NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim financial statements of American Exploration Corporation (the “Company” or “American”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete financial presentation. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"), have been included in the accompanying unaudited financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.
These financial statements should be read in conjunction with the audited financial statements and footnotes that are included as part of the Company’s Form 10-K for the year ended December 31, 2012.
The Company was originally incorporated under the laws of the state of Nevada on May 11, 2006. The Company’s current focus is oil and gas exploration and development. The Company has limited operations, is considered an exploration stage company, and has had no revenues from operations to date.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those regarding the recoverability of the Company’s unevaluated oil and gas properties and valuation of option and warrant transactions.
Reclassification
Certain amounts for prior periods have been reclassified to conform to the current period presentation.
Income (Loss) per Common Share
Basic net loss per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants or the assumed conversion of convertible debt instruments, using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.
For the quarter ended March 31, 2013 and 2012, the dilutive effect of options to purchase 3,900,000 and 3,900,000 shares of common stock and warrants to purchase Nil and Nil shares of common stock, respectively, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.
Oil and Gas Properties, Full Cost Method
The Company has elected to use the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells, including directly related overhead costs and related asset retirement costs, are capitalized.
Under this method, all costs, including internal costs directly related to acquisition, exploration and development activities, are capitalized as oil and gas property costs on a country by country basis. Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. The Company assesses the realizability of unproved properties on at least an annual basis or when there has been an indication that impairment in value may have occurred. Impairment of unproved properties is assessed based on management's intention with regard to future exploration and development of individually significant properties and the ability of the Company to obtain funds to finance such exploration and development. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.
In applying the full cost method, the Company performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of property and equipment is compared to the “estimated present value” of its proved reserves. The estimated present value of proved reserves is based upon future net revenues (after consideration of current economic and operating conditions at the end of the period) discounted at a 10 percent interest rate, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense.
As of March 31, 2013, the Company had no proved properties and the exploratory well on the Company’s properties has previously been fully impaired pending future development.
Foreign Exchange and Currency Translation
For the periods presented, the Company maintained cash accounts in Canadian and U.S. dollars, and incurred certain expenses denominated in Canadian dollars. The Company's functional and reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are translated using exchange rates at the end of each period. Exchange gains or losses on transactions are included in earnings. Adjustments resulting from the translation process are reported in a separate component of other comprehensive income and are not included in the determination of the results of operations.
Comprehensive Income
Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of non-vested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates, if historical forfeiture rates are available. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital.
Subsequent Events
The Company evaluated all material subsequent events from March 31, 2013 through the date of the issuance of these consolidated financial statements for disclosure consideration.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company’s operations, financial position or cash flows.
NOTE 2. GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses for the period from inception to March 31, 2013 of $7,857,110; has negative working capital of $1,088,555 at March 31, 2013; and is currently in default on certain outstanding debt obligations. Accordingly, there is substantial doubt as to the ability of the Company to continue as a going concern. The Company intends to fund initial operations through equity financing or debt arrangements.
The ability of the Company to emerge from the exploration stage is dependent upon the Company’s successful efforts to raise sufficient capital and then attain profitable operations. There can be no assurances, however, that management’s expectations of future revenues will be realized.
NOTE 3. SPOTLIGHT MERGER AGREEMENT
Effective on February 12, 2013, the Company entered into a merger agreement (the “Spotlight Merger Agreement”) with Spotlight Innovation LLC, a limited liability company based in the State of Iowa ("Spotlight"). 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 its restricted common stock on a post reverse split basis. Certain conditions precedent must 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 the Company; (ii) the Company 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) the Company shall have completed a 100:1 reverse stock split of our common stock; (iv) the Company shall have amended its certificate of incorporation to change its name to Spotlight Innovation, Inc.; (v) the Company shall have received approval from a majority of its 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) the Company’s current officers and directors shall resign upon closing of the transactions contemplated in the Merger Agreement.
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 .
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.
NOTE 4. RELATED PARTY TRANSACTIONS
Accounts Payable – Related Parties
As of March 31, 2013, the Company owed $502,000 of compensation to its CEO and CFO.
Short-term Notes Payable – Directors
As of March 31, 2013, former directors of the Company had outstanding loans to the Company of $88,345 that were used to pay operating expenses of the Company. Average interest of 10% per annum has been accrued to the lenders and the loans are due upon demand. All of these loans are unsecured and no interest has been paid to date. Accrued interest as of March 31, 2013, was $34,265.
Convertible Note – Related Party
A 5% unsecured convertible debenture, due January 13, 2010, was also issued by the Company to a related party on October 13, 2009 for CDN $100,000 (USD $101,765). The unpaid principal amount can be converted at the option of the holder, into common stock at the price of $0.50 per share. The convertible note was not redeemed or converted at the maturity date, is currently in default and is still accruing interest. Accrued interest as of March 31, 2013 was $16,492.
Short-term Notes Payable - Mainland Resources
In September 2010, the Company borrowed $60,000 from Mainland Resources to pay the Company’s operating costs during the merger period. The note bears interest at 12% and was due on December 31, 2010. The Company entered into multiple extensions of the note during the period the Company was contemplating its merger with Mainland. On December 21, 2011, the Company and Mainland Resources entered into a new promissory note (the “New Promissory Note”), which superseded and replaced the Original Promissory Note. The New Promissory Note evidenced the Corporation’s current obligation to pay to Mainland Resources $77,400, comprised of $60,000 in principal and $17,400 in accrued interest. The New Promissory Note is due on demand and bears interest at 12% per annum. As of March 31, 2013, through the date of this filing, the Company has not received a demand notice from Mainland Resources for payment on this note payable.
Advances from Officer and Spotlight
As of March 31, 2013, the Company’s CEO has made total advances to the Company of $23,433. The Company also owed $10,550 in advances from Spotlight.
As of March 31, 2013, through the date of this filing, the Company has not received a demand notice from any of the related party lenders noted above for payment on these notes payable.
NOTE 5. NOTES PAYABLE
From June 2010 to December 2011, the Company entered the following notes with the same unrelated third party:
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Date
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Stated
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Original
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Of
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Interest
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Principal
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Due
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Note
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Rate
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Amount
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Date
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Default
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Promissory Note
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#1
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06/02/10
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5
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%
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$
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50,000
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On Demand
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No
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#2
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02/04/11
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5
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%
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30,000
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On Demand
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No
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#3
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05/04/11
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5
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%
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35,000
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On Demand
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No
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#4
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08/11/11
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10
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%
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20,000
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On Demand
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No
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#5
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12/05/11
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10
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%
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20,000
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On Demand
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No
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On April 28, 2012, the Company borrowed $30,000 pursuant to a note payable agreement with another unrelated third party. The note is due on demand and accrues interest at 10% per annum.
As of March 31, 2013, and through the date of this filing, the Company has not received a demand notice from the lender noted above for payment of principal or interest on these notes payable.
NOTE 6. INCOME TAXES
Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income.
At March 31, 2013, the Company’s deferred tax assets consist primarily of net operating loss carry forwards. For the three months ended March 31, 2013, the material reconciling items between the tax benefit computed at the statutory rate and the actual benefit recognized in the financial statements consisted of expenses related to share-based compensation and the change in the valuation allowance during the applicable period. At March 31, 2013, the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.
As of March 31, 2013 and December 31, 2012, the Company has a net operating loss carry forward of approximately $5.8 million and $5.7 million, respectively, which will expire between years 2026 and 2032. Due to the change in ownership provisions of the Tax Reform Act of 1986, the Company’s net operating loss carry forwards could be subject to annual limitations should a change in ownership occur.
NOTE 7.
EQUITY TRANSACTIONS
Common Stock:
The Company did not have any common stock activities during the three months ended March 31, 2013 and 2012.
Stock Option:
In September 2009, the Company adopted the 2009 Stock Option Plan (“2009 Plan”). The 2009 Plan allows the Company to issue options to officers, directors and employees, as well as consultants, to purchase up to 7,000,000 shares of common stock.
During September 2009, the following options were granted:
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1,000,000 options to the Company’s Chief Executive Officer, who is also a director of the Company.
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·
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1,150,000 options to three Directors of the Company
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·
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150,000 options to the Company’s Chief Financial Officer
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·
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400,000 options to three consultants to the Company
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All the options granted have an exercise price of $0.80 per share and a 10 year life. With the exception of 50,000 options granted to a consultant that vested immediately, one third of the options granted vested at the date of grant, with the remainder vesting in equal parts in September 2012 and September 2015.
The Company recognized stock-based compensation expense of $69,193 related to these options during the three-month periods ended March 31, 2013 and 2012.
On March 14, 2011, 100,000 options with an exercise price of $0.13 per share, a ten year life and immediate vesting were granted to two directors of the Company. The fair value of the options granted was $14,928, or $0.15 per share, and was calculated in accordance with the Black-Scholes valuation model based on the following assumptions: (a) risk free interest rate 3.36%, (b) expected volatility of 173.17% (c) expected life of 5 years, and (d) zero expected future dividends. These options vested immediately and $14,928 of share-based compensation was recognized during the six months ended June 30, 2011 related to this option grant.
On April 20, 2011, 800,000 options were granted to two directors, 150,000 options were granted to the Chief Financial Officer, and 150,000 options were granted to legal counsel of the Company. These options had an exercise price of $0.09 per share, a ten year life and vested immediately. The fair value of the options granted was $99,231, or $0.01 per share, and was calculated in accordance with the Black-Scholes valuation model based on the following assumptions: (a) risk free interest rate 3.43%, (b) expected volatility of 171.00% (c) expected life of 5 years, and (d) zero expected future dividends. These options vested immediately.
The options qualify as ‘plain vanilla’ under the accounting literature and therefore, the expected life has been calculated pursuant to the provisions of Staff Accounting Bulletin No. 107.
A summary of stock option activity for the three months ended March 31 2013 is presented below:
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Options
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Weighted-Average Exercise Price
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Aggregate Intrinsic Value
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Outstanding at January 1, 2012
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3,900,000
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$
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0.58
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$
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-
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Granted
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-
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-
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-
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Exercised
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-
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-
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-
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Expired
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-
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-
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-
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Outstanding at March 31, 2013
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3,900,000
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|
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$
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0.58
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$
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-
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Exercisable at March 31, 2013
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3,016,667
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$
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0.52
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$
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-
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|
The Company recognized total stock-based compensation expense of $69,192 related to these options during the quarter ended March 31, 2013. As of March 31, 2013, the total unrecognized stock-based compensation expense related to non-vested stock options was $484,354. The unrecognized stock-based compensation is expected to be ratably amortized to expense over a weighted average period of 2.46 years. The weighted average remaining contractual term of the outstanding options and exercisable options at March 31, 2013 is 6.96 years.
Stock Warrant:
There were no stock warrant activities during the three months ended March 31, 2013 and 2012. As of March 31, 2013, there were no stock warrants outstanding.
NOTE 8.
SUBSEQUENT EVENTS
Subsequent to the reporting period, Spotlight Innovation LLC advanced $4,450 to American Exploration to cover short term expenses. The advances are due on demand and bear no interest.