NOTES TO FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Spotlight Innovations, Inc. (the “Company”) was incorporated under the laws of the State of Iowa on March 23, 2012 (“inception”) under the name Spotlight Innovations, LLC. The Company is a development stage company that 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. The Company 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 commercialization of intellectual property developed by academic institutions. The principals of the Company have been involved in all stages of the commercialization of healthcare intellectual property over the last eight years. On December 16, 2013, Spotlight Innovations LLC was merged into Spotlight Innovation, Inc. which acquired American Exploration Corporation through a reverse merger transaction. Financial statements reflect operating results of the combined entities.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated 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 valuation of option and warrant transactions.
Development Stage Activities
The Company is presently in the development stage, with no revenues. Accordingly, all of the Company’s operating results and cash flows reported in the accompanying financial statements are considered to be those arising from the development stage activities and represent the ”cumulative from inception” amounts from its development stage activities.
Principles of Consolidation
The consolidated financial statements include the Company’s accounts, including those of the Company’s wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Loss per Common Share
Basic net income (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 (loss) per share is computed by dividing the net income (loss) 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 year ended December 31, 2013 and the periods from March 23, 2012 (inception) to December 31, 2012, the dilutive effect of 5,200 and 0 options and 1,381,671 and 0 warrants, and 400,000 and 0 shares issuable upon conversion of the convertible debentures, respectively, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation ("FDIC"). The Company had $19,102 and $5,505 cash equivalents at December 31, 2013 and 2012, respectively.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (FDIC). At December 31, 2013 and 2012, the Company had $0 cash balances that were uninsured. The Company has not experienced any losses on such accounts.
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. For all periods presented, any exchange gains or losses or translation adjustments resulting from foreign currency transactions were immaterial.
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 nonvested 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.
Income Taxes
The Company’s results of operations through December 16, 2013 were as a limited liability company. A limited liability company (“LLC”) is not a taxpaying entity. Any income or operating loss arising from the activities of the partnership is reported, after appropriate adjustments, on the personal income tax returns of the members. Adjustments to the income or loss allocated to a particular member will be required when the tax basis and accounting basis of net contributions made by an individual member are not equal. Because the LLC is not a taxpaying entity, its financial statements are different from those of taxpaying entities. Specifically, on the statement of operations there is no provision for federal income tax benefit that must be accrued relating to the LLC’s net taxable loss during the year. In addition, the balance sheet does not present any assets or liabilities for deferred income taxes that might arise from different methods used to measure net income for the statement of operations and taxable income for the members. The company will be filing as a C Corporation for the last 15 days of the year. As a result, the company may have a de minimis future deferred tax benefits which has not been recorded.
Fair Value of Financial Instruments
The Company follows FASB ASC 820,
Fair Value Measurement
(“ASC 820”), which clarifies fair value as an exit price, establishes a hierarchal disclosure framework for measuring fair value, and requires extended disclosures about fair value measurements. The provisions of ASC 820 apply to all financial assets and liabilities measured at fair value.
As defined in ASC 820, fair value, clarified as an exit price, represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
As a basis for considering these assumptions, ASC 820 defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.
Level 1 –
|
Quoted prices in active markets for identical assets or liabilities.
|
Level 2 –
|
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
Level 3 –
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Subsequent Events
The Company evaluated subsequent events through the date when financial statements are issued 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 3. 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 since its inception through December 31, 2013 of $6,904,585 and has a working capital deficit $5,489,938 at December 31, 2013. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s management plans to raise additional funds through offerings of our common stock and financing through debt facilities. The ability of the Company to emerge from the development 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 obtaining sufficient capital through stock offerings or other financings sources will be sufficient to meet our capital needs or that they will be on terms that are satisfactory to the Company.
NOTE 4. ACQUISITION OF AMERICAN EXPLORATION CORPORATION
On December 16, 2013, the Company completed the transaction contemplated by the February 12, 2013, merger agreement (the “Merger Agreement”) with American Exploration Corp, a wholly-owned subsidiary of the Company, a company based in the State of Nevada ("American Exploration").
Pursuant to the Merger Agreement on December 16, 2013, American Exploration was merged with the Company, with the Company continuing as the surviving entity and American Exploration becoming a wholly-owned subsidiary of the Company (the ”Merger”). In connection with the Merger the Company issued 245,049 shares of its common stock and options to purchase 7,800 shares of the Company’s common stock.
Additionally, in connection with the Merger, the Company approved a 1:500 reverse stock split. All share and per share amounts in the consolidated financial statements and footnotes have been retroactively restated for the impact of the reverse split. The Company, as a result of the reverse acquisition, has restated its equity as a recapitalilzation from a limited liability company into a corporation. All equity amounts prior to the merger have been retroactively restated for the impact of the reverse acquisition.
The acquisition was accounted for as a “reverse acquisition,” and the Company was deemed to be the accounting acquirer in the acquisition. American Exploration’s assets and liabilities are recorded at their fair value. The Company’s assets and liabilities are carried forward at their historical costs. The financial statements of the Company are presented as the continuing accounting entity since it is the acquirer for the purpose of applying purchase accounting. The equity section of the balance sheet and earnings per share of Company are retroactively restated to reflect the effect of the exchange ratio established in the Merger Agreement. Goodwill is recorded for the excess of fair value of consideration transferred and fair value of net assets. As a result of the issuance of the shares of common stock pursuant to the Merger Agreement, a change in control of the Company occurred.
The purchase price on the date of acquisition was:
Value of stock and options issued in acquisition
|
|
$
|
337,750
|
|
Cash advanced to American Exploration prior to merger
|
|
|
89,102
|
|
Total purchase price
|
|
|
426,852
|
|
|
|
|
|
|
Fair value of Net liabilities acquired:
|
|
|
|
|
Current assets
|
|
|
133,310
|
|
Current liabilities
|
|
|
(562,844
|
)
|
Net liabilities assumed
|
|
|
(429,534
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
856,388
|
|
Management evaluated the amount of goodwill associated with the transaction following the allocation of fair value to the assets and liabilities acquired and determined that the goodwill should be fully impaired and has reflected the impairment on the statement of operations as of the date of the merger.
NOTE 5. DEPOSITS
During the year ended December 31, 2013, the Company made deposits of $12,250 on a letter of intent to acquire 90% of Celtic Biotech, Inc. (“Celtic”). On March 11, 2014, the Company created a wholly-owned subsidiary, Celtic Biotech Iowa Inc., to hold the license upon closing of the transaction. The Company will issue as full consideration under the acquisition agreement, 115,839 Class B Preferred Shares, having a par value of five-dollars ($5.00) out of Celtic Biotech Iowa Inc.’s available preferred stock. The license agreement will have a term of five years. The Company is still in negotiations with Celtic and intends to close the acquisition during the six months ended June 30, 2014.
NOTE 6. NOTES PAYABLE
Notes Assumed in Merger
On December 10, 2013, the Company assumed the liabilities of American Exploration which included the following notes payable to unrelated third parties:
|
|
Date
|
|
Stated
|
|
|
Original
|
|
|
|
|
|
|
of
|
|
Interest
|
|
|
Principal
|
|
Due
|
|
|
Promissory Note
|
|
Note
|
|
Rate
|
|
|
Amount
|
|
Date
|
|
Default
|
#1
|
|
05/29/09
|
|
|
10
|
%
|
|
$
|
30,000
|
|
On Demand
|
|
No
|
#2
|
|
06/05/09
|
|
|
10
|
%
|
|
$
|
7,698
|
|
On Demand
|
|
No
|
#3
|
|
08/16/09
|
|
|
10
|
%
|
|
$
|
50,000
|
|
On Demand
|
|
No
|
#4
|
|
09/27/10
|
|
|
10
|
%
|
|
$
|
60,000
|
|
On Demand
|
|
No
|
#5
|
|
06/02/10
|
|
|
5
|
%
|
|
$
|
50,000
|
|
On Demand
|
|
No
|
#6
|
|
02/04/11
|
|
|
5
|
%
|
|
$
|
30,000
|
|
On Demand
|
|
No
|
#7
|
|
05/04/11
|
|
|
5
|
%
|
|
$
|
35,000
|
|
On Demand
|
|
No
|
#8
|
|
08/11/11
|
|
|
10
|
%
|
|
$
|
20,000
|
|
On Demand
|
|
No
|
#9
|
|
12/05/11
|
|
|
10
|
%
|
|
$
|
20,000
|
|
On Demand
|
|
No
|
#10
|
|
04/28/12
|
|
|
10
|
%
|
|
$
|
30,000
|
|
On Demand
|
|
No
|
The Company also assumed a liability for previous advances made by American Exploration’s former CEO in the amount of $23,433. These advances are due on demand and do not bear interest.
The Company also assumed $97,436 in accrued interest related to these notes. The Company recorded $1,653 in interest expense for the year ended December 31, 2013 on the above notes payable.
As of December 31, 2013, and through the date of these financial statements, the Company has not received any demand notice from the lenders noted above for payment of principal or interest on these notes payable.
NOTE 7. CONVERTIBLE DEBENTURES
Convertible Debenture Assumed in Merger
On December 16, 2013, the Company assumed the liabilities of American Exploration which included a convertible debenture (the “Debenture”) in the amount of CDN $115,098 (USD $110,598). The Debenture is due on demand and accrues interest at 5% per annum. The Debenture includes a conversion feature that allows the holder to convert into common stock of the Company at the greater of: i) 50% of the market price on the date of conversion or ii) $0.001.
Danley Note
On September 15, 2012, the Company entered into a loan agreement (the “Loan”) with The Danley Group (“Lenders”) to borrow $50,000 at an annual compounding rate of 2.7%, due March 15, 2013. In additions, the Company agreed to pay a $50,000 premium at maturity The Company has recorded the additional premium as a debt discount and increased the face amount of the note to $100,000. The debt discount is being amortized over the life of the Loan. During the year ended December 31, 2013 and the period from March 23, 2012 (inception) to December 31, 2012, the Company amortized the debt discount and recorded $20,833 and $29,187, respectively, as additional interest expense. For the period from inception through December 31, 2013, the Company recognized and amortized $50,000 of the debt discount as interest expense.
The Loan is contingently convertible upon the closing of the Merger. The conversion feature is 50% of the market price on the date of maturity.
On May 8, 2013, the Company’s president, Cristopher Grunewald extended the Loan’s maturity date with the Lenders to September 15, 2013, by signing a guarantee of obligations to repay a total amount of $100,000 plus accrued interest.
On October 4, 2013, the Company issued 262,000 shares of common stock and 800,000 warrants to purchase one share of common stock per warrant for a further extension of the Loan’s maturity date to December 31, 2013. The warrants have an exercise price of 60% of the 20 day average market price prior to the date of exercise. However, the exercise price cannot be less than $0.20 per share. The fair value of the shares on the date of grant was $178,160 and the fair value of the warrants on the date of grant was $529,643. The Company recorded the $707,803 in fair value of the shares and warrants as interest expense.
The Loan matured on December 31, 2013. As of December 31, 2013, the Company recorded $25,000 as a debt discount related to the fair value of the contingent conversion feature as a result of the Merger and maturity of the Loan. The Company expensed the debt discount of $25,000 immediately as the Loan was convertible on that date. The Company is currently in default of the repayment term as of that date. As a result of the default the Company is currently accruing interest at 10% per annum.
Kopriva Note
On September 27, 2013, the Company entered into a convertible note (the “Note”) in the amount of $40,000 from an investor. The term of this Note is fifteen months from commencement. During the term of this Note, interest shall accrue on the unpaid principal balance at a fixed rate equal to 10% per annum, compounded annually. Should the Company default on the Note, the outstanding balance of this Note shall bear interest at the default rate of 20% per annum, compounded annually. In addition to the interest accrued the holder received warrants to purchase up to 100,000 shares of common stock. The conversion feature of the Note and the exercise price of the warrants is the greater of: i) a discount of 40% to the 20 day average closing market price prior to the day that the warrant is executed or ii) $0.20 per share. The warrants will have a term of thirty-six (36) months from the date of repayment or conversion of the Note. The relative fair value of the warrants issued on the date of grant was $25,136 and was recorded as a debt discount on the Note.
In connection with the Note, the convertible debenture was also analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed. The Company recorded a debt discount of $14,864 for the fair value of the beneficial conversion feature. The Company is amortizing the combined debt discounts from the warrants and beneficial conversion feature over the term of the Note. The Company recorded interest expense of $8,000 related to the amortization of the debt discounts.
NOTE 8. 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 December 31, 2013 and 2012 the Company’s deferred tax assets consist primarily of net operating loss carry forwards acquired from American Exploration in the Merger. For the year ended December 31, 2013 and the period from March 23, 2012 (inception) to December 31, 2012, 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 December 31, 2013 and 2012, 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 December 31, 2013 and 2012, the Company has a net operating loss carry forward of approximately $6.0 million and $0, respectively, which will expire between years 2027 and 2033. Due to the change in ownership provisions of the Tax Reform Act of 1986, our net operating loss carry forwards could be subject to annual limitations for the change in ownership that resulted in the Merger.
NOTE 9. EQUITY
The Company has authorized the issuance of 500,000 shares of Series A preferred stock, 500,000 shares of Series C preferred stock, 4,000,000 shares of preferred stock and 4,000,000,000 shares of common stock.
COMMON STOCK
2013 Issuances
Stock Subscriptions
During the year ended December 31, 2013, the Company issued subscription units that consisted of common stock and warrants. The Company received subscriptions to acquire 530,176 shares of common stock and 418,389 warrants to purchase one share of common stock each for net cash proceeds $276,072. The warrants have an exercise price of $1.29 per share, and expires 48 months following an effective registration statement on the underlying shares or 24 months following the closing of any registered debt or equity offering contemplated by the Company subsequent to the merger with American Exploration. The issuances were as follows:
Date
|
|
Number of Shares
|
|
|
Number of Warrants
|
|
|
Proceeds
|
|
January 17, 2013
|
|
|
161,000
|
|
|
|
31,641
|
|
|
$
|
26,450
|
|
March 25, 2013
|
|
|
36,976
|
|
|
|
38,697
|
|
|
|
25,000
|
|
April 7, 2013
|
|
|
60,400
|
|
|
|
63,282
|
|
|
|
40,838
|
|
April 28, 2013
|
|
|
90,600
|
|
|
|
94,923
|
|
|
|
61,255
|
|
August 15, 2013
|
|
|
30,200
|
|
|
|
31,641
|
|
|
|
20,418
|
|
September 27, 2013
|
|
|
60,400
|
|
|
|
63,282
|
|
|
|
40,857
|
|
November 6, 2013
|
|
|
30,200
|
|
|
|
31,641
|
|
|
|
20,418
|
|
November 12, 2013
|
|
|
30,200
|
|
|
|
31,641
|
|
|
|
20,418
|
|
November 20, 2013
|
|
|
30,200
|
|
|
|
31,641
|
|
|
|
20,418
|
|
Total
|
|
|
530,176
|
|
|
|
418,389
|
|
|
$
|
276,072
|
|
Other Stock Issuances
On August 7, 2013, the Company issued 15,100 shares of common stock for services related to consulting. The fair value of the shares was $10,268 based on the most recent sale of the Company’s common stock to a third party.
On October 4, 2013, the Company issued 262,000 shares of common stock and 800,000 warrants to purchase one share of common stock per warrant for a further extension of the Loan’s maturity date to December 31, 2013. The warrants have an exercise price of 60% of the 20 day average market price prior to the date of exercise. However, the exercise price cannot be less than $0.20 per share. The fair value of the shares on the date of grant was $178,160 and the fair value of the warrants on the date of grant was $529,643.
On December 16, 2013, the Company issued 245,458 shares of common stock in connection with the Merger with American Exploration. The shares had a fair value of $330,816 based on the market price on the date of grant.
On December 16, 2013, the Company granted the CEO and a consultant 3,200,000 and 296,373 shares of the Company’s common stock, respectively, as compensation for services rendered during the year ended December 31, 2013. These shares were valued at $4,720,104 based on the market price on the date of grant. As of the date of this filing, these shares have not been issued and have been recorded as a stock payable.
2012 Issuances
On March 23, 2012 (inception), the Company issued 6,692,724 shares of common stock to the Company’s founder for no consideration.
OPTIONS
Upon the acquisition of American Exploration, the Company adopted the 2009 Stock Option Plan (the “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.
The Company, as part of the Merger, issued and exchanged 5,200 stock options to individuals who previously held stock options in American Exploration. These stock options were valued at $6,934 using the Black-Scholes model which was included in the purchase price of American Exploration.
A summary of the stock option activity for the years ended December 31, 2013 and 2012 is presented below:
|
|
Options
|
|
|
Weighted-Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
March 23, 2012 (Inception)
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Outstanding at December 31, 2012
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
5,200
|
|
|
|
359.04
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2013
|
|
|
5,200
|
|
|
$
|
359.04
|
|
|
$
|
-
|
|
Exercisable December 31, 2012
|
|
|
5,200
|
|
|
$
|
359.04
|
|
|
$
|
-
|
|
The weighted average remaining contractual term of the outstanding options and exercisable options at December 31, 2013 and 2012 is 6.21 and 0 years, respectively
WARRANTS
During the year ended December 31, 2013, the Company issued subscription units that consisted of common stock and warrants. The Company received subscriptions to acquire 530,176 shares of common stock and 418,389 warrants to purchase one share of common stock each for net cash proceeds $276,072. The warrants have an exercise price of $1.29 per share, and expires 48 months following an effective registration statement on the underlying shares or 24 months following the closing of any registered debt or equity offering contemplated by the Company subsequent to the merger with American Exploration. The relative fair value of the warrants based on the Black-Scholes model was $135,727.
On September 27, 2013, the Company issued 100,000 warrants to purchase one share of common stock per warrant, in connection with the Note. The exercise price of the warrants is the greater of i) a discount of 40% to the 20 day average closing market price prior to the day that the warrant is executed or ii) $0.20 per share. The warrants will have a term of thirty-six (36) months from the date of repayment or conversion of the Note. The relative fair value of the warrants based on the Black-Scholes model was $25,136 and was recorded as a debt discount on the Note.
On October 4, 2013, the Company issued 262,000 shares of common stock and 800,000 warrants to purchase one share of common stock per warrant for a further extension of the Loan’s maturity date to December 31, 2013. The warrants have an exercise price of 60% of the 20 day average market price prior to the date of exercise. However, the exercise price cannot be less than $0.20 per share. The fair value of the warrants on the date of grant was $529,643 based on the Black-Scholes model.
On August 2, 2013 and November 20, 2013, the Company issued 31,641 warrants to purchases one share of common stock per warrant, to a consultant of the Company for services. The warrants have an exercise price of $1.29 per share, and expires 48 months following an effective registration statement on the underlying shares or 24 months following the closing of any registered debt or equity offering contemplated by the Company subsequent to the merger with American Exploration. The fair value of the warrants was $42,754 based on the Black-Scholes model and was recorded as stock compensation.
The fair value of the above warrants was determined by using the Black-Scholes option-pricing model. Variables used in the model for the warrants issued include :i) discount rates ranging from 0.38% to 0.79%; ii) expected terms ranging from 4.25 to 5.70 years; iii) expected volatility ranging from 250.09% to 285.88%; iv) zero expected dividends and v) stock price of $0.68.
A summary of the warrant activity for the period from March 23, 2012 (inception) to December 31, 2012 and the year ended December 31, 2013 is presented below:
|
|
Warrants
|
|
|
Weighted-Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
March 23, 2012 (Inception)
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Outstanding at December 31, 2012
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
1,381,671
|
|
|
|
1.41
|
|
|
|
28,900
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2013
|
|
|
1,381,671
|
|
|
$
|
1.41
|
|
|
|
28,900
|
|
Exercisable December 31, 2013
|
|
|
1,381,671
|
|
|
|
1.41
|
|
|
|
28,900
|
|
The weighted average remaining contractual term of the outstanding warrants and exercisable warrants at December 31, 2013 and 2012 is 3.01 and 0 years, respectively
NOTE 10. SUBSEQUENT EVENTS
On January 30, 2014, the holders of the Debenture converted the full balance into shares of the Company’s common stock. As a result, the Company issued 1,105,970 shares of common stock in full settlement of the principal balance of $110,598 and $7,515 of accrued interest. The shares were issued at 50% of the market price on the conversion date. No gain or loss was recorded on the conversion.
On January 28, 2014, the Company issued 33,334 shares and 16,667 warrants to purchase one share of common stock each, for net proceeds of $25,000. The warrants have an exercise price of $1.25 per share and expire in three years.
On April 4, 2014, the Company entered into a letter of credit (the “Letter of Credit”) with Denver Savings Bank in the principal amount of $752,325. The Letter of Credit provides that the Company can borrow up to the aforementioned principal amount from the Bank until April 1, 2017. Interest accrues at the rate of 4.25% per year. The loan is repayable on demand, but if no demand is made, then quarterly payments of accrued interest calculated on the amount of credit outstanding. As security for the Letter of Credit a third party (the “Consigner”) cosigned the Letter of Credit, and pledged certain collateral. In exchange for this pledge the Company issued to the Cosigner, 150,000 shares of common stock of the Company, and agreed to issue 30,000 shares of its common stock with upon each one year anniversary of the Letter of Credit, provided that the Letter of Credit remains in effect. The shares of common stock had a fair value of $183,000 based on the market price on the date of grant and have been recorded a deferred financing costs.
On April 4, 2014, the Cosigner and three third parties entered into a Security and Loan Agreement (the “SLA”). The SLA ensures that the Cosigner will be fully remunerated should the Company default on the Letter of Credit. The SLA provides a guaranty to the Cosigner from the three third parties, which have pledged to repay any outstanding amounts on the Letter of Credit should the Company default on the Letter of Credit. Any amounts borrowed on the Letter of Credit will be issued directly to the three third parties from the Cosigner. The third parties will then loan the Company the funds from the Letter of Credit through convertible promissory notes (the “Convertible Notes”).
On April 8, 2014, the Company requested $250,000 be drawn on the Letter of Credit. As a result, the Company entered into the Convertible Notes with the third parties in the amount of $250,000. The Convertible Notes accrue interest at 20.5% per annum and mature in six months from the date of issuance. The Convertible Notes contain a conversion feature which allows the holder to convert the Convertible Notes into shares of the Company’s common stock. The conversion price is the lower of:
1)
|
50% of the prior 20 days average market price on the date of conversion
|
However, in no event will the conversion price be lower than $0.25.
On April 8, 2014, the Company paid $119,590 in full settlement of the Loan. No gain or loss was recorded.