ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
American Exploration Corporation was incorporated under the laws of the State of Nevada on May 11, 2006 under the name of Minhas Energy Consultants, Inc. Previously, we were engaged in the business of providing professional engineering consulting services to the oil and gas industry, including clients such as petroleum and natural gas companies, oilfield service companies, utilities and manufacturing companies with petroleum and/or natural gas interests and government agencies. After the effective date of March 14, 2007 of our registration statement filed with the Securities and Exchange Commission on March 5, 2007, we commenced trading on the Over-the-Counter Bulletin Board.
On August 6, 2008, with the approval of our Board of Directors, we merged with our subsidiary, American Exploration Corporation, and amended our Articles of Incorporation to change our name to “American Exploration Corporation.” We currently are a natural resource exploration and production company engaged in the acquisition, exploration and development of oil and gas properties in the United States and within North America. Effective at the opening for trading on August 19, 2008, our trading symbol for our shares traded on the Over-the-Counter Bulletin Board changed to “AEXP.OB.”
Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "American Exploration," refers to American Exploration Corporation.
CURRENT BUSINESS OPERATIONS
We have been an exploration stage company engaged in the acquisition, exploration and development of oil and gas properties in North America, primarily in the United States. Our primary focus was the acquisition of mineral leases located in Mississippi. However, we anticipate changing our business operations as described below (see Section entitled “Spotlight Merger Agreement”
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, which shall include commercialization of healthcare intellectual property.
Spotlight Merger Agreement
On February 12, 2013, we entered into a merger agreement (the “Spotlight Merger Agreement”) with Spotlight Innovation LLC, a limited liability company based in the State of Iowa ("Spotlight"). Completion of the merger is dependent upon certain conditions which have not been met as of June 30, 2013. In accordance with the terms and provisions of the Spotlight Merger Agreement, all of the issued and outstanding membership interests of Spotlight (the "Membership Interests") will be converted into the right to receive an aggregate of 7,500,000 fully paid and non-assessable shares of our restricted common stock on a post reverse split basis. Certain conditions were contemplated to be satisfied prior to closing of the Spotlight Merger Agreement which include, but are not limited to, the following: (i) Spotlight shall have completed and be satisfied with its due diligence review of us; (ii) we shall have received financing in an amount of at least $237,500 on terms approved by our Board of Directors, which shall be utilized to pay off certain of our liabilities; (iii) we shall have completed a 100:1 reverse stock split of our common stock; (iv) we shall have amended our certificate of incorporation to change our name to Spotlight Innovation, Inc.; (v) we shall have received approval from a majority of our shareholders of the Merger Agreement and the transactions contemplated therein; (vi) the current Board of Directors shall appoint Cris Grunewald as the sole member of the Board of Directors and the President/Chief Executive Officer and Secretary and a person to be designated by Spotlight as the Treasurer/Chief Financial Officer; and (vii) our current officers and directors shall resign upon closing of the transactions contemplated in the Merger Agreement. The contemplated stock split of 100:1 was subsequently amended post-reporting period to a ratio of 500:1.
There is no guarantee the transaction contemplated in the Spotlight Merger Agreement will close, and if it does, when it will close, or that the operations of Spotlight will be successful.
If the merger is completed, we will change our business plan to Spotlight’s business plan. Spotlight was founded to identify, validate and finance healthcare-focused companies founded for the purpose of commercializing intellectual property developed by major centers of academia in the United States. Spotlight provides strategic partners the opportunity to participate in the financing of a preferred search for, acquisition of, and/or funding of companies holding licenses for the commericalization of intellectual property developed by academic institutions. The principals of Spotlight have been involved in all stages of the commercialization of healthcare intellectual property over the last eight years.
Stock Purchase Agreement
On July 8, 2013, our Board of Directors authorized the execution of that certain stock purchase agreement (the “Stock Purchase Agreement”) with Orange Investments Ltd, a Bahamian limited liability company ("Orange Investments"). In accordance with the terms and provisions of the Stock Purchase Agreement, we agreed to sell to Orange Investments up to an aggregate of 60,000,000 shares of our restricted common stock at a purchase price based on the five (5) day weighted average trading price per share times 50% as quoted by the OTC Markets (the "Purchase Price"). In further accordance of the terms and provisions of the Stock Purchase Agreement, once the cash for the Purchase Price is placed in an escrow account by Orange Investments, certificates evidencing the shares of common stock of the Company would be delivered to Orange Investments. As of July 2, 2013, an aggregate of $129,000.00 had been placed by Orange Investments in escrow for the purchase of 60,000,000 shares of common stock of the Company at a per share price of $0.00215. In the event the price of the purchase shares of common stock in six months is less than the Purchase Price, we shall be obligated to make up the difference in the price with shares of our common stock at the then current five day weighted average trading price per share times 50%.
Information Statement on Form 14C
On August 1, 2013, we filed an Information Statement on Form 14(c) with the Securities and Exchange Commission, which will be furnished to all holders of our common stock as of July 22, 2013, in connection with the action taken by written consent of holders of a majority of the outstanding voting power of the Company to authorize the following: (i) ratification of the Spotlight Merger Agreement; (ii) ratification of the appointment of Cristopher Grunewald as a member of the Board of Directors and as the President of the Company; (iii) ratification of an amendment to the articles of incorporation (the "Name Change Amendment") to change our name from "American Exploration Corporation" to "Spotlight Innovation Inc."; (iv) ratification of an amendment to the articles of incorporation (the "Authorized Capital Amendment") to increase the total authorized capital from 2,100,000,000 shares of common stock, par value $0.001, to 4,000,000,000 shares of common stock, par value $0.001 (the "Increase in Authorized Capital"); (v) ratification of an amendment to the articles of incorporation to authorize 5,000,000 shares of preferred stock, including two new series of preferred stock, and blank check preferred stock (the “Preferred Stock Amendment”) and (vi) ratification of a reverse stock split of one for five hundred (1:500) of our shares of common stock (the "Reverse Stock Split").
The names of the shareholders of record who hold in the aggregate a majority of our total issued and outstanding common stock and who signed the written consent of stockholders are: (i) Orange Investments Ltd. holding of record 60,000,000 shares of common stock (49.8%); (ii) Steve Harding holding of record 2,150,000 shares of common stock (1.8%); (iii) Brian Manko holding of record 300,000 shares of common stock (.2%); and (iv) Devinder Randhawa holding of record 3,200,000 shares of common stock (2.7%).
These actions were approved by written consent on July 22, 201,3 by our Board of Directors and a majority of holders of our voting capital stock, in accordance with Nevada Revised Statutes. Our directors and majority of the shareholders of our outstanding capital stock, as of the record date of July 22, 2013, have approved the Merger Agreement, the Name Change Amendment, the Authorized Capital Amendment, the Preferred Stock Amendment, the Reverse Split and ratified the appointment of Cristopher Grunewald as determined were in the best interests of our Company and shareholders.
Once the Information Statement has been reviewed by the Securities Exchange Commission, it will be distributed to our shareholders of record shortly thereafter.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited financial statements and the related notes that appear elsewhere in this Quarterly Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this Quarterly Report. Our reviewed financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
We are an exploration stage company and have not generated any revenue to date. We have incurred recurring losses since inception. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.
We believe we will require additional capital to meet our long-term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.
Six Month Period Ended June 30, 2013 Compared to Six Month Period Ended June 30, 2012.
Our net loss for the six month period ended June 30, 2013 was $307,975 compared to a net loss of $309,881 during the six month period ended June 30, 2012, a decrease of $1,906. We generated no revenue for the six month periods ended June 30, 2013 and June 30, 2012, respectively.
During the six month period ended June 30, 2013, we incurred operating expenses of $291,235 compared to $296,161 incurred during the six month period ended June 30, 2012, a decrease of $4,926. During the six month period ended June 30, 2013, general and administrative expenses consisted of professional fees of $46,311 (2012: $48,467), which included legal, auditor, edgarizing and transfer agent fees, stock based compensation of $138,386 (2012: $138,386) and salary expense of $106,500 (2012: $106,500). Operating expenses decreased during the six month period ended June 30, 2013 generally due to reduced corporate activity.
Loss from operations for the six month period ended June 30, 2013 was $291,235 compared to loss from operations of $296,161 during the six month period ended June 30, 2012.
During the six month period ended June 30, 2013, we incurred interest expense of $16,740 (2012: $13,720). The increase in interest expense was a direct result of the increase in borrowings compared to prior year.
Our net loss and loss per share during the six month period ended June 30, 2013 was $307,975 or $0.01 per share compared to a net loss and loss per share of $309,881 or $0.01 per share during the six month period ended June 30, 2012. The weighted average number of shares outstanding was 60,273,333 for the six months ended June 30, 2013 and 2012.
Three Month Period Ended June 30, 2013 Compared to Three Month Period Ended June 30, 2012.
Our net loss for the three month period ended June 30, 2013 was $166,551 compared to a net loss of $159,323 during the three month period ended June 30, 2012, an increase of $7,228. We generated no revenue for the three month periods ended June 30, 2013 and June 30, 2012, respectively.
During the three month period ended June 30, 2013, we incurred operating expenses of $158,252 compared to $151,481 incurred during the three month period ended June 30, 2012, an increase of $6,771. During the three month period ended June 30, 2013, general and administrative expenses consisted of professional fees of $35,792 (2012: $28,599), which included legal, auditor, edgarizing and transfer agent fees, stock based compensation of $69,193 (2012: $69,193) and salary expense of $53,250 (2012: $53,250).
Loss from operations for the three month period ended June 30, 2013 was $166,551 compared to loss from operations of $159,323 during the three month period ended June 30, 2012
Operating expenses increased during the three month period ended June 30, 2013 generally due to increased corporate activity relating to the Spotlight Merger Agreement and associated Information Statement on Form 14(c).
During the three month period ended June 30, 2013, we incurred interest expense of $8,299 (2012: $7,842). The increase in interest expense was a direct result of the increase in borrowings compared to prior year.
Our net loss and loss per share during the three month period ended June 30, 2013 was $166,551 or $0.00 per share compared to a net loss and loss per share of $159,323 or $0.00 per share during the three month period ended June 30, 2012. The weighted average number of shares outstanding was 60,273,333 for the three months ended June 30, 2013 and 2012.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2013, our current assets were $4,341 and our current liabilities were $1,181,824, which resulted in a working capital deficit of $1,177,483. As of June 30, 2013, current assets were comprised of $4,341 in cash and cash equivalents and current liabilities were comprised of: (i) $64,354 in accounts payable and accrued liabilities; (ii) $627,766 in accounts payable–related parties; (iii) $184,978 in short-term notes payable; (iv) $147,790 in short-term notes payable – related parties; (v) $95,000 in convertible notes – short term; (vi) $23,433 in advances from officer; and (vii) $38,503 in advance from Spotlight.
As of June 30, 2013, our total assets were $4,341 comprised of current assets compares to $4,458 at December 31, 2012.
As of June 30, 2013, our total liabilities were $1,181,824 comprised entirely of current liabilities. The increase in liabilities during the six month period ended June 30, 2013 from fiscal year ended December 31, 2012 was primarily due to the increase in accounts payable – related parties for accrued salaries to our CEO and CFO.
Stockholders’ deficit increased from $1,012,000 as of December 31, 2012 to $1,102,124 as of June 30, 2013.
Cash Flows from Operating Activities
We have not generated positive cash flows from operating activities due to a lack of a source of revenues. For the six month period ended June 30, 2013, net cash flows used in operating activities was $6,435 compared to $44,102 used during the six month period ended June 30, 2012. Net cash flows used in operating activities consisted primarily of a net loss of $307,975 (2012: $309,881), which was offset by $138,386 (2012: $138,386) in share-based compensation, $47,931 (2012: $31,277 in change in accounts payable and accrued liabilities and $115,223 (2012: $96,116) in change in accounts payable - related parties.
Cash Flows from Investing Activities
For the six month periods ended June 30, 2013 and 2012, net cash flows related to investing activities was $0.
Cash Flows from Financing Activities
We have financed our operations primarily from debt or the issuance of equity instruments. For the six month periods ended June 30, 2013 and 2012, net cash flows provided from financing activities was $7,050 (which consisted of $7,050 advance from Spotlight) and $31,800 (which consisted of $30,000 in proceeds from notes payable and $1,800 in proceeds from advance from officer), respectively.
PLAN OF OPERATION AND FUNDING
A substantial portion of the six month period ended June 30, 2013 was dedicated to negotiating the Spotlight Merger Agreement and drafting and filing the Information Statement. In the event the Spotlight Merger Agreement is consummated, the business plan will change to that of Spotlight and possible further advances from related parties and the sale of securities will be required to fund our operations over the next six months. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt instruments. In the event the Spotlight Merger Agreement is consummated and in connection with our future business plan, management anticipates additional increases in operating expenses and capital expenditures relating to commencing and structuring new business operations. We would finance these expenses with further issuances of equity securities and debt issuances. We expect we would need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities could result in dilution to our current shareholders. Further, such securities may have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all.
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve months.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Quarterly Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
GOING CONCERN
There is substantial doubt about our ability to continue as a going concern. The financial statements have been prepared assuming that we will continue as a going concern, which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business.