UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: March 31, 2005
|_| Transition report under Section 13 or 15(d) of the
Exchange Act
For the transition period from ____________ to ____________
Commission File Number: 0-50894
Western Goldfields, Inc.
(Exact name of small business issuer as specified in its charter)
Idaho 38-3661016
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
961 Matley Lane, Suite 120
Reno, Nevada 89502
(Address of principal executive offices)
(775) 337-9433
(Issuer's telephone number)
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 |X| No |_|
The number of shares of common stock outstanding as of: April 30, 2005 was
38,891,809.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
WESTERN GOLDFIELDS, INC.
Form 10-QSB
Index
PART I. FINANCIAL INFORMATION............................................. 1
Item 1. Financial Information.................................................. 1
Consolidated Balance Sheets................................................ 1
Consolidated Statements of Operations and Comprehensive Income (Loss)...... 2
Consolidated Statement of Stockholders' Equity............................. 3
Consolidated Statements of Cash Flows...................................... 4
Notes to Consolidated Financial Statements................................. 5
Item 2. Plan of Operations..................................................... 7
Item 3. Controls and Procedures................................................ 11
PART II. OTHER INFORMATION................................................. 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............ 12
Item 6. Exhibits............................................................... 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Western Goldfields, Inc
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 778,801 $ 1,534,778
Accounts receivable 13,348 12,956
Inventories 1,546,574 1,574,249
Prepaid expenses 239,123 404,100
Deposits 4,050 4,050
------------ ------------
TOTAL CURRENT ASSETS 2,581,896 3,530,133
Property, plant, and equipment, net of
accumulated depreciation 5,609,725 5,863,944
Construction in progress 10,853 --
Investments - remediation and reclamation 6,109,886 6,089,572
Investments - other -- 21,400
Long-term deposits 312,043 309,674
Long-term prepaid expenses 1,274,940 1,312,853
Deferred loan fees and expenses, net of amortization 115,521 208,501
------------ ------------
TOTAL ASSETS $ 16,014,864 $ 17,336,077
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 612,319 $ 659,087
Accrued expenses 741,542 709,377
Accrued expenses - related party 24,325 38,043
Accrued interest 30,937 40,000
Loan payable, current portion 2,250,000 3,000,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,659,123 4,446,507
------------ ------------
LONG-TERM LIABILITIES
Reclamation and remediation liabilities 6,358,994 6,358,994
------------ ------------
TOTAL LONG-TERM LIABILITIES 6,358,994 6,358,994
------------ ------------
PROVISION FOR FORWARD SALES DERIVATIVE MARKED -
TO-MARKET 395,680 678,867
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 25,000,000 shares authorized;
1,000,000 and no shares issued and outstanding, respectively 10,000 10,000
Common stock, $0.01 par value, 100,000,000 shares authorized;
38,796,810 and 38,721,810 shares issued
and outstanding, respectively 387,968 387,218
Additional paid-in capital 9,933,163 9,891,305
Additional paid-in capital preferred 475,000 475,000
Stock options and warrants 4,888,682 4,779,018
Accumulated deficit (9,689,466) (9,003,365)
Accumulated other comprehensive loss (404,280) (687,467)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,601,067 5,851,709
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,014,864 $ 17,336,077
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
1
WESTERN GOLDFIELDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHERCOMPREHENSIVE LOSS
Three Months Ended March 31,
-----------------------------
2005 2004
------------ ------------
(Unaudited) (Unaudited)
REVENUES
Gross revenue $ 2,558,607 $ 2,916,729
Royalties (318,811) (287,231)
------------ ------------
Net revenue 2,239,796 2,629,498
------------ ------------
COST OF GOODS SOLD
Mine operating costs 1,586,341 1,902,098
Mine site administration 371,817 381,875
Selling, transportation, and refining 10,874 57,527
Depreciation, depletion & amortization 344,995 193,601
Inventory adjustment 67,679 (519,084)
------------ ------------
Total cost of goods sold 2,381,706 2,016,017
------------ ------------
GROSS PROFIT (LOSS) (141,910) 613,481
------------ ------------
EXPENSES
General and administrative 458,700 662,403
Exploration - Other 45,697 132,761
------------ ------------
Total expenses 504,397 795,164
------------ ------------
OPERATING LOSS (646,307) (181,683)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 25,914 37,900
Financing expense (38,651) --
Interest expense (53,391) (101,469)
Gain on sale of assets 26,334 27,132
------------ ------------
Total other income (expense) (39,794) (36,437)
------------ ------------
LOSS BEFORE INCOME TAXES (686,101) (218,120)
INCOME TAXES -- --
------------ ------------
NET LOSS (686,101) (218,120)
------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
Change in market value of securities -- (29,310)
Provision for forward sales derivative marked-to-market 283,187 (78,340)
------------ ------------
Total other comprehensive income (loss) 283,187 (107,650)
------------ ------------
NET COMPREHENSIVE LOSS $ (402,914) $ (325,770)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.02) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 38,752,088 38,171,507
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
2
WESTERN GOLDFIELDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
------------------------ ------------------------- Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital
------------ ---------- ----------- ----------- -------------
Balance, December 31, 2003 -- $ -- 38,149,078 $ 381,491 $ 10,057,384
Options issued for directors' services -- -- -- -- --
Options issued for officers' services -- -- -- -- --
Options issued for services by related party -- -- -- -- --
Options issued for services by employees -- -- -- -- --
Options issued for services by consultants -- -- -- -- --
Common stock issued for services -- -- 109,000 1,090 86,110
Common stock issued for penalty -- -- 444,232 4,442 (4,442)
Return of capital for penalty -- -- -- -- (257,152)
Extend warrants due to expire -- -- -- -- --
Common stock issued for exercise of warrants -- -- 20,000 200 9,400
Preferred stock and warrants issued for cash 1,000,000 10,000 -- -- 475,000
Retire treasury stock -- -- (500) (5) 5
Net loss for the year ended December 31, 2004 -- -- -- -- --
Other comprehensive income -- -- -- -- --
------------ ---------- ---------- ----------- ------------
Balance, December 31, 2004 1,000,000 10,000 38,721,810 387,218 10,366,305
Options issued for directors' services (unaudited) -- -- -- -- --
Options issued for officers' services (unaudited) -- -- -- -- --
Options issued for services by employees (unaudited) -- -- -- -- --
Options issued for services by consultants (unaudited) -- -- -- -- --
Common stock issued for services (unaudited) -- -- 75,000 750 29,750
Expiration of warrants & options (unaudited) -- -- -- -- 12,108
Extend warrants due to expire (unaudited) -- -- -- -- --
Net loss for the three months ended March 31, 2005
(unaudited) -- -- -- -- --
Other comprehensive income (unaudited) -- -- -- -- --
------------ ---------- ---------- ----------- ------------
Balance, March 31, 2005 (unaudited) 1,000,000 $ 10,000 38,796,810 $ 387,968 $ 10,408,163
============ ========== ========== =========== ============
Stock Options Other
and Accumulated Comprehensive
Warrants Deficit Income (Loss) Total
--------------- -------------- ---------------- -------------
Balance, December 31, 2003 $ 3,601,478 $ (4,584,552) $ (792,163) $ 8,663,638
Options issued for directors' services 451,095 -- -- 451,095
Options issued for officers' services 579,998 -- -- 579,998
Options issued for services by related party 22,500 -- -- 22,500
Options issued for services by employees 84,628 -- -- 84,628
Options issued for services by consultants 19,600 -- -- 19,600
Common stock issued for services -- -- -- 87,200
Common stock issued for penalty --
Return of capital for penalty -- -- -- (257,152)
Extend warrants due to expire 5,319 -- -- 5,319
Common stock issued for exercise of warrants (600) -- -- 9,000
Preferred stock and warrants issued for cash 15,000 -- -- 500,000
Retire treasury stock -- -- -- --
Net loss for the year ended December 31, 2004 -- (4,418,813) -- (4,418,813)
Other comprehensive income -- -- 104,696 104,696
------------ ------------ ------------ ------------
Balance, December 31, 2004 4,779,018 (9,003,365) (687,467) 5,851,709
Options issued for directors' services (unaudited) 46,213 -- -- 46,213
Options issued for officers' services (unaudited) 57,626 -- -- 57,626
Options issued for services by employees (unaudited) 11,700 -- -- 11,700
Options issued for services by consultants (unaudited) 900 -- -- 900
Common stock issued for services (unaudited) -- -- -- 30,500
Expiration of warrants & options (unaudited) (12,108) -- -- --
Extend warrants due to expire (unaudited) 5,333 -- -- 5,333
Net loss for the three months ended March 31, 2005
(unaudited) -- (686,101) -- (686,101)
Other comprehensive income (unaudited) -- -- 283,187 283,187
------------ ------------ ------------ ------------
Balance, March 31, 2005 (unaudited) $ 4,888,682 $ (9,689,466) $ (404,280) $ 5,601,067
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
3
WESTERN GOLDFIELDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
-----------------------------
2005 2004
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (686,101) $ (218,120)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and depletion 254,219 54,887
Amortization of loan fees 92,980 84,145
(Gain) on sale of assets and investments (26,334) (27,132)
Interest accrued on investments - reclamation and remediation (20,314) (30,260)
Common stock, options and warrants issued for services 146,939 434,441
Cost of extending expiry date of warrants 5,333 --
Exploration fees funded by stock -- 80,000
Changes in assets and liabilities:
Decrease (increase) in:
Restricted cash -- 3,815,400
Accounts receivable (392) (737,111)
Inventories 27,675 (473,997)
Prepaid expenses 202,890 141,702
Long Term Deposits (2,369) --
Increase (decrease) in:
Accounts payable (46,768) 232,729
Accrued expenses 32,165 (2,482)
Accrued expensed - related party (13,718) (22,500)
Accrued interest expense (9,063) --
----------- -----------
Net cash provided (used) by operating activities (42,858) 3,331,702
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property & equipment, including Construction
in Progress (10,853) (317,565)
Proceeds from sale of investments 47,734 --
Proceeds from sale of assets -- 407,231
----------- -----------
Net cash provided by investing activities 36,881 89,666
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on loan payable (750,000) (750,000)
----------- -----------
Net cash used by financing activities (750,000) (750,000)
----------- -----------
Change in cash (755,977) 2,671,368
Cash, beginning of period 1,534,778 373,500
----------- -----------
Cash, end of period $ 778,801 $ 3,044,868
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 62,454 $ 359,225
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
4
WESTERN GOLDFIELDS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with United States
generally accepted accounting principles have been condensed or omitted in
accordance with such rules and regulations. The information furnished in the
interim consolidated financial statements includes normal recurring adjustments
and reflects all adjustments, which, in the opinion of management, are necessary
for a fair presentation of such consolidated financial statements. Although
management believes the disclosures and information presented are adequate to
make the information not misleading, it is suggested that these interim
condensed consolidated financial statements be read in conjunction with the
Company's most recent audited consolidated financial statements and notes
thereto included in its Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2004. Operating results for the three months ended March 31, 2005
may not be indicative of the results that may be expected for the year ending
December 31, 2005.
NOTE 2 - GOING CONCERN
The Company's continued existence and plans for future growth depend on its
ability to obtain the capital necessary to operate through the generation of
revenue and the issuance of additional debt or equity. The Company may need to
raise additional capital to fund normal operating costs and exploration and
development efforts. If the Company is not able to generate sufficient revenues
and cash flows or obtain additional or alternative funding, it will be unable to
continue as a going concern. As disclosed in the report of independent auditors
on the Company's financial statements in the Company's Annual Report or Form
10-KSB for the fiscal year ended December 31, 2004, the Company's losses from
operations, lack of sufficient revenue to support operational cash flows and
working capital deficit raise substantial doubt regarding its ability to
continue as a going concern.
NOTE 3 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2005 2004
---------------- ----------------
(unaudited)
Bullion $ -- $ --
Metal-in-process 1,408,380 1,476,058
Supplies 138,194 98,191
---------------- ----------------
$ 1,546,574 $ 1,574,249
================ ================
Metal-in-process inventory contained approximately 4,054 and 4,004 ounces of
gold as of March 31, 2005, and December 31, 2004, respectively.
March 31, December 31,
2005 2004
------------ ------------
(unaudited)
Beginning Metal-in Process $ 1,476,058 $ 1,634,966
Inventory
Operating Costs for the Period 1,969,033 8,960,614
Depreciation, Depletion &
Amortization for the Period 344,995 1,413,646
Less Cost of Metal Sales (2,381,706) (10,533,168)
------------ ------------
$ 1,408,380 $ 1,476,058
============ ============
5
NOTE 4 - PROPERTY AND EQUIPMENT
The following is a summary of property, equipment, and accumulated depreciation
at March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
----------- -----------
(unaudited)
Buildings $ 3,550,000 $ 3,041,666
Equipment 3,465,323 3,973,657
----------- -----------
7,015,323 7,015,323
Less accumulated depreciation (1,405,598) (1,151,379)
----------- -----------
Net Property and Equipment $ 5,609,725 $ 5,863,944
=========== ===========
Depreciation expense for the three months ended March 31, 2005 and the year
ended December 31, 2004 was $254,219 and $1,151,379, respectively. The Company
evaluates the recoverability of property and equipment when events and
circumstances indicate that such assets might be impaired. The Company
determines impairment by comparing the present value of future cash flows
estimated to be generated by these assets to their respective carrying amounts.
Maintenance and repairs are expensed as incurred. Replacements and betterments
are capitalized. The cost and related reserves of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.
NOTE 5 - STOCK OPTIONS AND WARRANTS
The Company estimates the fair value of options and warrants using the
Black-Scholes Option Price Calculation. The Company used the following
assumptions in estimating fair value: the risk-free interest rate of 4%,
volatility ranging from 20% to 30%, and the expected life of the options and
warrants from two to ten years. The Company also assumed that no dividends would
be paid on common stock. Some warrants may be exercised under the cash-less
method requiring a corresponding reduction in the amount of common stock issued
in relationship to its cash value at the time the warrants are exercised.
In the first quarter of 2005, the Company granted 250,000 options exercisable
for the purchase of one share of common stock each with an exercise price when
vested of $.50. These options vest over a period of 12 months.
The following is a summary of stock options:
Weighted Average Weighted Average
Shares Exercise Price Fair Value
------------- -------------- --------------
Balance January 1, 2005 5,023,084 $ 0.78
Granted 250,000 0.50
Exercised -- --
------------- --------------
Outstanding at March 31, 2005 5,189,750 $ 0.78
============= ==============
Exercisable at March 31, 2005 3,966,750 $ 0.77
============= ==============
Weighted average fair value of options
granted during the nine months ended March
31, 2005 $ 0.29
==============
The above stock options have been issued under an equity compensation plan
approved by the directors but not by the shareholders.
6
Item 2. Plan of Operation
Overview
We are an independent precious metals production and exploration company focused
on the western United States.
In early 2003 we began exploring the possibility of acquiring the Mesquite Mine
from Newmont Mining Corporation and a subsidiary of Newmont Mining Corporation.
In July 2003, we issued 111,859 shares of our common stock to Newmont Mining
Corporation for an exclusive option to purchase the Mesquite Mine. In November
2003, we completed the purchase of the Mesquite Mine from Newmont Mining
Corporation for:
o assumption of reclamation responsibility and provision of
approximately $7.8 million in reclamation bonds to various
governmental authorities; which have since been reduced to $7.0
million;
o additional shares of our common stock and warrants to purchase our
common stock. As a result of the transaction, Newmont Mining
Corporation owns 3,454,468 shares of our common stock and warrants
to purchase an additional 8,091,180 shares of our common stock;
o a perpetual net smelter return royalty ranging from 0.5% to 2.0% on
any newly mined ore; and
o a net operating cash flow royalty equal to 50% of the proceeds
received, minus certain operating costs, capital expenses and other
allowances and adjustments, from the sale of ore or products derived
from ore that was placed on the heap leach pads as of the
acquisition date.
The purchase included all infrastructures and permits necessary to operate the
mine.
In November 2003, we obtained a $6 million credit facility in connection with
our acquisition of the Mesquite Mine. In addition, in November - December 2003,
we conducted a private placement of 12,500,000 units consisting of two shares of
our common stock and warrants to purchase an additional share of our common
stock which resulted in aggregate net proceeds to us of approximately $9.1
million. The warrants are exercisable for a period of two years from the date of
issuance for a purchase price of $1.00 per share, subject to anti-dilution
adjustments.
Production from the Mesquite Mine operations during 2004 resulted in the sale of
27,357 ounces of gold. Poured gold production (into dore bars) from the Mesquite
Mine during the first three months of 2005 totaled 6,536 ounces. Management at
the mine continues to optimize production schedules and leach cycle rotation in
order to match gold production and sales to its forward sales commitments.
During the first quarter of 2005 the average poured gold production was 556
ounces above budget.
A bonding plan is in place through American Home Assurance Company for the
operation and liability of the Mesquite Mine whereby the insurance company
offers a series of environmental insurance programs designed to cap sponsor,
vendor and partner liability for reclamation and closure costs, including cost
overruns as a result of unexpected contamination, increased costs and
legislative changes. The insurance company charged an initial premium based on
their estimate of the net present value of the completion of the reclamation,
plus an annual fee. In exchange, the insurance company insures the reclamation
and closure process and provides the surety bond. We will make claims against
the insurance policy and funds will be released to pay for the reclamation and
closure expenditures as they are incurred. Any revenue from the sale of material
is to the account of the project sponsor and any profits from cost savings in
the actual program versus the bonded amount are released to the sponsors when
the project bonding is released.
There are two phases of the Mesquite Mine project. The continuing operations
comprise leaching of minerals inventoried on the pads prior to September 2001.
Various programs have been implemented since the Company took over operations
from the previous operator. These include optimizing solution management
programs controlling flow and application rates as well as modifications to the
solution chemistry. Over the course of the past year and into 2005, management
has optimized solution management within the re-leaching program. Additional
modifications have been made to site infrastructure including re-commissioning
of a gold refinery, construction of reagent addition pumping stations and
installation of improved flow monitoring systems.
7
In 2004 we evaluated the expansion of the Big Chief open pit to the north, where
a mineralized resource was estimated to contain 19 million tons of mineralized
material. An internal scoping study was carried out to determine viability of
mining this zone on a stand alone basis. Preliminary conclusions suggest that
the optimum scenario for restarting the Mesquite project will be through the
initiation of mining operations on as large a scale as possible. We intend to
conduct a bankable feasibility study during 2005. Additional exploration
drilling may be required to validate the previous operator's data.
We are also engaged in the acquisition of advanced level precious metal
properties throughout the western United States, primarily Nevada. We believe
that this area may have some of the most important geological terrain conducive
to hosting world-class economic gold deposits. Our goal is to obtain precious
metal projects that are favorable for project development and mine production in
a cost effective, efficient manner.
We intend to contact other companies to explore joint venture possibilities with
respect to any findings of mineralized materials on its properties. We also
intend to attempt to define mineralized material on the properties that could be
developed into mineable reserves and to bring reserves to production. We plan to
identify and engage joint venture candidates with funds available to support the
cost of defining and developing the properties to production. Currently, we
entered into nonbinding letters of intent for joint venture arrangements with
respect to the Lincoln Hill Property and have entered into the Mining Joint
Venture Agreement on the Sunny Slope Gold Project with 321 Gold. The Sunny Slope
Gold Project Mining Joint Venture Agreement covers 16 claims in Mineral County,
Nevada and an area of interest including all lands within approximately one mile
beyond the boundary of the claims.
We filed an application to have our common stock listed on the Toronto Stock
Exchange on May 12, 2005. We anticipate listing on the Toronto Stock Exchange in
June 2005, subject to obtaining all required regulatory and stock exchange
approvals.
Results of Operations
Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31,
2004
During the three months ended March 31, 2005, we had net revenues of $2,239,796
from the sale of 6,348 ounces of gold produced from the Mesquite Mine. During
the three month period ended March 31, 2004, the Company had net revenue of
$2,629,498 from the sale of 7,172 ounces of gold. Sales during the first quarter
of 2004 included ounces produced in November and December of 2003
Mine operating costs were $1,586,341 in the three months ended March 31, 2005
compared to $1,902,098 for the three months ended March 31, 2004. During the
first quarter of 2004 we had an outside contractor managing the mine as well as
temporary employees. Mine site administration was $371,817 in the three months
ended March 31, 2005 compared to $381,875 in the three months ended March 31,
2004. Depreciation, depletion and amortization were $344,995 in three months
ended March 31, 2005 compared with $193,601 in the three months ended March 31,
2004. After an increase adjustment to the inventory account of $67,679 in the
three months ended March 31, 2005 compared with an adjustment in the three
months ended March 31, 2004 to decrease inventory by $519,084, total cost of
goods sold was $2,381,706 in the three months ended March 31, 2005 compared to
$2,016,017 in the three months ended March 31, 2004. We reported a gross loss of
$141,910 for the three months ended March 31, 2005 compared to a gross profit of
$613,481 in the three months ended March 31, 2004.
We incurred exploration expenses of $45,697 during the three months ended March
31, 2005 compared with $132,761 in the three months ended March 31, 2004. There
were more land payments made during the first quarter of 2004. General and
administrative expenses decreased to $458,700 during the three months ended
March 31, 2005, compared with $662,403 in the three months ended March 31, 2004
due to the issuance of stock options during the first quarter of 2004. We
reported an operating loss of $646,307 during the three months ended March 31,
2005 compared to an operating loss of $181,683 in the three months ended March
31, 2004.
Other income/expense totaled $39,794 during the three months ended March 31,
2005 compared with other income/expense of $36,437 in the three months ended
March 31, 2004. We reported a net loss of $686,101 for the three months ended
March 31, 2005 compared with a net loss of $218,120 for the three months ended
March 31, 2004. During the first quarter of 2004 we were building in process
inventory which lowered operating costs.
8
Liquidity and Capital Resources; Recent Developments
As of March 31, 2005 there is limited historical financial information upon
which to base an evaluation on the company's performance. We began our operation
of the Mesquite Mine in November 2003. As a result, our operating profile and
the reasons for fluctuation in the expense amounts between the periods prior to
and following November 2003 changed significantly. Prior to November 2003, we
primarily concentrated our business on the acquisition of properties and raising
funds to advance our business. After our acquisition of the Mesquite Mine, we
intend to dedicate the majority of our expenditures to retrieve gold from heap
leach pads or from new mining and processing at the Mesquite Mine.
The expansion of operations at the Mesquite Mine; and plans for future growth of
the Company depend on our ability to obtain additional capital through the
issuance of additional debt or equity and through the generation of revenue.
Operating cash flows commenced in the first quarter of 2004, and therefore, we
have no historical comparative performance data.
As of March 31, 2005, the cash balance was $778,801. As of March 31, 2005, we
had an accumulated deficit of $9,689,466. As of March 31, 2005 the Company had a
working capital deficit of $1,077,227.
In November 2003, Western Mesquite Mines, Inc., our wholly-owned subsidiary,
entered into a $6 million credit facility agreement with RMB International
(Dublin) Limited and RMB Resources Limited. We guaranteed the obligations of
Western Mesquite Mines, Inc. under the facility agreement and issued warrants to
purchase 780,000 shares of our common stock to RMB Resources Limited. The
warrants are exercisable for a period of three years from the date of the
facility agreement for a purchase price of $1.00 per share, subject to
adjustments.
Western Mesquite Mines, Inc. commenced making principal and interest payments
under this loan in January 2004. Western Mesquite Mines, Inc. made six principal
payments under the facility agreement of $750,000 at the end of January, April,
July and October 2004 and at the end of January and April 2005. Borrowings under
the facility agreement bear interest at a base interest rate of LIBOR plus 6
percent. The facility agreement also provides for contingent additional interest
if cash flows from the gold production from the materials currently located on
the heap facilities in the project areas described in the facility agreement
exceed certain defined levels. No additional interest has been paid under this
facility to date.
Western Mesquite Mines, Inc. may prepay all or part of the outstanding principal
on any quarterly date after January 2004 and before the final repayment date in
an amount of not less than $200,000. If Western Mesquite Mines, Inc. does not
make a quarterly payment, it must pay an additional amount of not less than
$750,000 on the next quarterly payment date as a reduction in principal. It is
an event of default under the facility agreement if Western Mesquite Mines, Inc.
fails to pay an amount of not less than $750,000 on two consecutive quarterly
payment dates. In addition, Western Mesquite Mines, Inc. must pay 50% of its
excess cash flow for each quarter as a prepayment of principal.
Our credit facility also restricts us from making expenditures that have not
been approved by the credit facility agent. Under the facility agreement, we
have agreed with the credit facility agent on a corporate budget as well as a
detailed operating budget for the Mesquite Mine. We provide the credit facility
agent with monthly reports that reconcile the actual results with that budget.
If we wish to make material expenditures not agreed to in the budget, we have to
seek the credit facility agent's prior approval. In particular, the facility
agreement provides that we may not dispose of, or create any encumbrance over,
any assets other than in the normal course of business, or incur indebtedness in
excess of $250,000.
In January 2004, we closed a private placement we conducted in November -
December 2003 of 12,500,000 units at a price of $0.80 per unit. Units consisted
of one share of our common stock, a warrant to purchase one share of our common
stock exercisable for two years at an exercise price of $1.00 per share and the
right to receive one share of our common stock issued in escrow under certain
circumstances. Each purchaser of a unit in the private placement was entitled to
receive the additional escrow share per unit purchased if we did not close a
transaction with another company before February 28, 2004 which resulted in the
listing of the resulting company's securities on the Toronto Stock Exchange. We
entered into a letter of intent with Tandem Resources, Ltd. for a potential
merger transaction to satisfy this condition of the private placement, but we
terminated the letter of intent in February 2004 due to potential tax and
regulatory issues associated with the transaction. The escrow agent released the
escrowed shares to the purchasers in March 2004.
9
We also agreed to register under the Securities Act of 1933, as amended, the
shares of common stock issued in the private placement, issued upon exercise of
the warrants issued in the private placement and shares of any resulting entity
in a merger transaction. In addition, we agreed under certain circumstances,
upon the request of the holders, to include those shares of our common stock in
a securities registration that we undertake on our behalf or on behalf of others
by June 30, 2004. In the agreements, we agreed to pay certain amounts to the
holders based on 2% of the average closing sale price of our common stock for
each 30 days following June 30, 2004 in which the registration statement is not
effective. The Securities and Exchange Commission declared our SB-2 registration
statement effective on August 12, 2004, and these amounts totaled $479,267. We
have offered to satisfy the payment of these amounts with shares of our common
stock and have issued 446,398 shares of our common stock to these holders to
satisfy $223,299 of this obligation.
In December 2004, we closed a private placement of 1,000,000 shares of our
Series "A-1" Convertible Preferred Stock and warrants to purchase up to 500,000
shares of our Series "A-1" Convertible Preferred Stock for an aggregate purchase
price of $500,000. We entered in a registration rights agreement with the
investor whereby we agreed to prepare and file a registration statement with the
Securities and Exchange Commission with respect to the common stock issuable
upon conversion of the Series "A-1" Convertible Preferred Stock. We filed a
registration statement on Form SB-2 in January 2005.
Except for the Mesquite Mine, none of our properties has commenced commercial
production. While we may attempt to generate additional working capital through
the operation, development, sale or possible joint venture development of our
properties, there is no assurance that any such activity will generate funds
that will be available for operations.
Our operations of the Mesquite Mine began in November 2003. We accumulated
metal-in-process inventory during 2003 and produced 2,593 ounces of poured gold
during operations in December 2003, produced an additional 27,398 ounces and
sold 27,357 ounces during 2004, and kept in inventory 5,593 ounces at an outside
refiner for deliveries of gold under our forward sales contract at the end of
January 2005. Production for the first quarter 2005 was 556 ounces higher than
budget. We have implemented programs at the mine to reduce and control monthly
expenditures with the objective of reducing the operating cash cost.
Sales of metal will be recorded at both the spot price and under the forward
sales agreement in 2004, with the related costs charged from inventory to cost
of goods sold.
As part of our credit facility agreement, we entered into a cash flow hedging
program under which we sold forward through RMB International (Dublin) Limited
26,399 ounces of gold at $382.95 per ounce, or approximately 50% of expected
production of gold from the heaps. These ounces were scheduled for delivery
beginning January 30, 2004 and every three months thereafter until October 30,
2005 as follows: 2,380, 4,368, 3,733, 3,324, 3,577, 3,523, 2,897 and 2,597
ounces. On each of the settlement dates, we settle in cash for the difference
between the sales price and the hedged price times the number of scheduled
ounces to be sold for that three month period. Unlike a conventional hedge, we
were not required to put up collateral, and we are not subject to any margin
requirements. Since we sold gold for more than the hedged price in the periods
ended January 31, April 30, and July 31, 2004, we made a payment under the hedge
of $64,379 as of January 31, 2004; $24,242 as of April 30, 2004; $31,544 as of
July 31, 2004; October 29, 2004 and January 29, 2005 we made payments under the
hedge of $64,379, $24,242, $31,544, $141,603 and $185,838 respectively and
reduced revenue by corresponding amounts. As of April 29, 2005, the Company paid
approximately $447,606 to RMB International (Dublin) Limited under this
agreement and had 5,494 ounces of gold outstanding subject to this hedge
facility.
We have a long-term strategy of selling our gold production at prevailing market
prices. Under our risk management policy, we periodically review our exposure
under this hedge and adjust our risk profile accordingly. Furthermore, to manage
a portion of our revenue risk and provide additional comfort to the lender under
our facility agreement, we entered into this forward sale. We believe this
program to be effective for its purpose and do not expect that it will be
ineffective during the hedge period.
10
Our calculation of the derivative effects of the forward sales contract as of
March 31, 2005 and December 31, 2004 is as follows:
March 31, 2005 December 31, 2004
Afternoon Fix on the London Metal Exchange $ 427.50 $ 438.00
Undelivered ounces of gold sold forward 9,017 12,594
(Gain) Loss recognized as other comprehensive income ($283,187) $(176,921)
Value of provision for forward sales derivative - $ 395,680 $ 678,867
marked-to-market
We are currently spending approximately $100,000 per month for our ongoing
corporate functions. In addition, we plan to spend between $300,000 and $500,000
over the next 12 months to advance our current portfolio of properties or to
acquire and advance other strategically important projects. We have not budgeted
specific amounts for exploration or development for any of our properties.
Our credit facility restricts us from making expenditures that have not been
approved by the credit facility agent. We may need to obtain additional funds,
either through equity offerings or debt, to fund our general and administrative
expenses, make the advance royalty payments required on our properties and
conduct exploration programs on our properties. Failure to obtain such
additional financing will result in the loss by us of our interests in our
mineral properties. These conditions raise doubt as to the Company's ability to
continue as a going concern. Management's plans for the continuation of the
Company as a going concern include financing the Company's operations through
issuance of its common stock and the eventual profitable development of its
mining properties. We have commenced the process for an offering of our
securities in Canada and the listing of our common stock on the Toronto Stock
Exchange. The terms of the offering, including the amount to be raised, have not
been finalized. There are no assurances, however, with respect to the future
success of these plans. The financial statements do not contain any adjustments
which might be necessary if the Company is unable to continue as a going
concern.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Forward Looking Statements
This report contains several "forward-looking statements." Forward-looking
statements are those that use words such as "believe," "expect," "anticipate,"
"intend," "plan," "may," "will," "likely," "should," "estimate," "continue,"
"future" or other comparable expressions. These words indicate future events and
trends. Forward-looking statements are our current views with respect to future
events and financial performance. These forward-looking statements are subject
to many assumptions, risks and uncertainties, many of which are beyond our
control, that could cause actual results to differ significantly from historical
results or from those we anticipated. The most significant risks are detailed
from time to time in our filings and reports with the Securities and Exchange
Commission.
Item 3. Controls and Procedures
Our management, with the participation of our Principal Executive Officer and
Principal Accounting Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of
the end of the period covered by this report. Based on such evaluation, our
Principal Executive Officer and Principal Accounting Officer have concluded
that, as of the end of such period, our disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Company in the reports that
it files or submits under the Exchange Act.
11
There have not been any changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended March 31, 2005 we issued shares of our common stock to
IW Exploration and Mountain Gold Exploration, Inc. for lease payments due under
the Exploration and Mining Lease Agreement we entered into in November 2004.
Number of Exercise Vesting
Officer/Director Options Price Date Value
---------------- ------- ----- ---- -----
IW Exploration 12,500 $0.48 2/10/2005 $6,000
Mountain Gold Exploration 12,500 $0.48 2/10/2005 6,000
IW Exploration 25,000 $0.37 3/01/2005 9,250
Mountain Gold Exploration 25,000 $0.37 3/01/2005 9,250
Total 75,000 $30,500
====== =======
During the quarter ended March 31, 2005, we issued options to purchase shares of
our common stock with a promotion to an officer of the Company as follows:
Number of Exercise Vesting
Name Common Shares Price Date Value
---- ------------- ----- ---- -----
Becky Corigliano 50,000 $0.50 3/7/2005 $25,000
Becky Corigliano 100,000 $0.50 9/7/2005 50,000
Becky Corigliano 100,000 $0.50 3/7/2006 50,000
Total 250,000 $125,000
======= ========
The options issued to the officer are exercisable for three-year periods from
their respective vesting dates.
These transactions did not involve any underwriters, underwriting discount or
commissions, or any public offering, and we believe that the transactions were
exempt from the registration by virtue of Section 4(2) of the Securities Act of
1933, as amended. The investors represented their intention to acquire the
securities for investment purposes only and not with a view to or for sale in
connection with any distribution thereof. The investors had adequate access,
through their relationships with us, to information about us.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
12
Item 6. Exhibits
Number Description
------ -----------
31.1 Certification of Principal Executive Officer
pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Principal Accounting Officer
pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Principal Executive Officer of
Periodic Report Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Accounting Officer of
Periodic Report Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WESTERN GOLDFIELDS, INC.
Date: May 20, 2005 /s/ Thomas K. Mancuso
-----------------------------------
Thomas K. Mancuso
President
Principal Executive Officer
Date: May 20, 2005 /s/ Becky Corigliano
-----------------------------------
Becky Corigliano
Treasurer and Secretary
Principal Accounting Officer
EXHIBIT INDEX
Number Description
------ -----------
31.1 Certification of Principal Executive Officer
pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Principal Accounting Officer
pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Principal Executive Officer of
Periodic Report Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Accounting Officer of
Periodic Report Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002