest bearing note payable to the Brockbank Trust related to our purchase
of the Plum Mining property. The note is payable in ten quarterly payments
through June 2006.
During
2005 we purchased certain mining claims that were near or contiguous to our
Plum
Gold Property (See Note 2). In connection with the purchase we issued a note
payable of $160,000. The note is payable in quarterly installments of $16,000
and is payable in its entirety on or before March 31, 2007.
At
December 31, 2005 and December 31, 2004, our balance owing on mineral property
notes payable was as follows:
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
| |
|
|
Dec.
31, 2005
|
|
|
Dec.
31, 2004
|
|
|
Balance
|
|
$
|
510,000
|
|
$
|
600,000
|
|
|
Less
current portion
|
|
|
414,000
|
|
|
(400,000
|
)
|
|
Non-current
portion
|
|
$
|
$96,000
|
|
$
|
200,000
|
|
Note
6 —Convertible Debentures and Notes Payable
Convertible
Debentures-Investors
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.
Note
6 —Convertible Debentures and Notes Payable - Continued
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 9 and 12).
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. 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. As a result of our failure
to deliver shares, we were subject to liquidated damages that were settled
by
the issuance of notes payable to the investors.
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
Convertible
Debentures-Mandatory Redemption Payment
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,
John V. Winfield, a major shareholder and note holder elected to demand payment
of approximately $6.9 million pursuant to the mandatory redemption payment
provisions of the subscription agreement and forfeit his right to receive the
shares in favor of the payment.
On
March
31, 2005, we entered into a Settlement Agreement (“Settlement”) with the Mr.
Winfield and agreed to convert the mandatory redemption payment into six
Convertible Debentures (“the Debentures”). Accordingly, we accrued a liability
for approximately $6.9 million and reduced our paid-in-capital account for
approximately $3.5 million (See Note 12). The Debentures are subject to various
covenants and conditions, including, but not limited to anti-dilution rights
and
protective rights.
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:
Note
6 —Convertible Debentures and Notes Payable - Continued
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.
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 the Brockbank Trust
(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. As of December 31, 2005 we had failed to make any
monthly payments on the debentures and are in default.
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
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
Accordingly,
at December 31, 2005 and December 31, 2004, we classified the following
convertible debentures as current liabilities as follows:
|
|
|
|
Dec.
31, 2005
|
|
|
Dec.
31, 2004
|
|
|
Convertible
Debentures Payable-Investors
|
|
$
|
6,220,409
|
|
$
|
11,100,649
|
|
|
Convertible
Debentures Payable- Mandatory Redemption payment
|
|
|
6,885,184
|
|
|
–
|
|
|
Convertible
Debentures Payable- Failure to Deliver Shares
|
|
$
|
356,348
|
|
$
|
–
|
|
|
Total
|
|
$
|
13,461,941
|
|
$
|
11,100,649
|
|
Note
7 —Promissory Notes Payable
Promissory
Notes Payable—July Financing
In
July
of 2005, we borrowed $1.2 Million from companies controlled by John V. Winfield,
a major shareholder. Proceeds from the notes were reduced by a 33.3% original
issue discount and other origination fees. Net proceeds received by the Company
from the borrowing were $740,000. The notes accrue interest at 15% 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
July 15, 2007.
Note
7 —Promissory Notes Payable - Continued
The
notes
are collateralized by substantially all of the Company’s assets subject to the
security interest of the Brockbank Trust (See Note 5). As of December 31, 2005
we had failed to make any monthly payments on the notes and are in
default.
Promissory
Notes Payable—September Financing
In
September of 2005, we borrowed $300,000 from Longview Fund L.P., a major
shareholder. Proceeds from the notes were reduced by a 33.3% original issue
discount and other origination fees. Net proceeds received by the Company from
the borrowing were $165,500.The notes accrue interest at 15% 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
July 15, 2007. The notes are collateralized by substantially all of the
Company’s assets subject to the security interest of the Brockbank Trust (See
Note 5) and the Winfield convertible debentures of March 2005.
The
notes
share a security interest with the Winfield notes issued in July 2004. As of
December 31, 2005 we had failed to make any monthly payments on the notes and
are in default.
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
Promissory
Notes Payable—December Financing
In
December of 2005, we borrowed $575,000 from Longview Fund L.P., a major
shareholder. The notes accrue interest at 16% per annum, are uncollateralized
and are payable including accrued interest on or before March 15,
2006.
Accordingly,
at December 31, 2005 we classified the following notes payable as current
liabilities as follows:
|
|
|
|
Dec.
31, 2005
|
|
|
Promissory
Notes Payable-July Financing
|
|
$
|
1,200,000
|
|
|
Promissory
Notes Payable-September Financing
|
|
|
300,000
|
|
|
Promissory
Notes Payable-December Financing
|
|
|
575,000
|
|
|
Total
|
|
$
|
2,075,000
|
|
Note
8 —Other Long-term Debt
Notes
Payable- Plum Mine
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.
Notes
Payable- Seller Note
In
connection with our acquisition of the Justice, Woodville and Keystone patented
claims we issued a promissory note to the seller for $160,000. The note is
payable in ten quarterly payments through June 2008.
Notes
Payable- Equipment Financing
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, 2005
|
|
|
Dec.
31, 2004
|
|
|
Long-term
Debt-Current Plum Mine
|
|
$
|
350,000
|
|
$
|
400,000
|
|
|
Long-term
Debt-Current Seller Note
|
|
|
64,000
|
|
|
---
|
|
|
Other
Long-term Debt-Current
|
|
$
|
9,108
|
|
$
|
21,127
|
|
| |
|
|
|
|
|
|
|
|
Total
|
|
$
|
423,108
|
|
$
|
421,127
|
|
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
|
|
|
|
Dec.
31, 2005
|
|
|
Dec.
31, 2004
|
|
|
Long-term
Debt-non current Plum Mine
|
|
$
|
–
|
|
$
|
200,000
|
|
|
Long-term
Debt-non current Seller Note
|
|
|
96,000
|
|
|
–
|
|
|
Other
Long-term Debt -Non-current
|
|
|
34,243
|
|
|
43,858
|
|
|
Total
|
|
$
|
130,243
|
|
$
|
243,858
|
|
Note
8 —Other Long-term Debt-Continued
Principal
payments on other long-term debt related to equipment financing for the next
five years are as follows:
|
2006
|
$
9,964
|
|
2007
|
10,676
|
|
2008
|
11,441
|
|
2009
|
11,270
|
|
2010
and thereafter
|
0
|
Convertible
Notes Payable-Failure to Deliver Shares
In
March
of 2005, and pursuant to our settlement with investors for our failure to
deliver shares of our common stock upon their conversion of debentures during
2004 (See above), we issued convertible notes payable that accrue interest
at 8%
and are payable in equal monthly installments including interest beginning
April
1, 2006. In the event of our default on the notes the interest rate increased
to
15%.
Conversion
Rights
The
notes
are convertible, in all or in part, into shares of our common stock at any
time
at an initial conversion price of $0.20, subject to certain anti-dilution
provisions that include the sale of assets, reclassifications of our equity,
issuance of additional shares and stock splits and dividends.
Borrower’s
Repayment Election.
The
Monthly Amount due on a repayment date shall be paid by the Company at its
election (i) in cash at the rate of 102% of such monthly amount otherwise due
on
such repayment date within three (3) business days of the applicable repayment
date, or (ii) with registered, freely transferable common stock at an applied
conversion rate equal to 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 such repayment date.
On
April
1, 2005, we failed to make our first payment on the convertible debentures
and
were in default of the terms of the convertible notes. At December 31, 2005
and
December 31, 2004 we classified the following notes payable as current
liabilities as follows:
|
|
|
|
Dec.
31, 2005
|
|
|
Dec.
31, 2005
|
|
|
Convertible
Notes Payable
|
|
$
|
13,461,941
|
|
$
|
11,100,649
|
|
|
Promissory
notes
|
|
|
2,075,000
|
|
|
–
|
|
|
Total
|
|
$
|
15,536,941
|
|
$
|
11,100,649
|
|
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
Note
9 — Liquidated Damages
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 Note 12).
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 could sell their shares of common stock without restriction.
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. 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
Note
9 — Liquidated Damages-Continued
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. Pursuant to this
settlement agreement, we issued 59 million shares of restricted common stock
in
April 2005 and .approximately 40 million s shares of restricted common stock
in
November of 2005.
In
addition, pursuant to the November 2004 subscription agreement, we were subject
to liquidated damages for failure to issue shares to holders of convertible
notes payable (see Note 6)
We
recorded liquidated damages and other related expenses due to investors of
our
March 2004 offering and the subsequent November 30, 2004 restructuring, during
December 31, 2005 and December 31, 2004 as follows:
|
Liquidated
damages relating to:
|
|
|
Dec.
31,
2005
|
|
|
Dec.
31,
2004
|
|
|
Non-Registration
Provisions
|
|
$
|
4,520,615
|
|
|
1,322,662
|
|
|
Failure
to timely deliver shares upon notice of converting note
holders
|
|
|
98,529
|
|
|
304,646
|
|
| |
|
$
|
4,619,144
|
|
|
1,627,308
|
|
At
December 31, 2005 we had accrued $1,913,418 of liquidated damages payable in
our
other accrued liabilities.
GOLDSPRING,
INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
Note
10 — 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, 2005 and 2004, 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, 2005 and 2004, we had a net operating loss carry forwards of
approximately $11.4 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 $3.9 and
$3.4
million, respectively, for the years ended December 31, 2005 and 2004,
respectively.
Note
11 - Related Party Transactions
In
addition to the related party transactions discussed in Notes 6,7,8 and 12,
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
Note
11 - Related Party Transactions - Continued
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.
Note
12 — Stockholders’ Equity
During
April of 2005 we issued 59,203,484 shares of our common stock to investors
in
connection with satisfying liquidated damages totaling $1,776,104 related to
a
registration statement filed to register shares of our common stock issued
in
our March private placement. In addition, during November 2005 we issued an
additional 35,103,534 shares of our common stock to investors in connection
with
satisfying liquidated damages totaling $1,053,106 pursuant to the terms and
conditions of the November 30, 2004 Subscription Agreement (See Note
9).
Common
Stock issued for Mining Properties
During
2005 we acquired mining claims near or contiguous to our Plum Mining Property
in
exchange for a cash payment of $10,000, a note payable of $100,000 and 3,000,000
restricted shares of our common stock valued at $150,000. We valued the shares
based upon our estimate of their market value at the time of
issuance.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
During
October of 2005 the Company issued 444,444 shares of its restricted common
stock
to an individual as consideration for the purchase of an entity controlled
by
the individual owning property near our Plum Mining property. If we are unable
to consummate the transaction the shares will be retained the individual. We
valued the shares at $20,000 based on our estimate of the common stock’s fair
value at the time of issuance.
Common
Stock issued for Convertible Debenture Principal and Interest
During
2005 the Company issued 28,201,478 and 23,729,909 shares of its restricted
common stock in connection with the conversion of $1,118,994 and $787,675 of
debenture principal and interest, respectively.
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
Note
12 — Stockholders’ Equity - Continued
$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
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.
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.
GOLDSPRING,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2005 and 2004
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.