UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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.)
8585 E. Hartford Drive, Suite 400
Scottsdale, Arizona 85255
(480) 505-4040
(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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date:
192,859,611 shares of Common Stock,
$0.000666 Par Value, as of August 10, 2004.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
GOLDSPRING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three month period ended June 30,
2004 2003
(Unaudited) (Unaudited)
---------------------------- --------------------------
REVENUE, NET $ - $ -
COSTS AND EXPENSES
General and administrative 367,144 -
Consulting & Professional Services 15,096 -
---------------------------- --------------------------
Total Costs & Expenses 382,240 -
---------------------------- --------------------------
OTHER INCOME (EXPENSE)
Gain on derivative instruments, net 395,150
Unrealized Loss: Investment (42,180)
Interest Income 12,178 -
---------------------------- --------------------------
Total Other Income / (Expense) 365,148 -
LOSS BEFORE INCOME TAX BENEFIT (17,092) -
INCOME TAX BENEFIT - -
---------------------------- --------------------------
NET LOSS (17,092) -
============================ ==========================
Net loss per common share, basic and diluted ($0.00) $ 0.00
============================ ==========================
Basic weighted common shares outstanding 184,291,427 100,597,079
----------------------------- --------------------------
Diluted weighted common shares outstanding 196,511,347 100,597,079
----------------------------- --------------------------
The accompanying notes are an integral part of these financial statements
2
GOLDSPRING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six month period ended June 30,
2004 2003
(Unaudited) (Unaudited)
----------------------------- -----------------------------
REVENUE, NET $ - $ -
COSTS AND EXPENSES
General and administrative 670,682 -
Consulting & Professional Services 146,146 -
----------------------------- -----------------------------
Total Costs & Expenses 816,828 -
----------------------------- -----------------------------
OTHER INCOME (EXPENSE)
Gain on derivative instruments, net 395,150
Unrealized Loss: Investment (42,180)
Interest Income 12,636 -
----------------------------- -----------------------------
Total Other Income / (Expense) 365,606 -
LOSS BEFORE INCOME TAX BENEFIT (451,222) -
INCOME TAX BENEFIT (480,000) -
----------------------------- -----------------------------
NET INCOME 28,778 -
============================= =============================
Net loss per common share, basic and diluted $ 0.00 $ 0.00
============================= =============================
Basic weighted average common shares outstanding 184,291,427 115,471,489
----------------------------- -----------------------------
Diluted weighted average common shares outstanding 196,355,461 115,471,489
----------------------------- -----------------------------
The accompanying notes are an integral part of these financial statements
3
GOLDSPRING, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2004 2003
(Unaudited) (Audited)
------------------ -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 5,610,321 $ 364,138
Investment, net 974,520 --
Inventory 106,689 54,000
Prepaid and other current assets 138,619 48,291
Deferred tax benefit 1,420,000 940,000
----------- -----------
TOTAL CURRENT ASSETS 8,250,149 1,406,429
----------- -----------
MINERAL PROPERITES, PLANT AND EQUIPMENT, NET
Mineral Properties 5,894,837 6,249,556
Plant and equipment 2,457,545 850,453
----------- -----------
TOTAL MINERAL PROPERITES, PLANT AND EQUIPMENT, NET 8,352,382 7,100,009
----------- -----------
OTHER ASSETS:
Reclamation deposit 145,000 145,000
Equipment purchase deposit 100,000 100,000
Deferred Mining Costs, Net 1,593,281 --
----------- -----------
TOTAL OTHER ASSETS 1,838,281 245,000
TOTAL ASSETS $18,440,812 $ 8,751,438
------------ =========== ===========
The accompanying notes are an integral part of these financial statements
4
GOLDSPRING, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2004 2003
(Unaudited) (Audited)
------------------ -------------------
CURRENT LIABILITIES:
Accounts Payable $ 545,659 $ 108,950
Accrued Expenses 336,226 49,322
Current portion of long-term debt - related party 400,000 400,000
------------- -------------
TOTAL CURRENT LIABILITIES 1,281,885 558,272
LONG-TERM DEBT - RELATED PARTY, NET OF CURRENT PORTION 400,000 600,000
------------- -------------
TOTAL LIABILITIES 1,681,885 1,158,272
------------- -------------
STOCKHOLDERS' EQUITY
Convertible redeemable preferred stock, $100 par
value, 150,000 authorized, 46,500 issued and
outstanding 4,650,000 4,650,000
Common stock, $.000666 par value, 500,000,000
shares authorized, 192,859,611 and 172,627,149
shares issued and outstanding, respectively 128,444 114,970
Treasury Stock (75,000) --
Additional Paid-in Capital 15,731,724 6,533,215
Accumulated Results - Current Year (3,676,241) (3,705,019)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 16,758,927 7,593,166
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 18,440,812 $ 8,751,438
============= =============
The accompanying notes are an integral part of these financial statements
5
GOLDSPRING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six month period ended June 30,
2004 2003
(Unaudited) (Unaudited)
------------------ ------------------
Cash Flows from Operating Activities:
Net Income $ 28,778 $ --
------------------ ------------------
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Deferred tax benefit (480,000)
Consulting services provided in exchange for common stock 42,000
Unrealized Loss on Investment 42,180
Inventory (52,689)
Prepaid and other Current Assets (90,328) --
Deferred Mining Costs (1,593,281)
Accounts payable 436,709 --
Accrued expenses 286,904
------------------ ------------------
(1,408,505) --
------------------ ------------------
Net Cash Used in Operating Activities (1,379,727) --
------------------ ------------------
Investing Activities:
Investment (1,016,700)
Acquisitions of plant, equipment and mineral properties (1,252,373) --
------------------ ------------------
Net cash used in investing activities (2,269,073) --
------------------ ------------------
Financing Activities:
Net Proceeds from the issuance of common stock 9,319,983 --
Principal Payment Note Payable, Related Party (200,000) --
Purchase and Cancellation of Company's Common Stock (150,000) --
Purchase of Company's Common Stock, recoded to Treasury (75,000) --
------------------ ------------------
Net Cash Flows Provided by Financing Activities 8,894,983 --
------------------ ------------------
Net Increase (Decrease) in Cash 5,246,183 --
Cash Beginning of Year 364,138 318
------------------ ------------------
Cash End of Period $ 5,610,321 $ 318
================== ==================
The accompanying notes are an integral part of these financial statements
6
GOLDSPRING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Preparation of Financial Statements
The following interim Consolidated Financial Statements of Goldspring, Inc. and
its subsidiaries (collectively, "Goldspring" or the "Company") are unaudited and
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for Form 10-QSB. Such rules and regulations allow the
omission of certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles as long as the statements are not misleading. In the opinion of
management, all adjustments necessary for a fair presentation of these interim
statements have been included. These interim Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements of
Goldspring, Inc. included in its Annual Report on Form 10-KSB for the year ended
December 31, 2003.
The Company's Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of the Company's Consolidated Financial statements requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the related disclosure of contingent assets and
liabilities at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses during the reporting period. The more
significant areas requiring the use of management's estimates and assumptions
relate to mineral reserves that are the basis for future cash flow estimates and
units-of -production depreciation, depletion and amortization calculations;
environmental reclamation and closure obligations; estimates of recoverable gold
and other minerals in stockpile and leach pads inventories; asset impairments
(including impairments of goodwill, long-lived assets, and investments);
valuation allowances for deferred tax assets; reserves for contingencies and
litigation; and the fair value and accounting treatment of financial
instruments. The Company bases its estimates on the Company's historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Accordingly, actual results may differ significantly
from these estimates under different assumptions or conditions.
Restatement of Financial Statements
The Company after careful consideration and review elected to change the
accounting treatment of the transaction between the Company and Ecovery, Inc.
(the "Transaction") and accordingly restated the financial statements for the
year ended December 2003 and the first quarter 2004. Originally, the Transaction
was accounted for as a business combination that resulted in recording goodwill,
an intangible asset, of approximately $8.9 million. After further investigation
and consideration, the Company concluded that treatment of this Transaction as a
reverse merger more accurately reflects the nature of this Transaction. The
primary factors influencing the accounting treatment change for this Transaction
were: (1) the change in control of the Company based on the number of GoldSpring
shares issued to the Ecovery shareholders in the transaction; (2) effective the
date of the transaction, the sole officer and director of the Company resigned;
and (3) the Company, GoldSpring, Inc. had no operations prior to the
Transaction. The accounting impact of treating this Transaction as a reverse
merger instead of a business combination is an elimination of $8.9 million of
goodwill and a reduction of Additional Paid - in Capital by the same amount.
This change in accounting treatment had no effect on the Company's results of
operations.
Note B - Revenue Recognition
GoldSpring recognizes revenue from a sale when the sales price is determinable,
the product has been delivered, the title has been transferred to the customer
and the collection of the sales price is reasonably assured. Revenues from
silver and other by-product sales are credited to Costs Applicable to Sales as a
by-product credit.
7
Note C -Deferred Stripping Costs
In general, mining costs are charged to Costs Applicable to Sales as incurred.
However, at open pit mines, like Billie the Kid, which have diverse grades and
waste-to-ore ratios over the mine life, the Company defers and amortizes certain
mining costs on a unit of production (UOP) basis over the life of the mine.
These mining costs, which are commonly referred to as "deferred stripping"
costs, are incurred in mining activities that are normally associated with the
removal of waste rock and waste material. The deferred stripping accounting
method is generally accepted in the mining industry where mining operations have
diverse grades and waste-to-ore ratio; however, industry practice does vary.
Deferred stripping matches the costs of production with the sale of such
production by assigning each ounce of gold with an equivalent amount of waste
removal cost. If the Company were to expense stripping costs as incurred, there
could be greater volatility in the Company's period-to-period results of
operations.
At the Company's Billie the Kid mining operations, deferred stripping costs will
be charged to Costs Applicable to Sales as gold is produced and sold using the
Units of Production method based on estimated recoverable ounces of proven and
probable gold reserves and the estimated total cost to remove waste. The
application of the deferred stripping accounting method generally results in an
asset on the Consolidated Balance Sheet (Deferred Stripping Costs). A liability,
however, will arise if the actual stripping ratio costs incurred to date are
less than the expected waste-to-ore ratio over the life of the mine.
Note D - Stockholders' Equity
In February 2004, the Company raised $332,500 under a Restricted Private
Placement for accredited private investors. The private placement consisted of
44 1/3 Units, each Unit represented 10,000 shares of restricted common stock and
5,000 warrants exercisable at $1.00 per share. The warrants expire on February
23, 2005 (one year from the closing date of the private placement).
In March 2004, the Company raised a total of $10 million in a private placement
to institutional and accredited investors through the issuance of 21,739,130
shares of unregistered common stock. The investors also received warrants to
purchase 50% additional shares of common stock, at an exercise price of $0.86
per share and Green Shoe warrants, providing investors the opportunity to invest
an additional $5 million at an exercise price of $.46 per share. The warrants
are exercisable for four years, and the Green Shoe warrants are exercisable for
one hundred and eighty (180) days after the Effective Date of the S-1
registration statement.
Pursuant to the February private placement, the Company in April 2004
repurchased 100,000 shares of common stock for $75,000, or $0.75 per share,
which was the market price at the time of the transaction. The funds for the
stock repurchase came from the proceeds related to the gain on the April 2004
spot deferred sale of gold contract.
In April 2004, 2,000,000 shares of the Company's restricted common stock issued
to Antonio Treminio were returned to the Company and subsequently cancelled. A
dispute had arisen between the Company and Mr. Treminio relating to alleged
obligations owed by the Company to Treminio and GoldSpring shares owned by
Treminio. An agreement was reached whereby Mr. Treminio returned the shares and
the Company simultaneously paid Treminio $150,000 in full satisfaction of all
amounts owed to Treminio.
8
Shares Issued in Consideration of Consulting Services
On January 12, 2004, the Company issued a total of 50,000 shares to Purnendu K.
Rana Medhi, a Board Member, pursuant to a consulting services agreement. The
shares were issued in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. No commissions were paid for the
issuance of such shares. These issuance of shares of common stock qualified for
exemption under Section 4(2) of the Securities Act of 1933 since the issuance of
such shares by the Company did not involve a public offering. The offering was
not a "public offering" as defined in Section 4(2) due to the insubstantial
number of persons involved in the deal, size of the offering, manner of the
offering and number of shares offered. The Company did not undertake an offering
in which we sold a high number of shares to a high number of investors. In
addition, Mr. Medhi had the necessary investment intent as required by Section
4(2) since he agreed to and received share certificates bearing legends stating
that such shares are restricted pursuant to Rule 144 of the 1933 Securities Act.
These restrictions ensure that these shares would not be immediately
redistributed into the market and therefore not be part of a "public offering."
Based on an analysis of the above factors, the Company has met the requirements
to qualify for exemption under Section 4(2) of the Securities Act of 1933 for
the above transaction.
During the second quarter 2004, 4,370,896 restricted common shares became
unrestricted and qualified for sale in a brokered transaction pursuant to Rule
144 of the Securities Act of 1933. During 2004, a total of 4,923,396 restricted
common shares became unrestricted and qualified for sale in a brokered
transaction by unaffiliated and minority shareholders of the Company.
Common Shares Outstanding
Unrestricted Restricted Total
------------ ---------- -----
Common Shares Outstanding 34,301,418 158,558,193 192,859,611
at June 30, 2004
Subsequent Events
On a limited basis, the Company enters into spot deferred contracts to protect
the selling price for certain anticipated gold and silver production and to
manage risks associated with fluctuating precious metal prices. Although there
were no spot deferred contracts open at June 30, 2004, the Company in July 2004,
entered into spot deferred contracts. Some of these spot deferred contracts were
closed realizing a gain of $116,500. Currently the Company has outstanding spot
deferred contracts for 250,000 ounces of silver at an average price of $6.19.
The Company has up to two years to deliver the silver against these contracts.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following discussion provides information that management believes is
relevant to an assessment and understanding of the consolidated financial
condition and results of operations of GoldSpring, Inc. and its subsidiaries
(collectively "GoldSpring" or the "Company"). This discussion addresses matters
we consider important for an understanding of our financial condition and the
results of operations as of and for the three months ended June 30, 2004, as
well as our future results.
9
Forward-Looking Statements
The information in this Quarterly Report on Form 10-QSB contains
"forward-looking statements," which include information relating to future
events, future financial performance, strategies, expectations, competitive
environment, regulation and availability of resources. These forward-looking
statements include statements regarding: proposed new programs; expectations
that regulatory developments or other matters will not have a material adverse
effect on our consolidated financial position, results of operations or
liquidity; statements concerning projections, predictions, expectations,
estimates or forecasts as to our business, financial and operational results and
future economic performance; and statements of management's goals and objectives
and other similar expressions concerning matters that are not historical facts.
Words such as "may," "will," "should," "could," "would," "predicts,"
"potential," "continue," "expects," "anticipates," "future," "intends," "plans,"
"believes," "estimates" and similar expressions, as well as statements in future
tense, identify forward-looking statements.
You should not read forward-looking statements as a guarantee of future
performance or results. They will not necessarily be accurate indications of the
times at or by which such performance or results will be achieved.
Forward-looking statements are based on information available at the time those
statements are made and/or management's good faith belief as of that time with
respect to future events. They are subject to risks and uncertainties that could
cause actual performance or results to differ materially from those expressed in
or suggested by the forward-looking statements.
Forward-looking statements speak only as of the date the statements are made.
You should not put undue reliance on any forward-looking statements. We assume
no obligation to update forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting forward-looking
information, except to the extent required by applicable securities laws. If we
do update one or more forward-looking statements, you should draw no inference
that we will make additional updates with respect to those or other
forward-looking statements.
Overview
We are a mining company focused on the production of gold, other precious
metals, iron ore and other minerals. We currently have operations in the United
States and own mineral rights in Canada. We are actively seeking to acquire and
operate precious metals, copper and other mineral properties in the United
States, Canada and Mexico. Our business model is to acquire mining projects with
proven reserves, advanced permits and exploration potential that can be put into
near-term operation and production.
We were formed through a "reverse merger" whereby in March 2003 GoldSpring, Inc.
acquired GoldSpring LLC and Ecovat Copper Nevada LLC from Ecovery, Inc., a
private corporation. These two LLC's represented substantially all of Ecovery's
mining activities. Specifically these mining assets included the Gold Canyon and
Spring Valley gold placer projects in Lyon County, Nevada plus the "Big Mike"
Copper Ore Project, located about two hours east of Reno in Winnemucca, Nevada.
On November 1, 2003, we acquired The Plum Mining Company LLC, or Plum. The Plum
property consists of two gold and silver projects: The Billie the Kid Project,
consisting of the Billie the Kid, Lucerne and the Hartford Pits, and The Como
Project. Plum's property interests include 28 unpatented mining claims; mineral
exploration and mining leases for 12 patented and 13 unpatented mining claims;
title to 40 acres of private land with improvements, consisting of a 2,700
square-foot office building, two laboratory trailers, and an enclosed
maintenance facility; earth-moving equipment, dump trucks, and other processing
equipment, including a Merrill Crowe solution extraction plant and a primary ore
crusher; and what we believe is the only cyanide heap leach permit in the
Comstock Lode. On November 18, 2003, we commenced work on the Plum property and
we are currently in production.
10
Second Quarter Operating Results
For the three month period ended June 30,
2004 2003
(Unaudited) (Unaudited)
------------------------- -----------------------
REVENUE, NET $ -- $ --
COSTS AND EXPENSES
General and administrative 367,144 --
Consulting & Professional Services 15,096 --
-------------- --------------
Total Costs & Expenses 382,240 --
-------------- --------------
OTHER INCOME (EXPENSE)
Gain on derivative instruments, net 395,150
Unrealized Loss: Investment (42,180)
Interest Income 12,178 --
-------------- --------------
Total Other Income / (Expense) 365,148 --
LOSS BEFORE INCOME TAX BENEFIT (17,092) --
============== ==============
INCOME TAX BENEFIT -- --
-------------- --------------
NET LOSS (17,092) --
============== ==============
Although we had gold deliveries in the second quarter 2004 we had no revenues
from operations during the three-month periods ended June 30, 2004 and June 30,
2003. Since the completion of the reverse merger in June 2003, we have focused
on acquisition opportunities and bringing the Billie the Kid / Lucerne Project
into production. In June 2004, we delivered our first shipment of precious
metals, consisting of 372 ounces of gold and 1,720 ounces of silver, to the
refinery. As of July 16, 2004, we had shipped approximately 760 ounces of gold
and 3,500 ounces of silver to the refinery.
On a limited basis, the Company enters into spot deferred contracts to protect
the selling price for certain anticipated gold and silver production and to
manage risks associated with fluctuating precious metal prices. During the
second quarter the Company realized profits of $395,150 through the purchase and
sale of these deferred spot contacts. GoldSpring did not have any deferred spot
contracts outstanding at June 30, 2004.
The Company, as margin for these spot deferred transactions, purchased and
provided 2,400 ounces of gold. In July 2004, the Company sold 3,000 ounces of
gold, these 2,400 ounces of gold plus 600 ounces of gold production from Billie
the Kid, for $1,218,150 or $406.05 per ounce. The sale of the 2,400 ounces of
gold held for investment produced a loss of $48,150, which was accrued in the
second quarter 2004.
11
First half of 2004 Results
For the Six month period ended June 30,
2004 2003
(Unaudited) (Unaudited)
--------------------------------- ------------------------------
REVENUE, NET $ - $ -
COSTS AND EXPENSES
General and administrative 670,682 -
Consulting & Professional Services 146,146 -
--------------------------------- ------------------------------
Total Costs & Expenses 816,828 -
--------------------------------- ------------------------------
OTHER INCOME (EXPENSE)
Gain on derivative instruments, net 395,150
Unrealized Loss: Investment (42,180)
Interest Income 12,636 -
--------------------------------- ------------------------------
Total Other Income / (Expense) 365,606 -
LOSS BEFORE INCOME TAX BENEFIT (451,222) -
INCOME TAX BENEFIT (480,000) -
--------------------------------- ------------------------------
NET INCOME 28,778 -
================================= ==============================
We had no revenues for the six month periods ended June 30, 2004 and June 30,
2003. Since the completion of the reverse merger in June 2003, we have focused
on acquisition opportunities and bringing the Billie the Kid / Lucerne Project
into production. In June 2004, we delivered our first shipment of precious
metals, consisting of 372 ounces of gold and 1,720 ounces of silver, to the
refinery. As of July 16, 2004, we had shipped approximately 760 ounces of gold
and 3,500 ounces of silver to the refinery.
On a limited basis, the Company enters into spot deferred contracts to protect
the selling price for certain anticipated gold and silver production and to
manage risks associated with fluctuating precious metal prices. During the
second quarter the Company realized profits of $395,150 through the purchase and
sale of these deferred spot contacts. GoldSpring did not have any deferred spot
contracts outstanding at June 30, 2004.
The Company, as margin for these spot deferred transactions, purchased and
provided 2,400 ounces of gold. In July 2004, the Company sold 3,000 ounces of
gold, these 2,400 ounces of gold plus 600 ounces of gold production from Billie
the Kid, for $1,218,150 or $406.05 per ounce. The sale of the 2,400 ounces of
gold held for investment produced a loss of $48,150, which was accrued in the
second quarter 2004.
Plan of Operations
The Billie the Kid Project:
Since the acquisition of Plum in November 2003, we have focused on bringing the
Billie the Kid / Lucerne Project into production. Our first shipment of gold and
silver was delivered to the refinery in late June 2004. As of July 16, 2004, we
had shipped approximately 760 ounces of gold and 3,500 ounces of silver. Gold
and silver shipments to the refinery are scheduled to occur on a weekly basis.
12
During the second quarter of 2004, we made a transition from using an EMEW
direct electro winning gold and silver recovery plant to a Merrill Crowe plant.
This transition increased the capacity of our recovery plant from 100 gallons
per minute to 400 gallons per minute. We are in the process of modifying our air
quality permit to increase the permitted capacity and operating hours of the
crusher at the Plum Mining facility. We believe we will be successful in
modifying the permit to allow for the crushing of 400 tons per hour, 24 hours
per day, and seven days per week. This increased efficiency would allow us to
increase the rate at which ore is loaded on to the leach pad from approximately
3,000 tons per day to approximately 4,000 tons per day. Pursuant to the existing
permit, the crusher is operating at a rate of 225 tons per hour and its
operation is limited to 9.5 hours per day, five days per week. Approximately
70,000 tons of ore was on the pad and under leach as of June 30, 2004. An
additional 50,000 tons was stockpiled and ready for agglomeration and leaching.
We expect most of the revenue related to the 70,000 tons of ore will be
recognized in the third quarter of 2004. Approximately 13,000 tons of ore has
been loaded on to the leach pad since June 30, 2004.
As of June 30, 2004, we have deployed approximately $3,500,000 of cash at the
Plum Mining facility in infrastructure development and mining activities. The
breakdown of the investment is as follows: $150,000 for additional reclamation
bond requirements; $2,000,000 in construction and development of the operations
infrastructure, including a fully constructed, inspected and lined heap leach
pad and pond facility and a recovery system for the gold and silver; and
$1,400,000 for mining, hauling, screening and agglomeration,.
Mining during the first six months of 2004 by Plum Mining Co. LLC has resulted
in depletion of roughly 103,000 tons from the original mine reserve. These mined
reserves are presently distributed as follows.
Ore Under Leach 54,602 tons
Ore stock piled 26,000 tons
Low grade used for Overliner 22,037 tons
Sampling of the ore placed on the pad and under leach shows an actual average
grade of 0.042 opt Au, and 0.605 opt Ag. In line with operating records of the
Lucerne Pit by the South Comstock Joint Venture, the Reverse Circulation
drilling results appear to have slightly understated the average projected
grade, which for this ore, was .040 opt Au, and 0.29 opt Ag.
Reserve / Resource Area Tons Contained Au Contained Ag Avg. Au Avg Ag opt
----------------------- ---- ------------ ------------ ------- ----------
Lucerne 04 Model 437,351 26,248 366,763 0.0600 0.839
Billie the Kid 03 Model 426,400 27,100 145,200 0.0636 0.341
Ore mined to 5-31-04 -102,639 -4,123 -29,848 0.0402 0.291
Subtotal 761,112 49,225 482,115 0.0647 0.633
Resources within SR 341 587,649 24,627 359,737 0.0419 0.612
"footprint"
Total Reserves + Resources 1,348,761 73,852 841,852 0.0548 0.624
The reserves in the Lucerne Pit are based on assumed successful completion of
active negotiations for acquisition of the adjacent Justice Patented mining
claims. If these negotiations are not successful, the reserve for the Lucerne
Pit would be reduced by 91,508 tons, of ore and 379,000 tons of waste. This
would result in a slight improvement in the waste to ore ratio from 3.1:1 to
2.8:1. The mine modeled ore grade would remain nearly identical, at 0.060 opt Au
and 0.94 opt Ag, as compared with 0.060 opt Au and 0.84 opt Ag for the model
which includes the Justice mining claims.
13
Expansion of the heap leach pads commenced late in the second quarter of 2004.
Two additional heap leach pads have now been completed. Total pad capacity under
our existing permits is 340,000 tons. We are in the process of modifying our
water pollution control permit to increase the permitted capacity of the leach
pads. We believe we will be successful in modifying the permit to allow a
capacity of 2.5 million tons on the three completed heap leach pads. The
Company's current operating plans call for the construction of heap leach pads
#4 and #5 at the Plum Mining location, increasing total capacity to
approximately 5 million tons for the five pads. We are currently in discussions
to acquire mining projects in the area around the Billie the Kid project to
fully leverage our Plum processing facility. The leach pad expansion project
should accommodate the processing of ore from the contemplated mining
acquisitions in the Comstock Lode region.
GoldSpring Placer Mining Operations
The GoldSpring Placer Claims are located on 850 acres at the south end of the
Comstock, about 7.8 miles east of Carson City, Nevada and three miles south of
Plum. These properties contain virgin sand and gravels (not tailings) that have
been explored for gold but have not been mined. Exploration work completed on
these claim groups has been carried out under the supervision of experienced
mining consultants familiar with the gold mineralization of the Carson City
area.
We have recently staked four additional placer claims, bringing the total number
of unpatented placer claims in this project to 25. We are in the process of
obtaining governmental permits and acquiring additional water rights and sources
of water that are required for the development of this placer project. Our water
rights requirements have increased due to increased activity, and further
planned activity, at the Plum Mining facility, which is located three miles from
the placer project.
The "Big Mike" Copper Project
The Big Mike Copper Ore Project is located approximately 32 miles south of
Winnemuca in Pershing County, Nevada. The project covers a total of 310 acres
and consists of 17 unpatented lode mining claims and one placer mining claim. We
are currently in the process of obtaining the necessary governmental permits and
water rights to develop the Big Mike project. Big Mike is an oxide copper
recovery project with the copper oxides remaining from a previous copper
sulphide operation. The property includes an open pit, copper ore in a
stockpile, copper ore in an old leach pile and waste dumps. We believe the
property has exploration potential for further copper oxides and copper
sulphides.
Mineral Interest Acquired Alberta, Canada
In May 2004, we were granted mineral permits for all non energy minerals on
nearly 800 square miles of Alberta, Canada mining property. We have assembled a
team in Calgary to review the existing data and conduct a pre-feasibility study
on the project. The initial study will focus on the feasibility of developing a
direct iron ore reduction facility. In addition to conducting the
pre-feasibility study of the iron project, the Calgary team is evaluating coal,
oil and gas acquisition opportunities within and adjacent to the permitted area.
The acquisition of sufficient coal, oil and gas reserves could fuel a potential
co-generation power facility that would be designed to serve the iron reduction
facility.
Acquisition Activities
We intend to increase In-Ground gold reserves in 2004 through acquisitions and
exploration of existing properties. We believe that exploration opportunities
exist on all of our properties. In order to leverage our Plum heap leach
operation, we are actively pursuing the acquisition of additional mining
projects in the Comstock Lode region of Nevada. We are also evaluating
opportunities to acquire precious metals, copper and other mineral projects in
other areas of Nevada, Arizona, Canada and Mexico.
14
Financing Activities
In February 2004, we completed a private placement to accredited private
investors for $332,500 (44 1/3 units). Units of $7,500 consisted of 10,000
shares of restricted common stock, par value $.000666, and warrants to purchase
5,000 shares of common stock exercisable at $1.00 for a one-year period. The
warrants/converted shares have registration rights commencing 180 days after the
date of issuance. The restricted shares will remain restricted for one year.
This offering was closed on February 23, 2004.
In March 2004, we closed a $10 million Private Investment in a Public Entity or
PIPE transaction through Merriman Curhan Ford & Co. of San Francisco,
California. We received gross proceeds of $10 million from a group of accredited
institutional and individual investors in exchange for: (1) 21,739,129 shares of
unregistered restricted common stock at a price of $0.46 per share; (2)
10,869,575 A warrants to purchase shares of common stock at an exercise price of
$0.86 per share and exercisable during the four year period ending March 2008;
(3) 10,869,575 Green Shoe Warrants to purchase shares of common stock at $0.46
per share and are exercisable for a period of 180 days from the effective date
of the Form S-1 registration statement.
Use of proceeds from the $10 million private equity placement is as follows:
$3,000,000 to accelerate the ramp up of existing gold, silver and copper
reserves into production;
$3,000,000 to complete and bring to production those acquisitions
currently under executed Letters of Intent;
$2,000,000 for additional acquisitions, development and exploration;
$2,000,000 for working capital.
Form S-1 Registration Statement Filed
Pursuant to the first quarter of 2004 equity raise, we filed a Form S-1
Registration Statement under the Securities Act of 1933 in April 2004, to
register the qualifying common shares and issuable warrant shares issued in the
February and March 2004 private placements. The Form S-1 covered the
registration of the following securities: 21,739,129 shares of common stock
issued in the March 2004 PIPE transaction; 10,869,575 shares of common stock
issuable to the investors in the PIPE transaction in connection with the
conversion of the "A" warrants; 10,869,575 shares of common stock issuable to
the investors in the PIPE transaction in connection with the conversion of the
Green Shoe warrants; and 211,666 common stock warrants issued to the investors
in the February 2004 private placement.
Accounting Treatment Change
On June 24, 2004, we filed an amendment to our Form S-1 Registration
Statement. After careful review and consideration, we elected to change
the accounting treatment of the original transaction between us and
Ecovery, Inc. to treat it as a reverse merger and not as a business
combination. The amended filing incorporated the restatement of the
financial statements to reflect the accounting treatment change for
recording this transaction.
At the time of the reverse merger, we adopted the business combination
accounting treatment to record this transaction, whereby the market
value of the common stock exchanged for the assets plus the book value
of the assets acquired were used to determine the valuation of the
transaction. Employing this accounting treatment, we recorded
approximately $8.9 million of goodwill, which is an intangible asset.
We concluded that the reverse merger accounting treatment more
appropriately reflected the nature of this transaction after
considering such factors as (a) the change in control of our company
based on the number of our shares issued to the Ecovery shareholders in
the transaction; (b) the sole officer and director of our company
resigned on the effective date of the transaction; and (c) the fact
that we had no operations prior to the transaction. Under the reverse
merger accounting treatment, historical asset values (book value of the
assets) are utilized to determine the valuation of the transaction.
Accordingly, no goodwill was generated with this transaction.
15
Pursuant to our decision to change the accounting treatment, the
financial statements were restated to reflect the new treatment. This
change in accounting treatment had no impact on our results of
operations.
Form S-1 Amendment 2 Filed
On July 28, 2004, we filed a second amendment to our Form S-1
Registration Statement in response to engineering comments made by the
SEC. At the time of the filing of this Form 10-QSB, we are waiting for
approval of the amended Form S-1.
Registration Rights
Pursuant to the $10 million Private Investment Public Entity (PIPE)
Subscription Agreement dated March 22, 2003, the Company had 90 days
from the closing date to file and obtain approval for the S-1
Registration Statement registering the shares issued in the
transaction. In the event the Registration Statement is not declared
effective within the 90 day window, a penalty of two percent (2%) of
the private placement amount would be assessed for each 30 day period
after the expiration of the 90 days.
Liquidity and Capital Resources
Since the reverse merger in June 2003, the Company has raised $12.3 million in
three separate private placement transactions. These funds are being deployed to
put the existing mining projects into production, acquire additional mining
projects and perform exploration. The Company at June 30, 2004 had approximately
$5.6 million in the bank and another $974,000 in investments. We intend to
acquire additional mining projects prior to year-end. Although we have
sufficient cash in the bank today and we expect the Billie the Kid project to be
cash flow positive before year-end it may be necessary to raise additional
capital to develop mining projects that we intend to acquire.
Environmental
The Company's mining and exploration activities are subject to various federal
and state laws and regulations governing the protection of the environment.
These laws are continually changing and are generally becoming more restrictive.
The Company conducts its operations so as to protect the public health and
environment and believes its operations are in compliance with all applicable
laws and regulations. The Company has made, and expects to make in the future,
expenditures to comply with such laws and regulations, but cannot predict the
amount of such future expenditures. We are generally required to mitigate
long-term environmental impacts by stabilizing, contouring, resloping, and
revegetating various portions of a site after mining and mineral processing
operations are completed. These reclamation efforts are conducted in accordance
with detailed plans, which must be reviewed and approved by the appropriate
regulatory agencies.
The Nevada Revised Statutes and regulations promulgated under there by the
Nevada State Environmental Commission and the Nevada Division of Environmental
Protection, Bureau of Mining and Reclamation require surety to be posted for
mining projects to assure we will leave the site safe, stable and capable of
providing for a productive post-mining land use. Pursuant to the approved
Reclamation Plan for Billie the Kid, we posted a surety in the amount of
$321,000, of which $145,000 came in the form of a cash deposit and the balance
was secured from a surety agent.
16
Safe Harbor Statement
Certain statements contained in this report (including information incorporated
by reference) are "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are intended to be covered by the safe
harbor provided for under these sections. Our forward-looking statements
include, without limitation: (a) statements regarding future earnings, and the
sensitivity of earnings to gold and other metal prices; (b) estimates of future
mineral production and sales for specific operations and on a consolidated
basis; (c) estimates of future production costs and other expenses, for specific
operations and on a consolidated basis; (d) estimates of future cash flows and
the sensitivity of cash flows to gold and other metal prices; (e) estimates of
future capital expenditures and other cash needs for specific operations and on
a consolidated basis and expectations as to the funding thereof; (f) statements
as to the projected development of certain ore deposits, including estimates of
development and other capital costs, financing plans for these deposits, and
expected production commencement dates; (g) estimates of future costs and other
liabilities for certain environmental matters; (h) estimates of reserves, and
statements regarding future exploration results and reserve replacement; (i)
statements regarding modifications to GoldSpring's hedge positions; (j)
statements regarding future transactions relating to portfolio management or
rationalization efforts; and (k) projected synergies and costs associated with
acquisitions and related matters.
Where we express an expectation or belief as to future events or results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis. However, our forward-looking statements are subject to risks,
uncertainties, and other factors, which could cause actual results to differ
materially from future results expressed, projected, or implied by those
forward-looking statements. Important factors that could cause actual results to
differ materially from such forward-looking statements ("cautionary statements")
are disclosed under "Risk Factors" in the GoldSpring Form 10-K/A for the year
ended December 31, 2003, as well as in other filings with the Securities and
Exchange Commission. Many of these factors are beyond GoldSpring's ability to
control or predict. Given these uncertainties, readers are cautioned not to
place undue reliance on our forward-looking statements.
All subsequent written and oral forward-looking statements attributable to
GoldSpring or to persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements. GoldSpring disclaims any intention or
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise, except as may be required
under applicable securities laws.
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the
"Exchange Act"), we carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of June 30, 2004.
This evaluation was carried out under the supervision and with the participation
of our Chief Executive Officer, Stephen B. Parent, and our Chief Financial
Officer, Robert T. Faber. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the required time periods.
Even an effective internal control system, no matter how well designed, has
inherent limitations--including the possibility of the circumvention or
overriding of controls. Therefore, the Company's internal control over financial
reporting can provide only reasonable assurance with respect to the reliability
of the Company's financial reporting and financial statement preparation.
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
that is reasonably likely to materially affect, the Company's internal control
over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently is not a party to any material legal proceedings and to
the Company's knowledge, no such proceedings are threatened or contemplated.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Pursuant to the February private placement, the Company in April 2004
repurchased 100,000 shares of common stock for $75,000, or $0.75 per share,
which was the market price at the time of the transaction. The funds for the
stock repurchase came from the proceeds related to the gain on the April 2004
spot deferred sale of gold contract.
In April 2004, we entered into a settlement agreement with Antonio Treminio. A
dispute had arisen between the Company and Mr. Treminio relating to alleged
obligations owed by the Company to Treminio and 2,000,000 GoldSpring shares
owned by Treminio. An agreement was reached whereby Mr. Treminio returned the
shares and the Company simultaneously paid Treminio $150,000 in full
satisfaction of all amounts owed to Treminio. The shares were returned to the
Company and subsequently cancelled.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2004 Annual General Meeting of its shareholders on
June 15, 2004 at the Siena Hotel in Reno, Nevada. At the meeting, it was
announced that the shareholders had re-elected all of the current
directors to serve another one-year term. The members of the Board of
Directors are: Stephen B. Parent, John F. Cook, Robert T. Faber, Leslie
L. Cahan, Purnendu K. Rana Medhi and Anthony E. Applebaum.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed in its
behalf by the undersigned, thereunto duly authorized, on August 16, 2004.
GOLDSPRING, INC.
Date: August 16, 2004 By: /s/ Robert T. Faber
--------------------------------
Robert T. Faber
Chief Financial Officer
18