New Accounting Pronouncement
In January 2010, the Financial Accounting Standards Board issued authoritative guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements, and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures, which are effective for annual periods beginning after December 15, 2010. The adoption of the above guidance did not impact America West’s financial position, results of operations or cash flows.
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No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.
NOTE 2 – GOING CONCERN
As shown in the accompanying consolidated financial statements, America West had a working capital deficit of $26,429,243 and an accumulated deficit of $27,926,956 as of March 31, 2010. These conditions raise substantial doubt as to America West’s ability to continue as a going concern. Management is attempting to raise additional capital through sales of stock and enhance the operations of Hidden Splendor to achieve cash-positive operations. The consolidated financial statements do not include any adjustments that might be necessary if America West is unable to continue as a going concern.
NOTE 3 – DEBT
On January 27, 2010, America West and its subsidiaries signed a note to borrow a total of $1,000,000, consisting of six draws. The note bears interest at the rate of 10% per annum and matured on March 1, 2010. Two of the draws occurred in December 2009 and totaled $325,000. The remaining 4 draws occurred in January 2010 and totaled $675,000. A total of 10,000,000 common shares were issued in connection with the debt, as the draws occurred. The relative fair value of the 6,750,000 shares issued in 2010 was $400,054 and was recorded as a debt discount. The debt discount was fully amortized and recorded as interest expense over the term of the debt using the effective interest method. The note is secured by substantially all of the assets of America West Services, primarily consisting of mining equipment and a coal purchase agreement with a third party. America West has guaranteed the note.
During February and March 2010, America West and its subsidiaries signed four notes to borrow a total of $930,000. The notes bear interest at 10% per annum and matured on March 15, 2010 and March 31, 2010. A total of 9,300,000 common shares were issued in connection with the debt. The relative fair value of these shares was $568,292 and was recorded as a debt discount. The debt discount was fully amortized and recorded as interest expense over the term of the debt using the effective interest method.
A summary of debt activity for the three months ended March 31, 2010 is as follows:
| | |
Balance at December 31, 2009 | | |
| $ | 13,885,294 |
Borrowings Principal payments | | 1,605,000 (259,035) |
Balance at March 31, 2010 Less: current maturities | | 15,231,264 (14,756,259) |
| $ | 475,000 |
NOTE 4 – RELATED PARTY TRANSACTIONS
In February 2010, an entity controlled by a director of America West loaned the Company $50,000. The loan bears interest at 10% per annum and matured on March 15, 2010. In addition, 500,000 common shares were issued with the debt. The relative fair value of these shares is $30,769 and was recorded as a debt discount. The discount was fully amortized over the life of the loan using the effective interest rate method.
Hidden Splendor ships a portion of its coal utilizing a trucking company owned by America West's Chief Executive Officer (CEO). For the three months ended March 31, 2010,
Hidden Splendor paid trucking fees amounting to $157,000 which is included in coal production costs in the consolidated statements of operations.
NOTE 5 – STOCKHOLDERS’ EQUITY
Common stock.
During the three months ended March 31, 2010, America West issued 1,684,000 common shares for services rendered valued at $262,370.
During the three months ended March 31, 2010, 654,000 common shares valued at $104,640 were issued to America West’s Chairman for pledging personal assets as collateral for certain debt obligations of the Company. These shares were accounted as loan costs and charged to interest expense.
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During the three months ended March 31, 2010, America West issued 16,550,000 common shares with debt. The relative fair value of the shares was determined to be $999,115 and was recorded as a discount on the debt. See Notes 3 and 4 for details.
During the three months ended March 31, 2010, 350,000 previously issued common shares were cancelled.
Options
On March 26, 2010, America West granted employees and officers options to purchase an aggregate 8,260,000 common shares at an exercise price of $0.20. The options vest 100% on March 24, 2011 and have a term of the earlier of 1) 3 years from the vesting date, or 2) six months upon the employee's termination. The fair value of the options was determined to be $1,141,730 using the Black-Scholes stock option valuation model. The significant assumptions used in the valuation were: the exercise price noted above; the market value of America West's common stock on March 26, 2010, $0.16; expected volatility of 194.60%; risk free interest rate of 1.34%; and an expected term of 2.5 years. During the three months ended March 31, 2010, $15,346 of this fair value was expensed and the remaining $1,126,384 will be expensed over the remaining vesting period of the options.
A summary of option transactions for the three months ended March 31, 2010 is as follows:
| | | | |
| | March 31, 2010 |
| | Options | | Wtd. Avg Exercise Price |
Outstanding at December 31, 2009 | | 6,747,500 | $ | 0.30 |
Granted | | 8,260,000 | $ | 0.20 |
Exercised | | - | $ | - |
Forfeited | | - | $ | - |
Expired | | - | $ | - |
Outstanding at March 31, 2010 | | 15,007,500 | $ | 0.24 |
Exercisable at March 31, 2010 | | 4,025,000 | $ | 0.31 |
At March 31, 2010, the range of exercise prices and the weighted average remaining contractual life of the options outstanding were $0.01 to $0.45 and 3.72 years, respectively. The intrinsic value of the exercisable options outstanding at March 31, 2010 was $160,800. The weighted average grant date fair value of the options granted during the three months ended March 31, 2010 was $0.14.
Warrants
On March 1, 2010, America West entered into a six month consulting agreement with a third party whereby America West granted 100,000 warrants to purchase common shares. 50,000 of the warrants, with an exercise price of $0.23 per share are exercisable immediately. The remaining 50,000 warrants, with an exercise price of $0.27 per share are exercisable on June 1, 2010. The warrants have a term of three years. The fair value of the warrants was determined to be $15,328 using the Black-Scholes stock option valuation model. The significant assumptions used in the valuation were: the exercise price noted above; the market value of America West's common stock on March 1, 2010, $0.18; expected volatility of 240.90%; risk free interest rate of 1.34%; and an expected term of three years. During the three months ended March 31, 2010, $10,253 of this fair value was expensed and the remaining $5,075 will be expensed over the remaining vesting period of the warrants.
On March 26, 2010, America West granted the Chairman of America West warrants to purchase an aggregate 3,949,543 common shares at an exercise price of $0.20. The warrants vested immediately and have a term of 3 years. The fair value of the warrants was determined to be $603,843 using the Black-Scholes stock option valuation model. The significant assumptions used in the valuation were: the exercise price noted above; the market value of America West's common stock on March 26, 2010, $0.16; expected volatility of 236.24%; risk free interest rate of 1.64%; and an expected term of 3 years. During the three months ended March 31, 2010, the fair value of $603,843 was fully charged to expense.
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A summary of warrant transactions for the three months ended March 31, 2010 is as follows:
| | | | |
| | March 31, 2010 |
| | Options | | Wtd. Avg Exercise Price |
Outstanding at December 31, 2009 | | 38,660,000 | $ | 0.09 |
Granted | | 4,049,543 | $ | 0.20 |
Exercised | | - | $ | - |
Forfeited | | - | $ | - |
Expired | | - | $ | - |
Outstanding at March 31, 2010 | | 42,709,543 | $ | 0.10 |
Exercisable at March 31, 2010 | | 29,659,543 | $ | 0.14 |
At March 31, 2010, the range of exercise prices and the weighted average remaining contractual life of the warrants outstanding were $0.01 to $0.42 and 5.34 years, respectively. The intrinsic value of the warrants exercisable at March 31, 2010 was $2,010,000. The weighted average grant date fair value of the warrants granted during the three months ended March 31, 2010 was $0.15.
NOTE 6 – DERIVATIVES
As of March 31, 2010, America West has an aggregate of 25,072,500 outstanding warrants containing exercise price reset provisions that are classified as derivative liabilities. In addition, on March 26, 2010, America West issued more common shares and instruments potentially convertible into common shares than the number of authorized common shares. As a result, under ASC 815-15, 4,587,043 warrants that were previously classified as equity, were reclassified to derivative liabilities. Consequently, America West recorded a derivative liability for these warrants equivalent to their initial fair value of $662,835 and reduced additional paid in capital by the same amount. These derivative instruments are then marked to market at each reporting period with the corresponding changes in fair value charged to derivative gain or loss.
The fair value of these liabilities as of March 31, 2010 totaled $4,040,693. The change in the fair value of these instruments from December 31, 2009 to March 31, 2010 of $181,988 was recorded as a derivative loss during the three months ended March 31, 2010. The Black Scholes stock option valuation model was used to determine the fair values. The significant assumptions used in the March 26, 2010 valuation were: the exercise prices ranging from $0.20 to $0.42; the market value of America West’s common stock on March 26, 2010, $0.16; expected volatilities between 183.08% and 236.89%; risk free interest rates of 1.64%; and remaining contract terms between 0.52 and 3.00 years. The significant assumptions used in the March 31, 2010 valuation were: the exercise prices ranging from $0.01 to $0.42; the market value of America West’s common stock on March 31, 2010, $0.14; expected volatilities between 166.6% and 237.93%; risk free interest rate of 1.64% and 2.08%; and r emaining contract terms between 0.50 and 3.78 years.
Fair value measurement
America West values its derivative instruments under FASB ASC 820 which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). America West utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. America West classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
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Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
America West uses Level 2 to value its derivative instruments.
The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on March 31, 2010.
| | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Level 4 |
Assets | | | | | | | | | | | |
None | $ | - | | $ | - | | $ | - | | $ | - |
| | | | | | | | | | | |
Liabilities | | | | | | | | | | | |
Derivative Financial instruments | $ | - | | $ | 4,040,693 | | $ | - | | $ | 4,040,693 |
NOTE 7 – COMMITMENTS & CONTINGENCIES
In March 2010, America West entered into a six-month agreement, engaging a consultant for total cash compensation of $24,000 over the six-month period. In addition, pursuant to the agreement, America West issued the consultant 134,000 common shares and 100,000 warrants to purchase common shares during the three months ended March 31, 2010.
NOTE 8 – SUBSEQUENT EVENTS
On April 5, 2010, America West borrowed $70,000 from a third party. The loan bears interest of 10% per annum and matured on April 30, 2010. In addition, 700,000 common shares were issued with this loan.
On April 21, 2010, the Chairman of America West fully paid the outstanding balance of the Company’s line of credit of $36,011.
In May 2010, America West borrowed a total of $350,000 from entities controlled by a director. These loans bear interest of 10% per annum and are due on July 31, 2010. In addition, 3,500,000 common shares were issued with these loans.
On May 17, 2010, America West extended the maturity date of certain third party loans and the related interest totaling $2.3 million to December 31, 2010. In connection with the extension of the maturity date, America West issued 23,440,880 common shares to the lender and granted the lender a royalty fee equivalent to 5% of the gross sales price of all coal purchased from third parties and sold by America West for the period from May 17, 2010 through December 31, 2016.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statement Notice When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect the Company's future plans of operations, business strategy, operating results, and financial position. Persons reviewing this report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and those actual results may differ materially from those included within the forward-looking statements as a result of various factors.
MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Management’s Discussion and Analysis should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our 2009 Annual Report filed with the SEC on Form 10-K on April 15, 2010. Our auditor's report on our consolidated financial statements contained in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2009, expressed an opinion that substantial doubt exists as to whether we can continue as an on-going business. The consolidated financial statements of the Company do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Overview
The Company is an established domestic coal producer engaged in the mining of clean and compliant (low-sulfur) coal. The majority of our coal is sold to utility companies for use in the generation of electricity. During 2010, we have entered into contracts with three customers to deliver a certain quantity of coal at fixed prices, subject to other terms and conditions that are standard in the industry. With respect to customers not subject to long-term contracts, we have short-term or market delivery and price contracts that we negotiate and perform on a continuous basis. Our strategy is to have a combination of long-term and short-term delivery contracts. We operate the Horizon Mine located in Carbon County, Utah, and we plan to expand mining operations in this mine and acquire and develop additional mining properties.
The Horizon Mine is operated through our wholly-owned subsidiary Hidden Splendor Resources, Inc. Hidden Splendor’s only business is the coal mining operation at the Horizon Mine located approximately eleven miles west of Helper, Utah in Carbon County. This mine produces what is commonly known as “steam coal,” that is, coal used to heat water to create steam which, in turn, is used to turn turbine engines to produce electricity. While steam coal primarily is sold to power companies for use in coal-fired power plants, steam coal also can be used in the production process for concrete and often is sold in the western United States for this purpose. Since 2003, the market for the coal mined from the Horizon Mine has been sold to local utilities, other coal mining operations, a concrete producer and a coal broker.
Coal mined from the Horizon Mine is loaded into trucks which haul the coal either directly to end users of the coal or to distribution facilities known as loadouts where the coal is loaded into rail cars and transported via rail to customers. The Horizon Mine is located approximately eight miles from the nearest loadout facility and approximately sixteen miles from the loadout facility most commonly used to ship our coal to end users. Hidden Splendor sells the coal mined at the Horizon Mine on a “FOB the mine” or “FOB the railcar” basis. For the “FOB the mine” basis, Hidden Splendor earns payment for the coal mined from the Horizon Mine as that coal is loaded into trucks at the mine site. Once the coal is loaded into those trucks, the coal belongs to our customers. For the “FOB the railcar” basis, Hidden Splendor earns payment for the coal mined from the Horizon Mine as that coal is loaded into the railcar at the railroad loadout fac ility. Once the coal is loaded into those railcars, the coal belongs to our customers.
Hidden Splendor Bankruptcy & Plan of Reorganization
On October 15, 2007, Hidden Splendor filed a Chapter 11 Petition in the United States Bankruptcy Court for the District of Nevada as a debtor in possession. Hidden Splendor’s operations have continued since the petition, and the company has operated as a Debtor in Possession. On December 8, 2008, Hidden Splendor’s Plan of Reorganization (the “Plan”) was formally confirmed by the U.S. Bankruptcy Court for the District of Nevada to emerge from Chapter 11 bankruptcy protection. The Plan became effective on December 19, 2008, at which time the subsidiary officially emerged from bankruptcy. In connection with the Plan, the Company paid an initial $500,000 “administrative earmark contribution” payment and an initial $2,250,000 “Plan Funding Contribution” payment, which were allocated to the payment of professional fees, taxes, and initial settlement payments to various creditors. Additionally, the Plan provides for payments to creditors ov er time in an aggregate principal amount of not less than approximately $10,000,000 and up to approximately $10,700,000 over a period not exceeding seven years from the effective date of the Plan.
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After all payments under the Plan are made, certain classified creditors will receive a total principal amount of approximately $8,300,000 as follows: (i) secured creditors will receive an aggregate principal amount of approximately $6,000,000 amortized in equal monthly installments of $94,879 per month, maintaining a lien on the Horizon Mine as collateral for the obligations; (ii) the Internal Revenue Service and certain State of Utah tax authorities will collectively receive an aggregate principal amount $1,800,000 amortized in equal quarterly payments of $162,156 to be paid over a period continuing to the earlier of sixty months from the petition date or forty-six months from the effective date of the Plan; and (iii) the Howard Kent, Inc. Profit Sharing Plan will receive an aggregate principal amount of $475,000 to be paid (A) in interest only payments at 8.1% for the first 24 months immediately following the effective date of the Plan, and (B) after 24 months of intere st only payments, commencing in the 25thmonth immediately following the effective date of the Plan, in payments of both principal and interest fully amortizing for a period of an additional 24 months. Hidden Splendor is current on payments to its secured creditor as of the date of this Report. However, the delinquency on payments of other loans to third parties and as outlined herein result in Hidden Splendor being in default on its secured creditor loan. Hidden Splendor is delinquent on the $162,156 payment due March 31, 2010 to the Internal Revenue Service and the State of Utah tax authorities as of the date of this Report. The Company is currently working to remedy the aforementioned defaults. As of the date of this Report, no parties had provided the Company a notice default, nor has any party to the Plan filed a notice of default under the Plan with the bankruptcy court.
Hidden Splendor’s general unsecured creditors were owed approximately $3,400,000 as of the date of the Plan. Under the Plan, general unsecured creditors will receive no less than 50% and up to 70% of their respective allowed claims, or a minimum principal amount of approximately $1,700,000 and a maximum principal amount of approximately $2,380,000. On the effective date of the Plan, general unsecured creditors received an initial distribution of 10% of their respective allowed claims from the Plan Funding Contribution, or approximately $340,000. Thereafter, assuming the general unsecured creditors receive 70% of their respective allowed claims, the general unsecured creditors will receive semi-annual payments from a disbursing agent continuing for the duration of the Plan term. Hidden Splendor will pay the disbursing agent in equal quarterly installments of approximately $190,000 per quarter over the Plan term. If, however, Hidden Splendor pays the general unsecured c reditors 60% of the allowed general unsecured creditor claims within twenty-four months following the effective date of the Plan, then no additional payments will be due and owing to the general unsecured creditors. Hidden Splendor has not made any payments to general unsecured creditors in excess of the aforementioned required quarterly payments as of the date of this Report. Insider claims will receive no distributions. Hidden Splendor is current on the $190,000 quarterly payments due to its general unsecured creditors per the Plan as of the date of this Report.
Company Obligations under the Plan. Under the Plan, America West must pay all of Hidden Splendor’s post-petition liabilities that Hidden Splendor cannot pay, in the ordinary course of business, in an amount not to exceed $1,560,000. In the event the Company borrows money or otherwise incurs a liability to fund capital expenditures after Hidden Splendor’s Plan becomes effective, Hidden Splendor may make payments to service such debt up to $13,500 for every $1,000,000 dollars borrowed and made available to Hidden Splendor. Hidden Splendor may make additional payments to the Company provided certain Plan repayment benchmarks are achieved.
Results of Operations for the Three Months Ended March 31, 2010 Compared to March 31, 2009
Material changes in financial statement line items
The following table presents statements of operations data for each of the periods indicated and presents the percentage of change in each line item from one period to the next.
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| | | | | | | |
| Three Months Ended | | Percentage |
| March 31, | | Increase |
| 2010 | | 2009 | | (Decrease) |
| | | | | | | |
Coal sales | $ | 1,083,104 | | $ | 1,790,489 | | (40%) |
Machine repair services | | 17,817 | | | 37,122 | | (52%) |
Total revenue | | 1,100,921 | | | 1,827,611 | | (40%) |
| | | | | | | |
Coal production costs | | 2,311,484 | | | 1,551,003 | | 49% |
Coal purchases | | 15,033 | | | - | | 100% |
Machine repair costs | | 112,650 | | | 29,327 | | 284% |
Total cost of revenue | | 2,439,167 | | | 1,580,330 | | 54% |
| | | | | | | |
Gross profit (loss) | | (1,338,246) | | | 247,281 | | 641% |
| | | | | | | |
Operating expenses: | | | | | | | |
General and administrative expenses | | 1,883,249 | | | 1,774,783 | | 6% |
| | | | | | | |
Loss from operations | | (3,221,495) | | | (1,527,502) | | (111%) |
| | | | | | | |
Other income (expenses): | | | | | | | |
Interest income | | 54 | | | 5,777 | | (99%) |
Interest expense | | (1,562,629) | | | (351,174) | | 345% |
Change in derivative fair value | | (181,988) | | | 3,974,319 | | (105%) |
Total other income (expenses) | | (1,744,563) | | | 3,628,922 | | (148%) |
| | | | | | | |
Net income (Loss) | $ | (4,966,058) | | $ | 2,101,420 | | (336%) |
We had revenue for the three months ended March 31, 2010 of $1.1 million, a 40% decrease from revenues of $1.8 million for the same three month period in 2009. All coal sales revenue was related to coal produced from our Horizon coal mine operated by Hidden Splendor. The decrease in revenues was primarily attributable to lower demand for coal during the three months of 2010 compared to 2009.
Our production costs during the three months ended March 31, 2010 were $2.3 million, an increase of 49% over the production costs of $1.5 million reported for the three months ended March 31, 2009. Production costs increased primarily due to:
1)
Approximately $0.5 million increase in depletion expense in 2010 associated with mine development costs capitalized in prior periods. Capitalized mine development costs were higher during 2010 as compared to 2009, resulting in higher depletion expense.
2)
Approximately $0.2 million increase in freight costs in 2010 due to coal shipped during the period being on “FOB the railcar” delivery terms. Under these delivery terms, our Company is responsible for freight costs to ship the coal to the loadout facility. During the same period in 2009, most of our shipments were “FOB the mine”, which required our customer to be responsible for freight costs.
We had a negative gross margin of $1.3 million during the three months ended March 31, 2010, a decrease of $1.6 million compared to the first quarter of 2009. The negative gross margin was attributed to lower coal sales and higher production costs as outlined above.
General and administrative expenses for the three months ended March 31, 2010 totaled $1.9 million, an increase of 6% from general and administrative expenses of $1.8 million in the prior year’s comparable three month period. The increase is primarily attributed to higher stock option compensation expense associated with stock options being issued to management and employees during the first quarter of 2010.
Loss from operations increased 111% due to lower revenues and higher production and general and administrative costs.
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Total other expenses decreased $5.4 million, or 148%, in the first three months of 2010 from other expenses of $1.7 million reported for the three months ended March 31, 2009. The change was primarily due to a negative change of approximately $4.2 million in the derivative fair value, as well as approximately $1.1 million increase in interest expense relate to a higher level of debt in 2010.
For the reasons noted above, our net loss for the three months ended March 31, 2010 of $5 million increased 136% from a net income of $2.1 million for the three months ended March 31, 2009.
Liquidity and Capital Resources
Beginning in September 2009, a few of our major customers either ceased or decreased their acceptance of our coal due to a buildup of coal inventories in the western United States. These unforeseen circumstances in demand resulted in decreased cash flows from operations during the fourth quarter of 2009 and through April 2010. We have recently executed additional coal sales contracts and have seen demand for our coal increase. However, the deficient cashflows from operations due to lower sales since the fall of 2009 have resulted in a poor current liquidity position. As a result, we need to raise additional capital to meet our working capital needs during 2010. Due to delinquency of payments to certain creditors by our Company in late 2009 and through the date of this Report, certain debts to both related and third parties are in default. As a result, a total of approximately $7.1 million associated with Hidden Splendor’s Bankruptcy Plan of Reorganization is in defaul t and due upon demand, of which approximately $4.5 million was previously scheduled to mature subsequent to 2010. The Company is working to remedy these defaults and, as of the date of this Report, no creditors have filed a default under the Plan with the bankruptcy court. In addition, due to the aforementioned defaults, approximately $7.8 million in other third party and related party debt, of which approximately $7 million was scheduled to mature in 2011, is now due on demand and is default. The Company has not received a notice of default of any of the aforementioned debt as of the date of this Report. In addition, the Company has approximately $237,000 in related party and third party debt that matures in 2010. In addition, we have accrued unpaid federal and state taxes and royalties of approximately $2,400,000 related to 2009 and 2010. As a result, we will likely be required to raise at least $4 million in capital to meet the aforementioned obligations and fund expected working capital required in 2010. Of this $4 million capital requirement, it is expected that approximately $3 million will be utilized to purchase equipment with the balance to be utilized for working capital purposes. Should the Company receive a notice of default and demand for immediate payment on any of the aforementioned debts, we will likely be required to raise up to a total of approximately $20 million. Our inability to obtain immediate financing from third parties will negatively impact our ability to fund operations and execute our business plan. Any failure to obtain such financing could force us to abandon or curtail our operations. There is no assurance that we can raise additional capital from external sources, the failure of which could cause us to sell assets or curtail operations. We have no credit facilities in place, and as the Company has no debt or equity funding commitments, we will need to rely upon best efforts financings. Our auditors have issued a going concern opinion for our consolidated financial statements due to the substantial doubt about our ability to continue as a going concern.
Off-Balance Sheet Arrangements
As of March 31, 2010, the Company had no off-balance sheet arrangements.
Critical Accounting Policies
Use of Estimates– The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Cash and Cash Equivalents– For purposes of reporting cash flows, America West considers all investments purchased with a maturity of three months or less to be cash equivalents. America West maintains its cash in bank deposit accounts which, at times, have exceeded federally insured limits.
Accounts Receivable– The Company’s receivables are mainly from the Company’s coal broker and are collected within a few weeks of production and shipment. As such no allowance for doubtful accounts is considered necessary.
Inventory– Inventory is stated valued at the lower of cost or market, determined by the first-in, first out method.
Property and Equipment– Property and equipment are carried at cost and include expenditures for new facilities and those expenditures that substantially increase the productive lives of existing equipment. Maintenance and repair costs are expensed as incurred. Mine development costs are capitalized and amortized by the units of production method over estimated total recoverable proven and probable reserves. Amortization of mineral rights is provided by the units of production method over estimated total recoverable proven and probable reserves.
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Property and equipment are depreciated on a straight-line basis over the assets’ estimated useful lives. Fully depreciated property and equipment still in use are not eliminated from the accounts.
The Company assesses the carrying value of its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing estimated undiscounted cash flows expected to be generated from such assets to their net book value. If net book value exceeds estimated cash flows, the asset is written down to fair value. When an asset is retired or sold, its cost and related accumulated depreciation and amortization are removed from the accounts. The difference between the net book value of the asset and proceeds on disposition is recorded as a gain or loss.
Asset Retirement Obligations –FASB ASC 410-20 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company’s asset retirement obligation (“ARO”) liabilities primarily consist of estimated costs related to reclaiming mines and related facilities in accordance with federal and state reclamation laws as defined by each mining permit.
The Company estimates its ARO liabilities for final reclamation and mine closure based upon detailed engineering calculations of the amount and timing of the future costs for a third party to perform the required work. Cost estimates are escalated for inflation, and then discounted at the credit-adjusted risk-free rate. The Company records an ARO asset associated with the initial recorded liability.
When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is amortized based on the units of production method over the estimated recoverable and probable reserves at the related mine. Accretion expense is included in the cost of produced coal. To the extent there is a difference between the liability recorded and the cost incurred, a gain or loss upon settlement is recognized.
The reclamation plan calls for a bonding and insurance requirement. The bond is the deed to residential property owned personally by the shareholders.
Income Taxes– Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are recognized for differences between the bases of assets and liabilities for financial statement and income tax purposes. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses and tax credits that are available to offset future taxable income and income taxes.
Since January 1, 2007, America West accounts for uncertain tax positions in accordance with the authoritative guidance issued by the FASB on income taxes which addresses how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to this guidance, the Company can recognize a tax
benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement.
Revenue Recognition– Hidden Splendor’s revenues are generated under sales contracts with three coal customers. The terms of the contract are “FOB the mine” or “FOB the railcar”. Revenues from coal sales are recognized when the coal is loaded onto the delivery truck or railcar contracted by the customers. In addition, the customer may apply a penalty against invoices relating to deviations in delivered coal quality per the contract terms. Variances between estimated revenue and actual payment are recorded in the month the payment is received; however, differences have been minimal.
Share-Based Payments -The Company accounts for share-based payments in accordance with the authoritative guidance issued by the FASB on stock compensation, which establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under the provisions of the authoritative guidance, share-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period). The Company estimates the fair value of share-based payments using the Black-Scholes option-pricing model. Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value.
Basic and Diluted Loss per Share– Basic loss per share is calculated on the basis of weighted-average number of shares of common stock outstanding during the year. Diluted loss per share is computed using the weighted-average number of shares of common stock outstanding during the year, adjusted for the dilutive effect of common stock equivalents consisting of shares that would be issued upon exercise of common stock options and warrants.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cash and Cash Equivalents
We have historically invested our cash and cash equivalents in short-term, fixed rate, highly rated and highly liquid instruments which are reinvested when they mature throughout the year. Although our existing investments are not considered at risk with respect to changes in interest rates or markets for those instruments, our rate of return on short-term investments could be affected at the time of reinvestment as a result of intervening events.
We do not issue or invest in financial instruments or their derivatives for trading or speculative purposes. Our operations are conducted primarily in the United States and are not subject to material foreign currency exchange risk. Although we have outstanding debt and related interest expense, market risk of interest rate exposure in the United States is currently not material.
ITEM 4T : CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the SEC under the Securities Exchange Act of 1934 (“Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of the chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of the Company's “disclosure, controls and procedures” (as defined in the Exchange Act) Rules 13a-15(3) and 15-d-15(3) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and chief financial officer concluded that, as of the Evaluation Date, the Company’s disclosure, controls and procedures are not effective at providing them with material information relating to the Company as required to be disclosed in the reports the Company files or submits under the Exchange Act on a timely basis. The following material weaknesses were noted in the evaluation of our disclosure controls and procedures:
1)
There are inadequate controls over the creation and posting of journal entries to ensure they are authorized, accurate, and complete. In addition, there are no controls to ensure that all authorized journal entries have been posted and that the postings reflected the authorized journal entry.
2)
The Company has not established an Audit Committee independent of management.
3)
There are inadequate controls to ensure that subjective analyses (e.g. impairment analysis of assets) are prepared and reviewed by appropriate personnel.
4)
The Company has not consistently utilized reporting disclosure checklists to ensure the propriety and completeness of disclosures included in the financial statements filed.
5)
The Company has not consistently utilized closing checklists to ensure appropriate actions and journal entries are completed as a normal part of the closing process
6)
The Company does provide access to a technical accounting research database for personnel involved in financial reporting.
7)
The Company has not consistently reconciled significant accounts on a regular basis, and some reconciliations are not reviewed and approved by appropriate personnel.
8)
There have been a significant number of audit adjustments discovered by the Company’s independent registered accounting firm.
These material weaknesses have been disclosed to our Board of Directors and we are continuing our efforts to improve and strengthen our control processes and procedures. Our management and directors will continue to work with our auditors to ensure that our controls and procedures are adequate and effective.
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As a result of the existence of these material weaknesses as of March 31, 2010, management has concluded that we did not maintain effective internal control over financial reporting as of March 31, 2010, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework.
(b) Changes in Internal Controls.
There were no changes in the Company’s internal controls over financial reporting, known to the chief executive officer or to the chief financial officer that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in the status of legal proceedings previously reported in the Company’s 2009 Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
The risk factors below supplement and should be read in conjunction with “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
We have granted certain lenders a security interest in substantially all of our assets and our subsidiaries’ assets, and if we default under the applicable loan documents, the lenders may foreclose on our assets and the assets of our subsidiaries.
We have secured amounts owing to certain lenders with substantially all of our and our subsidiaries’ assets. If we default under the terms of the applicable loan documents, the lenders have the right to accelerate the indebtedness and foreclose upon and sell substantially all of our and our subsidiaries’ assets to repay the indebtedness, which would have a material adverse effect on our business.
Our debt instruments may adversely affect our ability to run our business.
Our substantial amount of debt and the debt of our subsidiaries, as well as the guarantees of our subsidiaries and the security interests in our assets and those of our subsidiaries, could impair our ability to operate our business effectively and may limit our ability to take advantage of business opportunities. For example, our indebtedness may:
·
limit our ability to borrow additional funds or to obtain other financing in the future for working capital, capital expenditures, acquisitions, investments and general corporate purposes;
·
limit our ability to dispose of our assets, create liens on our assets or to extend credit;
·
make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business and economic conditions;
·
limit our flexibility in planning for, or reacting to, changes in our business or industry;
·
place us at a competitive disadvantage to our competitors with less debt; and restrict our ability to merge or consolidate with another entity.
If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, our operating results may suffer.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Set forth below is certain information concerning issuances of common stock that were not registered under the Securities Act of 1933 (“Securities Act”) that occurred, but were not reported in the Form 10-K filed with the SEC on May 15, 2010 for the fiscal year ended December 31, 2009, during the first quarter of fiscal 2010 and to date:
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During November 2009 through January 2010, we entered into loan agreements with a third party pursuant to which we borrowed a principal amount of $1,150,000. In connection with the loans, we issued the third party lender 11,500,000 shares of the company’s common stock in January 2010 as additional consideration for these loans.
During January 2010, we issued 150,000 shares of common stock to consultants as settlement of cash fees incurred during 2009 related to services rendered to the Company valued at $23,250.
During February 2010, we issued 300,000 shares of common stock to consultants as settlement of cash fees incurred during 2009 related to services rendered to the Company valued at $45,000.
During February 2010, we issued 8,243,444 shares of common stock to several third party lenders as settlement of interest incurred during 2009 related to loans made by those parties in 2009.
During February 2010, we issued 4,438,778 shares of common stock to John Thomas Bridge and Opportunity Fund, managed by George Jarkesy, a director of the Company, as settlement of interest incurred during 2009 related to a loan from that related party in 2009.
During March 2010, we entered into loan agreements with a third party pursuant to which we borrowed a principal amount of $1,000,000. In connection with the loans, we issued the third party lender 10,000,000 shares of the company’s common stock as additional consideration for these loans.
During March 2010, we entered into a loan agreement with John Thomas Bridge & Opportunity Fund, an affiliate of George Jarkesy, a director of the Company, pursuant to which we borrowed a principal amount of $50,000. In connection with the loan, we issued the related party lender 500,000 shares of the Company’s common stock as additional consideration for such loan.
During March 2010, we issued 434,000 shares of common stock to consultants as settlement of cash fees incurred during 2009 for services rendered to the Company, as well as for ongoing services rendered to the Company during 2010, valued at a total of $77,440.
During March 2010, we issued 800,000 shares of common stock to Brian Rodriguez, the Company’s chief financial officer, for services rendered valued at $128,000.
During March 2010, we issued 654,000 shares of common stock to Alex Walker, the Company’s chairman, as consideration for pledging personal assets as collateral for certain bonds required for the Company’s coal mining operations. The shares were valued at $81,750.
The issuance of these equity securities were consummated pursuant to Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder on the basis that such transactions did not involve a public offering and the offerees were sophisticated, accredited investors with access to the kind of information that registration would provide. The recipient of these securities represented its intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. Unless otherwise noted, no sales commissions were paid.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Disclosure of the default is set forth in Liquidity and Capital Resources.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
Exhibits
| | | | |
Exhibit | | Description | | Location of Exhibit |
| | | | |
31.1 | | Chief Executive Officer Section 302 Certification pursuant to Sarbanes-Oxley Act. | | Included with this filing. |
| | | | |
31.2 | | Chief Financial Officer Section 302 Certification pursuant to Sarbanes-Oxley Act. | | Included with this filing. |
| | | | |
32.1 | | Chief Executive Officer Section 906 Certification pursuant to Sarbanes-Oxley Act. | | Included with this filing. |
| | | | |
32.2 | | Chief Financial Officer Section 906 Certification pursuant to Sarbanes-Oxley Act. | | Included with this filing |
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SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| AMERICA WEST RESOURCES, INC. |
| | |
| | |
| | |
Dated: May 20, 2010 | By: | /s/Dan R. Baker | |
| | Dan R. Baker |
| | Chief Executive Officer |
| | |
| By: | /s/Brian E. Rodriguez | |
| | Brian E. Rodriguez |
| | Chief Financial Officer |
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EXHIBIT INDEX
| | | | |
Exhibit | | Description | | Location of Exhibit |
| | | | |
31.1 | | Chief Executive Officer Section 302 Certification pursuant to Sarbanes-Oxley Act. | | Included with this filing. |
| | | | |
31.2 | | Chief Financial Officer Section 302 Certification pursuant to Sarbanes-Oxley Act. | | Included with this filing. |
| | | | |
32.1 | | Chief Executive Officer Section 906 Certification pursuant to Sarbanes-Oxley Act. | | Included with this filing. |
| | | | |
32.2 | | Chief Financial Officer Section 906 Certification pursuant to Sarbanes-Oxley Act. | | Included with this filing |
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