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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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, 2005 0-20722
NEWGOLD INC.
Delaware 16-1400479
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(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. [X]
The issuer's revenues for its most recent fiscal year were $0.
As of April 15, 2005, 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 $9,738,000 based upon the
closing price of $0.24/share.
As of April 15, 2005, the Registrant had outstanding 48,777,842 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
Newgold'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.........................................11
ITEM 3. LEGAL PROCEEDINGS...............................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............12
PART II......................................................................14
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......16
ITEM 7 FINANCIAL STATEMENTS............................................23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................25
ITEM 8A. CONTROLS AND PROCEDURES.........................................25
ITEM 8B. OTHER INFORMATION...............................................25
PART III.....................................................................26
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT...............26
ITEM 10. EXECUTIVE COMPENSATION..........................................27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.................................30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION...................31
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
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") 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.
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, an entity 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.
Newgold'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 Newgold placed its only remaining property, the Relief
Canyon Mine, located in Pershing County, Nevada, on a care and maintenance
status. During fiscal 2000, Newgold executed a contract to sell the Relief
Canyon Mine to A. Scott Dockter, Chairman of Newgold; however the sale was never
completed and the asset remains the property of Newgold. It is now Newgold's
intention to resume mining at the Relief Canyon mine. See Business below for
further detail.
Newgold's independent accountants have included a "going concern" explanatory
paragraph in their report dated April 15, 2005 on Newgold's financial statements
for the fiscal year ended January 31, 2005, indicating substantial doubt about
Newgold's ability to continue as a going concern (See Note 2 of Financial
Footnotes). If Newgold's new strategy is not successful or if insufficient funds
are available to carry out Newgold's development plan, then Newgold will have no
other recourse than to seek protection of the Federal Bankruptcy Courts.
For financial information regarding Newgold, see "Item 7: Financial Statements."
1
BUSINESS
Newgold's business will be to acquire, explore and, if warranted, develop
various mining properties located in the state of Nevada. Newgold plans to
carryout comprehensive exploration and development programs on its properties.
While Newgold may fund and conduct these activities itself, Newgold's current
plan is to outsource most of these activities through the use of various joint
venture, royalty or partnership arrangements pursuant to which other companies
would agree to finance and carryout the exploration and development programs on
Newgold's mining properties. Consequently, Newgold'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
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The Relief Canyon Mine is an open-pit, heap leaching operation located
approximately 110 miles northeast of Reno, Nevada. Newgold held 50 unpatented
mining claims covering approximately 1000 acres until October 2004 at which time
Newgold completed re-staking the Relief Canyon mill site and lode claims.
Newgold currently holds a total of 78 claims including 57 mill site claims and
21 unpatented mining claims. The annual payments to maintain these claims are
approximately $15,600. 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
On January 10, 1995, Newgold purchased the Relief Canyon mine from J.D. Welsh &
Associates 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 Newgold's property.
Located on the property are, a building containing five carbon tanks and a
boiler 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, Newgold 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, Newgold staked
an additional 402 claims. However, subsequent to January 31, 1998, Newgold
reduced the total claims to 50 (covering approximately 1,000 acres). In 1999
Newgold placed the mine in a care and maintenance status.
2
If mining operations are not resumed at the Relief Canyon mine, it is possible
Newgold 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.
During 1996, Repadre Capital Corporation ("Repadre") purchased for $500,000 a
net smelter return royalty (Repadre Royalty). Repadre was to receive a 1.5%
royalty from production at each of the Relief Canyon Mine and Mission Mines. In
July 1997, an additional $300,000 was paid by Repadre for an additional 1%
royalty from the Relief Canyon Mine. In October, 1997, when the Mission Mine
lease was terminated, Repadre exercised its option to transfer the Repadre
Royalty solely to the Relief Canyon Mine resulting in a total 4% royalty. The
total amount received of $800,000 has been recorded as deferred revenue in the
accompanying financial statements.
Plan for Relief Canyon Production
Newgold is an "exploration stage" company engaged in the search and/or
verification of ore deposits (reserves) in its property. Current ore deposits
under Newgold's control at the Relief Canyon Mine are estimated by Newgold
(based on past exploration by Newgold and work done by others) to contain
significant amounts of gold bearing ore. Newgold believes 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, 2005 Newgold's properties include 78 unpatented mining claims
contained in about 1,000 acres.
Newgold's operating plan is to place the most promising mining targets into
production during the 2006 fiscal year, and use the net proceeds from these
operations to fund expanded exploration and development of its entire property
holdings. By this means, Newgold intends to progressively enlarge the scope and
scale of the mining and processing operations, thereby increasing both Newgold's
annual revenues and its net profits.
Newgold'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 Newgold's operations
will permit this environmentally responsible plan of operations.
Newgold will focus on placing the North Relief mining property into production.
New permits for mining and processing are being applied for and should be in
place by early 2006. 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. The estimated
time for completing the permitting process is between 9 months to 18 months.
However, once a suitable bond is posted, Newgold expects to be able to carry on
limited operations pending full permitting for full mining operations.
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Description of Past Exploration and Existing Development Efforts
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
Newgold will pursue exploration drilling to further identify areas of possible
gold-bearing ore deposits. Results of this additional drilling will allow
Newgold to better plan its eventual underground mining efforts. Further
development of Newgold's underground mining activity will also be dependent on
the availability of adequate capital to initiate and sustain this effort.
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.
4
It is Newgold's intention 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 Newgold 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 $454 in December 2004. The price was $424 as of April
15, 2005. This price increase has made it economically more feasible to produce
gold as well as made gold a more attractive investment for many. Newgold 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 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
5
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. Newgold'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 Newgold's
operations and profits.
Newgold also competes in the hiring and retention of experienced employees.
Consequently, Newgold may not be able to hire qualified miners or operators in
the numbers or at the times desired.
GOVERNMENT CONTROLS AND REGULATIONS
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 Newgold 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 Newgold'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 on Newgold'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,
6
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 Newgold believes the
permits can be obtained in a timely fashion, permitting procedures are complex,
costly, time consuming and subject to potential regulatory delay. Newgold 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, Newgold 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 Newgold's property. Newgold cannot predict whether it will be able
to obtain new permits or whether material changes in permit conditions will be
imposed. Granting new permits or the imposition of additional conditions could
have a material adverse effect on Newgold's ability to operate the Relief Canyon
mine.
Subsequent to the fiscal year end, Newgold received permission from the Nevada
Bureau of Mining Regulation and Reclamation ("BMRR") to commence designated
mining activities previously requested by Newgold.
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
Newgold'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 Newgold'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 or a posting of a bond by Newgold in the
amount of $464,000. While Newgold has appealed this amount, it has been fully
accrued as reclamation costs in the Financial Statements. Full mining operations
cannot commence until such financial assurances or a bond have been provided and
all necessary permits issued. Newgold has developed a specific reclamation plan
and began implementation of the plan in April 2005. This work is expected to
continue into the summer of 2005. When work is
7
completed the State of Nevada will establish a revised financial assurance
amount which Newgold plans on depositing in the form of cash with the State of
Nevada.
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
Newgold 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 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.
Newgold 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 Newgold is not clear at this
time.
Moreover, the Clean Air Act, as 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
8
minimum elements of state operating permit programs. Newgold will be required to
comply with these EPA standards to extent adopted by the State of Nevada.
In addition, Newgold 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. Newgold has posted security bonds and has made
provision to cover the estimated costs of such reclamation as required by
permit.
Newgold 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
Newgold's mining property rights are represented by 78 unpatented mill and
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 April 15, 2005, Newgold was current in the
payment of such maintenance fees.
EMPLOYEES
On April 30, 2005, Newgold had two full-time and one part-time employee located
in Cameron Park, California and Dallas, Texas. Newgold's employees are not
subject to a labor contract or collective bargaining agreement. Newgold
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
Newgold has been relatively inactive since April 2001. Consequently, it is only
recently reactivating its business operations and has generated no revenues,
other than dividend income, since its inception. As a result, Newgold has only a
limited operating history upon which to evaluate its future potential
performance. Newgold's prospects must be considered in light of the risks and
difficulties encountered by new companies which have not yet established their
business operations.
Newgold will need additional funds to finance its mining and exploration
activities as well as fund its current operations. It currently has 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
9
public or private equity financings, establish increasing cash flow from
operations, enter into joint ventures or other arrangements with corporate
sources, or secure other sources of financing to fund operations.
The audit report of Newgold's independent auditors includes a "going concern"
qualification. In the auditor's opinion, Newgold's limited operating history and
the accumulated shareholders' deficit as of January 31, 2005, raise substantial
doubt about its ability to continue as a going concern.
The price of gold has experienced an increase in value over the past four
years, generally reflecting among other things declining interest rates in the
United States; worldwide instability due to terrorism; and a global economic
slump. Any significant drop in the price of gold may have a materially adverse
affect on the results of Newgold's operations unless it is able to offset such a
price drop by substantially increased production.
Newgold's disclosures of its mineral resources are only estimates. Newgold has
no proven or probable reserves and has no ability to currently measure or prove
its reserves other then estimating such reserves relying on information produced
in the 1990's and thus may be unable to actually recover the quantity of gold
anticipated. Newgold can only estimate a potential mineral resource which is a
subjective process which depends in part on the quality of available data and
the assumptions used and judgments made in interpreting such data. There is
significant uncertainty in any resource estimate such that the actual deposits
encountered or reserves validated and the economic viability of mining the
deposits may differ materially from Newgold's estimates.
Gold exploration is highly speculative in nature. Success in exploration is
dependent upon a number of factors including, but not limited to, quality of
management, quality and availability of geological expertise and availability of
exploration capital. Due to these and other factors, no assurance can be given
that Newgold's exploration programs will result in the discovery of new mineral
reserves or resources.
Newgold's mining property rights consist of 78 mill site and unpatented mining
claims. The validity of unpatented mining claims is often uncertain and is
always subject to contest. Unpatented mining claims are generally considered
subject to greater title risk than patented mining claims, or real property
interests that are owned in fee simple. If title to a particular property is
successfully challenged, Newgold may not be able to retain its royalty interests
on that property, which could reduce its future revenues.
Mining is subject to extensive regulation by state and federal regulatory
authorities. State and federal statutes regulate environmental quality, safety,
exploration procedures, reclamation, employees' health and safety, use of
explosives, air quality standards, pollution of stream and fresh water sources,
noxious odors, noise, dust, and other environmental protection controls as well
as the rights of adjoining property owners. Newgold believes that, it is
currently operating in compliance with all known safety and environmental
standards and regulations applicable to its Nevada property. However, there can
be no assurance that its compliance could be challenged
10
or that future changes in federal or Nevada laws, regulations or interpretations
thereof will not have a material adverse affect on Newgold's ability to resume
and sustain mining operations.
The business of gold mining is subject to certain types of risks, including
environmental hazards, industrial accidents, and theft. Prior to suspending
operations, Newgold carried insurance against certain property damage loss
(including business interruption) and comprehensive general liability insurance.
While Newgold maintained insurance consistent with industry practice, it is not
possible to insure against all risks associated with the mining business, or
prudent to assume that insurance will continue to be available at a reasonable
cost. Newgold has not obtained environmental liability insurance because such
coverage is not considered by management to be cost effective. Newgold currently
carries no insurance on any of its properties due to the current status of the
mine and Newgold's current financial condition.
Newgold is substantially dependent upon the continued services of A. Scott
Dockter, its President. Newgold has no employment agreement with Mr. Dockter,
nor is there either key person life insurance or disability insurance on Mr.
Dockter. While Mr. Dockter expects to spend the majority of his time assisting
Newgold, there can be no assurance that Mr. Dockter's services will remain
available to Newgold. If Mr. Dockter's services are not available to Newgold,
Newgold will be materially and adversely affected. However, Mr. Dockter has been
a significant shareholder of Newgold since its inception and considers his
investment of time and money in Newgold of significant personal value.
ITEM 2. DESCRIPTION OF PROPERTY
Newgold's office is located at 3090 Boeing Drive, Cameron Park, CA 95682.
Newgold also owns 78 unpatented mill and 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 Newgold 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 Newgold. It was discovered
during the pendency of this action that a former Secretary-Treasurer of Newgold,
Inc., (prior to Newgold going public through its merger with Warehouse Auto)
signed a contract in 1994 which obligated Newgold, 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 Newgold. 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 Newgold. On May 11, 2000, Newgold satisfied this judgment
through the issuance of 350,000 shares of Common Stock to a shareholder who
subsequently settled this judgment.
11
On May 7, 1997 a judgment was entered against Newgold 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 Newgold; loan proceeds were used for development
purposes at Newgold's mining properties. On May 11, 2000, Newgold satisfied this
judgment through the issuance of 300,000 shares of Common Stock to a shareholder
who subsequently settled this judgment.
On February 4, 2000, a complaint was filed against Newgold 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 Newgold 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. Newgold 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 Newgold, Newgold cannot predict the outcome of any such
action or the amount of expenses that would be ultimately incurred in defending
any such claims. Newgold 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 maintains that Mr.
Ngoyi's claims are invalid as the two judgments were previously satisfied and
that Newgold is not insolvent. A pre-trial hearing was held on April 4, 2005 at
which time Newgold prevailed in having Mr. Ngoyi's petition dismissed. An order
of dismissal is expected to be issued shortly.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Subsequent to the fiscal year end, Newgold held a special meeting of
shareholders on March 29, 2005 in Sacramento, California. The purpose of the
special shareholders' meeting was to approve an amendment to Newgold's
Certificate of Incorporation to increase its authorized shares of common stock
from 50,000,000 to 250,000,000 shares. This proposed amendment was approved by
the following vote:
For Against Abstain
31,392,611 411,711 10,207
12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Commencing in July 1997, Newgold's' common stock was listed and traded on the
NASDAQ Electronic Bulletin Board (OTCBB) under the symbol "NGLD". Effective as
of June 2001, Newgold'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 Newgold'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, 2005 LOW HIGH
------------------------------------ ----------- -----------
Fourth Quarter (November - January) $0.08 $0.33
------------------------------------ ----------- -----------
Third Quarter (August - October) $0.02 $0.249
------------------------------------ ----------- -----------
Second Quarter (May-July) $0.149 $0.259
------------------------------------ ----------- -----------
First Quarter (February - April) $0.159 $0.359
------------------------------------ ----------- -----------
------------------------------------ ----------- -----------
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
------------------------------------ ----------- -----------
As of April 15, 2005, there were approximately 1,108 holders of record of
Newgold's Common Stock. This amount does not include shares held in street name.
DIVIDEND POLICY
Newgold has never paid any cash dividends on its common stock. Newgold 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.
13
RECENT SALES OF UNREGISTERED SECURITIES
During Newgold's fiscal year ended January 31, 2005, it issued the following
equity securities pursuant to exemptions from registration under the Securities
Act of 1933 Act (the "1933 Act"):
In April 2004, Newgold borrowed $9,650 from its President, Scott Dockter. The
promissory note is not convertible into stock, is due on April 30,2005, and
bears interest at 8% per year. In connection with the loans, warrants to
purchase 64,333 shares of Newgold 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.
In July 2004, Newgold borrowed $8,500 from its President, Scott Dockter. The
promissory note is not convertible into stock, is due on July 31, 2005, and
bears interest at 8% per year. In connection with the loans, warrants to
purchase 56,667 shares of Newgold 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.
In October 2004, Newgold borrowed $3,081 from its President, Scott Dockter. The
promissory note is not convertible into stock, is due on in one year and bears
interest at 8% per year. In conjunction with this loan, the President was issued
warrants to purchase 20,540 shares of Newgold's common stock of $0.15 per share.
In addition, new convertible promissory notes were issued to Scott Dockter,
Newgold's CEO and James Kluber, Newgold's CFO in the principal amounts of
$1,402,742 and $209,251, respectively. The notes bear interest at 8% per annum
and are due September 30, 2005. In connection with the issuance of these notes,
Newgold issued warrants to purchase 5,798,140 and 1,395,007 shares of common
stock to its Chief Executive Officer and Chief Financial Officer, respectively.
Each of the issuances of notes and warrants described above were made in
reliance upon the exemption from registration set forth in Section 4(2) of the
1933 Act as a transaction not involving a public offering and made to two
affiliates of Newgold. The notes and warrants are deemed to be "restricted
securities" as defined in Rule 144 under the 1933 Act.
During Newgold's fiscal year ended January 31, 2004, it issued the following
equity securities pursuant to exemptions from registration under the 1933 Act:
In February 2003, one person exercised a warrant to purchase 200,000 shares of
Newgold's common stock. The exercise price was $0.10/share.
The above issuance was 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 Newgold 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 will bear a legend stating the restrictions on resale.
14
During the fiscal year ended January 31, 2003, Newgold issued the following
equity securities pursuant to exemptions from registration under the 1933 Act:
In January 2003, three investors exercised warrants to purchase 550,000 shares
of Newgold's common stock. The exercise price was $0.10/share.
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
Newgold 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 will 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,
2005 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 Newgold's business
are discussed throughout this Form 10-KSB and should be considered carefully.
For purposes of the discussion in this Item 6, Newgold, Inc. may be referred to
as "we" or "us."
PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
Certain key factors that have affected our financial and operating results in
the past will affect our future financial and operating results. These include,
but are not limited to the following:
o Gold prices, and to a lesser extent, silver prices;
o Current gold deposits under our control at the Relief Canyon Mine are
estimated by us (based on past exploration by Newgold and work done by
others).
Our properties now include 78 unpatented mining claims contained in
about 1000 acres.
15
Our operating plan is to place our mining claims into profitable
production by the end of fiscal 2006, and use the net proceeds from
these operations to fund ongoing exploration and development of our
property holdings. Through the use of joint ventures, royalties and
partnerships, we intend to progressively enlarge the scope and scale of
the mining and processing operations, thereby increasing both our
annual revenues and ultimately our net profits. Our objective is to
achieve annual growth rates in revenue and net profits for the
foreseeable future;
o We expect to make capital expenditures in fiscal year 2006 of between
$2.5 million and $4 million, including costs related to the resumption
of mine operations and production at the Relief Canyon mine.
o Due to the strengthening of the gold market, and consistent with our
exploration growth strategy, we expect exploration, research and
development expenditures in 2005 will total between $500,000 and $1
million.
o Additional funding or the utilization of other venture partners will be
required for mining operations, exploration, research, development and
operating expenses. In the past we have been dependent on the funding
from the private placement of our securities as well as loans from
related parties as the sole sources of capital to fund operations.
RESULTS OF OPERATION
We have only recently resumed business operations after having been inactive
from July 2001 until February 2003. Consequently, we are in the process of
reinstituting our business and mining operations, the results of operations for
the last two fiscal years will likely not be indicative of Newgold's current and
future operations. The current management discussion and analysis should be read
from the context of Newgold's recent resumption of its mining business.
Operating Results for the Fiscal Years Ended January 31, 2005 and 2004
----------------------------------------------------------------------
Although we commenced efforts to re-establish our mining business early in
fiscal year 2004, no mining operations had commenced and no revenues had been
recognized during the fiscal years 2004 and 2005. We were inactive during fiscal
year 2003 and, as a result, generated no revenues from operations. We hope to be
able to commence generating revenues from mining operations during the 2006
fiscal year. We have 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 2005 we spent $28,433 on exploration expenses related to the
Relief Canyon mining property. This compares to exploration expenses of $37,916
expended during fiscal 2004. These expenses relate primarily to maintenance and
retention costs required to maintain Newgold's mining claims. We incurred
operating expenses of $353,972 during fiscal year 2005. Of this amount, $220,000
reflects officer compensation and related payroll taxes during the year, $33,510
reflect payroll penalties and $89,900 reflect fees for outside professional
services.
16
During fiscal year 2004 we incurred operating expenses of $306,477 of which
$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. It is anticipated that both exploration costs and
operating expenses will increase significantly as we resume our mining
operations and exploration program.
We incurred interest expense of $614,672 during fiscal year 2005 which compares
to interest expenses of $136,493 incurred during fiscal year 2004. Although the
amount of loans outstanding during fiscal 2005 increased slightly, the overall
interest rate on such borrowing decreased.
Our total net loss for fiscal year 2005 increased to $1,278,140 compared to a
net loss of $470,823 incurred for fiscal year 2004. The larger net loss in
fiscal year 2005 reflects the substantial increase in operating expenses and
interest expense and a lack of revenues recognized during fiscal year 2005.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating losses during the last two fiscal years
which has resulted in an accumulated deficit of $16,385,303 as of the end of
fiscal year 2005. At January 31, 2005, we had cash of $16,730 and a net working
capital deficit of $3,828,226. Since the resumption of our business in February
2003, we have been dependent on borrowed or invested funds in order to finance
Newgold's ongoing operations. As of January 31, 2005, we had $1,006,088 of
outstanding notes payable which reflects a significant decrease compared to
notes payable of $1,581,721 outstanding as of January 31, 2004.
During fiscal year 2005, we borrowed an additional $41,797 from Newgold's
President and Chief Executive Officer at an interest rate of 8% per year and is
due January 31, 2006.. This amount increased our total indebtedness to Newgold's
President to $1,422,587. Of this amount, $1,402,742 which had been in default
was converted into a convertible note payable at a rate of 8% per year due
September 30, 2005. Also during fiscal year 2005, the Chief Financial Officer
converted $209,251 of accrued payroll and other amounts owed to him into a
convertible note payable at a rate of 8% per year. The convertible note is due
September 30, 2005. Principal and interest due four other individuals are due on
demand of the holder.
Subsequent to the fiscal year end, we secured $75,000 of new equity capital
through the sale of 500,000 shares of Newgold common stock and the issuance of
warrants to purchase up to an additional 500,000 shares of Newgold's common
stock exercisable at $0.30 per share.
By attempting to resume mining operations, we 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 our intention
to pursue several possible funding opportunities including the sale of
additional securities or the incurring of additional debt.
17
Due to our continuing losses from our business operations, the independent
auditor's report includes a "going concern" explanation relating to the fact
that Newgold's continuation is dependent upon obtaining additional working
capital either through significantly increasing revenues or through outside
financing.
As of January 31, 2005, we were in default on two promissory notes due to
unrelated parties in the principal amounts of $19,844 and $176,500.
Due to our limited cash flow, operating losses and limited assets, it is
unlikely that we could obtain financing through commercial or banking sources.
Consequently, we are dependent on continuous cash infusions from our major
stockholders or other outside sources in order to fund our current operations.
If these investors were unwilling or unable to provide necessary working capital
to us, we would probably not be able to commence or sustain our operations.
There is no written agreement or contractual obligation which would require our
investors to fund Newgold's operations up to a certain amount or indeed continue
to finance Newgold's operations at all.
While we believe Newgold has sufficient capital to fund its current
administrative expenses, we 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, Newgold's President has paid substantially all of its expenses
since restarting its business in February 2003. Although we believe that these
creditors and investors will continue to fund our expenses based upon their
significant debt or equity interest in Newgold, there is no assurance that such
investors will continue to pay our expenses. If adequate funds are not otherwise
available, we 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. Newgold 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.
Valuation of long-lived assets
------------------------------
Long-lived assets, consisting primarily of property and equipment, patents and
trademarks, and goodwill, comprise a significant portion of Newgold'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
18
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 Newgold 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.
Exploration Costs
-----------------
Exploration costs are expensed as incurred. All costs related to property
acquisitions are capitalized.
19
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 Newgold'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 Newgold'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 November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS No. 151
amends the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) under the guidance in ARB No. 43,
Chapter 4,"Inventory Pricing". Paragraph 5 of ARB No. 43, Chapter 4, previously
stated that ". . . under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so
abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not expect adoption
of SFAS No. 151 to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 152,"Accounting for Real Estate
Time-Sharing Transactions". The FASB issued this Statement as a result of the
guidance provided in AICPA Statement of Position (SOP) 04-2,"Accounting for Real
Estate Time-Sharing Transactions". SOP 04-2 applies to all real estate
time-sharing transactions. Among other items, the SOP provides guidance on the
recording of credit losses and the treatment of selling costs, but does not
change the revenue recognition guidance in SFAS No. 66,"Accounting for Sales of
Real Estate", for real estate time-sharing transactions. SFAS No. 152 amends
Statement No. 66 to reference the
20
guidance provided in SOP 04-2. SFAS No. 152 also amends SFAS No. 67, "Accounting
for Costs and Initial Rental Operations of Real Estate Projects", to state that
SOP 04-2 provides the relevant guidance on accounting for incidental operations
and costs related to the sale of real estate time-sharing transactions. SFAS No.
152 is effective for years beginning after June 15, 2005, with restatements of
previously issued financial statements prohibited. This statement is not
applicable to the Company.
In December 2004, the FASB issued SFAS No. 153,"Exchanges of Nonmonetary
Assets," an amendment to Opinion No. 29,"Accounting for Nonmonetary
Transactions". Statement No. 153 eliminates certain differences in the guidance
in Opinion No. 29 as compared to the guidance contained in standards issued by
the International Accounting Standards Board. The amendment to Opinion No. 29
eliminates the fair value exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Such an exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary asset exchanges occurring in periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
periods beginning after December 16, 2004. Management does not expect adoption
of SFAS No. 153 to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123(R),"Share-Based Payment". SFAS
123(R) amends SFAS No. 123,"Accountung for Stock-Based Compensation", and APB
Opinion 25,"Accounting for Stock Issued to Employees." SFAS No.123(R) requires
that the cost of share-based payment transactions (including those with
employees and non-employees) be recognized in the financial statements. SFAS No.
123(R) applies to all share-based payment transactions in which an entity
acquires goods or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP) or by
incurring liabilities (1) in amounts based (even in part) on the price of the
entity's shares or other equity instruments, or (2) that require (or may
require) settlement by the issuance of an entity's shares or other equity
instruments. This statement is effective (1) for public companies qualifying as
SEC small business issuers, as of the first interim period or fiscal year
beginning after December 15, 2005, or (2) for all other public companies, as of
the first interim period or fiscal year beginning after June 15, 2005, or (3)
for all nonpublic entities, as of the first fiscal year beginning after December
15, 2005. Management is currently assessing the effect of SFAS No. 123(R) on the
Company's financial statement. On April 14, 2005, the Securities and Exchange
Commission amended the compliance dates to allow companies to implement
Statement No. 123R at the beginning of their next fiscal year, instead of the
next reporting period, that begins after June 15, 2005, or Dec. 15, 2005 for
small business issuers.
Effective for reporting periods beginning after April 29, 2004, the Emerging
Issues Task Force (EITF) released Issue 04-2, "Whether Mineral Rights are
Tangible or Intangible Assets." The consensus was that mineral rights acquired
on a business combination are tangible assets and should be recorded as a
separate component of property, plant and equipment either on the face of the
financial statements or in the notes. The Company will comply with the Issue in
the future as required.
Effective for reporting periods beginning after March 31, 2004, the EITF
released Issue No. 04-3, "Mining Assets: Impairment and Business Combinations."
The EITF reached consensus that an entity should include value beyond proven and
probable reserves in the value allocated to mining assets in a purchase price
allocation to the extent a market participant would include such value in
determining the fair market value of the asset. The EITF also reached consensus
that an entity should include the effects of anticipated changes in market
prices of minerals when determining the fair market value of mining assets in a
purchase price equation in a manner consistent with expectations of the
marketplace.
Effective for reporting periods beginning after December 15, 2005, the EITF
released Issue No. 04-6, "Accounting For Stripping Costs Incurred During
Production In The Mining Industry." The EITF reached a consensus of accounting
for "stripping cost", the cost of removing overburden (material overlying a
mineral deposit that must be removed prior to mining) and waste materials,
during the production phase and determined that such costs are considered
variable production costs and thus should be included in the cost of inventory
produced during the period in which the stripping costs are incurred. The
consensus applies to only entities involved in finding and removing wasting
natural resources. As such, this statement is not applicable to the Company.
21
ITEM 7 FINANCIAL STATEMENTS
NEWGOLD, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JANUARY 31, 2005 AND 2004
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
Balance Sheet F-2
Statements of Operations F-3
Statements of Comprehensive Loss F-4
Statements of Shareholders' Deficit F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Newgold, Inc.
We have audited the balance sheet of Newgold, Inc. (the "Company") as of January
31, 2005, 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, 2005. 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,
2005, and the results of its operations and its cash flows for each of the two
years in the period ended January 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
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, 2005, the Company
incurred a net loss of $1,273,140 and had negative cash flows from operations of
$353,201. In addition, the Company had an accumulated shareholders' deficit of
$4,114,280 at January 31, 2005. 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
April 15, 2005
F-1
NEWGOLD, INC.
BALANCE SHEET
JANUARY 31, 2005
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 16,730
Travel advance 2,000
-------------
Total current assets 18,730
OTHER ASSETS
Deferred reclamation costs 513,946
-------------
Total other assets 513,946
-------------
TOTAL ASSETS $ 532,676
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 568,276
Accrued expenses 1,758,646
Accrued reclamation costs 513,946
Notes payable due to individuals and officers 1,006,088
-------------
Total current liabilities 3,846,956
--------------
DEFERRED REVENUE 800,000
--------------
Total liabilities 4,646,956
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.001 par value
50,000,000 shares authorized
48,277,841shares issued and outstanding 48,278
Additional paid in capital 12,222,745
Accumulated deficit (16,385,303)
-------------
Total shareholders' deficit (4,114,280)
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 532,676
==============
The accompanying notes are an integral part of these financial statements
F-2
NEWGOLD, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
2005 2004
----------- -----------
NET SALES $ - $ -
COST OF GOODS SOLD 28,433 37,916
----------- -----------
GROSS PROFIT (LOSS) (28,433) (37,916)
OPERATING EXPENSES (353,972) (306,477)
------------ -----------
LOSS FROM OPERATIONS (382,405) (344,393)
------------ -----------
OTHER INCOME (EXPENSE)
Dividend income - 10,063
Interest expense (614,672) (136,493)
Loss on sale of marketable securities (281,063) -
------------ -----------
Total other income (expense) (895,735) (126,430)
------------ -----------
NET LOSS (1,278,140) $ (470,823)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.01)
=========== ===========
BASIC AND DILUTED WEIGHTED-AVERAGE
SHARES OUTSTANDING 47,644,745 47,595,763
============= ===========
The accompanying notes are an integral part of these financial statements
F-3
NEWGOLD, INC.
STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
2005 2004
------------- -------------
NET LOSS $ (1,273,140) $ (470,823)
OTHER COMPREHENSIVE LOSS
Unrealized loss from
marketable securities - (204,820)
SALE OF SECURITIES WITH PREVIOUS UNREALIZED
HOLDING LOSS $ 204,820 -
------------- -------------
COMPREHENSIVE LOSS $ (1,068,320) $ (675,643)
============ =============
The accompanying notes are an integral part of these financial statements
F-4
NEWGOLD, INC.
STATMENTS 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, 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)
COMMON STOCK
ISSUED FOR CASH 671,667 672 100,078 100,750
OFFERING COSTS (124,337) (124,337)
WARRANTS ISSUED
WITH COMMON STOCK 124,337 124,337
WARRANTS ISSUED
WITH DEBT - - 1,284,234 1,284,234
SALE OF MARKETABLE
SECURITIES 204,820 204,820
NET LOSS (1,278,140) 1,278,140)
------------ ------- ------------- ----------- ----------- ------------
BALANCE, JANUARY
31, 2005 48,277,841 $48,278 $ 12,222,745 - $(16,385,303) $ (4,114,280)
============ ======= ============= =========== =========== ============
The accompanying notes are an integral part of these financial statements
F-5
NEWGOLD, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
2005 2004
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,278,140) $ (470,823)
Adjustments to reconcile net loss to net cash
used in operating activities
Accretion of warrants issued as a debt discount 443,682 22,753
Accretion of beneficial conversion of warrants 35,823 -
Loss on sale of marketable securities 281,063 -
(Increase) decrease in
Employee receivable 2,000 -
Deposits 45,000 (38,500)
Deferred reclamation costs - (463,446)
Increase (decrease) in
Accounts payable 28,082 (2,000)
Accrued salaries and benefits (106,394) 113,000
Accrued expenses 195,683 662,433
--------------- ----------------
Net cash used by operating activities (353,201) (176,583)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities 34,124 (10,063)
--------------- ----------------
Net cash provided (used) by financing activities 34,124 (10,063)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of common stock 100,750 20,000
Proceeds from notes payable 251,043 338,943
Principal repayments of notes payable (21,953) (171,952)
--------------- ----------------
Net cash provided by financing activities 329,840 186,991
--------------- ----------------
Net increase in cash 10,763 345
CASH, BEGINNING OF YEAR 5,967 5,622
--------------- ----------------
CASH, END OF YEAR $ $ 16,730 $ 5,967
=============== ================
The accompanying notes are an integral part of these financial statements
F-6
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
NEWGOLD, Inc. ("the Company") has been in the business of acquiring,
exploring, developing, and producing gold properties. The Company had
rights to mine properties in Nevada and Montana. Its primary focus was
on the Relief Canyon Mine located near Lovelock, Nevada, where it has
performed development and exploratory drilling and was in the process
of obtaining permits to allow operation of the Relief Canyon Mine. In
December 1997, the Company placed the Relief Canyon Mine on care and
maintenance status. The Company also conducted exploration at its
Washington Gulch Mine property in Montana.
In February 2000 the Company began to implement an entirely new
business model of investing in Internet companies. Due to the
deterioration of the investment market for these types of companies
later in 2000, the Company abandoned this investment strategy. From
mid-2001 until the beginning of 2003 Newgold was essentially inactive,
only continuing with some of the care and maintenance at Relief Canyon,
as provided for by a non-affiliate company owned by the Chairman and
CEO of Newgold.
The Company has embarked on a business strategy whereby it will invest
in and/or manage gold mining and other mineral producing properties.
Currently, the Company's principal assets include various mineral
leases associated with the Relief Canyon mine located near Lovelock,
Nevada along with various items of mining equipment located at that
site. The Company's business will be to acquire, explore and, if
warranted, develop various mining properties located in the state of
Nevada. The Company plans to carryout comprehensive exploration and
development programs on its properties. While the Company may fund and
conduct these activities itself, the Company's current plan is to
outsource most of these activities through the use of various joint
venture, royalty or partnership arrangements pursuant to which other
companies would agree to finance and carryout the exploration and
development programs on Newgold's mining properties. Consequently, the
Company's current plan will not require the hiring of significant
amounts of mining employees but will require a smaller group of
employees to monitor and/or supervise the mining and exploration
activities of other entities in exchange for royalties or other revenue
sharing arrangements.
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-7
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
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, 2005, the Company incurred a
net loss of $1,273,140 and had negative cash flows from operations of
$634,265. In addition, the Company had an accumulated shareholders'
deficit of $4,109,280 at January 31, 2005. The Company's ability to
continue as a going concern is dependent upon its ability to generate
profitable operations in the future and/or to obtain the necessary
financing to meet its obligations and repay its liabilities arising
from normal business operations when they come due. The outcome of
these matters cannot be predicted with any certainty at this time.
Since inception, the Company has satisfied its capital needs by issuing
equity securities.
Management plans to continue to provide for its capital needs during
the year ended January 31, 2006 by issuing equity securities or
incurring additional debt financing, with the proceeds to be used to
re-establish mining operations at Relief Canyon as well as improve its
working capital position. These financial statements do not include any
adjustments to the amounts and classification of assets and liabilities
that may be necessary should the Company be unable to continue as a
going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
-------------------------
For the purpose of the statements of cash flows, the Company considers
all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents.
Marketable Securities Available for Sale
----------------------------------------
Investments in equity securities are classified as available-for-sale.
Securities classified as available for sale are marked to market at
each period end. Changes in value on such securities are recorded as a
component of Other comprehensive income (loss). If declines in value
are deemed other than temporary, losses are reflected in Net income
(loss).
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-8
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
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
F-9
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
depletion rates are subject to periodic review to ensure that asset
costs are amortized over their useful lives.
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-10
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
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,
2005 and 2004.
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, 2005, 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
F-11
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
involving 50 percentage points or more of the issued and outstanding
securities of the Company.
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:
2005 2004
--------------- ---------------
Warrants 11,724,583 3,718,229
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 November 2004, the FASB issued SFAS No. 151,"Inventory Costs". SFAS
No. 151 amends the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) under
the guidance in ARB No. 43, Chapter 4,"Inventory Pricing". Paragraph 5
of ARB No. 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires
that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this
Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred
during fiscal years beginning after June
F-12
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
15, 2005. Management does not expect adoption of SFAS No. 151 to have a
material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 152,"Accounting for Real
Estate Time-Sharing Transactions". The FASB issued this Statement as a
result of the guidance provided in AICPA Statement of Position (SOP)
04-2,"Accounting for Real Estate Time-Sharing Transactions". SOP 04-2
applies to all real estate time-sharing transactions. Among other
items, the SOP provides guidance on the recording of credit losses and
the treatment of selling costs, but does not change the revenue
recognition guidance in SFAS No. 66,"Accounting for Sales of Real
Estate", for real estate time-sharing transactions. SFAS No. 152 amends
Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS
No. 152 also amends SFAS No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects", to state that SOP 04-2
provides the relevant guidance on accounting for incidental operations
and costs related to the sale of real estate time-sharing transactions.
SFAS No. 152 is effective for years beginning after June 15, 2005, with
restatements of previously issued financial statements prohibited. This
statement is not applicable to the Company.
In December 2004, the FASB issued SFAS No. 153,"Exchanges of
Nonmonetary Assets," an amendment to Opinion No. 29,"Accounting for
Nonmonetary Transactions". Statement No. 153 eliminates certain
differences in the guidance in Opinion No. 29 as compared to the
guidance contained in standards issued by the International Accounting
Standards Board. The amendment to Opinion No. 29 eliminates the fair
value exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. Such an exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No.
153 is effective for nonmonetary asset exchanges occurring in periods
beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in periods beginning after
December 16, 2004. Management does not expect adoption of SFAS No. 153
to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123(R),"Share-Based
Payment". SFAS 123(R) amends SFAS No. 123,"Accountung for Stock-Based
Compensation", and APB Opinion 25,"Accounting for Stock Issued to
Employees." SFAS No.123(R) requires that the cost of share-based
payment transactions (including those with employees and non-employees)
be recognized in the financial statements. SFAS No. 123(R) applies to
all share-based payment transactions in which an entity acquires goods
or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP)
or by incurring liabilities (1) in amounts based (even in part) on the
price of the entity's shares or other equity instruments, or (2) that
require (or may require) settlement by the issuance of an entity's
shares or other equity instruments. This statement is effective (1) for
public companies qualifying as SEC small business issuers, as of the
first interim period or fiscal year beginning after December 15, 2005,
or (2) for all other public companies, as of the first interim period
or fiscal year beginning after June 15, 2005, or (3) for all nonpublic
entities, as of the first fiscal year beginning after December 15,
2005. Management is currently assessing the effect of SFAS
F-13
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
No. 123(R) on the Company's financial statement. On April 14, 2005, the
Securities and Exchange Commission amended the compliance dates to
allow companies to implement Statement No. 123R at the beginning of
their next fiscal year, instead of the next reporting period, that
begins after June 15, 2005, or Dec. 15, 2005 for small business
issuers.
Effective for reporting periods beginning after April 29, 2004, the
Emerging Issues Task Force (EITF) released Issue 04-2, "Whether Mineral
Rights are Tangible or Intangible Assets." The consensus was that
mineral rights acquired on a business combination are tangible assets
and should be recorded as a separate component of property, plant and
equipment either on the face of the financial statements or in the
notes. The Company will comply with the Issue in the future as
required.
Effective for reporting periods beginning after March 31, 2004, the
EITF released Issue No. 04-3, "Mining Assets: Impairment and Business
Combinations." The EITF reached consensus that an entity should include
value beyond proven and probable reserves in the value allocated to
mining assets in a purchase price allocation to the extent a market
participant would include such value in determining the fair market
value of the asset. The EITF also reached consensus that an entity
should include the effects of anticipated changes in market prices of
minerals when determining the fair market value of mining assets in a
purchase price equation in a manner consistent with expectations of the
marketplace.
Effective for reporting periods beginning after December 15, 2005, the
EITF released Issue No. 04-6, "Accounting For Stripping Costs Incurred
During Production In The Mining Industry." The EITF reached a consensus
of accounting for "stripping cost", the cost of removing overburden
(material overlying a mineral deposit that must be removed prior to
mining) and waste materials, during the production phase and determined
that such costs are considered variable production costs and thus
should be included in the cost of inventory produced during the period
in which the stripping costs are incurred. The consensus applies to
only entities involved in finding and removing wasting natural
resources. As such, this statement is not applicable to the Company.
NOTE 4 -MARKETABLE SECURITIES AVAILABLE FOR SALE
At January 31, 2005 the Company held no marketable securities available
for sales. 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. This
resulted in net proceeds of $34,124 and a recognized loss of sale of
$281,063.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at January 31, 2005 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
F-14
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
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 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, 2005.
NOTE 6 - NOTES PAYABLE TO RELATED PARTIES AND INDIVIDUALS
Unsecured notes payable to individuals and related parties consist of
the following at January 31, 2005:
Loans from officers:
Convertible notes payable $1,611,993
The notes bear interest at 8% per year.
In October 2004, the Company consolidated the amounts owed to the
Chief Executive Officer and the Chief Financial Officer referred to
in Note 10 (excluding accrued interest payable) into new
convertible notes payable due September 30, 2005. The notes and any
interest accrued on the new notes are convertible into common
shares of the Company at a conversion price of $0.15 per share. In
connection with the loans, warrants to purchase 5,798,140 and
1,395,007 shares of common stock have been issued to the Chief
Executive Officer and the Chief Financial Officer, respectively.
Term notes payable $19,844
The notes bear interest at 8% per year.
The notes are due January 31, 2006. The Company is in default with
respect to these loans. In connection with the loans, warrants to
purchase 141,540 shares of common stock have been issued. The
warrants have been valued using the Black-Scholes option pricing
model (see Note 7). The warrants were issued at $0.15per share and
expire in five years from the date of issuance.
Loan from individual. $176,500
The note bears interest at 8% per year.
The note is currently due. The Company is in default with respect
to this loan.
Other non-interest bearing advances 47,038
Unamortized warrant expense (849,288)
--------------
Total notes payable to individuals and related parties $ 1,006,088
==============
Interest expense was $614,672 and $136,493 for 2005 and 2004,
respectively.
F-15
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
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, 2005. However, minimum annual royalty payments
are required to retain the lease rights to the Company's properties.
Relief Canyon Mine
------------------
The Company purchased the Relief Canyon Mine from J.D. Welsh Associates
(Welsh) in January 1995. The mine consisted of 39 claims and a lease
for access to an additional 800 acres contiguous to the claims. During
1997, the Company staked an additional 402 claims. Subsequent to
January 31, 1998, the Company reduced the total claims to 50
(approximately 1,000 acres). The annual payment to maintain these
claims is $5,000. As part of the original purchase of Relief Canyon
Mine, Welsh assigned the lease from Santa Fe Gold Corporation (Santa
Fe) to the Company. The lease granted Santa Fe the sole right of
approval of transfer to any subsequent owner of the Relief Canyon Mine.
Santa Fe had accepted lease and minimum royalty payments from the
Company, but has declined to approve the transfer. Due to Welsh's
inability to transfer the Santa Fe lease, the original purchase price
of $500,000 for Relief Canyon Mine was reduced by $50,000 in 1996 to
$450,000.
Subsequent to January 31, 1998, the lease was terminated by Santa Fe.
Management believes loss of the Santa Fe lease will have no material
adverse affect on the remaining operations of the mine operation or the
financial position of the Company.
During 1996, Repadre Capital Corporation ("Repadre") purchased for
$500,000 a net smelter return royalty (Repadre Royalty). Repadre was to
receive a 1.5% royalty from production at each of the Relief Canyon
Mine and Mission Mines. In July 1997, an additional $300,000 was paid
by Repadre for an additional 1% royalty from the Relief Canyon Mine. In
October, 1997, when the Mission Mine lease was terminated, Repadre
exercised its option to transfer the Repadre Royalty solely to the
Relief Canyon Mine resulting in a total 4% royalty. The total amount
received of $800,000 has been recorded as deferred revenue in the
accompanying financial statements.
Litigation
----------
On February 4, 2000, a complaint was filed against the Company by Sun
G. Wong in the Superior Court of Sacramento County, California (Case
No. 00AS00690). In the complaint, Mr. Wong claims that he was held
liable as a guarantor of Newgold in a claim brought by Don Christianson
in a breach of contract action against Newgold. Despite the fact that
Newgold settled the action with Mr. Christianson through the issuance
of 350,000 shares of Newgold common stock, Mr. Wong, nevertheless, paid
$60,000 to a third party claiming to hold Mr. Christianson's judgment
pursuant to Mr. Wong's guaranty agreement. Similarly, Mr. Wong alleges
that he was held liable as a guarantor for a debt of $200,000 owed by
Newgold to Roger Primm with regard to money borrowed by Newgold. Mr.
Primm filed suit against the Company which was settled through the
issuance of 300,000 shares of Newgold common stock. Nevertheless, Mr.
Wong alleges that he remains liable to a third party claiming to hold
Mr. Primm's judgment for up to $200,000 pursuant to his guaranty of
such debt of Mr. Primm.
F-16
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
On December 29, 2000, the superior court entered a default judgment
against Newgold in the amount of $400,553 with regard to the
Christianson judgment and an additional $212,500 in regard to the Primm
judgment against Mr. Wong. The Company believes that Mr. Wong was not
obligated to pay any sums pursuant to his guarantees with regard to the
Christianson and Primm judgments against Newgold and, as a result, Mr.
Wong should not have any recourse against the Company for
reimbursement. Should Mr. Wong seek to assert these judgments against
the Company, the Company cannot predict the outcome of any such action
or the amount of expenses that would be ultimately incurred in
defending any such claims. The Company is currently negotiating a
settlement with Mr. Wong; however there is no assurance that an
acceptable settlement will be consummated.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate dispositions of these matters will not have a
material adverse effect on the Company's financial position, results or
operations or liquidity.
NOTE 8 - SHAREHOLDERS' DEFICIT
The following common stock transactions occurred during the years ended
January 31, 2005 and 2004:
Common Stock
------------
In January 2005 the Company issued 671,667 shares of commons stock at a
price of $0.15 per share to four investors for total proceeds of
$100,750. Additionally, 671,667 warrants to purchase common stock at a
price of $0.30 per share were issued to the investors. The warrants
expire three years from the date of issuance. The fair market value of
these warrants was determined to be $124,337 and was calculated under
the Black-Scholes option pricing model with the following assumptions
used:
2005
---------
Expected life 3 years
Risk free interest rate 3.41%
Volatility 266%
Expected dividend yield None
Warrants
--------
The Company has issued common stock warrants to two officers of the
Company as part of certain financing transactions (see Note 6).
The fair market value of these warrants issued during the years ended
January 31, 2005 and 2004 was determined to be $1,176,766 and $63,919,
respectively, and was calculated under the Black-Scholes option pricing
model with the following assumptions used:
F-17
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
2005 2004
------- -------
Expected life 5 years 5 years
Risk free interest rate 3.3%-3.71% 3.16%
Volatility 348% 400%
Expected dividend yield None None
The fair value of these warrants is being amortized to interest expense
over one year, the original life of the loans. Total amortization
expense for the years ended January 31, 2005 and 2004 was approximately
$443,682 and $22,800 respectively.
F-18
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
The following table presents warrant activity through January 31, 2005:
Weighted-
Average
Number Exercise
of Shares Price
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
Granted 8,006,354 $ 0.16
Exercised - $ -
------------ -
OUTSTANDING, JANUARY 31, 2005 11,724,583 $ 0.16
============ ============
EXERCISABLE, JANUARY 31, 2005 11,724,583 $ 0.16
============ ============
Weighted average remaining contractual term 47 months
NOTE 9 - INCOME TAXES
As of January 31, 2005, the Company had net operating loss
carry-forwards of approximately $10,263,063 available to reduce future
Federal taxable income which, if not used, will expire at various dates
through January 31, 2025. 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, 2005:
Deferred Tax Assets
Net Operating Loss Carry-forwards $ 4,396,555
Accrued Interest Payable 178,633
Accrued Payroll Tax 139,586
Accrued Payroll 2,843
AmortizationDiffBook/Tax 212,890
AccruedAccountsPayable 88,250
Capital Loss Difference 120,416
Other 272
Less valuation allowance (4,778,925)
-----------
Total Deferred Tax Assets 360,520
-------
Deferred Tax Liability
State Taxes (360,520)
---------
Total Deferred Tax Liabilities (360,520)
---------
NET DEFERRED TAX ASSETS $ -
============
F-19
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
The net change in the total valuation allowance for the year ended
January 31, 2005 was $174,971. 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, 2005 and the statutory Federal
income tax rate, is reconciled to the actual tax benefit reflected in
the accompanying financial statements as follows:
Expected tax benefit at statutory rates $ 283,437
Decrease resulting from valuation allowance for benefits
from net operating loss carry-forwards and other (283,437)
----------
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 officers
-------------------
During the year ended January 31, 2005, the Chief Executive Officer and
Chairman of the Company, loaned the Company an aggregate of $41,797 and
was repaid $21,953. As of January 31, 2005 the net principal balance
owing to him was $1,422,587 and accrued interest payable was $446,193.
See Note 6.
During the year ended January 31, 2005, the Chief Financial Officer and
Secretary of the Company, loaned the Company an aggregate of $209,251.
As of January 31, 2005 the net principal balance owing to him was
$209,251 and accrued interest payable was $5,720. See Note 5.
Accrued Payroll and Expenses Owed to Officers
---------------------------------------------
As of January 31, 2005 the Company owed the Chief Financial Officer and
Secretary of the Company $93,500 for back wages and $6,000 for accrued
expenses.
NOTE 11 - SUBSEQUENT EVENTS
In February 2005 the Company issued 500,000 shares of commons stock at
a price of $0.15 per share to an investor for total proceeds of
$75,000. Additionally, 500,000 warrants to purchase common stock at a
price of $0.30 per share were issued to the investor. The warrants
expire three years from the date of issuance.
F-20
NEWGOLD, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------------
On March 29, 2005 a Special Meeting of Shareholders of the Company was
held for the purpose of amending the Articles of Incorporation to
affect an increase in the authorized shares of common stock issuable to
250,000,000 shares. At the meeting the proposal was approved by the
shareholders, with a total of 31,392,611 shares voting in favor of the
amendment, 411,711 voting against the amendment and 10,207 shares
abstained from voting.
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 maintains that Mr. Ngoyi's claims are invalid as the
two judgments were previously satisfied and that Newgold is not
insolvent. A pre-trial hearing was held on April 4, 2005 at which time
Newgold prevailed in having Mr. Ngoyi's petition dismissed. An order of
dismissal is expected to be issued shortly.
F-21
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No changes or disagreements.
ITEM 8A. CONTROLS AND PROCEDURES
Newgold carried out an evaluation, under the supervision and with the
participation of Newgold's management, including Newgold's President and Chief
Executive Officer along with Newgold's Chief Financial Officer, of the
effectiveness of the design and operation of Newgold'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, Newgold's President and
Chief Executive Officer along with Newgold's Chief Financial Officer concluded
that Newgold's disclosure controls and procedures are effective to ensure the
information required to be disclosed by Newgold 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.
There have been no significant changes in Newgold'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 Newgold's internal controls over financing reporting.
ITEM 8B. OTHER INFORMATION
None
25
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 Newgold together with the principal positions and offices with
Newgold held by each:
----------------- --- ---------------------------------------- --------------
NAME OF PERSON AGE POSITION AND OFFICE PRESENTLY HELD WITH DIRECTOR SINCE
NEWGOLD
----------------- --- ---------------------------------------- --------------
----------------- --- ---------------------------------------- --------------
A. Scott Dockter 49 Chairman, CEO and President 1996
----------------- --- ---------------------------------------- --------------
James W. Kluber 54 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 Newgold'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 and since January 2005 has been the interim 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
26
served as Vice President of Financial Operations for two 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. Newgold'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 Newgold held three meetings during the fiscal year
ended January 31, 2005. The Board does not currently have an Audit, Executive or
Compensation Committee. At the current time, the entire Board of Directors acts
as Newgold's audit committee. In addition, Newgold does not have an audit
committee financial expert because it does not currently have a designated audit
committee. Newgold has only two directors, both of whom are also officers of
Newgold. Newgold plans to appoint additional directors to its Board and appoint
an independent audit committee during the current year.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Newgold's executive officers and directors, and persons who own more than 10% of
Newgold'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 Newgold 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, Newgold believes that, during the fiscal year ended
January 31, 2005, its executive officers and directors and 10% stockholders
complied with all applicable Section 16(a) filing requirements.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of Newgold's Chief Executive
Officer during the last three complete fiscal years and each officer who
received annual compensation in excess of $100,000 during the last completed
fiscal year.
27
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
---------------------------------- ------------------------------------------
Awards Payout
----------------------------- ----------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Fiscal Salary Bonus Compensation ($) Award(s) ($) Options Payout Compensation
Year ($) (#) ($) ($)
------- ---------- ------ --------------- ------------- --------------- ---------- --------------
Scott Dockter(1) 2005 $ 60,000 -0- -0- -0- -0- -0- -0-
(CEO)
2004 $ 60,000 -0- -0- -0- -0- -0- -0-
2003 $ 12,400 -0- -0- -0- -0- -0- -0-
James Kluber(2) 2005 $140,000 -0- -0- -0- -0- -0- 6,000 (3)
(CFO)
2004 $140,000 -0- -0- -0- -0- -0- 6,000 (3)
2003 $ 20,000 -0- -0- -0- -0- -0- 6,000 (3)
(1) Of the amounts shown, the following amounts have been deferred: 2004 -
$24,000. The deferred amount for 2004 was converted to a convertible
note payable on October 1, 2004.
(2) Of the amounts shown, the following amounts have been deferred: 2005 -
$93,500; 2004 - $89,000. The deferred amount for 2004 was converted to a
convertible note payable on October 1, 2004.
(3) Amount reflects a home office allowance
STOCK OPTION PLAN
Newgold does not have a formal stock option plan currently in place. Options to
date have been granted on an individual basis pursuant to individual option
agreements. Newgold expects to adopt a formal stock option plan during this next
fiscal year.
Options/SAR Grants in Last Fiscal Year
--------------------------------------
The following table sets forth certain information with respect to options or
SAR grants in Newgold during the fiscal year ended January 31, 2005 to the Named
Executive Officers.
28
-------------------------- ------------------------- ----------------------- ------------------ ---------------
Name Number of Securities Percent of Total Exercise or Base Expiration Date
Underlying Options Options Granted to Price
Granted Employees at ($ Per Share)
January 31, 2005
-------------------------- ------------------------- ----------------------- ------------------ ---------------
None
-------------------------- ------------------------- ----------------------- ------------------ ---------------
Aggregated Option/SAR Exercises Year-End Table.
----------------------------------------------
During the fiscal year ended January 31, 2005, 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, 2005
by the Named Executive Officers.
------------------------------ ------------------------------------------- -------------------------------------------
Name Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
January 31, 2005 January 31, 2005
------------------------------ --------------------- --------------------- -------------------- ----------------------
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 Newgold and do not receive any
additional compensation for their services as members of the Board of Directors.
Newgold intends to appoint additional directors in the future who may or may not
be employees. For the non-employee directors, Newgold 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.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to the principal executive
officer, principal accounting officer or controller, or persons performing
similar functions. A copy of the Code of Ethics is submitted as an exhibit to
this 10-KSB
29
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Newgold'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 Newgold 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 Newgold 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
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
corporation 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 Newgold'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
1933 (the "1933Act") 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 1933 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 Newgold's Common
Stock beneficially owned as of April 15, 2005 by, (i) each executive officer and
director of Newgold; (ii) all executive officers and directors of Newgold as a
group; and (iii) owners of more than 5% of Newgold's Common Stock.
30
--------------------------------------- ----------------------- ------------------------ -------------------
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) 13.95%
P.O. Box 1626
Shingle Springs, CA 95682
--------------------------------------- ----------------------- ------------------------ -------------------
--------------------------------------- ----------------------- ------------------------ -------------------
James Kluber CFO, Executive Vice 1,395,007(2) 2.86%
P.O. Box 1626 President, and
Shingle Springs, CA 95682 Secretary
--------------------------------------- ----------------------- ------------------------ -------------------
All officers and directors as a group 8,201,816 16.81%
( 2 individuals)
--------------------------------------- ----------------------- ------------------------ -------------------
--------------------------------------- ----------------------- ------------------------ -------------------
SHAREHOLDERS OWNING 5% OR MORE None
--------------------------------------- ----------------------- ------------------------ -------------------
--------------------------------------- ----------------------- ------------------------ -------------------
(1) Amount includes 3,859,769 shares issuable under stock warrants exercisable
within 60 days of April 15, 2005. Amount excludes shares issuable pursuant to a
convertible promissory note in the principal amount of $1,402,742.
(2) Amount represents 1,395,007 shares issuable under stock warrants exercisable
within 60 days of April 15, 2005. Amount excludes shares issuable pursuant to a
convertible promissory note in the principal amount of $209,251.
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
31
expectedthat 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 2005 fiscal year, the President of Newgold, Scott Dockter, had loaned
Newgold an aggregate of $41,797 and was repaid $21,953. In October 2004 various
loans made by Mr. Dockter were consolidated into a convertible promissory note
which is due on September 30, 2005 and bears interest at 8% per annum. As of
January 31, 2005, Mr. Dockter had loaned Newgold a total of $1,422,587 and
accrued interest of $446,193. Mr. Dockter is the largest creditor of Newgold. In
addition to the convertible promissory note, Mr. Dockter has been issued
Warrants to purchase up to 3,859,769 shares of Newgold's common stock at an
exercise price of $0.15/share.
Newgold is currently in negotiations to acquire additional mining properties
located in the Battle Mountain, Nevada area known as the Red Caps group of
claims and the BXA properties. Mining rights for these properties are currently
held by ASDi, Corp., a company owned by Scott Dockter. While the due diligence
process has been completed by Newgold, no final agreement or terms have been
reached. Due to the conflict of interest in this transaction, any final
agreement for Newgold to acquire these properties will be evaluated and approved
by the disinterested members of Newgold's Board of Directors.
32
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 Newgold and A. Scott Dockter,
dated April
2, 1997, for the principal amount of $100,000.
Exhibit 10.2(3) Promissory Note between Newgold and A. Scott Dockter,
dated April
17, 1997, for the principal amount of $50,000.
Exhibit 10.3(3) Promissory Note between Newgold and A. Scott Dockter,
dated April
30, 1997, for the principal amount of $20,000.
Exhibit 10.4(3) Promissory Note between Newgold and A. Scott Dockter,
dated May
30, 1997, for the principal amount of $35,000
Exhibit 10.5(5) Promissory Note between Newgold 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 14 Code of Business Conduct and Ethics.
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 Newgold's fiscal years ended January 31, 2004 and January 31, 2005,
Newgold was billed the following aggregate fees by Singer Lewak Greenbaum &
Goldstein LLP ("SLGG").
Audit Fees.
----------
The aggregate fees billed by SLGG to Newgold for professional services rendered
for the audit of Newgold's financial statements for the fiscal year, for reviews
of the financial statements included in Newgold'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 $12,759 for the fiscal year ended
2004 and $25,000 for the fiscal year ended 2005.
All Other Fees.
--------------
No fees were billed by SLGG to Newgold for products and services rendered for
fiscal years 2004 and 2005, relating to Audit-Related Fees, Tax Fees or other
accounting fees.
All of the services performed by SLGG during fiscal year 2005 were pre-approved
by Newgold'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: May 2, 2005 By/s/ 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/ Scott Dockter Chairman of the Board and May 2, 2005
A. Scott Dockter President
/s/ James Kluber Director, Secretary and
James W. Kluber Chief Financial Officer May 2, 2005
(Principal Financial and Accounting Officer)