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 APRIL 30, 2005
[ ] 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)
400 Capitol Mall, Suite 900
Sacramento, California 95814
--------------------------------------- ----------------------------------------
(Address of Principal Executive Offices) Zip Code
Issuer's telephone number: (916) 449-3913
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 X NO
Common stock, $0.001 par value, 50,777,841 issued and outstanding as of June 1,
2005.
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.................................................16
ITEM 3. CONTROLS AND PROCEDURES.....................................23
PART II - OTHER INFORMATION..................................................24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES.....................24
ITEM 5. OTHER INFORMATION...........................................25
ITEM 6. EXHIBITS ...................................................25
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEWGOLD, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
----
Condensed Balance Sheet as of April 30, 2005 (Unaudited) 4
Condensed Statements of Operations for the three months
ended April 30, 2005 and 2004 (Unaudited) 5
Condensed Statements of Comprehensive Loss for the three months
ended April 30, 2005 and 2004 (Unaudited) 6
Condensed Statements of Cash Flows for the three months
ended April 30, 2005 and 2004 (Unaudited) 7
Notes to Unaudited Financial Statements 8-15
3
NEWGOLD, INC.
CONDENSED BALANCE SHEET
April 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 243,192
Travel advance 2,657
--------------
Total current assets 245,849
Other Assets
Deferred reclamation costs 513,946
--------------
Total other assets 513,946
--------------
Total assets $ 759,795
==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 538,276
Accrued expenses 1,708,409
Accrued reclamation costs 513,946
Notes payable due to individuals and officers 1,327,147
--------------
Total current liabilities 4,087,778
Deferred revenue 800,000
--------------
Total liabilities 4,887,778
Commitments and contingencies
Shareholders' deficit
Common stock, $0.001 par value
250,000,000 shares authorized
50,777,841 shares issued and outstanding 50,778
Additional paid in capital 12,795,245
Accumulated deficit (16,974,006)
Total shareholders' deficit (4,127,983)
--------------
Total liabilities and shareholders' deficit $ 759,795
==============
4
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended April 30,
(Unaudited)
--------------------------------------------------------------------------------
2005 2004
----------- -----------
Net sales $ - $ -
Cost of goods sold 29,000 5,000
----------- -----------
Gross loss (29,000) (5,000)
Operating expenses (202,880) (75,375)
----------- -----------
Loss from operations (231,880) (80,375)
----------- -----------
Other income (expense)
Interest expense (356,824) (47,565)
----------- -----------
Total other income (expense) (356,824) (47,565)
----------- -----------
Net loss $ (588,704) $ (127,940)
=========== ===========
Basic and diluted loss per share $ (0.01) $ (0.01)
=========== ===========
Basic and diluted weighted-average
shares outstanding 49,446,380 47,606,174
=========== ===========
5
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
For the Three Months Ended April 30,
(Unaudited)
--------------------------------------------------------------------------------
2005 2004
------------ ------------
Net loss $ (588,704) $ (127,940)
Other comprehensive loss
Unrealized loss from
marketable securities - (30,618)
------------ ------------
Comprehensive loss $ (588,704) $ (158,558)
============ ============
6
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended April 30,
(Unaudited)
--------------------------------------------------------------------------------------------------
2005 2004
------------ ------------
Cash flows from operating activities
Net loss $ (588,704) $ (127,940)
Adjustments to reconcile net loss to net cash
used in operating activities
Accretion of warrants issued as a debt discount 294,192 15,980
Accretion of beneficial conversion of warrants 26,868 -
(Increase) Decrease in
Deposits - 11,000
Travel advance (657) -
Increase (Decrease) in
Accounts payable (30,000) -
Accrued salaries and benefits (50,237) 40,000
Accrued expenses - 51,275
------------ ------------
Net cash (used) provided by
operating activities (348,538) (9,685)
------------ ------------
Cash flows from investing activities - -
Cash flows from financing activities
Proceeds from the issuance of common stock 575,000 -
Proceeds from note payable - 10,000
Repayments of note payable - (350)
------------ ------------
Net cash provided (used) by financing activities 575,000 9,650
Net increase (decrease) in cash 226,462 (35)
Cash, beginning of period 16,730 5,967
------------ ------------
Cash, end of period $ 243,192 $ 5,932
============ ============
7
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
For the Three Months Ended April 30, 2005
(Unaudited)
--------------------------------------------------------------------------------
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.
The Company has embarked on a business strategy whereby it will invest
in and/or manage gold mining and other mineral producing properties.
Currently, the Company's principal assets include various mineral
leases associated with the Relief Canyon mine located near Lovelock,
Nevada along with various items of mining equipment located at that
site. The Company's business will be to acquire, explore and, if
warranted, develop various mining properties located in the state of
Nevada. The Company plans to carryout comprehensive exploration and
development programs on its properties. While the Company may fund and
conduct these activities itself, the Company's current plan is to
outsource most of these activities through the use of various joint
venture, royalty or partnership arrangements pursuant to which other
companies would agree to finance and carryout the exploration and
development programs on Newgold's mining properties. Consequently, the
Company's current plan will not require the hiring of significant
amounts of mining employees but will require a smaller group of
employees to monitor and/or supervise the mining and exploration
activities of other entities in exchange for royalties or other revenue
sharing arrangements.
NOTE 2 - GOING CONCERN
These financial statements have been prepared on a going concern basis.
However, during the year ended January 31, 2005, the Company incurred a
net loss of $1,278,140 and had negative cash flows from operations of
$353,201. In addition, the Company had an accumulated shareholders'
deficit of $4,114,280 at January 31, 2005. 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
8
needs by issuing equity securities.
Management plans to continue to provide for its capital needs during
the year ended January 31, 2006 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
Cash and Cash Equivalents
-------------------------
For the purpose of the statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents.
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 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.
9
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) of from changes in equity from available-for-sale
marketable securities.
Stock-Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," defines a fair value based method of accounting for
stock-based compensation. However, SFAS No. 123 allows an entity to
continue to measure compensation cost related to stock and stock
options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain
with the accounting method of APB No. 25 must make pro forma
disclosures of net income and earnings per share as if the fair value
method of accounting defined in SFAS No. 123 had been applied. The
Company has elected to account for its stock-based compensation to
employees using the intrinsic value method under APB No. 25. There were
no stock options granted or outstanding for the three months ended
April 30, 2005 and 2004.
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.
10
The following common stock equivalents were excluded from the
calculation of diluted loss per share since their effect would have
been anti-dilutive:
2005 2004
---------- ---------
Warrants 13,324,583 3,782,562
Recent Accounting Pronouncements
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations". FIN No. 47
clarifies that the term conditional asset retirement obligation as used
in FASB Statement No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement
are conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the
timing and (or) method of settlement. Uncertainty about the timing
and/or method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability
when sufficient information exists. This interpretation also clarifies
when an entity would have sufficient information to reasonably estimate
the fair value of an asset retirement obligation. FIN No. 47 is
effective no later than the end of fiscal years ending after December
15, 2005 (December 31, 2005 for calendar-year companies). Retrospective
application of interim financial information is permitted but is not
required. Management does not expect adoption of FIN No. 47 to have a
material impact on the Company's financial statements.
NOTE 4 - MARKETABLE SECURITIES AVAILABLE FOR SALE
At April 30, 2005 the Company held no marketable securities available
for sale. At April 30, 2004 the Company held 71,205 common shares of
NutraCea which was accounted for as an investment in marketable
securities. During the quarter ended April 30, 2004, unrealized holding
losses of $30,618 were recorded in Other comprehensive loss to reflect
the market value decrease during the period. In October 2004 the
Company sold all of its investment in marketable securities.
NOTE 5 - PROPERTY AND EQUIPMENT
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
April 30, 2005.
11
NOTE 6 - NOTES PAYABLE TO RELATED PARTIES AND INDIVIDUALS
Unsecured notes payable to individuals and related parties consist of
the following at April 30, 2005:
Loans from officers:
Convertible notes payable $1,611,993
The notes bear interest at 8% per year.
In October 2004, the Company consolidated the amounts owed to the
Chief Executive Officer and the Chief Financial Officer referred
to in Note 9 (excluding accrued interest payable) into new
convertible notes payable 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.
Term notes payable $19,844
The notes bear interest at 8% per year.
The notes are due January 31, 2006. The Company is not in default
with respect to these loans. In connection with the loans,
warrants to purchase 141,540 shares of common stock have been
issued. The warrants have been valued using the Black-Scholes
option pricing model (see Note 8). The warrants were issued at
$0.15 per share and expire in five years from the date of
issuance.
Loan from individual $176,500
The note bears interest at 8% per year.
The note is currently due. The Company is in default with respect
to this loan.
Other non-interest bearing advances 47,038
Unamortized warrant expense (528,228)
Total notes payable to individuals
and related parties $1,327,147
Interest expense was $356,824 and $47,565 for the quarters ended April
30, 2005 and 2004, respectively.
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 April 30, 2005. 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
12
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 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.
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.
13
NOTE 8 - SHAREHOLDERS' DEFICIT
Common Stock
------------
In March 2005 a Special Meeting of Shareholders of the Company was held
for the purpose of amending the Articles of Incorporation to affect an
increase in the authorized shares of common stock issuable to
250,000,000 shares. At the meeting the proposal was approved by the
shareholders, with a total of 31,392,611 shares voting in favor of the
amendment, 411,711 voting against the amendment and 10,207 shares
abstained from voting.
In February 2005 the Company issued 500,000 shares of common stock at a
price of $0.15 per share to an investor for total proceeds of $75,000.
Additionally, 500,000 warrants to purchase common stock at a price of
$0.30 per share were issued to the investor. The warrants expire three
years from the date of issuance.
In April 2005 the Company issued 2,000,000 shares of common stock at a
price of $0.25 per share to investors for total proceeds of $500,000.
Additionally, 1,000,000 warrants to purchase common stock at a price of
$0.50 per share were issued to the investors. The warrants expire three
years from the date of issuance.
Warrants
--------
The Company has issued common stock warrants to officers of the Company
as part of certain financing transactions (see Note 6). The Company has
also issued warrants as part of the issuance of common stock (see this
Note 8).
The fair market value of warrants issued during the quarter ended April
30, 2005 in conjunction with the issuance of common stock was
determined to be $312,122 and was calculated under the Black-Scholes
option pricing model with the following assumptions used:
Expected life 3 years
Risk free interest rate 4.01%
Volatility 199.8%
Expected dividend yield None
The fair value of these warrants has been recorded as both a debit and
credit to additional paid in capital.
The following table presents warrant activity from January 31, 2005
through April 30, 2005:
Weighted-
Average
Number Exercise
of Shares Price
Outstanding, January 31, 2005 11,724,583 $ 0.16
Granted 1,500,000 $ 0.43
Outstanding, April 30, 2005 13,224,583 $ 0.19
Exercisable, April 30, 2005 13,224,583 $ 0.19
14
NOTE 9 - RELATED PARTY TRANSACTIONS
Loans from officers
-------------------
During prior periods, the Chief Executive Officer and Chairman of the
Company, loaned the Company an aggregate of $1,422,587. As of April 30,
2005 the net principal balance owing to him was $1,422,587 and accrued
interest payable was $449,931. See Note 6.
During prior periods, the Chief Financial Officer and Secretary of the
Company, loaned the Company an aggregate of $209,251. As of April 30,
2005 the net principal balance owing to him was $209,251 and accrued
interest payable was $9,858. See Note 6.
Accrued Payroll and Expenses Owed to Officers
---------------------------------------------
As of April 30, 2005 the Company owed the Chief Financial Officer and
Secretary of the Company $93,500 for back wages and $6,000 for accrued
expenses.
15
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 our financial and operating results in
the past will affect our 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 our control at the Relief Canyon Mine are
estimated by us (based on past exploration by Newgold and work done by
others).
Our properties now include 78 unpatented mining claims contained in
about 1000 acres.
Our operating plan is to place our mining claims into profitable
production by the end of fiscal 2006, and use the net proceeds from
these operations to fund ongoing exploration and development of our
property holdings. Through the use of joint ventures, royalties,
arrangements and partnerships, we intend to progressively enlarge the
scope and scale of the mining and processing operations, thereby
increasing both our annual revenues and ultimately our net profits. Our
objective is to achieve annual growth rates in revenue and net profits
for the foreseeable future;
o We expect 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 our
exploration growth strategy, we expect exploration, research and
development expenditures in 2005 will total between $500,000 and $1
million.
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 we have been dependent on the funding
from the private placement of our securities as well as loans from
related parties as the sole sources of capital to fund operations.
16
RESULTS OF OPERATION
We have only recently resumed business operations after having been inactive
from July 2001 until February 2003. Consequently, we are in the process of
reinstituting our business and mining operations, the results of operations for
the last two fiscal years will likely not be indicative of Newgold's current and
future operations. The current management discussion and analysis should be read
from the context of Newgold's recent resumption of its mining business.
Operating Results for the Fiscal Quarters Ended April 30, 2005 and 2004
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 quarters ended April 30, 2005 and 2004, respectively.
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 related to the Relief Canyon mining
property which has been recorded as an $800,000 deferred option income.
During the quarter ended April 30, 2005 the Company spent $29,000 on exploration
expenses related to the Relief Canyon mining property. Exploration expenses
expended during the same quarter ended April 30, 2004 were $5,000. These
expenses relate primarily to maintenance and retention costs required to
maintain the Company's mining claims. The Company incurred operating expenses of
$202,880 during the quarter ended April 30, 2005. Of this amount, $93,500
reflects officer compensation and related payroll taxes during the quarter,
$22,323 reflect promotional expense and $59,848 reflect fees for outside
professional services. A large portion of the outside professional services
reflects legal and accounting work pertaining to Newgold's annual report on Form
10-KSB for fiscal year 2005 and for the amended annual report on Form 10-KSB/A
for fiscal year 2004. During the quarter ended April 30, 2004 the Company
incurred operating expenses of $75,375 of which $55,000 represents officer
compensation, $8,190 reflecting payroll penalties and $11,000 reflect fees for
outside professional services. 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 $356,824 during the quarter ended April
30, 2005 which compares to interest expenses of $47,565 incurred during the same
quarter ended April 30, 2004. Although the amount of loans outstanding during
the first quarter of fiscal 2006 only increased by approximately $220,000
compared to the first quarter of fiscal 2005, the increase in additional
interest expense was primarily due to the increase in accretion of warrants
issued in October 2004 as a debt discount.
The Company's total net loss for the quarter ended April 30, 2005 increased to
$588,704 compared to a net loss of $127,940 incurred for the same quarter ended
April 30, 2004. 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 quarter of fiscal year 2006.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses during the last two fiscal
years and during the quarter ended April 30, 2005 which has resulted in an
accumulated deficit of $16,974,006 as of the end of the first quarter of fiscal
year 2006. At April 30, 2005, the Company had cash and other current assets of
$245,848 and a net working capital deficit of $3,841,930. 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 April 30, 2005,
the Company had outstanding notes payable in the gross principal amount of
$1,855,375 (net balance of $1,327,147 after $528,228 of note payable discount)
which reflects an increase of $219,445 compared to notes payable in the gross
principal amount of $1,635,930 (net balance of $1,593,840 after $42,090 of note
payable discount) as of April 30, 2004.
As of April 30, 2005, we were in default on two promissory notes due to
unrelated parties in the principal amounts of $19,844 and $176,500.
In the quarter ended April 30, 2005 Newgold raised a total of $575,000 through
the sale of 2,500,000 shares of its restricted stock.
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 April 15, 2005, 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 April 30, 2005,
Newgold's principal commitments included its obligation to pay ongoing
maintenance fees on its 78 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 a
substantial portion 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
18
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 April 30, 2005, 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
Newgold 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. Newgold's prospects must be considered in light of the risks and
difficulties encountered by new companies which have not yet established their
business operations.
Newgold will need additional funds to finance its mining and exploration
activities as well as fund its current operations. It currently has limited 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 Newgold's independent auditors includes a "going concern"
qualification. In the auditor's opinion, Newgold's limited operating history and
the accumulated shareholders' deficit as of January 31, 2005, raise substantial
doubt about its ability to continue as a going concern.
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 Newgold's operations unless it is able to offset such a
price drop by substantially increased production.
Newgold's disclosures of its mineral resources are only estimates. Newgold has
no proven or probable reserves and has no ability to currently measure or prove
its reserves other then estimating such reserves relying on information produced
in the 1990's and thus may be unable to actually recover the quantity of gold
anticipated. Newgold can only estimate a potential mineral resource 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
19
Newgold'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 Newgold's exploration programs will result in the discovery of new mineral
reserves or resources.
Newgold's mining property rights consist of 78 mill site and 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, Newgold may not be able to retain its royalty interests
on that property, which could reduce its future revenues.
Mining is subject to extensive 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. Newgold believes that, it is
currently operating in compliance with all known safety and environmental
standards and regulations applicable to its Nevada property. Currently, Newgold
is only permitted to carry on designated mining activities until it posts a
reclamation bond and the mining property is brought into compliance with the
requirements of the Nevada Department of Environmental Protection. Permitting
Newgold's mining property for full exploration and mining activities is expected
to take 6 to 15 months. However, there can be no assurance that permits will be
granted or that future changes in federal or Nevada laws, regulations or
interpretations thereof will not have a material adverse affect on Newgold'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, Newgold carried insurance against certain property damage loss
(including business interruption) and comprehensive general liability insurance.
While Newgold 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. Newgold has not obtained environmental liability insurance because such
coverage is not considered by management to be cost effective. Newgold currently
carries no insurance on any of its properties due to the current status of the
mine and Newgold's current financial condition.
Newgold is substantially dependent upon the continued services of A. Scott
Dockter, its President. Newgold 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
20
spend the majority of his time assisting Newgold, there can be no assurance that
Mr. Dockter's services will remain available to Newgold. If Mr. Dockter's
services are not available to Newgold, Newgold will be materially and adversely
affected. However, Mr. Dockter has been a significant shareholder of Newgold
since its inception and considers his investment of time and money in Newgold 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 requires management 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, 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.
21
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.
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
22
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.
Recent Accounting Pronouncements
--------------------------------
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47, "Accounting
for Conditional Asset Retirement Obligations". FIN No. 47 clarifies that the
term conditional asset retirement obligation as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and (or) method
of settlement. Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. This interpretation also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN No. 47 is
effective no later than the end of fiscal years ending after December 15, 2005
(December 31, 2005 for calendar-year companies). Retrospective application of
interim financial information is permitted but is not required. Management does
not expect adoption of FIN No. 47 to have a material impact on the Company's
financial statements.
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 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.
23
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES DURING THE QUARTER
In February 2005 the Company issued 500,000 shares of commons stock at a price
of $0.15 per share to an investor for total proceeds of $75,000. Additionally,
500,000 warrants to purchase common stock at a price of $0.30 per share were
issued to the investor. The warrants expire three years from the date of
issuance. The shares were offered and sold exclusively to individuals residing
or entities formed outside the United States and are not deemed to be "U.S.
persons" as that term is defined under Regulation S of the Securities Act of
1933 (the "1933 Act"). Each investor represented that it is purchasing such
shares for its own account. Both the offer and the sale of the Newgold shares
were made outside the United States and are deemed to be "offshore transactions"
as that term is defined under Regulation S. The share certificate contains a
legend indicating that such shares can only be transferred in compliance with
the provisions of Regulation S. In light of the foregoing, such sales were
deemed exempt from registration pursuant to Regulation S of the 1933 Act. The
shares are deemed to be "restricted securities" as defined in Rule 144 under the
1933 Act.
In April 2005 the Company issued 2,000,000 shares of commons stock at a price of
$0.25 per share to investors for total proceeds of $500,000. Additionally,
1,000,000 warrants to purchase common stock at a price of $0.50 per share were
issued to the investors. The warrants expire three years from the date of
issuance. 1,000,000 of the shares were offered and sold exclusively to
individuals residing or entities formed outside the United States and are not
deemed to be "U.S. persons" as that term is defined under Regulation S. Each
investor represented that it is purchasing such shares for its own account. Both
the offer and the sale of the Newgold shares were made outside the United States
and are deemed to be "offshore transactions" as that term is defined under
Regulation S. The share certificate contains a legend indicating that such
shares can only be transferred in compliance with the provisions of Regulation
S. In light of the foregoing, such sales were deemed exempt from registration
pursuant to Regulation S of the 1933 Act. The shares are deemed to be
"restricted securities" as defined in Rule 144 under the 1933 Act. The issuances
of the other 1,000,000 shares were made without any public solicitation to two
investors and were acquired for investment purposes only. The investors had
access to information about Newgold and were deemed capable of protecting their
own interests. The issuance of the stock 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. The stock and warrants are 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 2005 and 2004
have been reported in the Company's prior filings with the Securities and
Exchange Commission.
24
ITEM 5. OTHER INFORMATION
Effective June 7, 2005 Newgold was cleared to resume trading on the
Over-the-Counter Bulletin Board trading service. Newgold's trading symbol is
NGLD.
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
25
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: June 10, 2005 NEWGOLD, INC.
/s/SCOTT DOCKTER
----------------------------------------------
Scott Dockter, President and Chief Executive
Officer
/s/JAMES KLUBER
----------------------------------------------
James Kluber, Principal Accounting Officer and
Chief Financial Officer
26