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 September 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,
as of November 8, 2004.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
GOLDSPRING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine-month period ended September 30,
Restated Restated
2004 2003
(Unaudited) (Unaudited)
---------------------------- --------------------------
REVENUE, NET $ 450,252 $ -
COSTS AND EXPENSES
Cost applicable to sales (exclusive of
depreciation, depletion and amortization
shown separately below) 690,856 -
Depreciation, depletion and amortization 243,836 -
General and administrative 960,309 79,208
Consulting & Professional Services 341,880 26,823
---------------------------- --------------------------
Total Costs & Expenses 2,236,881 106,031
---------------------------- --------------------------
OTHER INCOME (EXPENSE)
Gain on derivative instruments, net 444,460
Realized Loss: Investment (42,180)
Interest Income 32,746 -
---------------------------- --------------------------
Total Other Income / (Expense) 435,026 -
---------------------------- --------------------------
NET LOSS (1,351,603) (106,031)
============================ ==========================
Net loss per common share, basic ($0.007) $ nil
============================ ==========================
Basic weighted common shares outstanding 187,168,336 122,597,690
----------------------------- --------------------------
The accompanying notes are an integral part of these financial statements
2
GOLDSPRING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three-month period ended September 30,
Restated Restated
2004 2003
(Unaudited) (Unaudited)
---------------------------- --------------------------
REVENUE, NET $ 450,252 $ -
COSTS AND EXPENSES
Cost applicable to sales (exclusive of
depreciation,depletion and amortization
shown separately below) 690,856 -
Depreciation, depletion and amortization 243,836 -
General and administrative 289,627 79,208
Consulting & professional services 195,734 26,823
---------------------------- --------------------------
Total Costs & Expenses 1,420,053 106,031
---------------------------- --------------------------
OTHER INCOME
Gain on derivative instruments, net 49,310
Interest Income 20,110 -
---------------------------- --------------------------
Total Other Income 69,420 -
---------------------------- --------------------------
NET LOSS (900,381) (106,031)
============================ ==========================
Net loss per common share, basic ($0.005) $ nil
============================ ==========================
Basic weighted common shares outstanding 192,859,611 136,947,400
----------------------------- --------------------------
The accompanying notes are an integral part of these financial statements
3
GOLDSPRING, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
As Restated As Restated
September 30, December 31,
2004 2003
(Unaudited)
------------------ -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 5,008,322 $ 364,138
Prepaid and other current assets 69,414 48,291
Finished Goods Inventory 197,212 -
Inventory 40,835 54,000
Other - -
----------- -----------
TOTAL CURRENT ASSETS 5,315,783 466,429
----------- -----------
MINERAL PROPERITES, PLANT AND EQUIPMENT, NET
Mineral properties, net 1,296,401 1,334,837
Plant and equipment, net 4,889,548 952,657
----------- -----------
TOTAL MINERAL PROPERITES, PLANT AND EQUIPMENT, NET 6,185,949 2,287,494
----------- -----------
OTHER ASSETS:
Reclamation deposit 145,000 145,000
Equipment purchase deposit 100,000 100,000
Long-lived asset 302,732 --
Other 60,000 --
----------- -----------
TOTAL OTHER ASSETS 607,732 245,000
TOTAL ASSETS $12,109,464 $ 2,998,923
------------ =========== ===========
The accompanying notes are an integral part of these financial statements
4
GOLDSPRING, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
As Restated As Restated
September 30, December 31,
2004 2003
(Unaudited)
------------------ -------------------
CURRENT LIABILITIES:
Accounts payable $ 999,366 $ 108,952
Accrued expenses 184,322 49,322
Return of contributed capital 800,000 -
Short-term capital lease obligations 46,153 -
Current portion of long-term debt - related party 400,000 400,000
------------- -------------
TOTAL CURRENT LIABILITIES 2,429,841 558,274
LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES
Long-term debt - related party, net of current portion 300,000 600,000
Long-term capital lease obligation, net of current portion 122,049 -
Long-lived asset retirement obligations 322,747 -
------------- -------------
TOTAL LONG-TERM DEBT AND OTHER LONG-TERM LIABILITIES 744,796 600,000
TOTAL LIABILITIES 3,174,637 1,158,274
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $.000666 par value; 500,000,000 shares authorized;
192,859,611 and 172,627,149 shares issued and outstanding as of
September 30, 2004
and December 31, 2003, respectively 128,445 114,970
Treasury stock (67) --
Additional paid-in capital 14,803,071 6,370,698
Accumulated Results - Prior Period (4,645,019) -
Accumulated Results - Current Year (1,351,603) (4,645,019)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 8,934,827 1,840,649
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 12,109,464 $ 2,998,923
============= =============
The accompanying notes are an integral part of these financial statements
5
GOLDSPRING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine-month period ended September 30,
As Restated As Restated
2004 2003
(Unaudited) (Unaudited)
------------------ ------------------
Cash Flows from Operating Activities:
Net Loss $ (1,351,603) $ (106,031)
------------------ ------------------
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation, depletion and amortization 223,820 -
Accretion of accumulated reclamation obligations 5,940 -
Write-down of long lived assets 14,076 -
Common stock issued for consulting services 42,000 25,000
(Increase) Decrease in operating assets:
Finished goods inventory (197,212) -
Inventory 13,165 -
Prepaid and other current assets (21,123) (20,790)
Other assets (60,000) -
Increase (Decrease) in operating liabilities:
Accounts payable 890,414 (100,000)
Accrued expenses 135,000 -
Asset retirement obligation, net 20,015 -
------------------ ------------------
Total Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities 1,066,095 (95,970)
------------------ ------------------
Net Cash Used in Operating Activities (285,508) (201,821)
------------------ ------------------
Investing Activities:
Acquisitions of plant, equipment and mineral properties (3,974,088) (108,000)
------------------ ------------------
Net cash used in investing activities (3,974,088) (108,000)
------------------ ------------------
Financing Activities:
Net proceeds from the issuance of common stock 9,428,780 1,910,008
Principal payment of note payable to related party (300,000) --
Purchase and cancellation of Company's common stock (150,000) --
Purchase of treasury stock (75,000) --
------------------ ------------------
Net Cash Flows Provided by Financing Activities 8,903,780 1,910,008
------------------ ------------------
Net Increase in Cash 4,644,184 1,600,187
Cash, Beginning of Period 364,138 318
------------------ ------------------
Cash, End of Period $ 5,008,322 $ 1,600,505
================== ==================
Supplemental disclosures of non-cash investing and financing activities:
------------------------------------------------------------------------
Issuance of common stock for the acquisitions of GoldSpring LLC and Ecovat LLC $ - $ 119,138
================== ==================
Issuance of common stock for an equipment deposit $ - $ 100,000
================== ==================
Purchase of assets under capital leases $ 168,202 $ -
================== ==================
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 our opinion, 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 included in our Annual
Report on Form 10-KSB for the year ended December 31, 2003.
Our Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of our Consolidated Financial Statements requires us 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. In our opinion, all
adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation of the interim financial statements have been included.
Operating results for the nine-month period ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2004. The more significant areas requiring the use of our
estimates and assumptions that are the basis for future cash flow estimates
relate to depreciation, depletion and amortization calculations; environmental
reclamation and closure obligations; 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. We base our estimates on our
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.
Note B - Restatement of Financial Statements
On June 24, 2004, we filed the following amended Exchange Act documents: (1)
Form 10-KSB for the year ended December 31, 2003; and (2) Form 10-QSB for the
quarter ended March 31, 2004. After careful review and consideration, we have
elected to change the accounting treatment of the original transaction between
Ecovery, Inc. and us to treat it as a recapitalization and not as a business
combination. In connection with the change in accounting treatment of the
original transaction, we and the seller have mutually agreed to cancel the
46,500 convertible redeemable preferred shares in favor of 20% net proceeds
contingent royalty agreement. Incorporated in this filing is the restatement of
the financial statements to reflect the accounting treatment changes for
recording these transactions.
At the time of the acquisition of substantially all of the assets of Ecovery,
Inc. in March 2003, 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 for the
transaction, we recorded approximately $8.9 million of goodwill, which is an
intangible asset. In June 2004, we concluded that the recapitalization
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 recapitalization 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.
7
In connection with the preparation and filing of our Form S-1 registration
statement, we reevaluated our accounting for certain convertible, redeemable
preferred stock issued to Harlesk Nevada, a company controlled by Leslie L.
Cahan, a director of our Company since 2003. Since the substance of the economic
arrangement between Harlesk Nevada and us was to provide a maximum financial
benefit of $4.65 million to Harlesk Nevada by way of a 20% net proceeds royalty
contingent obligation (subject to a continuing 2% NSR royalty) when and if the
Gold Canyon and Spring Valley properties were put into commercial production, we
and Harlesk Nevada mutually agreed to cancel the preferred stock and restate the
same obligation in a net proceeds royalty agreement between the parties.
Accordingly, the Gold Canyon and Spring Valley assets have been adjusted to
reflect the cancellation of the preferred stock.
Furthermore, after careful consideration and review of negative and positive
evidence regarding the realization of deferred tax assets, we have determined
that for the period ended September 30, 2004, it is more likely than not that
any deferred tax asset arising from net operating loss carryforwards or
temporary differences will not be recognized in the near term given our current
stage of evolution. Accordingly, the financial statements have been restated to
reflect a full reservation of deferred tax assets with a corresponding
adjustment to income tax benefit shown in the statement of operations. The
affect of the restatement on the nine-month period ended September 30, 2004 was
to reduce the previously recorded income tax benefit and deferred tax asset by
$480,000.
Pursuant to our decision to adopt these accounting treatments, the financial
statements have been restated and are presented within this filing to reflect
the new accounting treatment changes.
Note C - Revenue Recognition
Revenue is recognized in accordance with the Securities and Exchange Commission
Staff Accounting Bulletin No. 104, such that revenue is recognized when the
sales price is determinable, the product has been delivered , the transfer of
title to the customer has occurred , and collectibility of payment is reasonable
assured. Revenues from silver and other by-product sales are credited to Costs
Applicable to Sales as a by-product credit.
Note D - Asset Retirement Obligations
Minimum standards for site reclamation and closure have been established by
various government agencies that affect certain of our operations. We calculate
our estimates of reclamation liability based on current laws and regulations and
the expected future costs to be incurred in reclaiming, restoring and closing
its operating mine sites. It is possible that our estimate of our reclamation,
site restoration and closure liability could change in the near term due to
possible changes in laws and regulations and changes in cost estimates. In
August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS 143 established a uniform
methodology for accounting for estimating reclamation and abandonment costs. As
our properties enter into production and we become legally obligated to perform
reclamation activities as a condition to operating, we will accrue asset
retirement liabilities and assets in accordance with SFAS 143.
Note E - Stockholders' Equity
In February 2004, we raised $332,500 under a Restricted Private Placement for
accredited private investors. The private placement consisted of 44 1/3 Units,
with each Unit representing 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, we 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 180
days after the Effective Date of the S-1 registration statement.
Pursuant to the February private placement, in April 2004 we 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.
8
In April 2004, 2,000,000 shares of restricted common stock issued to Antonio
Treminio were returned to us and subsequently cancelled. A dispute had arisen
between the Company and Mr. Treminio relating to alleged obligations owed by us
to Mr. Treminio and our shares owned by Mr. Treminio. An agreement was reached
whereby Mr. Treminio returned the shares and the Company simultaneously paid Mr.
Treminio $150,000 in full satisfaction of all amounts owed to Treminio.
Shares Issued in Consideration of Consulting Services
On January 12, 2004, we issued a total of 50,000 shares to Purnendu K. Rana
Medhi, our 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 issuances 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.
Common Shares Outstanding
As of September 30, 2004, we had 192,859,611 common shares outstanding. Of these
outstanding shares, approximately 34,000,000 were unrestricted (free trading)
shares.
Note F - Spot Deferred Contracts (Derivative Instruments)
We have sold some future production of gold pursuant to hedge positions. On a
limited basis, we enter into spot deferred contracts (derivative instruments) to
secure the selling price for certain anticipated gold and silver production from
test mining and to manage risks associated with fluctuating precious metal
prices. 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.
Note G - Return of Contributed Capital
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 common shares and warrant shares issued in March 2004 private
placement. The subscription agreement for that equity raise provided the
investors with registration rights and required us to have a registration
statement covering the common shares and warrant shares issued in the
transaction filed and declared effective within 90 days of the March 22, 2004
closing date. In the event the registration statement was not declared effective
within the 90-day period, a penalty of two percent of the amount raised in the
private placement amount would be assessed for each 30-day period after the
expiration of the 90 days. The 90-day period expired on June 21, 2004. As of
September 30, 2004 we have accrued a penalty of $800,000. Until the registration
statement is declared effective, the penalty will continue to accrue at $200,000
for each 30-day period from October 1, 2004. While we intend to negotiate a
compromise of the terms of the penalty with the stockholders, we cannot
guarantee we will be successful in this negotiation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion provides information that we believe 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 and nine months ended September 30, 2004, as
well as our future results.
This item should be read in conjunction with our consolidated financial
statements and the notes thereto included in this quarterly report.
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 changes 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,"
"goal," "budget," "schedule," "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 a number of assumptions, estimates and
information available at the time those statements are made and/or our good
faith belief as of that time with respect to future events. Known and unknown
factors could cause actual results to differ materially from those projected in
the forward-looking statements. Such factors include 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; the ability to
successfully integrate acquisitions; operating or technical difficulties in
connection with exploration or mining activities; and the speculative nature of
gold exploration, including risks of diminishing quantities or grades of
reserves; and contests over our title to properties. In addition, there are
risks and hazards associated with the business of gold exploration and mining,
including environmental hazards, industrial accidents, unusual or unexpected
formations and we may have no insurance or inadequate insurance to cover these
risks. Many of these uncertainties and contingencies can affect our actual
results and could cause our actual results to differ materially from those
expressed or implied in any forward-looking statements made by or on behalf of
us. Specific reference is made to the "Risk Factors" section in the Company's
annual report on Form 10-KSB for the period ended December 31, 2003 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
elsewhere in this filing.
Forward-looking statements speak only as of the date the statements are made.
You should not put undue reliance on any forward-looking statements. These
cautionary statements qualify all of the forward-looking statements made in this
report. 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 North American mineral exploration company focused on the exploration
for gold, precious metals and other minerals. Our primary focus is precious
metals exploration. We became a mineral exploration company through the
acquisition of substantially all of the mineral assets of Ecovery, Inc. in March
2003. These assets included 25 unpatented placer claims known as the Gold Canyon
and Spring Valley Projects and 17 unpatented lode claims known as the Big Mike
Copper Project. We currently own mineral properties in the United States and own
mineral permits in Alberta, Canada. We are seeking to acquire, develop and
operate precious metals, copper and other mineral properties in the United
States, Canada and Mexico. Our business plan is to acquire mining projects that
can be put into near-term operation and production. When evaluating potential
acquisitions, we look for projects that have sufficient mineralized material or
established reserves, exploration potential, and that are in advanced stages of
permitting.
10
We do not anticipate spending substantial capital on outside engineering firms
to establish proven or probable reserves. From time to time, however, we may
engage outside mining and engineering firms to audit proven and probable
reserves calculated by our engineering staff. We will use our judgment, based on
the drilling and analysis that has already been conducted on the properties and
any additional drilling or analysis we determine reasonably necessary, as to
whether we can conduct test mining operations on our properties for a profit.
Our current operations are located in and around Virginia City, Nevada, about 30
miles south and east of Reno. In addition to the mineral properties purchased
from Ecovery, to date, we have acquired The Plum Mining Company LLC, which
included the Billie the Kid/Lucerne open pit gold and silver project and the
Como gold and silver property. As part of the Plum transaction, we also acquired
40 acres of land, which has an office building, a maintenance building and
laboratory facilities and a heap leach permit.
Accounting Treatment Change
On June 24, 2004, we filed the following amended Exchange Act documents: (1)
Form 10-KSB for the year ended December 31, 2003; and (2) Form 10-QSB for the
quarter ended March 31, 2004. After careful review and consideration, we have
elected to change the accounting treatment of the original transaction between
Ecovery, Inc. and us to treat it as a recapitalization and not as a business
combination. In connection with the change in accounting treatment of the
original transaction, we and the seller have mutually agreed to cancel the
46,500 convertible redeemable preferred shares in favor of 20% net proceeds
contingent royalty agreement. Incorporated in this filing is the restatement of
the financial statements to reflect the accounting treatment changes for
recording these transactions.
At the time of the acquisition of substantially all of the assets of Ecovery,
Inc. in March 2003, 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 for the
transaction, we recorded approximately $8.9 million of goodwill, which is an
intangible asset. In June 2004, we concluded that the recapitalization
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 recapitalization 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.
We also have reevaluated our accounting for certain convertible, redeemable
preferred stock issued to Harlesk Nevada, a company controlled by Leslie L.
Cahan, a director since 2003. Since the substance of the economic arrangement
between Harlesk Nevada and us was to provide a maximum financial benefit of
$4.65 million to Harlesk Nevada by way of a 20% net proceeds royalty contingent
obligation (subject to a continuing 2% NSR royalty) when and if the Gold Canyon
and Spring Valley properties were put into commercial production, we and Harlesk
Nevada mutually agreed to cancel the preferred stock and restate the same
obligation in a net proceeds royalty agreement between the parties. Accordingly,
the Gold Canyon and Spring Valley assets have been adjusted to reflect the
cancellation of the preferred stock.
Pursuant to our decision to adopt these accounting treatments, the financial
statements have been restated and are presented within this report to reflect
the new accounting treatment changes. These changes in accounting treatment have
no impact on our results of operations.
Restatement of Financial Statements
After careful consideration and review of negative and positive evidence
regarding the realization of deferred tax assets, we have determined that for
the period ended September 30, 2004, it is more likely than not that any
deferred tax asset arising from net operating loss carryforwards or temporary
differences will not be recognized in the near term given our current stage of
evolution. Accordingly, the financial statements have been restated to reflect a
full reservation of deferred tax assets with a corresponding adjustment to
income tax benefit shown in the statement of operations. The affect of the
restatement on the nine-month period ended September 30, 2004 was to reduce the
previously recorded income tax benefit and deferred tax asset by $480,000.
11
Consolidated Financial Results
Revenue - from the sale of gold was $450,252 and $0 for the three-month
periods ended September 30, 2004 and 2003, respectively. Revenue from the sale
of gold was $450,252 and $0 for the nine-month periods ended September 30, 2004
and 2003, respectively. The revenue realized in 2004 reflects the activities at
the Billie the Kid / Lucerne project that began producing gold during the third
quarter 2004. Actual production of gold for both the three month period ended
and nine month period ended September 2004 was 1,561 ounces gold. Actual gold
sold and recognized as revenue, however, was 1,124 ounces and the balance of 437
ounces is reflected as finished goods inventory on the balance sheet.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Consolidated gold sales $450,252 $0 $452,252 $0
Consolidated gold ounces sold 1,124 - 1,124 -
Average gold price realized $ 400.58 - $ 400.58 -
Costs applicable to sales - gold, which includes total cash costs related
to gold production, adjustments for changes in finished goods inventory and
proceeds from the sale of by-products (e.g., silver), increased to $690,856 from
$0 during the three-month periods ended September 30, 2004 and 2003,
respectively; and to $690,856 from $0 during the nine-month periods ended
September 30, 2004 and 2003, respectively, as detailed below by operation. The
increase in cost applicable to sales reflects the impact of the Billie the Kid /
Lucerne project beginning to produce gold during the third quarter 2004. Given
our current stage of evolution, an inventory adjustment for gold in the pregnant
pond and the leach pad was not recorded.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Billie the Kid / Lucerne Project $690,856 $0 $690,856 $0
Depreciation, depletion and amortization, which includes provisions related
to asset retirement obligations as defined by FASB #143, was $243,836 and $0 for
the three-month periods ended September 30, 2004 and 2003, respectively; and
$243,836 and $0 for the nine-month periods ended September 30, 2004 and 2003,
respectively. The increase in 2004 is primarily attributable to the start-up of
the Billie the Kid / Lucerne project during the third quarter 2004. The
following is a summary of Depreciation, depletion and amortization by
operations:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Billie the Kid / Lucerne Project
Depreciation, depletion and amortization $ 202,030 $0 $ 202,030 $0
Accretion of accumulated reclamation obligations $ 5,940 $0 $ 5,940 $0
Write-down of long-lived assets $ 14,076 $0 $ 14,076 $0
Other
Depreciation, depletion and amortization $ 21,790 $0 $ 21,790 $0
General and administrative expenses, including consulting and professional
services were $485,361 and $106,031 for the three-month periods ended September
30, 2004 and 2003, respectively; and $1,302,189 and $106,031 for the nine-month
periods ended September 30, 2004 and 2003, respectively. The increase in 2004
reflects the ramping up of operations after the September 2003 equity financing.
The following is a summary General and administrative costs and consulting and
professional services:
12
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
General and administrative $ 289,627 $ 79,208 $ 960,309 $ 79,208
Consulting and professional services $ 195,734 $ 26,823 $ 341,880 $ 26,823
Other Income was $69,420 and $0 for the three-month periods ended September
30, 2004 and 2003, respectively; and $435,460 and $0 for the nine-month periods
ended September 30, 2004 and 2003, respectively. On a limited basis, in 2004 we
began entering into spot deferred contracts (derivative instruments) to secure
the selling price for certain anticipated gold and silver production from test
mining and to manage risks associated with fluctuating precious metal prices.
During 2004 a net gain from closing out certain forward sales contracts of
$444,460 was realized. As of September 30, 2004, we had deferred contracts for
10,000 ounces of gold outstanding at an average price of $407.50. These
derivative contracts remain open as of November 8, 2004.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Realized Gain on Spot deferred contracts, net $ 49,310 $ 0 $ 444,460 $ 0
Loss on Investment $ 0 $ 0 ($42,180) $ 0
Interest Income $ 20,110 $ 0 $ 32,746 $ 0
Operations
The Billie The Kid/Lucerne Project:
November 2004 marked the one-year anniversary of our acquisition of the Plum
Mining Company. As of September 30, 2004, we had deployed nearly $5 million 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; $3,600,000 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 excavating and hauling.
In the third quarter 2004, the Billie the Kid / Lucerne project began producing
gold. During the third quarter, 1,561 ounces of gold and 7,556 ounces of silver
were shipped to the refinery. Third quarter net revenue from the sale of 1,124
ounces of gold was $450,252.
We are currently performing exploration work (Phase 1 Drift Exploration program)
on the Billie the Kid/Lucerne property to expand the mineralized material
inventory. Approximately 8000-ft. of drilling will be done on the Olympia,
Billie The Kid - Southwest, and the Hartford - Lucerne Pits. This phase of
exploration will determine the mineralization between the Lucerne and Billie the
Kid pits, condemnation of potential waste sites, and will produce an optimized
mine plan for mine operations. We expect to have the Mine Plan completed in
fourth quarter 2004. Results from the Phase 1 exploration program will be a
basis for a Phase 2 exploration program to be carried out in 2005. Our
exploration program will test surface mining targets as well as deep underground
targets by using geological mapping, geochemical and geophysical investigations
and drilling. Efforts continue to expand our mineral rights in and around the
Billie the Kid/Lucerne project by staking additional claims and through
acquisitions.
13
Our focus for fourth quarter 2004 and 2005 at the Billie the Kid / Lucerne
Project is to increase the efficiency of the operation, establish predictable
gold and silver production and expand our inventory of mineralized material
through exploration and acquisitions. Our gold production target for this
project in 2005 is 25,000 ounces. We are in the process of modifying our
Reclamation, Water Pollution Control and Air Quality Permits with the Nevada
Department of Environmental Protection (NDEP) to allow for increased production
and expand the capacity of our heap leach pad.Modification of our Reclamation
Permit to allow for mining of the Lucerne Pit has been approved. Construction is
underway to switch from the use of generator power to grid power at the Plum
crushing and process plant and should be completed prior to the end of November
2004. The switch to grid power will result in decreased costs by eliminating the
need for a diesel generator. Furthermore, by replacing the generator with grid
power we will eliminate combustible emissions, allowing for a permit
modification which extends operating hours, thus increasing production capacity.
The conversion to grid power and the permit modification should be completed
prior to year-end 2004, resulting in additional tonnage to the heap leach pad in
first quarter 2005.
Infrastructure construction is continuing at the Plum property. We have
completed the construction of a second overflow pond and our second and third
heap leach pads. Pads four and five are scheduled for construction in 2005 at an
estimated capital cost of $600,000. Our Water Pollution Control Permit
modification request to the NDEP, which we believe will be approved during the
first quarter of 2005, will allow for maximized loading, leaching and mineral
recovery on five heap leach pads to a height of 100 feet and a tonnage capacity
of 4-5 million tons of mineralized material.
We have not completed extensive characterization of mineralized material,
geologic analysis, metallurgical testing, mine planning and economic analysis on
the Plum Mining Company mineral assets. While this extensive characterization
and analysis of our mineral properties has not been completed, we are currently
proceeding in the same manner as other mining companies in the state of Nevada.
For example, we have conducted surface geological mapping and additional
drilling to fill in areas of our current data in the mineralized area. The
results of the additional drilling are being sent to outside assay laboratories
for analysis and our laboratory will analyze the same data. We are using the
results from the assay laboratory to plot both vertical and horizontal cross
sections to build a geological model of the mineralized area to construct a
resource model for incorporation into our optimized mine plan. The analysis of
the assay results and the resource model will be used to determine whether we
can establish mineral reserves based on cut-off grades calculated for the
mineralized area based on our experience of costs derived from the current test
mining.
GoldSpring Placer Claims
The Gold Canyon and Spring Valley placer claims (the GoldSpring Placer Claims)
were included in the original mineral asset acquisition from Ecovery, Inc. The
claims are located on 850 acres near the intersections of Highway 341 and
Highway 50, about 7.8 miles east of Carson City, Nevada and three miles south of
Plum. Since the acquisition of Plum Mining, we have focused on bringing the
Billie the Kid / Lucerne project into production. We have not yet performed any
exploration activity or established any reserves on the GoldSpring placer
claims. A 1,000-ton test permit has been secured, and we intend to utilize a
gravity plant and a 250-kilowatt power plant to perform the test. The operating
test is scheduled to commence in the second quarter of 2005. We anticipate that
neither crushing nor chemicals will be used or required in the test mining
operations. Because reserves have not been established for the Goldspring placer
claims, all activity on this property will be considered test mining or
exploratory in nature. We are in the process of creating an exploration plan for
these claims. In addition to our own team, we intend to employ experienced and
knowledgeable mining consultants who are familiar with the gold mineralization
of the Carson City area. We expect the exploration program to commence during
the second or third quarter of 2005.
14
The Big Mike Copper Project
The Big Mike Copper project is located approximately 32 miles south of
Winnemucca in Pershing County, Nevada. The project 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. Therefore, all of our activities on this property will be
considered test mining or exploratory in nature. We have not completed any
exploration activity or undertaken any geologic, engineering or economic studies
on the Big Mike Copper Project. We anticipate that the project will be a
low-cost copper oxide leaching operation to recover copper from the copper oxide
bearing material remaining from the leaching operation carried out on the
property by a prior owner. The property includes an open pit, mined material in
a stockpile and waste dumps. We believe the property has exploration potential
for primary and oxide copper.
On November 1, 2004, we announced the signing of a Memorandum of Understanding
with MBMI Resources, Inc, of Vancouver, Canada, to form a 50-50 joint venture to
bring the Big Mike Copper Project into operation. The current price of copper
has enhanced the economic viability of this project and has prompted us to
accelerate our efforts to place it into production. The objective of the joint
venture is to establish commercial copper production using a vat leaching
process. MBMI will be responsible for all costs associated with the development
of the project, estimated to be in the range of $1.25 to $1.50 million. The
joint venture will provide us with the opportunity to participate in future
production profits from the Big Mike project with no capital outlay. Completion
of the transaction is subject to due diligence and regulatory approval.
Alberta, Canada 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. Sedimentary Oolitic iron bearing material was discovered in 1953 from
oil and gas drilling on the area of our mineral permits. We are in the process
of reviewing existing data and conducting a pre-feasibility study on the
project. This study will include new testwork to follow-up earlier testwork
performed on the property. From 1995 through 1997, a series of tests were
performed that showed the mineralized material present was amenable to treatment
to produce iron pellets and pig iron. We are in the process of negotiating the
acquisition of the rights to the coal that overlies the iron ore on a portion of
this property. We are also investigating the possible acquisition of natural gas
and oil rights on this property.
This is an early stage project and our activities associated with this mineral
area are exploratory in nature. We have not established 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 alternatives to move forward with this
project. One option under consideration is flow-through financing to fund an
exploration program on the property. In a flow-through financing, flow-through
shares are issued by mining, petroleum or renewable energy companies to
facilitate financing their exploration and project development activities.
Canadian tax law allows eligible companies to issue these equity shares to new
investors. In addition to the equity interest in the company, the investors
receive income tax deductions associated with new expenditures incurred by the
company on exploration and development. We hope to collect enough data through
our pre-feasibility and preliminary exploration activity to attract a Tier 1
joint venture partner to establish commercial iron and coal production on this
property.
Business Development Activities
We have established a program to actively seek opportunities to acquire, develop
and operate precious metals, copper and other mineral properties in the United
States, Canada and Mexico. Our business plan is to acquire mining projects that
can be put into near-term operation and production. When evaluating potential
acquisitions, we look for projects that have sufficient mineralized material or
established reserves, exploration potential, and that are in advanced stages of
permitting. Our primary focus is on gold projects. We are currently in
negotiations on several acquisition opportunities in the Southwest United States
that fit our business model and would be accretive to our operations. We hope to
complete these acquisitions in the near-term, at which time we will release
details of the transactions.
15
The following is an update on previously-announced Letters of Intent. We are
continuing to conduct due diligence on a gold project in Mexico for which we
have an executed Letter of Intent (LOI). The LOI is non-binding on us, but gives
us a right of first refusal on the property. Initial assay results from the
property were positive. We are in the process of performing additional assays to
determine the most economical method of mineral recovery from this property.
This is an exploration-stage project with no established reserves. Our
evaluation of the Virginia City Dumps project is ongoing. We have obtained some
information about mineral grades for these materials, and we are evaluating the
economics of moving the material, the feasibility of permitting the dumps
project and the availability of leach pad capacity for processing the material.
The identification of additional mineralized material through exploration at the
Plum property may preclude us from moving forward with the Virginia City dumps
project. We will make a determination on this project after evaluating the
updated Plum Mine operating plan, which we expect to complete in December 2004.
After completing our due diligence on the Timm Mine in northern California, we
have elected not to pursue the project.
Recent Board Developments
On August 18, 2004, Anthony E. Applebaum resigned as a director due to personal
time constraints. Mr. Applebaum served as the Chairperson of the Board's Audit
Committee. The Company has appointed Todd Brown as the new Audit Committee
Chairperson.
Effective September 3, 2004, Stephen B. Parent resigned as Chairman of the Board
of Directors and Chief Executive Officer for personal reasons. Mr. Parent
continues to serve as a director of the Company.
On September 7, 2004, we appointed Robert T. Faber to replace Mr. Parent as
Chief Executive Officer and to serve as President of the Company. In addition,
we appointed John F. Cook to replace Mr. Parent as Chairman of the Board of
Directors.
On September 10, 2004, the Board of Directors elected Jerrie W. Gasch as a
director of the Company. It is currently anticipated that Mr. Gasch will serve
on our Audit and Compensation Committees.
On October 4, 2004, the Board of Directors elected four new board members:
Christopher L. Aguilar, Todd S. Brown, Stanley A. Hirschman and Phillip E.
Pearce. Todd S. Brown will serve as Chairperson of the Company's Audit
Committee; Christopher L. Aguilar will serve as Chairperson of the Nominating
and Corporate Governance Committee; and Stanley A. Hirschman will serve as
Chairperson of the Compensation Committee.
We are actively seeking a Chief Financial Officer following Mr. Faber's
appointment as President and Chief Executive Officer. Mr. Faber will continue to
act as Chief Financial Officer until a replacement is selected.
Board Committees
We have established a nominating and corporate governance committee, a
compensation committee and an audit committee. The three committees consist
solely of independent directors with the exception of the Chairperson for the
Nominating and Corporate Governance Committee. Such committees will operate in
accordance with written charters. Todd S. Brown will serve as Chairperson of the
Company's Audit Committee; Christopher L. Aguilar will serve as Chairperson of
the Company's Nominating and Corporate Governance Committee; and Stanley A.
Hirschman will serve as Chairperson of the Company's Compensation Committee.
16
Form S-1 Registration Statement Filed
We filed a Form S-1 Registration Statement under the Securities Act of 1933 in
April 2004, to register the common shares and warrant shares issued in the
February and March 2004 private placements. We filed the Form S-1 to register
the common stock to permit security holders to conduct secondary trading of
these securities from time to time after the effective date of the registration
statement. We will not receive any proceeds from the sale of the securities
covered by the registration statement, other than the consideration due for the
purchase of the securities upon exercise of the warrants. This Registration
Statement was filed pursuant to the terms of certain registration rights granted
to stockholders in connection with our private placement of 21,739,129 shares of
common stock in March 2004. The subscription agreement for that equity raise
provided the investors with registration rights and required us to have a
registration statement covering the shares and issuable warrant shares issued in
the transaction filed and declared effective within 90 days of the March 22,
2004 closing date. In the event the registration statement was not declared
effective within the 90-day period, a penalty of two percent of the amount
raised in the private placement amount would be assessed for each 30-day period
after the expiration of the 90 days. The 90-day period expired on June 21, 2004.
As of September 30, 2004 , we have accrued a penalty of $800,000. Until the
registration statement is declared effective, the penalty will continue to
accrue at $200,000 for each 30-day period from October 1, 2004. While we intend
to negotiate a compromise of the terms of the penalty with the stockholders, we
cannot guarantee we will be successful in this negotiation. We have also filed
to register 21,950,816 shares of common stock issuable in connection with the
conversion of our series A warrants, our Green Shoe warrants and the warrants
issued in our February 23, 2004 private placement.
Liquidity and Capital Resources
As of the date of this filing, we have yet to realize an operating profit. At
this time, we believe we have adequate capital resources to execute the
preliminary stage of our business plan. As additional acquisition opportunities
are identified, we may have to raise additional capital to fund those
acquisition projects.
We recorded an operating loss of $4,645,019 for the year ended 2003 versus a
loss of $78,929 in 2002. Our results in 2003 were negatively impacted by
$4,258,235 of consulting fees that were expensed in 2003. Specifically, between
February 2002 and March 11, 2003 (prior to the Plan and Agreement of
Reorganization), we entered into various contractual arrangements whereby we
issued 26,726,932 shares of common stock valued at $4,123,278 as consideration
for investor relations, business advisory and related consulting services. The
entire amount, however, was not recognized as an expense until 2003.
In March 2003, in connection with the acquisition of Ecovery, we issued
90,000,000 restricted shares of our common stock to the Ecovery shareholders and
paid $100,000 in cash to Ecovery for GoldSpring, LLC's gold placer claims and
Ecovat Copper Nevada LLC's copper claims.
Prior to April 2003, we had entered into various contractual arrangements to
issue common stock as consideration for investor relations, business advisory
and related consulting services. A total of 26,726,932 common shares valued at
$4,123,278 were issued for consulting services during the period February 2002
through March 24, 2003. The entire amount was realized as an expense in 2003.
Since March 2003, we have raised $12.3 million in capital, of which $10.3
million was raised in two transactions in the first quarter of 2004. In March
2004, we closed a $10 million Private Investment in a Public Entity (PIPE)
transaction. We received gross proceeds of $10 million from a group of 33
accredited institutional and individual investors. Pursuant to the terms and
conditions of the transaction, we issued 21,739,129 shares of unregistered
restricted common stock at a price of $0.46 per share. These shares represented
approximately 10% of the outstanding shares of the Company. The investors also
received two forms of warrants in this transaction. The Green Shoe Warrants
allow the investor group to purchase an additional 10,869,575 shares of common
stock under the same terms and conditions as the initial allotment of shares at
a price of $0.46 per share. The Green Shoe Warrants are exercisable for a period
of 180 days from the effective date of this registration statement. The series A
warrants allow the investor group to purchase 10,869,575 shares of common stock
at an exercise price of $0.86 per share and are exercisable during the 4-year
period ending March 2008. This registration statement is registering for resale
all of the shares and warrant shares issued in the transaction. The Company paid
Merriman Curhan Ford & Co. a fee of $700,000 for their investment banking
services in this transaction.
17
The terms and conditions of the PIPE transaction restricted our use of the $ 10
million proceeds as follows: $3,000,000 to accelerate the ramp up of existing
gold, silver and copper mineralized material 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. If we wish to deviate from this use
of proceeds schedule by more than 15% per item or more than 25% in the
aggregate, we must receive the prior written consent of the investors holding
the majority of the shares issued in the transaction.
We announced, in February 2004, a private placement offering for accredited
investors. This offering allowed private investors the opportunity to invest a
maximum of $500,000 (66 2/3 units). Units were offered for $7,500, each
consisting of 10,000 shares of the Company's restricted common stock, par value
$.000666 and 5,000 warrants exercisable at $1.00 for a one-year period. The
proceeds of this private placement were to be used for general working capital.
We had the right to redeem the restricted shares from the investors within 120
days of the purchase of the shares at the same price paid by the investor and
the investor would retain the warrants. The restricted shares, if not redeemed
by the Company, were to remain restricted for one year from the date of
issuance. The terms of the offering called for it to remain open to investors
for up to ten business days. We decided to close the offering on February 23,
2004, at which time $332,500 (representing 44 1/3 units) had been invested. We
issued 443,333 shares of restricted common stock and 221,666 warrants in
connection with this offering. Pursuant to the terms and conditions of the
private placement offering, in April 2004, we redeemed 100,000 shares that had
been issued in the offering at a price of $0.75 per share, which was the market
price on the date of the redemption.
The terms of the private placement offering in February 2004 provided the
investors with registration rights for the warrant shares commencing 180 days
after the date of issuance. Two directors of the Company subscribed to the
private placement offering. Under the terms of the offering, the directors were
issued an aggregate of 10,000 warrants. The directors have requested that their
warrant shares not be registered for resale. Therefore, the S-1 registration
statement seeks to register only 211,666 common shares issuable upon the
conversion of the warrants issued in the private placement.
In December 2003, we initiated the application process to be listed on the
American Stock Exchange (AMEX). We have not yet received approval from the AMEX.
Environmental
Our 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. We conduct our
operations so as to protect the public health and environment and believes its
operations are in compliance with all applicable laws and regulations. We have
made, and expect 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 thereunder 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 revised
Reclamation Plan for Billie the Kid dated November 2004, we are required to post
a surety in the amount of $553,169. As of November 7, 2004, we have posted
surety of $382,747, of which $206,747 is in the form of a certificate of deposit
and the balance is in the form of a surety bond. On November 8, 2004 we the
surety was increased to the required $553,169.
18
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 - quantitative and qualitative disclosures about market risk
Metal Price
Changes in the market price of gold will significantly affect Our
profitability and cash flow. Gold prices can fluctuate widely and are affected
by numerous factors, such as demand; forward selling by producers; central bank
sales, purchases and lending; investor sentiment; and global mine production
levels. The gold price fell to a 20-year low of $253 in July 1999 and recovered
significantly since that time to reach a level of $416 on December 31, 2003 and
was $418 on September 30, 2004. To a lesser extent, changes in the market price
of silver will also affect our profitability and cash flows.
ITEM 4. 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 September 30,
2004. This evaluation was carried out under the supervision and with the
participation of our President and Chief Executive Officer and Acting Chief
Financial Officer Robert T. Faber. Based on such evaluation, our President and
Chief Executive Officer and Acting Chief Financial Officer has 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 us in reports that we file or submit 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, our internal control over financial reporting
can provide only reasonable assurance with respect to the reliability of the our
financial reporting and financial statement preparation.
19
There has been no change in the our internal control over financial reporting
during the most recent fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 9, 2004, the Company filed a lawsuit in the Superior Court
of Arizona, Maricopa County, against Stephen B. and Judith A. Parent, Ron and
Jane Doe Haswell, Walter and Jane Doe Doyle, Seth and Jane Doe Shaw, Antonio and
Jane Doe Treminio, and Ecovery, Inc. The complaint alleges that the defendants
committed torts against the Company, including violations of Arizona's
Racketeering Act, Arizona's securities fraud statutes, breach of contract,
common law fraud, negligent misrepresentation, and breach of fiduciary duty.
Generally, the claims are based on the following allegations:
1. Stephen Parent, through his company Ecovery, misrepresented his
ownership interest in, and proven value of, certain placer mining claims, which
he ostensibly sold to the Company in exchange for 99,000,000 shares of the
Company's common stock, almost half of which were issued to Mr. Parent, and
$100,000.
2. The defendants conspired to defraud the Company of at least
24,000,000 shares of the Company's common stock. The defendants negotiated three
"consulting agreements," wherein each of the three consultants were given
8,000,000 shares of the Company's common stock in exchange for some ambiguously
described consulting services. The consultants have not provided any service to
the Company pursuant to the consulting agreements.
3. Mr. Parent spent approximately $300,000 for unauthorized expenses
through the use of the Company's bank and charge accounts.
The Company has requested relief in the form of monetary damages; an order
rescinding the three consulting agreements with Haswell, Doyle, and Shaw, as
well as the asset purchase transaction with Ecovery; punitive damages; and
attorneys' fees and costs.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits to this report are listed in the Exhibit Index.
(b) Reports filed on Form 8-K during the quarter ended September 30, 2004:
o A report on Form 8-K was filed with the Securities and Exchange
Commission on September 3, 2004 pursuant to Item 5.02 to announce
the resignation of Stephen B. Parent as Chairman of the Board of
Directors and Chief Executive Officer of the Company and to announce
the appointment of Robert T. Faber as Chief Executive Officer and
President and John F. Cook as Chairman of the Board of Directors.
o A report on Form 8-K was filed with the Securities and Exchange
Commission on September 10, 2004 pursuant to Items 5.02 and 5.03 to
announce the election of Jerrie W. Gasch to the Company's Board of
Directors and to announce that the Board of Directors had amended
and restated the Company's Bylaws.
20
o A report on Form 8-K was filed with the Securities and Exchange
Commission on October 4, 2004 pursuant to Item 5.02 to announce the
election of Todd S. Brown, Phillip E. Pearce, Christopher L. Aguilar
and Stanley A. Hirschman to the Company's Board of Directors.
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 November 9, 2004.
GOLDSPRING, INC.
Date: November 9, 2004 By: /s/ Robert T. Faber
--------------------------------
Robert T. Faber
Acting Chief Financial Officer
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