UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT FOR THE TRANSITION PERIOD FROM
_______________ to _______________
Commission File Number 0-20722
NEWGOLD, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 16-1400479
------------------------------- -------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
400 Capitol Mall, Suite 900
Sacramento, California 95814
------------------------------- -------------------------------
(Address of Principal Executive Offices) Zip Code
Issuer's telephone number: (916) 449-3913
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days:
YES X NO
------- -------
Indicate by checkmark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act)
YES NO X
------- -------
Common stock, $0.001 par value, 68,604,072 issued and outstanding as of April
30, 2006.
Transitional Small Business Disclosure Format: YES NO X
------- -------
Note: This filing is subject to completion of a SAS No. 100 review by Newgold,
Inc.'s independent accountants.
INDEX
Page
----
PART I - FINANCIAL INFORMATION.............................................. 3
ITEM 1. FINANCIAL STATEMENTS........................................ 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS.................................................. 21
ITEM 3. CONTROLS AND PROCEDURES..................................... 31
PART II - OTHER INFORMATION................................................. 32
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.................................................... 32
ITEM 5. OTHER INFORMATION........................................... 32
ITEM 6. EXHIBITS ................................................... 33
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEWGOLD, INC.
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Page
Condensed Balance Sheet as of April 30, 2006 (Unaudited)
and for fiscal year ended January 31, 2006 (Audited) 4
Condensed Statements of Operations for the three months ended
April 30, 2006 and 2005 (Unaudited) 6
Condensed Statements of Cash Flows for the three months
ended April 30, 2006 and 2005 (Unaudited) 7
Notes to Unaudited Financial Statements 11
3
NEWGOLD, INC.
(AN EXPLORATION STAGE COMPANY)
BALANCE SHEET
APRIL 30, 2006
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 398,749
Travel advance 5,714
-------------
Total current assets 404,463
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
of $960 50,525
OTHER ASSETS
Restricted cash 243,204
Deferred reclamation costs 270,736
-------------
Total other assets 513,940
-------------
TOTAL ASSETS $ 968,928
=============
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 657,010
Accrued expenses 1,261,731
Accrued reclamation costs 270,736
Notes payable due to individuals and officers 452,634
-------------
Total current liabilities 2,642,111
-------------
LONG-TERM LIABILITIES
Convertible debenture and related derivative liabilities,
net of unamortized discount of $646,293 and deferred
financing costs of $89,375 597,960
Deferred revenue 800,000
-------------
Total long-term liabilities 1,397,960
Total liabilities 4,040,071
4
The accompanying notes are an integral part of these financial statements
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, $0.001 par value
250,000,000 shares authorized
68,604,072 shares issued and outstanding 68,604
Additional paid in capital 16,101,566
Deficit accumulated during the exploration stage (19,241,313)
-------------
Total shareholders' deficit (3,071,145)
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 968,928
=============
5
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 2006 AND 2005
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO APRIL 30, 2006
--------------------------------------------------------------------------------
For the Period
For the Three Months Ended April 30, From January 1,
------------------------------------ 1995 to January
2006 2005 31, 2006
--------------- --------------- ---------------
NET SALES $ - $ - $ -
COST OF GOODS SOLD 69,510 29,000 372,341
--------------- --------------- ---------------
GROSS (LOSS) (69,510) (29,000) (372,341)
OPERATING EXPENSES (262,729) (202,880) (14,174,737)
--------------- --------------- ---------------
LOSS FROM OPERATIONS (332,239) (231,880) (14,547,078)
--------------- --------------- ---------------
OTHER INCOME (EXPENSE)
Interest income - - 72,687
Dividend income - - 30,188
Other income - - 6,565
Adjustments to fair value of derivatives 207,451 - 170,033
Interest expense (85,990) (356,824) (2,495,027)
Loss from joint venture - - (859,522)
Loss on sale of marketable securities - - (281,063)
Bad debt expense - - (40,374)
Loss on disposal of plant, property
and equipment - - (334,927)
Loss on disposal of bond - - (21,000)
--------------- --------------- ---------------
Total other income (expense) 121,461 (356,824) (3,752,440)
--------------- --------------- ---------------
NET LOSS $ (210,778) $ (588,704) $ (18,299,518)
=============== =============== ===============
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.01)
=============== ===============
BASIC AND DILUTED WEIGHTED-AVERAGE
SHARES OUTSTANDING 68,306,319 49,446,380
=============== ===============
6
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 2006 AND 2005
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO APRIL 30, 2006
--------------------------------------------------------------------------------
For the Period
For the Three Months Ended April 30, From January 1,
------------------------------------ 1995 to April
2006 2005 30, 2006
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($210,778) ($588,704) ($18,284,318)
Adjustments to reconcile net loss to net cash
used in operating activities
Accretion of warrants issued as a debt discount - 294,192 1,274,257
Accretion of beneficial conversion - 26,868 107,468
Accretion of debt discount 54,629 - 57,369
Adjustments to fair value of derivatives (207,451) - 170,034
Loss from joint venture - - 859,522
Loss on sale of marketable securities - - 281,063
Depreciation and amortization 9,086 - 133,243
Loss on disposal of property, plant and equipment - - 334,927
Impairment in value of property, plant and equipment - - 807,266
Loss on disposal of bond - - 21,000
Impairment in value of Relief Canyon Mine - - 3,311,672
Impairment in value of joint investments - - 490,000
Bad debt - - 40,374
Assigned value of stock and warrants exchanged for services - - 552,948
7
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 2006 AND 2005
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO APRIL 30, 2006
--------------------------------------------------------------------------------
Gain on write off of note payable - - (7,000)
Judgment loss accrued - - 250,000
(Increase) decrease in
Restricted cash - - (243,204)
Travel advance (4,392) (657) 1,714
Deposits - - 4,500
Deferred reclamation costs - - (194,742)
Prepaid expenses - - (2,900)
Reclamation bonds - - 185,000
Other assets - - (1,600)
Increase (decrease) in
Accounts payable (141,223) 30,000 376,050
Accrued expenses (44,059) (50,237) 1,904,315
--------------- --------------- ---------------
Net cash used by operating activities (544,188) (348,538) (7,914,532)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities - 34,124 34,124
Investment in marketable securities - - (315,188)
Advances from shareholder - - 7,436
Contribution from joint venture partner - - 775,000
Purchase of joint venture partner interest - - (900,000)
Capital expenditures (32,287) - (3,002,993)
Proceeds from disposal of property, plant and equipment - 278,783
8
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 2006 AND 2005
AND FOR THE PERIOD FROM JANUARY 1, 1995 TO APRIL 30, 2006
--------------------------------------------------------------------------------
Investments in joint ventures - - (490,000)
Note receivable - - (268,333)
Repayment of note receivable - - 268,333
--------------- --------------- ---------------
Net cash used by investing activities (32,287) - (3,612,838)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of common stock 100,000 575,000 7,659,253
Proceeds from notes payable 180,000 - 5,734,548
Principal repayments of notes payable (5,000) - (2,042,706)
Repayment of advances to affiliate - - (231,663)
Deferred revenue - - 800,000
Net cash provided by financing activities 275,000 575,000 11,919,432
--------------- --------------- ---------------
Net increase in cash (301,476) 226,462 392,062
CASH, BEGINNING OF YEAR 700,224 16,730 6,687
--------------- --------------- ---------------
CASH, END OF YEAR $ 398,749 $ 243,192 $ 398,749
=============== =============== ===============
9
The accompanying notes are an integral part of these financial statements
SUPPLEMENTAL CASH FLOW INFORMATION FOR THE THREE MONTHS ENDED APRIL 30, 2006 AND
2005 AND JANUARY 1, 1995 THROUGH APRIL 30, 2006 AS FOLLOWS:
For the Period
For the Three Months Ended April 30, From January 1,
------------------------------------ 1995 to April
2006 2005 30, 2006
--------------- --------------- ---------------
Cash paid for interest $ $ - $ 161,107
Cash paid for income taxes $ - $ - $ -
Non Cash Investing and Financing Activities:
Conversion of related party note payable to common
stock,including interest payable of $446,193 $ - $ - $ 1,848,935
10
The accompanying notes are an integral part of these financial statements
NEWGOLD, INC.
(AN EXPLORATION STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 30, 2006
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
NEWGOLD, Inc. has been in the business of acquiring, exploring, developing, and
producing gold properties. Newgold 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, Newgold placed the Relief Canyon Mine on care and maintenance
status. 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.
Newgold has embarked on a business strategy whereby it will invest in and/or
manage gold mining and other mineral producing properties. 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. 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.
NOTE 2 - GOING CONCERN
These financial statements have been prepared on a going concern basis. During
the years ended January 31, 2006 and 2005 and the period from January 1, 1995 to
January 31, 2006, Newgold incurred net losses of approximately $2,645,231,
$1,278,140 and $18,088,740, respectively. In addition, Newgold had a total
shareholders' deficit of $2,960,365 and was in the development stage since
inception and through January 31, 2006. Information for the three months ended
April 30, 2006 include a net loss of $210,778; negative cash flows from
operations of $544,188 and an accumulated shareholders' deficit of $3,071,145.
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.
11
Management plans to continue to provide for its capital needs during the year
ended January 31, 2007 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 Newgold be unable to
continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
These financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnotes normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of
America have been condensed or omitted pursuant to these rules and regulations.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in Newgold's
Form 10-KSB, as filed with the SEC for the year ended January 31, 2006.
Exploration Stage Company
-------------------------
Effective January 1, 1995 (date of inception), the Company is considered a
development stage Company as defined in SFAS No. 7. The Company's development
stage activities consist of the development of several mining properties located
in Nevada. Sources of financing for these development stage activities have been
primarily debt and equity financing. The Company has, at the present time, not
paid any dividends and any dividends that may be paid in the future will depend
upon the financial requirements of the Company and other relevant factors.
Cash and Cash Equivalents
-------------------------
For the purpose of the statements of cash flows, Newgold considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
Restricted Cash
---------------
Restricted cash represents a certificate of deposit with Wells Fargo Bank to
serve as collateral for a reclamation bond with the Nevada Department of
Environmental Protection at the Relief Canyon Mine.
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
12
monitoring costs. Changes in estimates at inactive mines were reflected in
earnings in the period an estimate was revised.
Risks Associated with Gold Mining
---------------------------------
The business of gold mining is subject to certain types of risks, including
environmental hazards, industrial accidents, and theft. Prior to suspending
operations, 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.
Comprehensive Income
--------------------
Newgold 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 Newgold's financial statements since
Newgold did have unrealized gain (loss) from changes in equity from
available-for-sale marketable securities.
Estimates
---------
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Loss Per Share
--------------
Newgold 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:
2006 2005
-------------- --------------
Warrants 21,274,583 13,224,583
Recent Accounting Pronouncements
--------------------------------
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments", which amends SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS No.
155 amends SFAS No. 133 to narrow the
13
scope exception for interest-only and principal-only strips on debt instruments
to include only such strips representing rights to receive a specified portion
of the contractual interest or principle cash flows. SFAS No. 155 also amends
SFAS No. 140 to allow qualifying special-purpose entities to hold a passive
derivative financial instrument pertaining to beneficial interests that itself
is a derivative instrument. The Company is currently evaluating the impact this
new Standard but believes that it will not have a material impact on the
Company's financial position, results of operations, or cash flows.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS NO. 156"), which provides an approach to simplify
efforts to obtain hedge-like (offset) accounting. This Statement amends FASB
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The Statement
(1) requires an entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a servicing contract in certain situations; (2) requires that a separately
recognized servicing asset or servicing liability be initially measured at fair
value, if practicable; (3) permits an entity to choose either the amortization
method or the fair value method for subsequent measurement for each class of
separately recognized servicing assets or servicing liabilities; (4) permits at
initial adoption a one-time reclassification of available-for-sale securities to
trading securities by an entity with recognized servicing rights, provided the
securities reclassified offset the entity's exposure to changes in the fair
value of the servicing assets or liabilities; and (5) requires separate
presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the balance sheet and additional disclosures for all separately
recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
for all separately recognized servicing assets and liabilities as of the
beginning of an entity's fiscal year that begins after September 15, 2006, with
earlier adoption permitted in certain circumstances. The Statement also
describes the manner in which it should be initially applied. The Company does
not believe that SFAS No. 156 will have a material impact on its financial
position, results of operations or cash flows.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at April 30, 2006 was recorded at $51,485 and consisted
of $32,286 of computer equipment and related software purchased during the
quarter ended April 30, 2006 and $19,199 in additional monitoring wells that
were installed at the Relief Canyon Mine during the year ended January 31, 2006.
Newgold 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 Newgold can reestablish mining operations at Relief Canyon it is
possible that some of these assets could be utilized in such operations.
14
A summary of property and equipment was as follows:
` Machinery
& Development Capitalized
Buildings Equipment Costs Interest Total
------------- ------------- ------------- ------------- -------------
Relief Canyon Mine $ 215,510 $ 277,307 $ 261,742 $ 45,441 $ 800,000
NOTE 5 - NOTES PAYABLE TO RELATED PARTIES AND INDIVIDUALS
Unsecured notes payable to individuals and related parties consist of the
following at April 30, 2006:
Loans from officers:
Convertible note payable $ 209,251
The note bears interest at 8% per year.
In October 2004, Newgold consolidated the amounts owed to the Chief
Executive Officer and the Chief Financial Officer referred to in Note 9
(excluding accrued interest payable) into new convertible notes payable
due September 30, 2005. The notes and any interest accrued on the new
notes are convertible into common shares of Newgold at a conversion price
of $0.15 per share. On July 31, 2005 the Chief Executive Officer converted
his note payable and accrued interest payable on all of his notes payable
into 12,326,231 common shares of Newgold. 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 note payable $ 19,844
The note bears interest at 8% per year.
The note is due January 31, 2007 and is owed to the Chief Executive
Officer. Newgold is not in default with respect to this loan. In
connection with the loan, warrants to purchase 132,293 shares of common
stock have been issued. The warrants have been valued using the
Black-Scholes option pricing model (see Note 8). The warrants were issued
at $0.15 per share and expire in five years from the date of issuance.
These loans were paid off subsequent to April 30, 2006.
Loan from individual $ 176,500
The note bears interest at 8% per year.
The note is currently due. Newgold is in default with respect to this
loan.
Other non-interest bearing advances 47,039
--------------
Total notes payable to individuals and related parties $ 452,634
==============
Interest expense was $70,790, $356,824 and $2,479,827 for the three months ended
April 30, 2006 and 2005, and the period from January 1, 1995 to April 30, 2006,
respectively.
NOTE 6 - CONVERTIBLE DEBENTURE
On January 27, 2006, Newgold entered into a Securities Purchase Agreement (the
"Purchase Agreement") and other agreements in connection with the private
placement of a convertible debenture, in the principal amount of $1,000,000 and
bearing interest at 8% per annum (the "Debenture"). The Debenture was funded
$600,000 on January 27, 2006, and $200,000 on March 2, 2006 with additional
funding of $200,000 due upon the registration statement being declared
15
effective by the SEC. Of the $600,000 funded on January 27, 2006, $77,500 was
paid for various loan fees and closing costs. Of the $200,000 funded on March 2,
2006, $20,000 was paid for loan fees. The Debenture is due and payable on
January 27, 2009 unless it is converted into shares of Newgold Common Stock or
is repaid prior to its expiration date. The conversion rate is adjustable and at
any conversion date, will be the lower of $0.2626 per share or 95% of the Market
Conversion Price.
In conjunction with the Purchase Agreement, Newgold entered into an Investor
Registration Rights Agreement (the "Registration Rights Agreement"). The
Registration Rights Agreement requires Newgold to register at least 24,050,025
shares of our Common Stock to cover the conversion of the Debenture (assuming
conversion prices substantially below $0.2626) and 2,500,000 shares of our
Common Stock issuable upon conversion of warrants (the "Warrants") granted to
the Debenture holder. Newgold is required to keep this Registration Statement
effective until the Debenture has been fully converted, repaid, or becomes due
and the Warrants have been fully exercised or expire. Both the Debenture and the
Warrants are currently convertible or exercisable, respectively.
In conjunction with the Purchase Agreement, Newgold entered into a Security
Agreement (the "Security Agreement"). The Security Agreement creates a secured
interest in favor of the Debenture holder in our mining interest and assets in
the Relief Canyon Mine property. This security interest was created by
recordation of a Memorandum of Security Agreement filed in Pershing County,
Nevada on February 14, 2006. Consequently, if a default occurred under the
Debenture, the Debenture holder could take over or sell all of our interests,
business and assets associated with the Relief Canyon Mine.
The transaction, to the extent that it is to be satisfied with common stock of
the Company, would normally be included as equity obligations. However, in the
instant case, due to the indeterminate number of shares which might be issued
under the embedded convertible note debt conversion feature, the Company is
required to record a liability for the fair value of the detachable warrants and
the embedded convertible feature of the note payable (included in the
liabilities as a "derivative liability").
The accompanying financial statements comply with current requirements relating
to warrants and embedded conversion features as described in FAS 133, EITF 98-5,
00-19, and 00-27, and APB 14 as follows:
o The Company allocated the proceeds received between convertible debt and
the detachable warrants based upon the relative fair market values on the
date the proceeds were received.
o Subsequent to the initial recording, the change in the fair value of the
detachable warrants, determined under the Black-Scholes option pricing
formula, and the change in the fair value of the embedded derivative in the
conversion feature of the convertible debentures are recorded as
adjustments to the liabilities at January 31, 2006.
o $207,451 of income relating to the change in the fair value of the
Company's stock reflected in the change in the fair value of the warrants
and derivatives (noted above) is included as other income (expense).
o Accreted interest of $57,369 as of April 30, 2006.
The following table summarizes the various components of the convertible notes
as of April 30, 2006:
16
Derivative liabilities $ 533,628
Convertible debenture 800,000
Unamortized discount (646,293)
Deferred financing costs, net (89,375)
----------------
Total convertible debt
and financing costs $ 597,960
================
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Except for the advance royalty and rent payments noted below, Newgold is not
obligated under any capital leases or non-cancelable operating lease with
initial or remaining lease terms in excess of one year as of April 30, 2006.
However, minimum annual royalty payments are required to retain the lease rights
to Newgold's properties.
Relief Canyon Mine
------------------
Newgold 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, Newgold staked an
additional 402 claims. Subsequent to January 31, 1998, Newgold 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 Newgold. 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 Newgold, 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 Newgold.
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.
Crescent Red Caps Joint Venture
-------------------------------
Newgold is the owner of a 22.22% joint venture interest and is the operator of
the Crescent Red Caps Joint Venture ("Crescent Red Caps"). The remaining 77.78%
interest is held by ASDi LLC, a California limited liability company owned by A.
Scott Dockter, Chairman and CEO of Newgold. Additionally, Newgold, by making
expenditures over the next three years aggregating $2,700,000, will end up with
a 66.66% overall interest in the joint venture. Newgold will then have the
opportunity to purchase the remaining joint venture interest held by Mr. Dockter
based on the results of the exploration work contemplated by these additional
expenditures.
The Company acquired its 22.22% in the joint venture by issuing to ASDi LLC
2,500,000 shares
17
of its restricted common stock and a warrant to purchase 2,500,000 shares of its
common stock at a price of $0.40. The warrant has a term of three years. The
common stock was valued at $0.20 per share for a total of $500,000. The fair
market value of the warrants was calculated to be $359,522 as determined by the
methodology described in Note 9. The Company recorded this investment as a loss
form the joint venture of $859,522 for the year ended January 31, 2006.
The properties are subject to two leases which include approximately 135
unpatented mining claims and cover approximately 2700 acres. All gold, silver
and other mineral production by Crescent Red Caps is subject to a 3% net smelter
return ("NSR") royalty payable to the lessors except for barite which is subject
to a 10% royalty on ore produced from claims covered by the leases.
Litigation
----------
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 up to $200,000 pursuant to
his guaranty of such debt of Mr. Primm.
On December 29, 2000, the superior court entered a default judgment against
Newgold in the amount of $400,553 with regard to the Christianson judgment and
an additional $212,500 in regard to the Primm judgment against Mr. Wong. 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
and, as a result, Mr. Wong should not have any recourse against Newgold for
reimbursement. 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.
Newgold 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
Newgold's financial position, results of operations or liquidity.
NOTE 8 - SHAREHOLDERS' DEFICIT
Common Stock
------------
In March 2006 Newgold issued 500,000 shares of common stock at a price of $0.20
per share to an investor for total proceeds of $100,000. Additionally, 500,000
warrants to purchase common stock at a price of $0.40 per share were issued to
the investor. The warrants expire three years from the date of issuance.
18
Warrants
--------
Newgold has issued common stock warrants to officers of Newgold as part of
certain financing transactions (see Note 5). Newgold has also issued warrants as
part of the issuance of a convertible debt transaction (see Note 6). Newgold has
also issued warrants as part of the issuance of common stock (see this Note 8).
The fair market value of warrants issued during the three months ended April 30,
2006 in conjunction with the issuance of common stock was determined to be
$56,724 and was calculated under the Black-Scholes option pricing model with the
following assumptions used:
Expected life 3 years
Risk free interest rate 4.78%
Volatility 160.4%
Expected dividend yield None
The fair value of these warrants has been recorded as both a debit and credit to
additional paid in capital.
The following table presents warrant activity from January 31, 2006 through
April 30, 2006:
Weighted-
Average
Number Exercise
of Shares Price
-------------- --------------
Outstanding, January 31, 2006 20,774,583 $ 0.25
Granted 500,000 $ 0.40
-------------- --------------
Outstanding, April 30, 2006 21,274,583 $ 0.25
============== ==============
Exercisable, April 30, 2006 21,274,583 $ 0.25
============== ==============
NOTE 9 - RELATED PARTY TRANSACTIONS
Loans from officers
-------------------
During the quarter ended April 30, 2006 the Company repaid $5,000 previously
borrowed from the Chief Executive Officer. As of April 30, 2006 the net
principal balance owing to the Chief Executive Officer and Chairman of Newgold
was $19,844 and accrued interest payable was $33,430. See Note 5.
During prior periods, the Chief Financial Officer and Secretary of Newgold
loaned Newgold an aggregate of $209,251. As of April 30, 2006 the net principal
balance owing to him was $209,251 and accrued interest payable was $26,831. See
Note 5.
Joint venture with officer
--------------------------
On January 25, 2006, Newgold entered into a joint venture with ASDi, LLC to
develop two Nevada mining properties known as the Red Caps Project and Crescent
Valley Project. The Red Caps consists of approximately 96 unpatented mining
claims covering 1900 acres and the Crescent Valley consists of approximately 39
unpatented mining claims covering 750 acres. The Red Caps and Crescent Valley
mining claims are currently owned by ASDi, LLC, which is owned and managed by A.
Scott Dockter, Chairman and CEO of Newgold. The joint venture will be operated
through a newly formed Nevada limited liability company called Crescent Red
19
Caps, LLC. The terms of the joint venture provide for ASDi to contribute the Red
Caps and Crescent Valley mining claims to the LLC in exchange for Newgold
issuing 2.5 million shares of its Common Stock to ASDi. Additionally, 2,500,000
warrants to purchase common stock at a price of $0.40 per share were issued to
ASDi LLC. The warrants expire three years from the date of issuance. Newgold
will initially own a 22.22% interest in the LLC and ASDi will hold a 77.78%
interest. By expending up to $1,350,000 on each project over the next three
years, Newgold can increase its interest in the LLC to 66.66%. Thereafter,
Newgold has the right to purchase the remaining interest in the LLC held by ASDi
at a price to be determined by the results of the exploration work conducted.
Newgold will be the Manager of the LLC.
Accrued Payroll and Expenses Owed to Officers
---------------------------------------------
As of April 30, 2006 Newgold owed the Chief Executive Officer and Chairman of
Newgold $40,000 for back wages.
As of April 30, 2006 Newgold owed the Chief Financial Officer and Secretary of
Newgold $34,000 for back wages.
NOTE 10 - SUBSEQUENT EVENTS
In May 2006 Newgold repaid the remaining term note payable of $19,844 to the
Chief Executive Officer. The accrued interest remains outstanding. See Note 5.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-QSB includes "forward-looking" statements about future financial
results, future business changes and other events that haven't yet occurred. For
example, statements like Newgold "expects," "anticipates" or "believes" are
forward-looking statements. Investors should be aware that actual results may
differ materially from Newgold's expressed expectations because of risks and
uncertainties about the future. Newgold does not undertake to update the
information in this Form 10-QSB if any forward-looking statement later turns out
to be inaccurate. Details about risks affecting various aspects of Newgold's
business are discussed throughout this Form 10-QSB and should be considered
carefully.
PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
Certain key factors that have affected our financial and operating results in
the past will affect our future financial and operating results. These include,
but are not limited to the following:
o Gold prices, and to a lesser extent, silver prices;
o Current gold deposits under our control at the Relief Canyon Mine are
estimated by us (based on past exploration by Newgold and work done by
others).
o Our proposed exploration of properties now include 78 unpatented mining
claims contained in about 1000 acres of the Relief Canyon Property; 96
unpatented mining claims contained in about 1900 acres of the Red Caps
Property; and 39 unpatented mining claims contained in about 750 acres
of the Crescent Valley Property.
o Our operating plan is to commence exploration work on all three mining
properties beginning with the Relief Canyon mining property in the
summer of 2006. We expect this exploration program to continue through
the end of 2006. We expect to begin exploration work at the Red Caps
and Crescent Valley properties in the fall of 2006. By the fourth
quarter of fiscal 2007, we plan to resume mining operation at the
Relief Canyon mine. We anticipate by the end of fiscal 2007 to be
realizing production revenue from the Relief Canyon mine. Through the
use of joint ventures, royalties, arrangements and partnerships, we
intend to progressively enlarge the scope and scale of our exploration,
mining and processing operations, thereby potentially increasing our
chances of locating commercially viable ore deposits which could
increase 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 calendar years 2006 and 2007
of between $2.5 million and $4 million, including costs related to the
exploration of the Relief Canyon mining property. We will have to raise
additional outside capital to pay for
21
these activities and the resumption of mine operations and production
at the Relief Canyon mine.
o Additional funding or the utilization of other venture partners will be
required to fund mining operations, exploration, research, development
and operating expenses at the Red Caps and Crescent Valley properties.
In the past we have been dependent on funding from the private
placement of our securities as well as loans from related and third
parties as the sole sources of capital to fund operations.
RESULTS OF OPERATION
Newgold, Inc., a Delaware corporation ("we," "us," "our" or "Newgold") has a
business strategy to invest in, explore and if warranted, conduct mining
operations of its current mining properties and other mineral producing
properties. Newgold is a public company that in the past has been engaged in the
exploration, acquisition and development of gold-bearing properties in the
continental United States. Currently, our principal assets include various
mineral leases associated with the Relief Canyon Mine located near Lovelock,
Nevada along with various items of mining equipment and improvements located at
that site. We have also entered into a joint venture to explore additional
mining properties known as the Red Caps Project and Crescent Valley Project,
both of which are located in Lander County, Nevada.
Operating Results for the Fiscal Quarters Ended April 30, 2006 and 2005
-----------------------------------------------------------------------
Although we commenced efforts to re-establish its mining business early in
fiscal year 2004, no mining operations have commenced and no revenues have been
recognized during the quarters ended April 30, 2006 and 2005, respectively.
Newgold hopes to be able to commence generating revenues from mining operations
during the 2007 fiscal year. We have granted a 4% net smelting return royalty to
a third party related to the Relief Canyon mining property which has been
recorded as an $800,000 deferred option income.
During the quarter ended April 30, 2006 we spent $69,510 on reclamation and
maintenance expenses related to the Relief Canyon mining property. Reclamation
and maintenance expenses expended during the same quarter ended April 30, 2005
were $29,000. These expenses relate primarily to maintenance and retention costs
required to maintain our mining claims. We incurred operating expenses of
$262,729 during the quarter ended April 30, 2006. Of this amount, $93,500
reflects officer compensation and related payroll taxes during the quarter and
$138,864 reflect fees for outside professional services. A large portion of the
outside professional services reflects legal and accounting work pertaining to
our annual and quarterly reporting on Form 10-KSB and Form 10-QSB occurring in
fiscal year 2006 as well as our recently filed Form SB-2. During the quarter
ended April 30, 2005 we incurred operating expenses of $202,880 of which $93,500
represented officer compensation and related payroll taxes, $22,323 reflected
promotional expenses and $59,848 reflected fees for outside professional
services. It is anticipated that both mining costs and operating expenses will
increase significantly as we resume our exploration program and mining
operations.
22
We incurred interest expense of $85,990 during the quarter ended April 30, 2006
which compares to interest expenses of $356,824 incurred during the same quarter
of 2005. The principal balance of loans outstanding during the first quarter of
fiscal year 2007 decreased by $602,741 compared to first quarter of fiscal year
2006, which was primarily the result of the Chief Executive Officer's conversion
of a convertible note payable of $1,402,742 into shares of common stock in July
2005, which was partially offset by the convertible debenture of $600,000 issued
in January 2006 and an additional convertible debenture of $200,000 issued in
March 2006. The increase in additional interest expense during the quarter ended
April 30, 2006 was primarily due to the increase in accretion of warrants issued
in October 2004 as a debt discount.
In conjunction with the Convertible Debenture issued January 27, 2006, we
allocated the proceeds received between convertible debt and the detachable
warrants based upon the relative fair market values on the date the proceeds
were received. Subsequent to the initial recording, the change in the fair value
of the detachable warrants, determined under the Black-Scholes option pricing
formula, and the change in the fair value of the embedded derivative in the
conversion feature of the convertible debentures are recorded as adjustments to
the liabilities at January 31, 2006. This resulted in $37,418 of expense
relating to the change in the fair value of Newgold's stock reflected in the
change in the fair value of the warrants and derivatives (noted above) and is
included as other income (expense).
Our total net loss for the quarter ended April 30, 2006 decreased to $210,778
compared to a net loss of $588,704 incurred for the same quarter ended April 30,
2005. The smaller net loss in the first quarter of fiscal 2007 reflects the
income effect of the adjustment to fair value of derivatives and lower interest
expense that are partially offset by the increase in operating expenses as we
reactivate our mining activities and a continued lack of revenues recognized
during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating losses since inception and during the
three months ended April 30, 2006 which has resulted in an accumulated deficit
of $19,241,313 as of April 30, 2006. At April 30, 2006, we had cash and other
current assets of $404,463 compared to $701,546 at January 31, 2006 and a net
working capital deficit of $2,237,648. Since the resumption of our business in
February 2003, we have been dependent on borrowed or invested funds in order to
finance our ongoing operations. As of April 30, 2006, we had outstanding
debentures and notes payable in the gross principal amount of $1,252,634 (net
balance of $1,050,594 after $(735,668) of note payable discount and deferred
financing costs and $533,628 of derivative liabilities) which reflects a
decrease of $602,741 compared to notes payable in the gross principal amount of
$1,855,375, (net balance of $1,327,147 after $528,228 of note payable discount)
as of April 30, 2005.
In January 2006 we made a cash deposit of $243,204 in a blocked account to cover
future reclamation costs as required by the Nevada Department of Environmental
Protection for the Relief Canyon Mine.
As of April 30, 2006, we were in default on a promissory note due to an
unrelated party in the principal amount $176,500.
23
On January 25, 2006, Newgold entered into a joint venture with ASDi, LLC to
develop two Nevada mining properties known as the Red Caps Project ("Red Caps")
and Crescent Valley Project ("Crescent Valley"). Pursuant to the joint venture,
Newgold will initially own a 22.22% interest in the LLC and ASDi will hold a
77.78% interest. By expending up to $1,350,000 on each project over the next
three years, Newgold can increase its interest in the LLC to 66.66%. Thereafter,
Newgold has the right to purchase the remaining interest in the LLC held by ASDi
at a price to be determined by the results of the exploration work conducted.
On January 27, 2006, we entered into a Securities Purchase Agreement and a
Convertible Debenture in the principal amount of $1,000,000 and bearing interest
at 8% per annum. The Debenture was funded $600,000 on January 27, 2006 and we
received an additional $200,000 on March 2, 2006 upon the filing of a resale
registration statement with the SEC and we will receive a final $200,000 upon
the registration statement being declared effective by the SEC.
By attempting to resume mining operations, we will require approximately $10
million to $15 million in additional working capital above the amounts realized
from the convertible debentures to bring the Relief Canyon Mine into full
production. It is our intention to pursue several possible funding opportunities
including the sale of additional securities, entering into joint venture
arrangements, or the incurring of additional debt.
Due to our continuing losses from business operations, the independent auditor's
report dated April 26, 2006, 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 April 30, 2006, Newgold's principal commitments
included its obligation to pay ongoing maintenance fees on its 78 unpatented
mining claims and the funding arrangement pursuant to the joint venture with
ASDi, LLC.
Our management believes that it will need to raise additional capital to
continue to develop, promote and conduct our mining operations. 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. Prior to the
transaction with Cornell Capital Partners, Newgold's president had paid a
substantial portion of Newgold's expenses since restarting its business in
February 2003. Although we believe that our creditors and investors will
continue to fund Newgold's 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, through public
or private financing as well as borrowing from other sources, Newgold would not
be able to establish or sustain its mining operations.
Off-Balance Sheet Arrangements
------------------------------
During the fiscal quarter ended April 30, 2006, Newgold did not engage in any
off-balance sheet arrangements as defined in Item 303(c) of the SEC's Regulation
S-B.
24
FACTORS AFFECTING FUTURE OPERATING RESULTS
We are an exploration stage company and an investment in, or ownership position
in our common stock is inherently risky. Some of these risks pertain to our
business in general, and others are risks which would only affect our common
stock. The price of our common stock could decline and/or remain adversely
affected due to any of these risks and investors could lose all or part of an
investment in our company as a result of any of these risks coming to pass.
Readers of this Report should, in addition to considering these risks carefully,
refer to the other information contained in this Report, including disclosures
in our financial statements and all related notes, for a full description of our
business. If any of the events described below were to occur, our business,
prospects, financial condition, or results of operations or cash flow could be
materially adversely affected. When we say that something could or will have a
material adverse effect on it, we mean that it could or will have one or more of
these effects. We also refer readers to the information in this Report,
discussing the impact of Forward-Looking Statements on the descriptions
contained in this Report and included in the Factors discussed below.
As an exploration stage company with unproven mining properties, we may not be
able to achieve positive cash flows and our limited history of operations makes
evaluation of our business and prospects difficult. We have been relatively
inactive since April 2001. Consequently, we have only recently reactivated our
business operations and we have not generated any revenues, other than dividend
income, since our reactivation. As a result, we have only a limited operating
history upon which to evaluate our future potential performance. Our prospects
must be considered in light of the risks and difficulties encountered by new
companies which have not yet established their business operations.
We will need additional funds to finance our mining and exploration activities
as well as fund our current operations. We currently have limited cash reserves
and a working capital deficit of $2,237,648 as of April 30, 2006. Consequently,
our ability to meet our long-term obligations in the ordinary course of business
is dependent upon our ability to raise additional financing through public or
private equity financings, establish cash flow from operations, enter into joint
ventures or other arrangements with corporate sources, or secure other sources
of financing to fund operations.
Our independent certified public accountants qualified their opinion contained
in our financial statements as of and for the years ended January 31, 1997,
through January 31, 2006 to include an explanatory paragraph related to our
ability to continue as a going concern, stating that " the Company has incurred
a net loss of $2,645,231 and had negative cash flow from operations of $899,807.
In addition, the Company had an accumulated deficit of $19,030,535 and a
shareholders' deficit of $2,960,365 at January 31, 2006." These factors, among
others, as discussed in "Note 2- Going Concern" to the financial statements for
the quarter ended April 30, 2006, raise substantial doubt about our ability to
continue as a going concern. The auditors recognize that the cash flow
uncertainty makes their basic assumptions about value uncertain. When it seems
uncertain whether an asset will be used in a "going concern" or sold at auction,
the auditors assume that the business is a "going concern" for purposes of all
their work, and then they disclose that there is material uncertainty about that
assumption. It is definitely a consequence of our negative cash flows from
operations that we continually need additional
25
cash. At any time, a serious deficiency in cash flows could occur and it is not
always possible or convenient to raise additional capital. A problem in raising
capital could result in temporary or permanent insolvency and consequently
potential lawsuits by unpaid creditors and perhaps closure of the business. All
of these things are possibilities. It is certain, in any case, that analysts and
investors view unfavorably any report of independent auditors expressing
substantial doubt about a company's 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 slow recovery from prior
global economic slumps. Any significant drop in the price of gold may have a
materially adverse affect on the results of our operations unless we are able to
offset such a price drop by substantially increased production.
Our disclosures of mineral resources are only estimates. We have no proven or
probable reserves and have no ability to currently measure or prove our 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. We 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 our 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, the probability of our
exploration program identifying individual prospects having commercially
significant reserves cannot be predicted. It is likely that many of the claims
explored will not contain any commercially viable reserves. As such substantial
funds will be spent on exploration which may identify only a few, if any, claims
having commercial development potential. In addition, if commercially viable
reserves are identified, significant amounts of capital will be required to mine
and process such reserves.
Our mining property rights consist of 78 mill site and unpatented mining claims
at the Relief Canyon Mine and approximately 135 unpatented mining claims
covering approximately 2700 acres located along the Cortez/Battle Mountain trend
that are part of the Crescent Red Caps Joint Venture. 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, we may not be able
to retain our royalty interests on that property, which could reduce our 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
26
well as the rights of adjoining property owners. We believe that, we are
currently operating in substantial compliance with all known safety and
environmental standards and regulations applicable to its Nevada property.
Currently, we are only permitted to carry on designated mining activities until
the mining property is brought into full compliance with the requirements of the
Nevada Department of Environmental Protection ("NDEP"). While current
environmental work is ongoing, permitting our mining property for full
exploration and mining activities is expected to take 4 to 12 months. However,
there can be no assurance that permits will be granted or that future changes in
federal or Nevada laws, regulations or interpretations thereof will not have a
material adverse affect on our 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, we carried insurance against certain property damage loss (including
business interruption) and comprehensive general liability insurance. Since
resuming operations in February 2003, Newgold has not carried insurance on any
of its properties due to the current status of the mine and Newgold's current
financial condition. While we 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. We have not obtained environmental liability
insurance because such coverage is not considered by management to be cost
effective. We currently carry no insurance on any of our properties due to the
current status of our mining properties and our current financial condition.
We are substantially dependent upon the continued services of A. Scott Dockter,
its president. We have 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 us, we 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.
We have acquired the exploration rights to two mining properties from ASDi LLC
whose sole manager and majority member is A. Scott Dockter, President and CEO of
Newgold. Consequently, Mr. Dockter has a conflict of interest in this joint
venture. Furthermore, ASDi LLC will initially hold a 77.78% interest in a newly
formed Nevada LLC through which the joint venture will be operated. While
Newgold will be the sole manager of the Nevada LLC, Mr. Dockter will be able to
control the joint venture activities through his position with the Manager
(Newgold) and through his ownership and control of the majority member (ASDi
LLC). While Mr. Dockter will endeavor to always act in the best interest of
Newgold and its stockholders, stockholders will have only limited ability to
influence or object to actions taken by the Nevada LLC in exploring, developing
and capital spending on the joint venture properties.
As of April 30, 2006, Newgold had approximately 68,604,072 shares of Common
Stock outstanding and a convertible debenture which is convertible into up to
24,050,025 shares of our
27
Common Stock. Additionally, warrants to purchase a total of 21,274,583 shares of
our Common Stock were outstanding as of April 30, 2006. Furthermore, up to an
additional 24,050,025 shares of Common Stock could become issuable to the
convertible debenture holders if a default were to occur. The possibility that
substantial amounts of our outstanding Common Stock may be sold by investors or
the perception that such sales could occur, often called "equity overhang,"
could adversely affect the market price of our Common Stock and could impair our
ability to raise additional capital through the sale of equity securities in the
future
At the time of entering into the $1,000,000 Secured Convertible Debenture
("Convertible Debenture") with Cornell Capital Partners, the Fixed Conversion
Price was $0.26 per share which would equal approximately 3,808,073 if the
entire principal were converted into Newgold Common Stock. This represents the
minimum number of shares issuable upon the conversion of the Convertible
Debenture. However, if the market price for Newgold Common Stock should remain
below $0.26 per share, we would be required to issue substantially more shares
of Common Stock upon the conversion of the Convertible Debenture. The issuance
of significantly more shares at a lower conversion price would have a dilutive
effect to our current stockholders.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial conditions and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements requires management to make estimates
and disclosures on the date of the financial statements. On an on-going basis,
we evaluate our estimates, including, but not limited to, those related to
revenue recognition. We use authoritative pronouncements, historical experience
and other assumptions as the basis for making judgments. Actual results could
differ from those estimates. We believe that the following critical accounting
policies affect our more significant judgments and estimates in the preparation
of our financial statements.
Exploration Stage Company
-------------------------
Effective January 1, 1995 (date of inception), Newgold is considered a
development stage company as defined in SFAS No. 7. Newgold's development stage
activities consist of the development of several mining properties located in
Nevada. Sources of financing for these development stage activities have been
primarily debt and equity financing. Newgold has, at the present time, not paid
any dividends and any dividends that may be paid in the future will depend upon
the financial requirements of Newgold and other relevant factors.
Valuation of long-lived assets
------------------------------
Long-lived assets, consisting primarily of property and equipment, patents and
trademarks, and goodwill, comprise a significant portion of our total assets.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying values may not be recoverable.
Recoverability of assets is measured by a comparison of the carrying value of an
asset to the future net cash flows expected to be generated by those assets. The
cash flow projections are based on historical experience, management's view of
growth rates within the
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industry, and the anticipated future economic environment.
Factors we consider 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 we determine 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, we measure any
impairment based on a projected discounted cash flow method using a discount
rate determined by our 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.
Mine Development Costs
----------------------
Mine development costs consist of all costs associated with bringing mines into
production, to
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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 our
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 our best estimates
of our ultimate reclamation liabilities could change as a result of changes in
regulations or cost estimates.
Valuation of Derivative Instruments
-----------------------------------
FAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
requires bifurcation of embedded derivative instruments and measurement of their
fair value for accounting purposes. In determining the appropriate fair value,
the Company uses the Black Scholes model as a valuation technique. Derivative
liabilities are adjusted to reflect fair value at each period end, with any
increase or decrease in the fair value being recorded in results of operations
as Adjustments to Fair Value of Derivatives. In addition, the fair values of
freestanding derivative instruments such as warrants are valued using Black
Scholes models.
Recent Accounting Pronouncements
--------------------------------
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments", which amends SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS No.
155 amends SFAS No. 133 to narrow the scope exception for interest-only and
principal-only strips on debt instruments to include only such strips
representing rights to receive a specified portion of the contractual interest
or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative
instrument. Newgold is currently evaluating the impact of this new Standard but
believes that it will not have a material impact on Newgold's financial
position, results of operations, or cash flows.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" which provides an approach to simplify efforts to obtain
hedge-like (offset) accounting. This
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Statement amends FASB Statement No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities", with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
The Statement (1) requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by
entering into a servicing contract in certain situations; (2) requires that a
separately recognized servicing asset or servicing liability be initially
measured at fair value, if practicable; (3) permits an entity to choose either
the amortization method or the fair value method for subsequent measurement for
each class of separately recognized servicing assets or servicing liabilities;
(4) permits at initial adoption a one-time reclassification of
available-for-sale securities to trading securities by an entity with recognized
servicing rights, provided the securities reclassified offset the entity's
exposure to changes in the fair value of the servicing assets or liabilities;
and (5) requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the balance sheet and
additional disclosures for all separately recognized servicing assets and
servicing liabilities. SFAS No. 156 is effective for all separately recognized
servicing assets and liabilities as of the beginning of an entity's fiscal year
that begins after September 15, 2006, with earlier adoption permitted in certain
circumstances. The Statement also describes the manner in which it should be
initially applied. Newgold does not believe that SFAS No. 156 will have a
material impact on its financial position, results of operations or cash flows.
ITEM 3. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
-----------------------------------
We carried out an evaluation, under the supervision and with the participation
of management, including our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the year
covered by this report. Based upon that evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective in timely alerting them to material information
relating to us (including our consolidated subsidiary) that is required to be
included in our periodic reports.
Changes in Internal Control Over Financial Reporting.
-----------------------------------------------------
There was no change in our internal control over financial reporting that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting..
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PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES DURING THE QUARTER
The following issuances of stock, warrants, debentures and other equity
securities were made without any public solicitation to a limited number of
investors or related individuals or entities in separately negotiated
transactions. Each investor represented to us that the securities were being
acquired for investment purposes only and not with an intention to resell or
distribute such securities. Each of the individuals or entities had access to
information about our business and financial condition and was deemed capable of
protecting their own interests. The stock, warrants and other securities were
issued pursuant to the private placement exemption provided by Section 4(2) or
Section 4(6) of the Securities Act. These are deemed to be "restricted
securities" as defined in Rule 144 under the Securities Act and the debenture,
warrant or stock certificates bear a legend limiting the resale thereof.
During Newgold's current fiscal year ending January 31, 2007, it issued the
following securities pursuant to exemptions from registration under the
Securities Act:
(a) In March 2006 Newgold issued 500,000 shares of common stock at a
price of $0.20 per share to an investor for total proceeds of $100,000.
Additionally, 500,000 warrants to purchase common stock at a price of $0.40 per
share were issued to the investor. The warrants expire three years from the date
of issuance.
(b) In March 2006 Newgold issued a convertible debenture in the
principal amount of $200,000 per the terms of the Securities Purchase Agreement
dated January 27, 2006 with Cornell Capital Partners. Of the $200,000 funded,
$20,000 was paid for loan fees. All of the original terms and conditions as set
forth in the Securities Purchase Agreement and related documents remain
unchanged.
Prior issuances of Newgold's common stock or other securities during fiscal
years 2006, 2005 and 2004 have been reported in Newgold's prior filings with the
Securities and Exchange Commission.
ITEM 5. OTHER INFORMATION
On April 1, 2006, we hired Mr. Jesse P. Wellman as our mining geologist. Mr.
Wellman is a Reno, Nevada based economic geologist and GIS analyst. Mr. Wellman
has a wide range of experience in precious metal exploration and development in
the U.S. and Mexico.
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ITEM 6. EXHIBITS
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32. Certification by CEO and CFO pursuant to Section 906 of the
Sarbanes- Oxley Act of 2002
33
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: June 19, 2006 NEWGOLD, INC.
/s/ SCOTT DOCKTER
--------------------------------------------
Scott Dockter, President and Chief Executive
Officer
/s/ JAMES KLUBER
--------------------------------------------
James Kluber, Principal Accounting Officer
and Chief Financial Officer
34