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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
January 31, 2004 0-20722
NEWGOLD INC.
Delaware 16-1400479
-------------------------------- --------------------------------
(State of Incorporation) (I.R.S. Employer Identification)
Principal Executive Offices:
P.O. Box 1626
Shingle Springs, CA 95682
Telephone: (530) 672-1116
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Each Class
Common Stock $0.001 Par Value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes No X
----------- ------------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year was approximately $ -0-
-------
As of April 30, 2004, the aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average of the
bid and ask price on such date was approximately $9,304,177 based upon the
average price of $0.209/share.
As of April 30, 2004, the Registrant had outstanding 47,606,174 shares of common
stock.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits required by Item 13 have been incorporated by reference from
the Company's previously filed Form 8-K's, Form 10-QSB and Form 10-KSB.
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TABLE OF CONTENTS
PAGE OF
REPORT
PART I........................................................................1
ITEM 1. DESCRIPTION OF BUSINESS........................................1
ITEM 2. DESCRIPTION OF PROPERTY.......................................15
ITEM 3. LEGAL PROCEEDINGS.............................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........16
PART II......................................................................17
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....18
ITEM 7 FINANCIAL STATEMENTS...........................................25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....25
ITEM 8A. CONTROLS AND PROCEDURES........................................25
ITEM 8B. OTHER INFORMATION..............................................26
PART III.....................................................................27
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..............27
ITEM 10. EXECUTIVE COMPENSATION.........................................28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS................................31
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION..................32
ITEM 13. EXHIBITS ......................................................33
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................34
SIGNATURES...................................................................35
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
AMENDMENTS TO FORM 10-KSB
The Form 10-KSB of Newgold, Inc. for the year ended January 31,2004, originally
filed on December 7, 2004, has been amended to include an audited balance sheet
as of January 31, 2003. Additionally, footnotes to the financial statements have
been expanded to include appropriate discussion for the year ended January 31,
2003. Also, Item 6, Management's Discussion and Analysis or Plan of Operations
has been expanded to include appropriate discussion for the year ended January
31, 2003.
GENERAL
Newgold, Inc. has embarked on a business strategy whereby it will invest in
and/or manage gold mining and other mineral producing properties. Newgold, Inc.,
("Newgold" or the "Company") is a public company that in the past has been
engaged in the mining and processing of gold and silver ore and the exploration,
acquisition and development of gold-bearing properties in the continental United
States. Currently, Newgold'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.
HISTORY
The Company originally was incorporated as Newgold, Inc. under the laws of
Nevada on September 1, 1993. The Company began operations as Newgold, Inc., a
Delaware corporation, on November 21, 1996, on the effective date of a reverse
merger between itself and a company known as Warehouse Auto Centers Inc.
("WAC"), a public company, which had previously filed in 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. (Delaware), (ii) the outstanding
shares of Newgold (Nevada) 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 Newgold (Delaware), (iii) each outstanding share of WAC was converted
into the right to receive 1/65 share of the common stock of Newgold (Delaware),
for an aggregate of 51,034 shares or less than 1% of the post merger 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 Newgold (Delaware) 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, Newgold (Delaware) 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
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underwriters during the year ended January 31, 1998 for delay in the effective
date of the Company's stock trading.
For accounting purposes, Newgold (Nevada) has been treated as the acquirer
(reverse acquisition). Accordingly, historical financial statements prior to
November 21, 1996 are those of Newgold (Nevada). There were no assets or
liabilities acquired in this transaction and there is no impact on the statement
of operations. All references to the "Company" or "Newgold" refer to the merged
entity operating as Newgold, Inc., a Delaware corporation.
Until the beginning of 2000, Newgold had followed the above described business
activity focusing on the mining and processing of gold and silver ore. At the
beginning of 2000, Newgold's business strategy became focused on investing in
Internet start-up companies. That strategy was not successful and by mid-2001
Newgold had abandoned such investments. From approximately July 2001 until
February 2003 Newgold had been inactive. During the period of inactivity ASDi
LLC, owned by A. Scott Dockter who is also the Chairman and CEO of Newgold, has
made the necessary expenditures to maintain the current status of the Relief
Canyon mining claims.
The Company's mailing address is PO Box 1626 Shingle Springs CA 95682; and its
telephone number is (530)672-1116.
THE COMPANY
Newgold, Inc., a Delaware corporation, has been engaged in the acquisition,
development and exploration of gold-bearing properties in the continental United
States. In fiscal 1999 the Company placed its only remaining property, the
Relief Canyon Mine, located in Pershing County, Nevada, on a care and
maintenance status,. During fiscal 2000, the Company executed a contract to sell
the Relief Canyon Mine to A. Scott Dockter, Chairman of the Company; however the
sale was never completed and the asset remains the current property of Newgold.
It is now the Company's intention to resume mining at the Relief Canyon mine.
See Business below for further detail.
The Company's independent accountants have included a "going concern"
explanatory paragraph in their report dated November 7, 2004, on the Company's
financial statements for the fiscal year ended January 31, 2004, indicating
substantial doubt about the Company's ability to continue as a going concern. If
the Company's new strategy is not successful or if insufficient funds are
available to carry out the Company's development plan, then the Company will
have no other recourse than to seek protection of the Federal Bankruptcy Courts.
For financial information regarding the Company, see "Item 7: Financial
Statements and Supplementary Data."
BUSINESS
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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 the Company'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.
PROPERTY
Relief Canyon Mine
The Relief Canyon Mine is an open-pit, heap leaching operation located
approximately 110 miles northeast of Reno, Nevada. The Company currently holds
50 unpatented mining claims covering approximately 1000 acres. The mine is
readily accessible by improved roads. Water for mining and processing of
operations is provided by two wells located on the property in close proximity
to the mine and processing facilities. Power is provided by a local rural
electric association and phone lines are present at the mine site. Relief Canyon
is located in the Humboldt Range, a mining district of Nevada.
BACKGROUND AND HISTORY
The Relief Canyon gold deposit was discovered by Duval Corporation, ("Duval") in
1981. Lacana Mining, ("Lacana") purchased the property from Duval, drilled
additional holes to establish reserves, and commenced mining in 1984 as an
open-pit cyanide heap leach operation. In 1986, Pegasus Gold, Inc. ("Pegasus"),
purchased the mine from Lacana, drilled additional holes for a total of
approximately 400 with approximately 120,000 linear feet to confirm reserves,
and mined a cumulative total of approximately 6.3 million tons of ore containing
an average of 0.035 ounces of gold per ton from 1986-1989. Pegasus ceased mining
activities in 1989 and began the reclamation process of the mine site from
1990-1992.
In 1993, Pegasus sold the Relief Canyon Mine to its reclamation contractor, J.D.
Welsh & Associates ("Welsh"). Welsh continued to rinse the heaps to detoxify
them of their cyanide content and recovered minor amounts of gold in the
process. By December 1994, Welsh had completed detoxification of the heaps and
was required only to submit quarterly water quality reports to the state of
Nevada for the next five years.
On January 10, 1995, the Company purchased the mine from Welsh for $500,000. The
mine at that time consisted of 39 unpatented lode mining claims covering
approximately 780 acres and a lease for access to an additional 800 acres
contiguous to the 39 claims located on the Company's property. Located on the
property are, a building containing five carbon tanks and a boiler
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for carbon strip solution, four detoxified leach pads, a preg pond for gold
bearing solution, a barren pond for solution from which gold had been removed,
water rights, and various permits. From acquisition through November 1997, the
Company refurbished the processing facilities by the purchase and installation
of all equipment required to process the gold bearing leach solution when the
mine was returned to production. During 1997, the Company staked an additional
402 claims. However, subsequent to January 31, 1998, the Company reduced the
total claims to 50 (covering approximately 1,000 acres).
There also was a sub-lease (the "Santa Fe Lease") to fee simple real property
entered into between Welsh and Santa Fe Gold Company, which has merged with
Newmont Gold Company ("Santa Fe"). Welsh assigned the Santa Fe Lease to the
Company at its base annual lease payment of $12,500, plus an advance royalty
payment of a similar amount. The Santa Fe Lease required that Santa Fe consent
to any assignment however Santa Fe never consented formally to the assignment.
Santa Fe previously had accepted the Company's lease and royalty payments and it
is the Company's position that such acceptance constituted consent. Subsequent
to the signing of the contract for sale, the parties reduced the amount due
Welsh to $450,000 because of Welsh's inability to secure Santa Fe's acceptance
of assignment of the Santa Fe Lease.
On October 19, 1998, Santa Fe terminated the Welsh lease as a result of the
Company's inability to maintain the required insurance and the Company's
inability to post a reclamation bond for the property. The Company does not
believe the loss of the Santa Fe property will adversely affect the Company's
mining plans.
If mining operations are not resumed, it is possible the Company may be required
to reclaim the mine. Reclamation consists of recontouring the four heaps to a
3:1 slope, sale and removal of the building and its contents, evaporation of all
water in both ponds and burial of the building foundation and floor within the
ponds' liners under the soil contained in the pond berms. Finally, native
vegetation must be re-established in all areas of disturbance.
Repadre Capital Corporation ("Repadre") purchased a 3% Net Smelter Return
("NSR"). Royalty that was allocated to two properties owned by the Company for
$500,000 during 1996 (the "Repadre royalty"). These funds were applied to the
Company's ongoing reserve confirmation and expansion program at the Relief
Canyon Mine. Under the terms of the Repadre royalty, Repadre had the option to
reallocate the Repadre royalty to the Relief Canyon Mine. In 1997, Repadre
purchased an additional 1% NSR royalty (total of 4% royalty) on the Relief
Canyon mine by payment of $300,000 to the Company. The Company has recorded the
total payments received of $800,000 as deferred revenue.
PLAN FOR RELIEF CANYON PRODUCTION
The Company is an "exploration stage" company engaged in the search and/or
verification of ore deposits (reserves) in its property. Current ore 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) to contain
significant amounts of gold bearing ore. The Company believes
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there is potential for additional gold bearing ore deposits through validation
of previous exploration data and through further exploration of additional
mining claims.
As of January 31, 2004 the Company's properties include 50 unpatented mining
claims contained in about 1,000 acres.
The Company's operating plan is to place the most promising mining targets into
production during the 2005 fiscal year, and use the net proceeds from these
operations to fund expanded exploration and development of its entire property
holdings. By this means, 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 key to the financial viability of the Company's initial operations is the
ability to substantiate suspected areas of gold bearing ore and the advantage of
over 165,000 feet of exploration drilling. Newgold constructed the ADR
(Absorbtion Desorbtion Recovery) process infrastructure for a heap leach process
and it is in-place on the property.
Initially, a 350 ton per day ore processing facility (the "mill") will be
constructed on-site to treat the gold bearing ore. The mill will be fed
principally by ore from the North end of the property. This high-grade deposit
will be developed by an underground mine, accessed by a decline. The decline
will be portaled off in the existing North pit and driven at a 15 percent grade
to the North East. Regular production is planned to commence in 2005, at an
initial rate of 350 tons per day increasing to 700 tons per day by late 2005.
Use of an underground mine to remove ore, while being more expensive than open
pit mining, minimizes the surface disturbance at the site, and will, initially,
avoid the need to mine ore from surface pits. Underground mining methods will
significantly reduce ore dilution and surface disturbance. The ore can be
selectively mined leaving the waste rock in place. Milling the selected mine ore
substantially decreases recovery time and increases percentages producing gold
that is available for immediate sale. Waste rock removed will be deposited in
the existing pit (excavated by previous miners), thereby contributing to
reclamation of these surface pits. After the deposits are mined out and
operations cease, the entire disturbed surface including the mill site can be
reclaimed and restored.
The Company's goals for environmental protection and reclamation are for minimal
environmental disturbance during mining, and reclamation and/or restoration of
the disturbed area after mining ceases. The economics of the Company's
operations will permit this environmentally responsible plan of operations.
The Company will focus on placing the North Relief mining property into
production through the North Pit decline at a rate of 122,500 st/yr. Permits for
mining and processing are being applied for and should be in place by early
2005. A reclamation bond will be posted and the property brought into compliance
with the Bureau of Land Management ("BLM") and Nevada Department of
Environmental Protection ("NDEP") before any work can commence. Permitting
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an underground mine in an existing open pit involves a shorter permit time due
to minimal surface disturbance requirements. The maximum amount of time
estimated for the permitting process is 180 days. The mill construction will
begin in 2005, and is expected to be functional in 90 days.
DESCRIPTION OF PAST EXPLORATION AND EXISTING DEVELOPMENT EFFORTS
The Northern ore zone of the property contains several drill holes with
intercepts of 5ft to over 50ft of plus 0.2 oz/t gold ore. Most of these
intercepts are 400 feet below the surface making open pit mining un-economical.
This ore zone is over 1,250 feet long, 250 feet wide and contains several ore
horizons. Accessing the ore in this area first is deemed appropriate because of
the location of the ore relative to the North pit. The portal area would be
approximately 150 feet below the undisturbed surface saving up to 1000 feet of
decline. The North pit was also chosen for the portal location because of the
stability of the pit walls, rock type, and safety of the mining personnel. All
waste rock will be placed in the bottom of the pit thus reducing truck cycle
time. Gold bearing ore is expected to be encountered after approximately 890
feet of decline. Economical lower grade ore is exposed on the surface of the
North pit and requires an open pit mine plan with a bond before mining.
Based on drill hole analysis, the Company believes there could be gold bearing
ore exposed at the surface, extending south of the North Pit and extending East
of the South Pit. The Company believes a new open pit can be mined in a
relatively short period of time and much of the ore is expected to be processed
through the proposed new mill.
Over 400 reverse circulation holes were drilled at the Relief Canyon project. Of
the 400 holes drilled, 106 had intercepts of 0.1 au/t or better. Additionally
there are numerous holes with several feet of 0.09 - 0.099 au/t content.
The ore zone of Relief Canyon is open ended on three sides. It is projected that
additional drilling will increase the size of the probable reserve. Most of the
drilling to date was targeted for open pit mining, resulting in shallow holes
overlooking deep ore. A significant number of deep holes with 0.3 oz/t and
better were drilled on the North end of the property. This area is targeted for
initial underground mining development.
Additional exploration holes will be drilled as underground mining advances
throughout the various ore zones to determine future development.
Typically, grade values of the Relief Canyon drill holes are reduced as a result
of finds being lost down the hole or vented out as dust. Actual mining and
recovery of gold in the milling process will determine the loss if any which
could be as much as 30%.
PROPOSED UNDERGROUND MINING EFFORTS
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The goal of Newgold's mining program at Relief Canyon is to locate high-grade
gold deposits that are minable by underground methods.
The Company's initial plans for mining will focus on recovery of gold from the
North end of the property. As ground is being broken for the mill a short
distance away (1,500 feet), the main haulage decline will be portaled off at the
extreme east end of the North pit. This site was chosen because of safety
concerns and it leaves enough room in the bottom of the pit to store waste. The
portal would be on the 5,160 ft level of the pit leaving approximately 40 feet
of storage area (56,000 tons on the level). The pit wall immediately above and
on each side of the portal area will be stabilized by bolting wire mesh to the
rock, prior to actual mining. After the walls are secure, a 10 ft x 10 ft
decline will be driven North 55 East 350 feet at a 15% (15ft drop/100ft of
decline). At 350 feet, a left turn will be cut to access the North Central ore
block. The main haulage (MH) ramp will continue N55E for another 260 feet where
a right hand turn of 180 degrees will be driven with a 50 foot radius back to
the S55W direction. Mining will continue on the North Central ramp and the MH
simultaneously. The North Central Block (NCB) ramp will turn around at 180
degrees at a 50 foot radius and is planned to continue down 400 feet to the
5,050 foot level of the mine. Mining this block will commence immediately with a
series of crosscuts driven across the ore-body to define its geometry. There are
several drill holes that encountered minable ore at the 5,050 foot level of the
mine. Drill holes also encountered minable ore two hundred feet further North on
the 5,000 level and additional ore minable from the 4,900 foot level is also
indicated.
While the 5,000 foot level is being mined and explored, the MH ramp will
continue 1,322 feet to the 4,900 foot level. Drill holes suggested minable ore
on 4,700 foot level of this hole as well. The MH ramp will continue North an
estimated 500 feet, hopefully developing several ore intercepts along the way.
At 500 feet another spiral will be driven 600 feet back to the South, to
identify the ore on the 4,800 foot level.
The next target area of mining is back to the southeast of the North ore block.
Access would be from the MH 4900 level. Drill samples in the East ore block are
in jasperoid beds, which can be substantially large and extend for thousands of
feet. The surface topography in this area is steep and rugged. This zone can be
easily drilled from various drill stations cut during underground development of
the ore body.
Mining will continue throughout the ore zones targeting intercept after
intercept. Typically, in a flat-bed mining environment, the mining method of
choice is stope and pillar. Due to the nature of the ore zone, the Company
believes a minimal amount of development work will be required. Burn-cut
headings 25 feet to 35 feet will be driven through the ore body. Slab-rounds
will be driven off of burn-cut rounds leaving 25 feet by 25 feet pillars behind.
When the ore is depleted, pillars that can be removed safely will be removed in
a retreat method. Normally, pillars are left in low-grade or waste rock.
Underground mining equipment will consist of 3 yard muckers and 10 ton Elmac
dump trucks. Diesel driven two-machine jumbos will be used to drill 8' to 12'
rounds. ANFO will be used for
7
blasting. Blasting techniques will be modified to minimize damage to pillars.
Trucking 2,700 feet from the North end of the ore zone will require about 15
minutes/round trip (40 tons per hour/truck) to the mill. Trucking 4,300 feet of
decline from the South end of the mine will require about 20 minutes/round trip
(30 tons per hour/truck). A minimum of four trucks and two muckers will be
required to meet production demands when the mine is in full production (est.
245,000 tons year).
ORE PROCESSING
Some gold-bearing sulfide ores may be processed through a flotation plant. In
flotation, ore is finely ground, turned into slurry, then placed in a tank known
as a flotation cell. Chemicals are added to the slurry causing the
gold-containing sulfides to float in air bubbles to the top of the tank, where
they can be separated from waste particles that sink to the bottom. The sulfides
are removed from the cell and converted into a concentrate that can then be
processed in an autoclave or roaster to recover the gold. The ore is then
processed through an oxide mill.
Higher-grade oxide ores are processed through mills, where the ore is ground
into a fine powder and mixed with water in slurry, which then passes through a
cyanide leaching circuit. Lower grade oxide ores are processed using heap
leaching. Heap leaching consists of stacking crushed or run-of-mine ore on
impermeable pads, where a weak cyanide solution is applied to the top surface of
the heaps to dissolve the gold. In both cases, the gold-bearing solution is then
collected and pumped to facilities to remove the gold by collection on carbon or
by zinc precipitation directly from leach solutions.
It is Newgold's intentions to process gold ore at the Relief Canyon mine by
refining and producing dore bars to be sent to an external refinery to be
refined into pure gold.
If the Company is successful in obtaining adequate additional funds to finance
its mining and exploration activities as well as fund its current operations,
and it can quickly obtain the necessary approvals to begin mining operations,
then it should be able to become a producing operator generating cash flow
within a short period of time. These prospects to produce cash flow and to fund
its growth potential in the near term would distinguish Newgold from many other
mining companies of similar size that face a longer time horizon to reach such a
position.
INDUSTRY OVERVIEW
The gold mining and exploration industry has experienced several factors
recently that are favorable to Newgold as follows.
The spot market price of an ounce of gold has increased from a low of $253 in
February 2001 to a high of $432 in March 2004. The price was $429 as of November
1, 2004. This price increase has made it economically more feasible to produce
gold as well as made gold a more attractive investment for many. The Company is
projecting a cash cost per ounce of gold produced in a range of $170 to $210.
Accordingly, the gross margin per ounce of gold produced per the
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historical spot market price range above should provide adequate profitability
for Newgold to successfully mine gold at the Relief Canyon mine.
By industry standards, Newgold is considered a "junior mining company" in size.
Typically junior mining companies have proven and probable reserves of less then
one million ounces of gold, generally produces less then 100,000 ounces of gold
annually and / or are in the process of trying to raise enough capital to fund
the remainder of the steps required to move from a staked claim to production.
Mid-tier and large mining ("senior") companies may have several projects in
production plus several million ounces of gold in reserve while exploration
stage mining companies usually just focus on finding new gold deposits.
Generally gold reserves have been declining for a number of years for the
following reasons:
o The extended period of low gold prices from 1996 to 2001 made it
economically unfeasible to explore for new deposits for most mining
companies.
o The demand for and production of gold products have exceeded the amount
of new reserves added over the last several consecutive years.
Reversing the decline in lower gold reserves is a long term process. Due to the
extended time frame it takes to explore, develop and bring new production on
line, the large mining companies are facing an extended period of lower gold
reserves. Accordingly, junior companies that are able to increase their gold
reserves should directly benefit with an increased valuation.
Additional factors causing higher gold prices over the past two years have come
from a weakened United States dollar. Reasons for the lower dollar compared to
other currencies include the historically low US interest rates, the increasing
US budget and trade deficits and the general worldwide political instability
caused by the war on terrorism.
COMPETITION
There are generally considered four types of mining companies: exploration,
junior, mid-tier and large companies. Junior companies represent the largest
group of gold companies in the public stock market. All four types of companies
may have projects located in any of the gold producing continents of the world
and many have projects located near the Relief Canyon mine in Nevada. Many of
Newgold's competitors have greater exploration, production, and capital
resources than it does, and may be able to compete more effectively in any of
these areas. The Company's inability to generate capital to fund exploration and
production capacity near-term, would establish a competitive cost disadvantage
in the marketplace which would have a material adverse effect on the Company's
operations and profits.
The Company also competes in the hiring and retention of experienced employees.
Consequently, the Company may not be able to hire qualified miners in the
numbers or at the times desired.
GOVERNMENT CONTROLS AND REGULATIONS
9
Newgold's exploration, mining and processing operations are subject to various
federal, state and local laws and regulations governing prospecting,
exploration, development, production, labor standards, occupational health, mine
safety, control of toxic substances, and other matters involving environmental
protection and employment. United States environmental protection laws address
the maintenance of air and water quality standards, the preservation of
threatened and endangered species of wildlife and vegetation, the preservation
of certain archaeological sites, reclamation, and limitations on the generation,
transportation, storage and disposal of solid and hazardous wastes, among other
things. There can be no assurance that all the required permits and governmental
approvals necessary for any mining project with which we may be associated can
be obtained on a timely basis, or maintained. Delays in obtaining or failure to
obtain government permits and approvals may adversely impact the Company's
operations. The regulatory environment in which Newgold operates could change in
ways that would substantially increase costs to achieve compliance. In addition,
significant changes in regulation could have a material adverse effect on
Newgold's operations or financial position.
Outlined below are some of the more significant aspects of governmental controls
and regulations which materially affect the Company's interests in the Relief
Canyon mine.
Regulation of Mining Activity
The Relief Canyon mine, including care and maintenance, exploration, development
and production activities, is subject to environmental laws, policies and
regulations. These laws, policies and regulations regulate, among other matters,
emissions to the air, discharges to water, management of waste, management of
hazardous substances, protection of natural resources, protection of endangered
species, protection of antiquities and reclamation of land. The mine also is
subject to numerous other federal, state and local laws and regulations. At the
federal level, the mine is subject to inspection and regulation by the Division
of Mine Safety and Health Administration of the Department of Labor ("MSHA")
under provisions of the Federal Mine Safety and Health Act of 1977. The
Occupation and Safety Health Administration ("OSHA") also has jurisdiction over
certain safety and health standards not covered by MSHA. Mining operations and
all future exploration and development will require a variety of permits.
Although the Company believes the permits can be obtained in a timely fashion,
permitting procedures are complex, costly, time consuming and subject to
potential regulatory delay. The Company does not believe that existing
permitting requirements or other environmental protection laws and regulations
would have a material adverse effect on its ability to operate the mine.
However, the Company cannot be certain that future changes in laws and
regulations would not result in significant additional expenses, capital
expenditures, restrictions or delays associated with the operation of the
Company's property. The Company cannot predict whether it will be able to renew
its existing permits or whether material changes in existing permit conditions
will be imposed. Non-renewal of existing permits or the imposition of additional
conditions could have a material adverse effect on the Company's ability to
operate the Relief Canyon mine.
10
Legislation has been introduced in prior sessions of the U.S. Congress to make
significant revisions to the U.S. General Mining Law of 1872 that would affect
the Company's unpatented mining claims on federal lands, including a royalty on
gold production. It cannot be predicted whether any of these proposals will
become law. Any levy of the type proposed would only apply to unpatented federal
lands and accordingly could adversely affect the profitability of portions of
the gold production from the Relief Canyon mine
The State of Nevada, where the Company's mine property is located, adopted the
Mined Land Reclamation Act (the "Nevada Act") in 1989 which established design,
operation, monitoring and closure requirements for all mining facilities. The
Nevada Act has increased the cost of designing, operating, monitoring and
closing mining facilities and could affect the cost of operating, monitoring and
closing existing mine facilities. The State of Nevada also has adopted
reclamation regulations pursuant to which reclamation plans must be prepared and
financial assurances established for existing facilities. The financial
assurances can be in the form of cash placed on deposit with the State or
reclamation bonds underwritten by insurance companies. The State of Nevada has
requested financial assurances from the Company in the amount of $464,000. While
the Company has appealed this amount, it has been fully accrued as reclamation
costs in the Financial Statements. Mining operations cannot commence until such
financial assurances have been provided.
Environmental Regulations
Legislation and implementation of regulations adopted or proposed by the United
States Environmental Protection Agency ("EPA"), the BLM and by comparable
agencies in various states directly and indirectly affect the mining industry in
the United States. These laws and regulations address the environmental impact
of mining and mineral processing, including potential contamination of soil and
water from tailings discharges and other wastes generated by mining companies.
In particular, legislation such as the Clean Water Act, the Clean Air Act, the
Federal Resource Conservation and Recovery Act ("RCRA"), the Environmental
Response, Compensation and Liability Act and the National Environmental Policy
Act require analysis and/or impose effluent standards, new source performance
standards, air quality antimycin standards and other design or operational
requirements for various components of mining and mineral processing, including
gold-ore mining and processing. Such statutes also may impose liability on the
Company for remediation of waste it has created.
Gold mining and processing operations by an entity would generate large
quantities of solid waste which is subject to regulation under the RCRA and
similar state laws. The majority of the waste which was produced by such
operations is "extraction" waste that EPA has determined not to regulate under
RCRA's "hazardous waste" program. Instead, the EPA is developing a solid waste
regulatory program specific to mining operations under the RCRA. Of particular
concern to the mining industry is a proposal by the EPA entitled "Recommendation
for a Regulatory Program for Mining Waste and Materials Under Subtitle D of the
Resource Conservation and Recovery Act" ("Strawman II") which, if implemented,
would create a system of comprehensive Federal regulation of the entire mine
site. Many of these requirements would be duplicates of
11
existing state regulations. Strawman II as currently proposed would regulate not
only mine and mill wastes but also numerous production facilities and processes
which could limit internal flexibility in operating a mine. To implement
Strawman II the EPA must seek additional statutory authority, which is expected
to be requested in connection with Congress' reauthorization of RCRA.
The Company also is subject to regulations under (i) the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or
"Superfund") which regulates and establishes liability for the release of
hazardous substances and (ii) the Endangered Species Act ("ESA") which
identifies endangered species of plants and animals and regulates activities to
protect these species and their habitats. Revisions to "CERCLA" and "ESA" are
being considered by Congress, however, the impact of these potential revisions
on the Company is not clear at this time.
Moreover, the Clean Air Act, as recently amended, mandates the establishment of
a Federal air permitting program, identifies a list of hazardous air pollutants,
including various metals and cyanide, and establishes new enforcement authority.
The EPA has published final regulations establishing the minimum elements of
state operating permit programs. The states had until November 15, 1993 to
submit their permit programs to the EPA for review and approval. Until the state
regulations are promulgated and approved by the EPA, the full impact of the new
regulations on the Company cannot accurately be predicted.
In addition, the Company is required to mitigate long-term environmental impacts
by stabilizing, contouring, resloping, and revegetating various portions of a
site. While a portion of the required work was performed concurrently with prior
operations, completion of the environmental mitigation occurs once removal of
all facilities has been completed. These reclamation efforts are conducted in
accordance with detailed plans which have been reviewed and approved by the
appropriate regulatory agencies. The Company has posted security bonds and has
made provision to cover the estimated costs of such reclamation as required by
permit.
The Company believes that its care and maintenance operation, as it exists
today, is in substantial compliance with federal and state regulations and that
no further significant capital expenditures for environmental control facilities
will be required until production resumes at the site.
MINING PROPERTY RIGHTS
The Company's mining property rights are represented by 50 unpatented mining
lode claims. Unpatented mining claims are generally considered subject to
greater title risks than patented mining claims or real property interests that
are owned in fee simple. To remain valid, such unpatented claims are subject to
annual maintenance fees. As of January 31, 2004, the Company was current in the
payment of such maintenance fees.
EMPLOYEES
12
On April 30, 2004, Newgold had two full-time and one part-time employees located
in Cameron Park, California and Dallas, Texas. Newgold's employees are not
subject to a labor contract or collective bargaining agreement. The Company
considers its employee relations to be good.
Consulting services, relating primarily to geologic and geophysical
interpretations, and also relating to such metallurgical, engineering, and other
technical matters as may be deemed useful in the operation of Newgold's
business, will be provided by independent contractors.
FACTORS AFFECTING NEWGOLD'S BUSINESS
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 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.
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.
13
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.
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.
14
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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's office is located at 3090 Boeing Drive, Cameron Park, CA 95682.
The Company also owns 50 unpatented mining claims representing the Relief Canyon
mining property located the Humboldt Range mining district in Nevada. See Item
I, Business, Relief Canyon Mine.
ITEM 3. LEGAL PROCEEDINGS
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 in the amount of $212,500. 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 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.
15
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 approximately $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.
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 has filed 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Commencing in July 1997, the Company's common stock was listed and traded on the
NASDAQ Electronic Bulletin Board (OTCBB) under the symbol "NGLD". Effective as
of June 2001, the Company's shares ceased to be traded on the OTCBB and, since
that time have been listed in the Pink Sheets(R) which is a centralized
quotation service that collects and published market maker quotes for
over-the-counter securities. Pink Sheets is a limited, voluntary reporting
service and does not include all transactions regarding Newgold. Accordingly,
the following information can only be considered a sample of transactions. The
following chart sets forth the known high and low price on a bid basis for the
Company's stock for each quarter during the previous two years. Prices are as
reported in the Pink Sheets(R) published by the Pink Sheets LLC. The quotations
set forth below reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not represent actual transactions.
----------------------------------- ---------------- ----------------
YEAR ENDED JANUARY 31, 2004 LOW HIGH
----------------------------------- ---------------- ----------------
Fourth Quarter (November - January) $0.001 $0.469
----------------------------------- ---------------- ----------------
Third Quarter (August - October) $0.065 $0.159
----------------------------------- ---------------- ----------------
Second Quarter (May-July) $0.04 $0.149
----------------------------------- ---------------- ----------------
First Quarter (February - April) $0.049 $0.119
----------------------------------- ---------------- ----------------
----------------------------------- ---------------- ----------------
YEAR ENDED JANUARY 31, 2003 LOW HIGH
----------------------------------- ---------------- ----------------
Fourth Quarter (November - January) $0.001 $0.11
----------------------------------- ---------------- ----------------
Third Quarter (August - October) $0.005 $0.04
----------------------------------- ---------------- ----------------
Second Quarter (May - July) $0.01 $0.20
----------------------------------- ---------------- ----------------
First Quarter (February - April) $0.01 $0.06
----------------------------------- ---------------- ----------------
As of April 30, 2004, there were approximately 1,015 holders of record of the
Company's Common Stock. This amount does not include shares held in street name.
DIVIDEND POLICY
The Company has never paid any cash dividends on its common stock. The Company
currently anticipates that it will retain all future earnings for use in its
business. Consequently, it does not anticipate paying any cash dividends in the
foreseeable future.
17
RECENT SALES OF UNREGISTERED SECURITIES
During the Company's fiscal year ended January 31, 2004, it issued the following
equity securities pursuant to exemptions from registration under the Securities
Act of 1933 (the "1933 Act").
In February 2003, one person exercised a warrant to purchase 200,000 shares of
the Company's common stock. The exercise price was $0.10/share
During the fiscal year ended January 31, 2003, the Company issued the following
equity securities pursuant to exemptions from registration under the 1933 Act.
In Janauary 2003, three investors exercised warrants to purchase 550,000 shares
of the Company's common stock. The exercise price was $0.10/share.
All of the above issuances were made without any public solicitation, to a
limited number of individuals or entities and were acquired for investment
purposes only. Each of the individuals or entities had access to information
about the Company and were deemed capable of protecting their own interests. The
warrants and shares underlying the warrants were issued pursuant to the private
placement exemption provided by Section 4(2) of the 1933 Act. These are deemed
to be "restricted securities" as defined in Rule 144 under the 1933 Act and the
certificates evidencing the shares bear a legend stating the restrictions on
resale.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
For more detailed financial information, please refer to the audited January 31,
2004 Financial Statements included in this Form 10-KSB.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-KSB includes "forward-looking" statements about future financial
results, future business changes and other events that haven't yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We do not undertake to update the information in
this Form 10-KSB 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-KSB 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:
18
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 annual 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.
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 OPERATION
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 2003 and 2004 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.
19
Operating Results for the Fiscal Years Ended January 31, 2004 and 2003
----------------------------------------------------------------------
Although the Company commenced efforts to re-establish its mining business early
in fiscal year 2004, no mining operations had commenced and no revenues had been
recognized during the fiscal year 2004. The Company was inactive during fiscal
year 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.
In fiscal year 2004 the Company spent $37,916 on exploration expenses related to
the Relief Canyon mining property. This compares to exploration expenses of
$11,135 expended during fiscal 2003. These expenses relate primarily to
maintenance and retention costs required to maintain the Company's mining
claims. The Company incurred operating expenses of $306,477 during fiscal year
2004. Of this amount, $220,000 reflects officer compensation and related payroll
taxes during the year, $32,259 reflect payroll penalties and $28,805 reflect
fees for outside professional services. During fiscal year 2003 the Company
incurred operating expenses at $79,644 of which $32,400 represents officer
compensation and $30,583 reflecting payroll 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 $136,493 during fiscal year 2004 which
compares to interest expenses of $144,879incurred during fiscal year 2003.
Although the amount of loans outstanding during 2004 increased slightly, the
overall interest rate on such borrowing decreased.
The Company's total net loss for fiscal year 2004 increased to $470,823 compared
to a net loss of $215,533 incurred for fiscal year 2003. The larger net loss in
fiscal year 2004 reflects the substantial increase in operating expenses and a
lack of revenues recognized during fiscal year 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses during the last two fiscal
years which has resulted in an accumulated deficit of $15,107,162 as of the end
of fiscal year 2004. At January 31, 2004, the Company had cash and marketable
securities of $116,335 and a net working capital deficit of $4,181,390. 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
January 31, 2004, the Company had $1,581,721 of outstanding notes payable which
reflects a small increase compared to notes payable of $1,455,896 outstanding as
of January 31, 2003.
During fiscal year 2004 the Company borrowed an additional $338,943 from and
repaid $171,942 to 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 $1,402,742. Principal and interest due to the President as well as
notes payable to four other individuals are due on demand of the holder.
20
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 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.
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 sustain mining operations.
CRITICAL ACCOUNTING POLICIES
Newgold's discussion and analysis of its financial conditions and results of
operations are based upon its consolidated 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, 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 consolidated
financial statements.
21
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 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.
22
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The clarification provisions of this statement require that
contracts with comparable characteristics be accounted for similarly. This
statement is effective for any new derivative instruments the Company may enter
into after June 30, 2003. Implementation of this statement is not anticipated to
have a significant impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope, which possesses certain characteristics, and was previously classified as
equity, as a
23
liability (or an asset in some circumstances). The provisions of this statement
are effective at the beginning of the first interim period beginning after June
15, 2003. The implementation of the provisions of SFAS No. 150 did not have a
material impact on the Company's financial position or results of operations.
24
ITEM 7 FINANCIAL STATEMENTS
NEWGOLD, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JANUARY 31, 2004 AND 2003
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
Balance Sheets F-2
Statements of Operations F-4
Statements of Comprehensive Loss F-5
Statements of Shareholders' Deficit F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8 - F-20
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Newgold, Inc.
We have audited the balance sheets of Newgold, Inc. (the "Company") as of
January 31, 2004 and January 31, 2003, and the related statements of operations,
comprehensive loss, shareholders' deficit, and cash flows for each of the two
years in the period ended January 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provided a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Newgold, Inc. as of January 31,
2004 and January 31, 2003, and the results of its operations and its cash flows
for each of the two years in the period ended January 31, 2004 in conformity
with United States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, 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. These factors, among others, as discussed in Note
2 to the financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
November 7, 2004
F-1
NEWGOLD, INC.
BALANCE SHEETS
AS OF JANUARY 31,
--------------------------------------------------------------------------------
ASSETS
2004 2003
------- -------
CURRENT ASSETS
Cash $ 5,967 $ 5,622
Marketable securities available for sale,
net of $204,820 of unrealized loss 110,368 305,125
------- -------
Total current assets 116,335 310,747
OTHER ASSETS
Deferred reclamation costs 513,946 50,500
Deposits 5,000 6,500
------- -------
Total other assets 558,946 57,000
------- -------
TOTAL ASSETS $675,281 $367,747
======= =======
The accompanying notes are an integral part of these financial statements
F-2
NEWGOLD, INC.
BALANCE SHEETS
AS OF JANUARY 31,
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
2004 2003
------- -------
CURRENT LIABILITIES
Accounts payable $ 540,194 $ 542,194
Accrued expenses 1,665,364 1,353,375
Accrued reclamation costs 513,946 50,500
Notes payable due to individuals and officer 1,581,721 1,455,897
--------- ---------
Total current liabilities 4,301,225 3,401,966
--------- ---------
DEFERRED REVENUE 800,000 800,000
--------- ---------
Total liabilities 5,101,225 4,201,969
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.001 par value
50,000,000 shares authorized
47,606,174, and 47,604,174
shares issued and outstanding 47,606 47,406
Additional paid in capital 10,838,432 10,754,714
Other comprehensive loss (204,820) -
Accumulated deficit (15,107,162) (14,636,339)
--------- ---------
Total shareholders' deficit (4,425,944) (3,834,219)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 675,281 $ 367,747
========= =========
The accompanying notes are an integral part of these financial statements
F-3
NEWGOLD, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
2004 2003
--------------- ----------------
NET SALES $ - $ -
COST OF GOODS SOLD 37,916 11,135
--------------- ----------------
GROSS PROFIT (LOSS) (37,916) (11,135)
OPERATING EXPENSES (306,477) (79,644)
---------------- ----------------
LOSS FROM OPERATIONS (344,393) (90,779)
---------------- ----------------
OTHER INCOME (EXPENSE)
Dividend income 10,063 20,125
Interest expense (136,493) (144,879)
--------------- ---------------
Total other income (expense) (126,430) (124,754)
---------------- ----------------
NET LOSS $ (470,823) $ (215,533)
================ ================
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.01)
=============== ================
BASIC AND DILUTED WEIGHTED-AVERAGE
SHARES OUTSTANDING 47,595,763 46,863,708
=============== ================
The accompanying notes are an integral part of these financial statements
F-4
NEWGOLD, INC.
STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
2004 2003
--------------- ---------------
NET LOSS $ (470,823) $ (215,533)
OTHER COMPREHENSIVE LOSS
Unrealized loss from
marketable securities (204,820) -
--------------- ---------------
COMPREHENSIVE LOSS $ (675,643) $ (215,533)
=============== ===============
The accompanying notes are an integral part of these financial statements
F-5
NEWGOLD, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
Common Stock Additional Other Com-
---------------------------- Paid in prehensive Accumulated
Shares Amount Capital (Loss) Deficit Total
-------------- ------------ -------------- ------------- ------------ -----------
BALANCE, JANUARY
31, 2002 46,856,174 $ 46,856 $ 10,688,157 $ - $(14,420,806) $(3,685,793)
COMMON STOCK
ISSUED
upon exercise of
warrants 550,000 550 54,450 55,000
OFFERING COSTS (1,467) (1,467)
WARRANTS ISSUED
WITH DEBT - - 13,574 13,574
NET LOSS (215,533) (215,533)
-------------- ------------ -------------- ------------- ------------ -----------
BALANCE, JANUARY
31, 2003 47,406,174 47,406 10,754,714 - (14,636,339) (3,834,219)
COMMON STOCK
ISSUED
upon exercise of
warrants 200,000 200 19,800 20,000
WARRANTS ISSUED
WITH DEBT - - 63,918 63,918
OTHER COMPREHENSIVE
LOSS (204,820) (204,820)
NET LOSS (470,823) (470,823)
-------------- ------------ -------------- ------------- ------------ -----------
BALANCE, JANUARY
31, 2004 47,606,174 $ 47,606 $ 10,838,432 $ (204,820) $(15,107,162) $(4,425,944)
============== ============ ============== ============= ============ ===========
The accompanying notes are an integral part of these financial statements
F-6
NEWGOLD, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
2004 2003
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (470,823) $ (215,533)
Adjustments to reconcile net loss to net cash
used in operating activities
Accretion of warrants issued as a debt discount 22,753 30,180
(Increase) decrease in
Deposits (38,500) -
Deferred reclamation costs (463,446) -
Increase (decrease) in
Accounts payable (2,000) -
Accrued salaries and benefits 113,000 -
Accrued expenses 662,433 160,520
--------------- ----------------
Net cash used by operating activities (176,583) (24,833)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Marketable securities (10,063) (20,125)
---------------- -----------------
Net cash used by financing activities (10,063) (20,125)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of common stock 20,000 53,533
Proceeds from note payable 338,943 -
Repayments of note payable (171,952) (1,838)
---------------- -----------------
Net cash provided by financing activities 186,991 51,695
--------------- ----------------
Net increase in cash 345 6,737
CASH, BEGINNING OF YEAR 5,622 (1,115)
--------------- -----------------
CASH, END OF YEAR $ 5,967 $ 5,622
=============== =================
The accompanying notes are an integral part of these financial statements
F-7
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
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. (the Company), (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.
F-8
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
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.
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
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).
Property and Equipment
----------------------
Depreciation, depletion and amortization of mining properties, mine
development costs and major plant facilities will be computed
principally by the units-of-production method based on estimated proven
and probable ore reserves. Proven and probable ore reserves reflect
estimated quantities of ore which can be economically recovered in the
future from known mineral deposits. Such estimates are based on current
and projected costs and prices. Other equipment is depreciated using
the straight-line method principally over the estimated useful life of
seven years.
F-9
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
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.
Financing Costs
---------------
Financing costs, including interest, are capitalized when they arise
from indebtedness incurred to finance development and construction
activities on properties that are not yet subject to depreciation or
depletion. Financing costs are charged against earnings from the time
that mining operations commence. Capitalization is based upon the
actual interest on debt specifically incurred or on the average
borrowing rate for all other debt except where shares are issued to
fund the cost of the project.
Depreciation, Depletion and Amortization
----------------------------------------
Assets other than mining properties and mineral rights are depreciated
using the straight-line method over their estimated useful lives.
Capitalized development costs are amortized on the units of production
method considering proven and probable reserves. Depreciation and
depletion rates are subject to periodic review to ensure that asset
costs are amortized over their useful lives.
F-10
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
Impairment
----------
Mining projects and properties are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. If estimated future cash flows
expected to result from the use of the mining project or property and
its eventual disposition are less than the carrying amount, impairment
is recognized based on the estimated fair market value of the mining
project or property. Fair value generally is based on the present value
of estimated future net cash flows for each mining project or property,
calculated using estimates of proven and probable minable reserves,
geological resources, future prices, operating costs, capital
requirements and reclamation costs. A provision for impairment in
valuation of development costs and property, plant and equipment
amounted to $800,000 for the year ended January 31, 2002 and was
charged to operating expense. After these adjustments all development
costs and property, plant and equipment have been fully written off.
Management's estimates of future cash flows are subject to risks and
uncertainties. Therefore, it is reasonably possible that changes could
occur which may affect the recoverability of the Company's investment
in mineral properties.
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.
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.
Revenue Recognition
-------------------
Revenues will be recognized when deliveries of gold are made, title and
risk of loss passes to the buyer and collectibility is reasonably
assured. Deferred revenue represents non-refundable cash received in
exchange for royalties on net smelter returns on the Relief Canyon
Mine. Deferred revenue will be amortized to earnings based on estimated
production in accordance with the royalty agreement.
F-11
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments include cash and cash equivalents
and accounts payable - trade. The carrying amounts for these financial
instruments approximate fair value due to their short maturities.
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 years ended January 31,
2004 and 2003.
Income Taxes
------------
The Company accounts for income taxes under the liability method, which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
As of January 31, 2004, the deferred tax assets related to the
Company's net operating loss carry-forwards are fully reserved. Due to
the provisions of Internal Revenue Code Section 338, the Company may
not have any net operating loss carry-forwards available to offset
financial statement or tax return taxable income in future periods as a
result of a change in control involving 50 percentage points or more of
the issued and outstanding securities of the Company.
F-12
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 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.
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 3,718,229 3,648,463
Concentrations of Credit Risk
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents. The
Company places its cash and cash equivalents with high credit, quality
financial institutions. At times, such cash and cash equivalents may be
in excess of the Federal Deposit Insurance Corporation insurance limit
of $100,000. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents.
Recent Accounting Pronouncements
--------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The
clarification provisions of this statement require that contracts with
comparable characteristics be accounted for similarly. This statement
is effective for any new derivative instruments the Company may enter
into after June 30, 2003. Implementation of this statement is not
anticipated to have a significant impact on our financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope, which
possesses certain characteristics, and was previously classified as
equity, as a
F-13
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
liability (or an asset in some circumstances). The provisions of this
statement are effective for financial instruments entered into or
modified after May 31, 2003, and otherwise are effective at the
beginning of the first interim period beginning after June 15, 2003.
The implementation of the provisions of SFAS No. 150 did not have a
material impact on the Company's financial position or results of
operations.
NOTE 4 -MARKETABLE SECURITIES AVAILABLE FOR SALE
At January 31, 2003 the Company held 287,500 preferred shares along
with $17,625 of accrued, unpaid dividends of NutraCea. In September
2003 the preferred shares and accrued dividends were exchanged for a
total of 712,047 shares of common stock of NutraCea. In November 2003
NutraCea affected a 1 for 10 reverse share split of its common shares,
resulting in an adjusted total of 71,205 common shares held by the
Company. At January 31, 2004 the 71,205 common shares of NutraCea was
accounted for as an investment in marketable securities. During the
year ended January 31, 2004, unrealized holding losses of $204,820 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 (see Note 11).
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at January 31, 2004 and 2003 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, plant and equipment at January 31, 2004 and 2003
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
January 31, 2004 and 2003.
NOTE 6 - NOTES PAYABLE TO RELATED PARTIES AND INDIVIDUALS
Unsecured notes payable to individuals and related parties consist of
the following at January 31, 2004 and 2003:
2004 2003
---------- ----------
Loans from officer. The notes bear interest at 8% per year.
F-14
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
The notes are currently due. The Company is in default with
respect to these loans. In connection with the loans,
warrants to purchase 3,718,229 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. $1,402,742 $1,235,752
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. 176,500 176,500
Other non-interest bearing advances 47,038 47,038
Unamortized warrant expense (44,559) (3,393)
---------- ----------
Total notes payable to individuals and related parties $1,581,721 $1,455,897
========== ==========
The Company incurred interest expense of $136,493 during fiscal year
2004 and interest expense of $144,879 incurred during fiscal year 2003.
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 January 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
F-15
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
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 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
F-16
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
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 has filed 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 is scheduled for November 22, 2004. 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
The following common stock transactions occurred during the years ended
January 31, 2004 and 2003:
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 Company
renegotiated the exercise price to $0.10 per share.
On January 27, 2003 warrants to purchase 550,000 shares of common stock
were exercised at a price of $0.10 per share. The original exercise
price was $1.00 however the investors and the 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).
The fair market value of these warrants issued during the years ended
January 31, 2004 and 2003 was determined to be $63,919 and $13,574 and
was calculated under the Black-Scholes option pricing model with the
following assumptions used:
2004 2003
--------- --------
Expected life 5 years 5 years
Risk free interest rate 3.16% 3.00%
Volatility 400% 506%
Expected dividend yield None None
F-17
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
The fair value of these warrants is being amortized to interest expense
over one year, the original life of the loans. Total amortization
expense for the years ended January 31, 2004 and 2003 was approximately
$22,800 and $30,200 respectively.
The following table presents warrant activity through January 31, 2004:
Weighted-
Average
Number Exercise
of Shares Price
Outstanding, January 31, 2002 3,746,000 $ 0.53
Granted 452,463 $ 0.15
Exercised (550,000) $ (0.10)
--------------- - -----
Outstanding, January 31, 2003 3,648,463 $ 0.43
Granted 1,265,766 $ 0.15
Exercised (200,000) $ (0.10)
Expired (996,000) $ 1.00
---------------- - ----
OUTSTANDING, JANUARY 31, 2004 3,718,229 $ 0.15
=============== = ====
EXERCISABLE, JANUARY 31, 2004 3,718,229 $ 0.15
=============== = ====
NOTE 9 - INCOME TAXES
As of January 31, 2004, the Company had net operating loss
carry-forwards of approximately $10,161,000 available to reduce future
Federal taxable income which, if not used, will expire at various dates
through January 31, 2024. Due to changes in the ownership of the
Company, the utilization of these loss carry-forwards may be subject to
substantial annual limitations. Deferred tax assets (liabilities) are
comprised of the following at January 31, 2004 and 2003:
2004 2003
------------ ------------
Deferred Tax Assets
Net Operating Loss Carry-forwards $ 4,129,645 $ 4,070,438
Accrued Interest Payable 164,278 115,551
Accrued Payroll Tax 139,586 131,018
Accrued Payroll 48,422 -
Amortization Diff Book/Tax 21,165 12,067
Accrued Accounts Payable 88,250 74,119
Other 272 272
Less valuation allowance (4,269,515) (4,094,544)
------------ ------------
Total Deferred Tax Assets 322,104 308,922
------------ ------------
Deferred Tax Liability
State Taxes (322,104) (308,922)
------------ ------------
Total Deferred Tax Liabilities (322,104) (308,922)
------------ ------------
NET DEFERRED TAX ASSETS $ - -
============ ============
F-18
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
The net change in the total valuation allowance for the year ended
January 31, 2004 and 2003 was $174,971 and $$73,946, respectively. The
valuation allowance is provided to reduce the deferred tax asset to a
level which, more likely than not, will be realized.
The expected Federal income tax benefit, computed based on the
Company's pre-tax losses at January 31, 2004 and 2003 and the statutory
Federal income tax rate, is reconciled to the actual tax benefit
reflected in the accompanying financial statements as follows:
2004 2003
---------- ----------
Expected tax benefit at statutory rates $ 174,971 $ 73,946
Decrease resulting from valuation allowance for benefits
from net operating loss carry-forwards and other (174,971) (73,946)
---------- ----------
TOTAL $ - -
========== ==========
Previous to June 21, 1996, the stockholder of the Company elected under
Internal Revenue Code Section 1362 to have the Company taxed as an S
Corporation. As such, all Federal and substantially all State income
tax attributes passed through the Company directly to the stockholder
until that date.
NOTE 10 - RELATED PARTY TRANSACTIONS
Loans from officer
------------------
As of January 31, 2004, the Chief Executive Officer and Chairman of the
Company, loaned the Company an aggregate of $338,943 and was repaid
$171,952. During the year ended January 31, 2003, he was repaid $9,248.
As of January 31, 2004 the net principal balance owing to him was
$1,402,742 and accrued interest payable was $331,101. See Note 5 and
Note 10.
Accrued Payroll and Expenses Owed to Officers
---------------------------------------------
As of January 31, 2004 the Company owed the Chief Executive Officer and
Chairman of the Company $64,000 for back wages. As of January 31, 2004
the Company owed the Chief Financial Officer and Secretary of the
Company $192,334 for back wages and $16,717 for accrued expenses. See
Note 11.
NOTE 11 - 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 referred to in Note
10 (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 9,351,613 and 1,395,007
shares of common stock have been issued to the Chief Executive Officer
and the Chief Financial Officer, respectively.
F-19
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 2004
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.
F-20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On December 5, 2003, the Company dismissed Burnett & Company LLP ("Burnett") as
its independent accountants. The Company's Board of Directors participated in
and approved the decision to change independent accountants. This change was due
to Burnett's determination to discontinue auditing services for companies
subject to the reporting obligations of the Securities Exchange Act of 1934.
("Exchange Act")
Burnett did not perform any audit services for the Company during the past two
fiscal years.
In connection with its audits for fiscal years 2000 and 1999 there were no
disagreements with Burnett on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Burnett would have caused
them to make reference thereto in their report on the financial statements for
such years.
The Company engaged Singer Lewak Greenbaum & Goldstein LLP ("SLGG") as its new
independent accountants as of December 5, 2003. During the two most recent
fiscal years and through December 5, 2003, the Company has not consulted with
SLGG regarding either (i) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, and
neither a written report was provided to the Company or oral advice was provided
that the Company concluded was an important factor considered by it in reaching
a decision as to the accounting, auditing or financial reporting issue; or (ii)
any matter that was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the related instructions
to Item 304 of Regulation S-B, or a reportable event, as that term is defined in
Item 304(a)(1)(iv)(B) of Regulation S-B.
ITEM 8A. 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 will in
the future be reported within the time periods specified in the Securities and
Exchange Commission rules and forms.
25
There have been no significant changes in the Company's internal controls over
financing 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 financing reporting.
ITEM 8B. OTHER INFORMATION
None
26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
The following table sets forth information about the directors and executive
officers of the Company together with the principal positions and offices with
the Company held by each:
------------------- --- ------------------------------------ ------------------
NAME OF PERSON AGE POSITION AND OFFICE PRESENTLY HELD DIRECTOR SINCE
WITH NEWGOLD, INC.
------------------- --- ------------------------------------ ------------------
A. Scott Dockter 48 Chairman, CEO and President 1996
------------------- --- ------------------------------------ ------ ------------
James W. Kluber 53 Chief Financial Officer and Director 2000
------------------- --- ------------------------------------ ------------------
A. SCOTT DOCKTER has been the Chief Executive Officer and Chairman since
December 2000, assuming such positions upon the resignation of James Cutburth.
Mr. Dockter had previously served as the Company's CEO and President from
November 1996 until February 2000 at which time Mr. Cutburth assumed such
positions. Mr. Dockter has been self-employed in the business sector since 1978
and currently operates his business through ASD CORP. He has held a Class A
General Engineering and Contracting License for more than 20 years, operating
his businesses in California, Nevada and Montana, specializing in earth moving,
mining, pipeline projects, structures, dams, industrial parks and sub divisions.
Mr. Dockter has directed his companies in large landfill operations, underground
concrete structures projects, large excavations, reclamation projects and
others, which include state and local municipal projects. Mr. Dockter has also
been a real estate developer, worked on oil & gas projects and has spent 15
years in the mining industry. He has personally owned mines, operated mines,
constructed mine infrastructures (physical, production and process) and produced
precious metals. In January 2002, Mr. Dockter pleaded guilty to one felony
charge of environmental pollution and was sentenced to 5 months in a Federal
detention camp and a $5,000 fine. The charge related to the release in the
summer 1997 of a hazardous material (asbestos) at a demolition project owned by
Riverfront Development Corporation, a corporation founded by Mr. Dockter of
which he was then the CEO.
JAMES W. KLUBER has been the Chief Financial Officer of Newgold since February
2000 and a director since April 2000. Mr. Kluber has served as a senior
financial consultant in a variety of service and technology environments with
special focus on high growth companies and restructuring operations. He has
successfully raised capital for companies in a variety of markets, utilizing
public and private equity as well as securitized and unsecured debt to
accomplish funding requirements. From December 2001 to September 2003, Mr.
Kluber was the CFO of Nutracea, a public company involved in the development and
distribution of products based on the use of stabilized rice bran. Additionally,
he was the Senior Vice President and CFO from 1996 to 1999 for RealPage, Inc. a
leading provider of software and services to the real estate industry. From 1993
to 1996 he served as Vice President of Financial Operations for two
27
public companies sponsored by Security Capital Group, ProLogis Trust and
Archstone Communities.
The current Directors will serve and hold office until the next annual
shareholders' meeting or until their respective successors have been duly
elected and qualified. The Company's executive officers are appointed by the
Board of Directors and serve at the discretion of the Board.
FAMILY RELATIONSHIPS
There are no family relationships between any director or executive officer.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held one meeting during the fiscal year
ended January 31, 2004. The Board does not currently have an Audit, Executive or
Compensation Committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who own more than 10% of
the Company's common stock to file reports of ownership on Form 3 and changes in
ownership on Form 4 with the Securities and Exchange Commission (the "SEC").
Such executive officers, directors and 10% stockholders are also required by SEC
rules to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon its review of copies of such forms received by it, or on
written representations from certain reporting persons that no other filings
were required for such persons, the Company believes that, during the fiscal
year ended January 31, 2004, its executive officers and directors and 10%
stockholders complied with all applicable Section 16(a) filing requirements,
except as follows: A Form 4 indicating the acquisition of a convertible note and
warrants was filed delinquently by the Company's President, Mr. Dockter.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's Chief Executive
Officer during the last three complete fiscal years. No other officer received
annual compensation in excess of $100,000 during the last completed fiscal year.
28
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
--------------------------------- --------------------------------------------
Awards Payout
------------------------ ----------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Fiscal Salary Bonus Compensation ($) Award(s) ($) Options Payout Compensation
Year ($) (#) ($) ($)
--------- ---------- ----- ---------------- ------------- ---------- ---------- ------------
Scott Dockter(1) 2004 $60,000 -0- -0- -0- -0- -0- -0-
(CEO)
2003 $12,400 -0- -0- -0- -0- -0- -0-
2002 $30,000 -0- -0- -0- -0- -0- -0-
James Kluber(2) 2004 $140,000 -0- -0- -0- -0- -0- -0-
(CFO)
2003 $20,000 -0- -0- -0- -0- -0- -0-
2002 $70,000 -0- -0- -0- -0- -0- -0-
(1) Of the amounts shown, the following amounts have been deferred: 2004 - $24,000; 2002 - $30,000
(2) Of the amounts shown, the following amounts have been deferred: 2004 - $89,000; 2002 - $30,000
STOCK OPTION PLAN
Newgold does not have a formal stock option plan currently in place. Options to
date have been granted on an individual basis pursuant to individual option
agreements. Newgold expects to adopt a formal stock option plan during this next
fiscal year.
Options/SAR Grants in Last Fiscal Year
--------------------------------------
The following table sets forth certain information with respect to options or
SAR grants in Newgold during the fiscal year ended January 31, 2004 to the Named
Executive Officers.
----- -------------------- -------------------- ---------------- ---------------
Name Number of Securities Percent of Total Exercise or Base Expiration Date
Underlying Options Options Granted to Price
Granted Employees at January ($ Per Share)
----- -------------------- -------------------- ---------------- ---------------
None
----- -------------------- -------------------- ---------------- ---------------
----- -------------------- -------------------- ---------------- ---------------
29
Aggregated Option/SAR Exercises Year-End Table.
----------------------------------------------
During the fiscal year ended January 31, 2004, none of the Named Executive
Officers had exercised any options/SARs issued by Newgold. The following table
sets forth information regarding the stock options held as of January 31, 2004
by the Named Executive Officers.
----- ------------------------------------ ---------------------------------
Name Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
January 31, 2004 January 31, 2004
----- ---------------- ------------------- --------------- -----------------
Exercisable Unexercisable Exercisable Unexercisable
----- ---------------- ------------------- --------------- -----------------
None
----- ---------------- ------------------- --------------- -----------------
----- ---------------- ------------------- --------------- -----------------
EMPLOYEE PENSION, PROFIT SHARING OR OTHER RETIREMENT PLANS
Newgold does not have a defined benefit pension plan or profit sharing or other
retirement plan.
COMPENSATION OF DIRECTORS
Newgold's directors are also officers of the Company and do not receive any
additional compensation for their services as members of the Board of Directors.
The Company intends to appoint additional directors in the future who may or may
not be employees. For the non-employee directors, the Company may seek
shareholder approval for a "Director Option Plan" which would serve as the
compensation plan for such directors. No specific plan had been developed as of
the end of the fiscal year.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's bylaws provide that it will indemnify its officers and
directors, employees and agents and former officers, directors, employees and
agents unless their conduct is finally adjudged as grossly negligent or to be
willful misconduct. This indemnification includes expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by these individuals in connection with such action, suit, or
proceeding, including any appeal thereof, subject to the qualifications
contained in Delaware law as it now exists. Expenses (including attorneys' fees)
incurred in defending a civil or criminal action, suit, or proceeding will be
paid by the Company in advance of the final disposition of such action, suit, or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount, unless it shall ultimately be
determined that he or she is entitled to be indemnified by the Company as
authorized in the bylaws. This indemnification will continue as to a person who
has ceased to be a director, officer, employee or agent, and will benefit their
heirs, executors, and administrators. These indemnification rights are not
deemed
30
exclusive of any other rights to which any such person may otherwise be entitled
apart from the bylaws. Delaware law generally provides that a corporation shall
have the power to indemnify persons if they acted in good faith in a manner
reasonably believed to be in, or not opposed to, the best interests of the
Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. In the event any such
person is judged liable for negligence or misconduct, this indemnification will
apply only if approved by the court in which the action was pending. Any other
indemnification shall be made only after the determination by the Company's
Board of Directors (excluding any directors who were party to such action), by
independent legal counsel in a written opinion, or by a majority vote of
stockholders (excluding any stockholders who were parties to such action) to
provide such indemnification.
Insofar as indemnification for liabilities arising under the Securities Act of
1993 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
enforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of April 30, 2004 by, (i) each executive
officer and director of the Company; (ii) all executive officers and directors
of the Company as a group; and (iii) owners of more than 5% of the Company's
Common Stock.
--------------------------------------- ----------------------- --------------------- ---------
NAME AND ADDRESS OF BENEFICIAL OWNER POSITION NUMBER OF SHARES PERCENT
BENEFICIALLY OWNED
--------------------------------------- ----------------------- --------------------- ---------
OFFICERS AND DIRECTORS
--------------------------------------- ----------------------- --------------------- ---------
Scott Dockter Chairman and CEO 6,806,809(1) 14.3%
P.O. Box 1626
Shingle Springs, CA 95682
--------------------------------------- ----------------------- --------------------- ---------
--------------------------------------- ----------------------- --------------------- ---------
James Kluber CFO, Executive Vice -0-(2) n/a
P.O. Box 1626 President, and
Shingle Springs, CA 95682 Secretary
--------------------------------------- ----------------------- --------------------- ---------
All officers and directors as a group 6,806,809 14.3%
( 2 individuals)
--------------------------------------- ----------------------- --------------------- ---------
--------------------------------------- ----------------------- --------------------- ---------
SHAREHOLDERS OWNING 5% OR MORE None
--------------------------------------- ----------------------- --------------------- ---------
(1) Amount includes 3,718,229 shares issuable under stock warrants exercisable
within 60 days of April 30, 2004. Amount excludes shares issuable pursuant to a
convertible promissory note in the principal amount of $1,402,742.
(2) Amount excludes shares issuable pursuant to a convertible promissory note in
the principal amount of $209,251.
31
EQUITY COMPENSATION PLAN INFORMATION
------------------------------- ---------------------------- ---------------------------- -------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and right future issuance under
warrants and rights equity compensation plans
(excluding securities
reflected in column
(a))
(a) (b) (c)
------------------------------- ---------------------------- ---------------------------- -------------------------
Equity compensation plans
approved by security holders N/A
------------------------------- ---------------------------- ---------------------------- -------------------------
Equity compensation plans not
approved by security holders N/A
------------------------------- ---------------------------- ---------------------------- -------------------------
N/A
Total
------------------------------- ---------------------------- ---------------------------- -------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
ASD CORP, incorporated in the State of Delaware, is owned by Mr. A Scott
Dockter, Chairman and CEO of Newgold. ASD CORP operates as an engineering and
construction company. It is expected that ASD CORP will enter into agreements
with Newgold to operate as the prime engineering and mining contractor for
Newgold's mining related properties. Fees that would be paid to ASD CORP for
such services will be at or below market rates earned by similar service
providers.
During the 2004 fiscal year, the President of the Company, Scott Dockter, had
loaned the Company an aggregate of $338,943 and was repaid $171,952. As of
January 31, 2004, Mr. Dockter had loaned the Company a total of $1,402,742. In
October, 2004 these loans were consolidated into a convertible promissory note
which is due on September 30, 2005 and bears interest at 8% per annum. Mr.
Dockter is the largest creditor of the Company. In addition to the convertible
promissory note, Mr. Dockter will be issued a Warrant to purchase up to
9,351,613 shares of the Company's common stock at an exercise price of
$0.15/share.
Subsequent to the fiscal year end, the Chief Financial Officer, James Kluber,
was issued a convertible promissory note in the principal amount of $209,251
reflecting accrued but unpaid compensation and unreimbursed expenses. The
convertible promissory note, issued in October, 2004, is due on September 30,
2005 and bears interest at 8% per annum. In addition to the convertible
promissory note, Mr. Kluber was issued a Warrant to purchase up to 1,395,007
shares of the Company's common stock at an exercise price of $0.15/share.
32
Subsequent to the year ended January 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 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.
ITEM 13. EXHIBITS
Exhibit 2.1(4) Plan of Reorganization and Merger Agreement, dated as of
July 23, 1999, between the Registrant and Business Web, Inc.
Exhibit 2.2(6) First Amendment to Plan of Reorganization and Merger
Agreement, dated as of October 31, 1999, between the Registrant and
Business Web, Inc.
Exhibit 2.3(7) Termination Agreement, dated as of December 27, 1999,
between the Registrant and Business Web, Inc.
Exhibit 3.1(2) Certificate of Incorporation of the Registrant.
Exhibit 3.2(1) Certificate of Amendment to Certificate of Incorporation of
the Registrant.
Exhibit 3.3(2) Bylaws of the Registrant.
Exhibit 10.1(3) Promissory Note between the Company and A. Scott Dockter,
dated April 2, 1997, for the principal amount of $100,000.
Exhibit 10.2(3) Promissory Note between the Company and A. Scott Dockter,
dated April 17, 1997, for the principal amount of $50,000.
Exhibit 10.3(3) Promissory Note between the Company and A. Scott Dockter,
dated April 30, 1997, for the principal amount of $20,000.
Exhibit 10.4(3) Promissory Note between the Company and A. Scott Dockter,
dated May 30, 1997, for the principal amount of $35,000
Exhibit 10.5(5) Promissory Note between the Company and A. Scott Dockter,
dated December 24, 1998, for the principal amount of $24,000.
Exhibit 10.6(7) Warrant to Purchase shares of Common Stock of Business Web,
Inc.
Exhibit 31.1 Certification by CEO pursuant to Sections 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification by CFO pursuant to Sections 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
--------------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended January 31, 1996 filed with the omission on
January 22, 1997.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (File No. 33-49920) filed with the Commission on October 14,
1993.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the fiscal year ended January 31, 1997 filed with the Commission on June
30, 1997.
(4) Incorporated by reference to Registrant's Annual Report on Form 10-KSB for
the fiscal year ended January 31, 1999 filed with the Commission on October
1, 1999.
(5) Incorporated by reference to Registrant's First Amendment to Annual Report
on Form 10-KSB for the fiscal year ended January 31, 1999, filed with the
Commission on October 20, 1999.
(6) Incorporated by reference to Registrant's Form 8-K filed with the
Commission on November 2, 1999. (7) Incorporated by reference to
Registrant's Annual Report on Form 10-KSB for the fiscal year ended January
31, 2000 filed with the Commission on May 17, 2000.
33
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During the Company's fiscal years ended January 31, 2003 and January 31, 2004,
the Company was billed the following aggregate fees by Singer Lewak Greenbaum &
Goldstein LLP ("SLGG").
Audit Fees.
----------
The aggregate fees billed by SLGG to the Company for professional services
rendered for the audit of the Company's financial statements for the fiscal
year, for reviews of the financial statements included in the Company's Forms
10-QSB for the fiscal year, and for services provided by SLGG in connection with
statutory or regulatory filings for the fiscal year, were $12,600 for the fiscal
year ended 2003 and $12,759 for the fiscal year ended 2004.
All Other Fees.
--------------
No fees were billed by SLGG to the Company for products and services rendered
for fiscal years 2003 and 2004, relating to Audit-Related Fees, Tax Fees or
other accounting fees.
All of the services performed by SLGG during 2004 were pre-approved by the
Company's Board of Directors, which concluded that the provision of the
non-audit services described above is compatible with maintaining the
accountant's independence.
PRE-APPROVED POLICIES AND PROCEDURES
Prior to retaining SLGG to provide services in any fiscal year, the Board of
Directors first reviews and approves SLGG's fee proposal and engagement letter.
In the fee proposal, each category of services (Audit, Audit Related, Tax and
All Other) is broken down into subcategories that describe the nature of the
services to be rendered, and the fees for such services. Newgold's pre-approval
policy provides that the Board of Directors must specifically pre-approve any
engagement of SLGG for services outside the scope of the fee proposal and
engagement letter.
34
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NEWGOLD, INC.
Date: April 29, 2005 By /s/ A. SCOTT DOCKTER
--------------------- --------------------------------------
A. Scott Dockter
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
/s/ A. SCOTT DOCKTER
---------------------
A. Scott Dockter Chairman of the Board and April 29, 2005
President --------------
/s/ JAMES W. KLUBER
---------------------
James W. Kluber Secretary April 29, 2005
--------------
/s/ JAMES W. KLUBER Director and
---------------------
James W. Kluber Chief Financial Officer April 29, 2005
(Principal Financial and --------------
Accounting Officer)
35