-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C/kMBzEonujmh/bs0dY06PFtvGGIDV0Hggtq3F8Zj7pbfViYO9tt6CYzGTJ6se5v HZh3m8HUp9bpxx48zv/fCg== 0001015402-04-005322.txt : 20041208 0001015402-04-005322.hdr.sgml : 20041208 20041207194509 ACCESSION NUMBER: 0001015402-04-005322 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041208 DATE AS OF CHANGE: 20041207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN GOLDFIELDS INC CENTRAL INDEX KEY: 0001208038 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 383661016 STATE OF INCORPORATION: ID FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-50894 FILM NUMBER: 041189478 BUSINESS ADDRESS: STREET 1: 1519 MAIN STREET STE 169 CITY: HILTON HEAD STATE: SC ZIP: 29926 BUSINESS PHONE: 8436822023 MAIL ADDRESS: STREET 1: 1519 MAIN STREET STE 169 CITY: HILTON HEAD STATE: SC ZIP: 29926 10QSB/A 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A (Amendment No. 1) (MARK ONE) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: SEPTEMBER 30, 2004 [ ] 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 Identification No.) incorporation or organization) 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: November 10, 2004 was 38,712,309. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] EXPLANATORY NOTE Due to technical errors, the following items were incorrectly reported in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the column for the three months ended September 30, 2004 filed on November 15, 2004: - -Mine site administration - -Total cost of goods sold - -Gross Profit (Loss) - -General and administrative - -Exploration - other - -Total Expenses - -Operating Loss - -Loss Before Income Taxes - -Net Loss - -Net Comprehensive Loss - -Basic and Diluted Loss per Share The Company is filing this Amendment No. 1 to Form 10-QSB filed on November 15, 2004 solely to reflect the corrected amounts. The error did not affect any of the other numbers reported.
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 . . . . . . . . . . . . . . . . . . . . . . . 22 Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . 28 PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 29 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. . . 29 Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WESTERN GOLDFIELDS, INC. (FORMERLY BISMARCK MINING COMPANY) CONSOLIDATED BALANCE SHEETS September 30, December 31, 2004 2003 (Unaudited) --------------- -------------- ASSETS CURRENT ASSETS Cash $ 1,397,334 $ 373,500 Restricted cash held by investment company - 3,897,229 Accounts receivable 597,485 17,050 Loan receivable, net of allowance of $10,000 - 40,000 Inventories 2,121,334 2,221,627 Prepaid expenses 257,068 534,440 Deposits 4,050 585,000 --------------- -------------- TOTAL CURRENT ASSETS 4,377,271 7,668,846 Mineral Properties - - Property, plant, and equipment, net of accumulated depreciation 6,058,680 6,150,509 Construction in progress 443,850 13,303 Investments - remediation and reclamation 6,089,254 5,998,994 Investments - other 25,200 98,510 Long-term deposits 307,279 300,000 Long-term prepaid expenses 1,350,765 1,482,921 Deferred loan fees and expenses, net of amortization 325,030 829,041 --------------- -------------- TOTAL ASSETS $ 18,977,329 $ 22,542,124 =============== ============== LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 585,975 $ 677,585 Accrued expenses 783,323 257,699 Accrued expenses - related party - 22,500 Accrued interest 45,312 65,920 Loan payable, current portion 3,000,000 3,000,000 --------------- -------------- TOTAL CURRENT LIABILITIES 4,414,610 4,023,704 --------------- -------------- LONG-TERM LIABILITIES Loan payable, net of current portion 750,000 3,000,000 Reclamation and remediation liabilities 5,998,994 5,998,994 --------------- -------------- TOTAL LONG-TERM LIABILITIES 6,748,994 8,998,994 --------------- -------------- PROVISION FOR FORWARD SALES DERIVATIVE MARKED - TO-MARKET 506,197 855,788 --------------- -------------- COMMITMENTS AND CONTINGENCIES - - --------------- -------------- STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value, 25,000,000 shares authorized; no shares issued and outstanding - - Common stock, $0.01 par value, 100,000,000 shares authorized; 38,704,475 and 38,149,078 shares issued and outstanding, respectively 387,045 381,491 Additional paid-in capital 9,882,962 10,057,384 Stock options and warrants 4,557,815 3,601,478 Accumulated deficit (7,009,297) (4,584,552) Accumulated other comprehensive income (loss) (510,997) (792,163) --------------- -------------- TOTAL STOCKHOLDERS' EQUITY 7,307,528 8,663,638 --------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,977,329 $ 22,542,124 =============== ============== The accompanying notes are an integral part of these financial statements
1
WESTERN GOLDFIELDS, INC. (FORMERLY BISMARCK MINING COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------- ------------------------------------- 2004 2003 2004 2003 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------------- ------------------- ------------------ ----------------- REVENUES Gross revenue $ 2,766,463 $ - $ 8,109,877 $ - Royalties (251,181) - (837,616) - ----------------- ------------------- ------------------ ----------------- Net revenue 2,515,282 - 7,272,261 - ----------------- ------------------- ------------------ ----------------- COST OF GOODS SOLD Mine operating costs 1,727,253 - 5,402,999 - Mine site administration 505,496 - 1,455,396 - Selling, transportation, and refining 11,646 - 76,987 - Depreciation, depletion & amortization 554,070 - 1,042,449 - Inventory adjustment 302,106 - (354,457) - ----------------- ------------------- ------------------ ----------------- Total cost of goods sold 3,100,571 - 7,623,374 - ----------------- ------------------- ------------------ ----------------- GROSS PROFIT (LOSS) (585,289) - (351,113) - ----------------- ------------------- ------------------ ----------------- EXPENSES General and administrative 625,435 332,228 1,712,443 578,002 Exploration - other 40,448 25,668 230,011 54,415 ----------------- ------------------- ------------------ ----------------- Total expenses 665,883 357,896 1,942,454 632,417 ----------------- ------------------- ------------------ ----------------- OPERATING LOSS (1,251,172) (357,896) (2,293,567) (632,417) ----------------- ------------------- ------------------ ----------------- OTHER INCOME (EXPENSE) Interest income 33,223 401 112,120 401 Interest expense (72,991) - (259,696) - Gain on sale of assets - - 27,132 6,177 Loss on sale of investments - - (10,734) - ----------------- ------------------- ------------------ ----------------- Total other income (expense) (39,768) 401 (131,178) 6,578 ----------------- ------------------- ------------------ ----------------- LOSS BEFORE INCOME TAXES (1,290,940) (357,495) (2,424,745) (625,839) INCOME TAXES - - - - ----------------- ------------------- ------------------ ----------------- NET LOSS (1,290,940) (357,495) (2,424,745) (625,839) ----------------- ------------------- ------------------ ----------------- OTHER COMPREHENSIVE INCOME (LOSS) Change in market value of securities (17,800) 259,200 (68,425) 258,415 Change in provision for forward sales derivative (262,217) - 349,591 - ----------------- ------------------- ------------------ ----------------- Total other comprehensive income (loss) (280,017) 259,200 281,166 258,415 ----------------- ------------------- ------------------ ----------------- NET COMPREHENSIVE LOSS $ (1,570,957) $ (98,295) $ (2,143,579) $ (367,424) ================= =================== ================== ================= BASIC AND DILUTED NET LOSS PER SHARE $ (0.03) $ (0.04) $ (0.06) $ (0.07) ================= =================== ================== ================= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 38,277,699 9,413,630 38,236,003 9,213,454 ================= =================== ================== ================= The accompanying notes are an integral part of these financial statements
2
WESTERN GOLDFIELDS, INC. (FORMERLY BISMARCK MINING COMPANY) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Common Stock ---------------------- Additional Stock Options Number Paid-in and of Shares Amount Capital Warrants ----------- --------- ------------ --------------- Balance, January 1, 2002 3,333,333 $ 33,333 $ 534,324 $ - Common stock issued for: property at $0.45 per share 250,000 2,500 110,000 - payables at $0.37 per share 16,667 167 18,351 - Common stock and warrants issued for cash at $0.30 per share 1,771,669 17,717 460,633 53,150 Adjustment and correction to outstanding shares 8,607 86 (86) - Acquisition of Calumet Mining Company 3,500,000 35,000 13,743 - Net loss for the year ended December 31, 2002 - - - - Other comprehensive income - - - - ----------- --------- ------------ --------------- Balance, December 31, 2002 8,880,276 88,803 1,136,965 53,150 Common stock and warrants issued for services at $0.30 per share 209,166 2,092 52,000 11,687 Common stock and options issued for services at $0.30 per share 83,334 833 20,717 4,656 Common stock issued for services at $0.30 per share 9,834 98 2,852 - Common stock issued for services at $0.80 per share 12,000 120 7,800 - Stock options issued for services - - - 1,500 Common stock issued for exercise of warrants at $0.45 per share, net of commission expense of $14,850 350,000 3,500 149,920 (10,500) Common stock issued for services at $0.66 per share 30,000 300 19,500 - Stock options issued for directors fees and other services - - - 55,000 Common stock and warrants issued for purchase of the Mesquite Mine 3,454,468 34,545 1,755,346 1,344,485 Common stock and warrants issued in private placement less commissions and expenses of $1,187,835 25,125,000 251,250 6,912,234 1,985,500 Warrants issued for debt financing agreement - - - 156,000 Miscellaneous adjustments of stock (5,000) (50) 50 - Net loss for the year ended December 31, 2003 - - - - Other comprehensive (loss) - - - - ----------- --------- ------------ --------------- Balance, December 31, 2003 38,149,078 381,491 10,057,384 3,601,478 Options issued for directors' services - - - 377,967 Options issued for officers' services - - - 492,624 Warrants issued for services by related party - - - 22,500 Options issued for services by employees - - - 52,366 Options issued for services by consultants - - - 10,880 Common stock issued for services at $0.80 per share 109,000 1,090 86,110 - Return of capital and adjustment in shares from prior private placement 446,398 4,464 (260,533) Miscellaneous adjustments of stock (1) - 1 - Net loss for the nine months ended September 30, 2004 (unaudited) - - - - Other comprehensive income - - - - ----------- --------- ------------ --------------- Balance, September 30, 2004 (unaudited) 38,704,475 $387,045 $ 9,882,962 $ 4,557,815 =========== ========= ============ =============== Other Accumulated Comprehensive Deficit Income (Loss) Total --------------- -------------- ------------ Balance, January 1, 2002 $ (468,805) $ (96,474) $ 2,378 Common stock issued for: property at $0.45 per share - - 112,500 payables at $0.37 per share - - 18,518 Common stock and warrants issued for cash at $0.30 per share - - 531,500 Adjustment and correction to outstanding shares - - - Acquisition of Calumet Mining Company - - 48,743 Net loss for the year ended December 31, 2002 (370,051) - (370,051) Other comprehensive income - 275,474 275,474 --------------- -------------- ------------ Balance, December 31, 2002 (838,856) 179,000 619,062 Common stock and warrants issued for services at $0.30 per share - - 65,779 Common stock and options issued for services at $0.30 per share - - 26,206 Common stock issued for services at $0.30 per share - - 2,950 Common stock issued for services at $0.80 per share - - 7,920 Stock options issued for services - - 1,500 Common stock issued for exercise of warrants at $0.45 per share, net of commission expense of $14,850 - - 142,920 Common stock issued for services at $0.66 per share - - 19,800 Stock options issued for directors fees and other services - - 55,000 Common stock and warrants issued for purchase of the Mesquite Mine - - 3,134,376 Common stock and warrants issued in private placement less commissions and expenses of $1,187,835 - - 9,148,984 Warrants issued for debt financing agreement - - 156,000 Miscellaneous adjustments of stock - - - Net loss for the year ended December 31, 2003 (3,745,696) - (3,745,696) Other comprehensive (loss) - (971,163) (971,163) --------------- -------------- ------------ Balance, December 31, 2003 (4,584,552) (792,163) 8,663,638 Options issued for directors' services - - 377,967 Options issued for officers' services - - 492,624 Warrants issued for services by related party - - 22,500 Options issued for services by employees - - 52,366 Options issued for services by consultants - - 10,880 Common stock issued for services at $0.80 per share - - 87,200 Return of capital and adjustment in shares from prior private placement (256,069) Miscellaneous adjustments of stock - - 1 Net loss for the nine months ended September 30, 2004 (unaudited) (2,424,745) - (2,424,745) Other comprehensive income - 281,166 281,166 --------------- -------------- ------------ Balance, September 30, 2004 (unaudited) $ (7,009,297) $ (510,997) $ 7,307,528 =============== ============== ============ The accompanying notes are an integral part of these financial statements
3
WESTERN GOLDFIELDS, INC. (FORMERLY BISMARCK MINING COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, ------------------------------------- 2004 2003 (Unaudited) (Unaudited) ---------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (2,424,745) $ (625,839) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and depletion 515,844 - Amortization of loan fees 526,605 - (Gain) on sale of assets and investments (29,854) (6,177) Interest accrued on investments - reclamation and remediation (90,260) - Common stock, options and warrants issued for services 963,537 278,140 Exploration fees funded by stock 80,000 - Common stock adjustment 1 - Changes in assets and liabilities: Decrease (increase) in: Restricted cash 3,897,229 - Accounts receivable (580,435) - Inventories (264,041) - Prepaid expenses 409,528 - Deposits 580,950 - Long Term Deposits (7,279) - Accrued interest receivable - (400) Allowance for bad debt - 400 Increase (decrease) in: Accounts payable (347,679) 62,772 Accrued expenses 525,624 8,000 Accrued expensed - related party (22,500) - Accrued interest expense (20,608) - ---------------- ------------------- Net cash provided (used) by operating activities 3,711,917 (283,104) ---------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property & equipment, including Construction in Progress (854,562) - Principal payments received on loan receivable 40,000 - Purchase of investments - (29,972) Proceeds from sale of investments 7,606 39,025 Bond refund - 5,000 Purchase of asset (15,764) - Proceeds from sale of assets 407,231 - ---------------- ------------------- Net cash provided (used) by investing activities (415,489) 14,053 ---------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES Loan proceeds - 15,115 Deferred debt offering costs (22,594) - Principal payments on loan payable (2,250,000) (25,115) Common stock issued for cash - 135,900 ---------------- ------------------- Net cash provided (used) by financing activities (2,272,594) 125,900 ---------------- ------------------- Change in cash 1,023,834 (143,151) Cash, beginning of period 373,500 209,101 ---------------- ------------------- Cash, end of period $ 1,397,334 $ 65,950 ================ =================== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest $ 280,303 $ - ================ =================== Cash paid for income taxes $ - $ - ================ =================== NON-CASH FINANCING AND INVESTING ACTIVITIES: Stock and warrants issued for services $ 7,200 $ 90,700 Stock options issued for services $ 956,337 $ 187,440 Stock options issued for deposit for acquisition $ - $ 167,789 Exploration fees paid by issuance of common stock $ 80,000 $ - Stock issued for 2% penalty $ 4,464 $ - Accounts payable increased for 2% penalty on stock $ 256,069 $ - Interest reinvested, investments - reclamation and remediation $ 90,260 $ - The accompanying notes are an integral part of these financial statements
4 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Western Goldfields, Inc. (hereinafter "the Company") and its wholly owned subsidiaries are engaged in the exploration for, development of and extraction of precious metals principally in the states of California, Nevada and Idaho. The Company's two wholly owned subsidiaries are Calumet Mining Company and Western Mesquite Mines, Inc. Calumet Mining was acquired in August 2002 and was a dormant mining company. (See Note 12.) Western Mesquite Mines was incorporated in 2003 for the acquisition of the Mesquite Mine in California from Newmont Mining Corporation in November 2003. (See Note 12.) The Company was in the exploration stage through most of the year ended December 31, 2003 and all of the year ended December 31, 2002. With the acquisition of the Mesquite Mine, the Company exited the exploration stage and became an operating mining company. The Company's first sale of gold from its production occurred in mid-January 2004. For the year ended December 31, 2002, the Company's auditors expressed a going concern qualification in the Company's audited financial statements. In November and December 2003, the Company obtained significant additional capital through a private placement of its stock. Management plans to use the majority of the proceeds from the financing for operations of the Mesquite Mine, as well as exploration and development on the Mesquite Mine and other properties. The Company was originally formed on January 15, 1924, under the laws of the State of Idaho, and in August 2002 changed its name from Bismarck Mining Company to Western Goldfields, Inc. The Company's year-end for reporting purposes is December 31. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies is presented to assist in understanding the financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements. INTERIM FINANCIAL STATEMENTS - ---------------------------- The interim financial statements for the periods September 30, 2004 and 2003 included herein have not been audited, at the request of the Company. They reflect all adjustments, which are, in the opinion of management, necessary to present fairly the results of operations for the period. All such adjustments are normal recurring adjustments. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year. ACCOUNTING METHOD - ----------------- The Company uses the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. The Company's convention for closing its books is to cut-off all financial and operational measurements at midnight on the Saturday closest to the actual end of each month during the year and at midnight on the 31st of December each year. PRINCIPLES OF CONSOLIDATION - ----------------------------- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, after elimination of the inter-company accounts and transactions. Wholly owned subsidiaries of the Company are listed in Note 14. 5 REVENUE RECOGNITION - -------------------- Revenue is recognized when metal is delivered and title passes. The effect of forward sales contracts are reflected in revenue at the date the related precious metals are delivered or the contracts expire. Third party smelting and refining costs are recorded as a reduction of revenue. By-product credits are off-set against operating expenses as generated. ACCOUNTS RECEIVABLE - -------------------- The Company records its accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. The Company's trade receivables are related to precious metals delivered against a forward sales contract or a spot sale contract whose settlement has not occurred. Settlement usually occurs in between two and fifteen business days and is made through international metals refiners and brokers. USE OF ESTIMATES - ---------------- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of mineral reserves, reclamation and environmental obligations, impairment of assets, useful lives for depreciation, depletion and amortization, measurement of metal-in-process and finished goods inventories, values of options and warrants, and valuation allowances for future tax assets. Actual results could differ from those estimates. EXPLORATION COSTS - ------------------ In accordance with accounting principles generally accepted in the United States of America, the Company expenses exploration costs as incurred. EXPLORATION STAGE ACTIVITIES - ---------------------------- The Company is primarily engaged in the acquisition, exploration and development of mining properties. On November 7, 2003, concurrent with the acquisition of the Mesquite Mine, the Company started production of metals while studying enhancements to the processing of the heaps and the potential commencement of future mining operations. CASH AND CASH EQUIVALENTS - ---------------------------- The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. RESTRICTED CASH - --------------- As of December 31, 2003, the Company had cash proceeds from common stock sold as part of a private placement in November and December 2003 held by the investment firm representing the Company. Most of the proceeds from these stock sales were released in January and February 2004 with the remainder released in June 2004. DERIVATIVE INSTRUMENTS - ----------------------- The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133," SFAS No. 138, 6 "Accounting for Certain Derivative Instruments and Certain Hedging Activities," and SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which is effective for the Company as of June 30, 2003. These standards establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. A derivative may be specifically designated as a hedge of financial risk exposures of anticipated transactions if, both at the inception of the hedge and throughout the hedge period, the changes in fair value of the contract substantially offset the effect of commodity price changes on the anticipated transactions and if it is probable that the transactions will occur. The Company regularly monitors its commodity exposures and ensures that contracted amounts do not exceed the amounts of underlying exposures. Realized prices under the Company's forward sales contract are recognized in gold sales and by-product credits as the designated production is delivered to meet commitments. The Company values gold for all cash flow hedging purposes based upon the London Afternoon Gold Fix for each valuation date, modified by the gold forward rate expected by the Company subject to the Company's discounted financing costs. Management maintains estimates for each quarterly expected forward sales value to approximate the future value of forward sales contracts for the determination of provisions for gains or losses on derivatives. The income effect of the change in derivative values will be accounted for in other comprehensive income based upon the Company's quarterly valuation of the associated financial gain or loss. Any changes arising from the determination of the derivative's effectiveness is accounted for as a charge to current operations. In the event of early settlement or redesignation of hedging transactions, gains or losses are deferred and brought into income at the delivery dates originally designated. Where the anticipated transactions are no longer expected to occur, with the effect that the risk hedged no longer exists, unrealized gains or losses are recognized as income at the time such a determination is made. Cash flows arising in respect of these contracts are recognized under cash flow from operating activities. COMPREHENSIVE INCOME (LOSS) - ----------------------------- Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which was issued in June 1997. SFAS No. 130 establishes rules for the reporting and displaying of comprehensive income and its components, but had no effect on the Company's net loss. SFAS No. 130 requires unrealized gains and losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity, to be included in comprehensive income. COMPENSATED ABSENCES - --------------------- Employees of the Company are entitled to paid vacation depending on length of service. As of December 31, 2003, the Company had no liability and had not yet hired employees. As of September 30, 2004, a liability of $32,607 for accrued vacation has been recorded for all locations. RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (hereinafter "SFAS No. 150"). SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has determined that this statement has no effect on the Company's financial statements. 7 In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - - Transition and Disclosure" (hereinafter "SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of the statement are effective for financial statements for fiscal years ending after December 15, 2002. The Company currently reports stock issued to employees under the rules of SFAS 123. Accordingly there is no change in disclosure requirements due to SFAS 148. In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (hereinafter "SFAS No. 146"). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 was issued in June 2002 and is effective for activities after December 31, 2002. The Company has established a remediation and reclamation liability to cover costs related to the exit and/or disposal of its mining property. In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (hereinafter "SFAS No. 145"), which updates, clarifies and simplifies existing accounting pronouncements. FASB No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect was rescinded. As a result, FASB No. 64, which amended FASB No. 4, was rescinded, as it was no longer necessary. FASB No. 44, "Accounting for Intangible Assets of Motor Carriers", established the accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Since the transition has been completed, FASB No. 44 is no longer necessary and has been rescinded. SFAS No. 145 amended FASB No. 13 to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company adopted SFAS No. 145 which did not have a material effect on the financial statements of the Company at September 30, 2004 or December 31, 2003. CONCENTRATION OF CREDIT RISK - ------------------------------- The Company maintains its cash in several commercial accounts at major financial institutions which includes funds included in cash and deposit accounts. Although the financial institutions are considered creditworthy and have not experienced any losses on their deposits, at September 30, 2004 and December 31, 2003, respectively, the Company's cash balance exceeded Federal Deposit Insurance Corporation (FDIC) limits by $1,197,334 and $176,270. The Company processes and sells its metal through an international metals company. The Company reviews the credit worthiness of its metals outlets at least annually and as of September 30, 2004 was not aware of any factor which would impact its sales of metal and ultimate collection of receivables from such sales. PROVISION FOR TAXES - ------------------- Income taxes are provided based upon the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the "more likely than not" standard imposed by SFAS No. 109 to allow recognition of such an asset. 8 At September 30, 2004, the Company had net deferred tax assets (calculated at an expected rate of 39% for 2004 and part of 2003, and 34% for all prior periods) of approximately $1,255,000 principally arising from net operating loss carryforwards for income tax purposes. The net deferred taxes are calculated based upon both federal and state expected tax rates. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been recorded at September 30, 2004, and December 31, 2003. The significant components of the deferred tax asset at September 30, 2004, and December 31, 2003, were as follows:
SEPTEMBER 30, DECEMBER 31, 2004 2003 --------------- -------------- Net operating loss carryforward $ 3,370 ,000 $ 1,570,000 =============== ============== Deferred tax asset $ 1,255,000 $ 555,000 Deferred tax asset valuation allowance (1,255,000) (555,000) --------------- -------------- Net tax assets $ - $ - =============== ==============
At September 30, 2004, the Company has net operating loss carryforwards of approximately $3,370,000, which expire in the years 2019 through 2024. The Company recognized approximately $935,000 and $180,000 of losses from issuance of restricted common stock and stock options for services during the nine months ended September 30, 2004 and fiscal year 2003, respectively, which are not deductible for tax purposes and are not included in the above calculation of deferred tax assets. Also, the Company has recognized costs for financial statement purposes of approximately $2,700,000 for mineral property and ore on leach pad that are not deductible for tax purposes in 2003. The allocation of the costs to the leach pads did result in additional tax deduction for depletion from recoveries of gold estimated to be $310,000 as of September 30, 2004. The change in the allowance account from December 31, 2003 to September 30, 2004 was $700,000 and from December 31, 2002 to December 31, 2003 was $300,000. The Company has also issued substantial amounts of new common stock in 2002 and 2003, which may have resulted in control changes. A control change may limit the availability of the net operating losses from periods prior to the control change. The Company also has available limited net operating losses from prior acquisitions, which may be available for tax purposes. INVESTMENT IN SECURITIES - -------------------------- Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115, the Company's investments in securities is classified as either trading, held to maturity, or available-for-sale. During the nine months ended September 30, 2004 and the year ended December 31, 2003 the Company did not own any securities classified as either trading or held to maturity. However, at September 30, 2004 and December 31, 2003 the Company did own securities classified as available-for-sale. Securities available-for-sale consists of debt and equity securities not classified as trading securities or as securities to be held to maturity. Unrealized holding gains and losses, net of tax, on securities available-for-sale are reported as a net amount in a separate component of other comprehensive income. Gains and losses on the sale of securities available-for-sale are determined using the specific identification method and are included in earnings. PROPERTY, PLANT AND EQUIPMENT - -------------------------------- Property, plant and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years, or units-of-production method over the estimated useful life of the property. (See Note 5.) 9 MINERAL PROPERTIES - ------------------- Mineral properties are stated at cost. Depletion of mineral properties is calculated using the units-of-production method over the estimated recoverable ounces of gold on the property. (See Note 3.) BASIC AND DILUTED NET LOSS PER SHARE - ------------------------------------ Net loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Basic and diluted net loss per share was the same, as the common stock equivalents outstanding would be considered anti-dilutive. As of September 30, 2004 and December, 31, 2003 respectively, the Company had outstanding options for 4,668,334 and 358,334 shares and outstanding warrants for 24,787,515 and 24,637,515 shares. FAIR VALUE OF FINANCIAL INSTRUMENTS - --------------------------------------- The Company's financial instruments as defined by SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," include cash, restricted cash, accounts and loans receivable, prepaids, accounts payable, accrued expenses and short-term borrowings. All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at September 30, 2004 and December 31, 2003. ACCOUNTING FOR STOCK OPTIONS AND WARRANTS GRANTED TO EMPLOYEES AND NONEMPLOYEES - -------------------------------------------------------------------------------- Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (hereinafter "SFAS No. 123"), defines a fair value-based method of accounting for stock options and other equity instruments. The Company has adopted this method, which measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period. METAL ON LEACH PAD AND IN METAL-IN-PROCESS INVENTORY - ----------------------------------------------------------- The Company took over the Mesquite Mine on November 7, 2003 with an estimated 50,800 ounces of recoverable gold contained in mineralized ores previously placed on impermeable, lined pads. During the periods ended September 30, 2004 and December 31, 2003 the Company produced 20,690 and 5,367 ounces of gold, respectively, from the pads into metal-in-process inventory, leaving on the pads an estimated 24,743 ounces of gold as of September 30, 2004 and 45,433 ounces of gold as of December 31, 2003. The Company carries no value in its financial statements for metal on the leach pads as the initial value assigned to mineral properties for metal on the leach pads, in accordance with SEC Industry Guide 7, has been included in exploration expense. In the nine month period ended September 30, 2004, the Company had its first sales of gold from metal-in-process inventory generating sales of 20,687 ounces. There were no sales prior to January 1, 2004. Prior to November, 2003, the Company had no production activities. The determination of both the ultimate recovery percentage and the quantity of metal expected over time requires the use of estimates, which are subject to revision since they are based upon metallurgical test work. The Company expects to continue to process and recover metal from the leach pads until no longer considered economically feasible. INVENTORIES: - ------------ i) Bullion (metal refined to industry purity standards) inventory, which includes metal held on our behalf by third parties is valued at market. ii) Metal-in-process inventory, which is metal in solution or in various parts of the processing circuit, is valued at the lower of average production cost or net realizable value. Production costs include processing and administrative costs, which are charged to operations and included in cost of sales on the basis of ounces of gold recovered. Based upon actual gold recoveries and operating plans, the Company continuously 10 evaluates and refines estimates used in determining the costs charged to operations and the carrying value of costs associated with the metals in circuit. iii) Materials and supplies inventory is stated at the lower of average cost or net realizable value. DEPOSITS - -------- Under the terms of its power purchase agreement with the local power provider, which is a quasi-public agency, the Company is required to collateralize certain portions of the Company's obligations. The Company has collateralized these obligations by assigning a $300,000 certificate of deposit for a period of three years. The ultimate timing for the release of the collateralized amounts is dependent on the credit worthiness of the Company and/or the timing and closure of the Mesquite mine. Collateral could also be released to the extent that the Company is able to secure alternative financial assurance satisfactory to the respective agency. The Company's management expects that the aforementioned collateral will remain in place beyond a twelve-month period and has therefore classified these deposits as long-term. The Company had also advanced working capital, in the amount of $585,000, to its management contractor to cover anticipated operating costs at the Mesquite Mine. In May 2004, this deposit was offset against the final invoices from the contractor upon the termination of its contract. RECLAMATION AND REMEDIATION COSTS - ------------------------------------ Estimated future costs are based principally on legal and regulatory requirements. Such costs related to active mines are accrued and charged over the expected operating lives of the mines using the units-of-production method. Future remediation costs for inactive mines are accrued based on management's best estimate at the end of each period of the undiscounted costs expected to be incurred at the site. Such cost estimates include, where applicable, ongoing care and maintenance and monitoring costs. Changes in estimates are reflected in earnings in the period an estimate is revised. RECLASSIFICATIONS - ----------------- Certain reclassifications of prior year balances have been made to conform to current year presentation. NOTE 3 - MINERAL PROPERTIES The Company controls the following mineral properties: CALIFORNIA PROPERTIES MESQUITE MINE - -------------- In July 2003, the Company issued 111,859 shares of common stock as a deposit on the purchase of the Mesquite Mine, in Imperial County, California. In November 2003, the Company completed this purchase and issued an additional 2,217,609 shares of common stock and 2,494,810 warrants with an exercise price of $1.00 per share. As of December 2003, the Company remained obligated to issue additional shares and warrants under the purchase agreement. The Company issued 1,125,000 shares of common stock in January 2004, and 5,596,370 warrants for the purchase of one share of common stock each, with an exercise price of $1.00 per share, in March 2004, in final settlement of its obligations under this agreement (See Note 12). 11
VALUE PER AMOUNT SHARE VALUE --------- ---------- ---------- Reclamation Obligation Assumed - - $5,998,994 Western Goldfields Common Stock 3,454,468 $ 0.52 1,789,891 Warrants - Western Goldfields stock, exercisable at $1.00 per share of common 450 days from issuance and for 5 years thereafter 2,494,810 0.18 449,066 Warrants - Western Goldfields stock, exercisable at $1.00 per share of common 815 days from issuance and for 5 years thereafter 5,596,370 0.16 895,419 ---------- Total Consideration 9,133,370 ========== Allocation to Fixed Assets: Property, plant and equipment, including buildings $6,471,000 Mineral properties 2,662,370 ---------- $9,133,370 ==========
The fair market value of the acquired property, plant and equipment was determined by review by the mine operations contractor. (See Note 15.) The remaining value was allocated to mineral properties, and expensed in December 2003 as a part of a $2,791,603 in exploration expenses. GOLD POINT MINE - ----------------- In September 2002, the Company acquired the Gold Point Mine mining claims from Western Continental, Inc. in exchange for 250,000 shares of our common stock valued at $112,500, assumption of liabilities of $5,000, mining claims valued at $15,000, 141,875 shares of Grand Central Silver Mines valued at approximately $28,375 and $2,500 cash. Western Continental, Inc. was controlled by William L. Campbell, its President, who prior to August 24, 2002, also served as the Company's President. CALIFORNIA PROPERTIES - OTHER - -------------------------------- In January 2003, the Company reached an agreement on the Cahuilla Gold Project near Indio, California. This agreement with the Torres Martinez Tribe, and two extensions signed in July 2004 and October 2004, gives the Company through January 2005 the exclusive negotiation rights and access to geologic sites for their evaluation in advance of entering into a formal exploration/mining agreement to nearly two square miles of property. In January 2004, the Company increased its land position at Cahuilla by acquiring 100% of La Cuesta International, Inc.'s interests in two separate mining leases that collectively cover approximately 70 acres adjacent to the Torres Martinez Tribal lands. NEVADA AND IDAHO PROPERTIES At December 31, 2002, Calumet Mining Company, the Company's subsidiary, held several mining claims throughout Nevada and Idaho. They consist of four unpatented mining claims in Sunnyslope, Nevada, two unpatented mining claims in Koegel Hills, Nevada, two unpatented mining claims in Corral Canyon, Nevada, six unpatented mining claims in Buckskin North (lease lapsed in 2003), Nevada, two unpatented mining claims in Golden Lyon (lease lapsed in 2003), Nevada, nineteen unpatented lode mining claims in Shoshone County, Idaho, in addition to a 10-year lease for 635 acres in Shoshone County, Idaho and five unpatented lode mining claims in the Pyramid Mine near Fallon, Nevada. Due to a lack of evidence establishing proven and probable reserves, the acquisition costs of these mines were included in Calumet Mining Company's net loss for the period ended August 25, 2002 as an exploration expense. (See Note 14.) In April 2004, the Company entered a non-binding letter of intent with Coolcharm Ltd. with respect to a joint venture for the Lincoln Hill Mine, whereby Coolcharm will invest in exploration and development of the property. 12 Under the agreement Coolcharm could invest up to $4,000,000 in exploration and development expenses and earn up to 60% interest in the property. In September 2004, Coolcharm paid a portion of its initial obligation and a joint venture is in the process of being formed. Also in April 2004 the Company entered a non-binding letter of intent to form a joint venture with 321 Gold for an exploration and development agreement on the Sunny Slope Mine property. Under this agreement, 321 Gold would expend up to $1,000,000 on the exploration and development of the property in anticipation of earning up to a 70% interest in the property. The Company has staked additional claims during 2003 at the Sunny Slope Mine, increasing the unpatented mining claims to 240 acres. The Company has staked additional claims during 2003 at the Kibby Flats Mine, increasing the unpatented mining claims to 320 acres. The Company has staked additional claims during 2003 at the Gold Star Mine, increasing the unpatented mining claims to 260 acres. The Company has staked additional claims during 2003 at the Koegel Hills Mine, increasing the unpatented mining claims to 1,480 acres. The Lincoln Hill Mine was leased in December 2002 from an officer of the Company and his partner. This claim represents unpatented claims covering 700 acres in the Rochester Mining District near Lovelock, Nevada. In January 2004, the Company entered discussions regarding the acquisition of Nevada Colca Gold, a private corporation with mineral property interests in the western United States and Mexico. NOTE 4 -INVENTORIES Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31, 2004 2003 -------------- ------------- Bullion $ - $ 364,334 Metal-in-process 1,989,423 1,634,966 Supplies 131,911 222,327 -------------- ------------- Inventories $ 2,121,334 $ 2,221,627 ============== =============
Inventories include $364,334 in bullion at December 31, 2003 which, along with $15,765 acquired in the first quarter of 2004, was all related to the original purchase transaction with Newmont Mining Corporation for the Mesquite Mine. This purchased inventory was disposed of in the first quarter for the total amount of $407,231, which resulted in a gain of $27,132. These 1,003 gold ounces of bullion were not produced in the normal course of business and were not included in cost of sales. Metal-in-process inventory contained approximately 5,303 and 5,367 ounces of gold as of September 30, 2004, and December 31, 2003, respectively. This did not include the 1,003 ounces of gold in bullion inventory at December 31, 2003. 13
SEPTEMBER 30, DECEMBER 31, 2004 2003 -------------- ------------- Beginning Metal-in Process Inventory $ 1,634,966 $ - Operating Costs for the Period 6,935,382 1,197,025 Depreciation, Depletion & Amortization for the Period 1,042,449 437,941 Less Cost of Metal Sales 7,623,374 - -------------- ------------- Inventories $ 1,989,423 $ 1,634,966 ============== =============
NOTE 5 - PROPERTY AND EQUIPMENT The following is a summary of property, equipment, and accumulated depreciation at September 30, 2004:
SEPTEMBER 30,, DECEMBER 31, 2004 2003 ---------------- -------------- Buildings $ 3,550,000 $ 3,550,000 Equipment 3,405,391 2,981,376 ---------------- -------------- 6,955,391 6,531,376 Less accumulated depreciation (896,711) (380,867) ---------------- -------------- Net Property and Equipment $ 6,058,680 $ 6,150,509 ================ ==============
Depreciation expense for the nine months ended September 30, 2004 and the year ended December 31, 2003 was $515,844 and $380,867, respectively. There was no depreciation expense taken for the year ended December 31, 2002 as the Company had no depreciable property. 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. In addition, the Company had construction in progress of $443,850 and $13,303 at September 30, 2004, and December 31, 2003, respectively. No construction took place in 2002. NOTE 6 - RECLAMATION AND REMEDIATION INVESTMENTS AND BONDS The Company paid $7,388,910 for a reclamation cost policy with American International Specialty Loans Insurance Company in conjunction with the acquisition of the Mesquite Mine. The policy covers liability for reclamation up to $14,000,000 and establishes a reimbursement account with an initial balance of $5,998,994 and prepays the excess coverage with an additional premium of $1,389,916, which is to be amortized over an eleven-year period. The reimbursement account has a balance of $6,089,254 and $5,998,994 as of September 30, 2004 and December 31, 2003, respectively. Management's estimate of all reclamation obligations arising from the mine purchase and subsequent operations are exceeded by the account balance. 14
The following bonds are covered by this insurance arrangement: INCEPTION CONTRACT BOND NUMBER DATE AMOUNT OBLIGEE(S) - --------------------------------------------------------------------------- ESD 7315360 11/7/2003 $1,179,465 Imperial County, CA California Department of Conservation U.S. Bureau of Land Management - --------------------------------------------------------------------------- ESD 7315361 11/7/2003 $1,190,614 Imperial County, CA California Department of Conservation U.S. Bureau of Land Management - --------------------------------------------------------------------------- ESD 7315362 11/7/2003 $ 61,783 Imperial County, CA California Department of Conservation U.S. Bureau of Land Management - --------------------------------------------------------------------------- ESD 7315363 11/7/2003 $ 550,000 California Water Quality Control Board - --------------------------------------------------------------------------- ESD 7315358 11/7/2003 $3,984,199 U.S. Bureau of Land Management - --------------------------------------------------------------------------- ESD 7315359 11/7/2003 $ 50,000 CA State Lands Commission - ---------------------------------------------------------------------------
NOTE 7 - INVESTMENTS
The Company's investments are summarized as follows: Fair value of common stock holdings: SEPTEMBER 30, DECEMBER 31, 2004 2003 - --------------------------------------- -------------- ------------- Cadence Resources Corporation $ 25,200 $ 98,510 Lucky Joe Mining Company - - Trend Mining Company - - -------------- ------------- Total fair value 25,200 98,510 Cost 30,000 34,885 -------------- ------------- Gross unrealized holding gains/(losses) $ 4,800 $ 63,625 ============== =============
In October 2003, the Company sold all its interest in 250,000 common shares of Trend Mining Company for $220,147, recognizing a loss on disposition of $29,853. As a part of this sale, two former officers/directors purchased a total of 200,589 shares for $17,050 under similar terms to the other purchasers in the transaction. The Company classifies its investments as available-for-sale securities. Cadence Resources Corporation is a related party since one of Cadence's officers is a director of the Company. Prior to March 1, 2004, Lucky Joe Mining Company and Trend Mining Company were related parties in that each company had one or more officers and directors in common with the Company. NOTE 8 - LOANS RECEIVABLE In October 2003, the Company loaned $40,000 to Trend Mining Company. The loan is uncollateralized, non-interest bearing and due on demand. The loan was repaid in June 2004. In January 2003, the Company paid expenses on behalf of Cadence Resources Corporation in the amount of $15,115. In June 2003, these non-interest bearing cash advances were repaid in full. In September 2000, Calumet Mining Company loaned Elite Logistics $36,000 at 8% per annum, uncollateralized, payable upon demand. In February 2001, principal and accrued interest was partially repaid in the form of securities, leaving a balance of $10,000. An allowance for bad debt has been established for the full amount of the loan including accrued interest. 15 NOTE 9 - LONG-TERM PREPAID EXPENSES The Company has entered into insurance contracts to insure the environmental and pollution risk up to $14 million at its Mesquite Mine project. Additionally, the policy covers reclamation risk, above the amount covered by the investment - remediation and reclamation account, up to $14 million associated with the Mesquite Mine project. The policies cover risk for up to 11 years. Their costs are being amortized against earnings monthly and are summarized below.
SEPTEMBER 30, DECEMBER 31, 2004 2003 --------------- -------------- Original Policy Premiums $ 1,642,621 $ 1,661,159 Amortization (140,207) (25,169) --------------- -------------- Unamortized Premium Cost 1,502,414 1,635,990 Current Portion (151,649) (153,069) --------------- -------------- Long-Term Prepaid Expenses $ 1,350,765 $ 1,482,921 =============== ==============
NOTE 10 - LOAN PAYABLE As part of the acquisition of the Mesquite Mine, the Company entered into a credit facility agreement on November 5, 2003 with R.M.B. International, (Dublin) Limited, a Republic of Ireland corporation. This two-year credit facility agreement resulted in the Company receiving $6,000,000 for a mortgage, security, assignment, and financing agreement. Substantially all of the assets acquired in the Mesquite Mine are pledged and mortgaged under these agreements, as well as most of the Company's other property. Interest is accrued on this credit facility at LIBOR plus 6% per annum, on a monthly basis. In January, April, and July 2004, the Company made the first three quarterly payments of $750,000 plus interest. The Company is obligated to pay an additional $750,000 of loan principal in 2004 and the balance of $3,000,000 in 2005. As part of the credit facility agreement, the Company entered into a gold hedging program under which it sold forward 26,399 ounces of gold at $382.95 per ounce, or approximately 50% of expected production of gold from the heaps. These ounces are scheduled to be delivered on January 30, 2004 and every three months thereafter until October 31, 2005. On each of the settlement dates, the Company settles 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, the Company was not required to put up collateral, and the Company is not subject to any margin requirements. Since the Company sold gold for more than the hedged price in the periods ended January 30, April 30, and July 30, 2004, it made payments under the hedge totaling $120,165 and reduced revenue by corresponding amounts. Further, the Company expected the payments due under the hedge, net of the sales revenues in excess of the forward price, covering the periods ended after September 30, 2004 to be nominal. The Company has a long-term strategy of selling its gold production at prevailing market prices. Under its risk management policy, the Company periodically reviews its exposure under this hedge and adjusts its risk profile accordingly. Furthermore, to manage a portion of its revenue risk and in order to provide additional comfort to the lender under the credit facility the Company entered into this forward sale. The forward sale was entered into for the amount of gold projected at the time entered into to be needed to cover approximately 80% of the company's operating costs at Mesquite. The Company has concluded that this program is effective for its purpose and does not expect that it will be ineffective during the hedge period. In addition to the pledge, credit facility, and facility agreements associated with the loan, the Company also entered into a deposit account control agreement wherein the Company agreed to maintain two bank accounts with an approved bank. These accounts control the funds advanced for the project and the proceeds of gold and other metal sales. Funds from these accounts can be released only with the consent of the lender and the approved bank. 16 The Company's summary information for the valuation of derivatives, which includes management's estimate of the Company's discounted financing rate and the gold forward rate, as of September 30, 2004 and December 31, 2003 is as follows:
-------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, 2004 2003 -------------------------------------------------------------------------------- London Afternoon Gold Fix $ 415.65 $ 417.25 -------------------------------------------------------------------------------- Undelivered ounces of gold sold forward 15,918 26,399 -------------------------------------------------------------------------------- Loss (Gain) recognized as other $ (349,591) $ 855,788 comprehensive Income -------------------------------------------------------------------------------- Value of provision for forward sales derivative- $ 506,197 $ 855,788 Marked-to-market --------------------------------------------------------------------------------
In September 2002, Dotson Exploration Company, a related party, loaned $10,000 to the Company. The debt was uncollaterized, non-interest bearing and due on demand. In June 2003, the loan was repaid in full. NOTE 11 - PREFERRED STOCK The Company has 25,000,000 shares, $0.01 par value per share, of preferred stock authorized. No shares are issued or outstanding. NOTE 12 - COMMON STOCK As discussed in Note 3, the Company issued 3,454,468 shares of common stock for the purchase of the Mesquite Mine during the period between July 2003 and January 2004. The initial deposit for this transaction was the issuance in July 2003 of 111,859 shares of common stock. During the first quarter of 2004, the Company issued 100,000 shares of common stock to satisfy its obligations under two property acquisition agreements. In November and December 2003, as part of a private placement raising $9.1 million after expenses, the Company issued 12,500,000 investments units. The investment units consisted of one share of common stock, one warrant to purchase another share of common stock at $1.00 per share, and an additional share of common stock held in escrow. The escrowed shares were to be distributed if the Company had not completed a listing on the Toronto Stock Exchange by the end of February 2004. In an attempt to satisfy this requirement, the Company entered into a letter of intent with Tandem Resources, Ltd. for a potential merger transaction which would have accomplished this listing. In February of 2004, this letter of intent was terminated by the Company due to complex tax and regulatory issues. The escrow agent released the escrowed shares to the original purchasers in March 2004. In the fourth quarter of 2003, the Company issued 30,000 shares of common stock at $0.66 per share for a total value of $19,800 for services rendered. In the third quarter of 2003, certain shareholders exercised warrants at $0.45 per share for 350,000 shares of common stock. In June 2003, the Company entered into a consulting agreement, with an outside consulting company controlled by a director, but prior to his appointment as a director, whereby the Company issued common stock and 50,000 options to for the purchase of common stock (with an exercise price of $1.70 per share) valued at $31,470. (See Notes 13 and 15.) At December 31, 2003, 12,000 shares had been issued and an additional 9,000 shares accrued under the agreement. The value of the 9,000 shares was accrued in accounts payable at December 31, 2003 and the shares were issued in March of 2004. In November 2003, and in conjunction with the private placement referred to above, 17 the Company issued an additional 125,000 shares of common stock valued at $0.80 per share and 200,000 options to this consultant with an exercise price of $1.00 per share of common stock. (See Note 13.) In January 2003, the Company issued 209,166 units for services rendered. Each unit consists of one share of common stock and a warrant exercisable for the purchase of one share of common stock. The warrants have an exercise price of $0.45 per share, are fully vested and can be exercised for up to two years from the date of issuance. The common stock in this transaction was valued at $0.27 per share, and the warrants at $0.03 per warrant. Also in January 2003, the Company issued 83,334 option units for services rendered. Each unit consists of one share of common stock and an option exercisable for the purchase of one share of common stock. The options have an exercise price of $0.45 per share, are fully vested and can be exercised for up to two years from the date of issuance. The common stock in this transaction was valued at $0.27 per share, and the options at $0.03 per option. In January 2003, the Company cancelled 5,000 shares of common stock valued at par as part of a shareholder transaction. Also in 2003, the Company issued 9,834 shares of common stock for services rendered of $2,950. In December 2002, the Company issued 1,771,669 units for $531,500 cash. Each unit consists of one share of common stock and a warrant exercisable for the purchase of one share of common stock. The warrants have an exercise price of $0.45 per share, are fully vested and can be exercised for up to two years from the date they were issued. The common stock in this transaction was valued at $0.27 per share, and the warrants at $0.03 per warrant. In April 2002, the Company issued 16,667 shares to a related party for outstanding payables attributable to accounting, stock transfer and consulting services rendered of $18,518. On August 24, 2002, the Company completed a 1 for 3 reverse split. Prior issuances presented in these financial statements have been adjusted to reflect the split. On August 25, 2002, the Company acquired all of the outstanding shares of Calumet Mining Company on a 1 for 2 basis by issuing 3,500,000 shares (See Note 14). Also in August 2002, the Company issued 250,000 shares of the Company's common stock plus other consideration for a mineral property known as the Gold Point Mine. The Company's common stock issued as part of this transaction was valued at $112,500. The Company made other cumulative stock corrections during 2002 in the amount of 8,607 shares. NOTE 13 - 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 3.5% to 5%, volatility ranging from 30% to 60%, 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 third quarter of 2004, the Company granted 1,985,000 options exercisable for the purchase of one share of common stock each with an exercise price when vested between $.65 and $.80. These options generally vest over periods from 36 to 120 months. In the second quarter of 2004, the Company granted 250,000 options exercisable for the purchase of one share of common stock each with an exercise price when vested at market value, or at between $0.50 and $2.00 per share if specified. These options generally vest over periods of up to 60 months. In the first quarter of 2004, the Company granted 2,075,000 options exercisable for the purchase of one share of common stock each with an exercise price when vested at market value, or at between $0.50 and $2.00 per share if specified. These options generally vest over periods of up to 60 months. In December 2003, the Company issued 13,750,000 warrants exercisable for the purchase of one share of common stock each with an exercise price of $1.00 per share. 18 As part of the purchase of the Mesquite Mine in 2003, the Company issued 8,091,180 warrants for the purchase of one share of common stock each with an exercise price of $1.00 per share. (See Note 3.) In June 2003, the Company issued 50,000 options to purchase common stock for consulting services rendered. In November 2003, the Company issued an additional 200,000 options to purchase common stock to the same consultant. (See Note 12.) In September 2003, the Company issued 200,000 options to a director and 75,000 to another director for services rendered. The options have an exercise price of $0.50 per share, and are exercisable for three years. These options were valued at $55,000. In September 2003, the Company issued 75,000 options to a consultant for services rendered. The options have an exercise price of $1.50 per share, and are exercisable for three years. These options were valued at $10,500. In January 2003, the Company issued 209,166 warrants and 83,334 options for services rendered. (See Note 12.) No options were issued prior to January 1, 2003. In December 2002, the Company issued 1,771,669 warrants as part of a sale of securities. (See Note 12.)
The following is a summary of stock options: WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES EXERCISE PRICE FAIR VALUE --------- ----------------- ----------------- January 1, 2003 - $ - Granted 358,334 0.49 Exercised - - --------- ----------------- Outstanding and exercisable at December 31, 2003 358,334 $ 0.49 ========= ================= Weighted average fair value of options granted during the year ended December 31, 2003 $ 0.17 ================= Balance January 1, 2004 358,334 $ 0.49 Granted 4,310,000 0.83 Exercised - - --------- ----------------- Outstanding at September 30, 2004 4,668,334 $ 0.80 ========= ================= Exercisable at September 30, 2004 2,678,334 $ 0.78 ========= ================= Weighted average fair value of options granted during the nine months ended September 30, 2004 $ 0.30 =================
The above stock options have been issued under an equity compensation plan approved by the directors but not by the shareholders. NOTE 14 - SUBSIDIARIES CALUMET MINING COMPANY - ------------------------ On August 25, 2002, the Company acquired all of the outstanding shares of Calumet Mining Company. (See Note 12.) This was considered a merger of commonly controlled entities because Calumet was controlled and owned in 19 part by one of the Company's directors. The acquisition was accounted for through the purchase method of accounting at the book value of the net assets. Calumet was mainly a dormant mining company with no significant transactions in 2002, other than the information reflected in Note 3 and the acquisition of the Gold Point Mine. The net assets acquired were as follows:
Cash $ 1,453 Investments 31,000 Bond - State of Idaho 5,000 Note receivable 10,000 Accrued interest receivable 1,133 Other assets 157 Liabilities - ------- Total Net Assets Acquired $48,743 =======
WESTERN MESQUITE MINES, INC. - ------------------------------- In November 2003, the Company created a wholly owned subsidiary, Western Mesquite Mines, Inc. ("WMMI"), which entered into a $6 million credit facility agreement with two companies. Coincident with the establishment of the credit facility, the Company contributed to WMMI the assets at the Mesquite Mine referred to in Note 3. The Company guaranteed the obligations of WMMI under the agreement and issued warrants to purchase 780,000 shares of common stock to the lenders. The warrants are exercisable for three years from the date of the agreement for a purchase price of $1.00 per share. NOTE 15 - RELATED PARTY TRANSACTIONS A director of the Company, appointed on January 23, 2004, has and has had a separate consulting relationship with the Company, through a company he controls, whereby his company is compensated for its consulting service at the rate of $4,000 per month plus expenses. All invoices are paid monthly and no amounts are recorded as payable to him or his company at September 30, 2004. In April 2002, payables of approximately $22,500 were settled by the issuance of 16,667 shares of the Company and cash of $4,000. The amounts were for general and administrative expenses and were advanced to the Company by its former president. Prior to January 1, 2004, officers of the Company were compensated for their services as independent consultants on a monthly basis. As of September 30, 2004 and December 31, 2003, nothing and $33,228, respectively, were accrued for these services. In order to complete the transition of operations, when the Company closed the acquisition, the Company retained the services of Harrison Western Construction Corporation to manage the Mesquite Mine for an initial period of six months. Under the contract, Harrison Western Construction Corporation charged a management fee of costs plus 10%. Prior to July 8, 2004, the President of Harrison Western Construction Corporation was also a director of the Company. Additionally, two shareholders, and former officers, of the Company purchased the remaining outstanding shares of Trend Mining Company that Western Goldfields has been recognizing as an available-for-sale security. At September 30, 2004 and December 31, 2003, these persons owe the Company $11,575 and $17,050 respectively for the purchase which is reflected in accounts receivable in the financial statements. Other related party transactions are discussed in Notes 4, 7, 8, 10, 12, 14, and 16. 20 NOTE 16 - COMMITMENTS AND CONTINGENCIES MINING INDUSTRY - --------------- The Company is engaged in the exploration and development of mineral properties. At present, the Company is in the process of preparing, but does not have, feasibility studies establishing proven and probable reserves. Although the minerals exploration and mining industries are inherently speculative and subject to complex environmental regulations, the Company is unaware of any pending litigation or of any specific past or prospective matters which could impair the value of its mining claims. CONSULTING AGREEMENTS - --------------------- During the period August 1, 2002 through December, 31, 2003, the Company's President was granted compensation between $6,000 and $10,000 per month, Secretary/Treasurer at $3,000 per month and Vice-President at $2,000 per month in accordance with consulting service contracts. Amounts owed at December 31, 2003 and 2002 under these agreements are reflected in the accompanying balance sheets under accrued expenses. MINE OPERATING AGREEMENT - -------------------------- In September 2003, a Company subsidiary entered into an agreement with Harrison Western Construction Corporation for the operation of the Mesquite Gold Mine. The agreement, which became effective with the acquisition of the Mesquite Mine, has six-month terms that are automatically renewed unless terminated by one of the parties. The contract was completed and terminated on May 8, 2004. LEASE AGREEMENT - ---------------- On April 1, 2004, the Company leased office space in Reno, Nevada to provide for corporate offices. This lease is for a term of two years, requiring monthly minimum lease payments of $4,613. The lease is renewable for two one-year renewal periods at a 5% increase in base rent to $4,844 per month. The Company's commitment as of September 30, 2004 is $13,839 for the last three months of 2004, $55,356 for 2005 and $13,839 for three months of 2006. In addition to the minimum lease payments, the Company will pay 14% of the taxes and property maintenance expenses. The Company paid one month's rent as a deposit of $4,444. CONTRACT WITH THE COUNTY SANITATION DISTRICT OF LOS ANGELES - ------------------------------------------------------------------- During its ownership of the Mesquite Mine, Hanson Natural Resources, a prior operator of the mine, entered into an agreement with the County Sanitation District of Los Angeles County which then developed and permitted a plan to create a 100 year landfill at the Mesquite Mine that, when completed, is expected to be the largest residential waste disposal in the United States. Waste is expected to be dumped on lined pads on the pediment commencing in an area to the southwest of the Mesquite pits, ultimately including the southern sections of the leach pads. The waste dumps can utilize much of the material mined at Mesquite as liner and seal. Each cell of the landfill is expected to be sealed as it is completed. Under the agreement with the County Sanitation District of Los Angeles County, the Company has the right to explore, mine, extract, process, market and sell ore, and otherwise conduct mining and processing activities, anywhere on the property for an initial period through 2024 with automatic extensions until 2078. Much of the infrastructure at the property is likely to be retained by the landfill after mining operations are completed and the Company has met certain reclamation standards. Landfill operations are not expected to begin until 2008. REGISTRATION RIGHTS AGREEMENT - ------------------------------- During the period from November 2003 through January 2004 in connection with its private placement, the Company 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 21 entity in a merger transaction. In addition, the Company agreed under certain circumstances, upon the request of the holders, to include those shares of its common stock in a securities registration that the Company undertakes on its behalf or on behalf of others by June 30, 2004. In the agreements, the Company agreed to pay certain amounts to the holders based on 2% of the average closing sale price of its common stock for each 30 days following June 30, 2004 in which the registration statement is not effective. The Securities and Exchange Commission declared the Company's SB-2 registration statement effective on August 12, 2004. The Company offered to satisfy the payment of these amounts with shares of its common stock. As of September 30, 2004, the Company issued 446,398 shares and recorded accounts payable for $256,069 to satisfy the agreed upon settlement amount of $479,267. 22 ITEM 2. PLAN OF OPERATION OVERVIEW We are an independent precious metals production and exploration company focused on the western United States. 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. 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: - 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; - 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; - a perpetual net smelter return royalty ranging from 0.5% to 2.0% on any newly mined ore; and - 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. Poured gold production (poured gold into dore bars) from the Mesquite Mine has averaged approximately 2,200 ounces per month for the nine months of 2004. Poured gold averaged approximately 2,100 ounces per month in the first quarter, approximately 2,000 ounces per month in the second quarter, and approximately 2,500 ounces per month in the third quarter from material that previous owners had placed on the heap leach pads. Mine management is more closely managing its production schedules to match gold production and sales to its forward sales commitments, starting in the third quarter. During the period from November 7, 2003 to September 30, 2004, the poured production was approximately 22,575 ounces of gold, of which 1,888 ounces were held as inventory of metal at the outside refiner waiting to be sold under our forward sales contract. During the first nine months of 2004, we sold approximately 20,687 ounces of gold which either had been processed by Newmont Mining Corporation under the terms of the carbon processing agreement with Newmont Mining Corporation or had been processed at our own gold refining circuit. The Mesquite operations produced 19,982 ounces of gold in dore during the first nine months of 2004, began the year with 2,593 ounces in inventory and ended the period ended September 30, 2004 with 1,888 ounces in inventory. We completed reconstruction of the gold refining circuit in April 2004 and terminated the carbon processing agreement. Between April 1, 2004 and September 30, 2004, we have poured 13,624 ounces of gold. We have negotiated a bonding plan 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 us 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 23 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. We intend to implement a program that will seek to increase recovery from the pads. We estimate that in 2004 we will invest approximately $1.1 million for facilities enhancements and infrastructure improvements for the continuing operations, of which approximately $803,477 has been spent through September 2004. In the second phase at the Mesquite Mine, we also intend to undertake development of the existing heap leach pads and exploration of the other areas of the Mesquite Mine in 2004. There can be no assurance that we will find any minerals or reserves on our properties. We must conduct exploration to determine what amount of minerals, if any, exist on our properties and if any minerals which are found can be economically extracted and profitably processed. We are evaluating the expansion of the Big Chief pit to the north where we have identified a potential mineralized zone of 19.7 million tons grading 0.022 ounces per ton within which our internal scoping study has identified a mineable area that we believe may contain 5.2 million tons grading 0.032 ounce of gold per ton, using a cutoff of 0.012 ounces of gold per ton. In addition to Big Chief North, we intend to complete a thorough review of all the permitted expansion areas that in total cover approximately 2,700,000 feet of drilling in more than 6,200 exploration holes and also cover 650,000 blast holes. In addition, work is in process on a third-party review of the potential to increase production from 154 million tons of ore stacked on the leach pads at the Mesquite Mine by prior owners. The Company is 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. The Company's 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 our properties. We intend to attempt to define mineralized material on the properties that could be developed into minable reserves and to bring reserves to production. We intend to identify and engage joint venture candidates with funds available to support the cost of defining and developing the properties to production. Currently, we have entered into nonbinding letters of intent for joint venture arrangements with respect to the Lincoln Hill Mine and the Sunny Slope Mine. However, we have not identified or contacted any other joint venture candidates. We cannot assure you that we will be able to enter into a joint venture arrangement for the exploration or development of our properties, including the Lincoln Hill Mine and the Sunny Slope Mine, on terms that are favorable to us, if at all. The Company is preparing an application to have its shares listed on the Toronto Stock Exchange. The Company anticipates listing on the Toronto Stock Exchange in early 2005, subject to obtaining all required regulatory and stock exchange approvals. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003 During the three months ended September 30, 2004, we had net revenues of $2,515,282 from the sale of 7,008 ounces of gold produced from the Mesquite Mine. During the three month period ended September 30, 2003, the Company had not conducted any mining operations and had not generated any revenues. Mine operating costs were $1,727,253 in the three months ended September 30, 2004 compared with $0 for the three months ended September 30, 2003. Mine site administration was $505,494 in the three months ended September 30, 2004 compared with $0 in the three months ended September 30, 2003. Depreciation, depletion and amortization were $554,070 in the third quarter of 2004 compared with $0 in the third quarter of 2003. After adjusting for a decrease in inventories of $302,106 in the third quarter of 2004 compared with $0 in the third quarter 24 of 2003, total cost of goods sold was $3,100,569 in the three months ended September 30, 2004 compared with $0 in the three months ended September 30, 2003. We reported a gross loss of $585,287 for the three months ended September 30, 2004 compared with $0 in the three months ended September 30, 2003. These changes reflect the acquisition of our Mesquite Mine in November 2003. We incurred exploration expenses of $40,447 during the three months ended September 30, 2004 compared with $25,668 in the three months ended September 30, 2003. This increase reflects the costs of projects to expand the Mesquite operations and preliminary exploration activity relating to several properties we reviewed for possible acquisition. General and administrative expenses increased to $625,437 during the third quarter of 2004, compared with $332,228 in the third quarter of 2003, reflecting additional corporate costs associated with the acquisition of the Mesquite Mine in November 2003 and costs relating to financing transactions. We reported an operating loss of $1,251,171 during the three months ended September 30, 2004 compared with an operating loss of $357,896 in the three months ended September 30, 2003. Other expense totaled $39,768 during the three months ended September 30, 2004 compared with other income of $401 in the three months ended September, 2003. We reported a net loss of $1,290,939 for the three month period ended September 30, 2004 compared with a net loss of $357,495 for the three month period ended September 30, 2003. NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003 During the nine months ended September 30, 2004, we earned our first revenues from operations since we emerged from dormancy in April 1999. We had net revenues of $7,272,261 during the nine months ended September 30, 2004 from the sale of 20,687 ounces of gold produced from the Mesquite Mine. Mine operating costs were $5,402,999 in the nine months ended September 30, 2004 compared with $0 for the nine months ended September 30, 2003. Mine site administration was $1,455,396 in the nine months ended September 30, 2004 compared with $0 in the nine months ended September 30, 2003. Selling, transportation and refining was $76,987 and depreciation, depletion and amortization was $1,042,449 in the first nine months of 2004 compared with $0 and $0 respectively in the first nine months of 2003. After adjusting for an increase in inventories of $354,457 in the first nine months of 2004 compared with $0 in the nine months of 2003, total cost of goods sold was $7,623,374 in the nine months ended September 30, 2004 compared with $0 in the nine months ended September 30, 2003. We reported a gross loss of $351,113 for the nine months ended September 30, 2004 compared with $0 in the nine months ended September 30, 2003. These changes reflect the acquisition of our Mesquite Mine in November 2003. We incurred exploration expenses of $230,011 during the nine months ended September 30, 2004 compared with $54,415 in the nine months ended September 30, 2003. This increase reflects the costs of projects to expand the Mesquite operations and preliminary exploration activity relating to several properties we reviewed for possible acquisition. General and administrative expenses for the nine months ended September 30, 2004 were $1,712,443, compared with $578,002 for the nine months ended September 30 2003, reflecting additional corporate costs associated with the acquisition of the Mesquite Mine in November 2003 as well as expenses incurred relating to financing transactions. We reported an operating loss of $2,293,567 for the nine months ended September 30, 2004 compared with an operating loss of $632,417 for the nine months ended September 30, 2003. Other expense totaled $131,178 for the nine months ended September 30, 2004 compared with other income of $6,578 for the nine months end September 30, 2003. We reported a net loss of $2,424,745 for the nine month period ended September 30, 2004 compared with a net loss of $625,839 for the nine month period ended September 30, 2003. Cash received from operating activities increased to $3,711,917 during the nine month period ended September 30, 2004 compared with a cash outflow of $283,104 during the nine month period ended September 30, 2003. This change was largely due to operations at the Mesquite Mine and the release of $3,897,229 in restricted cash relating to proceeds of our November-December 2003 private placement and by an increase in inventories of $264,041 during the period. 25 During the nine months ended September 30, 2004, we used $854,562 to purchase plant and equipment primarily related to the gold recovery circuit, a new computerized accounting system and project expansion studies at the Mesquite Mine and office equipment and furniture at the corporate office, compared with $0 in the nine months ended September 30, 2003. We also made the first three scheduled repayments totaling $2,250,000 under the terms of our credit facility. For the next four to five quarters, we expect to spend between approximately $500,000 and $750,000 per month to operate the heap leach pad operation, a total of approximately $200,000 for the investigation and initial enhancement of heap leach pad processes and approximately $500,000 to complete a feasibility study regarding the expansion of mining operations at the Mesquite Mine. LIQUIDITY AND CAPITAL RESOURCES; RECENT DEVELOPMENTS As of September 30, 2004 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 further 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 September 30, 2004, the cash balance was $1,397,334. As of September 30, 2004, we had an accumulated deficit of $7,009,297 and generated net revenues of $7,272,261 during the nine months ended September 30, 2004 compared to an accumulated deficit of approximately $1,464,695 with no revenues at September 30, 2003. Total current liabilities as of September 30, 2004 were $4,414,610 as compared to $121,772 at September 30, 2003. 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 its first three principal payments under the facility agreement of $750,000 at the end of January, April, and July 2004. 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 26 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. 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. Except for the Mesquite Mine, none of our properties has commenced commercial production, and we have no history of earnings or cash flow from our operations. 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-procress inventory during 2003 and produced 2,593 ounces of poured gold during operations in December 2003, produced an additional 19,982 ounces and sold 20,687 ounces during the first three quarters of 2004, and kept in inventory 1,888 ounces at an outside refiner for deliveries of gold under our forward sales contract at the end of October 2004. Production has not been at the levels expected, from the releaching of the materials previously placed on the pads, in all of 2004. We have implemented programs at the mine to reduce and control monthly expenditures with the objective of reducing the operating cash cost. We had no sales in 2003 as metal was being built up in circuits at the Mesquite Mine and at the processing facility. 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; and $31,544 as of July 31, 2004; and reduced revenue accordingly. As of September 30, 2004, we have paid 27 approximately $120,165 to RMB International (Dublin) Limited under this agreement and have 15,918 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. Our calculation of the derivative effects of the forward sales contract as of September 30, 2004 and December 31, 2003 is as follows:
SEPTEMBER 30, 2004 DECEMBER 31, 2003 Afternoon Fix on the London Metal Exchange $ 415.65 $ 417.25 Undelivered ounces of gold sold forward 15,918 26,399 (Gain) Loss recognized as other comprehensive income ($349,591) $ 855,788 Value of provision for forward sales derivative - marked-to- $ 506,197 $ 855,788 market
We are currently spending approximately $75,000 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. As of September 30, 2004, we believe that we have sufficient working capital to make the royalty payments required on our properties, to conduct preliminary exploration programs and to satisfy our cash requirements for the next twelve months. 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. We have no agreements or understandings with any person for additional financing. 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 28 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. 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. 29 PART II - OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ITEM 5. OTHER INFORMATION We entered into a letter agreement on October 18, 2004 with the Torres Martinez Desert Cahuilla Indian Tribe to extend the term of our Statement of Intent and Confidentiality Agreement through January 2005. During the quarter ended September 30, 2004, we issued options to purchase shares of our common stock in connection with ongoing services provided by the officers and directors of the Company as follows:
Number of Exercise Vesting Officer/Director Options Price Date Value - -------------------- --------- --------- -------- -------- Thomas K. Mancuso 100,000 $ 0.75 9/1/2004 $ 33,000 Thomas K. Mancuso 75,000 $ 0.75 3/1/2005 24,750 Thomas K. Mancuso 75,000 $ 0.75 9/1/2005 24,750 Thomas E. Callicrate 100,000 $ 0.75 9/1/2004 33,000 Thomas E. Callicrate 75,000 $ 0.75 3/1/2005 24,750 Thomas E. Callicrate 75,000 $ 0.75 9/1/2005 24,750 Mark C. Shonnard 100,000 $ 0.75 9/1/2004 33,000 Mark C. Shonnard 50,000 $ 0.75 3/1/2005 16,500 Mark C. Shonnard 50,000 $ 0.75 9/1/2005 16,500 Lawrence J. O'Connor 100,000 $ 0.75 9/1/2004 33,000 Lawrence J. O'Connor 50,000 $ 0.75 3/1/2005 16,500 Lawrence J. O'Connor 50,000 $ 0.75 9/1/2005 16,500 James Mancuso 100,000 $ 0.75 9/1/2004 33,000 James Mancuso 50,000 $ 0.75 3/1/2005 16,500 James Mancuso 50,000 $ 0.75 9/1/2005 16,500 Douglas J. Newby 100,000 $ 0.75 9/1/2004 33,000 Douglas J. Newby 50,000 $ 0.75 3/1/2005 16,500 Douglas J. Newby 50,000 $ 0.75 9/1/2005 16,500 Gerald B. Ruth 100,000 $ 0.75 9/1/2004 33,000 Gerald B. Ruth 50,000 $ 0.75 3/1/2005 16,500 Gerald B. Ruth 50,000 $ 0.75 9/1/2005 16,500 --------- -------- Total 1,500,000 $495,000 ========= ========
The options issued to the officers and directors are exercisable for ten-year periods from their respective vesting dates. 30 During the quarter ended September 30, 2004, we issued options to purchase shares of our common stock to employees and consultants providing ongoing services as follows:
Number of Exercise Vesting Options Price Date Value --------- --------- ------- ------- 35,000 $ 0.80 7/2004 $ 7,000 30,000 $ 0.80 7/2004 6,000 10,000 $ 0.80 7/2004 2,000 5,000 $ 0.80 9/2004 1,000 70,000 $ 0.80 10/2004 14,000 70,000 $ 0.80 11/2004 14,000 15,000 $ 0.80 1/2005 3,000 75,000 $ 0.80 4/2005 15,000 75,000 $ 0.80 5/2005 15,000 40,000 $ 0.65 7/2004 6,800 60,000 $ 0.65 1/2005 10,200 --------- ------- Total 485,000 $94,000 ========= =======
The options issued to the employees and consultants of the company are exercisable for three-year periods from their respective vesting dates. ITEM 6. EXHIBITS
Number Description - ------ ----------- 10.1 Letter Agreement, dated October 18, 2004, from Western Goldfields, Inc. and accepted and agreed to by the Torres Martinez Desert Cahuilla Indian Tribe 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
31 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: December 7, 2004 /s/ Thomas K. Mancuso ---------------------------------------- Thomas K. Mancuso President Principal Executive Officer Date: December 7, 2004 /s/ Mark C. Shonnard ---------------------------------------- Mark C. Shonnard Treasurer and Secretary Principal Accounting Officer
EXHIBIT INDEX Number Description - ------ ----------- 10.1 Letter Agreement, dated October 18, 2004, from Western Goldfields, Inc. and accepted and agreed to by the Torres Martinez Desert Cahuilla Indian Tribe 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
EX-10.1 2 doc2.txt EXHIBIT 10.1 Exhibit 10.1 [LOGO OMITTED] Western Goldfields, Inc. ------------------------------------------------------------ 961 Matley Lane, Suite 120 - Reno, Nevada 89502 (775) 337-9433 - Fax (775) 337-9441 - -------------------------------------------------------------------------------- October 14, 2004 Mary Belardo Selnek-is Tem-Al Corporation Torres Martinez Desert Cahuilla Indians P.O. Box 160, 66725 Martinez Road Thermal, California 92274 RE: STATEMENT OF INTENT AND CONFIDENTIALITY AGREEMENT DATED JANUARY 23, 2004 BY AND BETWEEN WESTERN GOLDFIELDS, INC. AND TORRES MARTINEZ DESERT CAHUILLA INDIAN TRIBE. Dear Mary: Pursuant to the terms of the above captioned Statement of Intent and Confidentiality Agreement, Western Goldfields, Inc. would like to request a 90 day extension commencing on October 20, 2004 while the Torres Martinez Desert Cahuilla Indian Tribe and Bureau of Indian Affairs continues to review the proposed formal Exploration /Mining Agreement. If you are in agreement with the proposed extension, please sign below and return a copy of this letter to me. Please feel free to give me a call at any time is you have questions. Sincerely, Toby Mancuso President Accepted and agreed to this 18th day of October 2004 by the Torres Martinez Desert Cahuilla Indian Tribe. By: /s/ Mary E. Belardo Name: Mary e. Belardo Title: Corporation Secretary Cc ================================================================================ EX-31.1 3 doc3.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATIONS I, Thomas K. Mancuso, President of Western Goldfields, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB for the quarter ended September 30, 2004 of Western Goldfields, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: December 7, 2004 /s/ Thomas K. Mancuso - ------------------------ Thomas K. Mancuso President Principal Executive Officer EX-31.2 4 doc4.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATIONS I, Mark C. Shonnard, Treasurer and Secretary of Western Goldfields, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-QSB for the quarter ended September 30, 2004 of Western Goldfields, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: December 7, 2004 /s/Mark C. Shonnard - --------------------- Mark C. Shonnard Treasurer and Secretary Principal Accounting Officer EX-32.1 5 doc5.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 I, the undersigned Thomas K. Mancuso, President of Western Goldfields, Inc. (the "Company"), do hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Quarterly Report on Form 10-QSB of the Company for the quarter ended September 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 7, 2004 /s/ Thomas K. Mancuso ------------------------ Thomas K. Mancuso President Principal Executive Officer EX-32.2 6 doc6.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 I, the undersigned Mark C. Shonnard, Treasurer and Secretary of Western Goldfields, Inc. (the "Company"), do hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1. The Quarterly Report on Form 10-QSB of the Company for the quarter ended September 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 7, 2004 /s/ Mark C. Shonnard ----------------------- Mark C. Shonnard Treasurer and Secretary Principal Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----