UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT FOR THE TRANSITION PERIOD FROM
_______________ to _______________
Commission File Number 0-20722
NEWGOLD, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 16-1400479
------------------------------- -------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
P.O. Box 1626
Shingle Springs, California 95682
---------------------------------------- -------------------------------------
(Address of Principal Executive Offices) Zip Code
Issuer's telephone number: (530) 672-1116
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 NO X
-------- --------
Common stock, $0.001 par value, 47,606,174 issued and outstanding as of July 31,
2004.
Transitional Small Business Disclosure Format: YES NO X
-------- --------
INDEX
Page
----
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1. FINANCIAL STATEMENTS.........................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS..................................................17
ITEM 3. CONTROLS AND PROCEDURES.....................................24
PART II - OTHER INFORMATION...................................................26
ITEM 1. LEGAL PROCEEDINGS...........................................26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS....................................................26
ITEM 5. OTHER INFORMATION...........................................26
ITEM 6. EXHIBITS....................................................26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEWGOLD, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Condensed Balance Sheet as of July 31, 2004 (Unaudited) 4-5
Condensed Statements of Operations for the three months and six months
ended July 31, 2004 and 2003 (Unaudited) 6
Condensed Statements of Comprehensive Loss for the three months and
six months ended July 31, 2004 and 2003 (Unaudited) 7
Condensed Statements of Cash Flows for the six months
ended July 31, 2004 and 2003 (Unaudited) 8
Notes to Unaudited Financial Statements 9-16
3
NEWGOLD, INC.
CONDENSED BALANCE SHEET
JULY 31, 2004
(UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 5,340
Marketable securities available for sale 60,525
---------------
Total current assets 65,865
OTHER ASSETS
Deferred reclamation costs 513,946
Deposits 23,000
---------------
Total other assets 536,946
---------------
TOTAL ASSETS $ 602,811
===============
4
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
CONDENSED BALANCE SHEET
JULY 31, 2004
(UNAUDITED)
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 540,194
Accrued expenses 1,851,438
Accrued reclamation costs 513,946
Notes payable due to individuals and officer 1,612,630
-----------------
Total current liabilities 4,518,208
-----------------
DEFERRED REVENUE 800,000
Total liabilities 5,318,208
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.001 par value
50,000,000 shares authorized
47,606,174 shares issued and outstanding 47,606
Additional paid in capital 10,861,010
Other comprehensive loss (254,663)
Accumulated deficit (15,369,350)
-----------------
Total shareholders' deficit (4,715,397)
-----------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 602,811
=================
5
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX AND THREE MONTHS ENDED JULY 31,
(UNAUDITED)
--------------------------------------------------------------------------------
For the Six Months Ended For the Three Months Ended
July 31, July 31,
-------- --------
2004 2003 2004 2003
------------- ------------- ------------- -------------
NET SALES $ - $ - $ - $ -
COST OF GOODS SOLD 10,000 1,500 5,000 1,500
------------- ------------- ------------- -------------
GROSS LOSS (10,000) (1,500) (5,000) (1,500)
OPERATING EXPENSES (152,782) (143,284) (77,407) (76,431)
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (162,782) (144,784) (82,407) (77,931)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Dividend income - 10,063 - 5,031
Interest expense (99,405) (59,446) (51,841) (28,085)
------------- ------------- ------------- -------------
Total other income
(expense) (99,405) (49,383) (51,841) (23,054)
------------- ------------- ------------- -------------
NET LOSS $ (262,187) $ (194,167) $ (134,248) $ (100,985)
============= ============= ============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
BASIC AND DILUTED WEIGHTED-
AVERAGE SHARES
OUTSTANDING 47,606,174 47,585,180 47,606,174 47,585,180
============= ============= ============= =============
6
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JULY 31,
(UNAUDITED)
--------------------------------------------------------------------------------
For the Six Months Ended For the Three Months Ended
July 31, July 31,
-------- --------
2004 2003 2004 2003
------------- ------------ ------------ ------------
NET LOSS $ (262,187) $ (194,167) $ (134,248) $ (100,985)
OTHER COMPREHENSIVE LOSS
Unrealized loss from
marketable securities (49,843) - (19,225) -
------------- ------------ ------------ ------------
COMPREHENSIVE LOSS $ (312,030) $ (194,167) $ (153,473) $ (100,985)
============= ============ ============ ============
7
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31,
(UNAUDITED)
--------------------------------------------------------------------------------
2004 2003
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (262,187) $ (194,167)
Adjustments to reconcile net loss to net cash
used in operating activities
Accretion of warrants issued as a debt discount 35,337 3,393
Decrease in deposits 22,000 -
Increase in
Accrued salaries and benefits 82,500 70,000
Accrued expenses 103,574 85,183
---------------- -----------------
Net cash used by
operating activities (18,777) (35,591)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Marketable securities - (10,062)
---------------- -----------------
Net cash used by investing activities - (10,062)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of common stock - 20,000
Proceeds from note payable 18,500 76,995
Repayments of note payable (350) (56,949)
---------------- -----------------
Net cash provided by financing activities 18,150 40,046
---------------- -----------------
Net decrease in cash (627) (5,607)
CASH, BEGINNING OF PERIOD 5,967 5,622
---------------- -----------------
CASH, END OF PERIOD $ 5,340 $ 15
================ =================
.
8
The accompanying notes are an integral part of these financial statements
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
NEWGOLD, Inc. (the "Company") has been in the business of acquiring,
exploring, developing, and producing gold properties. The Company had
rights to mine properties in Nevada and Montana. Its primary focus was on
the Relief Canyon Mine located near Lovelock, Nevada, where it has
performed development and exploratory drilling and was in the process of
obtaining permits to allow operation of the Relief Canyon Mine. In December
1997, the Company placed the Relief Canyon Mine on care and maintenance
status. The Company also conducted exploration at its Washington Gulch Mine
property in Montana.
In February 2000 the Company began to implement an entirely new business
model of investing in Internet companies. Due to the deterioration of the
investment market for these types of companies later in 2000, the Company
abandoned this investment strategy. From mid-2001 until the beginning of
2003 Newgold was essentially inactive, only continuing with some of the
care and maintenance at Relief Canyon, as provided for by a non-affiliate
company owned by the Chairman and CEO of Newgold.
Merger
------
In November 1996, Newgold, Inc. of Nevada ("Old Newgold") was merged into
Warehouse Auto Centers, Inc. ("WAC"), a public company, which had
previously filed an involuntary petition under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the
Western District of New York. Pursuant to the plan of reorganization and
merger (the "Plan"), (i) WAC, which was the surviving corporation for legal
purposes, changed its name to Newgold Inc. (ii) the outstanding shares of
Old Newgold were converted into the right to receive an aggregate of
12,000,000 shares or approximately 69% of the post merger outstanding
common stock of the Company, (iii) each outstanding share of WAC was
converted into the right to receive 1/65 share of the common stock of the
Company, for an aggregate of 51,034 shares or less than 1% of the post
merger outstanding common stock, (iv) unsecured trade debts and other
unsecured pre-petition liabilities were paid in full via the issuance of
one share of the Company's stock, for each $42 of debt, for an aggregate of
63,374 shares or less than 1% of the post merger outstanding common stock,
and (v) post petition creditors received 1 share of stock for each $1 of
debt, for an aggregate of 191,301 shares or approximately 1% of the post
merger outstanding common stock. The Plan also required an amendment to the
Company's capital structure to increase the number of shares authorized to
50,000,000 and to reduce the corresponding par value to $.001.
In connection with the Plan, the Company raised $4,707,000 of cash through
the issuance of convertible debtor certificates. Shortly after confirmation
of the Plan, the debtor certificates were exchanged for 5,135,130 shares of
common stock (including 428,130 shares issued in lieu of paying cash for
underwriter's fees) representing approximately 29% of the post merger
outstanding common stock. An additional bonus of 513,514 shares was issued
to investors and underwriters during the year ended January 31, 1998 for
delay in the effective date of the Company's stock trading.
For accounting purposes, Old Newgold has been treated as the acquirer
(reverse acquisition). Accordingly, the historical financial statements
prior to November 21, 1996 are those of Old Newgold. There were no assets
or liabilities acquired in this transaction and there is no impact on the
statement of operations.
9
NOTE 2 - GOING CONCERN
These financial statements have been prepared on a going concern basis.
However, during the year ended January 31, 2004, the Company incurred a net
loss of $470,823 and had negative cash flows from operations of $176,583.
In addition, the Company had an accumulated shareholders' deficit of
$4,425,944 at January 31, 2004. The Company's ability to continue as a
going concern is dependent upon its ability to generate profitable
operations in the future and/or to obtain the necessary financing to meet
its obligations and repay its liabilities arising from normal business
operations when they come due. The outcome of these matters cannot be
predicted with any certainty at this time. Since inception, the Company has
satisfied its capital needs by issuing equity securities.
Management plans to continue to provide for its capital needs during the
year ended January 31, 2005 by issuing equity securities or incurring
additional debt financing, with the proceeds to be used to re-establish
mining operations at Relief Canyon as well as improve its working capital
position. These financial statements do not include any adjustments to the
amounts and classification of assets and liabilities that may be necessary
should the Company be unable to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Marketable Securities Available for Sale
----------------------------------------
Investments in equity securities are classified as available-for-sale.
Securities classified as available for sale are marked to market at each
period end. Changes in value on such securities are recorded as a component
of Other comprehensive income (loss). If declines in value are deemed other
than temporary, losses are reflected in Net income (loss).
Deferred Reclamation Costs
--------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations," which established a uniform methodology
for accounting for estimated reclamation and abandonment costs. The
statement was adopted February 1, 2003. The reclamation costs will be
allocated to expense over the life of the related assets and will be
adjusted for changes resulting from the passage of time and revisions to
either the timing or amount of the original present value estimate.
Prior to adoption of SFAS No. 143, estimated future reclamation costs were
based principally on legal and regulatory requirements. Such costs related
to active mines were accrued and charged over the expected operating lives
of the mines using the UOP method based on proven and probable reserves.
Future remediation costs for inactive mines were accrued based on
management's best estimate at the end of each period of the undiscounted
costs expected to be incurred at a site. Such cost estimates included,
where applicable, ongoing care, maintenance and monitoring costs. Changes
in estimates at inactive mines were reflected in earnings in the period an
estimate was revised.
Risks Associated with Gold Mining
---------------------------------
The business of gold mining is subject to certain types of risks, including
environmental hazards, industrial accidents, and theft. Prior to suspending
operations, the Company carried insurance against certain property damage
loss (including business interruption) and comprehensive general liability
insurance. While the Company maintained insurance consistent with industry
practice, it is not possible to insure against all risks associated with
the mining business, or prudent to assume
10
that insurance will continue to be available at a reasonable cost. The
Company has not obtained environmental liability insurance because such
coverage is not considered by management to be cost effective. The Company
currently carries no insurance on any of its properties due to the current
status of the mine and the Company's current financial condition.
Reclamation Costs
-----------------
Reclamation costs and related accrued liabilities, which are based on the
Company's interpretation of current environmental and regulatory
requirements, are accrued and expensed, upon determination.
Based on current environmental regulations and known reclamation
requirements, management has included its best estimates of these
obligations in its reclamation accruals. However, it is reasonably possible
that the Company's best estimates of its ultimate reclamation liabilities
could change as a result of changes in regulations or cost estimates.
Comprehensive Income
--------------------
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which
are excluded from net income, include foreign currency translation
adjustments, minimum pension liability adjustments, and unrealized gains
and losses on available-for-sale marketable securities. Comprehensive
income is presented in the Company's financial statements since the Company
did have unrealized gain (loss) from changes in equity from
available-for-sale marketable securities.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Loss Per Share
--------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per
share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. Common equivalent
shares are excluded from the computation if their effect is anti-dilutive.
The following common stock equivalents were excluded from the calculation
of diluted loss per share since their effect would have been anti-dilutive:
2004 2003
------------- -------------
Warrants 3,839,229 2,738,600
11
NOTE 4 -MARKETABLE SECURITIES AVAILABLE FOR SALE
At July 31, 2004 the Company held 71,205 common shares of NutraCea which
were accounted for as an investment in marketable securities. Unrealized
holding losses of $19,225 and $49,843 for the three and six months ended
July 31, 2004, respectively, and $0 and $0 for the three months and six
months ended July 31, 2003, respectively, were recorded in Other
comprehensive loss to reflect the market value decrease during the
respective periods. In October 2004 the Company sold all of its investment
in marketable securities (see Note 10).
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at July 31, 2004 was recorded at no value. The
Company had previously determined that the value of its fixed assets at the
Relief Canyon Mine were permanently impaired and wrote off assets with a
basis of $800,000. If the Company can reestablish mining operations at
Relief Canyon it is possible that some of these assets could be utilized in
such operations.
A summary of property and equipment was as follows:
` Machinery
& Development Capitalized
Buildings Equipment Costs Interest Total
Relief Canyon Mine $215,510 $277,307 $261,742 $45,441 $800,000
All office furniture and equipment has been fully depreciated as of July
31, 2004.
NOTE 6 - NOTES PAYABLE TO RELATED PARTIES AND INDIVIDUALS
Unsecured notes payable to individuals and related parties consist of the
following at July 31, 2004:
Loans from officer. The notes bear interest at 8% per
year. The notes are currently due. The Company is in
default with respect to these loans. In connection with
the loans, warrants to purchase 3,839,229 shares of
common stock have been issued. The warrants have been
valued using the Black-Scholes option pricing model
(see Note 7). The warrants were issued at $0.15 per
share and expire in five years from the date of
issuance. $1,420,892
Loan from individual. The note bears interest at 8% per
year. The note is currently due. The Company is in
default with respect to this loan. 176,500
Other non-interest bearing advances 47,038
Unamortized warrant expense (31,800)
-----------
Total notes payable to individuals and related parties $1,612,630
===========
The Company recorded interest expense of $51,841 and $99,406 for the three
months and six months ended July 31, 2004.
12
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Except for the advance royalty and rent payments noted below, the Company
is not obligated under any capital leases or non-cancelable operating lease
with initial or remaining lease terms in excess of one year as of July 31,
2004. However, minimum annual royalty payments are required to retain the
lease rights to the Company's properties.
Relief Canyon Mine
------------------
The Company purchased the Relief Canyon Mine from J.D. Welsh Associates
("Welsh") in January 1995. The mine consisted of 39 claims and a lease for
access to an additional 800 acres contiguous to the claims. During 1997,
the Company staked an additional 402 claims. Subsequent to January 31,
1998, the Company reduced the total claims to 50 (approximately 1,000
acres). The annual payment to maintain these claims is $5,000. As part of
the original purchase of Relief Canyon Mine, Welsh assigned the lease from
Santa Fe Gold Corporation (Santa Fe) to the Company. The lease granted
Santa Fe the sole right of approval of transfer to any subsequent owner of
the Relief Canyon Mine. Santa Fe had accepted lease and minimum royalty
payments from the Company, but has declined to approve the transfer. Due to
Welsh's inability to transfer the Santa Fe lease, the original purchase
price of $500,000 for Relief Canyon Mine was reduced by $50,000 in 1996 to
$450,000.
Subsequent to January 31, 1998, the lease was terminated by Santa Fe.
Management believes loss of the Santa Fe lease will have no material
adverse affect on the remaining operations of the mine operation or the
financial position of the Company.
During 1996, Repadre Capital Corporation ("Repadre") purchased for $500,000
a net smelter return royalty (Repadre Royalty). Repadre was to receive a
1.5% royalty from production at each of the Relief Canyon Mine and Mission
Mines. In July 1997, an additional $300,000 was paid by Repadre for an
additional 1% royalty from the Relief Canyon Mine. In October, 1997, when
the Mission Mine lease was terminated, Repadre exercised its option to
transfer the Repadre Royalty solely to the Relief Canyon Mine resulting in
a total 4% royalty. The total amount received of $800,000 has been recorded
as deferred revenue in the accompanying financial statements.
Litigation
----------
On December 3, 1996, plaintiff Roy Christiansen filed a breach of contract
action against the Company in the Second Judicial District, Reno, Washoe
County, Nevada. Plaintiff alleged that he was owed $250,000 relating to
recovery of his investment in a property subsequently acquired by the
Company. It was discovered during the pendency of this action that a former
Secretary-Treasurer of Newgold, Inc., (prior to the Company going public
through its merger with Warehouse Auto) signed a contract in 1994 which
obligated the Company, Newgold, Inc. (the Delaware Corporation) to pay
$250,000 to Christiansen, a former developer of the Golden Asset project
which Newgold purchased and is located in Helena Montana. This obligation
was unknown to the current principals of the Company. During the course of
litigation, Plaintiff moved the court for summary judgment based on this
signed agreement; this motion was granted and a judgment for $250,000 was
entered against the Company. On May 11, 2000, the Company satisfied this
judgment through the issuance of 350,000 shares of Common Stock to a
shareholder who subsequently settled this judgment.
On May 7, 1997 a judgment was entered against the Company on behalf of the
plaintiff, Roger Primm, in the Second Judicial District, Reno, Washoe
County, Nevada. The underlying lawsuit sought repayment of a loan made by
the plaintiff to the Company; loan proceeds were used for development
purposes at the Company's mining properties. On May 11, 2000, the Company
13
satisfied this judgment through the issuance of 300,000 shares of Common
Stock to a shareholder who subsequently settled this judgment.
On March 11, 1998, one of the Company's former consulting firms, JBR
Consultants, instituted a suit against the Company for sums due under a
consultant engineering contract. On August 19, 1998 the court for the
Second Judicial District, Washoe County, Reno, Nevada, entered a default
judgment against the Company for $28,815. On September 25, 1999, the
outstanding balance of the judgment was paid in full.
On February 4, 2000, a complaint was filed against the Company by Sun G.
Wong in the Superior Court of Sacramento County, California (Case No.
00AS00690). In the complaint, Mr. Wong claims that he was held liable as a
guarantor of Newgold in a claim brought by Don Christianson in a breach of
contract action against Newgold. Despite the fact that Newgold settled the
action with Mr. Christianson through the issuance of 350,000 shares of
Newgold common stock, Mr. Wong, nevertheless, paid $60,000 to a third party
claiming to hold Mr. Christianson's judgment pursuant to Mr. Wong's
guaranty agreement. Similarly, Mr. Wong alleges that he was held liable as
a guarantor for a debt of $200,000 owed by Newgold to Roger Primm with
regard to money borrowed by Newgold. Mr. Primm filed suit against the
Company which was settled through the issuance of 300,000 shares of Newgold
common stock. Nevertheless, Mr. Wong alleges that he remains liable to a
third party claiming to hold Mr. Primm's judgment for up to $200,000
pursuant to his guaranty of such debt of Mr. Primm.
On December 29, 2000, the superior court entered a default judgment against
Newgold in the amount of $400,553 with regard to the Christianson judgment
and an additional $212,500 in regard to the Primm judgment against Mr.
Wong. The Company believes that Mr. Wong was not obligated to pay any sums
pursuant to his guarantees with regard to the Christianson and Primm
judgments against Newgold and, as a result, Mr. Wong should not have any
recourse against the Company for reimbursement. Should Mr. Wong seek to
assert these judgments against the Company, the Company cannot predict the
outcome of any such action or the amount of expenses that would be
ultimately incurred in defending any such claims. The Company is currently
negotiating a settlement with Mr. Wong, however there is no assurance that
an acceptable settlement will be consummated.
On May 18, 2004 Paul Ngoyi filed a petition for involuntary bankruptcy
against Newgold (Case No. BK-N-0451511). Mr. Ngoyi claims to be the holder
of both the Christiansen and Primm judgments against Newgold and is claming
that Newgold cannot pay such judgments because it is insolvent. Newgold
intends to file for Summary Judgment alleging that Mr. Ngoyi's claims are
invalid as the two judgments were previously satisfied and that Newgold is
not insolvent. A preliminary hearing on the Summary Judgment motion has not
yet been scheduled. The Company intends to vigorously oppose the bankruptcy
petition.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate dispositions of these matters will not have a material adverse
effect on the Company's financial position, results or operations or
liquidity.
NOTE 8 - SHAREHOLDERS' DEFICIT
Common Stock
------------
On February 20, 2003 warrants to purchase 200,000 shares of common stock
were exercised at a price of $0.10 per share. The original exercise price
was $1.00 however the investor and the
14
Company renegotiated the exercise price to $0.10 per share.
Warrants
--------
The Company has issued common stock warrants to an officer of the Company
as part of certain financing transactions (see Note 5 and Note 10).
The fair market value of these warrants issued during the quarter ended
July 31, 2004 was determined to be $9,067 and was calculated under the
Black-Scholes option pricing model with the following assumptions used:
Expected life 5 years
Risk free interest rate 3.71%
Volatility 348%
Expected dividend yield None
The fair value of these warrants is being amortized to interest expense
over one year, the original life of the loans. Total amortization expense
was $19,357 and $35,337 for the three and six months ended July 31, 2004,
respectively, and $0 and $3,393 for the three months and six months ended
July 31, 2003, respectively.
The following table presents warrant activity from January 31, 2004 through
July 31, 2004:
Weighted-
Average
Number Exercise
of Shares Price
Outstanding, January 31, 2002 3,718,229 $0.15
Granted 121,000 $0.15
-------------- ----------
Outstanding, July 31, 2004 3,839,229 $0.15
============== ==========
Exercisable, July 31, 2004 3,839,229 $0.15
============== ==========
NOTE 9 - RELATED PARTY TRANSACTIONS
Loans from officer
------------------
During the quarter ended April 30, 2004, the Chief Executive Officer and
Chairman of the Company, loaned the Company $10,000 and was repaid $350.
During the quarter ended July 31, 2004, the Chief Executive Officer and
Chairman of the Company, loaned the Company $8,500 and was repaid $0. As of
July 31, 2004 the net principal balance owing to him was $1,420,892 and
accrued interest payable was $388,030. See Note 6 and Note 10.
Accrued Payroll and Expenses Owed to Officers
---------------------------------------------
As of July 31, 2004 the Company owed the Chief Executive Officer and
Chairman of the Company $94,000 for back wages. As of July 31, 2004 the
Company owed the Chief Financial Officer and Secretary of the Company
$244,834 for back wages and $19,717 for accrued expenses. See Note 10.
15
NOTE 10 - SUBSEQUENT EVENTS
As of October 31, 2004 the Chief Executive Officer and Chairman of the
Company, loaned the Company an additional $21,581 and was repaid $350
during fiscal 2005. In connection with the loans, warrants to purchase
141,500 shares of common stock have been issued. The warrants were issued
at $0.15 per share and expire in five years from the date of issuance.
In October 2004, the Company consolidated the amounts owed to the Chief
Executive Officer and the Chief Financial Officer as of January 31, 2004
(excluding accrued interest payable) into new convertible notes payable
bearing interest at 8% and due September 30, 2005. The notes and any
interest accrued on the new notes are convertible into common shares of the
Company at a conversion price of $0.15 per share. In connection with the
loans, warrants to purchase 5,798,140 and 1,395,007 shares of common stock
have been issued to the Chief Executive Officer and the Chief Financial
Officer, respectively.
In October 2004, the Company liquidated its investment in marketable
securities through open market transactions. Net proceeds totaled
approximately $34,100.
In October 2004, the Company re-staked the Relief Canyon mill site and lode
claims, which now include a total of 78 claims. The annual payment to
maintain these claims is approximately $15,600.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-QSB includes "forward-looking" statements about future financial
results, future business changes and other events that haven't yet occurred. For
example, statements like the Company "expects," "anticipates" or "believes" are
forward-looking statements. Investors should be aware that actual results may
differ materially from the Company's expressed expectations because of risks and
uncertainties about the future. The Company does not undertake to update the
information in this Form 10-QSB if any forward-looking statement later turns out
to be inaccurate. Details about risks affecting various aspects of the Company's
business are discussed throughout this Form 10-QSB and should be considered
carefully.
PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
Certain key factors that have affected the Company's financial and operating
results in the past will affect its future financial and operating results.
These include, but are not limited to the following:
o Gold prices, and to a lesser extent, silver prices;
o Current gold deposits under Company control at the Relief Canyon Mine
are estimated by the Company (based on past exploration by the Company
and work done by others).
The Company's properties now include 50 unpatented mining claims
contained in about 1000 acres.
The Company's operating plan is to place its mining claims into
profitable production by the end of 2005, and use the net proceeds from
these operations to fund ongoing exploration and development of its
property holdings. Through the use of joint ventures, royalties and
partnerships, the Company intends to progressively enlarge the scope
and scale of the mining and processing operations, thereby increasing
both the Company's annual revenues and its net profits. The Company's
objective is to achieve quarterly growth rates in revenue and net
profits for the foreseeable future;
o The Company expects to make capital expenditures in fiscal year 2006 of
between $2.5 million and $4 million, including costs related to the
resumption of mine operations and production at the Relief Canyon mine.
o Due to the strengthening of the gold market, and consistent with the
Company's exploration growth strategy, it expects exploration, research
and development expenditures in 2005 will total between $500,000 and $1
million.
17
o Additional funding or the utilization of other venture partners will be
required for mining operations, exploration, research, development and
operating expenses. In the past the Company has been dependent on the
funding from the private placement of its securities as well as loans
from related parties as the sole sources of capital to fund its
operations.
RESULTS OF OPERATIONS
The Company has only recently resumed business operations after having been
inactive from July 2001 until February 2003. Consequently, comparisons between
the operating results of the Company for the fiscal years 2004 and 2005 are not
as relevant as they otherwise would be if the Company had been engaged in
business operations during both fiscal years. In addition, because the Company
is in the process of reinstituting its business and mining operations, the
results of operations for the last two fiscal years will likely not be
indicative of the Company's current and future operations. The current
management discussion and analysis should be read from the context of the
Company's recent resumption of its mining business.
Operating Results for the Fiscal Quarters Ended July 31, 2004 and 2003
----------------------------------------------------------------------
Although the Company commenced efforts to re-establish its mining business early
in fiscal year 2004, no mining operations have commenced and no revenues have
been recognized during the quarter ended July 31, 2004. The Company was also
inactive during the quarter ended July 31, 2003 and, as a result, generated no
revenues from operations. The Company hopes to be able to commence generating
revenues from mining operations during the 2006 fiscal year. The Company has
granted a 4% net smelting return royalty to a third party which has been
recorded as an $800,000 deferred option income.
During the quarter ended July 31, 2004 the Company spent $5,000 on exploration
expenses related to the Relief Canyon mining property. This compares to
exploration expenses of $1,500 expended during the same quarter ended July 31,
2003. These expenses relate primarily to estimated maintenance and retention
costs required to maintain the Company's mining claims. The Company incurred
operating expenses of $77,407 during the quarter ended July 31, 2004. Of this
amount, $55,000 reflects officer compensation and related payroll taxes during
the quarter, $8,315 reflect payroll tax penalties and $12,000 reflect fees for
outside professional services. During the same quarter ended July 31, 2003 the
Company incurred operating expenses of $76,431 of which $55,000 represents
officer compensation and $8,065 reflecting payroll tax penalties. It is
anticipated that both exploration costs and operating expenses will increase
significantly as the Company resumes its mining operations and exploration
program.
The Company incurred interest expense of $51,841 during the quarter ended July
31, 2004 which compares to interest expenses of $28,085 incurred during the same
quarter ended July 31, 2003. Although the amount of loans outstanding during the
second quarter of fiscal 2005 increased slightly, the increase in additional
interest expense was a direct result of the increase in accretion of warrants
issued as a debt discount.
18
The Company's total net loss for the quarter ended July 31, 2004 increased to
$134,248 compared to a net loss of $100,985 incurred for the same quarter ended
July 31, 2003. The larger net loss in the current fiscal year reflects the
substantial increase in operating expenses and interest expense as well as a
lack of revenues recognized during the second quarter of fiscal year 2005.
Operating Results for the Six Months Ended July 31, 2004 and 2003
-----------------------------------------------------------------
During the six months ended July 31, 2004 the Company spent $10,000 on
exploration expenses related to the Relief Canyon mining property. This compares
to exploration expenses of $1,500 expended during the same period ended July 31,
2003. These expenses relate primarily to estimated maintenance and retention
costs required to maintain the Company's mining claims. The Company incurred
operating expenses of $152,782 during the six months ended July 31, 2004. Of
this amount, $110,000 reflects officer compensation and related payroll taxes
during the period, $16,505 reflect payroll tax penalties and $23,000 reflect
fees for outside professional services. During the same period ended July 31,
2003 the Company incurred operating expenses of $143,283 of which $110,000
represents officer compensation and $16,129 reflecting payroll tax penalties. It
is anticipated that both exploration costs and operating expenses will increase
significantly as the Company resumes its mining operations and exploration
program.
The Company incurred interest expense of $99,406 during the six months ended
July 31, 2004 which compares to interest expenses of $59,446 incurred during the
same period ended July 31, 2003. Although the amount of loans outstanding during
the first six months of fiscal 2005 increased slightly, the increase in
additional interest expense was a direct result of the increase in accretion of
warrants issued as a debt discount.
The Company's total net loss for the six months ended July 31, 2004 increased to
$262,187 compared to a net loss of $194,167 incurred for the same period ended
July 31, 2003. The larger net loss in the current fiscal year reflects the
substantial increase in operating expenses and interest expense as well as a
lack of revenues recognized during the first six months of fiscal year 2005.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses during the last two fiscal
years and during the six month period ended July 31, 2004 which has resulted in
an accumulated deficit of $15,369,350 as of July 31, 2004. At July 31, 2004, the
Company had cash and marketable securities of $65,865 and a net working capital
deficit of $4,452,343. Since the resumption of its business in February 2003,
the Company has been dependent on borrowed or invested funds in order to finance
its ongoing operations. As of July 31, 2004, the Company had $1,612,630 of
outstanding notes payable which reflects an increase compared to notes payable
of $1,581,721 outstanding as of January 31, 2004.
During the quarter ended July 31, 2004 the Company borrowed an additional $8,500
from its President and Chief Executive Officer at an interest rate of 8% per
year. This amount increased the Company's total indebtedness to its President to
$1,420,892. Notes representing principal
19
and interest due to the President of the Company as well as notes payable to
four other individuals have one year terms. As of July 31, 2004, $1,255,798 of
loans due to the Company's President and $176,500 of loans due to other
individuals were in default.
By attempting to resume mining operations, the Company will require
approximately $3 million to $5 million in additional working capital above the
current working capital deficiency to bring the mine into full production. It is
the Company's intention to pursue several possible funding opportunities
including the sale of additional securities or the incurring of additional debt.
Due to the Company's continuing losses from its business operations, the
independent auditor's report dated November 7, 2004, includes a "going concern"
explanation relating to the fact that the Company's continuation is dependent
upon obtaining additional working capital either through significantly
increasing revenues or through outside financing. As of July 31, 2004, Newgold's
principal commitments included its obligation to pay ongoing maintenance fees on
its 50 unpatented mining claims.
Due to the Company's limited cash flow, operating losses and limited assets, it
is unlikely that the Company could obtain financing through commercial or
banking sources. Consequently, the Company is dependent on continuous cash
infusions from its major stockholders or other outside sources in order to fund
its current operations. If these investors were unwilling or unable to provide
necessary working capital to the Company, the Company would probably not be able
to commence or sustain its operations. There is no written agreement or
contractual obligation which would require the Company's investors to fund
Company operations up to a certain amount or indeed continue to finance the
Company's operations at all.
Management of the Company believes that it will need to raise additional capital
to continue to develop, promote and conduct its mining operations. Such
additional capital may be raised through public or private financing as well as
borrowing from other sources. To date, the Company's President has paid
substantially all of the Company's expenses since restarting its business in
February 2003. Although the Company believes that these creditors and investors
will continue to fund the Company's expenses based upon their significant debt
or equity interest in Newgold, there is no assurance that such investors will
continue to pay the Company's expenses. If adequate funds are not otherwise
available, the Company would not be able to establish or sustain mining
operations.
Off-Balance Sheet Arrangements
------------------------------
During the fiscal quarter ended July 31, 2004, the Company did not engage in any
off-balance sheet arrangements as defined in Item 303(c) of the SEC's Regulation
S-B.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company has been relatively inactive since April 2001. Consequently, it is
only recently reactivating its business operations and has generated no
revenues, other than dividend income, since its inception. As a result, Newgold
has only a limited operating history upon which to evaluate its future potential
performance. The Company's prospects must be considered in light
20
of the risks and difficulties encountered by new companies which have not yet
established their business operations.
The Company will need additional funds to finance its mining and exploration
activities as well as fund its current operations. It currently has no cash
reserves and a working capital deficit and is unable to fund its operations from
revenues. Consequently, its ability to meet its obligations in the ordinary
course of business is dependent upon its ability to raise additional financing
through public or private equity financings, establish increasing cash flow from
operations, enter into joint ventures or other arrangements with corporate
sources, or secure other sources of financing to fund operations.
The audit report of the Company's independent auditors includes a "going
concern" qualification. In the auditor's opinion, the Company's limited
operating history and the accumulated net deficit as of January 31, 2004, raise
substantial doubt about its ability to continue as a going concern. See Note 2
to the Unaudited Financial Statements.
The price of gold has experienced an increase in value over the past three
years, generally reflecting among other things declining interest rates in the
United States; worldwide instability due to terrorism; and a global economic
slump. Any significant drop in the price of gold may have a materially adverse
affect on the results of the Company's operations unless the Company is able to
offset such a price drop by substantially increased production.
The Company prepares estimates of future gold production for its various
operations. The Company's production estimates are dependent on, among other
things, the accuracy of mineral reserve estimates, the accuracy of assumptions
regarding ore grades and recovery rates, assumptions pertaining to ground
conditions and physical characteristics of ores, such as hardness and the
presence or absence of particular metallurgical characteristics and the accuracy
of estimated rates and costs of mining and processing. The failure of the
Company to achieve its production estimates could have a material and adverse
effect on any or all of the Company's future cash flows, profitability, results
of operations and financial condition.
The Company's published figures for mineral resources are only estimates. The
Company has no proven or probable reserves and has no ability to currently
measure or prove its reserves other then relying on information produced in the
1990's and thus may be unable to actually recover the quantity of gold
anticipated. The Company can only estimate potential mineral resources which is
a subjective process which depends in part on the quality of available data and
the assumptions used and judgments made in interpreting such data. There is
significant uncertainty in any resource estimate such that the actual deposits
encountered or reserves validated and the economic viability of mining the
deposits may differ materially from the Company's estimates.
Gold exploration is highly speculative in nature. Success in exploration is
dependent upon a number of factors including, but not limited to, quality of
management, quality and availability of geological expertise and availability of
exploration capital. Due to these and other factors, no assurance can be given
that the Company's exploration programs will result in the discovery of new
mineral reserves or resources.
21
The Company's mining property rights consist of 50 unpatented mining claims. The
validity of unpatented mining claims is often uncertain and is always subject to
contest. Unpatented mining claims are generally considered subject to greater
title risk than patented mining claims, or real property interests that are
owned in fee simple. If title to a particular property is successfully
challenged, the Company may not be able to retain its royalty interests on that
property, which could reduce its future revenues.
Mining is generally subject to regulation by state and federal regulatory
authorities. State and federal statutes regulate environmental quality, safety,
exploration procedures, reclamation, employees' health and safety, use of
explosives, air quality standards, pollution of stream and fresh water sources,
noxious odors, noise, dust, and other environmental protection controls as well
as the rights of adjoining property owners. The Company believes that it is
currently operating in compliance with all known safety and environmental
standards and regulations applicable to its Nevada property. However, there can
be no assurance that its compliance could be challenged or that future changes
in federal or Nevada laws, regulations or interpretations thereof will not have
a material adverse affect on the Company's ability to resume and sustain mining
operations.
The business of gold mining is subject to certain types of risks, including
environmental hazards, industrial accidents, and theft. Prior to suspending
operations, the Company carried insurance against certain property damage loss
(including business interruption) and comprehensive general liability insurance.
While the Company maintained insurance consistent with industry practice, it is
not possible to insure against all risks associated with the mining business, or
prudent to assume that insurance will continue to be available at a reasonable
cost. The Company has not obtained environmental liability insurance because
such coverage is not considered by management to be cost effective. The Company
currently carries no insurance on any of its properties due to the current
status of the mine and the Company's current financial condition.
The Company is substantially dependent upon the continued services of A. Scott
Dockter, its President. The Company has no employment agreement with Mr.
Dockter, nor is there either key person life insurance or disability insurance
on Mr. Dockter. While Mr. Dockter expects to spend the majority of his time
assisting the Company, there can be no assurance that Mr. Dockter's services
will remain available to the Company. If Mr. Dockter's services are not
available to the Company, the Company will be materially and adversely affected.
However, Mr. Dockter has been a significant shareholder of the Company since its
inception and considers his investment of time and money in the Company of
significant personal value.
CRITICAL ACCOUNTING POLICIES
Newgold's discussion and analysis of its financial conditions and results of
operations are based upon its financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements require managers to make estimates and
disclosures on the date of the financial statements. On an on-going basis,
Newgold evaluates its estimates, including, but not limited to, those related to
revenue recognition. The Company uses authoritative pronouncements,
22
historical experience and other assumptions as the basis for making judgments.
Actual results could differ from those estimates. Newgold believes that the
following critical accounting policies affect its more significant judgments and
estimates in the preparation of its financial statements.
Valuation of long-lived assets
------------------------------
Long-lived assets, consisting primarily of property and equipment, patents and
trademarks, and goodwill, comprise a significant portion of the Company's total
assets. Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that their carrying values may not be recoverable.
Recoverability of assets is measured by a comparison of the carrying value of an
asset to the future net cash flows expected to be generated by those assets. The
cash flow projections are based on historical experience, management's view of
growth rates within the industry, and the anticipated future economic
environment.
Factors Newgold considers important that could trigger a review for impairment
include the following:
(a) significant underperformance relative to expected historical
or projected future operating results,
(b) significant changes in the manner of its use of the acquired
assets or the strategy of its overall business, and
(c) significant negative industry or economic trends.
When the Company determines that the carrying value of long-lived assets and
related goodwill and enterprise-level goodwill may not be recoverable based upon
the existence of one or more of the above indicators of impairment, it measures
any impairment based on a projected discounted cash flow method using a discount
rate determined by its management to be commensurate with the risk inherent in
its current business model.
Deferred Reclamation Costs
--------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which established a uniform methodology for
accounting for estimated reclamation and abandonment costs. The statement was
adopted February 1, 2003. The reclamation costs will be allocated to expense
over the life of the related assets and will be adjusted for changes resulting
from the passage of time and revisions to either the timing or amount of the
original present value estimate.
Prior to adoption of SFAS No. 143, estimated future reclamation costs were based
principally on legal and regulatory requirements. Such costs related to active
mines were accrued and charged over the expected operating lives of the mines
using the UOP method based on proven and
23
probable reserves. Future remediation costs for inactive mines were accrued
based on management's best estimate at the end of each period of the
undiscounted costs expected to be incurred at a site. Such cost estimates
included, where applicable, ongoing care, maintenance and monitoring costs.
Changes in estimates at inactive mines were reflected in earnings in the period
an estimate was revised.
Exploration Costs
-----------------
Exploration costs are expensed as incurred. All costs related to property
acquisitions are capitalized.
Mine Development Costs
----------------------
Mine development costs consist of all costs associated with bringing mines into
production, to develop new ore bodies and to develop mine areas substantially in
advance of current production. The decision to develop a mine is based on
assessment of the commercial viability of the property and the availability of
financing. Once the decision to proceed to development is made, development and
other expenditures relating to the project will be deferred and carried at cost
with the intention that these will be depleted by charges against earnings from
future mining operations. No depreciation will be charged against the property
until commercial production commences. After a mine has been brought into
commercial production, any additional work on that property will be expensed as
incurred, except for large development programs, which will be deferred and
depleted.
Reclamation Costs
-----------------
Reclamation costs and related accrued liabilities, which are based on the
Company's interpretation of current environmental and regulatory requirements,
are accrued and expensed, upon determination.
Based on current environmental regulations and known reclamation requirements,
management has included its best estimates of these obligations in its
reclamation accruals. However, it is reasonably possible that the Company's best
estimates of its ultimate reclamation liabilities could change as a result of
changes in regulations or cost estimates.
ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's President and
Chief Executive Officer along with the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14 as of the end of the period
covered by this report. Based upon that evaluation, the Company's President and
Chief Executive Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure the information required to be disclosed by the Company in reports filed
or submitted under the
24
Exchange Act were timely recorded, processed and reported within the time
periods specified in the Securities and Exchange Commission rules and forms.
There have been no significant changes in the Company's internal controls over
financial reporting or in other factors which occurred during the last quarter
covered by this report, which could materially affect or are reasonably likely
to materially affect the Company's internal controls over financial reporting.
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 18, 2004, Paul Ngoyi filed a petition for involuntary bankruptcy against
the Company (Case No. BK-N-0451511). Mr. Ngoyi claims to be a holder of both the
Christiansen and Primm judgments against Newgold and is claiming that Newgold
cannot pay such judgments because it is insolvent. Newgold intends to file for
Summary Judgment alleging that Mr. Ngoyi's claims are invalid because the two
judgments were previously satisfied and that Newgold is not insolvent. While the
petition is in its early stages and an outcome cannot be predicted, the Company
intends to vigorously oppose the bankruptcy petition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES DURING THE QUARTER
In July 2004, the Company borrowed $8,500 from its President, Scott Dockter. The
promissory note is not convertible into stock, is due on July 31,2005, and bears
interest at 8% per year. In connection with the loans, warrants to purchase
56,667 shares of common stock have been issued. The warrants have been valued
using the Black-Scholes option pricing model. The warrants were issued at $0.15
per share and expire in five years from the date of issuance. The issuance of
the note and warrants were made in reliance upon the exemption from registration
set forth in Section 4(2) of the 1933 Act as a transaction not involving a
public offering and made to one affiliate of the Company. The note and warrants
were deemed to be "restricted securities" as defined in Rule 144 under the 1933
Act.
Prior issuances of the Company's common stock during fiscal years 2003 and 2004
have been reported in the Company's Form 10-KSB for the year ended January 31,
2004.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32. Certification by CEO and CFO pursuant to Section 906 of the
Sarbanes- Oxley Act of 2002
26
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: December 28, 2004 NEWGOLD, INC.
/s/ SCOTT DOCKTER
--------------------------------------------
Scott Dockter, President and Chief Executive
Officer
/s/ JAMES KLUBER
--------------------------------------------
James Kluber, Principal Accounting Officer
and Chief Financial Officer
27