ITEM 1. DESCRIPTION OF BUSINESS
America West Resources, Inc. (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 fiscal 2009, four customers accounted for virtually all of our revenues. We expect one of these customers to account for significantly more than 10% of our revenues during 2010 as well. In addition, we have added one other major customer. We have entered into contracts with these two customers to deliver a certain quantity of coal at a fixed price during 2010, 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 additional mining properties.
The Horizon Mine is operated through our wholly owned subsidiary Hidden Splendor Resources, Inc., a Nevada corporation (“Hidden Splendor”). Hidden Splendor’s only business is the coal mining operation at the Horizon Mine located approximately 11 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 facility. Once the coal is loaded into those railcars, the coal belongs to our customers.
In 2008, we entered into an agreement with Hidden Splendor, Alexander H. Walker, Jr. and Cecil Ann Walker, both of whom were directors of the Company, to formalize the purchase by Hidden Splendor of five patented and forty-seven unpatented mining claims located in Lyon County, Nevada, known as the “Como Property” for 2,000,000 shares of our common stock. We have the right, but not the obligation, to unwind the agreement if (i) the Como Property does not appraise at $2,000,000 or greater, (ii) Hidden Splendor is unable to develop, work, lease or otherwise use the Como Property, to its sole satisfaction, within six months of the agreement or (iii) there is a material misrepresentation in the representations in the Agreement. Shares have not been issued pursuant to this agreement as of this date.
Organizational History
We were incorporated in Nevada on July 13, 1990, as Franklin Capital, Inc. On October 17, 1991, the Company changed its name to Wesco Auto Parts Corporation and again effected a name change on April 21, 1994, to Reddi Brake Supply Corporation. On March 17, 2008, we changed our name from Reddi Brake Supply Corporation to America West Resources, Inc. In addition, on January 16, 2008, the board of directors and a majority of our shareholders increased our authorized stock from 100,000,000 to 200,000,000 shares.
In August 2007, we acquired all of the outstanding stock of Hidden Splendor in exchange for the issuance of an aggregate of 52,945,200 shares of our common stock, representing 90% of the issued and outstanding Company common stock after the acquisition. Prior to the acquisition of Hidden Splendor, we had no business activities. From an accounting standpoint, Hidden Splendor is deemed the acquirer in a reverse merger whereby the parent is deemed the survivor of the reorganization. As such, our financial statements are those of Hidden Splendor.
Effective January 25, 2009, our board of directors and holders of in excess of 50% of our issued and outstanding shares of common stock authorized an amendment to the Company’s Articles of Incorporation to (i) increase the number of authorized shares of common stock from 200,000,000 shares to 300,000,000 shares and (ii) provide that the provisions of NRS 78.378 to 78.3793, inclusive (acquisition of controlling interest), are not applicable to the Company. The Company filed the amendment to its Articles of Incorporation with the Nevada Secretary of State on January 26, 2009.
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 continued following 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 over 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.
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 interest only payments, commencing in the 25th month 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. Hidden Splendor is delinquent on approximately $15,000 of interest only payments to the Howard Kent, Inc. Profit Sharing Plan 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 creditors 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 delinquent on the $190,000 quarterly payment due on March 31, 2010 to its general unsecured creditors per the Plan as of the date of this Report. The Company is currently working to remedy the aforementioned default. As of the date of this Report, no notice of default under the Plan has been filed with the bankruptcy court.
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. Additionally, America West must make capital expenditures in connection with the operations of the Horizon Mine by making available at least $2,000,000 in new equipment within 180 days of the effective date of the Plan. 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.
Default under the Plan . In the event Hidden Splendor (i) fails to pay fully any payments when due, or (ii) fails to comply with any provision of the Plan, and its creditors file a default under the Plan with the bankruptcy court, then (A) 100% (reduced only by the amounts actually paid and received by creditors) of all allowed claims of general unsecured creditors shall be immediately due and accelerated and (B) Hidden Splendor must immediately list its assets for sale. As stated above, Hidden Splendor is in default in payments to various creditors under the Plan. The Company is working to remedy the aforementioned defaults. As of the date of this Report, there has been no default to the Plan filed by Hidden Splendor’s creditors.
Consolidation with Mid-State Services, Inc . Hidden Splendor’s Chapter 11 bankruptcy proceeding was consolidated with the Chapter 11 proceeding of Mid-State Services, Inc. Pursuant to the Plan, Mid-State Services, Inc.’s assets and liabilities were assumed by Hidden Splendor.
Due to the bankruptcy of Hidden Splendor, our control over Hidden Splendor was considered compromised for financial reporting purposes. As a result, in previously filed financial statements, America West deconsolidated its investment in Hidden Splendor as of October 15, 2007, with the operations of Hidden Splendor being accounted for under the equity method of accounting and disclosed as activity related to “Investee” in those previously filed financial statements. As the Hidden Splendor subsidiary emerged from bankruptcy on December 19, 2008, the consolidated financial statements in this Report include the assets, liabilities and operations of Hidden Splendor for all periods presented through December 31, 2008.
Competition
The coal mining business is highly competitive. We face substantial competition in connection with the marketing and sale of our coal. Most of our competitors are well established, have greater financial, marketing, personnel and other resources, and have been in business for longer periods of time. Indeed, in the State of Utah, Hidden Splendor is likely the smallest producer of coal in terms of production, reserves and available capital resources. There is no assurance that we can maintain or expand our market share. The greater financial resources of such competitors will permit them to implement extensive marketing and production programs. Hidden Splendor’s place in the market for coal currently is limited to providing a supplemental supply of coal to customers who buy the majority of the coal they need from the other coal mining operations in the area. Hidden Splendor competes in this market not so much as a direct competitor with the other larger, well established coal operations, but as a supplemental source for coal.
According to the Utah Geological Survey of the Utah Division of Natural Resources, there were nine active coal mines in the State of Utah during 2008, of which the Horizon Mine was one. The same source indicates that those active coal mines produced a total of approximately 24,275,000 short tons of coal in 2008. During 2007, Hidden Splendor’s operations at the Horizon Mine yielded approximately 228,759 tons of coal, which is less than one percent of the total tons mined in Utah during that year.
Our Customers
During 2009, four customers accounted for virtually all of our revenues. We expect one of these customers to account for significantly more than 10% of our revenues during 2010 as well. We have entered into contracts with this customer to deliver a certain quantity of coal at a fixed price during 2010, 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.
Governmental Approvals
We pay a royalty to the federal government on coal sales from the Horizon Mine. During 2009, the royalty rate we paid was eight percent of all coal sales and is payable on a monthly basis. We have applied for a reduction in the royalty rate which applies to its coal sales, but as of the date of this Report, the Company has not received an approval of a reduction in the royalty it is obligated to pay.
The Horizon Mine is under the authority of an operating permit granted by the State of Utah Natural Resources Department, Division of Oil Gas and Mining (“DOGM”). Also, Hidden Splendor’s mining operations are subject to approval from the U.S. Bureau of Land Management (“BLM”). In this regard, Hidden Splendor has filed a Resource Recovery and Protection Plan (known as a “R2P2”) with the BLM and DOGM. The R2P2 details the Company’s mining plan in connection with various requirements imposed by both the state and federal governmental entities.
Government Regulation
Safety and Environmental Regulations. Our operations, like the operations of other coal companies, are subject to regulation, primarily by federal and state authorities, on matters such as: air quality standards; reclamation and restoration activities involving our mining properties; mine permits and other licensing requirements; water pollution; employee health and safety; the discharge of materials into the environment; management of materials generated by mining operations; storage of petroleum products; protection of wetlands and endangered plant and wildlife protection. Many of these regulations require registration, permitting, compliance, monitoring and self-reporting and may impose civil and criminal penalties for non-compliance.
Additionally, the electric generation industry is subject to extensive regulation regarding the environmental impact of its power generation activities, which could affect demand for our coal over time. The possibility exists that new legislation or regulations may be adopted or that the enforcement of existing laws could become more stringent, causing coal to become a less attractive fuel source and reducing the percentage of electricity generated from coal. Future legislation or regulation or more stringent enforcement of existing laws may have a significant impact on our mining operations or our customers’ ability to use coal.
While it is not possible to accurately quantify the expenditures we incur to maintain compliance with all applicable federal and state laws, those costs have been and are expected to continue to be significant. Federal and state mining laws and regulations require us to obtain surety bonds to guarantee performance or payment of certain long-term obligations, including mine closure and reclamation costs, federal and state workers’ compensation benefits, coal leases and other miscellaneous obligations. Compliance with these laws has substantially increased the cost of coal mining for domestic coal producers.
The following is a summary of the various federal and state environmental and similar regulations that have a material impact on our business:
Clean Air Act. The federal Clean Air Act and similar state and local laws that regulate air emissions affect coal mining directly and indirectly. Direct impacts on coal mining and processing operations include Clean Air Act permitting requirements and/or emissions control requirements relating to particulate matter which may include controlling fugitive dust. The Clean Air Act also indirectly affects coal mining operations by extensively regulating the emissions of fine particulate matter measuring 2.5 micrometers in diameter or smaller, sulfur dioxide, nitrogen oxides, mercury and other compounds emitted by coal-fueled power plants and industrial boilers, which are the largest end-users of our coal. Continued tightening of the already stringent regulation of emissions and regulation of additional emissions such as carbon dioxide or other greenhouse gases from coal-fueled power plants and industrial boilers could eventually reduce the demand for coal.
Surface Mining Control and Reclamation Act. The Surface Mining Control and Reclamation Act, which we refer to as SMCRA, establishes mining, environmental protection, reclamation and closure standards for all aspects of surface mining as well as many aspects of underground mining. Mining operators must obtain SMCRA permits and permit renewals from the Office of Surface Mining, which we refer to as OSM, or from the applicable state agency if the state agency has achieved primacy. A state agency may achieve primacy if the state regulatory agency develops a mining regulatory program that is no less stringent than the federal mining regulatory program under SMCRA.
SMCRA permit provisions include a complex set of requirements which include, among other things, coal prospecting; mine plan development; topsoil or growth medium removal and replacement; selective handling of overburden materials; mine pit backfilling and grading; disposal of excess spoil; protection of the hydrologic balance; subsidence control for underground mines; surface runoff and drainage control; establishment of suitable post mining land uses; and revegetation.
Once a permit application is prepared and submitted to the regulatory agency, it goes through an administrative completeness review and a thorough technical review. Also, before a SMCRA permit is issued, a mine operator must submit a bond or otherwise secure the performance of all reclamation obligations. After the application is submitted, a public notice or advertisement of the proposed permit is required to be given, which begins a notice period that is followed by a public comment period before a permit can be issued. It is not uncommon for a SMCRA mine permit application to take over a year to prepare, depending on the size and complexity of the mine, and anywhere from six months to two years or even longer for the permit to be issued. The variability in time frame required to prepare the application and issue the permit can be attributed primarily to the various regulatory authorities’ discretion in the handling of comments and objections relating to the project received from the general public and other agencies. Also, it is not uncommon for a permit to be delayed as a result of litigation related to the specific permit or another related company’s permit.
Mining Permits and Approvals. Numerous governmental permits or approvals are required for mining operations. When we apply for these permits and approvals, we may be required to prepare and present to federal, state or local authorities data pertaining to the effect or impact that any proposed production or processing of coal may have upon the environment. The authorization, permitting and implementation requirements imposed by any of these authorities may be costly and time consuming and may delay commencement or continuation of mining operations. Regulations also provide that a mining permit or modification can be delayed, refused or revoked if an officer, director or a shareholder with a 10% or greater interest in the entity is affiliated with another entity that has outstanding permit violations. Thus, past or ongoing violations of federal and state mining laws could provide a basis to revoke existing permits and to deny the issuance of additional permits.
In order to obtain mining permits and approvals from state regulatory authorities, mine operators must submit a reclamation plan for restoring, upon the completion of mining operations, the mined property to its prior condition, productive use or other permitted condition.
Under some circumstances, substantial fines and penalties, including revocation or suspension of mining permits, may be imposed under the laws described above. Monetary sanctions and, in severe circumstances, criminal sanctions may be imposed for failure to comply with these laws.
Surety Bonds. Mine operators are often required by federal and/or state laws to assure, usually through the use of surety bonds, payment of certain long-term obligations including mine closure or reclamation costs, federal and state workers’ compensation costs, coal leases and other miscellaneous obligations. Although surety bonds are usually noncancelable during their term, many of these bonds are renewable on an annual basis. The costs of these bonds have fluctuated in recent years while the market terms of surety bonds have generally become more unfavorable to mine operators. These changes in the terms of the bonds have been accompanied at times by a decrease in the number of companies willing to issue surety bonds.
Clean Water Act. The Clean Water Act of 1972 and comparable state laws that regulate waters of the United States can affect our mining operations directly and indirectly. One of the direct impacts on coal mining and processing operations is the Clean Water Act permitting requirements relating to the discharge of pollutants into waters of the United States. Indirect impacts of the Clean Water Act include discharge limits placed on coal-fueled power plant ash handling facilities’ discharges. Continued litigation of Clean Water Act issues could eventually reduce the demand for coal.
Under the Clean Water Act, states must conduct an anti-degradation review before approving permits for the discharge of pollutants to waters that have been designated as high quality. A state’s anti-degradation regulations would prohibit the diminution of water quality in these streams. In general, waters discharged from coal mines to high quality streams may be required to meet new “high quality” standards. This could cause increases in the costs, time and difficulty associated with obtaining and complying with permits, and could adversely affect our coal production.
Mine Health and Safety Laws. Stringent safety and health standards have been imposed by federal legislation since Congress adopted the Mine Safety and Health Act of 1969. The Mine Safety and Health Act of 1977 significantly expanded the enforcement of safety and health standards and imposed comprehensive safety and health standards on all aspects of mining operations. In addition to federal regulatory programs, all of the states in which we operate also have programs for mine safety and health regulation and enforcement. In reaction to several mine accidents in recent years, federal and state legislatures and regulatory authorities have increased scrutiny of mine safety matters and passed more stringent laws governing mining.
Comprehensive Environmental Response, Compensation and Liability Act. The Comprehensive Environmental Response, Compensation and Liability Act, which we refer to as CERCLA, and similar state laws affect coal mining operations by, among other things, imposing cleanup requirements for threatened or actual releases of hazardous substances that may endanger public health or welfare or the environment. Under CERCLA and similar state laws, joint and several liability may be imposed on waste generators, site owners and lessees and others regardless of fault or the legality of the original disposal activity. Although the EPA excludes most wastes generated by coal mining and processing operations from the hazardous waste laws, such wastes can, in certain circumstances, constitute hazardous substances for the purposes of CERCLA. In addition, the disposal, release or spilling of some products used by coal companies in operations, such as chemicals, could trigger the liability provisions of the statute. Thus, coal mines that we currently own or have previously owned or operated, and sites to which we sent waste materials, may be subject to liability under CERCLA and similar state laws. In particular, we may be liable under CERCLA or similar state laws for the cleanup of hazardous substance contamination at sites where we own surface rights.
Resource Conservation and Recovery Act. The Resource Conservation and Recovery Act, which we refer to as RCRA, may affect coal mining operations by establishing requirements for the proper management, handling, transportation and disposal of hazardous wastes. Currently, certain coal mine wastes, such as overburden and coal cleaning wastes, are exempted from hazardous waste management. However, the EPA has determined that national non-hazardous waste regulations under RCRA Subtitle D are needed for coal combustion products disposed in surface impoundments and landfills and used as mine-fill. Most state hazardous waste laws also exempt coal combustion products, and instead treat it as either a solid waste or a special waste. Any costs associated with handling or disposal of hazardous wastes would increase our customers’ operating costs and potentially reduce their ability to purchase coal. In addition, contamination caused by the past disposal of ash can lead to material liability.
Climate Change. One by-product of burning coal is carbon dioxide, which is considered a greenhouse gas and is a major source of concern with respect to global warming. In November 2004, Russia ratified the Kyoto Protocol to the 1992 Framework Convention on Global Climate Change, which establishes a binding set of emission targets for greenhouse gases. With Russia’s accedence, the Kyoto Protocol became binding on all those countries that had ratified it in February 2005. To date, the United States has refused to ratify the Kyoto Protocol. Although the targets vary from country to country, if the United States were to ratify the Kyoto Protocol our nation would be required to reduce greenhouse gas emissions to 93% of 1990 levels from 2008 to 2012. Future regulation of greenhouse gases in the United States could occur pursuant to future U.S. treaty obligations, statutory or regulatory changes under the Clean Air Act, federal or state adoption of a greenhouse gas regulatory scheme, or otherwise.
Endangered Species. The Endangered Species Act and other related federal and state statutes protect species threatened or endangered with possible extinction. Protection of threatened, endangered and other special status species may have the effect of prohibiting or delaying us from obtaining mining permits and may include restrictions on timber harvesting, road building and other mining or agricultural activities in areas containing the affected species.
Other Environmental Laws. We are required to comply with numerous other federal, state and local environmental laws in addition to those previously discussed. These additional laws include, for example, the Safe Drinking Water Act, the Toxic Substance Control Act and the Emergency Planning and Community Right-to-Know Act.
Costs of Compliance with Environmental Laws
We incur regular compliance costs associated with environmental laws. These costs include the costs associated with water monitoring, maintaining a reclamation bond, and the payment of reclamation fees.
Employees
As of April 14, 2010, Hidden Splendor had approximately 105 employees, all of which are full-time employees.
ITEM 1A.
ITEM 1A. Risk Factors
You should consider carefully the following risks and other information in this Annual Report, including the financial statements. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected.
RISKS RELATING TO OUR FINANCIAL CONDITION
We currently have revenues, but we are not profitable.
For the year ended December 31, 2009, the Company had coal sales of approximately $10.9 million. During this period, the Company had a net loss of approximately $8.7 million. There can be no assurance that the Company will have a gain from operations or net income in fiscal 2010 or thereafter.
We may need additional capital in 2010 to implement our business plan and/or meet our financial obligations.
During 2009, we experienced unexpected equipment failures and difficult mining conditions, which had an adverse effect on production. We also had downtime and delays in production during the third quarter as we sealed a section of the Horizon Mine and began mining in another section of the mine. There were also short-term delays in production as we deployed new mining equipment in the Horizon Mine during the third quarter. In addition, beginning at the end of September, 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 the first quarter of 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 $7.2 million associated with Hidden Splendor’s Bankruptcy Plan of Reorganization is in default and due upon demand, of which approximately $4.6 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 in 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. 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. As the Company has no debt or equity funding commitments, we will need to rely upon best efforts financings. There can be no assurance that the Company will be successful in raising the required capital. The failure to raise sufficient capital through future debt or equity financings or otherwise may cause the Company to curtail operations, sell assets, or result in the failure of our business.
Long-Term Financial Obligations of Plan of Reorganization.
Pursuant to the Plan, the Company paid $500,000 in “administrative earmark contribution” payments and $2,250,000 “plan funding contribution” payments in December 2008 and approximately $2,610,000 of payments in 2009. The Plan provides for payments to creditors over 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. However, due to the defaults on loans as mentioned above, the amounts due under the Plan may be accelerated. Additionally, the Company is required to make capital expenditures and make timely monthly and quarterly payments. The failure to comply with the terms of the Plan could result in the liquidation of the Horizon Mine, the only revenue generating asset of America West as of the date of this Report, likely resulting in the Company ceasing operations.
We will not establish a reserve or sinking fund for the payment of creditors under Hidden Splendor’s Plan.
The Company is relying on cash flow from operations and efforts to obtain financing to fund Hidden Splendor’s payment obligations under the Plan. We have not established a reserve or sinking fund in the event we cannot generate sufficient cash flow to make such payments. Our secured creditors will maintain a lien on the Horizon Mine until payment in full. Moreover, if we fail to make payments to our creditors under the Plan, then (i) 100% of all allowed claims of general unsecured creditors shall be immediately due and accelerated and (ii) the assets of Hidden Splendor, including the Horizon Mine, which is the Company’s primary asset, as of the date of this Report must be listed for sale. This would likely result in the Company ceasing operations. As stated above, the Company is currently in default with certain creditors under the Plan. The Company is working to remedy these defaults. As of the date of this Report, no creditors have filed notices of default under the Plan with the bankruptcy court.
Our business requires substantial capital investment and maintenance expenditures, which we may be unable to provide.
Our business strategy will require additional substantial capital investment in future periods. We require capital for, among other purposes, reducing debt, acquiring new supplies and equipment, acquiring additional reserves maintaining the condition of our existing equipment and maintaining compliance with environmental laws and regulations. To the extent that cash generated internally is not sufficient to fund capital requirements in 2010, we will require additional debt and/or equity financing. However, this type of financing may not be available or, if available, may not be available on satisfactory terms. Future debt financing, if available, may result in increased interest and amortization expense, increased leverage and decreased income available to fund operations. In addition, future debt financing may limit our ability to withstand competitive pressures and render us more vulnerable to economic downturns. If we fail to generate sufficient cash flow from operations in future periods or to obtain required capital in the future, we could be forced to reduce or delay capital expenditures, sell assets, and/or restructure or refinance our indebtedness, or our business may fail.
The Company’s financial statements have been prepared assuming that it will continue as a going concern.
The Company incurred a net loss of approximately $8.7 million and had a working capital deficit of $22.9 million for the year ended and as of December 31, 2009. These conditions raise substantial doubt as to our ability to continue as a going concern. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
The Company has additional debt obligations maturing in 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 $7.2 million associated with Hidden Splendor’s Bankruptcy Plan of Reorganization is in default and due upon demand, of which approximately $4.6 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.
The Company has based certain financial assumptions on projected coal prices and volume of production.
The Company believes that it will be able to fund Plan payments and nominal working capital needs based upon cash flow from operations. This assumption is based upon (i) increased coal production and (ii) estimated sales prices in 2010 will not be less than current prices, both assumptions of which are out of our control and cannot be assured. The failure of either of these assumptions to materialize will cause us to require more capital in 2010 to fund obligations. The Company has no debt or equity funding commitments and it will need to raise capital through best efforts financings. There can be no assurance that the Company will be successful in raising additional capital. The failure to raise additional capital may cause the Company to curtail operations, sell assets, or result in the failure of our business.
RISKS RELATED TO OUR BUSINESS
Significant competition from entities with greater resources could result in our failure.
We operate in a highly competitive industry with national and international energy resources companies. We face substantial competition in connection with the marketing and sale of our coal. Most of our competitors are well established, have greater financial and marketing, personnel, other resources, and have been in business for longer periods of time than we have. Indeed, in the State of Utah, we are likely the smallest producer of coal in terms of production, reserves and available capital resources. There is no assurance that we can maintain or expand our market share. The greater financial resources of such competitors will permit them to implement extensive marketing and production programs. Our competitors' use of their substantially greater resources could overwhelm our efforts to operate successfully and could cause our failure.
There is no assurance that our limited revenues will be sufficient to operate profitably, or that we will generate greater revenues in the future.
Hidden Splendor acquired the Horizon Mine in March of 2003. We are a new entrant in the coal industry in the western United States. We began mining operations in 2003. We have not been profitable and have a limited operating history. We should be regarded as a risky venture with all of the unforeseen costs, expenses, problems, risks and difficulties to which such ventures are subject. Our coal sales for the year ended December 31, 2009 were approximately $10.9 million, and for the year ended December 31, 2008 were approximately $7.3 million. There is no assurance that we can achieve greater sales or generate profitable sales. We expect that many coal producers can and will produce and sell coal at cheaper prices per ton than our production cost rates. Their production and sales could adversely affect our revenues and profits, if any. There is no assurance that we will ever operate profitably. There is no assurance that we will generate continued revenues or ever be profitable.
Our future success depends upon our ability to acquire and develop coal reserves that are economically recoverable.
Our recoverable reserves will decline as we produce coal. Our future success depends upon our conducting successful exploration and development activities and acquiring properties containing economically recoverable coal deposits. Our current strategy includes increasing our coal deposits base through acquisitions of other mineral rights, leases, or producing properties and continuing to use our existing properties.
Our planned development and exploration projects and acquisition activities may not result in the acquisition of significant additional coal deposits and we may not have continuing success developing additional mines. In order to develop coal deposits, we must obtain various governmental leases and permits. We cannot predict whether we will obtain the leases and permits necessary for us to operate profitably in the future. Furthermore, we may not be able to mine all of our coal deposits at our current operations.
Our operations could be adversely affected if we fail to maintain required bonds.
Federal and state laws require bonds or cash deposits to secure our obligations to reclaim lands used for mining, to secure coal lease obligations and to satisfy other miscellaneous obligations. During 2009, our reclamation bond obligation with the State of Utah totaled $387,000 and was met by transfer of the trust deed to real property owned by certain affiliates of the Company and pledged to secure the Company’s obligation. The trust deed is in favor of the State of Utah and secures Hidden Splendor’s reclamation obligation in the event the Company is unable to pay the costs associated with reclaiming the Horizon Mine site when it is closed. At the end of 2009, our coal lease bond obligation to the BLM in connection with our federal coal lease totaled $136,000 was covered by a bond purchased by the Company which is secured by an irrevocable bank letter of credit, which in turn is secured by personal assets pledged by an officer of the Company. There can be no assurance that this officer will continue to pledge personal property to secure these bonds in future periods, the failure of which would have a material adverse effect upon our operations.
Our bonds are typically renewable on a yearly basis if they are not posted with cash, and currently none of our bonds are in the form of cash. Our failure to maintain, or inability to acquire, bonds that are required by state and federal law would have a material adverse effect on us. That failure could result from a variety of factors including: the lack of availability, higher expense or unfavorable market terms of new bonds; restrictions on the availability of collateral for current and future bonds issuers under the terms of our indenture or new credit facility; and the exercise by third-party bond issuers of their right to refuse to renew the bonds
There may be delays in our production, resulting in poor profitability and cash flow, thus preventing us from meeting our financial obligations.
The Horizon Mine has experienced delays in production off and on in previous years and during 2009 and 2010 due to:
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encountering rock faults, water, varying conditions of the coal seam, and other challenging mining conditions;
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the breakdown of our mining equipment; and
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the need to address safety regulations and/or safety-related citations issued by governmental agencies.
Many of the aforementioned challenges are beyond our control and/or are unpredictable. If we encounter any or a combination of the aforementioned challenges for a prolonged period of time, our revenues, profitability, and cash flow may decrease, resulting in the inability to meet some or all of our financial obligations.
A significant extended decline in the prices we receive for our coal could adversely affect our operating results and cash flows.
Our results of operations are highly dependent upon the prices we receive for our coal, which are closely linked to consumption patterns of electric generation. Extended or substantial price declines for coal would adversely affect our operating results for future periods and our ability to generate cash flows necessary to improve productivity and expand operations. Prices of coal may fluctuate due to factors beyond our control such as overall domestic and global economic conditions; the consumption pattern of industrial consumers, electricity generators and residential users; technological advances affecting energy consumption; domestic and foreign government regulations; price and availability of alternative fuels; price of foreign imports and weather conditions. Any adverse change in these factors could result in weaker demand and possibly lower prices for our production, which would reduce our revenues and adversely affect our financial condition.
The loss of, or significant reduction in, purchases by our largest customers could adversely affect our revenues.
We currently sell the majority of our coal to one customer, which will most likely account for in excess of 10% of our revenue in 2010. If this customer were to significantly reduce its purchase of coal from us, or if we were unable to continue to sell coal to them on terms as favorable to us as the terms under our current agreements, our financial condition and results of operations could suffer materially.
There is no assurance that we will find purchasers for our product at profitable prices.
If we are unable to find buyers willing to purchase our coal at profitable prices, our revenues would suffer.
Our inability to diversify our operations may subject us to economic fluctuations within our industry.
Our limited financial resources reduce the likelihood that we will be able to diversify our operations. Our inability to diversify our activities into the operation of more than one coal mine will subject our single-mine operation to economic fluctuations within the coal industry and, therefore, increase the risks associated with our operations.
Disruption of rail, barge, overland conveyor and other systems that deliver our coal or an increase in transportation costs could make our coal less competitive.
Coal producers depend upon rail, barge, trucking, overland conveyor and other systems to provide access to markets. Disruption of transportation services because of weather-related problems, strikes, lock-outs, break-downs of locks and dams or other events could temporarily impair our ability to supply coal to customers and adversely affect our profitability. Transportation costs represent a significant portion of the delivered cost of coal and, as a result, the cost of delivery is a critical factor in a customer’s purchasing decision. Increases in transportation costs could make our coal less competitive.
Terrorist attacks and threat, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations.
Terrorist attacks and threats, escalation of military activity in response to such attacks or acts of war may negatively affect our business, financial condition and results of operations. Our business is affected by general economic conditions, fluctuations in consumer confidence and spending, and market liquidity, which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war. Future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions affecting our customers may materially adversely affect our operations. As a result, there could be delays or losses in transportation and deliveries of coal to our customers, decreased sales of our coal and extension of time for payment of accounts receivable from our customers. Strategic targets such as energy-related assets may be at greater risk of future terrorist attacks than other targets in the United States. In addition, disruption or significant increases in energy prices could result in government-imposed price controls. It is possible that any, or a combination, of these occurrences could have a materially adverse effect on our business, financial condition and results of operations.
Competition within the coal industry may adversely affect our ability to sell our coal and overcapacity in the coal industry could adversely affect pricing, either of which could impair our profitability.
We compete with coal producers in various regions of the United States for domestic sales primarily to power generators. Demand for our coal by our principal customers is affected by the delivered price of competing coals, other fuel supplies and alternative generating sources, including nuclear, natural gas, oil and renewable energy sources, such as hydroelectric power. Recent increases in coal prices could encourage the development of expanded capacity by new or existing coal producers. Any resulting overcapacity could affect our ability to sell coal or reduce coal prices, either of which would likely reduce our revenues.
We require a skilled workforce to run our business. If we cannot hire qualified people to meet replacement or expansion needs, we may not be able to achieve planned results.
Most of our workforce is comprised of people with technical skills related to coal mining. Some of our workforce is 50 years of age or older. We expect that some of our employees may retire between now and the next five to seven years. This will require us to conduct an expanded and sustained effort to recruit new employees to replace those who retire and to fill new jobs as we grow our business. A lack of qualified people may adversely impact our operations and profitability.
The characteristics of coal may make it difficult for coal users to comply with various environmental standards, which are continually under review by international, federal and state agencies, related to coal combustion. As a result, they may switch to other fuels, which would adversely affect our sales.
Coal contains impurities, including sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air when coal is burned. Stricter environmental regulations of emissions from coal-fired electric generating plants could increase the costs of using coal thereby reducing demand for coal as a fuel source, the volume of our coal sales and price. Stricter regulations could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future.
For example, in order to meet the federal Clean Air Act limits for sulfur dioxide emissions from electric power plants, coal users will need to install scrubbers, use sulfur dioxide emission allowances (some of which they may purchase), or switch to other fuels. Each option has limitations. Lower sulfur coal may be more costly to purchase on an energy basis than higher sulfur coal depending on mining and transportation costs. The cost of installing scrubbers is significant and emission allowances may become more expensive as their availability declines. Switching to other fuels may require expensive modification of existing plants. Because higher sulfur coal currently accounts for a significant portion of our sales, the extent to which power generators switch to alternative fuel could materially affect us if we cannot offset the cost of sulfur removal by lowering the delivered costs of our higher sulfur coals on an energy equivalent basis.
Proposed reductions in emissions of mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases may require the installation of additional costly control technology or the implementation of other measures, including trading of emission allowances and switching to other fuels. For example, in 2005 the Environmental Protection Agency proposed separate regulations to establish mercury emission limits nationwide and to reduce the interstate transport of fine particulate matter and ozone through reductions in sulfur dioxides and nitrogen oxides throughout the eastern United States. The Environmental Protection Agency continues to require reduction of nitrogen oxide emissions in a number of eastern states and the District of Columbia and will require reduction of particulate matter emissions over the next several years for areas that do not meet air quality standards for fine particulates. In addition, Congress and several states may consider legislation to further control air emissions of multiple pollutants from electric generating facilities and other large emitters. Any new or proposed reductions will make it more costly to operate coal-fired plants and could make coal a less attractive fuel alternative to the planning and building of utility power plants in the future. To the extent that any new or proposed requirements affect our customers, this could adversely affect our operations and results.
We may not be able to produce sufficient amounts of coal to fulfill our customers’ requirements, which could harm our relationships with customers.
We may not be able to produce sufficient amounts of coal to meet customer demand, including amounts that we are required to deliver under contracts. In such case, our inability to satisfy contractual obligations could result in our customers initiating claims against us.
Our mining operations consume significant quantities of commodities, the price of which is determined by international markets. If commodity prices increase significantly or rapidly, it could impact our cost of production.
Coal mines consume large quantities of commodities such as steel, copper, rubber products, and liquid fuels. Some commodities, such as steel, are needed to comply with roof control plans required by regulation. The prices we pay for these products are strongly impacted by the global commodities market. A rapid or significant increase in the cost of some commodities could impact our mining costs because we have a limited ability to negotiate lower prices, and, in some cases, do not have a ready substitute for these commodities.
Proposals to regulate greenhouse gas emissions could impact the market for our fossil fuels, increase our costs, and reduce the value of our coal assets.
Numerous proposals have been made at the international, national, regional, and state levels of government that are intended to limit emissions of greenhouse gas (“GHGs”), such as carbon dioxide and methane. Combustion of fossil fuels, such as the coal we produce, results in the creation of carbon dioxide that is currently emitted into the atmosphere by coal end users. Several states have already adopted measures requiring reduction of GHGs within state boundaries. If comprehensive regulations focusing on GHGs emission reductions were to be enacted by the United States or additional individual states, it may adversely affect the use of and demand for fossil fuels, particularly coal. Further regulation of GHGs could occur in the United States pursuant to treaty obligations, regulation under the Clean Air Act, or regulation under state law. In 2007, the U.S. Supreme Court held in Massachusetts vs. Environmental Protection Agency, that the Environmental Protection Agency had authority to regulate GHGs under the Clean Air Act, reversing the Environmental Protection Agency’s interpretation of the Clean Air Act. This decision could lead to federal regulation of GHGs under the existing Clean Air Act of coal-fired electric generation stations, which could adversely affect demand for our coal.
Government laws, regulations and other legal requirements relating to protection of the environment, health and safety matters and others that govern our business increase our costs of doing business, and may restrict our operations.
We are subject to laws, regulations and other legal requirements enacted or adopted by federal, state and local, as well as foreign authorities relating to protection of the environment and health and safety matters, including those legal requirements that govern discharges of substances into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, groundwater quality and availability, plant and wildlife protection, reclamation and restoration of mining or drilling properties after mining or drilling is completed, the installation of various safety equipment in our mines, control of surface subsidence from underground mining and work practices related to employee health and safety. Complying with these requirements, including the terms of our permits, has had, and will continue to have, a significant effect on our costs of operations and competitive position. In addition, we could incur substantial costs, including clean up costs, fines and civil or criminal sanctions and third party damage claims for personal injury, property damage, wrongful death, or exposure to hazardous substances, as a result of violations of or liabilities under environmental and health and safety laws.
Our mines are subject to stringent federal and state safety regulations that increase our cost of doing business at active operations, and may place restrictions on our methods of operation. In addition, government inspectors under certain circumstances, have the ability to order our operation to be shut down based on safety considerations.
Stringent health and safety standards were imposed by federal legislation when the Federal Coal Mine Health and Safety Act of 1969 was adopted. The Federal Coal Mine Safety and Health Act of 1977 expanded the enforcement of safety and health standards of the Coal Mine Health and Safety Act of 1969 and imposed safety and health standards on all (non-coal as well as coal) mining operations. Regulations are comprehensive and affect numerous aspects of mining operations, including training of mine personnel, mining procedures, the equipment used in mine emergency procedures, mine plans and other matters. The various requirements mandated by law or regulation can have a significant effect on operating costs and place restrictions on our methods of operations. In addition, government inspectors under certain circumstances, have the ability to order our operation to be shut down based on safety considerations.
Occasionally, Hidden Splendor is issued citations by the Mine Safety and Health Administration in connection with regular inspections of the Horizon Mine. At times, Hidden Splendor challenges citations, resulting in reductions to proposed penalties or administrative adjudications with no penalties. As of December 31, 2009, Hidden Splendor had challenges pending in several administrative actions. Such actions cover a total of approximately $531,481of proposed, assessed penalties. Management is uncertain as to how much, if any, of these citations Hidden Splendor will be responsible for.
In March 2009, Hidden Splendor was notified by the U.S. Department of Labor, Mine Safety and Health Administration (“MSHA”) that a potential pattern of violations may exist at the Horizon Mine based upon initial screening and pattern criteria review by MSHA. Upon receipt of such notification, we conducted a comprehensive review of the operations at the Horizon Mine and prepared and submitted plans to MSHA designed to enhance employee safety at the mines through better education, training, mining practices, and safety management. After its evaluation, MSHA determined that no pattern of violation existed. Accordingly, the operations at the Horizon Mine were not subjected to the more severe level of citation response requirements which would have accompanied a finding of a pattern of violation. The operations of the Horizon Mine, like the operations of all coal mines in the United States, remain subject to extensive inspection and evaluation by MSHA.
There are uncertainties in estimating our economically recoverable coal reserves, and inaccuracies in our estimates could result in lower than expected revenues, higher than expected costs and decreased profitability.
There are uncertainties inherent in estimating quantities and values of economically recoverable coal reserves, including many factors beyond our control. As a result, estimates of economically recoverable coal reserves are by their nature uncertain. Information about our reserves consists of estimates based on engineering, economic and geological data assembled and analyzed by our staff. Some of the factors and assumptions which impact economically recoverable reserve estimates include:
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geological conditions;
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historical production from the area compared with production from other producing areas;
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the assumed effects of regulations and taxes by governmental agencies;
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assumptions governing future prices; and
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future operating costs, including cost of materials.
Each of these factors may in fact vary considerably from the assumptions used in estimating reserves. For these reasons, estimates of the economically recoverable quantities of coal attributable to a particular group of properties, and classifications of those reserves based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and these variances may be material. As a result, our estimates may not accurately reflect our actual reserves.
Coal Mining is a dangerous industry.
Coal mining, especially underground coal mining, is dangerous. Great care must be taken to assure safe, continued operations. Past experiences of others in the industry indicate that lapses in safety practices can result in catastrophic events in coal mining operations. Even when best mining practices are strictly observed, natural disasters such as an earthquake could possibly destroy a coal mine’s operations. Any catastrophic event at our coal mine which would close our mine for an extended period of time likely would cause the failure of our operations.
We do not insure against all potential operating risks. We may incur losses and be subject to liability claims as a result of our operations.
We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Although we maintain insurance at levels we believe are appropriate and consistent with industry practice, we are not fully insured against all risks. In addition, pollution and environmental risks generally are not fully insurable. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition, results of operations and cash flows.
We are dependent upon the services of Messrs. Baker, Rodriguez, and Walker
The success of the Company is dependent upon, among other things, the services of Dan R. Baker, our chief executive officer; Brian Rodriguez, our interim chief financial officer; and Alexander H. Walker III, our chairman and secretary. The Company has entered into employment agreements with Messrs. Baker and Walker, but does not maintain any key man insurance on the lives of any of these individuals. The loss of either of these executives, for any reason, would have a material adverse effect on the Company. Mr. Rodriguez serves as interim chief financial officer of the Company and is employed on an “at-will” basis. During 2010, the Company will assess the proper timing to recruit and hire a long-term chief financial officer.
RISKS RELATED TO OUR COMMON STOCK
Future sales of our common stock could lower our stock price.
We may issue additional shares of Company common stock to finance future acquisitions. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. Moreover, sales of our common stock by existing shareholders could also depress the price of our common stock.
We presently do not intend to pay cash dividends on our common stock.
We currently anticipate that no cash dividends will be paid on the common stock in the foreseeable future. Therefore, prospective investors who anticipate the need for immediate income by way of cash dividends from their investment should not purchase our common stock.
Control by current shareholders.
The current shareholders have elected the directors and the directors have appointed current executive officers to serve America West. The current shareholders will continue to have the ability to elect the directors for the foreseeable future. The voting power of these shareholders could also discourage others from seeking to acquire control of us through the purchase of our common stock which might depress the price of our common stock.
There is not now, and there may not ever be, an active market for the Company’s common stock.
There currently is a limited public market for the Company’s common stock. Further, although the common stock is currently quoted on the OTC Bulletin Board, trading of its common stock may be extremely sporadic. For example, several days may pass before any shares may be traded. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations of the price of, the common stock. Accordingly, investors must assume they may have to bear the economic risk of an investment in the common stock for an indefinite period of time. This severely limits the liquidity of the common stock, and would likely have a material adverse effect on the market price of the common stock and on the Company’s ability to raise additional capital.
The Company cannot assure you that our common stock will become liquid or that the common stock will be listed on a securities exchange.
Until the common stock is listed on an exchange, the Company expects its common stock to remain eligible for quotation on the OTC Bulletin Board, or on another over-the-counter quotation system, or in the “pink sheets.” In those venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of the common stock. In addition, if the Company fails to meet the criteria set forth in the Securities and Exchange Commission (“SEC”) regulations, various requirements would be imposed by law on broker-dealers who sell the Company’s securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling the common stock, which may further affect the liquidity of the common stock. This would also make it more difficult for the Company to raise additional capital.
Applicable SEC rules governing the trading of “penny stocks” limits the trading and liquidity of the Company’s shares as well as the shares of common stock underlying the Company’s warrants which may affect the trading price of the common stock.
The common stock is currently quoted on the OTC Bulletin Board and trades below $5.00 per share; therefore, the common stock is considered a “penny stock” and subject to SEC rules and regulations which impose limitations upon the manner in which such shares may be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations have the effect of limiting the trading activity of the common stock and reducing the liquidity of an investment in the common stock.
The price of the Company’s common stock may become volatile, which could lead to losses by investors and costly securities litigation.
The trading price of the common stock is likely to be highly volatile and could fluctuate in response to factors such as:
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actual or anticipated variations in the Company’s operating results;
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announcements of developments by the Company or its competitors;
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announcements by the Company or its competitors of significant acquisitions, strategic partnerships, joint ventures, or capital commitments;
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adoption of new accounting standards affecting the Company’s industry;
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additions or departures of key personnel;
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adoption of new or revised regulation in the industry;
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sales of the Company’s common stock or other securities in the open market; and
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other events or factors, many of which are beyond the Company’s control.
The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against the company. Litigation initiated against the Company, whether or not successful, could result in substantial costs and diversion of its management’s attention and resources, which could harm the Company’s business and financial condition.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
Location of Principal Plants
The Company’s only coal mining operation is the Horizon Mine. The Company maintains office space at 3266 South 125 West, Price, Utah for general administrative purposes. The Company maintains its corporate offices at 57 West 200 South, Suite 400, Salt Lake City, Utah. Such office space is subleased from Arlington Ventures, an entity owned by the Company’s Chairman, Alexander H. Walker III and other Walker Family members.
Consumers Road Property
In January 2009, we acquired real and personal property in Carbon County, Utah, as follows:.
1. Three (3) buildings and fixtures used for record storage, mine support facilities, an equipment maintenance shop, training center, etc., collectively called the “Consumers Road Property,” located on approximately 35 acres of land owned by the United States for which we hold possession under Right-of-Way UTU-49754 granted by the Bureau of Land Management.
2. An interest in the following described parcel of land: “NW¼SW¼ of Section 26, T15S, R8E, SLM, containing 40.00 acres more or less”, a parcel which we refer to as the “South 40 Parcel.”
We intend to use the Consumers Road Property for office and shop support for our coal mine operations at the Horizon Mine. We are exploring alternative uses for the South 40 Parcel.
The location and means of access to the Horizon Mine.
The Horizon Mine is located approximately eleven miles west of Helper, Carbon County, Utah. The mine property abuts a county road known as Consumers Road which allows vehicular access to the mine and allows transportation of coal from the mine.
The Company’s right to operate the Horizon Mine.
Hidden Splendor operates the Horizon Mine pursuant to an operating permit issued by the Utah Department of Natural Resources, Division of Oil, Gas and Mining. Hidden Splendor’s permit number in this regard is C/007/0020. The permit allows Hidden Splendor to mine within the entire area subject to a federal coal lease Hidden Splendor owns. That federal coal lease, Lease Number U-74804, covers coal in an area of approximately 1,640 acres located in Township 13 South, Range 8 East, Salt Lake Base Meridian. Hidden Splendor owns fee title to approximately 80 acres of that acreage and the coal beneath the land Hidden Splendor owns is fee coal which Hidden Splendor owns and upon which Hidden Splendor pays no royalties. Thus, Hidden Splendor mines the coal within the area of its operating permit either by right of outright ownership of that coal or by right of the federal coal lease which Hidden Splendor owns.
In order to maintain its federal lease the Company must meet certain diligence requirements. In this regard, the Company must mine approximately 60,000 tons of coal each year over a ten-year period and the Company has the entire ten-year period to meet that total amount. Accordingly, our operations to date have been more than sufficient to meet this obligation.
A brief history of previous operations at the Horizon Mine.
According to the operator history for the Horizon Mine compiled by MSHA, the Horizon mine had four operators prior to Hidden Splendor. From April 1, 1992 to April 19, 1995, the mine was operated by an entity known as Blue Blaze Coal Company. From April 20, 1995 to August 28, 1997, it was operated by Horizon Coal Corp. From August 29, 1997 to July 14, 1999, it was operated by Horizon Mining, LLC. And from July 15, 1999 to March 23, 2003 it was operated by Lodestar Energy, Inc. Hidden Splendor purchased the operations of the Horizon Mine out of the bankruptcy of Lodestar in March of 2003 and has been operating the Horizon Mine since that time.
According to the mine overview data compiled by MSHA in connection with the Horizon Mine, the following number of tons have been mined from the Horizon Mine in the years shown:
Description of the Horizon Mine.
A glossary of mining terms is contained below to aid the reader in connection with the information in this Item 4 and elsewhere in this report.
Present Condition of the Property
The federal coal lease the Company has obtained covers coal which lies under approximately 1,640 acres of land in Carbon County, Utah. The surface rights to most all of the land in which the leased coal lies is owned by private landowners. The Horizon Mine is an underground, slope mine. At present, adequate surface facilities are in place at the mine site to support underground mining operations which take place at the mine. The surface facilities of the Horizon Mine operation are located on property owned by the Company.
Those surface facilities include a mine office and bathhouse facility, a storage trailer, the portals which lead to the underground operations of the mine, a conveyer belt structure which moves coal from the underground operations to the surface, a crushing unit which sizes the coal mined and a stacking tube around which the coal mined is stacked on the surface. All structures on the surface are in good operating condition. The surface operations cover approximately 8.9 acres of land.
Underground operations currently extend a total of approximately two miles underground when measured traveling from the surface entrance of the mine to the farthest working area in the mine. Underground operations at the Horizon Mine are “room and pillar” operations. The Company’s operations at the Horizon Mine are in the Production Stage, as that term is defined by Industry Guide No. 7 promulgated by the Securities and Exchange Commission in connection with Item 102 Disclosure under Regulation S-B. That is, the Company is engaged in the exploitation of a mineral deposit, or more simply, we actually are mining coal.
Work completed by the Company on the property
Hidden Splendor began its production operations at the Horizon Mine in August of 2003. At the time the Company took over the operations at the Horizon Mine, the surface facilities were substantially in place and underground mining operations had been established. Hidden Splendor acquired additional equipment to commence mining operations and since August of 2003 has acquired substantial additional equipment to continue operations. Since it took control of the mining operations at the Horizon Mine in 2003, the Company has removed approximately 1.4 million tons of coal from the reserves in the permitted area of the mine.
The Company’s proposed program for development of the property
The Company’s proposed plan for the continued development of the Horizon Mine involves continued operation of a room and pillar mining operation. A room-and-pillar operation involves creating a network of interconnected tunnels in the coal seam. These tunnels result from the excavation of a series of “rooms” into the coal bed, leaving “pillars” or columns of coal to help support the mine roof. The rooms and pillars create what on a map looks like a series of city streets and blocks, with the streets being the open rooms and the blocks being the pillars of coal.
Considerable time and materials are utilized in what is known as “development” mining in order to assure that the roof in the open areas of the mine is secure and supported. Development mining simply refers to the mining phase in which the series of rooms and pillars is created, or developed. Room-and-pillar mining also involves the removal of the pillars of coal from areas of the mine which have been fully developed. We refer to this kind of mining as “pillaring” or “MRS extraction of pillar coal.” Pillaring involves the use of mechanized roof support equipment known as mobile roof supports, or “MRSs,” to support the roof of the mine while some of the pillars of coal are removed. MRSs are large track-driven, hydraulic canopies which are remotely operated. The use of MRSs in pillaring replaced an older method of retreat mining which involved supporting the roof of a mine with wooden posts only as pillars were removed. That method did not afford the same level of safety which MRS pillar extraction affords.
Pillaring involves backing out of a section of the mine as the pillars in that section are removed. Because the pillars are being removed from the section, time and materials are not utilized to maintain the roof in that area of the mine to the same extent they are used in development mining. The roof is maintained by the MRSs which monitor the stress pushing down from the roof. The roof of the area in which pillaring takes place is not maintained because as pillars are removed that roof falls in the area after the MRS units are remotely removed and that area of the mine is sealed off and abandoned. Once the panel is fully created, pillaring takes place and the pillars are removed from the panel. Once pillaring in a panel is completed, another panel is developed.
While most coal mines in Utah mine coal using large and expensive longwall mine units, we mine coal from the Horizon Mine using continuous miner machines. Longwall mining is best suited for large, flat and uninterrupted blocks of coal. Because the coal seam in which we mine contains many faults and fractures, a long-wall operation in our mine is not economically feasible, and coal is best mined with a continuous miner which can more easily follow the contours of the coal seam as it rises and falls.
A continuous miner cuts the coal from the seam and places it in shuttle cars, which take the coal from the continuous miner to the conveyor belts. The conveyer belts then move the coal out of the mine where the coal is crushed to size and piled for loading into trucks. Our operations end with loading the coal into trucks on the mine site.
Since August 2003, we primarily have operated the Horizon Mine as what is known as a “one-section” mine. That is, we mine in one area of the mine at any one time using one continuous miner, two shuttle cars, and attendant equipment. Thus, all of our production comes from operating one set of mining equipment in one area of the mine. As a one-section mine, any problem we have encountered has had a significantly adverse effect on production. For example, when we have encountered a fault in the coal seam which has displaced the seam either up or down by several feet, we have had to spend time mining through the faulted area to reach the seam past the fault. We have spent just as much time and used just as much material mining through the fault, but we have mined no coal.
In 2007 we attempted to operate the mine as a “two-section” mine. That is, we mined coal in two areas of the mine at the same time. Optimally, we would like one section to be pillaring a developed panel while in another section a panel is being developed. Because development mining involves significant roof support efforts and often discovers problem areas in the mine, such as faults in the coal seam or inflows of water, development mining is slower and more capital intensive than pillaring. By operating two sections, the Company can blend the two types of mining and will have the flexibility to deal with adverse conditions which may affect mining in any one section. Operations as a two-section mine in 2007 were unsuccessful in large part because of the non-performance of equipment we obtained.
Beginning in late May 2008, we began operating the mine as a two-section mine. That is, we began mining coal in two areas of the mine at the same time. Due to equipment breakdowns, we were unable to operate in two sections consistently for the remainder of 2008. In July 2009, we deployed a rebuilt continuous miner, resulting in more efficient, consistent production. We plan to lease and deploy a second continuous miner by mid-2010 to enable the mine to begin operating in two sections, and ultimately expand to three sections by the end of 2010. However, there is no guarantee that the equipment will be deployed in the projected timeframes and/or that production will increase as planned.
Current operations of the Horizon Mine.
The Horizon Mine is currently operational, producing “compliant” thermal coal with an average of approximately 12,000 BTU/lb. and 0.5% sulfur. Since 2003, the Company has extracted over 1.6 million tons of coal from the mine.
The Horizon Mine coal is currently being sold at an average sale price of approximately $41 per ton as of the date of this Report, and was sold at an average price of approximately $46 per ton during the year ended December 31, 2009.
The Company’s average production cost per ton, excluding mine development costs, of coal for the year ended December 31, 2009 was approximately $39 per ton. Production costs per ton were extraordinarily high in 2009 due to 1) encountering artesian water in the Horizon Mine during the first quarter, 2) equipment breakdowns encountered during the first six months of 2009, 3) downtime associated with sealing an obsolete section of the mine and moving production to another section of the Horizon Mine during the third quarter, 4) downtime associated with deploying new equipment during the third quarter, and 4) intermittently idling the mine during the fourth quarter due to decreased demand for our coal in accordance with market conditions in the western United States. General and administrative expenses averaged approximately $521,141 per month, equating to approximately $32 per ton, during this period. General and administrative expenses were extraordinarily high during 2009 due to (i) legal fees being higher than normal as a result of numerous financings occurring during 2009, and (ii) over $1.2 million in expense related to the issuance of stock and options as compensation to employees/directors/officers. We do not anticipate similar extraordinary circumstances in 2010. As production escalates, we believe that the production expense and general and administrative cost per ton should decrease as a percentage of sales as a result of economies of scale.
Management’s plan is to escalate production to an average of 60,000 tons per month by mid-2010 by leasing and deploying a second continuous miner In addition, the Company plans to lease and deploy a third continuous miner, a shuttle car, and other key equipment to enable the Horizon Mine to operate as a three-section mine by the end of 2010. With these equipment additions/upgrades and logistical adjustments, we expect monthly production to increase.
Management estimates there are in excess of 100 million tons of additional recoverable coal reserves adjacent to the Horizon Mine that are controlled by Carbon County and the BLM. In March 2009, the BLM granted the Company a lease modification to access and lease approximately 6.8 million recoverable tons of the adjacent reserves. The Company intends to pursue additional adjacent reserves by negotiating with officials of Carbon County and the BLM.
The current state of development of the property
Currently the Company has mined approximately 1.6 million tons of coal from the leased and permitted area in which our reserves are located. We have obtained an estimate from a third party engineering firm which indicates that there were approximately 12.1 million tons of recoverable reserves in that leased and permitted area as of December 31, 2009.
We consider such reserves probable as they are based on estimates from drill hole data in the area and geological reports on our property from third-parties. Such estimates are revised as actual mining reveals more accurate information about the coal seams, thickness, quality of coal and locations of obstacles to mining such as faults or rock intrusions into the seam.
The modernization and physical condition of the plant and equipment.
Management believes the surface facilities at the mine were installed beginning in early 1990’s. Components to such facilities have been upgraded over time. For example, we have made additions to the mine office and bathhouse facility in both 2005 and again in 2007 in order to accommodate the growing number of employees. Those facilities were originally installed in 1995.
Also, in 2003 a crushing unit was added to the beltline by the Company in order to properly size the coal mined. Properly sizing the coal is crucial for coal sales, as our coal sales agreements have had requirements regarding the size of the coal purchased.
In 2004, the Company purchased significant additional equipment to continue mining operations at the Horizon Mine. Such equipment included a rebuilt continuous miner, two rebuilt shuttle cars, a rebuilt roof bolter, a new battery scoop, and additional attendant equipment. All such equipment has improved operations and remains in adequate operating condition. Nonetheless, management is of the opinion that at a minimum, additional roof bolting equipment is necessary to support the expanded operations at the mine. Management has identified other necessary equipment as well, but is concerned with the adequacy of the roof bolting equipment on hand to keep up with expanded operations. While the two current roof bolting machines at the mine operate properly, they are slow moving and can only keep up with mining operations involving one continuous miner. In 2007, a third roof bolting machine did not perform as expected and did not support mining operations behind the Company’s second continuous miner. The manufacturer of that equipment has attempted to remedy the problems with that roof bolter, but it has not functioned within reasonable standards. The Company encountered numerous minor and major equipment breakdowns during 2008 and through mid-2009 which delayed production intermittently. In July 2009, the Company rebuilt and deployed a continuous miner, resulting in more efficient, consistent production.
Description of the rock formations and mineralization of existing or potential economic significance on the property.
Coal mined at the Horizon Mine is located in what is known as the Hiawatha Coal Seam located in the Wasatch Plateau Coal Field. The average height of the seam as it runs through the mine is approximately seven feet. The coal we extract at the Horizon Mine generally has a BTU value of between 11,500 and 11,800 BTUs/lb. Analysis of the coal produced at the Horizon Mine in August of 2006 has shown BTU levels as high as 12,600. Ash levels in coal substantially affect the value of coal. As it sits in place in the Hiawatha Seam, coal at the Horizon Mine contains ash at levels from 8% to 9%. Mining of the coal can increase ash levels if the rock either above or below the coal seam is mined and mixed with the coal taken from the seam, and our ash levels generally test out at 8% to 15%, though conditions in the mine over the last couple of years have seen higher ash levels. As stated above, reports provided to us indicate that there are at least 12.1 million recoverable tons remaining in our leased and permitted operations. We believe this estimate is conservative. Additional tonnage, though not leased by us at this time, is in reserves adjacent to our operation.
Glossary of Terms.
Certain terms used in this Report are specific to the coal mining industry and may be technical in nature. The following is a list of selected mining terms and the definitions generally attributed to them when we use them throughout this document. In most cases, but not all, the following definitions generally are those used by the Energy Information Administration. The definitions of some terms, especially those associated with “reserves,” are taken from Industry Guide No. 7 promulgated by the Securities and Exchange Commission in connection with Item 102 Disclosure under Regulation S-B.
Ash: Impurities consisting of silica, iron, alumina, and other incombustible matter that are contained in coal. Ash increases the weight of coal, adds to the cost of handling, and can affect the burning characteristics. Ash content is measured as a percent by weight of coal on an "as received" or a "dry" (moisture-free) basis.
Bituminous Coal: A dense coal, usually black, sometimes dark brown, often with well-defined bands of bright and dull material, used primarily as fuel in steam-electric power generation, with substantial quantities also used for heat and power applications in manufacturing and to make coke. Bituminous coal is the most abundant coal in active U.S. mining regions. Its moisture content usually is less than 20 percent. The heat content of bituminous coal ranges from 21 to 30 million BTU per ton on a moist, mineral-matter-free basis. The heat content of bituminous coal consumed in the United States averages 24 million BTU per ton, on the as-received basis (i.e. containing both inherent moisture and mineral matter).
BTU (British Thermal Unit): The amount of heat needed to raise the temperature of one pound of water by one degree Fahrenheit. The BTU is a convenient measure by which to compare the energy content of various fuels.
Coal: A readily combustible black or brownish-black rock whose composition, including inherent moisture, consists of more than 50 percent by weight, and more than 70 percent by volume, of carbonaceous material. It is formed from plant remains that have been compacted, hardened, chemically altered, and metamorphosed by heat and pressure over geologic time.
Coalbed: A bed or stratum of coal. Also called a coal seam.
Coke: A solid carbonaceous residue derived from low-ash, low-sulfur bituminous coal from which the volatile constituents are driven off by baking in an oven at temperatures as high as 2,000 degrees Fahrenheit so that the fixed carbon and residual ash are fused together. Coke is used as a fuel and as a reducing agent in smelting iron ore in a blast furnace. Coke from coal is grey, hard, porous and has a heating value of 24.8 million BTU per short ton.
Coking Coal: Bituminous coal suitable for making coke.
Compliance Coal: A coal or a blend of coals that meets sulfur dioxide emission standards for air quality without the need for flue gas desulphurization.
Continuous Mining: A form of room-and-pillar mining in which a continuous mining machine extracts and removes coal from the working face in one operation; no blasting is required.
Conventional Mining: The oldest form of room-and-pillar mining which consists of a series of operations that involve cutting the coal bed so it breaks easily when blasted with explosives or high-pressure air, and then loading the broken coal.
EIA: The Energy Information Administration. An independent agency within the U.S. Department of Energy that develops surveys, collects energy data, and analyzes and models energy issues. The Agency must meet the requests of Congress, other elements within the Department of Energy, the Federal Energy Regulatory Commission, the Executive Branch, its own independent needs, and assist the general public, or other interest groups, without taking a policy position.
Federal Coal Lease: A lease granted to a mining company to produce coal from land owned and administered by the Federal Government in exchange for royalties and other revenues.
F.O.B. Mine Price: The free on board mine price. This is the price paid for coal at the mining operation site. It excludes freight or shipping and insurance costs.
Loadout: A central facility used in loading coal for transportation by rail.
Longwall Mining: An automated form of underground coal mining characterized by high recovery and extraction rates, feasible only in relatively flat-lying, thick, and uniform coal beds. A high-powered cutting machine is passed across the exposed face of coal, shearing away broken coal, which is continuously hauled away by a floor-level conveyor system. Longwall mining extracts all machine-mineable coal between the floor and ceiling within a contiguous block of coal, known as a panel, leaving no support pillars within the panel area. Panel dimensions vary over time and with mining conditions but currently average about 900 feet wide (coal face width) and more than 8,000 feet long (the mineable extent of the panel, measured in direction of mining). Longwall mining is done under movable roof supports that are advanced as the bed is cut. The roof in the mined-out area is allowed to fall as the mining advances.
Metallurgical Coal: Coking coal and pulverized coal consumed in making steel.
Mineable: Capable of being mined under current mining technology and environmental and legal restrictions, rules, and regulations.
Probable reserves: Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced.
Proven reserves: Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling, and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established
Recoverable Coal: Coal that is, or can be, extracted from a coal bed during mining.
Recoverable Reserves of Coal: An estimate of the amount of coal that can be recovered (mined) from the accessible reserves of the demonstrated reserve base.
Reserve: That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.
Room-and-Pillar Mining: The traditional method of underground mining in which the mine roof is supported mainly by coal pillars left at regular intervals. Rooms are places where the coal is mined; pillars are areas of coal left between the rooms. Room-and-pillar mining is done either by conventional or continuous mining.
Seam: A bed of coal lying between a roof and floor.
Short Ton: A unit of weight equal to 2,000 pounds.
Slope Mine: An underground mine in which the entry is driven at an angle to reach the coal deposit.
Steam Coal: All nonmetallurgical coal.
Underground Mine: A mine where coal is produced by tunneling into the earth to the coal bed, which is then mined with underground mining equipment such as cutting machines and continuous, longwall, and shortwall mining machines. Underground mines are classified according to the type of opening used to reach the coal, i.e. drift (level tunnel), slope (inclined tunnel), or shaft (vertical tunnel).
Underground Mining: The extraction of coal or its products from between enclosing rock strata by underground mining methods, such as room and pillar, longwall, and shortwall, or through in-situ gasification.
(a) Investment Policies.
Hidden Splendor’s operations are focused on the production of coal and participation in the coal industry. Accordingly, the Company has no particular policy regarding each of the following types of investments:
(1) Investments in real estate or interests in real estate;
(2) Investments in real estate mortgages; or
(3) Securities of or interests in persons primarily engaged in real estate activities.
(b) Description of Real Estate and Operating Data.
Hidden Splendor has no real estate the book value of which amounts to 10% or more of the Company’s total assets.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On October 15, 2007, Hidden Splendor filed a Chapter 11 Petition in the United States Bankruptcy Court for the District of Nevada. Hidden Splendor’s petition in this regard was a Chapter 11 Petition and Hidden Splendor continued to operate its business as a Debtor in Possession. On December 8, 2008, 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 over 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.
Certain classified creditors will receive a 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 will receive an aggregate principal amount of $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 interest only payments, commencing in the 25th month 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’s general unsecured creditors are owed approximately $3,400,000. 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 creditors 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. Insider claims will receive no distributions.
Under the Plan, the Company 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.
In the event Hidden Splendor (i) fails to pay fully any payments when due, or (ii) fails to comply with any provision of the Plan, then (A) 100% (reduced only by the amounts actually paid and received by creditors) of all allowed claims of general unsecured creditors shall be immediately due and accelerated and (B) Hidden Splendor must immediately list its assets for sale.
Hidden Splendor’s Chapter 11 bankruptcy proceeding was consolidated with the Chapter 11 proceeding of Mid-State Services, Inc. Pursuant to the Plan, Mid-State Services, Inc.’s assets and liabilities were assumed by Hidden Splendor on December 19, 2008.
Occasionally, Hidden Splendor is issued citations by the Mine Safety and Health Administration in connection with regular inspections of the Horizon Mine. At times, Hidden Splendor challenges citations, resulting in reductions to proposed penalties or administrative adjudications with no penalties. As of December 31, 2010, Hidden Splendor had challenges pending in several administrative actions. Such actions cover a total of approximately $531,481of proposed, assessed penalties. . Management has determined that of the total amount, the probable liability arising from these citations is approximately $266,000 which has been accrued at December 31, 2009.
In March 2009, Hidden Splendor was notified by MSHA that a potential pattern of violations may exist at the Horizon Mine based upon initial screening and pattern criteria review by MSHA. Upon receipt of such notification, we conducted a comprehensive review of the operations at the Horizon Mine and prepared and submitted plans to MSHA designed to enhance employee safety at the mine through better education, training, mining practices, and safety management. After its evaluation, MSHA determined that no pattern of violation existed. Accordingly, the operations at the Horizon Mine were not subjected to the more severe level of citation response requirements which would have accompanied a finding of a pattern of violation. The operations of the Horizon Mine, like the operations of all coal mines in the United States, remain subject to extensive inspection and evaluation by MSHA.
In January 2009, the United States Department of Labor and a former employee of the Hidden Splendor Resources, Inc. brought an action before the Office of Administrative Law Judges in Federal Mine Safety and Health Review Commission naming Hidden Splendor as the respondent. In that action, petitioners claim the former employee was wrongfully discharged and seek damages against Hidden Splendor for that alleged wrongful discharge. Hidden Splendor denies that the employee in question was wrongfully discharged and denies the employee in question and the Department of Labor are entitled to any relief sought in this action. Though the company is confident its subsidiary will prevail in this action, the outcome of this, or any pending action, is uncertain. The company could face liability of a material nature if the outcome of this action is adverse to Hidden Splendor, though any estimate of that potential liability would be purely speculative as the case is in the discovery phase and the company’s factual inquiry into this matter is not complete.
PART II
ITEM 4.
ITEM 4. RESERVED
Not applicable.
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
General Market Information
Our common stock trades on the OTC Bulletin Board under the symbol “AWSR.” The market for our common stock on the OTC Bulletin Board is limited, sporadic and highly volatile. The following table sets forth the approximate high and low closing sales prices per share as reported on the OTC Bulletin Board for our common stock for the last two fiscal years. The quotations reflect inter-dealer prices, without retail markups, markdowns, or commissions and may not represent actual transactions.
Holders
As of April 14, 2010, there were approximately 823 shareholders of record of the Company's common stock and 269,362,502 shares outstanding.
Dividends
We have not paid dividends since inception nor do we anticipate that any cash dividends will be paid in the foreseeable future.
Equity Compensation Plan Information
The following table sets forth certain information, as of December 31, 2009, concerning securities authorized for issuance under the 2008 Stock Option Plan and other outstanding options, warrants and rights:
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants & Rights
(a)
Weighted Averaged Exercise Price of Outstanding Options, Warrants & Rights
(b)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)
(c)
Equity compensation plans approved by security holders:
--
--
--
Equity compensations plans not approved by security holders (1) (2) (3):
5,547,500
$0.36
9,052,500
Total
4,237,500
$0.44
10,762,500
(1)
On July 3, 2008, we granted employees and officers options to purchase an aggregate 4,237,500 common shares at exercise prices ranging from $0.40 to $0.45. One-third of such options vested upon issuance of the options, one third-shall vest on the first anniversary of the issuance, and the remaining third shall vest on the second anniversary of the issuance. Vested options will expire five years from the date the option vested.
(2)
On October 8, 2009, we issued a third party consultant 400,000 common shares for services rendered during 2009.
(3)
On September 22, 2009, we granted certain employees options to purchase an aggregate 1,310,000 common shares at an exercise price of $0.10. The options will vest 100% on September 22, 2010.
Recent Sales of Unregistered Securities
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, during the fourth quarter of 2009:
During October 2009, we extended a $2.8 million loan from a third party that matured in October 2009. Per the loan extension terms, we issued 5,000,000 shares of common stock to the lender to repay $100,000 of the outstanding principal on the loan.
During October 2009, we issued 175,000 shares of common stock to consultants for consideration of services rendered to the Company valued at $15,925.
During October 2009, we modified the terms of 3,459,683 previously granted common stock warrants. The exercise price of these warrants was reduced from $0.30 per share to $0.10 per share. In October and November 2009, we issued 3,459,683 shares of common stock for the exercise of warrants. We received $345,968 gross proceeds from the exercise of the modified warrants. A commission of $44,976 was paid to John Thomas Financial in addition to other issuance fees paid of $23,500.
During November 2009, we entered into loan agreements with third parties pursuant to which we borrowed a principal amount of $200,000. In connection with the loan, we issued the third party lender 2,000,000 shares of the company’s common stock as additional consideration for such loan.
During November 2009, 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 $210,000. In connection with the loan, we issued the related party lender 2,100,000 shares of the Company’s common stock as additional consideration for such loan.
During November 2009, we issued 750,000 shares of common stock to an officer for services rendered valued at $74,250.
During December 2009, 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 $225,000. In connection with the loan, we issued the related party lender 2,250,000 shares of the Company’s common stock as additional consideration for such loan.
During December 2009, we issued 500,000 shares of common stock to consultants for consideration of services rendered to the Company valued at $38,500.
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.
Purchases of Equity Securities by Company
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not required.
ITEM 7.
ITEM 7. 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 financial statements of the Company and Hidden Splendor and notes thereto set forth herein. Our auditor's report on our financial statements expresses an opinion that substantial doubt exists as to whether we can continue as an ongoing business. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital. The financial statements of the Company and Hidden Splendor 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 fiscal 2009, four customers accounted for virtually all of our revenues. We expect one of these customers to account for significantly more than 10% of our revenues during 2010 as well. We have entered into a contract with this customer 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 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 facility. Once the coal is loaded into those railcars, the coal belongs to our customers.
Results of Operations for the Year Ended December 31, 2009 Compared to December 31, 2008
Material changes in financial statement line items
The following table presents combined statement 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. Changes in items which we feel have no meaningful impact on operations are marked with the designation NM, which we mean to indicate “not meaningful.”
Revenue
We had revenue from continuing operations for the year ended December 31, 2009 of $11.0 million, a 51% increase from revenues of $7.3 million for 2008. All coal sales revenue was related to coal produced from our Horizon coal mine operations by our wholly-owned subsidiary, Hidden Splendor Resources, Inc., as well as the purchase and sale of third-party coal. The Horizon Mine produced 35,093 less tons, or 15% less, in 2009 as compared to 2008. The decrease in production was attributed to 1) encountering artesian water in the Horizon Mine during the first quarter, 2) equipment breakdowns encountered during the first six months of 2009, 3) downtime associated with sealing an obsolete section of the mine and moving production to another section of the Horizon Mine during the third quarter, 4) downtime associated with deploying new equipment during the third quarter, and 4) intermittently idling the mine during the fourth quarter due to decreased demand for our coal in accordance with market conditions in the western United States. The decrease in Horizon Mine production was offset by the sale of 50,906 tons of coal, which we purchased from third parties and sold with our Horizon Mine coal. The overall increase in revenue was attributable to an increase in overall volume of tons sold, as well as an increase in average sales price per ton of coal during 2009 as compared to 2008.
Historically, we have operated the mine as a one-section mine, meaning we have mined coal in only one area of the mine. We plan to begin operating the mine as a two-section mine during 2010. That is, we will mine coal in two areas of the mine at the same time. Optimally, Section I will be pillaring a developed panel, while in Section II, a panel is being developed. Because development mining involves significant roof support efforts and often discovers problem areas in the mine, such as faults in the coal seam or inflows of water, development mining is more capital intensive than pillaring. By operating two sections, the Company can blend the two types of mining and will have the flexibility to deal with adverse conditions which may affect mining in any one section. By operating two sections, the Company plans to increase production. In July 2009, the Company rebuilt and deployed a continuous miner, resulting in more efficient, consistent production. Management’s plan is to escalate production to an average of 60,000 tons per month by mid-2010 by leasing and deploying a second continuous miner In addition, the Company plans to lease and deploy a third continuous miner, a shuttle car, and other key equipment to enable the Horizon Mine to operate as a three-section mine by the end of 2010. With these equipment additions/upgrades and logistical adjustments, we expect monthly production to increase. However, there is no guarantee that production will increase in the future as planned.
Coal Production Costs
Our production costs during the year ended December 31, 2009 were $8.0 million, compared to $6.8 million for 2008. Production costs increased despite lower tonnage production from the Horizon Mine as compared to 2008 due to 1) encountering artesian water in the Horizon Mine during the first quarter, 2) equipment breakdowns encountered during the first six months of 2009, 3) downtime associated with sealing an obsolete section of the mine and moving production to another section of the Horizon Mine during the third quarter, 4) downtime associated with deploying new equipment during the third quarter, and 4) intermittently idling the mine during the fourth quarter due to decreased demand for our coal in accordance with market conditions in the western United States. We continued to recognize certain fixed production expenses despite lower production, resulting in overall higher production costs. In addition, the aforementioned equipment and mining conditions required the expenditure of additional labor and resources.
Gross Profit
Gross profit increased 37% from $524,651 for the year ended December 31, 2008 to $719,179 for the year ended December 31, 2009, primarily due to increased revenue for the reasons noted above.
General and Administrative Expense
General and administrative expenses for the year ended December 31, 2009 totaled $6.5 million, an increase of 11% over general and administrative expenses of $5.9 million in the prior year. The increase was primarily attributed to an increase in stock compensation expense related to stock issued to officers and third parties as compensation for services .
Loss from Operations
Loss from operations increased 28% from $4.5 million for the year ended December 31, 2008 to $7.1 million for the year ended December 31, 2009, primarily due to the increase in coal production costs as well as forfeited royalty payments,.
Other Income (Expenses)
For the year ended December 31, 2009, we had net other expenses of $1.6 million, compared to net other expenses of $1.2 million for the prior year. The $0.4 million net increase is primarily attributed to a $3.2 million change on extinguishment of debt ($2.8 million loss in 2009 compared to $0.4 million gain in 2008) and a $1.6 million increase in interest expense compared to 2008. This was offset by a $4.5 million change in the fair value of derivative liabilities.
Net Loss
For the reasons noted above, our net loss for the year ended December 31, 2009, increased 32% to $8.7 million, compared to $6.6 million in 2008.
Liquidity and Capital Resources
Our current liquidity position has allowed us to meet our ongoing Plan payment obligations and nominal working capital requirements to date. During 2009, we experienced unexpected equipment failures and difficult mining conditions, which had an adverse effect on production. We also had downtime and delays in production during the third quarter as we sealed a section of the Horizon Mine and began mining in another section of the mine. There were also short-term delays in production as we deployed new mining equipment in the Horizon Mine during the third quarter. In addition, beginning at the end of September, 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 the first quarter of 2010. We have recently executed additional coal sales contracts and have seen demand for our coal increase. However, due to the aforementioned challenges in production and coal sales, we may 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 $7.2 million associated with Hidden Splendor’s Bankruptcy Plan of Reorganization is in default and due upon demand, of which approximately $4.6 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. 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.
Trends, events or uncertainties which could impact either liquidity or revenues
Several of the matters discussed in this report contain forward-looking statements that involve risks, trends and uncertainties. Factors associated with the forward-looking statements that could cause actual results to differ materially from those projected or forecast are included in the statements below. In addition to other information contained in this report, readers should carefully consider the cautionary statements contained in Item 1 of Part I above.
Contractual Commitments
A tabular disclosure of contractual obligations at December 31, 2009, is as follows:
(1)
Includes loan amounts previously scheduled to mature in 2011 that have become due on demand as a result of default. The Company is working to remedy loan defaults. As of the date of this Report, none of the Company’s creditors have provided notice of default to the Company, nor have any creditors filed a notice of default under the bankruptcy Plan with the bankruptcy court.
Off-Balance Sheet Arrangements
As of December 31, 2009, 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.
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.
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 its 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 proved and probable reserves at the related mine. Accretion expense is included in coal production costs. 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.
Derivatives - In January 1, 2009, the Company adopted the guidance set out in FASB ASC 815-15 which provides the basis for determining whether an instrument (or an embedded feature) is indexed to an entity’s own stock. As a result of the adoption, the Company’s outstanding warrants that were previously classified in equity were reclassified to liabilities as of January 1, 2009 as these warrants contain exercise price reset features and were no longer deemed to be indexed to the Company’s own stock. See Note 11 for further discussion.
Revenue Recognition - Hidden Splendor’s revenues are generated under a long-term sales contract with a single coal brokerage company. 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 at the mine or the railcar at the railroad loadout facility, both of which are contracted by the customer. At the end of each month, the amount of coal delivered to the coal brokerage is estimated. 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not required.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
America West Resources, Inc.
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheets of America West Resources, Inc. and subsidiaries ("the Company")
as of December 31, 2009 and 2008, and the related consolidated statements of operations, cash flows and changes in stockholders' deficit for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of business, realization of assets, and liquidation of liabilities in the ordinary course of business. As discussed in Note 3 to the consolidated financial statements, the Company has a working capital deficit and has incurred significant losses. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ MaloneBailey, LLP
www.malone-bailey.com
Houston, Texas
April 14, 2010
America West Resources, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
America West Resources, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
America West Resources, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
Years Ended December 31, 2008 and 2009
America West Resources, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Information
Cash paid for interest
$
417,202
$
325,018
Cash paid for income taxes
-
-
Noncash Investing and Financing Activities
Common stock subscribed
$
-
$
4,305,610
Share issuance costs accrued
-
7,500
Debt discount due to common stock issued with debt
2,184,041
800,000
Debt discount due to imputed interest
-
180,452
Net liabilities assumed from Mid State
-
536,502
Extinguishment of related party debt
-
888,078
Property and equipment acquired through issuance of debt
134,520
-
Accrued interest converted to debt
476,000
-
Initial recording of derivative liabilities
7,957,849
-
Derivative liability removed from the exercise of warrants
306,890
-
Common stock issued for debt repayment
100,000
-
Revision of asset retirement obligation estimate
48,625
-
The accompanying notes are an integral part of these consolidated financial statements.
America West Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Franklin Capital, Inc. was incorporated under the laws of the State of Nevada on July 12, 1990 with authorized common stock of 35,000,000 shares with a par value of $0.0001 and preferred stock of 2,500,000 shares with a par value of $0.0001. On October 24, 1996, the authorized common stock was increased to 75,000,000 shares and again on January 12, 2001 to 100,000,000 shares, both with the same par value. Franklin Capital, Inc. had several name changes and on April 21, 1994 changed its name to Reddi Brake Supply Corp (“Reddi Brake”).
On August 10, 2007, Reddi Brake consummated an acquisition agreement with Hidden Splendor Resources, Inc. (“Hidden Splendor”), a coal mining company located in Helper, Utah. Hidden Splendor operates a coal mine that covers approximately 1,288 acres. Daily coal production is delivered to a coal brokerage company at the mine site. Per the acquisition agreement, Reddi Brake acquired all of the outstanding common stock of Hidden Splendor in exchange for the issuance of 52,945,200 shares of common stock, which shares represented 90% of Reddi Brake’s common stock outstanding after the transaction. The transaction was recognized as the reorganization of Hidden Splendor into Reddi Brake and was recognized as a reverse stock split of the Hidden Splendor common stock outstanding. In addition, the transaction was recognized as the reverse acquisition of Reddi Brake. Upon completion of the transaction, Hidden Splendor became a wholly-owned subsidiary of Reddi Brake.
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 continued since the petition was filed and it continued to operate its business as a Debtor in Possession. Due to the bankruptcy of Hidden Splendor, Reddi Brake’s control over Hidden Splendor was considered compromised for financial reporting purposes. As a result, in previously filed financial statements, Reddi Brake deconsolidated its investment in Hidden Splendor as of October 15, 2007, with the operations of Hidden Splendor being accounted for under the equity method of accounting and disclosed as activity related to “Investee” in those previously filed financial statements. 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 Hidden Splendor officially emerged from bankruptcy.
On March 17, 2008, Reddi Brake changed its name to America West Resources, Inc. (“America West”). Hidden Splendor through October 15, 2007 and America West from August 10, 2007 are referred to herein as “the Company.”
During 2009, America West launched America West Services and America West Marketing, wholly-owned subsidiaries of America West Resources. America West Services provides machine repair services to third parties and to Hidden Splendor Resources. America West Services provides these services using the equipment and repair facility assumed from Mid-State Services as part of the Plan of Reorganization related to the Chapter 11 proceeding of Hidden Splendor Resources and Mid-State Services. America West Marketing purchases coal from third parties and sells coal to Hidden Splendor Resources and third party customers.
NOTE 2 - SUMMARY OF SIGNIFICANT 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.
Restricted Cash - Certain funds have been placed in a trust account for the purpose of purchasing mining equipment in the future.
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 at 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.
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 its 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.
Bank Overdraft - Under the Company’s cash management system, a bank overdraft balance exists for its primary disbursement account. This overdraft represents uncleared checks in excess of cash balances in the related bank account. The Company’s funds are transferred on an as-needed basis to pay for clearing checks.
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 proved and probable reserves at the related mine. Accretion expense is included in coal production costs. 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 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. No liability for unrecognized tax benefits was recorded as of December 31, 2009 and 2008.
Revenue Recognition - Hidden Splendor’s revenues are generated under a long-term sales contract with a single coal brokerage company. 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 at the mine or the railcar at the railroad loadout facility, both of which are contracted by the customer. At the end of each month, the amount of coal delivered to the coal brokerage is estimated. 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.
Common stock equivalents pertaining to stock options and warrants were no included in the calculation of diluted loss per share because the effect would have been anti-dilutive due to the net losses for the years ended December 31, 2009 and 2008.
Fair Value of Financial Instruments - The carrying value of short-term financial instruments, including cash and cash equivalents, accounts receivable, inventories, accounts payable and accrued expenses and short-term borrowings approximate fair value due to the relatively short period to maturity for these instruments. The long-term borrowings approximate fair value since the related rates of interest approximates current market rates. See Note 11 - Derivatives for additional information.
Reclassifications - Certain 2008 amounts have been reclassified to agree with the 2009 financial statement presentation.
Principles of Consolidation - The consolidated financial statements include the financial information of America West Resources, Inc, and its wholly owned subsidiaries, Hidden Splendor Resources, Inc., America West Services, Inc. and America West Marketing, Inc. All significant inter-company accounts and transactions have been eliminated.
Newly Issued Accounting Pronouncements - On January 1, 2009, the Company adopted the guidance set out in FASB ASC 815-15 which provides the basis for determining whether an instrument (or an embedded feature) is indexed to an entity’s own stock. As a result of the adoption, the Company’s outstanding warrants that were previously classified in equity were reclassified to liabilities as of January 1, 2009 as these warrants contain exercise price reset features and were no longer deemed to be indexed to the Company’s own stock. See Note 11 for further discussion.
In July 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance relating to the “FASB Accounting Standards Codification” at FASB ASC 105, as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The codification is effective for interim periods ending after September 15, 2009. All existing accounting standards are superseded as described in FASB ASC 105. All other accounting literature not included in the Codification is nonauthoritative. The adoption of FASB ASC 105 did not impact the Company’s results of operations, financial position or cash flows.
Effective third quarter of 2009, the Company implemented FASB ASC 855. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The adoption of FASB ASC 855 did not impact the Company’s financial position or results of operations.
America West does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its financial position, results of operations or cash flows.
NOTE 3 - GOING CONCERN
As shown in the accompanying financial statements, America West incurred net losses of $8,704,926 and $6,579,895 for the years ended December 31, 2009, and 2008, respectively and had a working capital deficit of $22,871,922 as of December 31, 2009. These conditions raise substantial doubt as to America West’s ability to continue as a going concern. Management is attempting to enhance the operations of Hidden Splendor to achieve cash-positive operations. The financial statements do not include any adjustments that might be necessary if America West is unable to continue as a going concern.
NOTE 4 - CHAPTER 11 BANKRUPTCY REORGANIZATION
As stated in Note 1 above, Hidden Splendor’s Plan of Reorganization 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 over 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.
Certain classified creditors will receive a 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 will 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 interest only payments, commencing in the 25th month 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’s general unsecured creditors are owed approximately $3,400,000. 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 creditors either (i) 50% of the allowed general unsecured creditor claims within twelve months following the effective date of the Plan, or (ii) 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. Insider claims will receive no distributions.
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. Additionally, America West must make capital expenditures in connection with the operations of the Horizon Mine by making available at least $2,000,000 in new equipment within 180 days of the effective date of the Plan. 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.
In the event Hidden Splendor (i) fails to pay fully any payments when due, or (ii) fails to comply with any provision of the Plan, then (A) 100% (reduced only by the amounts actually paid and received by creditors) of all allowed claims of general unsecured creditors shall be immediately due and accelerated and (B) Hidden Splendor must immediately list its assets for sale.
Hidden Splendor’s Chapter 11 bankruptcy proceeding was consolidated with the Chapter 11 proceeding of Mid-State Services, Inc. Pursuant to the Plan, Mid-State Services, Inc.’s assets and liabilities were assumed by Hidden Splendor on December 19, 2008.
America West recognized reorganization fees of $845,405 for the year ended December 31, 2008. These fees are comprised of legal and other expenses related to the Hidden Splendor bankruptcy.
NOTE 5 - PREPAID ROYALTIES
On July 2, 2008, America West entered into a six-year lease agreement to lease an abandoned coal mine known as the “Columbia" property. The property consists of 5,200 acres in Carbon County, Utah. The lease agreement calls for a six percent royalty to the lessor on all coal sales from the property and monthly prepaid royalty payments totaling approximately $2.2 million to be paid through March 2010. The lease agreement gave America West the exclusive option to purchase the property for a price ranging from $22,000,000 to $33,000,000, depending on the date of the purchase. As of December 31, 2009 and 2008, America West had paid $1,275,000 and $565,000, respectively, in prepaid royalties associated with the Columbia property. At December 31, 2009, America West is in default of this agreement due to nonpayment of several monthly royalty payments and America West no longer has a valid lease agreement. Therefore, the amount paid of $1,275,000 was fully expensed in 2009.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 2009 and 2008:
The capitalized asset retirement cost and the land and mineral rights are depleted based on the units of production method over the estimated reserves at the related mine, as discussed in Note 2. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which were as follows:
Depreciation and depletion expense was $3,839,880 and $1,673,577 for the years ended December 31, 2009 and 2008, respectively. Depreciation and depletion expense is included with coal production costs in the consolidated statements of operations.
NOTE 7 - REVOLVING LINES OF CREDIT
During 2008, a line of credit was extinguished as part of the December 22, 2008 Chapter 11 Bankruptcy Plan of Reorganization and its outstanding balance of $57,301 was included in the gain on extinguishment of debt for the year ended December 31, 2008.
On September 29, 2008, America West obtained a $75,000 line of credit with a bank. The line of credit matures in April 2010 and bears interest at the prime rate plus two percent. The line of credit is currently in default and America West is negotiating new terms. The loan is secured by personal assets of an America West board member and shareholder. As consideration for the loan collateral, America West agreed to issue the board member 250,000 shares of common stock valued at $67,500. As of December 31, 2009 and 2008, the total outstanding balance on the line of credit was $34,500 and $69,000, respectively.
NOTE 8 - SHORT-TERM AND LONG-TERM DEBT
On October 9, 2008, America West obtained a $2,800,000 loan from a third party. The loan bears interest at 17% per annum. The original maturity date was October 9, 2009. On October 9, 2009, the loan was modified whereby the maturity date was extended to April 9, 2011. In addition, interest of $476,000 incurred from October 2008 to October 2009 was added to the original principal. One $500,000 payment is required on October 9, 2010 and the balance of principal and interest is due April 9, 2011. In addition, $100,000 of the principal was paid at the time of the refinancing by issuing 5,000,000 shares of common stock, resulting in a new loan amount of $3,176,000. The shares were valued at $650,000. If the loan is not repaid by October 9, 2010, the creditor will be awarded 2,000,000 warrants to purchase common stock at $.02 per share. If certain mine mortgage requirements are not met by May 31, 2010, America West will issue up to an additional 11,000,000 warrants to purchase common stock at $.01 per share. See Note 10 for valuation of warrants. America West evaluated the modification under FASB ASC 470-50 and determined that the modification was substantial and the revised terms constituted a debt extinguishment. As a result, a $550,000 loss on extinguishment of debt was recorded to reflect the difference between the amount of debt reduced and the fair value of the common stock issued during 2009. America West also incurred financing costs of $280,000 associated with the original loan. The costs were capitalized and amortized over the life of the loan using the effective interest rate method which resulted in $218,858 and $61,142 of amortization expense for the years ended December 31, 2009 and 2008, respectively. The outstanding principal balance on the loan was $3,176,000 and $2,800,000 as of December 31, 2009 and 2008, respectively. As of December 31, 2009, America West defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
On December 5, 2008, Hidden Splendor assumed a loan originally in the name of Mid-States Services, Inc. for $346,041 as part of the Chapter 11 Bankruptcy Plan of Reorganization. The bank loan bears interest at 7% per annum and has an aggregate monthly principal and interest payment of $6,090. The loan matures in November 2014. The outstanding principal balance at December 31, 2009, was $296,361. As of December 31, 2009, the Company defaulted on this loan. Consequently, is loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
On December 5, 2008, Hidden Splendor assumed three automobile loans originally in the name of Mid-States Services, Inc. totaling $26,837 as part of the Chapter 11 Bankruptcy Plan of Reorganization. During 2009, a shareholder assumed one of the loans and the related vehicle. The remaining two loans bear interest at 12% per annum and have aggregate monthly principal and interest payments of $1,171. The loans are secured by the related automobiles and mature between September 2010 and January 2011. The outstanding principal balance on the loans at December 31, 2009, was $13,382.
On December 5, 2008, Hidden Splendor obtained new terms on existing bank loan number 9003 of $1,541,176 as part of the Chapter 11 Bankruptcy Plan of Reorganization. The loan bears interest at 7% per annum fixed, per the Plan, a decrease from the original rate of 11.25%. This loan has an aggregate monthly principal and interest payment of $27,125 and matures in November 2014. Principal and interest payments were made during the Chapter 11 bankruptcy proceeding which paid down the loan from $2,128,519 at December 31, 2007. The outstanding principal balance at December 31, 2009, was $1,319,917. As of December 31, 2009, the Company defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
On December 5, 2008, Hidden Splendor obtained new terms on its existing bank loan number 9005 of $1,499,187 as part of the Chapter 11 Bankruptcy Plan of Reorganization. The loan bears interest at 7% per annum fixed, per the Plan, a decrease from the original rate of 9.25%. This loan has an aggregate monthly principal and interest payment of $23,961 and matures in August 2015. Principal and interest payments were made during the Chapter 11 bankruptcy proceeding which paid down the loan from $2,009,457 at December 31, 2007. The outstanding principal balance at December 31, 2009, was $1,314,028. As of December 31, 2009, the Company defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
On December 5, 2008, Hidden Splendor obtained an arrearage loan (bank loan number 9004) with the aforementioned bank related to interest, bank fees, professional fees and unpaid principal on the aforementioned existing loans through the bankruptcy petition date of $2,358,952 as part of the Chapter 11 Bankruptcy Plan of Reorganization. The loan bears interest of 7% per annum and matures in August 2015. The loan has an aggregate monthly principal and interest payment of $37,703. The outstanding principal balance at December 31, 2009, was $2,067,607. As of December 31, 2009, the Company defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
On December 5, 2008, America West reclassified pre-petition trade accounts payable amounts owed to general unsecured creditors to a long-term debt owed to the general unsecured creditors per the Chapter 11 Bankruptcy Plan of Reorganization. Per the Plan, the amount was reduced by 30% to the amount of $1,965,093 and is payable in quarterly installments of $190,000 through December 2012. The loan is secured by Hidden Spendor’s assets. Interest was imputed on this loan using America West’s standard borrowing rate of 7% per annum. A discount of $180,452 was recorded on the loan and it is being amortized using the effective interest method over the life of the loan. The effective interest rate on the note is 6.82%. During the years ended December 31, 2009 and 2008, $177,450 and $3,002 of the discount was amortized and recorded as interest expense. The unamortized discount at December 31, 2009 and 2008 was $0 and $177,450, respectively. The outstanding principal balance at December 31, 2009, was $1,205,092. America West defaulted on this loan in the first quarter of 2010.. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
On December 5, 2008, Hidden Splendor obtained new payment terms on unpaid payroll and coal excise taxes totaling $1,528,835 as part of the Chapter 11 Bankruptcy Plan of Reorganization. The loan is secured by Hidden Splendor’s assets and is payable in quarterly payments of $162,156. The loan bears interest at 7% per annum and matures in September 2011. The outstanding principal balance at December 31, 2009, was $880,213. The Company defaulted on this loan in the first quarter of 2010. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
During 2007, The Howard Kent, Inc. Profit Sharing Plan, an entity controlled by the former spouse of a less than 10% shareholder of the Company, loaned America West $800,000. The loans bear interest at 8% to 8.25% and originally matured between May 2007 and June 2008. As part of the Chapter 11 Bankruptcy Plan of Reorganization, the principal balance was reduced to $475,000, the maturity date was extended to October 2012, and the loan interest rate was reduced to 8.1% per annum. The updated loan terms call for monthly interest-only payments the first 24 months, then monthly principal and interest payments the following 24 months. The principal that was extinguished was included in the gain on extinguishment of debt during 2008. The outstanding principal balance on the loan was $475,000 as of December 31, 2009 and 2008.
In January 2009, America West entered into a non-interest bearing promissory note to purchase land for $134,520. The note required monthly installments of $22,420 and matured on August 1, 2009. America West is in default and is currently negotiating a new maturity date for the loan. The outstanding principal balance at December 31, 2009, was $126,520.
On May 27, 2009, America West and its subsidiaries borrowed a total of $2,300,000, consisting of $1,495,000 from third parties and $805,000 from an affiliate of a director of America West. The notes bear interest at the rate of 16% compounded annually, with interest payable monthly commencing in August 2009, and the principal amount due at maturity, on May 27, 2011. The notes are 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 notes. As of December 31, 2009, America West defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
In relation to the above loans, America West issued the lenders 41,800,000 shares of the Company’s common stock for $150,000 cash and granted the lenders a royalty on the coal produced by Hidden Splendor for $50,000, subject to compliance with Hidden Splendor’s December 8, 2008 Plan of Reorganization. The royalty agreement expires in August 2018. The relative fair value of these shares is $1,483,642 and was recorded as a debt discount. This relative fair value of $1,483,642 along with the value of $150,000 allocated to the shares from the cash received resulted in a total value of $1,633,642 being recorded to additional paid-in capital. The debt discount is amortized over the life of the loans using the effective interest rate method. Amortization expense for the year ended December 31, 2009 was $149,545. In addition, America West incurred $380,000 in financing costs associated with this loan. These costs were capitalized and amortized over the life of the loan using the effective interest rate method. Amortization expense for the year ended December 31, 2009 was $62,628.
On October 23, 2009, the payment terms on the loans described above were modified whereby the interest incurred from the original issuance date of the loan through December 22, 2009 would be paid in common stock and interest accruing after December 22, 2009 is payable in monthly cash payments. In connection with this modification, 10,682,222 shares of common stock were issued to the lenders with a fair value of $854,578. America West evaluated the modification under FASB ASC 470-50 and determined that the modification was substantial and the revised terms constituted a debt extinguishment. As a result, a total loss on the extinguishment of $2,292,403 was recorded during the year ended December 31, 2009. The loss on the extinguishment of debt was comprised of the following: 1) $640,934 representing the difference between the interest repaid with stock and the fair value of the shares issued, 2) $1,334,097 representing the unamortized discount on the loans as of the date of modification and 3) $317,372 representing the unamortized deferred financing costs on the date of modification. The outstanding principal balance of the above loans at December 31, 2009 was $2,300,000, of which $805,000 is due to a related party.
During June and July 2009, America West and its subsidiaries borrowed an aggregate of $161,039. The loan proceeds were used to pay for business insurance. The notes bear interest at 4.27% per annum and mature on March 4, 2010. The outstanding principal balance at December 31, 2009, was $58,174.
On October 13, 2009, America West and its subsidiaries issued a promissory note for $200,000. The note bears interest at the rate of 10% per annum and matures on October 13, 2010. Two million (2,000,000) common shares were also issued to the creditor in connection with the debt. The relative fair value of these shares was $104,762 and was recorded as a discount to the debt. The debt discount is being amortized over the term of the debt using the effective interest method. The loan was repaid in full on November 7, 2009. Consequently, the debt discount was fully amortized to interest expense during the year. In addition, America West incurred financing costs of $10,000 associated with the loan. The costs were capitalized and the entire amount was amortized to interest expense during the year ended December 31, 2009.
On October 23, 2009, America West and its subsidiaries borrowed a total of $1,508,000, consisting of $983,000 from third parties and $525,000 from an affiliate of a director of America West. The notes bear interest at the rate of 16% compounded annually. Interest from the original issue date through December 22, 2009 was paid through issuance of 2,000,000 shares of common stock valued at $160,000. The amount of interest paid was $40,000 and, therefore, an additional $120,000 of interest expense was recorded. The notes mature at the earliest of i) May 27, 2011 or ii) the closing of $10,000,000 debt or equity financing. The notes are 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 notes. In addition, America West incurred $265,000 in financing costs associated with this loan. These costs are fully amortized to interest expense for the year ended December 31, 2009 as a result of the loan default noted below. The outstanding principal balance at December 31, 2009, was $1,508,000, of which $525,000 was from a related party. As of December 31, 2009, America West defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
On November 11, 2009, America West and its subsidiaries issued a promissory note for $150,000. The note bears interest at the rate of 10% per annum and matures on November 11, 2010. One million, five hundred thousand (1,500,000) common shares were also issued to the creditor in connection with the debt. The relative fair value of these shares was $75,000 and was recorded as a discount to the debt. The debt discount was fully amortized to interest expense for the year ended December 31, 2009 as a result of the loan default noted below. The outstanding principal balance at December 31, 2009 was $150,000. As of December 31, 2009, America West defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
On January 27, 2010, America West and its subsidiaries signed a note to borrow a total of $1,000,000, consisting of four draws. The note bears interest at the rate of 10% per annum, with interest and principal amount due at maturity, on March 1, 2010. Two of the four draws occurred in December 2009 and totaled $325,000. Three million, two hundred fifty thousand (3,250,000) common shares were also issued to the creditor in connection with the debt. An additional 6,750,000 shares will be issued in 2010 as the remaining loan is disbursed. The relative fair value of the 3,250,000 shares was $159,596 and was recorded as a discount to the debt. The debt discount was fully amortized and recorded as interest expense for the year ended December 31, 2009 as a result of the loan default noted below. The notes are 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 notes. The outstanding principal balance at December 31, 2009, was $325,000. As of December 31, 2009, America West defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
A summary of the outstanding third party debt at December 31, 2009 and 2008 is as follows:
Minimum principal payments on the above loans for each of the five years subsequent to December 31, 2009 are as follows:
$
13,410,135
475,000
-
-
Thereafter
-
$
13,885,294
NOTE 9 - RELATED PARTY TRANSACTIONS
Related Party Debt
During 2008, related party shareholders loaned America West a total of $1,065,000. The notes accrue interest at 10% per annum and originally matured on December 31, 2008. Three million, seven hundred sixteen thousand, six hundred and sixty-six (3,716,666) common shares were also issued to the shareholders in connection with the debt. The relative fair value of these shares was $800,000 and was recorded as a discount to the debt. The debt discount is being amortized over the term of the debt using the effective interest method. During the year ended December 31, 2008, the entire discount was amortized and recorded as interest expense. On December 31, 2008, the maturity date was extended to the earlier of (i) March 31, 2009 or (ii) the closing of a $10,000,000 debt or equity financing of America West Resources, Inc. America West evaluated the modification under FASB ASC 470-50 and concluded that the revised terms constituted a debt modification rather than a debt extinguishment. America West repaid these related party loans in full in January 2009.
In May 2009, an entity controlled by a director of America West loaned the Company $805,000. In relation to the financing, America West issued 14,630,000 shares of its common stock for $52,500 cash. In addition, the entity was granted the right to a $17,500 royalty on coal produced. America West recognized royalty expense during the year of $9,489. See also Note 8 above for full details regarding the debt and equity financing. As of December 31, 2009, America West defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
Likewise, on various dates in 2009, certain officers, directors and affiliates advanced to America West an aggregate amount of $397,000 of which $345,000 was repaid during the year. These notes accrue interest at 12% per annum and originally matured on the earlier of (i) May 22, 2009 or (ii) the closing of a $10,000,000 debt or equity financing by America West. As additional consideration, a total of 510,000 common shares were also issued to the related party lenders. The relative fair value of these shares is $25,500 and was recorded as a debt discount. The discount was fully amortized to interest expense over the original life of the loans using the effective interest method. In an event of default, the unpaid principal and accrued interest due under the notes is convertible into common shares at a conversion price equal to $0.02 per share. The maturity date on the unpaid loans was extended twice in 2009, with the first extended maturity date being November 22, 2009 and then May 31, 2010. America West evaluated each modification under FASB ASC 470-50 and concluded that the revised terms constituted a debt modification rather than a debt extinguishment. The unpaid principal balance on the loans at December 31, 2009, was $52,000.
On May 1, 2009, America West issued a non-interest bearing, demand note to an entity controlled by a director of America West for $10,000. The note was paid in full on May 28, 2009.
On October 23, 2009, America West and its subsidiaries borrowed a total of $1,508,000, consisting of $983,000 from third parties and $525,000 from an entity controlled by a director of America West. The notes bear interest at the rate of 16% compounded annually, with interest from the original issue date through December 22, 2009 payable in common stock. Interest accruing after December 22, 2009 is payable in monthly cash payments. The maturity date is the earliest of i) May 27, 2011, or ii) the occurrence of an event of default r iii) the closing of $10,000,000 debt or equity financing of America West Resources, Inc. The notes are 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 notes. See Note 8 for full details regarding this financing. As of December 31, 2009, America West defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
Likewise, in between October and December 2009, certain officers, directors and affiliates advanced to America West an aggregate of $645,000 of which $420,000 was repaid during the year. The outstanding notes accrue interest at 10% per annum and mature on various dates between October and December 2010. As additional consideration, a total of 6,450,000 common shares were also issued to the related party lenders. The relative fair value of these shares is $335,541 and was recorded as a debt discount. Also, America West incurred $61,050 in financing costs associated with these loans. The discount and deferred financing costs are fully amortized to interest expense for the year ended December 31, 2009 as a result of the loan default noted below. The outstanding principal balance on the notes at December 31, 2009 was $225,000. As of December 31, 2009, America West defaulted on this loan. Consequently, the loan is due on demand and the outstanding principal balance is reflected as part of current liabilities in the consolidated balance sheets.
Other Related Party Transactions
During 2009 and in previous years, a shareholder pledged personal assets as security for a performance bond related to the federal coal lease for Hidden Splendor.
During 2009 and in previous years, a shareholder pledged personal assets as security for a reclamation obligation to the State of Utah for Hidden Splendor.
Certain officers and directors of America West and their controlled entities owned Hidden Splendor prior to the reverse acquisition with Hidden Splendor (see Note 1 above).
In October 2008, a shareholder provided personal assets as collateral for a bank loan to America West. In relation to the collateral provided, the shareholder was issued 250,000 shares in December 2008. The shares were valued at $67,500.
During 2008 and previous years, a significant amount of supplies and equipment were purchased by Hidden Splendor from Mid-State Services (“Mid-State”), a company owned by certain stockholders of America West. Expenses for supplies and equipment purchased from Mid-State were $107,651 for the year ended December 31, 2008. During the twelve months ended 2008, Mid-State provided management services to Hidden Splendor and received $10,000 in management fees, which included administrative expenses. In previous years, Hidden Splendor had also occasionally advanced funds to Mid-State. Accounting for amounts owed to Mid-State for supplies, equipment, and services, and the amounts advanced to Mid-State, as of December 31, 2007, the net amount owed by Hidden Splendor to Mid-State was $33,083. In accordance with Hidden Splendor’s Chapter 11 bankruptcy proceeding, per Hidden Splendor’s plan of reorganization, effective on December 19, 2008, Hidden Splendor assumed all of Mid-State’s debt and assets. As a result, the related party receivable with Mid-State was eliminated as of December 19, 2008.
During the years ended December 31, 2009 and 2008, Hidden Splendor paid $6,000 and $12,000 for office space rent to an entity owned by certain stockholders of America West. Hidden Splendor accrued an additional $129,600 and $13,200 for rent not paid to the related party entity as of December 31, 2009 and 2008, respectively. In addition, Hidden Splendor leases certain water rights from the entity. During 2009, Hidden Splendor accrued $12,000 for the rent of these water rights.
Hidden Splendor ships a portion of its coal utilizing a trucking company owned by America West's chief executive officer. During the year ended December 31, 2009, Hidden Splendor paid the trucking company a total of $142,463. This is included in coal production costs in the consolidated statements of operations.
During 2009, an officer assumed a vehicle loan and took ownership of the vehicle. The debt assumed was approximately $3,400 and the net book value of the vehicle was $6,184.
During 2009, certain shareholders paid various invoices for America West and its subsidiaries which resulted in accounts payable due to related parties of $5,000.
NOTE 10 - STOCKHOLDERS’ EQUITY
Common Stock
During the year ended December 31, 2008, America West issued 41,779,999 common shares and 187,500 common stock warrants for $4,985,750 cash and incurred $570,035 in share issuance costs associated with the issuance.
During the year ended December 31, 2008, America West sold units under a private placement. Each unit consisted of 150,000 common shares and 75,000 common stock warrants. America West sold a total of 171.9 units, representing 25,789,365 common shares and 12,894,683 warrants. The shares had a total value of $5,157,873 and included a subscription receivable of $4,305,610. America West incurred $852,201 in share issuance costs associated with the private placement. The subscription receivable was collected in January 2009.
In October 2008, a shareholder pledged personal assets as security for a bank loan to America West. In relation to the collateral provided, the shareholder was issued 250,000 shares in December 2008. The shares were valued at $67,500 and recorded to interest expense.
During the year ended December 31, 2008, America West issued 350,000 common shares for services valued at $82,250 and issued 3,716,666 common shares in connection with loans valued at $800,000. The value of the shares issued for the loans was recorded as a discount on the debt and fully amortized over the life of the loans using the effective interest method.
In November 2008, the board of directors and certain shareholders constituting a majority of the outstanding common stock of America West voted to amend the America West Articles of Incorporation to increase the number of authorized shares of Company common stock from 200,000,000 shares to 300,000,000 shares. This increase in authorized common shares is reflected in the consolidated balance sheets herein.
In January 2009, America West sold 8.5 units in a private placement. Each unit consisted of 150,000 common shares and 75,000 common stock warrants. A total of 1,275,000 common shares and 637,500 common stock warrants were sold. The warrants are exercisable at $0.30 per share, vest immediately and have a term of five years. America West received cash of $187,616 net of share issuance costs of $67,384.
During the year ended December 31, 2009, America West issued an aggregate of 8,046,640 common shares for services valued at $888,646.
In June 2009, two parties related to America West signed personal guarantees for some of America West’s debt. As a result, America West granted these parties an aggregate of 1,500,000 common shares. The shares were valued at $150,000 and recorded to interest expense.
During the year ended December 31, 2009, America West issued an aggregate of 55,510,000 common shares with debt and had a total value of $2,334,040. See Notes 8 and 9 above for details.
In October 2009, America West issued 5,000,000 shares as repayment of a portion of third party debt amounting to $100,000. These shares were valued at $650,000 and the excess amount of $550,000 was recognized as a loss on extinguishment of debt.
In December 2009, America West issued an aggregate of 3,459,683 common shares in exchange for exercising 3,459,683 warrants. America West received cash of $277,492 net of share issuance costs of $68,476.
In December 31, 2009, America West issued an aggregate of 12,682,222 common shares, valued at $1,014,578, as payment of accrued interest on various loans.
Options
On July 3, 2008, America West granted employees and officers options to purchase an aggregate 4,237,500 common shares at exercise prices ranging from $0.40 to $0.45. The options vest one third per year through July 3, 2010 and have a term of five years. The fair value of the options was determined to be $1,438,973 using the Black-Scholes stock option valuation model. The significant assumptions used in the valuation were: the exercise prices noted above; the market value of America West’s common stock on July 3, 2008, $0.35; expected volatilities between 237.25% and 286.65%; risk free interest rate of 3.28%; and expected terms between 2.5 and 3.5 years. During the years ended December 31, 2009 and 2008, $490,441 and $824,889 of this fair value was expensed and the remaining $123,642 will be expensed over the remaining vesting period of the options.
On January 15, 2009, America West entered into an employment agreement with its chief financial officer. The agreement terminates on December 31, 2010. Pursuant to the terms of the agreement, America West granted its chief financial officer options to purchase 2,000,000 shares of its common stock at an exercise price of $0.01 per share. The options vest at a rate of 400,000 shares per calendar quarter-end with full vesting being completed on March 31, 2010 and an expiration on January 30, 2019. The grant date fair value of the options was determined to be $377,031 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 January 15, 2009, $0.19; expected volatilities between 231.02% and 251.56%; risk free interest rate of 1.01%; and expected terms between 2.6 and 3.1 years. The chief financial officer resigned on October 1, 2009. In accordance with the terms of the option agreement, 800,000 of the options were forfeited. For the year ended December 31, 2009, the Company recognized the related expense on the 1.2 million options that vested amounting to $226,215.
On September 22, 2009, America West granted employees options to purchase an aggregate 1,310,000 common shares at an exercise price of $0.10. The options vest 100% on September 22, 2010 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 $123,129 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 September 22, 2009, $0.099; expected volatility of 246.69%; risk free interest rate of 1.28%; and an expected term of 2.5 years. During the year ended December 31, 2009, $33,734 of this fair value was expensed and the remaining $89,395 will be expensed over the remaining vesting period of the options.
A summary of option transactions for the years ended December 31, 2009 and 2008 is as follows:
Wtd. Avg.
Exercise
Options
Price
Outstanding at December 31, 2007
-
$
-
Granted
4,237,500
0.44
Exercised
-
-
Forfeited
-
-
Outstanding at December 31, 2008
4,237,500
0.44
Granted
3,310,000
0.05
Exercised
-
-
Forfeited
(800,000)
(0.01)
Outstanding at December 31, 2009
6,747,500
0.30
Exercisable at end of year
4,025,000
$
0.31
At December 31, 2009, the range of exercise prices and the weighted average remaining contractual life of the options outstanding were $0.01 to $0.45 and 3.65 years, respectively. The intrinsic value of the exercisable options outstanding at December 31, 2009 was $144,000. At December 31, 2008, the range of exercise prices and the weighted average remaining contractual life of the options outstanding were $0.40 to $0.45 and 4.51 years, respectively. The exercisable options outstanding at December 31, 2008 had no intrinsic value.
Warrants
On March 2, 2008, America West granted warrants to a consultant to purchase up to 400,000 shares at exercise prices ranging from $0.26 to $0.42. The stock warrants vest over a nine-month period and terminate two years after America West files a registration statement encompassing the consultant's purchased stock. The fair value of the warrants was determined to be $74,659. During the twelve months ended December 31, 2008, the entire fair value of these warrants was expensed. The Black-Scholes stock option valuation model was used to determine the fair value of the warrants. The significant assumptions used in the valuation were: the exercise prices noted above; the market value of America West’s common stock on March 2, 2008, $0.21; expected volatilities between 304% and 323%; risk free interest rate of 2.53%; and expected terms between 1 and 1.38 years.
On July 3, 2008, America West entered into a six-month service agreement engaging a consultant. Pursuant to the agreement, America West granted the consultant warrants to purchase 500,000 shares of America West common stock with exercise prices ranging from $0.15 to $0.45. The warrants vest immediately and expire on January 3, 2009. The fair value of the warrants was determined to be $76,970 using the Black-Scholes stock option valuation model. The significant assumptions used in the valuation were: the exercise prices noted above; the market value of America West’s common stock on July 3, 2008, $0.35; expected volatility of 208.67%; risk free interest rate of 2.09%; and an expected term of three months. During the year ended December 31, 2008, $75,715 of this fair value was expensed. The remaining $1,255 was expensed during 2009.
During August 2008, America West sold 187,500 common stock warrants along with 375,000 common shares for cash. The warrants vest immediately, have an exercise price of $0.30 per share and expire 2 years from the date of grant.
On October 24, 2008, America West entered into an exclusive investment banking agreement with a third party for services related to the sale of common stock. Pursuant to the agreement, America West granted the investment banker warrants to purchase 15 million common shares of America West’s stock at an exercise price of $0.01 per share. The warrants vest immediately and have a term of five years. As the warrants were granted as stock issuance costs, no expense was recorded related to the warrants.
As part of the private placement mentioned under “common stock” above, on December 31, 2008, America West sold investors 12,894,683 common stock warrants. The warrants are exercisable at $0.30 per share, vest immediately and have a term of five years. On October 1, 2009, the exercise price was lowered to $0.10 per share and 3,459,683 warrants were exercised.
In January 2009, America West sold 8.5 units in a private placement. Each unit consisted of 150,000 common shares and 75,000 common stock warrants. A total of 1,275,000 common shares and 637,500 common stock warrants were sold. The warrants are exercisable at $0.30 per share, vest immediately and have a term of five years.
On October 9, 2009, America West granted warrants, with an exercise price of $0.02, in conjunction with a loan. See Note 8 for full details. 2,000,000 warrants are exercisable on October 9, 2010, if America West has not repaid all principal of $3,176,000 and the interest associated with the loan. The fair value of the warrants was determined to be $260,000. In addition, 11,000,000 warrants, with an exercise price of $0.01, are exercisable on May 31, 2010, if America West does not satisfy a certain mortgage requirement related to the Horizon Mine by May 31, 2010. The fair value of the warrants was determined to be $1,429,999. All of the above warrants have a term of 10 years. The Black-Scholes stock option valuation model was used to determine the fair value of the warrants. The significant assumptions used in the valuation were: the exercise prices noted above; the market value of America West’s common stock on October 9, 2009, $0.13; expected volatility of 292%; risk free interest rate of 3.4%; and expected terms of ten years. The fair value of these warrants was not recognized during 2009 as the warrants can only be exercised when certain performance conditions, as indicated above, are met.
A summary of warrant transactions for the years ended December 31, 2009 and 2008 is as follows:
Wtd. Avg.
Exercise
Warrants
Price
Outstanding at December 31, 2007
-
$
-
Granted
28,982,183
0.15
Exercised
-
-
Forfeited
-
-
Outstanding at December 31 ,2008
28,982,183
0.15
Granted
13,637,500
0.03
Exercised
(3,459,683)
(0.30)
Forfeited
(500,000)
(0.33)
Outstanding at December 31 ,2009
38,660,000
0.09
Exercisable at end of year
25,660,000
$
0.13
At December 31, 2009, the range of exercise prices and the weighted average remaining contractual life of the warrants outstanding were $0.01 to $0.42 and 5.83 years, respectively. The intrinsic value of the exercisable warrants outstanding at December 31, 2009, was $1,800,000.
At December 31, 2008, the range of exercise prices and the weighted average remaining contractual life of the warrants outstanding were $0.01 to $0.45 and 4.75 years, respectively. The intrinsic value of the exercisable warrants outstanding at December 31, 2008, was $4,068,000.
NOTE 11 - DERIVATIVES
On January 1, 2009 America West adopted FASB ASC 815-15, and as a result an aggregate 27,894,683 outstanding warrants containing exercise price reset provisions that were previously classified in equity were reclassified to derivative liabilities. In addition, the 637,500 warrants granted on January 9, 2009 contain the same reset provision and were recorded as derivative liabilities. As of January 1, 2009, these warrants were no longer deemed to be indexed to America West’s own stock. The fair value of these liabilities as of January 1, 2009 and January 9, 2009 totaled $7,957,849 and was removed from additional paid-in capital. The fair value of these liabilities as of December 31, 2009 totaled $3,195,870. The change in fair value of $4,455,089 was recorded as a gain during the year ended December 31, 2009. In addition, 3,459,863 warrants were exercised. As a result, $306,890 of the derivative liability was removed and added to additional paid-in capital. The Black Scholes stock option valuation model was used to determine the fair values. The significant assumptions used in the January 1, 2009 and January 9, 2009 valuations were: the exercise prices of $0.01 and $0.30; the market value of America West’s common stock on January 1, 2009 and January 9, 2009, $0.28 and $0.24; expected volatilities between 287.92% and 289.17%; risk free interest rates between 1.51% and 1.55%; and remaining contract terms between 4.83and 5.00 years. The significant assumptions used in the December 31, 2009 valuation were: the exercise prices of $0.01 and $0.30; the market value of America West’s common stock on December 31, 2009, $0.13; expected volatilities between 220.22% and 225.41%; risk free interest rate of 2.20%; and remaining contract terms between 3.84 and 4.03 years. There is no cumulative effect to adjust retained earnings due to 15,000,000 of these warrants being issued in connection with an investment banking agreement related to capital raise and thus scoped out from FASB ASC 815-15. The service agreement was fulfilled at the end of 2008 and therefore the derivative liability is first recorded on January 1, 2009. The other 12,894,683 warrants granted prior to January 1, 2009 were granted on December 31, 2008. The change in the fair value of these warrants between December 31, 2008 and January 1, 2009 was negligible.
Fair value measurement
America West values its warrant instruments under FASB ASC 820 which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008.
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.
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 warrant 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 December 31, 2009.
NOTE 12 - COMMITMENTS & CONTINGENCIES
The Company has an existing coal lease agreement with the U.S. Bureau of Land Management (“BLM”). Rental payments of $3,867 are payable to the BLM by the first of September each year. In addition, a royalty payment of eight percent of gross sales for production up to 900,000 tons is due to the BLM each month. The Company is also required to make payments each quarter to the Bureau of Land Reclamation. The payment is equal to $0.15 per ton of coal mined.
Mining operations are subject to conditions that can impact the safety of our workforce or delay coal deliveries or increase the cost of mining for varying lengths of time. These conditions include mine collapses; fires and explosions from methane gas or coal dust; accidental mine water discharges; weather, flooding and natural disasters; unexpected maintenance problems; key equipment failures; variations in coal seam thickness; variations in the amount of rock and soil overlying the coal deposit; variations in rock and other natural materials and variations in geologic conditions.
Coal mining, especially underground coal mining, is inherently dangerous and great care must be taken to assure safe, continued operations. Past experiences of others in the industry indicate that lapses in safety practices can result in catastrophic collapse of a coal mining operation. Even when best mining practices are strictly observed, natural disasters such as an earthquake could possibly destroy a coal mine’s operations. Any catastrophic event at the coal mine which would close the mine for an extended period of time likely would cause the failure of operations. The Company maintains insurance policies that provide limited coverage for some of these risks, although there can be no assurance that these risks would be fully covered by these insurance policies. Despite the Company’s efforts, significant mine accidents could occur and have a substantial impact. Such impact resulting from accidents could take the form of increased premiums on insurance policies, litigation, fines and penalties imposed by regulating agencies.
On December 28, 2007, America West entered into an employment agreement with its current chief executive officer. The agreement terminates on December 31, 2010. Per the employment agreement, an initial base salary of $150,000 per year would be paid through June 30, 2008, and the salary escalated to $250,000 per year on June 30, 2008. In addition, the employment agreement had certain cash bonus provisions, which were amended in December 2008. Per the employment agreement amendment, the chief executive officer received a $100,000 cash bonus payable upon the closing of $5,000,000 cumulative gross proceeds from equity financing, and another $100,000 cash bonus shall be payable upon America West’s provision of two consecutive months of positive cash flows.
On December 28, 2007, America West entered into an employment agreement with its current chairman. The agreement terminates on December 31, 2010. Per the employment agreement, an initial base salary of $150,000 per year would be paid through June 30, 2008, and the salary escalated to $250,000 per year on June 30, 2008. In addition, the employment agreement had certain cash bonus provisions, which were amended in December 2008. Per the employment agreement amendment, the chairman received a $20,000 cash bonus payable upon the closing of $5,000,000 cumulative gross proceeds from equity financing, and another $20,000 cash bonus shall be payable upon America West’s provision of two consecutive months of positive cash flows. In addition, per the agreement, in January 2009 and January 2010, the chairman was to be issued an amount of options to purchase shares of America West common stock equivalent to one percent of the outstanding common shares at the time of issuance. These shares were authorized to be issued in March 2010. See Note 16 for further details.
In October, 2008, America West entered into an exclusive investment banking agreement with a third party. Per the agreement, the investment banker was issued a five-year fully-vested warrant to purchase 15 million shares of the Company’s stock at an exercise price of $0.01 per share. In addition, America West agreed to enter into a two-year consulting agreement with the investment banker whereby America West will pay the investment banker $15,000 per month.
In connection with the Hidden Splendor Plan of Reorganization, which became effective on December 19, 2008, Hidden Splendor is obligated to make payments to creditors over 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. 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.
Occasionally, Hidden Splendor is issued citations by the Mine Safety and Health Administration in connection with regular inspections of the Horizon Mine. At times, Hidden Splendor challenges citations, resulting in reductions to proposed penalties or administrative adjudications with no penalties. As of December 31, 2009, Hidden Splendor had challenges pending in several administrative actions. Such actions cover a total of approximately $531,481 of proposed, assessed penalties. Management has determined that of the total amount, the probable liability arising from these citations is approximately $266,000 which has been accrued at December 31, 2009.
On October 9, 2009, America West entered into a loan that requires royalty payments on each ton of coal produced. The current rate per ton is $0.25. This rate lasts until August 2016 when the rate increases to $1.00 per ton of coal produced. The $1.00 per ton rate remains in effect until August 2018.
In January 2009, the United States Department of Labor and a former employee of the Hidden Splendor Resources, Inc. brought an action before the Office of Administrative Law Judges in Federal Mine Safety and Health Review Commission naming Hidden Splendor as the respondent. In that action, petitioners claim the former employee was wrongfully discharged and seek damages against Hidden Splendor for that alleged wrongful discharge. Hidden Splendor denies that the employee in question was wrongfully discharged and denies the employee in question and the Department of Labor are entitled to any relief sought in this action. Though America West is confident its subsidiary will prevail in this action, the outcome of this, or any pending action, is uncertain.
Minimum payments on the commitments described above for each of the five years subsequent to December 31, 2010 are as follows:
$
638,867
3,867
3,867
3,867
3,867
Thereafter
-
$
654,335
NOTE 13 - MAJOR CUSTOMERS
During 2009 three customers each accounted for more than 10% of America West’s coal sales. During 2008, four customers each accounted for more than 10% of America West’s coal sales.
NOTE 14 - ASSET RETIREMENT OBLIGATION
The following table summarizes the changes in America West’s asset retirement obligation for the years ended December 31, 2009 and 2008.
Asset retirement obligation, January 1
$
189,999
$
175,519
Asset retirement obligations incurred in the period
-
-
Asset retirement obligations settled in the period
-
-
Accretion expense
15,674
14,480
Revisions in accounting estimate
(48,625)
-
Asset retirement obligation, December 31
$
157,048
$
189,999
NOTE 15 - INCOME TAX EXPENSE
At December 31, 2009, America West had unused federal and state net operating loss carryforwards available of approximately $28,800,000, which may be applied against future taxable income, if any, and which expire in various years through 2029. The Internal Revenue Code contains provisions which likely will reduce or limit the availability and utilization of these net operating loss carryforwards. For example, limitations are imposed on the utilization of net operating loss carryforwards if certain ownership changes have taken place or will take place. The Company has not performed an analysis to determine whether any such limitations have occurred.
The temporary differences and carryforwards which give rise to the deferred income tax assets as of December 31, 2009 and 2008 are as follows:
A reconciliation of income taxes at the federal statutory rate to actual income tax expense is as follows:
NOTE 16 - DEFINED CONTRIBUTION PENSION PLAN
We provide a defined contribution plan for our employees meeting minimum service requirements. Employees can contribute up to 100% of their current compensation to the plan subject to certain statutory limitations. We contribute up to a maximum of 3% of an employee’s compensation and plan participants are fully-vested in the Company’s contributions immediately. We made contributions to the plan of approximately $14,000 and $23,000 during the years ended December 31, 2009 and 2008, respectively.
NOTE 17 - SUBSEQUENT EVENTS
On January 15, 2010, America West issued 150,000 shares of common stock for services rendered valued at $23,250.
In January 2010, America West received the remaining $675,000 of the $1 million loan dated January 27, 2010 that is described in Note 8. 6,750,000 shares of common stock were issued in conjunction with this debt.
On January 26, 2010, America West issued 300,000 shares of common stock for services rendered valued at $42,000.
On various dates in 2010, America West borrowed a total of $1 million from a third party. The loans bear interest of 10% per annum and are due on various dates in March and April 2010. In addition, a total of 10 million shares of common stock were issued with these loans.
On February 12, 2010 America West borrowed $50,000 from a related party. The loan bears interest at 10% per annum and is due on May 15, 2010. In addition, America West issued 500,000 common shares with the debt.
On March 1, 2010, America West entered into a six month consulting agreement whereby America West paid the first monthly payment of $4,000 upon signing the agreement, issued 134,000 shares of common stock, and issued 100,000 warrants to purchase shares of common stock. The value of the 134,000 shares of common stock was $24,120. 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.
On March 24, 2010, America West entered into a settlement agreement to settle fees due under a consulting agreement totaling $70,000. Pursuant to the settlement agreement, America West issued 300,000 common shares and paid $15,000 in cash. America West also agreed to pay $35,000 upon the successful closing of a $7,500,000 debt or equity raise.
On March 26, 2010, America West entered into the following transactions:
Granted 8,260,000 stock options with an exercise price of $0.20 per share, vesting 100% on March 24, 2011 with a term of 3 years from the vesting date
Granted 800,000 shares of common stock, with a value of $128,000, to its Chief Financial Officer for services rendered
Granted 170,000 shares of common stock, with a value of $27,200, to its Chief Executive Officer in consideration for his personal guarantee of the Company’s federal bond obligation
Granted 484,000 shares of common stock, with a value of $77,440, to its Chief Executive Officer for its guarantee of the Company’s reclamation obligation
Granted 3,949,543 options to its Chief Executive Officer to purchase shares of common stock with an exercise price of $0.20 per share, vesting immediately with a term of 3 years
During the first quarter of fiscal 2010, America West exceeded its authorized shares through the issuance of common stock and instruments potentially convertible into common stock. This will result in certain convertible instruments being accounted for as derivative liabilities during the first quarter of fiscal 2010.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit to the SEC under the 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 chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure.
The chief executive officer and the chief financial officer have concluded, based on their evaluation as of December 31, 2009 that, as a result of the material weaknesses described below, disclosure controls and procedures were ineffective in providing reasonable assurance that material information is made known to them by others within the Company.
(b) Management’s Report on Internal Control Over Financial Reporting
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 internal controls over financial reporting, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework, (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”). The following material weaknesses were noted in the evaluation of our internal controls over financial reporting:
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.
As a result of the existence of these material weaknesses as of December 31, 2009, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2009, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
(c) 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.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Executive Officers and Directors
The following table sets forth as of the date of this Annual Report, the name, age, and position of each executive officer and director and the term of office of each director of the Company.
Name
Age
Position
Dan R. Baker
Director, President, Chief Executive Officer
Brian Rodriguez
Director and Chief Financial Officer
Alexander H. Walker III
Chairman, Director, Secretary
George Jarkesy
Director
Amanda Cardinalli
Director
All Directors hold their positions for one year or until successors are duly elected and qualified. All officers hold their positions at the will of the Board of Directors.
Set forth below is certain biographical information regarding each of the Company's executive officers and directors:
Dan R. Baker has served as the Company’s Chief Executive Officer since July 2008 and as its Chief Operations Officer since December 2007. Mr. Baker began his business career in mining as a laborer in 1969, following an extended tour of duty with the U.S. Army in Vietnam. He advanced to longwall foreman, senior mining engineer, longwall superintendent, and manager of underground operations, working for U.S. Steel Corporation, Kaiser Steel Corporation, Braztah Corporation, Utah Power & Light Company, Emery Mining Corporation, and Kaiser Coal Corporation. In 1987, Mr. Baker joined Interwest Mining Company as Vice President-Operations, overseeing both underground and surface mines in Utah, Wyoming, Washington, and Australia for PacifiCorp. He served on the Interwest board of directors, and was a member of the mining and fuels team for PacifiCorp’s international activities. Mr. Baker became President and Chief Executive Officer of Interwest and Vice President-Fuels for PacifiCorp in January 1998, positions he held until he became an executive vice president at CONSOL Energy in November of 1999. At CONSOL Energy, Mr. Baker provided overall leadership, strategic direction and management to all mining operations to produce quality coal at a low cost and with high safety standards. Since 2002, Mr. Baker has been providing consulting services for energy companies. In September of 2006, Mr. Baker joined Hidden Splendor.
Brian Rodriguez has served as a Director of the Company since December 2007. From December 2007 through January 2009, Mr. Rodriguez served as the Chief Financial Officer of America West and has served as interim Chief Financial Officer since October, 2009. Mr. Rodriguez is the President of Marathon Advisors LLC, a professional services firm providing accounting and business development services to micro-cap and small-cap public companies. From March 2006 to May 2007, Mr. Rodriguez served as Chief Financial Officer for SH Celera Capital Corporation, an internally managed fund. From October 2004 to March 2006, Mr. Rodriguez served as an accounting and finance consultant for Jefferson Wells, an international professional services firm. During 2004 and 2005, he also served as a Director and Chairman of the Audit Committee for Opexa Therapeutics, currently a NASDAQ biotechnology company. Mr. Rodriguez has been a Certified Public Accountant in the State of Texas since May, 1995. Mr. Rodriguez holds a B.B.A. from Texas A&M University. Mr. Rodriguez is a director of G/O Business Solutions, Inc.
Alexander H. Walker III, has served as Director and Secretary since August 2007 and as the President and Chief Executive Officer of the Company from August 2007 to July 2008. Since March of 2003, Mr. Walker has been actively involved in the management of Hidden Splendor, acting as its Vice President. Prior to March of 2003, Mr. Walker was engaged in the practice of law focusing primarily in the areas of general business litigation and securities. Mr. Walker is a member of the Utah State Bar Association and the Nevada Bar Association. He is also the chair of the Mining Committee of the Energy, Natural Resources and Environmental Law Section of the Utah State Bar, a member of the board of directors of the South East Utah Energy Producers Association and has served as the co-chair of the board of the Western Energy Training Center.
George Jarkesy, has served as a Director of the Company since December 2007. Mr. Jarkesy has served as the Managing Member of John Thomas Capital Management Group, LLC, which is the general partner for John Thomas Bridge & Opportunity Fund, L.P. since June 2007. Mr. Jarkesy previously served as the Chief Operating Officer and President of SH Celera Capital Corporation, an internally managed fund from March 2007 until March 2008. Mr. Jarkesy has founded and built companies engaged in financial consulting, real estate investments, real estate management, employee leasing, light steel manufacturing, livestock management, oil field services and biotechnology during the last ten years. He is the Vice President of the Board of Directors for the Society of St. Vincent DePaul in the Galveston-Houston Archdiocese of the Catholic Church and is also on the board of the Jarkesy Foundation, Inc.
Amanda Cardinalli, has served as a Director of the Company since August 2007. Ms. Cardinalli is the President of The Nevada Agency and Trust Company, a company which provides trust, stock transfer and resident agent services to its corporate clients. Ms. Cardinalli has been the President of NATCO since 2003 and has managed NATCO operations since 1995. Ms. Cardinalli graduated from Hollins College, Roanoke, Virginia in 1985.
Family Relationships
Alexander H. Walker, III, and Amanda Cardinalli are brother and sister.
Independence of Directors & Board Committees
The Company has no “independent director” as that term is defined under Rule 10A-3 of the Exchange Act. The board has not established any committees and, accordingly, the board serves as the audit, compensation, and nomination committee.
Audit Committee
The Audit Committee of the Board currently consists of the entire Board of Directors, but it is expected that the Audit Committee will be constituted to consist of at least two non-employee directors. The Audit Committee selects an independent public accounting firm to be engaged to audit our financial statements, discuss with the independent auditors their independence, review and discuss the audited financial statements with the independent auditors and management and recommend to our Board of Directors whether the audited financials should be included in our Annual Reports to be filed with the SEC.
Upon the constitution of the Audit Committee, it is expected that all of the members of the Audit Committee will be non-employee directors who: (1) met the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act; (2) did not participate in the preparation of our financial statements or the financial statements of the Company; and (3) are able to read and understand fundamental financial statements, including a balance sheet, income statement and cash flow statement. The board has determined that none of its directors qualify as an audit committee financial expert as defined in Item 407(d) of Regulation S-B.
Board of Directors and Nominating Procedures
The Company has not established any specific, minimum qualifications that must be met by director candidates or identified any specific qualities or skills that it believes our directors must possess. The Company may take a wide range of factors into account in evaluating the suitability of director candidates, including the nominee's judgment, skill, integrity, diversity and business or other experience. Although there is no specific policy on considering diversity, the Board of Directors takes various diversity-related considerations into account in the selection criteria for new directors.
During 2009 there were no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
Board Leadership Structure
The Board elects its Chairman and appoints the Company’s Chief Executive Officer according to its view of what is best for the Company at any given time. Although the offices are currently held by two separate people, which the Board has determined is in the best interests of stockholders at this time, the Board does not believe there should be a fixed rule as to whether the offices of Chairman and Chief Executive Officer should be vested in the same person or two different people, or whether the Chairman should be an employee of the Company or should be elected from among the non-employee directors. The needs of the Company and the individuals available to play these roles may dictate different outcomes at different times, and the Board believes that retaining flexibility in these decisions is in the best interest of the Company. Currently, the Board believes that Mr. Walker’s role as non-executive Chairman ensures a greater role for the non-management directors in the oversight of the Company and encourages more participation of the non-management directors in setting agendas and establishing priorities and procedures for the work of the Board.
Role of the Board in Risk Oversight
One of the Board’s key functions is informed oversight of the Company's risk management process. The Board administers this oversight function directly through the Board as a whole, although it is expect that any of the Board's standing committees will also address risks inherent in their respective areas of oversight. In particular, our Board is responsible for monitoring and assessing strategic risk exposure, including a determination of the nature and level of risk appropriate for the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own beneficially more than ten percent of the common stock of the Company, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Based solely on the reports received by the Company and on written representations from certain reporting persons, the Company believes that the directors, executive officers, and greater than ten percent beneficial owners have complied with all applicable filing requirements, except for:; John Durbin failed to timely file a Form 3 in January 2009, Mr. Durbin subsequently filed a Form 3 in April 2009; Alexander Walker III failed to timely file a Form 4 in April 2009, Mr. Walker subsequently filed a Form 4 in May 2009; Dan Baker failed to timely file a Form 4 in May 2009, Mr. Baker subsequently filed a Form 4 in April 2010; Amanda Cardinalli failed to timely file a Form 4 in May 2009, Mrs. Cardinalli subsequently filed a Form 4 in April 2010; John Thomas Bridge & Opportunity Fund LP failed to timely file a Form 4 in June 2009, John Thomas Bridge & Opportunity Fund subsequently filed a Form 4 in April 2010; George Jarkesy failed to timely file a Form 4 in June 2009, Mr. Jarkesy subsequently filed a Form 4 in July 2009; Alexander Walker III failed to timely file a Form 4 in July 2009, Mr. Walker subsequently filed a Form 4 in October 2009; Dan Baker failed to timely file a Form 4 in July 2009, Mr. Baker subsequently filed a Form 4 in October 2009; John Durbin failed to timely file a Form 4 in July 2009, Mr. Durbin subsequently filed a Form 4 in October 2009; Brian Rodriguez failed to timely file a Form 4 in July 2009, Mr. Rodriguez subsequently filed a Form 4 in October 2009; Brian Rodriguez failed to timely file a Form 4 in November 2009, Mr. Rodriguez subsequently filed a Form 4 in April 2010; John Thomas Bridge & Opportunity Fund LP failed to timely file a Form 4 in November 2009, John Thomas Bridge & Opportunity Fund subsequently filed a Form 4 in April 2010; John Thomas Bridge & Opportunity Fund LP failed to timely file a Form 4 in December 2009, John Thomas Bridge & Opportunity Fund subsequently filed a Form 4 in April 2010;
Code of Ethics
In April 2009, the Company adopted a Code of Ethics that applies to all of its directors and officers. The Code is filed as an exhibit to this Annual Report for the year ended December 31, 2008. Copies of the Company’s Code of Ethics are available, free of charge, by submitting a written request to the Company at 57 West 200 South, Suite 400, Salt Lake City, Utah 84101.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following tables contain compensation data for our named executive officers as of the fiscal years ended December 31, 2009 and December 31, 2008.
______________
(1) Includes amounts accrued in 2009 that were subsequently paid in 2010. As of December 31, 2009, Mr. Baker had accrued and unpaid salary of $83,330 and a $100,000 cash bonus, both of which were subsequently paid in the first quarter of 2010.
(2) In July 2009, Mr. Baker was awarded 1,624,990 shares of common stock as consideration for allowing payment of $162,499 compensation to be deferred.
(3) Mr. Baker received an option to purchase 850,000 shares of common stock , vesting 33% each year beginning July 2, 2008, at an exercise price of $0.45 per share.
(4) Mr. Walker served as the chief executive officer of Hidden Splendor and America West from 2006 through July 2008, and since July 2008, as Secretary of America West.
(5) Mr. Walker received an option to purchase 850,000 shares of common stock, vesting 33% each year beginning July 2, 2008, at an exercise price of $0.45 per share. This value does not include the value of Mr. Walker’s options granted under his 2007 employment agreement, pursuant to which he was granted option to purchase one percent of the Company’s outstanding stock as of December 31, 2008, which vested on January 1, 2009, and another option to purchase one percent of the Company’s outstanding stock as of December 31, 2009, which vests on January 1, 2010. As of January 1, 2009, Mr. Walker was entitled to purchase 1,648,510 shares. As of January 1, 2010, Mr. Walker was entitled to purchase 2,323,423 shares. In March 2010, it was determined by our board of directors that the exercise price of both the January 1, 2009 and January 1, 2010 options referenced herein will be at a price of $0.20 per share.
(6) Mr. Rodriguez resigned as chief financial officer on January 15, 2009 and assumed the position of interim chief financial officer in October 2009
(7) Includes amounts accrued in 2009 that were subsequently paid in 2010. As of December 31, 2009, Mr. Rodriguez had accrued and unpaid salary of $83,000 and a $20,000 cash bonus. Subsequent to December 31, 2009, $62,000 of the accrued salary has been paid. The $20,000 cash bonus remains unpaid as of the date of this Report.
(8) In July 2009, Mr. Rodriguez was awarded 550,000 shares of common stock as consideration for allowing payment of $55,000 compensation to be deferred. In November 2009, Mr. Rodriguez was awarded 750,000 shares of common stock as compensation for services.
(9) Mr. Rodriguez received an option to purchase 850,000 shares of common stock, vesting 33% each year beginning July 2, 2008 at an exercise price of $0.45 per share.
(10) Mr. Durbin served as Chief Financial Officer from January 2009 through September, 2009.
(11) Mr.Durbin received an option to purchase 2,000,000 shares of common stock, vesting 400,000 shares each quarter-end beginning March 31, 2009, at an exercise price of $0.01 per share. Mr. Durbin vested in 1,200,000 shares prior to his resignation on September 30, 2009. The remaining 800,000 shares were forfeited.
(12) In July 2009, Mr. Durbin was awarded 371,670 shares of common stock as consideration for allowing payment of $37,167 compensation to be deferred.
Grants of Options and Stock Awards in 2009
(1)
Pursuant to his employment agreement, Alexander Walker III was granted an option to purchase one percent of the Company’s outstanding stock as of December 31, 2008, which vested on January 1, 2009, and another option to purchase one percent of the Company’s outstanding stock as of December 31, 2009, which vests on January 1, 2010. As of January 1, 2009, Mr. Walker was entitled to purchase 1,648,510 shares. As of January 1, 2010, Mr. Walker was entitled to purchase 2,323,423 shares. In March 2010, it was determined by our board of directors that the exercise price of both the January 1, 2009 and January 1, 2010 options referenced herein will be at a price of $0.20 per share.
No stock options under the Company’s 2008 Stock Option Plan were granted in 2009 to any of the individuals named in the summary compensation table above.
Outstanding Equity Awards at Fiscal Year-End
(1) Includes (i) 283,333 shares issuable pursuant to Mr. Walker’s July 2008 option, (ii) 1,647,510 shares issuable pursuant to Mr. Walker’s January 1, 2009 option, and (iii) 2,323,423 shares issuable pursuant to Mr. Walker’s January 1, 2010 option,
(2) The exercise price of Mr. Walker’s July 2008 option is $0.45. The exercise price of Mr. Walker’s January 1, 2009 and January 1, 2010 options is $0.20 per share.
(3) Mr. Walker’s July 2008 options expire five years after vesting. The expiration date of Mr. Walker’s January 1, 2009 and January 1, 2010 options will be March 26, 2013.
No other options or stock awards were issued to our employees, officers or directors in 2008 or 2009.
Employment and Consulting Agreements
Dan R. Baker
In December 2007, we entered into an employment agreement with Dan Baker, which agreement was amended in July 2008 when Mr. Baker became our Chief Executive Officer. Under the terms of the agreement, Mr. Baker serves as the Chief Executive Officer of the Company through January 2011 at an initial base salary of $150,000 per year, which salary was increased to $250,000 per year in July 2008. Under the terms of the agreement, Mr. Baker was issued 4,000,000 shares of our common stock in December 2007.
Brian E. Rodriguez
Brian Rodriguez serves as interim Chief Financial Officer and is currently engaged by our Company on an “at will” basis without any employment agreement. Mr. Rodriguez’s compensation was $13,000 per month through March 2010. Effective April 1, 2010, our board of directors approved an increase in Mr. Rodriguez’s compensation to $17,000 per month. In addition, in March 2010, Mr. Rodriguez was issued 800,000 shares of common stock for services rendered.
Alexander H. Walker, III
In December 2007, we entered into an employment agreement with Alexander H. Walker III, which agreement was amended in July 2008 when Mr. Walker resigned as Chief Executive Officer and became Chairman of the Board of Directors. Under the terms of the agreement, Mr. Walker serves as our Chairman of the Board of Directors and Secretary through January 2011 at an initial base salary of $150,000 per year, which base salary was increased to $250,000 per year in July 2008. Moreover, under the terms of the agreement, on January 1, 2009 and on January 1, 2010 and for one additional year, Mr. Walker given the option to purchase a number of shares of our common stock which is equal to one percent of the issued and outstanding shares of our common stock as of the day immediately before the date of issuance (December 31). In March 2010, it was determined by our board of directors that the exercise price of both the January 1, 2009 and January 1, 2010 options referenced herein will be at a price of $0.20 per share, and the options shall expire on March 26, 2013.
Director Compensation
The following table presents summary information for the year ended December 31, 2009 regarding the compensation of the members of our board of directors.
Name
Fees Earned
or Paid
in Cash
($)
Options
Awards
($)
Total
($)
Dan R. Baker
Alexander H. Walker, III
270,000(1)
270,000
Brian E. Rodriguez
56,000
56,000
George R. Jarkesy, Jr.
Amanda Cardinalli
(1)
Includes amounts accrued in 2009 that were subsequently paid in 2010. As of December 31, 2009, Mr. Walker had accrued and unpaid salary of $208,330 and a $20,000 cash bonus. Subsequent to December 31, 2009, $49,833 of the accrued salary has been paid. The $20,000 cash bonus remains unpaid as of the date of this Report.
No options were exercised during the fiscal year ended December 31, 2009.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them as of April 14, 2010.
The following table sets forth the number and percentage of outstanding shares of Company common stock beneficially owned as of the date of this Report by: (a) each person who is known by us to be the owner of more than five percent of our outstanding shares of common stock; (b) each of our directors; (c) all of our executive officers; and (d) all current directors and executive officers, as a group. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
Name of Beneficial Owner
Number of Shares
Of Common Stock
Beneficially Owned
Percentage
Beneficial Owners of more than 5%:
Estate of Alexander H. Walker, Jr.(1)
50 West Liberty, Suite 880
Reno, Nevada 89501
28,015,504
10.40%
John Thomas Financial, Inc.(2)
14 Wall Street, 5th Floor
New York, New York 10005
14,133,732
4.99%
John Thomas Bridge & Opportunity Fund, LP(4)
3 Riverway, Suite1800
Houston, Texas 77056
39,503,977
14.67%
Denly Utah Coal, LLC(5)
13809 Research Blvd., Suite 810
Austin, Texas 78750
65,741,111
24.41%
D. Mark von Waaden(5)
13809 Research Blvd., Suite 810
Austin, Texas 78750
65,741,111
24.41%
Matthew D. von Waaden(5)
13809 Research Blvd., Suite 810
Austin, Texas 78750
65,741,111
24.41%
Dennis C. von Waaden(5)
13809 Research Blvd., Suite 810
Austin, Texas 78750
65,741,111
24.41%
Sally A. von Waaden(5)
13809 Research Blvd., Suite 810
Austin, Texas 78750
65,741,111
24.41%
Named Executive Officers and Directors:
George R. Jarkesy, Jr.(6)
3 Riverway, Suite 1800
Houston, Texas 77056
51,120,644
18.94%
Alexander H. Walker III(7)
57 West 200 South, Suite 400
Salt Lake City, Utah 84101
14,765,422
5.39%
Amanda Cardinalli (8)
50 West Liberty, Suite 880
Reno, Nevada 89501
8,571,232
3.18%
Dan R. Baker(9)
6,708,324
2.49%
Brian Rodriguez (10)
4,196,667
1.55%
All directors & executive officers as a group (5 persons)
83,862,288
30.43%
___________________________
(1)
Alexander H. Walker, Jr. died on August 3, 2008, and the shares of common stock are owned by his estate. It is the Company’s understanding that Alexander H. Walker, III, is the executor of the estate of Alexander H. Walker, Jr. Therefore, it is possible that Alexander H. Walker, III, will have voting control of such shares, though ownership of such shares shall pass pursuant to the directives of Alexander H. Walker, Jr., which directives have not yet been adjudicated. The Company understands that up to 9,000,000 of such shares secure obligations of Hidden Splendor. In addition, 5,000,000 of such shares are subject to an option granted to ATB Holding Company, LLC. Because Mr. Walker’s estate has not been settled, any shares owned by him have not been distributed to Mr. Walker’s heirs, and this table does not reflect that either Mr. Walker, Ms. Cardinalli, or Ms. Kent are deemed beneficial owners of any of these shares of common stock.
(2)
Of the shares reported as beneficially owned by John Thomas Financial, Inc. (“JTF”), 14,133,732 shares are issuable upon a currently exercisable warrant owned by JTF expiring in October 2013 with an exercise price of $0.01 per share. Thomas Belesis is the President and sole shareholder of JTF and the Managing Member of ATB Holding Company, LLC.
(3)
Of the shares reported as beneficially owned by ATB Holding Company, LLC, 5,000,000 shares are issuable upon exercise of a currently exercisable option owned by ATB Holding Corporation, LLC to acquire such shares from a former director, expiring in June 2013, at an exercise price of $0.15 per share. Thomas Belesis is the President and Sole Shareholder of JTF and the Managing Member of ATB Holding Company, LLC.
(4)
JTBOF is a limited partnership, and the John Thomas Capital Management Group, LLC (“JTCMG”) is the general partner of the JTBOF. George R. Jarkesy, Jr., is the Managing Member of JTCMG.
(5) The shares reported are owned directly by Denly Utah Coal, LLC, a Texas limited liability company (the “Denly”). The two members of Denly are Denly ACI Partners, Ltd., a Texas limited partnership, which holds a 66 2/3% membership interest in the Denly, and The von Waaden 2004 Revocable Trust, which owns a 33 1/3% membership interest in the Company. The general partner of Denly ACI Partners, Ltd. is Denly ACI Mgt., LLC, which is owned by Dennis C. von Waaden and Sally A. von Waaden. The co-trustees and co-beneficiaries of The von Waaden 2004 Revocable Trust are Dennis C. von Waaden and Sally A. von Waaden. Additionally, Dennis C. von Waaden, Sally A. von Waaden, D. Mark von Waaden and Matthew D. von Waaden are each an officer of and member of the board of managers of Denly. Each of these persons may have a pecuniary interest in only a portion of such securities and disclaims beneficial ownership except to the extent thereof.
(6)
The shares reported as beneficially owned by George R. Jarkesy, Jr., consist of (i) 4,633,333 shares registered in Mr. Jarkesy’s name, (ii) 66,667 shares held by the Jarkesy Foundation, an affiliate of Mr. Jarkesy, (iii) 39,503.977 shares of common stock registered in the name of JTBOF, (iv) 1,500,000 shares registered in the name of Marathon Advisors, LLC, an affiliate of Mr. Jarkesy, (v) 566,667 shares underlying currently exercisable options, and (v) 4,850,000 registered in the name of John Thomas Bridge & Opportunity Fund II, L.P. (“JTBOF II”). JTBOF II is a limited partnership, and JTCMG is the general partner of JTBOF II. George R. Jarkesy, Jr., is the Managing Member of JTCMG.
(7) The shares reported as beneficially owned by Alexander H. Walker III consist of (i) 10,141,212 shares registered in the name of Mr. Walker, (ii) 60,000 shares registered in the name of Arlington Ventures, an affiliate of Mr. Walker, (iii) 566,667 shares underlying currently exercisable options, (iv) 3,949,543 shares issuable upon the exercise of options issued pursuant to Mr. Walker’s employment agreement, and (v) 48,000 shares purchased by Mr. Walker in the open market.
(8) The shares reported as beneficially owned by Amanda Cardinalli are registered in the name of The Nevada Agency and Transfer Company, our transfer agent and registrar, an entity of which Ms Cardinalli is the President.
(9) The shares reported as beneficially owned by Dan R. Baker consist of (i) 6,141,657 shares registered in the name of Mr. Baker and (ii) 566,667 shares underlying currently exercisable options.
(10) The shares reported as beneficially owned by Brian Rodriguez consist of (i) 1,500,000 shares registered in the name of Marathon Advisors, LLC, an entity of which Mr. Rodriguez is the Managing Member, (ii) 2,100,000 shares registered in the name of Mr. Rodriguez, (iii) 566,667 shares underlying currently exercisable options, and (iv) 30,000 shares purchased by Mr. Rodriguez in the open market.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
George Jarkesy and his affiliates
During April and May 2009, John Thomas Bridge & Opportunity Fund L.P. advanced the Company on an unsecured basis an aggregate principal amount of $280,000, bearing interest at the rate of 10% per annum, maturing by mid-2009. Both of these loans were repaid in May 2009.
In June 2009, Mr. Jarkesy provided a personal guarantee to a third party to enable the Company to purchase coal from the third party. Mr. Jarkesy received 500,000 common shares as consideration for the personal guarantee. In addition, in June 2009, John Thomas Bridge & Opportunity Fund LP provided a letter of credit to the same third party coal supplier on behalf of the Company. John Thomas Bridge & Opportunity Fund LP received 1,000,000 common shares as consideration for the letter of credit.
In 2009, John Thomas Bridge & Opportunity Fund, L.P., participated, along with certain third parties, in a debt financing transaction with the Company. Pursuant to the Loan Agreement, America West Services, a subsidiary of the Company, borrowed a total principal amount of $3,800,000 at the rate of 16% compounded annually, with interest payable monthly commencing in August 2009, and the principal amount due at maturity, on May 27, 2011. The loan is secured by substantially all of the assets of America West Services, and the Company has guaranteed the loans. As part of this financing transaction, John Thomas Bridge & Opportunity Fund, L.P. was issued (i) notes totaling a principal amount of $1,330,000, (ii) 14,630,000 shares of the Company’s common stock for a purchase price of $52,500 and (iii) a 35% participation in a royalty on all coal produced until August 2016.
During October through December 2009, John Thomas Bridge & Opportunity Fund L.P. advanced the Company on an unsecured basis an aggregate principal amount of $696,500, bearing interest at the rate of 10% per annum and maturing in various dates during 2009 and 2010. In connection with these loans, the John Thomas Bridge & Opportunity Fund L.P. was issued 4,350,000 shares of common stock as additional consideration. A total of $461,500 had been repaid as of December 31, 2009.
Alexander H. Walker, III
During 2009, Mr. Walker subleased office space of less than 1,000 square feet to the Company in Salt Lake City, Utah for its corporate offices at a rate of $2,700 per month, an amount the Company believes is consistent with market rates.;. In October 2008, America West secured a line of credit which will allow America West to borrow up to $75,000 from a bank secured by collateral provided by Mr. Walker. As a result, Mr. Walker received 250,000 shares of common stock of the Company. The line of credit matures in April 2010.
Dan R. Baker
In March and April 2009, Dan Baker advanced on an unsecured basis to the Company a principal amount of $45,000, bearing interest at the rate of 10% per annum, maturing in May 2010, and received 350,000 shares of common stock as additional consideration.
Amanda Cardinalli
Ms. Cardinalli is President of The Nevada Agency and Trust Company (“NATCO”), the Company’s transfer agent. We believe that the fees charged the Company for transfer agent services reflect market rates. During 2009, NATCO advanced on an unsecured basis to the Company a total principal amount of $25,000, bearing interest at the rate of 10% per annum, maturing in May 2010, and received 100,000 shares of common stock as additional consideration.
John Thomas Financial
John Thomas Financial provided investment banking services to the Company from October 2008 through December 2009, and the Company paid John Thomas Financial cash sales commissions of $115,425 and consulting fees of $180,000 during 2009.. . In May 2008, ATB Holding Company, LLC , an affiliate of John Thomas Financial acquired an option expiring in October 2013 to purchase up to 5,000,000 shares of common stock from the Estate of Alexander Walker, Jr. at a price of $0.15 per share, for which it paid $40,000 for such right. In addition, the Company and John Thomas Financial have entered into an investment banking agreement, pursuant to which John Thomas Financial was issued a five-year warrant to purchase 15,000,000 shares of the Company’s common stock at $0.01 per share.
We have been advised by John Thomas Bridge & Opportunity Fund L.P. that John Thomas Bridge & Opportunity Fund L.P. and John Thomas Financial are not affiliates of one another. We have further been advised by John Thomas Bridge & Opportunity Fund as follows, with respect to the relationship between John Thomas Financial and John Thomas Bridge & Opportunity Fund:
(a)
Neither John Thomas Financial nor any of its affiliates has any direct or indirect ownership or management interest in John Thomas Bridge & Opportunity Fund L.P..
(b)
Neither John Thomas Bridge & Opportunity Fund L.P. nor any of its affiliates has any direct or indirect ownership or management interest in John Thomas Financial.
(c)
From time to time John Thomas Financial has served as placement agent for John Thomas Bridge & Opportunity Fund L.P. in connection with offers and sales of John Thomas Bridge & Opportunity Fund L.P. securities.
(d)
Pursuant to a placement agent agreement, dated as of July 19, 2007, between John Thomas Financial and John Thomas Bridge & Opportunity Fund L.P., John Thomas Bridge & Opportunity Fund L.P. has been granted a trademark license to use the name “John Thomas” and variants thereof in connection with, among other things, the operation of John Thomas Bridge & Opportunity Fund L.P..
(e)
John Thomas Financial from time to time receives compensation with respect to companies it introduces to John Thomas Bridge & Opportunity Fund L.P. and which obtain loans from John Thomas Bridge & Opportunity Fund L.P..
Mid-State Services, Inc., and Arlington Ventures, LLC
Until December 2008, Mid-State Services, Inc., a Nevada corporation (“Mid-State”) had been in the business of providing repair and rebuilding services for diesel powered mining equipment. Mid-State also acts as vendor of mining supplies. Alexander H. Walker, III, was the President of Mid-State and Amanda Cardinalli was Mid-State’s Treasurer. Mid-State had previously rented equipment, provided supplies, and provided services to Hidden Splendor. In addition, a degree of common control between Hidden Splendor and Mid-State allowed both companies to obtain combined insurance policies for health, dental, general liability and workers compensation insurance. In October 2007, Mid-State filed a petition for Chapter 11 bankruptcy. In December 2008, the Chapter 11 bankruptcy proceeding of Mid-State was consolidated with the Chapter 11 bankruptcy proceeding of Hidden Splendor. Effective December 19, 2008, per Hidden Splendor’s Plan of Reorganization, Hidden Splendor assumed the debt and assets of Mid-State.
Arlington Ventures, LLC (“Arlington Ventures”) owns an office building in Price Utah , and leases that building to the Company. Arlington Ventures is owned by Alexander H. Walker, III, Amanda Cardinalli, and their sister, Timotha Kent. During 2009, Arlington Ventures leased the Price building space to the Company at a rate of $7,500 per month, an amount the Company believes is consistent with market lease rates. In addition, during January through September 2009, Arlington Ventures leased a corporate apartment to the Company for use of its former chief financial officer at a rate of $800 per month, an amount the Company believes is consistent with market rates. In addition, the Company leases certain water rights owned by Arlington Ventures at a rate of $1,000 per month in order to allow Hidden Splendor to utilize water in its mining operations. During 2009, the Company paid Arlington Ventures a total of $6,000 in relation to the leased properties and rights referenced herein.In March 2009, Arlington Ventures advanced on an unsecured basis to the Company a principal amount of 6,000, bearing interest at the rate of 10% per annum, maturing in May 2010, and received 60,000 shares of common stock as additional consideration.
Denly Utah Coal LLC & its affiliates
In October 2008, certain affiliates of Denly Utah Coal LLC (collectively, “Denly”) loaned the Company the sum of $2.8 million at 17% interest , maturing in October 2009. In relation to this loan, the Company issued10,000,000 common shares to Denly for the sum of $200,000. The loan was subsequently extended during 2009 to mature in October 2011. Per the loan extension terms, the loan principal was increased to $3.2 million, representing the accrued and unpaid interest through October 2009. The note is due to be repaid in one installment of $500,000 on October 9, 2010, and the remaining principal and interest is due upon maturity. In addition, per the loan extension terms, the Company issued 5,000,000 shares of common stock to Denly for $100,000 cash. In addition, the Company granted Denly a royalty of $1 per ton of coal sold by the Company for the 24 months period of August 2016 through August 2018. In addition, the Company agreed to issue the lender a warrant to purchase 2,000,000 common shares at an exercise price of $0.02 per share if the Company does not pay the entire $3.2 million balance by October 9, 2010. The Company agreed to issue Denly a first priority mortgage lien on the Horizon Mine by May 2010. If the aforementioned lien on the Horizon Mine is not granted by May 2010, for every calendar month the lien is not granted, the Company will issue the lender a warrant to purchase 1,000,000 common shares at an exercise price of $0.01 per share, up to a maximum of 11,000,000 shares. Both of the aforementioned warrants are null and void if the respective milestones are met by the Company. Both warrants would expire in October 2019.
During 2009, Denly entered into an additional debt financing transaction with the Company. Pursuant to the loan agreement, America West Services, a subsidiary of the Company, borrowed a total principal amount of $3,800,000 at the rate of 16% compounded annually, with interest payable monthly commencing in August 2009, and the principal amount due at maturity, on May 27, 2011. The loan is secured by substantially all of the assets of America West Services, and the Company has guaranteed the loans. As part of this financing transaction, Denly was issued (i) notes totaling a principal amount of $2,245,000, (ii) 20,900,000 shares of the Company’s common stock for a purchase price of $88,618 and (iii) a 59% participation in a royalty on all coal produced until August 2016.
During October through December 2009, Denly advanced the Company on an unsecured basis an aggregate principal amount of $675,000, bearing interest at the rate of 10% per annum and maturing in various dates during 2009 and 2010. In connection with these loans, Denly was issued 6,750,000 shares of common stock as additional consideration, A total of $200,000 had been repaid as of December 31, 2009.
Obligations Secured by Shareholders
Federal Lease Performance Bond. Under federal law, Hidden Splendor is required to maintain a performance bond in an amount determined by the BLM sufficient to secure Hidden Splendor’s performance under its federal coal lease. The BLM has set Hidden Splendor’s bond amount in this regard at $136,000 and Hidden Splendor has made arrangements with a bonding company to post a bond sufficient to meet the BLM requirement. Alexander H. Walker III has pledged personal assets as security for the bond posted by Hidden Splendor’s bonding agent. During 2009, Mr. Walker received no consideration for the arrangement. In March 2010, the Company issued 170,000 common shares to Mr. Walker as compensation for pledging personal assets as security for the bond.
Reclamation Obligation. Under Utah law, Hidden Splendor is required to post cash or assets with a value sufficient to cover its reclamation obligation as determined by the Utah Department of Natural Resources, Division of Oil, Gas and Mining. Hidden Splendor’s reclamation obligation is estimated on an annual basis. Its current obligation is for $387,000. Prior to their deaths, Alexander H. Walker, Jr. and Cecil Ann Walker executed a deed of trust on certain real property they owned in favor of the State of Utah in order to secure Hidden Splendor’s reclamation obligation. Mr. and Mrs. Walker received no consideration for their actions securing Hidden Splendor’s obligation in 2009. In March 2010, the Company issued 484,000 common shares to the estate of Mr. and Mrs. Walker as compensation for providing assets as security for the bond.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Professional services were rendered by MaloneBailey, LLP for the fiscal years ended December 31, 2009 and 2008. The aggregate fees for each of those years were as follows:
Audit fees for the fiscal years ended December 31, 2009, and 2008 represent the aggregate fees billed for professional services rendered for the audit of our annual financial statements and review of financial statements included in our quarterly reports on Form 10-Q or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.
Audit Committee Pre-Approval Policies and Procedures
The Board of Directors serves as the Audit Committee of the Company. The Board of Directors on an annual basis reviews audit and non-audit services performed by the independent auditor. All audit and non-audit services are pre-approved by the Board of Directors, which considers, among other things, the possible effect of the performance of such services on the auditors’ independence. The Board of Directors has considered the role MaloneBailey in providing services to us for the fiscal year ended December 31, 2009 and has concluded that such services are compatible with MaloneBailey’s independence as the Company’s auditors.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are to be filed as part of this 10-K:
EXHIBIT NO.
IDENTIFICATION OF EXHIBIT
3.1
Articles of Incorporation (1)
3.2
Articles of Amendment to Articles of Incorporation (7)
3.3
Articles of Amendment to the Articles of Incorporation (1)
3.4
Articles of Amendment to Articles of Incorporation (1)
3.5
Articles of Amendment to Articles of Incorporation (1)
3.6
Articles of Amendment to Articles of Incorporation (1)
3.7
Articles of Amendment to Articles of Incorporation (1)
3.8
Amended and Restated Bylaws (5)
4.1
Form of Common Stock Certificate (5)
10.1
Exchange Agreement with Hidden Splendor Resources, Inc. dated August 10, 2007 (2)
10.2
Loan Agreement by and among the Company and Denly ACI Partners, Ltd. And the Von Waaden 2004 Revocable Trust (“Loan Agreement”)(3)
10.3
Amendment no. 1 to Loan Agreement (4)
10.4
Amended and Restated Promissory Note (4)
10.5
Amendment no. 2 to Loan Agreement (5)
10.6
Amendment no. 4 to Loan Agreement (10)
10.7
Common Stock Purchase Agreement, dated October 9, 2009, by and between the Company and Denly Utah Coal , LLC (10)
10.8
Registration Rights Agreement, dated October 9, 2009, by and between the Company and Denly Utah Coal, LLC (10)
10.9
Royalty Agreement, dated October 9, 2009, by and between Hidden Splendor Resources, Inc. and Denly Utah Coal, LLC (10)
10.10
Form of Promissory Note dated October 9, 2009 (10)
10.11
Security Agreement, dated October 9, 2009, by and between the Company and Denly Utah Coal, LLC (10)
10.12
Loan Agreement, dated May 27, 2009, by and among the Company, Denly Utah Coal, LLC, John Thomas Bridge & Opportunity Fund, LP, Thomas Murch, James Moore, and John Meeks (“May Loan Agreement”) (6)
10.13
Form of Promissory Note dated May 27, 2009 (6)
10.14
Registration Rights Agreement, dated May 27, 2009, by and among the Company, Denly Utah Coal, LLC, John Thomas Bridge & Opportunity Fund, LP, Thomas Murch, James Moore, and John Meeks (6)
10.15
Royalty Agreement, May 27, 2009, by and among the Company, Denly Utah Coal, LLC, John Thomas Bridge & Opportunity Fund, LP, Thomas Murch, James Moore, and John Meeks (“May Royalty Agreement”) (6)
10.16
Security Purchase Agreement, May 27, 2009, by and among the Company, Denly Utah Coal, LLC, John Thomas Bridge & Opportunity Fund, LP, Thomas Murch, James Moore, and John Meeks (6)
10.17
Amendment no. 1 to May Loan Agreement (10)
10.18
Amendment no. 1 to May Royalty Agreement (10)
10.19
Form of Amendment no. 1 to May 27, 2009 Promissory Note (10)
10.20
Form of Promissory Note, dated October 23, 2009 (10)
10.21
2008 Stock Option Plan (10)
10.22
Consulting Agreement with Newport Capital Consultants, Inc.(7)
10.23
Employment Agreement with Dan R. Baker (7)
10.24
Employment Agreement with Alexander H. Walker III (7)
14.1
Code of Ethics (8)
14.2
Whistleblower Policy (8)
21.1
Subsidiaries (8)
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act provided by Chief Executive Officer (9)
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act provided by Chief Financial Officer (9)
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 provided by Chief Executive Officer (9)
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 provided by Chief Financial Officer (9)
___________________________
(1)
Filed as an exhibit on Form 10-KSB for the fiscal year ended June 30, 1999 and filed March 22, 2000 and incorporated herein by reference.
(2)
Filed as an exhibit on Form 8-K on August 13, 2007 and incorporated herein by reference.
(3)
Filed as an exhibit on Form 8-K on September 16, 2008 and incorporated herein by reference.
(4)
Filed as an exhibit on Form 8-K on November 6, 2008 and incorporated herein by reference.
(5)
Filed as an exhibit on Form 8-K on December 9, 2008 and incorporated herein by reference.
(6)
Filed as an exhibit on Form 8-K on June 2, 2009 and incorporated herein by reference.
(7)
Filed as an exhibit on Form 8-K on December 28, 2007 and incorporated herein by reference.
(8)
Filed as an exhibit on Form 10-K for the fiscal year ended December 31, 2009 and incorporated herein by reference.
(9)
Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.