10QSB 1 v018841_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) |X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: March 31, 2005 |_| Transition report under Section 13 or 15(d) of the Exchange Act For the transition period from ____________ to ____________ Commission File Number: 0-50894 Western Goldfields, Inc. (Exact name of small business issuer as specified in its charter) Idaho 38-3661016 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 961 Matley Lane, Suite 120 Reno, Nevada 89502 (Address of principal executive offices) (775) 337-9433 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of shares of common stock outstanding as of: April 30, 2005 was 38,891,809. Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
WESTERN GOLDFIELDS, INC. Form 10-QSB Index PART I. FINANCIAL INFORMATION............................................. 1 Item 1. Financial Information.................................................. 1 Consolidated Balance Sheets................................................ 1 Consolidated Statements of Operations and Comprehensive Income (Loss)...... 2 Consolidated Statement of Stockholders' Equity............................. 3 Consolidated Statements of Cash Flows...................................... 4 Notes to Consolidated Financial Statements................................. 5 Item 2. Plan of Operations..................................................... 7 Item 3. Controls and Procedures................................................ 11 PART II. OTHER INFORMATION................................................. 12 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............ 12 Item 6. Exhibits............................................................... 13
PART I - FINANCIAL INFORMATION Item 1. Financial Statements
Western Goldfields, Inc CONSOLIDATED BALANCE SHEETS March 31, December 31, 2005 2004 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS Cash $ 778,801 $ 1,534,778 Accounts receivable 13,348 12,956 Inventories 1,546,574 1,574,249 Prepaid expenses 239,123 404,100 Deposits 4,050 4,050 ------------ ------------ TOTAL CURRENT ASSETS 2,581,896 3,530,133 Property, plant, and equipment, net of accumulated depreciation 5,609,725 5,863,944 Construction in progress 10,853 -- Investments - remediation and reclamation 6,109,886 6,089,572 Investments - other -- 21,400 Long-term deposits 312,043 309,674 Long-term prepaid expenses 1,274,940 1,312,853 Deferred loan fees and expenses, net of amortization 115,521 208,501 ------------ ------------ TOTAL ASSETS $ 16,014,864 $ 17,336,077 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 612,319 $ 659,087 Accrued expenses 741,542 709,377 Accrued expenses - related party 24,325 38,043 Accrued interest 30,937 40,000 Loan payable, current portion 2,250,000 3,000,000 ------------ ------------ TOTAL CURRENT LIABILITIES 3,659,123 4,446,507 ------------ ------------ LONG-TERM LIABILITIES Reclamation and remediation liabilities 6,358,994 6,358,994 ------------ ------------ TOTAL LONG-TERM LIABILITIES 6,358,994 6,358,994 ------------ ------------ PROVISION FOR FORWARD SALES DERIVATIVE MARKED - TO-MARKET 395,680 678,867 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value, 25,000,000 shares authorized; 1,000,000 and no shares issued and outstanding, respectively 10,000 10,000 Common stock, $0.01 par value, 100,000,000 shares authorized; 38,796,810 and 38,721,810 shares issued and outstanding, respectively 387,968 387,218 Additional paid-in capital 9,933,163 9,891,305 Additional paid-in capital preferred 475,000 475,000 Stock options and warrants 4,888,682 4,779,018 Accumulated deficit (9,689,466) (9,003,365) Accumulated other comprehensive loss (404,280) (687,467) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 5,601,067 5,851,709 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,014,864 $ 17,336,077 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 1
WESTERN GOLDFIELDS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHERCOMPREHENSIVE LOSS Three Months Ended March 31, ----------------------------- 2005 2004 ------------ ------------ (Unaudited) (Unaudited) REVENUES Gross revenue $ 2,558,607 $ 2,916,729 Royalties (318,811) (287,231) ------------ ------------ Net revenue 2,239,796 2,629,498 ------------ ------------ COST OF GOODS SOLD Mine operating costs 1,586,341 1,902,098 Mine site administration 371,817 381,875 Selling, transportation, and refining 10,874 57,527 Depreciation, depletion & amortization 344,995 193,601 Inventory adjustment 67,679 (519,084) ------------ ------------ Total cost of goods sold 2,381,706 2,016,017 ------------ ------------ GROSS PROFIT (LOSS) (141,910) 613,481 ------------ ------------ EXPENSES General and administrative 458,700 662,403 Exploration - Other 45,697 132,761 ------------ ------------ Total expenses 504,397 795,164 ------------ ------------ OPERATING LOSS (646,307) (181,683) ------------ ------------ OTHER INCOME (EXPENSE) Interest income 25,914 37,900 Financing expense (38,651) -- Interest expense (53,391) (101,469) Gain on sale of assets 26,334 27,132 ------------ ------------ Total other income (expense) (39,794) (36,437) ------------ ------------ LOSS BEFORE INCOME TAXES (686,101) (218,120) INCOME TAXES -- -- ------------ ------------ NET LOSS (686,101) (218,120) ------------ ------------ OTHER COMPREHENSIVE INCOME (LOSS) Change in market value of securities -- (29,310) Provision for forward sales derivative marked-to-market 283,187 (78,340) ------------ ------------ Total other comprehensive income (loss) 283,187 (107,650) ------------ ------------ NET COMPREHENSIVE LOSS $ (402,914) $ (325,770) ============ ============ BASIC AND DILUTED NET LOSS PER SHARE $ (0.02) $ (0.01) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 38,752,088 38,171,507 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 2
WESTERN GOLDFIELDS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Preferred Stock Common Stock ------------------------ ------------------------- Additional Number Number Paid-in of Shares Amount of Shares Amount Capital ------------ ---------- ----------- ----------- ------------- Balance, December 31, 2003 -- $ -- 38,149,078 $ 381,491 $ 10,057,384 Options issued for directors' services -- -- -- -- -- Options issued for officers' services -- -- -- -- -- Options issued for services by related party -- -- -- -- -- Options issued for services by employees -- -- -- -- -- Options issued for services by consultants -- -- -- -- -- Common stock issued for services -- -- 109,000 1,090 86,110 Common stock issued for penalty -- -- 444,232 4,442 (4,442) Return of capital for penalty -- -- -- -- (257,152) Extend warrants due to expire -- -- -- -- -- Common stock issued for exercise of warrants -- -- 20,000 200 9,400 Preferred stock and warrants issued for cash 1,000,000 10,000 -- -- 475,000 Retire treasury stock -- -- (500) (5) 5 Net loss for the year ended December 31, 2004 -- -- -- -- -- Other comprehensive income -- -- -- -- -- ------------ ---------- ---------- ----------- ------------ Balance, December 31, 2004 1,000,000 10,000 38,721,810 387,218 10,366,305 Options issued for directors' services (unaudited) -- -- -- -- -- Options issued for officers' services (unaudited) -- -- -- -- -- Options issued for services by employees (unaudited) -- -- -- -- -- Options issued for services by consultants (unaudited) -- -- -- -- -- Common stock issued for services (unaudited) -- -- 75,000 750 29,750 Expiration of warrants & options (unaudited) -- -- -- -- 12,108 Extend warrants due to expire (unaudited) -- -- -- -- -- Net loss for the three months ended March 31, 2005 (unaudited) -- -- -- -- -- Other comprehensive income (unaudited) -- -- -- -- -- ------------ ---------- ---------- ----------- ------------ Balance, March 31, 2005 (unaudited) 1,000,000 $ 10,000 38,796,810 $ 387,968 $ 10,408,163 ============ ========== ========== =========== ============ Stock Options Other and Accumulated Comprehensive Warrants Deficit Income (Loss) Total --------------- -------------- ---------------- ------------- Balance, December 31, 2003 $ 3,601,478 $ (4,584,552) $ (792,163) $ 8,663,638 Options issued for directors' services 451,095 -- -- 451,095 Options issued for officers' services 579,998 -- -- 579,998 Options issued for services by related party 22,500 -- -- 22,500 Options issued for services by employees 84,628 -- -- 84,628 Options issued for services by consultants 19,600 -- -- 19,600 Common stock issued for services -- -- -- 87,200 Common stock issued for penalty -- Return of capital for penalty -- -- -- (257,152) Extend warrants due to expire 5,319 -- -- 5,319 Common stock issued for exercise of warrants (600) -- -- 9,000 Preferred stock and warrants issued for cash 15,000 -- -- 500,000 Retire treasury stock -- -- -- -- Net loss for the year ended December 31, 2004 -- (4,418,813) -- (4,418,813) Other comprehensive income -- -- 104,696 104,696 ------------ ------------ ------------ ------------ Balance, December 31, 2004 4,779,018 (9,003,365) (687,467) 5,851,709 Options issued for directors' services (unaudited) 46,213 -- -- 46,213 Options issued for officers' services (unaudited) 57,626 -- -- 57,626 Options issued for services by employees (unaudited) 11,700 -- -- 11,700 Options issued for services by consultants (unaudited) 900 -- -- 900 Common stock issued for services (unaudited) -- -- -- 30,500 Expiration of warrants & options (unaudited) (12,108) -- -- -- Extend warrants due to expire (unaudited) 5,333 -- -- 5,333 Net loss for the three months ended March 31, 2005 (unaudited) -- (686,101) -- (686,101) Other comprehensive income (unaudited) -- -- 283,187 283,187 ------------ ------------ ------------ ------------ Balance, March 31, 2005 (unaudited) $ 4,888,682 $ (9,689,466) $ (404,280) $ 5,601,067 ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
3
WESTERN GOLDFIELDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, ----------------------------- 2005 2004 ----------- ----------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (686,101) $ (218,120) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and depletion 254,219 54,887 Amortization of loan fees 92,980 84,145 (Gain) on sale of assets and investments (26,334) (27,132) Interest accrued on investments - reclamation and remediation (20,314) (30,260) Common stock, options and warrants issued for services 146,939 434,441 Cost of extending expiry date of warrants 5,333 -- Exploration fees funded by stock -- 80,000 Changes in assets and liabilities: Decrease (increase) in: Restricted cash -- 3,815,400 Accounts receivable (392) (737,111) Inventories 27,675 (473,997) Prepaid expenses 202,890 141,702 Long Term Deposits (2,369) -- Increase (decrease) in: Accounts payable (46,768) 232,729 Accrued expenses 32,165 (2,482) Accrued expensed - related party (13,718) (22,500) Accrued interest expense (9,063) -- ----------- ----------- Net cash provided (used) by operating activities (42,858) 3,331,702 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property & equipment, including Construction in Progress (10,853) (317,565) Proceeds from sale of investments 47,734 -- Proceeds from sale of assets -- 407,231 ----------- ----------- Net cash provided by investing activities 36,881 89,666 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on loan payable (750,000) (750,000) ----------- ----------- Net cash used by financing activities (750,000) (750,000) ----------- ----------- Change in cash (755,977) 2,671,368 Cash, beginning of period 1,534,778 373,500 ----------- ----------- Cash, end of period $ 778,801 $ 3,044,868 =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest $ 62,454 $ 359,225 =========== =========== Cash paid for income taxes $ -- $ -- =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
4 WESTERN GOLDFIELDS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such consolidated financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company's most recent audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004. Operating results for the three months ended March 31, 2005 may not be indicative of the results that may be expected for the year ending December 31, 2005. NOTE 2 - GOING CONCERN The Company's continued existence and plans for future growth depend on its ability to obtain the capital necessary to operate through the generation of revenue and the issuance of additional debt or equity. The Company may need to raise additional capital to fund normal operating costs and exploration and development efforts. If the Company is not able to generate sufficient revenues and cash flows or obtain additional or alternative funding, it will be unable to continue as a going concern. As disclosed in the report of independent auditors on the Company's financial statements in the Company's Annual Report or Form 10-KSB for the fiscal year ended December 31, 2004, the Company's losses from operations, lack of sufficient revenue to support operational cash flows and working capital deficit raise substantial doubt regarding its ability to continue as a going concern. NOTE 3 - INVENTORIES Inventories consist of the following: March 31, December 31, 2005 2004 ---------------- ---------------- (unaudited) Bullion $ -- $ -- Metal-in-process 1,408,380 1,476,058 Supplies 138,194 98,191 ---------------- ---------------- $ 1,546,574 $ 1,574,249 ================ ================ Metal-in-process inventory contained approximately 4,054 and 4,004 ounces of gold as of March 31, 2005, and December 31, 2004, respectively. March 31, December 31, 2005 2004 ------------ ------------ (unaudited) Beginning Metal-in Process $ 1,476,058 $ 1,634,966 Inventory Operating Costs for the Period 1,969,033 8,960,614 Depreciation, Depletion & Amortization for the Period 344,995 1,413,646 Less Cost of Metal Sales (2,381,706) (10,533,168) ------------ ------------ $ 1,408,380 $ 1,476,058 ============ ============ 5 NOTE 4 - PROPERTY AND EQUIPMENT The following is a summary of property, equipment, and accumulated depreciation at March 31, 2005 and December 31, 2004: March 31, December 31, 2005 2004 ----------- ----------- (unaudited) Buildings $ 3,550,000 $ 3,041,666 Equipment 3,465,323 3,973,657 ----------- ----------- 7,015,323 7,015,323 Less accumulated depreciation (1,405,598) (1,151,379) ----------- ----------- Net Property and Equipment $ 5,609,725 $ 5,863,944 =========== =========== Depreciation expense for the three months ended March 31, 2005 and the year ended December 31, 2004 was $254,219 and $1,151,379, respectively. The Company evaluates the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. The Company determines impairment by comparing the present value of future cash flows estimated to be generated by these assets to their respective carrying amounts. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations. NOTE 5 - STOCK OPTIONS AND WARRANTS The Company estimates the fair value of options and warrants using the Black-Scholes Option Price Calculation. The Company used the following assumptions in estimating fair value: the risk-free interest rate of 4%, volatility ranging from 20% to 30%, and the expected life of the options and warrants from two to ten years. The Company also assumed that no dividends would be paid on common stock. Some warrants may be exercised under the cash-less method requiring a corresponding reduction in the amount of common stock issued in relationship to its cash value at the time the warrants are exercised. In the first quarter of 2005, the Company granted 250,000 options exercisable for the purchase of one share of common stock each with an exercise price when vested of $.50. These options vest over a period of 12 months. The following is a summary of stock options:
Weighted Average Weighted Average Shares Exercise Price Fair Value ------------- -------------- -------------- Balance January 1, 2005 5,023,084 $ 0.78 Granted 250,000 0.50 Exercised -- -- ------------- -------------- Outstanding at March 31, 2005 5,189,750 $ 0.78 ============= ============== Exercisable at March 31, 2005 3,966,750 $ 0.77 ============= ============== Weighted average fair value of options granted during the nine months ended March 31, 2005 $ 0.29 ==============
The above stock options have been issued under an equity compensation plan approved by the directors but not by the shareholders. 6 Item 2. Plan of Operation Overview We are an independent precious metals production and exploration company focused on the western United States. In early 2003 we began exploring the possibility of acquiring the Mesquite Mine from Newmont Mining Corporation and a subsidiary of Newmont Mining Corporation. In July 2003, we issued 111,859 shares of our common stock to Newmont Mining Corporation for an exclusive option to purchase the Mesquite Mine. In November 2003, we completed the purchase of the Mesquite Mine from Newmont Mining Corporation for: o assumption of reclamation responsibility and provision of approximately $7.8 million in reclamation bonds to various governmental authorities; which have since been reduced to $7.0 million; o additional shares of our common stock and warrants to purchase our common stock. As a result of the transaction, Newmont Mining Corporation owns 3,454,468 shares of our common stock and warrants to purchase an additional 8,091,180 shares of our common stock; o a perpetual net smelter return royalty ranging from 0.5% to 2.0% on any newly mined ore; and o a net operating cash flow royalty equal to 50% of the proceeds received, minus certain operating costs, capital expenses and other allowances and adjustments, from the sale of ore or products derived from ore that was placed on the heap leach pads as of the acquisition date. The purchase included all infrastructures and permits necessary to operate the mine. In November 2003, we obtained a $6 million credit facility in connection with our acquisition of the Mesquite Mine. In addition, in November - December 2003, we conducted a private placement of 12,500,000 units consisting of two shares of our common stock and warrants to purchase an additional share of our common stock which resulted in aggregate net proceeds to us of approximately $9.1 million. The warrants are exercisable for a period of two years from the date of issuance for a purchase price of $1.00 per share, subject to anti-dilution adjustments. Production from the Mesquite Mine operations during 2004 resulted in the sale of 27,357 ounces of gold. Poured gold production (into dore bars) from the Mesquite Mine during the first three months of 2005 totaled 6,536 ounces. Management at the mine continues to optimize production schedules and leach cycle rotation in order to match gold production and sales to its forward sales commitments. During the first quarter of 2005 the average poured gold production was 556 ounces above budget. A bonding plan is in place through American Home Assurance Company for the operation and liability of the Mesquite Mine whereby the insurance company offers a series of environmental insurance programs designed to cap sponsor, vendor and partner liability for reclamation and closure costs, including cost overruns as a result of unexpected contamination, increased costs and legislative changes. The insurance company charged an initial premium based on their estimate of the net present value of the completion of the reclamation, plus an annual fee. In exchange, the insurance company insures the reclamation and closure process and provides the surety bond. We will make claims against the insurance policy and funds will be released to pay for the reclamation and closure expenditures as they are incurred. Any revenue from the sale of material is to the account of the project sponsor and any profits from cost savings in the actual program versus the bonded amount are released to the sponsors when the project bonding is released. There are two phases of the Mesquite Mine project. The continuing operations comprise leaching of minerals inventoried on the pads prior to September 2001. Various programs have been implemented since the Company took over operations from the previous operator. These include optimizing solution management programs controlling flow and application rates as well as modifications to the solution chemistry. Over the course of the past year and into 2005, management has optimized solution management within the re-leaching program. Additional modifications have been made to site infrastructure including re-commissioning of a gold refinery, construction of reagent addition pumping stations and installation of improved flow monitoring systems. 7 In 2004 we evaluated the expansion of the Big Chief open pit to the north, where a mineralized resource was estimated to contain 19 million tons of mineralized material. An internal scoping study was carried out to determine viability of mining this zone on a stand alone basis. Preliminary conclusions suggest that the optimum scenario for restarting the Mesquite project will be through the initiation of mining operations on as large a scale as possible. We intend to conduct a bankable feasibility study during 2005. Additional exploration drilling may be required to validate the previous operator's data. We are also engaged in the acquisition of advanced level precious metal properties throughout the western United States, primarily Nevada. We believe that this area may have some of the most important geological terrain conducive to hosting world-class economic gold deposits. Our goal is to obtain precious metal projects that are favorable for project development and mine production in a cost effective, efficient manner. We intend to contact other companies to explore joint venture possibilities with respect to any findings of mineralized materials on its properties. We also intend to attempt to define mineralized material on the properties that could be developed into mineable reserves and to bring reserves to production. We plan to identify and engage joint venture candidates with funds available to support the cost of defining and developing the properties to production. Currently, we entered into nonbinding letters of intent for joint venture arrangements with respect to the Lincoln Hill Property and have entered into the Mining Joint Venture Agreement on the Sunny Slope Gold Project with 321 Gold. The Sunny Slope Gold Project Mining Joint Venture Agreement covers 16 claims in Mineral County, Nevada and an area of interest including all lands within approximately one mile beyond the boundary of the claims. We filed an application to have our common stock listed on the Toronto Stock Exchange on May 12, 2005. We anticipate listing on the Toronto Stock Exchange in June 2005, subject to obtaining all required regulatory and stock exchange approvals. Results of Operations Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31, 2004 During the three months ended March 31, 2005, we had net revenues of $2,239,796 from the sale of 6,348 ounces of gold produced from the Mesquite Mine. During the three month period ended March 31, 2004, the Company had net revenue of $2,629,498 from the sale of 7,172 ounces of gold. Sales during the first quarter of 2004 included ounces produced in November and December of 2003 Mine operating costs were $1,586,341 in the three months ended March 31, 2005 compared to $1,902,098 for the three months ended March 31, 2004. During the first quarter of 2004 we had an outside contractor managing the mine as well as temporary employees. Mine site administration was $371,817 in the three months ended March 31, 2005 compared to $381,875 in the three months ended March 31, 2004. Depreciation, depletion and amortization were $344,995 in three months ended March 31, 2005 compared with $193,601 in the three months ended March 31, 2004. After an increase adjustment to the inventory account of $67,679 in the three months ended March 31, 2005 compared with an adjustment in the three months ended March 31, 2004 to decrease inventory by $519,084, total cost of goods sold was $2,381,706 in the three months ended March 31, 2005 compared to $2,016,017 in the three months ended March 31, 2004. We reported a gross loss of $141,910 for the three months ended March 31, 2005 compared to a gross profit of $613,481 in the three months ended March 31, 2004. We incurred exploration expenses of $45,697 during the three months ended March 31, 2005 compared with $132,761 in the three months ended March 31, 2004. There were more land payments made during the first quarter of 2004. General and administrative expenses decreased to $458,700 during the three months ended March 31, 2005, compared with $662,403 in the three months ended March 31, 2004 due to the issuance of stock options during the first quarter of 2004. We reported an operating loss of $646,307 during the three months ended March 31, 2005 compared to an operating loss of $181,683 in the three months ended March 31, 2004. Other income/expense totaled $39,794 during the three months ended March 31, 2005 compared with other income/expense of $36,437 in the three months ended March 31, 2004. We reported a net loss of $686,101 for the three months ended March 31, 2005 compared with a net loss of $218,120 for the three months ended March 31, 2004. During the first quarter of 2004 we were building in process inventory which lowered operating costs. 8 Liquidity and Capital Resources; Recent Developments As of March 31, 2005 there is limited historical financial information upon which to base an evaluation on the company's performance. We began our operation of the Mesquite Mine in November 2003. As a result, our operating profile and the reasons for fluctuation in the expense amounts between the periods prior to and following November 2003 changed significantly. Prior to November 2003, we primarily concentrated our business on the acquisition of properties and raising funds to advance our business. After our acquisition of the Mesquite Mine, we intend to dedicate the majority of our expenditures to retrieve gold from heap leach pads or from new mining and processing at the Mesquite Mine. The expansion of operations at the Mesquite Mine; and plans for future growth of the Company depend on our ability to obtain additional capital through the issuance of additional debt or equity and through the generation of revenue. Operating cash flows commenced in the first quarter of 2004, and therefore, we have no historical comparative performance data. As of March 31, 2005, the cash balance was $778,801. As of March 31, 2005, we had an accumulated deficit of $9,689,466. As of March 31, 2005 the Company had a working capital deficit of $1,077,227. In November 2003, Western Mesquite Mines, Inc., our wholly-owned subsidiary, entered into a $6 million credit facility agreement with RMB International (Dublin) Limited and RMB Resources Limited. We guaranteed the obligations of Western Mesquite Mines, Inc. under the facility agreement and issued warrants to purchase 780,000 shares of our common stock to RMB Resources Limited. The warrants are exercisable for a period of three years from the date of the facility agreement for a purchase price of $1.00 per share, subject to adjustments. Western Mesquite Mines, Inc. commenced making principal and interest payments under this loan in January 2004. Western Mesquite Mines, Inc. made six principal payments under the facility agreement of $750,000 at the end of January, April, July and October 2004 and at the end of January and April 2005. Borrowings under the facility agreement bear interest at a base interest rate of LIBOR plus 6 percent. The facility agreement also provides for contingent additional interest if cash flows from the gold production from the materials currently located on the heap facilities in the project areas described in the facility agreement exceed certain defined levels. No additional interest has been paid under this facility to date. Western Mesquite Mines, Inc. may prepay all or part of the outstanding principal on any quarterly date after January 2004 and before the final repayment date in an amount of not less than $200,000. If Western Mesquite Mines, Inc. does not make a quarterly payment, it must pay an additional amount of not less than $750,000 on the next quarterly payment date as a reduction in principal. It is an event of default under the facility agreement if Western Mesquite Mines, Inc. fails to pay an amount of not less than $750,000 on two consecutive quarterly payment dates. In addition, Western Mesquite Mines, Inc. must pay 50% of its excess cash flow for each quarter as a prepayment of principal. Our credit facility also restricts us from making expenditures that have not been approved by the credit facility agent. Under the facility agreement, we have agreed with the credit facility agent on a corporate budget as well as a detailed operating budget for the Mesquite Mine. We provide the credit facility agent with monthly reports that reconcile the actual results with that budget. If we wish to make material expenditures not agreed to in the budget, we have to seek the credit facility agent's prior approval. In particular, the facility agreement provides that we may not dispose of, or create any encumbrance over, any assets other than in the normal course of business, or incur indebtedness in excess of $250,000. In January 2004, we closed a private placement we conducted in November - December 2003 of 12,500,000 units at a price of $0.80 per unit. Units consisted of one share of our common stock, a warrant to purchase one share of our common stock exercisable for two years at an exercise price of $1.00 per share and the right to receive one share of our common stock issued in escrow under certain circumstances. Each purchaser of a unit in the private placement was entitled to receive the additional escrow share per unit purchased if we did not close a transaction with another company before February 28, 2004 which resulted in the listing of the resulting company's securities on the Toronto Stock Exchange. We entered into a letter of intent with Tandem Resources, Ltd. for a potential merger transaction to satisfy this condition of the private placement, but we terminated the letter of intent in February 2004 due to potential tax and regulatory issues associated with the transaction. The escrow agent released the escrowed shares to the purchasers in March 2004. 9 We also agreed to register under the Securities Act of 1933, as amended, the shares of common stock issued in the private placement, issued upon exercise of the warrants issued in the private placement and shares of any resulting entity in a merger transaction. In addition, we agreed under certain circumstances, upon the request of the holders, to include those shares of our common stock in a securities registration that we undertake on our behalf or on behalf of others by June 30, 2004. In the agreements, we agreed to pay certain amounts to the holders based on 2% of the average closing sale price of our common stock for each 30 days following June 30, 2004 in which the registration statement is not effective. The Securities and Exchange Commission declared our SB-2 registration statement effective on August 12, 2004, and these amounts totaled $479,267. We have offered to satisfy the payment of these amounts with shares of our common stock and have issued 446,398 shares of our common stock to these holders to satisfy $223,299 of this obligation. In December 2004, we closed a private placement of 1,000,000 shares of our Series "A-1" Convertible Preferred Stock and warrants to purchase up to 500,000 shares of our Series "A-1" Convertible Preferred Stock for an aggregate purchase price of $500,000. We entered in a registration rights agreement with the investor whereby we agreed to prepare and file a registration statement with the Securities and Exchange Commission with respect to the common stock issuable upon conversion of the Series "A-1" Convertible Preferred Stock. We filed a registration statement on Form SB-2 in January 2005. Except for the Mesquite Mine, none of our properties has commenced commercial production. While we may attempt to generate additional working capital through the operation, development, sale or possible joint venture development of our properties, there is no assurance that any such activity will generate funds that will be available for operations. Our operations of the Mesquite Mine began in November 2003. We accumulated metal-in-process inventory during 2003 and produced 2,593 ounces of poured gold during operations in December 2003, produced an additional 27,398 ounces and sold 27,357 ounces during 2004, and kept in inventory 5,593 ounces at an outside refiner for deliveries of gold under our forward sales contract at the end of January 2005. Production for the first quarter 2005 was 556 ounces higher than budget. We have implemented programs at the mine to reduce and control monthly expenditures with the objective of reducing the operating cash cost. Sales of metal will be recorded at both the spot price and under the forward sales agreement in 2004, with the related costs charged from inventory to cost of goods sold. As part of our credit facility agreement, we entered into a cash flow hedging program under which we sold forward through RMB International (Dublin) Limited 26,399 ounces of gold at $382.95 per ounce, or approximately 50% of expected production of gold from the heaps. These ounces were scheduled for delivery beginning January 30, 2004 and every three months thereafter until October 30, 2005 as follows: 2,380, 4,368, 3,733, 3,324, 3,577, 3,523, 2,897 and 2,597 ounces. On each of the settlement dates, we settle in cash for the difference between the sales price and the hedged price times the number of scheduled ounces to be sold for that three month period. Unlike a conventional hedge, we were not required to put up collateral, and we are not subject to any margin requirements. Since we sold gold for more than the hedged price in the periods ended January 31, April 30, and July 31, 2004, we made a payment under the hedge of $64,379 as of January 31, 2004; $24,242 as of April 30, 2004; $31,544 as of July 31, 2004; October 29, 2004 and January 29, 2005 we made payments under the hedge of $64,379, $24,242, $31,544, $141,603 and $185,838 respectively and reduced revenue by corresponding amounts. As of April 29, 2005, the Company paid approximately $447,606 to RMB International (Dublin) Limited under this agreement and had 5,494 ounces of gold outstanding subject to this hedge facility. We have a long-term strategy of selling our gold production at prevailing market prices. Under our risk management policy, we periodically review our exposure under this hedge and adjust our risk profile accordingly. Furthermore, to manage a portion of our revenue risk and provide additional comfort to the lender under our facility agreement, we entered into this forward sale. We believe this program to be effective for its purpose and do not expect that it will be ineffective during the hedge period. 10 Our calculation of the derivative effects of the forward sales contract as of March 31, 2005 and December 31, 2004 is as follows:
March 31, 2005 December 31, 2004 Afternoon Fix on the London Metal Exchange $ 427.50 $ 438.00 Undelivered ounces of gold sold forward 9,017 12,594 (Gain) Loss recognized as other comprehensive income ($283,187) $(176,921) Value of provision for forward sales derivative - $ 395,680 $ 678,867 marked-to-market
We are currently spending approximately $100,000 per month for our ongoing corporate functions. In addition, we plan to spend between $300,000 and $500,000 over the next 12 months to advance our current portfolio of properties or to acquire and advance other strategically important projects. We have not budgeted specific amounts for exploration or development for any of our properties. Our credit facility restricts us from making expenditures that have not been approved by the credit facility agent. We may need to obtain additional funds, either through equity offerings or debt, to fund our general and administrative expenses, make the advance royalty payments required on our properties and conduct exploration programs on our properties. Failure to obtain such additional financing will result in the loss by us of our interests in our mineral properties. These conditions raise doubt as to the Company's ability to continue as a going concern. Management's plans for the continuation of the Company as a going concern include financing the Company's operations through issuance of its common stock and the eventual profitable development of its mining properties. We have commenced the process for an offering of our securities in Canada and the listing of our common stock on the Toronto Stock Exchange. The terms of the offering, including the amount to be raised, have not been finalized. There are no assurances, however, with respect to the future success of these plans. The financial statements do not contain any adjustments which might be necessary if the Company is unable to continue as a going concern. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Forward Looking Statements This report contains several "forward-looking statements." Forward-looking statements are those that use words such as "believe," "expect," "anticipate," "intend," "plan," "may," "will," "likely," "should," "estimate," "continue," "future" or other comparable expressions. These words indicate future events and trends. Forward-looking statements are our current views with respect to future events and financial performance. These forward-looking statements are subject to many assumptions, risks and uncertainties, many of which are beyond our control, that could cause actual results to differ significantly from historical results or from those we anticipated. The most significant risks are detailed from time to time in our filings and reports with the Securities and Exchange Commission. Item 3. Controls and Procedures Our management, with the participation of our Principal Executive Officer and Principal Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Principal Executive Officer and Principal Accounting Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. 11 There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended March 31, 2005 we issued shares of our common stock to IW Exploration and Mountain Gold Exploration, Inc. for lease payments due under the Exploration and Mining Lease Agreement we entered into in November 2004. Number of Exercise Vesting Officer/Director Options Price Date Value ---------------- ------- ----- ---- ----- IW Exploration 12,500 $0.48 2/10/2005 $6,000 Mountain Gold Exploration 12,500 $0.48 2/10/2005 6,000 IW Exploration 25,000 $0.37 3/01/2005 9,250 Mountain Gold Exploration 25,000 $0.37 3/01/2005 9,250 Total 75,000 $30,500 ====== ======= During the quarter ended March 31, 2005, we issued options to purchase shares of our common stock with a promotion to an officer of the Company as follows: Number of Exercise Vesting Name Common Shares Price Date Value ---- ------------- ----- ---- ----- Becky Corigliano 50,000 $0.50 3/7/2005 $25,000 Becky Corigliano 100,000 $0.50 9/7/2005 50,000 Becky Corigliano 100,000 $0.50 3/7/2006 50,000 Total 250,000 $125,000 ======= ======== The options issued to the officer are exercisable for three-year periods from their respective vesting dates. These transactions did not involve any underwriters, underwriting discount or commissions, or any public offering, and we believe that the transactions were exempt from the registration by virtue of Section 4(2) of the Securities Act of 1933, as amended. The investors represented their intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The investors had adequate access, through their relationships with us, to information about us. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 12 Item 6. Exhibits Number Description ------ ----------- 31.1 Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Accounting Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Principal Executive Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 32.2 Certification of Principal Accounting Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 13 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WESTERN GOLDFIELDS, INC. Date: May 20, 2005 /s/ Thomas K. Mancuso ----------------------------------- Thomas K. Mancuso President Principal Executive Officer Date: May 20, 2005 /s/ Becky Corigliano ----------------------------------- Becky Corigliano Treasurer and Secretary Principal Accounting Officer EXHIBIT INDEX Number Description ------ ----------- 31.1 Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Accounting Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Principal Executive Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 32.2 Certification of Principal Accounting Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002