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EX-31.1 - CERTIFICATION - Spotlight Innovation, Inc.aexp_ex311.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Mark One

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File No. 333-141060

American Exploration Corporation
(Name of small business issuer in its charter)
 
Nevada
 
98-0518266
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

520 5th Avenue, Suite 2600
Calgary, Alberta
Canada T2P 3R7
(Address of principal executive offices)
 
(403) 233-8484
(Issuer’s telephone number)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Name of each exchange on which registered:
None
   
     
Securities registered pursuant to Section 12(g) of the Act:
 
 
Common Stock, $0.001
   
(Title of Class)
   

Indicate by checkmark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes o No x

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the most practicable date:

Class
 
Outstanding as of December 17, 2012
Common Stock, $0.001
 
60,273,333



 
 

 
AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
BALANCE SHEETS
 (Unaudited)
 
   
September 30,
2012
   
December 31,
2011
 
             
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
  $ 4,965     $ 16,513  
Total Current Assets
    4,965       16,513  
                 
Total Assets
  $ 4,965     $ 16,513  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current Liabilities
               
Accounts payable and accrued liabilities
  $ 38,088     $ 19,944  
Accounts payable – related parties
    453,397       284,052  
Short-term note payable
    185,000       155,000  
Short-term notes payable – related parties
    148,311       147,809  
Advances from officer
    23,433       -  
Convertible notes – related party
    101,640       95,227  
Total Current Liabilities
    949,869       702,032  
                 
Commitments and contingencies
               
                 
Stockholders’ Deficit
               
Common stock, $0.001 par value, 2,100,000,000 shares authorized:
               
60,273,333 shares issued and outstanding
    60,274       60,274  
Additional paid-in capital
    6,577,464       6,369,884  
Accumulated other comprehensive income
    (4,903 )     -  
Accumulated deficit during exploration stage
    (7,577,739 )     (7,115,677 )
Total Stockholders’ Deficit
    (944,904 )     (685,519 )
                 
Total Liabilities and Stockholders’ Deficit
  $ 4,965     $ 16,513  
 
The accompanying notes are an integral part of these unaudited financial statements.
 
 
2

 
 
AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2012 and 2011
and For the Period from Inception (May 11, 2006) to September 30, 2012
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
   
Period from Inception
(May 11, 2006) to September 30,
 
   
2012
   
2011
   
2012
   
2011
   
2012
 
                               
Revenue
  $ -     $ -     $ -     $ -     $ -  
                                         
Operating expenses
                                       
General and administrative
    141,572       155,532       437,733       563,032       3,839,311  
Depreciation and amortization
    -       842       -       2,526       11,277  
Impairment of oil and gas properties
    -       -       -       -       3,771,001  
Total operating expenses
    141,572       156,374       437,733       565,558       7,621,589  
                                         
Loss from operations
    (141,572 )     (156,374 )     (437,733 )     (565,558 )     (7,621,589 )
                                         
Other income (expense)
                                       
Interest expense
    (10,609 )     (6,956 )     (24,329 )     (19,595 )     (128,789 )
Loss on sale of assets
    -       -       -       -       (1,161 )
Other income
    -       -       -       -       173,800  
Total other income (expense)
    (10,609 )     (6,956 )     (24,329 )     (19,595 )     43,850  
                                         
Net loss
  $ (152,181 )   $ (163,330 )   $ (462,062 )   $ (585,153 )   $ (7,577,739 )
                                         
Other comprehensive income (loss)
                                       
Net loss on foreign currency translation
    (4,869 )     -       (4,903 )     -       (4,903 )
Net comprehensive loss
  $ (157,050 )   $ (163,330 )   $ (466,965 )   $ (585,153 )   $ (7,582,642 )
                                         
Net loss per common share – basic and diluted
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )        
   
Weighted average common shares - basic and diluted
    60,273,333       60,273,333       60,273,333       60,273,333          
 
The accompanying notes are an integral part of these unaudited financial statements.
 
 
3

 
 
AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2012 and 2011
and For the Period from Inception (May 11, 2006) to September 30, 2012
(Unaudited)

 
Nine Months Ended September 30,
   
Inception (May 11, 2006) to September 30,
 
 
2012
   
2011
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net loss
  $ (462,062 )   $ (585,153 )   $ (7,577,739 )
Adjustments to reconcile net loss to cash used by operating activities:
                       
Depreciation and amortization
    -       2,526       11,277  
Amortization of debt discount
    -       -       60,945  
Share-based compensation
    207,579       321,737       1,843,792  
Impairment of oil and gas properties
    -       -       3,771,001  
Loss on sale of assets
    -       -       1,161  
Changes in operating assets and liabilities:
                       
Accounts payable and accrued liabilities
    18,136       1,020       37,702  
Accounts payable - related parties
    169,105       179,345       453,397  
Net cash used in operating activities
    (67,242 )     (80,525 )     (1,398,464 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Investment in website
    -       -       (10,000 )
Acquisition of unproved O&G properties
    -       -       (1,108,551 )
Net cash used in investing activities
    -       -       (1,118,551 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from issuance of common stock and warrants
    -       -       2,063,250  
Proceeds from notes payable
    30,000       85,000       185,000  
Proceeds from notes payable - related parties
            -       152,809  
Advances from officer
    23,433       -       23,433  
Proceeds from issuance of convertible debt - related parties
    -       -       95,227  
Net cash provided by financing activities
    53,433       85,000       2,519,719  
                         
Effect of exchange rate changes on cash
    2,261       -       2,261  
                         
Increase (decrease) in cash during the period
    (11,548 )     4,475       4,965  
                         
Cash, beginning of the period
    16,513       10,733       -  
                         
Cash, end of the period
  $ 4,965     $ 15,208     $ 4,965  
                         
Supplemental cash flow information:
                       
Income taxes paid
  $ -     $ -     $ -  
Interest paid
  $ -     $ -     $ -  
                         
NON-CASH INVESTING AND FINANCING ACTIVITIES:
                       
Common stock issued for acquisition of oil and gas property
  $ -     $ -     $ 2,664,750  
Cancellation of loan from director
  $ -     $ -     $ 5,000  
Cancellation of shares
  $ -     $ -     $ 83,100  
 
The accompanying notes are an integral part of these unaudited financial statements.
 
 
4

 
 
AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
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, 2011.

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 three and nine months ended September 30, 2012 and 2011, 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.

 
5

 
 
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 September 30, 2012, 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.
 
 
6

 
 
Subsequent Events

The Company evaluated all material subsequent events from September 30, 2012 through the date of the issuance of these consolidated financial statements for disclosure consideration. Subsequent to the reporting period, Spotlight Innovation LLC advanced $2500 to American Exploration to cover short term expenses.

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 September 30, 2012 of $7,577,739; has negative working capital of $944,904 at September 30, 2012; 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. UNEVALUATED OIL AND GAS PROPERTIES

In November 2008, the Company executed an option agreement (the "Option Agreement") to purchase a 75% net revenue interest (100% working interest) in approximately 5,000 net acres of oil and gas leases located in Mississippi in the onshore region of the Gulf Coast of the United States. The purchase price was $625 per net acre, or a total of $3,125,000. Following certain extensions of the Option Agreement, the Company made additional cash payments totaling $325,001 and issued 4,037,500 shares of its restricted common stock as satisfaction for the remaining balance due under the Option Agreement.

The Company agreed to drill and complete a minimum of at least one well on the properties in the Haynesville geological zone no later than December 31, 2010. On November 2, 2010, an agreement was signed between the counterparty and the Company which extended the deadline for drilling and completing a well in the Haynesville Formation to December 31, 2011. On November 11, 2011, we received a letter from Westrock advising that Westrock was willing to grant an extension to the December 31, 2011 deadline for the Company to meet its drilling obligations under the terms and provisions of the Option Agreement if the Company proposes reasonable financial consideration acceptable to Westrock by December 15, 2011. The Company was unable to provide financial consideration acceptable to Westrock, and was in default of the provisions of the Option Agreement and forfeited all rights under the Option Agreement. Westrock retained all payments made by us under the Option Agreement and all improvements made to the acquired properties. During the year ended December 31, 2011, the entire $3,771,001 was recorded to impairment expense.

Mainland Resources, Inc. Joint Development Project Termination

As a result of not completing the Burkley-Phillips #1 well prior to December 31, 2011 in accordance with its contractual obligations, the Company forfeited its 20% working interest in the 5,000 acre parcel that the Company had originally secured from Westrock. Effective December 12, 2011, the Leases were returned to Westrock.

 
7

 
 
Notwithstanding the Transfer of Leases, the Company still retains a twenty percent (20%) working interest in the 8,225 adjoining acres in Mississippi that Mainland Resources Inc. first contributed to the joint venture.

NOTE 4. RELATED PARTY TRANSACTIONS

As of September 30, 2012, former directors of the Company had outstanding loans to the Company of $88,334 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.

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 $101,640). The unpaid principal amount can be converted 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.

During the nine-month period ended September 30, 2012, the Company’s Chief Executive Officer made advances of $23,433 to the Company. These advances are due on demand and accrue no interest.

As of September 30, 2012, the Company owed $726,781 to related parties, which consisted of $395,500 of professional fees owed to entities owned by the Company’s CEO and CFO, $273,384 of notes payable and advances from officer and $57,897 of accrued interest on related party notes from above.

As of September 30, 2012, 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.

Mainland Resources Note Payable

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 $67,003, comprised of $60,000 in principal and $7,003 in accrued interest. The New Promissory Note is due on demand and bears interest at 12% per annum. As of September 30, 2012, through the date of this filing, the Company has not received a demand notice from Mainland Resources for payment on this note payable.

NOTE 5. NOTES PAYABLE

From June 2010 to December 2011, the Company entered the following notes with the same unrelated third party:

   
Date
 
Stated
   
Original
       
   
Of
 
Interest
   
Principal
 
Due
   
   
Note
 
Rate
   
Amount
 
Date
 
Default
Promissory Note
                 
#1
 
06/02/10
   
5
%
 
$
50,000
 
On Demand
 
No
#2
 
02/04/11
   
5
%
   
30,000
 
On Demand
 
No
#3
 
05/04/11
   
5
%
   
35,000
 
On Demand
 
No
#4
 
08/11/11
   
10
%
   
20,000
 
On Demand
 
No
#5
 
12/05/11
   
10
%
   
20,000
 
On Demand
 
No

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.

 
8

 
 
As of September 30, 2012, 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 September 30, 2012, the Company’s deferred tax assets consist primarily of net operating loss carry forwards. For the nine months ended September 30, 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 September 30, 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 September 30, 2012 and December 31, 2011, the Company has a net operating loss carry forward of approximately $5.7 million and $5.4 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 nine months ended September 30, 2012 and 2011.

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:
 
·
1,000,000 options to the Company’s Chief Executive Officer, who is also a director of the Company.
·
1,150,000 options to three Directors of the Company
·
150,000 options to the Company’s Chief Financial Officer
·
400,000 options to three consultants to the Company
 
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 $207,579 related to these options during the nine-month periods ended September 30, 2012 and 2011.

 
9

 
 
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 nine months ended September 30, 2012 is presented below:

   
Options
   
Weighted-Average Exercise Price
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2012
    3,900,000     $ 0.58     $ -  
Granted
    -       -       -  
Exercised
    -       -       -  
Expired
    -       -       -  
Outstanding at September 30, 2012
    3,900,000     $ 0.58     $ -  
Exercisable at September 30, 2012
    3,016,667     $ 0.52     $ -  

The Company recognized total stock-based compensation expense of $207,579 related to these options during the quarter ended September 30, 2012. As of September 30, 2012, the total unrecognized stock-based compensation expense related to non-vested stock options was $830,321. The unrecognized stock-based compensation is expected to be ratably amortized to expense over a weighted average period of 2.96 years. The weighted average remaining contractual term of the outstanding options and exercisable options at September 30, 2012 is 7.46 years.

Stock Warrant:

There were no stock warrant activities during the nine months ended September 30, 2012 and 2011. As of September 30, 2012, there were no stock warrants outstanding.

NOTE 8. SUBSEQUENT EVENTS

Subsequent to the reporting period, Spotlight Innovation LLC advanced $2500 to American Exploration to cover short term expenses. The advances are due on demand and bear no interest.
 
 
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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 are 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 has been the acquisition of mineral leases located in Mississippi.

Merger Agreement

Our Board of Directors previously authorized and approved the execution of a definitive merger agreement and plan of merger (the “Merger Agreement”) dated March 22, 2010 (the “Execution Date”) with Mainland Resources, Inc., a Nevada corporation (“Mainland Resources”). The Merger Agreement provided for a stock-for-stock merger to be effected under the laws of the State of Nevada whereby it was contemplated that our shareholders would receive one share of common stock of Mainland Resources for every four shares of our common stock held of record. The specific share exchange ratio was to be negotiated upon the completion of “fairness opinions” conducted by independent financial advisors and technical due diligence by both Mainland and American. In the event the Merger Agreement was consummated and the merger was completed: (i) Mainland Resources would have been the surviving corporation; (ii) Mainland Resources would have been vested with all of our assets and property (as discussed below); and (iii) our shareholders would have held approximately twenty percent (20%) of the total issued and outstanding shares of common stock of Mainland Resources.

Termination of Merger

Under Section 7.3 of the Merger Agreement: (i) either we or Mainland Resources may terminate the Merger Agreement if certain conditions specified in the Merger Agreement were not satisfied at or before the “Termination Date”, which is defined in Section 1.1 of the Merger Agreement to mean January 31, 2012, or such later date as may be mutually agreed; or (ii) we and Mainland Resources may mutually agree to terminate the Merger Agreement (without further action on the part of the shareholders of the Corporation) any time prior to the filing of the Articles of Merger.

 
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Our Board of Directors determined that it was in the best interests of us and our shareholders to mutually agree with Mainland Resources to terminate the Merger Agreement. The Board of Directors based its decision upon considerable analysis of certain factors including, but not limited to: (i) our default of the Option Purchase Agreement and based upon the Transfer of Leases, no longer had the asset base, including the Leases, we previously had to contribute now making such a merger undesirable; (ii) our retention of a twenty percent (20%) working interest in the 8,225 acres based upon the joint venture with Mainland Resources; (iii) the potential legal fees and costs, time and energy associated with any protracted litigation with Mainland Resources associated with termination of the merger; and (iv) our ability to pursue new business operations and asset base.

Therefore, effective December 21, 2011 (the “Effective Date”), we entered into that certain termination and release agreement with Mainland Resources (the “Termination and Release Agreement”), pursuant to and in accordance with Section 7.3 of the Merger Agreement, the Corporation and Mainland Resources mutually agreed to the termination of the Merger Agreement as of the Effective Date. In further accordance with the terms and provisions of the Termination and Release Agreement, we agreed with Mainland Resources to release one another from any further liability as to the performance of the respective party’s duties and obligations under the Merger Agreement and that Mainland Resources shall have no further obligations to issue any shares of common stock of Mainland Resources or grant any options or warrants of Mainland Resources to our shareholders.

Westrock Option Agreement

In November 2008, the Company executed an option agreement (the "Option Agreement") to purchase a 75% net revenue interest (100% working interest) in approximately 5,000 net acres of oil and gas leases located in Mississippi in the onshore region of the Gulf Coast of the United States. The purchase price was $625 per net acre, or a total of $3,125,000. Following certain extensions of the Option Agreement, the Company made additional cash payments totaling $325,001 and issued 4,037,500 shares of its restricted common stock as satisfaction for the remaining balance due under the Option Agreement.

The Company agreed to drill and complete a minimum of at least one well on the properties in the Haynesville geological zone no later than December 31, 2010. On November 2, 2010, an agreement was signed between the counterparty and the Company which extended the deadline for drilling and completing a well in the Haynesville Formation to December 31, 2011. On November 11, 2011, we received a letter from Westrock advising that Westrock was willing to grant an extension to the December 31, 2011 deadline for us to meet our drilling obligations under the terms and provisions of the Option Agreement if we propose reasonable financial consideration acceptable to Westrock by December 15, 2011. We were unable to provide financial consideration acceptable to Westrock, and were in default of the provisions of the Option Agreement and forfeited all rights under the Option Agreement. Westrock retained all payments made by us under the Option Agreement and all improvements made to the acquired properties. During the year ended December 31, 2011, the entire $3,771,001 was recorded to impairment expense.

Mainland Resources Letter Agreement

Effective on September 17, 2009, our Board of Directors authorized the execution of a letter agreement (the “Letter Agreement”) with Mainland Resources to jointly develop contiguous acreage known as the Buena Vista Area located in Mississippi (the “Joint Development Project”). In accordance with the terms and provisions of the Letter Agreement: (i) we agreed to commit approximately 5,000 net acres and Mainland Resources agreed to commit approximately 8,225 net acres to the Joint Development Project (the Acreage”); (ii) Mainland Resources would be the operator pursuant to the Joint Operating Agreement; (iii) Mainland Resources agreed to pay 80% of the initial well drilling and completion costs to earn a 51% working interest in the well and the total Joint Operating Area; and (iv) we agreed to pay 20% of the initial well drilling and completion costs to earn a 49% working interest in the well and the total Joint Operating Area. In further accordance with the terms and provisions of the Joint Operating Agreement, future costs, including drilling and completion, for oil and gas activities on the net acreage in the Joint Operating Area would have been split on a 51%/49% basis between Mainland Resources and us, respectively.

 
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On March 25, 2010, Mainland Resources issued an authorization for expenditure (“AFE”) for the Burkley-Phillips No. 1 well, which contemplated drilling to a depth of 22,000 feet or a depth sufficient to evaluate the Bossier/Haynesville formations. The total completed well cost was estimated at $13,550,000. In accordance with the terms and provisions of the Letter Agreement, we had thirty days to contribute our 20% share of the total completed well cost or $2,710,000.

On April 27, 2010, we failed to fund our 20% share of the estimated total well costs ($2,710,000) of the Burkley-Phillips No. 1 well within the thirty-day period provided for in the joint development agreement, (the 30 day period expired on April 23, 2010). As a result, we forfeited 29% (of the total 49% held by American) working interest in the Burkley-Phillips No. 1 well and the prospect in favor of Mainland Resources. We continue to be entitled to a 20% interest in the Acreage and the prospect after completion (subject to compliance by us with all other terms and conditions of the Letter Agreement and the related joint operating agreement).

Mainland subsequently renegotiated the term on the leases originally held by us as well as those they had secured on the Buena Vista structure in Mississippi. The lease expiration dates on the 8,225 acres that American holds a 20% working interest currently were extended beyond 2011 to 2012. These lands have varying expiries which range from June through to October 2012. Should Mainland not be successful at renegotiating the term, the 20% interest held by American would be lost.  As of the date of this filing nothing has changed in the status of these negotiations.

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.

Nine-Month Period Ended September 30, 2012 Compared to Nine-Month Period Ended September 30, 2011.

Our net loss for the nine-month period ended September 30, 2012 was $462,062 compared to a net loss of $585,153 during the nine-month period ended September 30, 2011, a decrease of $123,091. We generated no revenue for the nine-month periods ended September 30, 2012 and September 30, 2011, respectively.

During the nine-month period ended September 30, 2012, we incurred operating expenses of $437,733 compared to $565,558 incurred during the nine-month period ended September 30, 2011, a decrease of $127,825. The decrease in operating expenses was primarily attributable to a decrease in share-based compensation of $114,157 from $321,736 for the nine months ended September 30, 2011 compared to $207,579 for the nine month period ended September 30, 2012.

Interest expense of $24,329 and $19,595 was incurred during the nine-month period ended September 30, 2012 and 2011, respectively.

 
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Three-Month Period Ended September 30, 2012 Compared to Three-Month Period Ended September 30, 2011.

Our net loss for the three-month period ended September 30, 2012 was $152,181 compared to a net loss of $163,330 during the three-month period ended September 30, 2011, a decrease of $11,149. We generated no revenue for the three-month periods ended September 30, 2012 and September 30, 2011, respectively.

During the three-month period ended September 30, 2012, we incurred operating expenses of $141,572 compared to $156,374 incurred during the three-month period ended September 30, 2011, a decrease of $14,802. The decrease in operating expenses was primarily attributable to a decrease in audit fees and legal fees.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2012, our current assets were $4,965 and our current liabilities were $949,869, which resulted in a working capital deficit of $944,904. As of September 30, 2012, current assets were comprised of $4,965 in cash and cash equivalents and current liabilities were comprised of: (i) $38,088 in accounts payable and accrued liabilities; (ii) $453,397 in accounts payable–related parties; (iii) $185,000 in short-term notes payable; (iv) $148,311 in short-term notes payable – related parties; (v) $101,640 in convertible notes payable – related party; and (vi) $23,433 in advances from officer.

As of September 30, 2012, our total assets were $4,965 comprised of current assets. The decrease in total assets during the nine-month period ended September 30, 2012 from fiscal year ended December 31, 2011 was primarily due to payments made to vendors during the first quarter of 2012.

As of September 30, 2012, our total liabilities were $949,869 comprised entirely of current liabilities. The increase in liabilities during the nine-month period ended September 30, 2012 from fiscal year ended December 31, 2011 was primarily due to the increase in accounts payable – related parties.

Stockholders’ deficit increased from $685,519 as of December 31, 2011 to $944,904 as of September 30, 2012.

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 nine-month period ended September 30, 2012, net cash flows used in operating activities was $67,242 compared to $80,525 used during the nine-month period ended September 30, 2011. Net cash flows used in operating activities consisted primarily of a net loss of $462,062 (2011: $585,153), which was offset by $207,579 (2011: $321,737) in share-based compensation, $18,136 (2011: $1,020) in change in accounts payable and accrued liabilities and $169,105 (2011: $179,345) in change in accounts payable - related parties.

Cash Flows from Investing Activities

For the nine-month periods ended September 30, 2012 and 2011, 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 nine-month period ended September 30, 2012, net cash flows provided from financing activities was $53,433 compared to $85,000 for the nine-month period ended September 30, 2011. Cash flows from financing activities for the nine-month periods ended September 30, 2012 and September 30, 2011 consisted of $30,000 and $85,000 in borrowings from notes payable, respectively and $23,433 and $0 in advances from officer.

 
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PLAN OF OPERATION AND FUNDING

A substantial portion of the fiscal year ended December 31, 2011 was dedicated to consummation of the Merger Agreement and identification of potential drilling partners. Financing partners were sought with the intent of conducting a private placement to raise funds to finalize the mineral lease acquisition in Mississippi and for the participation in the drilling of a well on those lands. Since the Merger Agreement was not consummated, 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. Since the Merger Agreement was not consummated and in connection with our future business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) possible drilling initiatives on current Lease and future properties; and (ii) future property acquisitions. 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.

Should the initial Burkley Phillips well be frac’d and tested at rates that were deemed commercial and a second well proposed on lands that the Company holds an interest (the 8,225 acres), American Exploration would be required to fund its 20% interest representing a capital requirement of $3 to $4 million dollars. Should a new property be identified, funding requirements would be asset specific, anticipated to be less than $5 million dollars.

Much of our activity during the second quarter of 2012 was directed towards identifying new business opportunities for the Company. We are reviewing new opportunities and assets which might be used to grow our business.

Since the Merger Agreement was not consummated and if adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective new business endeavors or opportunities or develop our unevaluated oil and gas assets, which could significantly and materially restrict our business operations.

MATERIAL COMMITMENTS

Debt Maturities Schedule

   
Date
 
Stated
   
Original
       
   
of
 
Interest
   
Principal
 
Due
   
   
Note
 
Rate
   
Amount
 
Date
 
Default
Promissory Note
#1  
6/2/2010
    5 %   $ 50,000  
On Demand
 
No
#2  
2/4/2011
    5 %   $ 30,000  
On Demand
 
No
#3  
5/4/2011
    5 %   $ 35,000  
On Demand
 
No
#4  
8/11/2011
    10 %   $ 20,000  
On Demand
 
No
#5  
12/5/2011
    10 %   $ 20,000  
On Demand
 
No
#6  
4/28/2012
    10 %   $ 30,000  
On Demand
 
No
Short-Term Debt - Related Parties
#7  
8/16/2009
    10 %   $ 30,000  
On Demand
 
No
#8  
5/29/2009
    10 %   $ 8,334  
On Demand
 
No
#9  
6/5/2009
    10 %   $ 50,000  
On Demand
 
No
Mainland Resources (A)
 
9/27/2010
    12 %   $ 60,000  
On Demand
 
No
Convertible Notes Payable – Related Party
Debenture (B)
 
10/13/2009
    5 %   $ 101,640  
1/13/2010
 
Yes

 
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(A) Mainland Resources Note

In connection with the Merger Agreement, we previously entered into that certain promissory note dated September 27, 2010 with Mainland Resources, which was amended December 23, 2010, March 30, 2011, May 17, 2011, August 18, 2011 and October 31, 2011, (as amended being collectively, the “Original Promissory Note”). The Original Promissory Note evidenced monies advanced by Mainland Resources to us in order to assist us with various costs associated with the completion of the proposed merger between us and Mainland Resources pursuant to the terms and provisions of the Merger Agreement.

In accordance with the terms and conditions of the Termination and Release Agreement, we entered into a new promissory note dated December 21, 2011 with Mainland Resources (the “New Promissory Note”), which superseded and replaced the Original Promissory Note. The New Promissory Note evidenced our current obligation to pay to Mainland Resources $67,003, comprised of $60,000 in principal and $7,003 in accrued interest.

(B) Debenture

Effective on October 13, 2009, our Board of Directors authorized the execution of a 5% convertible debenture in the principal amount of $101,640 (the “Debenture”) with DMS Ltd. (“DMS”). In accordance with the terms and provisions of the Debenture: (i) accrues interest at the rate of 5% per annum; (ii) the maturity date for repayment is the earlier of: (a) that date when we are able to meet the insolvency test (i.e., when we have sufficient funds in our cash account to meet our obligations as they arise on a daily basis, which shall be determined by management in good faith); or (b) January 13, 2010; and (iii) DMS has the right at any time to convert the unpaid principal amount of the Debenture into shares of our common stock at the price of $0.50 per share. The conditions above were not met and the note is in default.

Related Parties

As of September 30, 2012, we owed $726,781 to related parties, which consisted of $395,500 of professional fees owed to entities owned by our Chief Executive Officer and Chief Financial Officer, $273,384 of notes payable and advances from officer and $57,897 of accrued interest on related party notes from above. During the nine-month period ended September 30, 2012, our Chief Executive Officer made advances of $23,433 to us. These advances are due on demand and accrue no interest.

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. Since the Merger Agreement was not consummated, 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. Since the Merger Agreement was not consummated and in connection with our future business plan, management anticipates additional increases in operating expenses and capital expenditures relating to: (i) possible drilling initiatives on current Lease and future properties; and (ii) future property acquisitions. 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.

 
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ITEM III. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse change in foreign currency and interest rates.

Exchange Rate

Our reporting currency is United States Dollars (“USD”). In the event we acquire any properties outside of the United States, the fluctuation of exchange rates may have positive or negative impacts on our results of operations.

Interest Rate

Interest rates in the United States are generally stable. Any potential future loans will relate mainly to acquisition of properties and will be mainly short-term. However, our debt may be likely to rise in connection with expansion and if interest rates were to rise at the same time, this could have a significant impact on our operating and financing activities. We have not entered into derivative contracts either to hedge existing risks for speculative purposes.

ITEM 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of September 30, 2012 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We identified a material weakness in our internal control over financial reporting primarily attributable to limited accounting and SEC reporting expertise within the Company. Due to our exploration stage, we have limited financial ability to remedy this staffing deficiency at this time; however, we will add additional accounting and SEC reporting expertise in the future as funds permit.

CHANGES IN INTERNAL CONTROLS

No significant changes were implemented in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

AUDIT COMMITTEE

Our Board of Directors has not established an audit committee. The respective role of an audit committee has been conducted by our Board of Directors. In the event the Merger Agreement is not consummated, we intend to establish an audit committee during the fiscal year 2012. When established, the audit committee's primary function will be to provide advice with respect to our financial matters and to assist our Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance. The audit committee's primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as its compliance with laws and regulations; (iv) oversee management's establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our Board of Directors.
 
 
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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Quarterly Report, no director, officer or affiliate is (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties.

ITEM IA. RISK FACTORS

No report required

ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

No report required.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

No report required.

ITEM 4. MINE SATEFY DISCLOSURES

No report required.

ITEM 5. OTHER INFORMATION

No report required.

ITEM 6. EXHIBITS

The following exhibits are filed as part of this Quarterly Report.
 
 
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SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
AMERICAN EXPLORATION CORPORATION
 
       
Dated: December 19, 2012
By:
/s/ STEVE HARDING
 
   
Steve Harding, President/Chief
 
   
Executive Officer
 
       
       
Dated: December 19, 2012
By:
/s/ BRIAN MANKO
 
   
Brian Manko, Chief Financial Officer
 
 
 
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