WASHINGTON,
D.C. 20549
FORM
10-QSB
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
quarterly period ended September 30, 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 of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Classification
Code Number)
|
Identification
No.)
|
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-QSB or any
amendment to this Form 10-QSB [ ]
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the last practicable date: 332,143,694 shares of Common Stock, $0.000666
Par Value, as of October 31, 2005.
TABLE
OF
CONTENTS
PART
I -
FINANCIAL INFORMATION
ITEM
1.
|
|
UNAUDITED
FINANCIAL STATEMENTS
|
|
F-1
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet as of September 30, 2005 (Unaudited)
|
|
F-1
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the three month periods ended
September
30, 2005 and 2004 (Unaudited)
|
|
F-2
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the nine month periods ended
September
30, 2005 and 2004 (Unaudited)
|
|
F-3
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the periods ended September 30, 2005
and 2004
(Unaudited)
|
|
F-4
|
|
|
|
|
|
|
|
Notes
to Financial Statements
|
|
F-5-6
|
|
|
|
|
|
ITEM
2.
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
|
|
1
|
|
|
|
|
|
ITEM
3.
|
|
CONTROLS
AND PROCEDURES
|
|
12
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
ITEM
1.
|
|
LEGAL
PROCEEDINGS
|
|
|
|
|
|
|
|
ITEM
2.
|
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
17
|
|
|
|
|
|
ITEM
3.
|
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
18
|
|
|
|
|
|
ITEM
4.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
|
18
|
|
|
|
|
|
ITEM
5.
|
|
OTHER
INFORMATION
|
|
19
|
|
|
|
|
|
ITEM
6.
|
|
EXHIBITS
AND REPORTS ON FORM 8-K
|
|
19
|
|
|
|
|
|
|
|
SIGNATURES
|
|
21
|
Statement
Regarding Forward-Looking Statements
The
statements contained in this report on Form 10-QSB 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” in our Form 10-KSB for the year ended
December 31, 2004.
PART
I - FINANCIAL INFORMATION
ITEM
1 - FINANCIAL STATEMENTS
GOLDSPRING,
INC.
GOLDSPRING,
INC.
|
|
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEET
|
|
|
|
ASSETS
|
|
September
30,
2005
(Unaudited)
|
|
As
Restated
December
31,
2004
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
112,247
|
|
$
|
1,951,802
|
|
Prepaid
expenses and other current assets
|
|
|
33,999
|
|
|
149,795
|
|
Finished
goods inventory
|
|
|
32,457
|
|
|
239,943
|
|
Inventory
|
|
|
29,785
|
|
|
48,745
|
|
Discount
on Notes Payable
|
|
|
648,975
|
|
|
-
|
|
TOTAL
CURRENT ASSETS
|
|
|
857,463
|
|
|
2,390,285
|
|
|
|
|
|
|
|
|
|
PLANT,
EQUIPMENT, ,AND MINERAL PROPERTIES, NET:
|
|
|
|
|
|
|
|
Mineral
properties
|
|
|
1,689,837
|
|
|
1,334,837
|
|
Plant
and Equipment
|
|
|
1,543,764
|
|
|
1,379,614
|
|
Plant,
Equipment and Mineral Properties
|
|
|
3,233,601
|
|
|
2,714,451
|
|
Accumulated
depreciation
|
|
|
(449,419
|
)
|
|
(219,834
|
)
|
TOTAL
PROPERTY AND EQUIPMENT
|
|
|
2,784,182
|
|
|
2,494,617
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Reclamation
deposit
|
|
|
377,169
|
|
|
377,169
|
|
Equipment
purchase deposit
|
|
|
100,000
|
|
|
110,000
|
|
TOTAL
OTHER ASSETS
|
|
|
477,169
|
|
|
487,169
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
4,118,814
|
|
|
5,372,071
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
1,191,505
|
|
$
|
589,799
|
|
Accrued
Expenses
|
|
|
299,670
|
|
|
792,884
|
|
Accrued
Liquidated Damages
|
|
|
1,758,676
|
|
|
-
|
|
Accrued
Interest
|
|
|
505,708
|
|
|
-
|
|
Short-Term
Lease Obligations
|
|
|
34,771
|
|
|
34,517
|
|
Current
portion of long-term debt
|
|
|
15,667,772
|
|
|
11,521,776
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
19,458,102
|
|
|
12,938,976
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT AND OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
132,795
|
|
|
243,858
|
|
Long-term
Lease obligation, net of current portion
|
|
|
89,463
|
|
|
119,152
|
|
Long-term
Reclamation liability
|
|
|
553,190
|
|
|
553,190
|
|
TOTAL
LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES
|
|
|
775,448
|
|
|
916,200
|
|
TOTAL
LIABILITIES
|
|
$
|
20,233,550
|
|
$
|
13,855,176
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
Common
stock, $.000666 par value, 500,000,000
|
|
|
|
|
|
|
|
shares
authorized , 328,785,390 shares issued and outstanding
|
|
$
|
218,971
|
|
$
|
113,966
|
|
Treasury
Stock
|
|
|
(67
|
)
|
|
(67
|
)
|
Additional
paid-in capital
|
|
|
5,490,349
|
|
|
3,574,272
|
|
Accumulated
deficit - Prior years
|
|
|
(12,171,276
|
)
|
|
(2,601,741
|
)
|
Accumulated
deficit - Current year
|
|
|
(9,652,713
|
)
|
|
(9,569,535
|
)
|
TOTAL
SHAREHOLDERS’ DEFICIENCY
|
|
|
(16,114,736
|
)
|
|
(8,483,105
|
)
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
|
|
$
|
4,118,814
|
|
$
|
5,372,071
|
|
The
accompanying notes are an integral part of
these financial statements.
GOLDSPRING,
INC.
|
UNAUDITED
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the three month periods ended September
30,
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
(Unaudited)
- restated
|
|
|
|
|
|
|
|
REVENUE
FROM GOLD SALES, NET
|
|
$
|
951,586
|
|
$
|
450,252
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
Depletion,
depreciation and amortization
|
|
|
72,899
|
|
|
243,836
|
|
Reclamation,
Exploration and Test Mining Expenses
|
|
|
1,061,186
|
|
|
690,856
|
|
General
and administrative
|
|
|
102,140
|
|
|
289,627
|
|
Other
|
|
|
55,311
|
|
|
195,734
|
|
TOTAL
COSTS AND EXPENSES
|
|
|
1,291,536
|
|
|
1,420,053
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Gain
on derivative instruments, net
|
|
|
-
|
|
|
49,310
|
|
Liquidated
Damages
|
|
|
(1,758,676
|
)
|
|
-
|
|
Other
|
|
|
-
|
|
|
-
|
|
Interest
expense
|
|
|
(882,216
|
)
|
|
-
|
|
Interest
income
|
|
|
-
|
|
|
20,110
|
|
|
|
|
(2,640,892
|
)
|
|
69,420
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(2,980,842
|
)
|
|
(900,381
|
)
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic
|
|
$
|
(0.011
|
)
|
$
|
(0.005
|
)
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
278,751,210
|
|
|
192,859,611
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of
these financial statements.
GOLDSPRING,
INC.
|
UNAUDITED
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the nine month periods ended September
30,
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
(Unaudited)
- restated
|
|
|
|
|
|
|
|
REVENUE
FROM GOLD SALES, NET
|
|
$
|
2,155,538
|
|
$
|
450,252
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
Depletion,
depreciation and amortization
|
|
|
229,584
|
|
|
243,836
|
|
Reclamation,
Exploration and Test Mining Expenses
|
|
|
3,870,316
|
|
|
690,856
|
|
General
and administrative
|
|
|
779,372
|
|
|
960,309
|
|
Consulting
and professional services
|
|
|
717,774
|
|
|
341,880
|
|
TOTAL
COSTS AND EXPENSES
|
|
|
5,597,046
|
|
|
2,236,881
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Gain
on derivative instruments, net
|
|
|
-
|
|
|
444,460
|
|
Liquidated
Damages
|
|
|
(4,619,144
|
)
|
|
-
|
|
Other
|
|
|
-
|
|
|
(42,180
|
)
|
Interest
expense
|
|
|
(1,605,587
|
)
|
|
-
|
|
Interest
income
|
|
|
13,526
|
|
|
32,746
|
|
|
|
|
(6,211,205
|
)
|
|
435,026
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(9,652,713
|
)
|
|
(1,351,603
|
)
|
|
|
|
|
|
|
|
|
Net
loss per common share - basic
|
|
$
|
(0.042
|
)
|
$
|
(0.007
|
)
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
232,206,184
|
|
|
187,168,336
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of
these financial statements.
GOLDSPRING,
INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the nine month periods ended September 30, |
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
-
restated
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(9,652,713
|
)
|
$
|
(1,351,603
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation,
depletion, and amortization
|
|
|
229,584
|
|
|
223,820
|
|
Accretion
of accumulated reclamation obligations
|
|
|
-
|
|
|
5,940
|
|
Write-down
of long lived assets
|
|
|
-
|
|
|
14,076
|
|
Liquidated
damages from March 2004 financing and November 2004 restructuring
|
|
|
4,619,144
|
|
|
-
|
|
Consulting
services provided in exchange for common stock
|
|
|
-
|
|
|
42,000
|
|
(Increase)
Decrease in operating assets:
|
|
|
|
|
|
|
|
Finished
goods inventory
|
|
|
207,486
|
|
|
(197,212
|
)
|
Inventory
|
|
|
18,960
|
|
|
13,165
|
|
Prepaid
and other current assets
|
|
|
115,796
|
|
|
(21,123
|
)
|
Other
assets
|
|
|
-
|
|
|
(60,000
|
)
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
601,706
|
|
|
890,414
|
|
Accrued
expenses
|
|
|
782,162
|
|
|
135,000
|
|
Other
|
|
|
(68,999
|
)
|
|
20,015
|
|
Total
Adjustments to Reconcile Net Loss Used in Operating
Activities
|
|
|
6,505,839
|
|
|
1,066,095
|
|
Net
cash used in operating activities
|
|
|
(3,146,874
|
)
|
|
(285,508
|
)
|
Investing
activities:
|
|
|
|
|
|
|
|
Equipment
deposit
|
|
|
(10,000
|
)
|
|
-
|
|
Acquisition
of plant, equipment and mineral properties
|
|
|
(369,150
|
)
|
|
(3,974,088
|
)
|
Net
cash used in investing activities
|
|
|
(379,150
|
)
|
|
(3,974,088
|
)
|
Financing
activities:
|
|
|
|
|
|
|
|
Net
Proceeds from Issuance of Stock
|
|
|
-
|
|
|
-
|
|
Proceeds
from financing, net
|
|
|
885,410
|
|
|
9,428,780
|
|
Purchase
and Cancellation of Company’s Stock
|
|
|
-
|
|
|
(150,000
|
)
|
Purchase
of Company’s Stock and Recorded to Treasury
|
|
|
-
|
|
|
(75,000
|
)
|
Conversion
of debt into Company’s common shares
|
|
|
885,812
|
|
|
|
|
Issuance
of Note for acquisition of mining claims
|
|
|
160,000
|
|
|
-
|
|
Principal
payment Note Payable
|
|
|
(244,753
|
)
|
|
(300,000
|
)
|
Net
Cash flows provided by financing activities
|
|
|
1,686,469
|
|
|
8,903,780
|
|
Net
Increase (Decrease) in cash
|
|
|
(1,839,555
|
)
|
|
4,644,184
|
|
Cash
- beginning of period
|
|
|
1,951,802
|
|
|
364,138
|
|
Cash
- end of period
|
|
$
|
112,247
|
|
$
|
5,008,322
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures 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
|
|
$
|
-
|
|
Purchase
and cancellation of common stock in connection with mandatory
redemption
payment
|
|
$
|
6,801,975
|
|
$
|
-
|
|
Purchase
of assets
|
|
$ |
|
|
$
|
168,202
|
|
Issuance
of Company stock for acquisition of mining claims
|
|
$
|
150,000
|
|
$
|
-
|
|
Issuance
of Company stock for interest expense
|
|
$
|
989,008
|
|
$
|
-
|
|
Issuance
of Company stock for liquidated damages
|
|
$
|
2,983,952
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of
these financial statements.
GOLDSPRING,
INC.
NOTES
TO
FINANCIAL STATEMENTS
September
30, 2005 AND 2004
NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES/ OVERVIEW
Forward-Looking
Statements
The
following discussion contains, in addition to historical information,
forward-looking statements regarding GoldSpring, Inc. (“we,” the "Company," or
"GSPG"), that involve risks and uncertainties. Our actual results could differ
materially. For this purpose, any statements contained in this Report that
are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate,"
or "continue" or the negative or other variations thereof or comparable
terminology are intended to identify forward-looking statements. Factors that
could cause or contribute to such differences include possible need for
additional financing; dependence on management; government regulation; and
other
factors discussed in this report and the Company's other filings with the
Securities and Exchange Commission.
Basis
of Presentation
The
accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In our opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended September 30,
2005
are not necessarily indicative of the results that may be expected for the
year
ending December 31, 2005. For further information, refer to the financial
statements and footnotes thereto included in our Form 10-KSB Report for the
fiscal year ended December 31, 2004.
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 annual financial statement 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.
NOTE
B -LIQUIDATED DAMAGES
For
the
third quarter of 2005 (ended September 30, 2005), we recorded liquidated damages
expenses due to investors of our March 2004 offering and subsequent November
30,
2004 restructuring as follows:
Liquidated
damages relating to:
|
|
|
|
November
30, 2004 Non-Registration Provisions
|
|
$
|
1,758,676
|
|
|
|
$
|
1,758,676
|
|
Non-Registration
Provisions
Our
SB-2
Registration Statement was declared effective on October 3, 2005, which caused
the liquidated damages referenced in this Note to cease accruing. The liquidated
damages arose from our November 2004 subscription agreement, which 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 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. Accordingly, at December 31, 2004, we had accrued
$222,013 of liquidated damages relating to Non-Registration Provisions. The
liquidated damages continued to accrue in the amount of 2% of the face value
of
the note for each 30-day period or part thereof after December 30, 2004 until
our registration statement was declared effective. For the quarter ended
September 30, 2005, the accrued liquidated damages totaled $ 1,758,676.
NOTE
C - MANDATORY REDEMPTION PAYMENT
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 the product
of 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 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. 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%.
Item
2. 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 quarter ended
September 30, 2005, as well as our future results.
Overview
We
are an
emerging North American precious metals mining company, which was formed in
June
2003. In less than two years, we have brought a gold and silver project into
production, established a solid footprint around our operations in northern
Nevada, and acquired mineral rights in Canada. We plan to build on this success
through the acquisition of mineral properties in North America that can be
efficiently put into near-term production. Our objectives are to increase
reserves, increase production and increase cash flow to maximize 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 the distractions of the litigation that has impacted
our Company since late 2004. The litigation has been a drain on our scarce
capital and human resources. (See Part II, Item 1, “Legal Proceedings,” for a
detailed discussion.) We are committed to finding a resolution to our pending
litigation 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. 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 evaluate each process of our mining operation.
The intent of the program is to identify additional efficiencies that can be
implemented to improve our overall performance. The program commenced with
our
hiring of Scott Jolcover as the mine manager. Mr. Jolcover has significant
experience in gold mining, primarily around the area of our current operation.
To date we have made modifications to our processing plant, equipment and
operations to increase operating efficiency and improve our financial
performance. In the spirit of maximizing overall operating performance and
reducing costs, in August 2005, we consolidated our corporate office with the
Plum Mine facility. The relocation has reduced costs and allowed for more
effective utilization of our resources, both human and capital.
The
new
contact information for the corporate office, effective August 1, 2005,
is:
P.O.
Box
1118
Virginia
City, NV 89440
Tel
775.847.5272
Fax
775.847.4762
www.goldspring.us
Additional
Contact Information:
Lisa
Boksenbaum, Corporate and Investor Relations
(480)
203-0510
We
continue to look for growth opportunities. On August 31, 2005, we completed
the
acquisition of the leases on three patented mineral claims from Comstock Gold,
LLC. The Justice, Woodville, and Keystone claims are adjacent to our existing
operation at the Plum Mine. In September 2005, we signed a purchase agreement
to
acquire the leases on an additional 19 mineral claims in the same region from
Comstock Gold, LLC. These acquisitions expand our footprint in the Comstock
Lode
region and have the potential for expanding the life of our existing Plum Mine
operation. The addition of these properties should also provide an opportunity
to expand our exploration program and improve our geologic understanding of
the
physical area and its trends.
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. The results of the election can
be found below in Part II, Item 4 “Submission of Matters to a Vote of Security
Holders”.
Results
of Operations and Operational Plan
During
the third quarter of 2005, our Company continued to focus on operations and
efficiencies. One of the operational improvements was our takeover of the
crushing operations at the Plum Mine, which provided us with the opportunity
to
have greater control over our overall operations and production results. Our
third-party crushing contractor had struggled to provide us with continuous
crushing services, straining our ability to increase our gold production. On
July 20, 2005, our third-party contractor shut down their crushing operations,
so that they could dismantle and remove their crushing circuit, creating space
for the installation of our crushing circuit. We invested approximately $200,000
procuring conveyors and installing the crushing circuit. The contractor
continued their mining at the Plum Mine until August 11, 2005, at which time
mining was suspended due to a lack of space to stockpile the uncrushed
mineralized material. Delays in the arrival of the conveyor systems for the
crushing circuit resulted in our missing our targeted completion date for the
circuit by approximately 30 days. Crushing operations resumed on October 1,
2005, and mining operations resumed on November 7, 2005. The delay in resuming
our crushing operations impacted our ability to place new mineralized material
on the pad and has resulted in lower gold production for the third quarter.
The
results of our crushing in October 2005 were positive. We crushed 40,000 tons
of
stockpiled mineralized material. We believe we are on track to achieve our
operating goals for crushing and to realize the financial savings anticipated
in
taking over the crushing operations.
We
added
Steve Russell, a geologist with over 20 years of experience in the Comstock
Lode
district, to our team in October 2005. One of his primary responsibilities
is to
oversee ore control in the mine pit. We believe that better ore control in
the
pit will reduce dilution, thus improving the grade of mineralized material
being
placed on the leach pad and increasing gold production.
In
the
remainder of 2005, we plan to focus the bulk of our efforts on achieving
additional operational improvements in both production and efficiency at our
Plum Mine operation. We are continuing to pursue operational improvements
through enhancements to our existing processes. These enhancements are expected
to stem from increasing our volume of production combined with lowering the
cost
of our processes. We are optimistic that the addition of a geologist to manage
ore control will lead to higher recovery rates, and increased gold production.
Our objective for operational performance in 2005 is to establish a stable
and
predictable level of gold and silver production at the Plum Mine resulting
in
profitability and positive cash flow.
Comparative
Financial Information:
|
|
Nine
Months ended
September
30, 2005
|
|
Nine
Months ended
September
30, 2004
|
|
Difference
|
|
Revenue
|
|
$
|
2,155,538
|
|
$
|
450,252
|
|
$
|
1,705,286
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclamation,
Exploration and Test Mining Expenses
|
|
$
|
3,870,316
|
|
$
|
690,856
|
|
$
|
3,179,460
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidated
Damages
|
|
$
|
4,619,144
|
|
$
|
0.0
|
|
$
|
4,619,144
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
$
|
1,605,587
|
|
$
|
0.0
|
|
$
|
1,605,587
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
($9,652,713
|
)
|
|
($1,351,603
|
)
|
|
($8,301,110
|
)
|
We
sold
5,004
ounces of gold at an average price of $431 per ounce during the nine-month
period ended September 30, 2005 compared to gold sales of 1,124
ounces at an average price of $ 400 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 $3,179,460 more for the first nine
months of 2005 than the same period in 2004. This 2005 expense increase 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.
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
September
30, 2005
|
|
Quarter
ended
September
30, 2004
|
|
Difference
|
|
Revenue
|
|
$
|
951,586
|
|
$
|
450,252
|
|
$
|
501,334
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclamation,
Exploration and Test Mining Expense
|
|
$
|
1,061,186
|
|
$
|
690,856
|
|
$
|
370,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidated
Damages
|
|
$
|
1,758,676
|
|
$
|
0.0
|
|
$
|
1,758.676
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
$
|
882,216
|
|
$
|
0.0
|
|
$
|
882,216
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
($2,980,842
|
)
|
|
($900,381
|
)
|
|
($2,000,461
|
)
|
During
the
third
quarter
of 2005 we sold 2,187 ounces of gold at an average price of $ 435 per ounce
compared to gold sales of 1,124 ounces at an average price of $ 400 per ounce
during the same period of 2004. Our “test mine” became operational during the
third quarter 2004, which was our first quarter of selling gold. Prior to the
3rd
quarter
2004 we were focused on constructing the required infrastructure to complete
our
“test mine.”
Reclamation,
Exploration and Test Mining Expenses in the third quarter of 2005 were $370,330
more than the third quarter of 2004. This variance reflects the exploration
drilling performed during the third quarter of 2005 plus 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
September 30, 2005, our Company had approximately $15,500,000 of outstanding
debt bearing an average interest rate of 15%. This debt originated from our
November 2004 restructuring of the March 2004 private placement, in which common
shares were exchanged for convertible debt currently bearing interest at 15%
per
annum. (See “Recent Financing Events and Restructuring,” below) Prior to
November 2004, our Company had no outstanding interest-bearing
debt.
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 Project. This acquisition did not include any real property
rights. In November 2003, we acquired the Plum Mine facility as well as water
rights that are usable at Plum Mine and the Gold Canyon and Spring Valley placer
claims. In a separate transaction, we obtained mineral permits in Alberta,
Canada in May 2004.
The
Big
Mike Copper Project is located in Pershing County, Nevada. It covers a total
of
310 acres and consists of 17 unpatented lode claims and one placer claim. We
have not established any proven or probable reserves that meet the requirements
of SEC Industry Guide 7. We have not completed any exploration activity on
the
project. The property includes an open pit, mineralized material in a stockpile
and waste dumps. We are actively looking for a business partner to develop
this
project.
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. This is an early
stage project and our activities associated with this mineral area are
exploratory in nature. We have not established any reserves on this property.
The scope and size of this potential project will require substantial capital,
time and outside assistance during both the pre- and post-feasibility stages.
We
are considering several financial alternatives, including a joint venture,
to
develop this project.
Liquidity
and Capital Resources
We
recognize that our cash resources are limited. Our continued existence and
plans
for future growth depend on our ability to obtain the capital necessary to
operate, through the generation of revenue or the issuance of additional debt
or
equity. In the third quarter of 2005, we received $1,000,000 in financing (See
“Recent Financing Events and Restructuring,” below). 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 provided in our Form 10-KSB for the year ended December 31, 2004,
our
recurring losses and negative cash flow from operations raise substantial doubt
about our ability to continue as a going concern.
Furthermore,
the litigation that our Company has been involved in since late 2004 has
strained the Company’s financial resources . (See Part II, Item 1, “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.
Under
the
terms of our November 2004 subscription agreement, we issued 8% convertible
notes to an investor group. Under the terms of the notes, our first principal
and interest repayment was scheduled for April 1, 2005. We are in default on
these notes. We are working with the note holders to cure the default. While
failure to reach a resolution would likely cause us to seek external funding
in
order to meet our obligation, there can be no assurance that such funding would
be available.
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%. We are working with the note holder to cure the
default. While failure to reach a resolution would likely cause us to seek
external funding in order to meet our obligation, there can be no assurance
that
such funding would be available.
During
the third quarter, we took over the crushing operations from our third-party
contractor. This transition required us to acquire and assemble our own crushing
equipment at an approximate cost of $200,000. We financed the crushing equipment
through the issuance of secured notes to existing shareholders. 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 the remainder of 2005 and 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.
RISK
FACTORS
Before
you invest in our common stock, you should be aware that there are risks,
including those set forth below. You should carefully consider these risk
factors, together with all the other information included in this prospectus,
before you decide to purchase shares of our common stock.
Risks
Related to Our Business
We
have limited resources and our inability to obtain additional financing could
affect our ability to continue as a going concern.
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 will 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
significant 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 have prepared a formal mine plan and mining schedule, and these documents
are
in the process of being reviewed by a third party specialist.
We
will not be successful unless we recover precious metals and sell them for
a
profit.
Our
success depends on our ability to recover precious metals, process them, and
successfully sell them for more than the cost of production. The success of
this
process depends on the market prices of metals in relation to our costs of
production. We may not always be able to generate a profit on the sale of gold
or other minerals because we can only maintain a level of control over our
costs
and have no ability to control 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.
The
cost of our exploration and acquisition activities are substantial, and there
is
no assurance that the quantities of minerals we discover or acquire will justify
commercial operations or replace reserves established in the
future.
Mineral
exploration, particularly for gold and other precious metals, is highly
speculative in nature, involves many risks, and frequently is nonproductive.
There can be no assurance that our exploration and acquisition activities will
be commercially successful. Once gold mineralization is discovered, it may
take
a number of years from the initial phases of drilling until production is
possible, during which time the economic feasibility of production may change.
Substantial expenditures are required to acquire existing gold properties,
to
establish ore reserves through drilling and analysis, to develop metallurgical
processes to extract metal from the ore, and in the case of new properties,
to
develop the processing facilities and infrastructure at any site chosen for
mineral exploration. There can be no assurance that any gold reserves or
mineralized material that may be discovered or acquired in the future will
be in
sufficient quantities or of adequate grade to justify commercial operations
or
that the funds required for mineral production operation can be obtained on
a
timely or reasonable basis. Mineral exploration companies must continually
replace mineralized material or reserves depleted by production. As a result,
there can be no assurance that we will be successful in replacing any reserves
or mineralized material acquired or established in the future.
The
price of gold fluctuates on a regular basis, and a downturn in price could
negatively impact our operations and cash flow.
Our
operations are significantly affected by changes in the market price of gold.
Gold prices can fluctuate widely and may be affected by numerous factors, such
as expectations for inflation, levels of interest rates, currency exchange
rates, central bank sales, forward selling or other hedging activities, demand
for precious metals, global or regional political and economic crises, and
production costs in major gold-producing regions, such as South Africa and
the
former Soviet Union. The aggregate effect of these factors, all of which are
beyond our control, is impossible for us to predict. The demand for and supply
of gold affect gold prices, but not necessarily in the same manner as supply
and
demand affect the prices of other commodities. The supply of gold consists
of a
combination of new mineral production and existing stocks of bullion and
fabricated gold held by governments, public and private financial institutions,
industrial organizations, and private individuals. As the amount produced in
any
single year constitutes a small portion of the total potential supply of gold,
normal variations in current production do not have a significant impact on
the
supply of gold or on its price. If gold prices decline substantially, it could
adversely affect the realizable value of our assets and potential future results
of operations and cash flow.
The
use of hedging instruments may not prevent losses being realized on subsequent
price decreases or may prevent gains being realized from subsequent price
increases.
We
may
from time to time sell some future production of gold pursuant to hedge
positions. If the gold price rises above the price at which future production
has been committed under these hedge instruments, we will have an opportunity
loss. However, if the gold price falls below that committed price, our revenues
will be protected to the extent of such committed production. In addition,
we
may experience losses if a hedge counterparty defaults under a contract when
the
contract price exceeds the gold price. As of the date of filing of this report,
we have no open hedge positions.
Since
our business consists of exploring for or acquiring gold prospects, the drop
in
the price of gold will negatively affect our asset values, cash flows, potential
revenues and profits.
We
plan
to pursue opportunities to acquire properties with gold mineralized material
or
reserves with exploration potential. The price that we pay to acquire these
properties will be influenced, in large part, by the price of gold at the time
of the acquisition. Our potential future revenues are expected to be derived
from the production and sale of gold from these properties or from the sale
of
some of these properties. The value of any gold reserves and other mineralized
material, and the value of any potential mineral production therefrom, will
vary
in direct proportion to variations in those mineral prices. The price of gold
has fluctuated widely as a result of numerous factors beyond our control. The
effect of these factors on the price of gold, and therefore the economic
viability of any of our projects, cannot accurately be predicted. Any drop
in
the price of gold would negatively affect our asset values, cash flows, and
potential revenues and profits.
We
compete with other mineral exploration and mining
companies.
We
compete with other mineral exploration and mining companies or individuals,
including large, established mining companies with substantial capabilities
and
financial resources, to acquire rights to mineral properties containing gold
and
other minerals. There is a limited supply of desirable mineral lands available
for claim staking, lease, or other acquisition. There can be no assurance that
we will be able to acquire mineral properties against competitors with
substantially greater financial resources than we have.
Our
activities are inherently hazardous and any exposure may exceed our insurance
limits or may not be insurable.
Mineral
exploration and operating activities are inherently hazardous. Operations in
which we have direct or indirect interests will be subject to all the hazards
and risks normally incidental to exploration and production of gold and other
metals, any of which could result in work stoppages, damage to property, and
possible environmental damage. The nature of these risks is such that
liabilities might exceed any liability insurance policy limits. It is also
possible that the liabilities and hazards might not be insurable, or we could
elect not to insure ourselves against such liabilities because of the high
premium costs, in which event, we could incur significant costs that could
have
a material adverse effect on our financial condition.
We
do not have proven or probable reserves, and our mineral calculations are only
estimates; any material change may negatively affect the economic viability
of
our properties.
Substantial
expenditures are required to acquire existing gold properties with established
reserves or to establish proven or probable reserves through drilling and
analysis. We do not anticipate expending sums for additional drilling and
analysis to establish proven or probable reserves on our properties. We drill
in
connection with our mineral exploration activities and not with the purpose
of
establishing proven and probable reserves. Therefore, our activity must be
called exploration or test mining. While we estimate the amount of mineralized
material we believe exists on our properties, our calculations are estimates
only, subject to uncertainty due to factors, including the quantity and grade
of
ore, metal prices, and recoverability of minerals in the mineral recovery
process. There is a great degree of uncertainty attributable to the calculation
of any mineralized material, particularly where there has not been significant
drilling, mining, and processing. Until the mineralized material located on
our
properties is actually mined and processed, the quantity and quality of the
mineralized material must be considered as an estimate only. In addition, the
quantity of mineralized material may vary depending on metal prices. Any
material change in the quantity of mineralized material may negatively affect
the economic viability of our properties. In addition, there can be no assurance
that we will achieve the same recoveries of metals contained in the mineralized
material as in small-scale laboratory tests or that we will be able to duplicate
such results in larger scale tests under on-site conditions or during
production.
Our
operations are subject to strict environmental regulations, which result in
added costs of operations and operational delays.
Our
operations are subject to environmental regulations, which could result in
additional costs and operational delays. All phases of our operations are
subject to environmental regulation. Environmental legislation is evolving
in
some jurisdictions in a manner that may require stricter standards and
enforcement, increased fines and penalties for non-compliance, more stringent
environmental assessments of proposed projects, and a heightened degree of
responsibility for companies and their officers, directors, and employees.
There
is no assurance that any future changes in environmental regulation will not
negatively affect our projects.
We
have no insurance for environmental problems.
Insurance
against environmental risks, including potential liability for pollution or
other hazards as a result of the disposal of waste products occurring from
exploration and production, has not been available generally in the mining
industry. We have no insurance coverage for most environmental risks. In the
event of a problem, the payment of environmental liabilities and costs would
reduce the funds available to us for future operations. If we are unable to
fund
fully the cost of remedying an environmental problem, we might be required
to
enter into an interim compliance measure pending completion of the required
remedy.
We
are subject to federal laws that require environmental assessments and the
posting of bonds, which add significant costs to our operations and delays
in
our projects.
The
Bureau of Land Management requires that mining operations on lands subject
to
its regulation obtain an approved plan of operations subject to environmental
impact evaluation under the National Environmental Policy Act. Any significant
modifications to the plan of operations may require the completion of an
environmental assessment or Environmental Impact Statement prior to approval.
Mining companies must post a bond or other surety to guarantee the cost of
post-mining reclamation. These requirements could add significant additional
cost and delays to any mining project undertaken by us. Our mineral exploration
operations are required to be covered by reclamation bonds deemed adequate
by
regulators to cover these risks. We believe we currently maintain adequate
reclamation bonds for our operations.
Changes
in state laws, which are already strict and costly, can negatively affect our
operations by becoming stricter and costlier.
At
the
state level, mining operations in Nevada are regulated by the Nevada Division
of
Environmental Protection, or NDEP. Nevada state law requires our Nevada projects
to hold Nevada Water Pollution Control Permits, which dictate operating controls
and closure and post-closure requirements directed at protecting surface and
ground water. In addition, we are required to hold Nevada Reclamation Permits
required under Nevada law. These permits mandate concurrent and post-mining
reclamation of mines and require the posting of reclamation bonds sufficient
to
guarantee the cost of mine reclamation. Other Nevada regulations govern
operating and design standards for the construction and operation of any source
of air contamination and landfill operations. Any changes to these laws and
regulations could have a negative impact on our financial performance and
results of operations by, for example, requiring changes to operating
constraints, technical criteria, fees or surety requirements.
Title
claims against our properties could require us to compensate parties, if
successful, and divert management’s time from
operations.
There
may
be challenges to our title in the properties in which we hold material
interests. If there are title defects with respect to any of our properties,
we
might be required to compensate other persons or perhaps reduce our interest
in
the effected property. The validity of unpatented mineral claims, which
constitute most of our holdings in the United States, is often uncertain and
may
be contested by the federal government and other parties. The validity of an
unpatented mineral claim, in terms of both its location and its maintenance,
depends on strict compliance with a complex body of federal and state statutory
and decisional law. Although we have attempted to acquire satisfactory title
to
our properties, we have not obtained title opinions or title insurance with
respect to the acquisition of the unpatented mineral claims. While we have
no
pending claims or litigation pending contesting title to any of our properties,
there is nothing to prevent parties from challenging our title to any of our
properties. While we believe we have satisfactory title to our properties,
some
risk exists that some titles may be defective or subject to challenge. Also,
in
any such case, the investigation and resolution of title issues would divert
management’s time from ongoing exploration programs.
We
have never paid a cash dividend on our common stock and do not expect to pay
cash dividends in the foreseeable future.
We
have
never paid cash dividends, and we do not plan to pay cash dividends in the
foreseeable future. Consequently, your only opportunity to achieve a return
on
your investment in our company 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 in the future will
ever exceed the price that you paid.
Our
business depends on a limited number of key personnel, the loss of whom could
negatively affect us.
Robert
Faber, Chief Executive Officer, President and acting-Chief Financial Officer,
and John Cook, Chairman of the Board, are important to our success. If either
of
them become unable or unwilling to continue in their present positions, our
business and financial results could be materially negatively affected.
If
we
fail to adequately manage our growth, we may not be successful in growing our
business and becoming profitable.
We
plan
to expand our business and the number of employees over the next 12 months.
In
particular, we intend to hire additional administrative personnel. Our inability
to hire and retain additional qualified employees could have a negative impact
on our chances of success.
The
issuance of securities by us may not have complied with or violated federal
and
state securities laws and, as a result, the holders of these securities may
have
rescission rights.
Securities
issued by us may not have complied with applicable federal and state securities
laws, the result of which is that the holders of these securities may have
rescission rights that could require us to reacquire the
securities.
Outstanding
convertible securities and warrants may result in substantial
dilution.
At
March
31, 2005, we had outstanding 234,567,757 shares of common stock. In addition,
we
had outstanding convertible notes and various common stock purchase warrants.
At
March 31, 2005, these notes and warrants were convertible into or exercisable
for a total of approximately 176,000 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
under the Securities Exchange Act of 1934, as amended, 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.
Restatement
of Financial Statements
Upon
review of the standards for reporting mineral reserves as defined by SEC
Industry Guide 7 (“Guide 7”), we have concluded that we did not have sufficient
information to establish the existence of reserves as of December 31, 2004
and
that certain costs that we had incurred in the development of our mining
facility must be expensed as exploration or “test mining” costs. We have
restated our 2004 financial statements to classify all costs previously
capitalized (the recovery of which is dependent upon the economical extraction
of gold from the mineralized material we are currently processing), as test
mining expenses. These costs, which total approximately $4.5 million net of
accumulated depreciation, include our asset retirement obligation asset of
$453,786. In connection with our restatement of our mineral property assets,
we
have also reversed depletion taken on our mineral properties totaling
$43,256.
We
have
also restated our shareholders’ equity. On December 20, 2004, we received notice
from holders of approximately $3.8 million of convertible notes of their
intention to convert into shares of our common stock. In connection with the
notice we reduced convertible notes payable by $3.8 million and recorded an
additional 33,817,594 shares (converted at approximately $0.11 per share) at
December 31, 2004. Upon further consideration, we have determined that since
the
shares had not been physically issued prior to year end, the liability and
stockholders’ equity accounts should not be adjusted until the shares had 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.
Recent
Financing Events and Restructuring
On
July
15, 2005, we completed a financing transaction, which provided us with $800,000
in funding. In consideration for the financing, the Company has 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 will be used for working capital and general corporate
purposes.
In
October 2005, we reached an agreement with the holders of the above-referenced
$1.2 million in promissory notes. The holders agreed to accept shares of our
restricted common stock as full payment for the outstanding secured notes.
Accrued interest on the notes through September 30, 2005 totals $49,964.36.
In
consideration for the retirement of the debt, the Company has agreed to issue
restricted shares to the note holders valued at a 50% discount to market. Market
price will be determined by the average of the five lowest closing bid prices
of
GoldSpring’s common stock for the 20 trading days preceding the effective date
of the transaction. The completion of this transaction is contingent on our
ability to obtain a waiver from the subscribers to our November 2004
Subscription Agreement. We are currently seeking to obtain this
waiver.
On
September 28, 2005, we completed a second 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 will be used for working capital
and general corporate purposes.
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.
The
delay
in effectiveness of our registration statement combined with the allegations
raised in the lawsuit we filed against our former Chief Executive Officer in
November 2004 (see Legal Proceedings) 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 March 2004
private placement transaction. In connection with the restructuring, we
exchanged the 21,739,129 shares of common stock and the 21,739,129 warrants
to
purchase shares of common stock issued to the investors in the March Offering
for 8% convertible notes in the aggregate principal amount of approximately
$11.1 million and four-year warrants to purchase 27,750,000 shares of
common stock at an exercise price of $0.20 per share, subject to anti-dilution
adjustments. The principal amount of the convertible notes consists of the
original $10.0 million investment plus approximately $1.1 million
of
accrued penalties associated with the delay in effectiveness of our registration
statement covering the resale of the shares of common stock held by the
investors.
During
the third quarter of 2005, holders of the convertible notes converted a total
of
$1,171,629 in principal and interest into shares of common stock at an average
price per share of $0.0332. 2005 year to date conversions totaled $1,871,820
in
principal and interest at an average price per share of $0.0367.
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.
The
restructured subscription agreement 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 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 stock which was issued in a
registered transaction 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 the product
of 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, stock which was issued in a registered transaction within three
business days of our receipt of the notices of conversion (the “Delivery Date”).
The failure to deliver the shares by the Delivery Date resulted in liquidated
damages of 1% of the Note principal amount being converted per business day
after the Delivery Date. Our former Chief Executive Officer did not deliver
the
stock certificates within the required period. On March 18, 2005 we delivered
the certificates representing the shares of common stock to these converting
note holders. The 84 -day delay in delivering the shares resulted in liquidated
damages of $403,175. We recognized these damages during the fourth quarter
of
2004 and the first quarter of 2005. We issued convertible notes for the amount
of liquidated damages due.
Our
November 2004 subscription agreement required us to file a registration
statement with the Securities and Exchange Commission no later than December
30,
2004 and to cause the registration statement to be declared effective no later
than February 14, 2005. As discussed above, our former Chief Executive Officer
withdrew our pending registration statement and did not submit a new
registration statement during the period of his purported control of our
company. His failure to submit the registration statement to the SEC by December
30, 2004 triggered liquidated damages to accrue under the November 2004
subscription agreement. Pursuant to the terms of the Subscription Agreement,
the
damages may be paid in cash or in unrestricted common stock. If paid in stock,
we are required to pay 200% of the cash penalty. Because we did not have the
cash or stock which was issued in a registered transaction to pay the liquidated
damages, we reached a settlement agreement with the investors to pay the
liquidated damages in restricted common stock valued at $0.03 per share. The
total liquidated damages accrued between December 30, 2004 and April 27, 2005
was approximately $ 1,776,000. Pursuant to this settlement agreement, we issued
approximately 59 million shares of restricted common stock in April 2005. Our
registration statement became effective on October 3, 2005, which caused these
liquidated damages to cease accruing.
During
the first half of 2005, we incurred approximately $2.8 million of liquidated
damages and other expenses related to our obligations under the March 2004
and
November 2004 subscription agreements. The damages were compounded by the former
Chief Executive Officer’s decision to withdraw the SEC registration statement
and his failure to deliver common shares pursuant to the November 2004
restructuring agreement. We filed the SB-2 registration statement in April
of
2005 and have delivered the shares. Our registration statement became effective
on October 3, 2005. Until the registration statement was declared effective,
we
continued to incur liquidated damages under the November 30, 2004 Subscription
Agreement (See “Recent Financing Events and Restructuring” above for additional
information). Pursuant to the terms of the Subscription Agreement, the damages
may be paid in cash or in unrestricted stock. If paid in stock, we are required
to pay 200% of the cash penalty. Because we did not have the cash or stock
which
was issued in a registered transaction to pay the liquidated damages,
we
reached a settlement agreement with the investors to pay the liquidated damages
in restricted common stock valued at $0.03 per share. The total liquidated
damages accrued between April 28, 2005 and July 26, 2005, was approximately
$
1.2 million. Pursuant to this settlement agreement, we issued approximately
40
million shares of restricted common stock in the third quarter of
2005.
Off-Balance
Sheet Arrangements.
We
were
not a party to any off-balance sheet arrangements during the period covered
by
this report.
Item
3. Controls
and Procedures
Based
on
the most recent evaluation, which was completed as of the end of the period
covered by this Form 10-QSB, 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 September 30, 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.
PART
II - OTHER INFORMATION
Item
1. 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 and Mr. Doyle have filed answers and generally denied the allegations
of
the complaint. Ecovery, Inc. has not yet responded to the complaint.
The
Federal Court Case
Background
Stephen
B. Parent and several others purporting to represent a majority of the
shareholders of our company adopted Consent Resolutions in Lieu of a Special
Meeting of Shareholder’s dated December 9, 2004, and Mr. Parent, Jerrie W.
Gasch, and Purnendu K. Rana Medhi, each of whom served as a director of our
company until Mr. Medhi’s resignation in April 2005, adopted Directors’ Consent
Resolutions (together the “December Consent Resolutions”) dated December 10,
2004. Taken together, the December Consent Resolutions, by their purported
terms, removed John F. Cook, Robert T. Faber, Leslie L. Cahan, Todd S. Brown,
Christopher L. Aguilar, Stanley A. Hirschman, and Phil E. Pearce as directors,
rescinded the restructuring of a $10 million financing transaction entered
into
in March 2004, removed Mr. Faber as President of our company, named Mr. Parent
as President of our company and his wife as Secretary of our company, designated
Mr. Parent as the sole signing officer of our company’s bank accounts, and
terminated our company’s legal counsel.
On
December 22, 2004, Robert T. Faber and Leslie L. Cahan (collectively, the
“Plaintiffs”), who are shareholders and directors of our company, filed a
lawsuit in the United States District Court for the District of Arizona,
entitled Robert T. Faber, et al. v. Stephen B. Parent, et al., No.
CV04-2960-PHX-EHC (“the Litigation”). The Plaintiffs asserted claims in both
their individual capacities and derivatively, on behalf of our company, against
directors Stephen B. Parent, Jerrie W. Gasch, and Purnendu K. Rana Medhi
(collectively, the “Defendants”), alleging that, by adopting the Consent
Resolutions, the Defendants had unlawfully orchestrated an illegal coup to
wrest
control of our company from its current officers and directors. As discussed
below, Messrs. Gasch and Medhi no longer support the Parent-led
board.
The
Temporary Restraining Order
Following
a hearing on December 22, 2004, at which the Court heard evidence and argument
of counsel, the Honorable Earl H. Carroll issued a December 23, 2004 Order
Granting Plaintiffs’ Motion for Temporary Restraining Order, or TRO. The TRO
precluded Defendants and their agents from (1) making any withdrawals from
any
bank accounts of our company, other than reasonable withdrawals necessary to
the
daily operations of the business; (2) rescinding or interfering in any way
with
any transactions approved by our company’s Board of Directors prior to December
9, 2004; (3) entering into any contracts or agreements with third parties on
behalf of our company or disposing of or transferring any property or assets
of
our company; and (4) issuing or otherwise transferring any stock or debentures.
The
Court
subsequently continued the TRO through February 15, 2005 and confirmed that
none
of the Defendants were to receive any payments from our company during the
pendency of the TRO. Despite the Court’s Order, the Defendants have since
produced business records of our company demonstrating that, after adopting
the
December Consent Resolutions, the Defendants arranged for our company to pay
them a collective total of $38,721, including $20,869 in payments to Stephen
Parent.
The
Preliminary Injunction and Notice of Appeal
Following
additional hearings in which the Court heard witness testimony and evidence,
the
Court issued an Order on February 15, 2005 granting Plaintiffs’ Motion for a
Preliminary Injunction. The Preliminary Injunction ordered the reinstatement
of
our company’s Board of Directors as it existed prior to December 10, 2004. As a
result of the Court’s Order, John F. Cook, Robert T. Faber, Christopher L.
Aguilar, Todd S. Brown, Leslie L. Cahan, Stanley A. Hirschman, and Phil E.
Pearce have been reinstated as directors. Stephen B. Parent, Jerrie W. Gasch,
and Purnendu K. Rana Medhi remained directors until Mr. Medhi’s resignation in
April 2005. The Court’s February 15 Order also stayed the implementation of the
Consent Resolutions, and directed us to hold a special shareholders meeting
within 30 days.
In
concluding that the Preliminary Injunction should issue, the Court stated,
“The
Court is specifically concerned about the irreparable injury that would occur
to
GoldSpring and its shareholders and investors if Defendants [Mr. Parent, his
wife, Jerrie W. Gasch, and Purnendu K. Rana Medhi] are permitted to manage
the
corporation. There is substantial evidence of Parent’s wrongdoing in his former
position as CEO of GoldSpring, such as his misappropriation of corporate assets
for his personal use. The Defendants’ attempt to rescind the [financing]
transaction that was approved at the Board of Directors meeting on November
30,
2004 could adversely impact GoldSpring’s ability to meet its obligations under
the agreement. Rescission of the refinancing transaction would prove detrimental
for GoldSpring because the corporation would be forced to pay the $200,000.00
monthly penalty for failing to file the S-1 Registration with the SEC within
ninety (90) days of the March 22, 2004 agreement between GoldSpring and [various
investors]. This penalty had accrued to over $1,000,000.00 as of November 30,
2004.”
Thereafter,
the Defendants filed a motion for reconsideration in which they asked that
the
Preliminary Injunction be dissolved or, alternatively, that the Court clarify
the injunction order and require the Plaintiffs to post a bond. On February
25,
2005, the Court held a hearing on the Defendants’ motion for reconsideration.
The Court denied the Defendants’ requests to dissolve the Preliminary Injunction
and to require the posting of a bond. In response to Defendants’ request for
clarification of the injunction order, the Court ordered that our company is
not
to issue additional shares prior to the special shareholders meeting, and that
the record date for the special shareholders meeting shall be December 9,
2004.
Our
company believed that this ruling would disenfranchise the investors that
participated in the November 30, 2004 restructuring transaction by preventing
them from receiving and voting the shares they are entitled to receive through
the conversion of their notes. A December 9, 2004 record date would also have
disenfranchised all shareholders that acquired their stock on the open market
after December 9, 2004.
Therefore,
on February 28, 2005, our company filed a legal memorandum with the Court
addressing these issues. In it, we pointed out that applicable federal
securities laws require us to provide shareholders with current financial
statements, which will not be available until March 31, 2005, and that Florida
law and our company’s bylaws require that a record date be fixed in advance
rather than in the past. On March 14, 2005, the Court held a hearing on these
issues. After hearing argument of counsel, the Court indicated that it agreed
with our position.
Accordingly,
on March 17, 2005, the Court vacated its earlier Order directing us to hold
a
special shareholders meeting and setting December 9, 2004 as the record date
for
purposes of that meeting. The Court also vacated the provision of its February
25 Order prohibiting us from issuing additional shares. Finally, the Court
reaffirmed its earlier Order reinstating our Board of Directors as it existed
prior to December 10, 2004. In doing so, the Court ordered that the reinstated
board shall remain in place until the Court orders otherwise.
On
April
13, 2005, a notice of appeal was filed on behalf of defendants (the Parents,
the
Gaschs, and the Medhis) seeking to reverse the Court’s March 17 Order. On April
21, 2005, the Gaschs moved to dismiss their appeal. On June 10, 2005, the
defendants (the Parents) filed their opening appellate brief. The plaintiffs
filed their response brief on August 16, 2005. The defendants’ response brief
was filed on October 3, 2005. The 9th
Circuit
Court of Appeals has placed the matter on its docket for the week of January
9-13, 2006.
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 share joint representation with
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
2. Unregistered
Sales of Equity Securities and Use of Proceeds
The Non-Registration
Events Provisions in our November 2004 Subscription Agreement (“Non-Registration
Provisions”), required us to file and cause to become effective 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 percent (2%) of the
principal amount of the Debenture for each thirty day period or part thereof
for
not having an effective Registration Statement. The liquidated damages ceased
accruing when our registration statement became effective on October 3,
2005.
Pursuant
to the terms of the Subscription Agreement, the damages may be paid in cash
or
in unrestricted stock. If paid in stock, we are required to pay 200% of the
cash
penalty. Because we did not have the cash or stock which was issued in a
registered transaction to pay the liquidated damages, we reached a
settlement agreement with the investors to pay the liquidated damages in
restricted common stock valued at $0.03 per share. The total liquidated damages
accrued between April 28, 2005 and July 26, 2005, was approximately $ 1.2
million. Pursuant to this settlement agreement, we issued 40,261,601 shares
of
restricted common stock in the third quarter of 2005. The Company issued the
shares of restricted common stock to the approximately 41 investors who had
rights under the Non-Registration Provisions in reliance upon the exemption
provided by Section 4(2) of the Securities Act, as a transaction by
an
issuer not involving a public offering.
During
the third quarter of 2005, we issued three million (3,000,000) shares of our
common stock to the ten members of Comstock Gold, LLC as part of the
consideration for our acquisition of the leases on the Justice, Keystone and
Woodville mineral claims from Comstock Gold, LLC. We issued the shares of
restricted common stock to the ten members in reliance upon the exemption
provided by Section 4(2) of the Securities Act, as a transaction by an issuer
not involving a public offering.
Item
3. Defaults
Upon Senior Securities
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%.
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
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.
We
are
working with the above-referenced note holders to cure the defaults. The above
referenced notes have a total value of approximately $15,660,000. The total
arrearage related to these notes was approximately $3,794,000 as of September
30, 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.
Item
4. Submission
of Matters to a Vote of Security Holders
No
matters were submitted to a vote of security holders during the quarter ended
September 30, 2005.
Subsequent
Events
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
|
|
|
|
|
Item
5. Other
Information
Not
applicable.
Item
6. 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:
|
·
|
Consolidated
Balance Sheet as of September 30, 2005
(Unaudited)
|
·
|
Consolidated
Statements of Operations for the three month periods ended September
30,
2005 and 2004 (Unaudited)
|
·
|
Consolidated
Statements of Operations for the nine month periods ended September
30,
2005 and 2004 (Unaudited)
|
·
|
Consolidated
Statements of Cash Flows for the periods ended September 30, 2005
and 2004
(Unaudited)
|
·
|
Notes
to Financial Statements
|
(2) Exhibits
filed as part of this Report:
Exhibit Number
|
Exhibit
|
|
|
|
10.15
|
|
Loan
Agreement dated as of July 15, 2005 by and among the Registrant and
the
subscriber parties thereto (1)
|
|
|
|
10.16
|
|
Security
Agreement dated as of July 15, 2005 by and among the Registrant and
the
subscriber parties to the Loan Agreement dated July 15, 2005
(1)
|
|
|
|
10.17
|
|
Form
of Promissory Note, dated as of July 15, 2005 issued by the Registrant
to
the subscribers to the Loan Agreement dated July 15, 2005
(1)
|
|
|
|
10.18(a)
|
|
Purchase
Agreement for mineral property leases between Company and Comstock
Gold,
LLC dated August 31, 2005 - Keystone, Justice and Woodville
claims
|
|
|
|
10.18(b)
|
|
Promissory
Note dated August 31, 2005 issued by Company to Comstock Gold, LLC
in
connection with Purchase Agreement between the parties dated August
31,
2005.
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Act of 1934, as
amended
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
(1)
Filed as an exhibit to Company’s quarterly report on Form 10-QSB filed on
August 15, 2005.
|
(b)
Reports
filed on Form 8-K during the quarter ended September 30, 2005:
|
(1)
|
A
Report on Form 8-K was filed with the Securities and Exchange Commission
on July 21, 2005 under Item 1.01 relating to our completion of a
financing
transaction which provided us with $800,000 in
funding.
|
|
(2)
|
A
Report on Form 8-K was filed with the Securities and Exchange Commission
on July 28, 2005 under Item 5.02 relating to the resignation of one
of our
directors, Leslie Cahan. Mr. Cahan expressed no disagreements
with
the Company in tendering his resignation.
|
|
|
|
|
(3)
|
A
Report on Form 8-K was filed with the Securities and Exchange Commission
on August 3, 2005 under Item 8.01 relating to our issuance of a press
release announcing the relocation of our corporate headquarters and
providing an update on our operations.
|
|
|
|
|
(4)
|
A
Report on Form 8-K was filed with the Securities and Exchange Commission
on September 6, 2005 under Item 8.01 relating to our acquisition
of the
leases on three patented mineral claims in Storey County,
Nevada.
|
SIGNATURES
Pursuant
to the requirements 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.
Date:
November 11, 2005
|
|
GOLDSPRING,
INC.
|
|
|
(Registrant)
|
|
|
|
|
|
By: /s/
Robert T. Faber
|
|
|
Name: Robert
T. Faber
|
|
|
Title: President
and Chief Executive Officer
|
|
|
|
|
|
By: /s/
Robert T. Faber
|
|
|
Name: Robert
T. Faber
|
|
|
Title: Chief
Financial Officer
|