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EXCEL - IDEA: XBRL DOCUMENT - Spotlight Innovation Inc.Financial_Report.xls
EX-31.2 - CERTIFICATION - Spotlight Innovation Inc.aexp_ex312.htm
EX-32.1 - CERTIFICATION - Spotlight Innovation Inc.aexp_ex321.htm
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, 2013

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.)
 
700 6th Avenue SW, Suite 1520
Calgary, Alberta
Canada T2P 0T8
(Address of principal executive offices)

(515) 274-9087
(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  x No  o

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 November 19, 2013
Common Stock, $0.001
 
122,523,333
 


 
 
 
 
 
ITEM 1.  FINANCIAL STATEMENTS
 
AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
BALANCE SHEETS
 (Unaudited)

   
September 30,
2013
   
December 31,
2012
 
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
  $ 4,310     $ 4,458  
Restricted cash
    129,000       -  
Total Assets
  $ 133,310     $ 4,458  
                 
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current Liabilities
               
Accounts payable and accrued liabilities
  $ 120,469     $ 41,289  
Accounts payable – related parties
    614,805       511,662  
Short-term notes payable
    192,952       185,000  
Short-term notes payable – related parties
    140,000       148,225  
Convertible notes
    111,619       -  
Convertible notes – related party
    -       100,310  
Advances from officer and Spotlight
    85,963       29,972  
Total Liabilities
    1,265,808       1,016,458  
                 
Commitments and contingencies
               
                 
Stockholders’ Deficit
               
Common stock, $0.001 par value, 2,100,000,000 shares authorized:
               
120,273,333 shares and 60,273,333 issued and outstanding, respectively
    120,273       60,273  
Additional paid-in capital
    7,020,900       6,646,657  
Accumulated other comprehensive income
    (1,561     (3,244 )
Accumulated deficit during exploration stage
    (8,272,110 )     (7,715,686 )
Total Stockholders’ Deficit
    (1,132,498 )     (1,012,000 )
                 
Total Liabilities and Stockholders’ Deficit
  $ 133,310     $ 4,458  

The accompanying notes are an integral part of these unaudited financial statements.
 
 
2

 
 
AMERICAN EXPLORATION CORPORATION
(An Exploration Stage Company)
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
For the Three and Nine Months Ended September 30, 2013 and 2012
and For the Period from Inception (May 11, 2006) to September 30, 2013
(Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
   
Period form
Inception
(May 11,
2006) to
September 30,
 
   
2013
   
2012
    2013    
2012
   
2013
 
Revenue
  $ -     $ -     $ -     $ -     $ -  
                                         
Operating expenses
                                       
General and administrative
    127,338       141,572       418,573       437,733       4,387,389  
Depreciation and amortization
    -       -       -       -       11,277  
Impairment of oil & gas properties
    -       -       -       -       3,771,001  
Total operating expenses
    127,338       141,572       418,573       437,733       8,169,667  
Loss from operations
    (127,338 )     (141,572 )     (418,573 )     (437,733 )     (8,169,667 )
Other income (expense)
                                       
Interest expense
    (121,111 )     (10,609 )     (137,851 )     (24,329 )     (275,082 )
Loss on sale of assets
    -       -       -       -       (1,161 )
Other income
    -       -       -       -       173,800  
Total other income (expense)
    (121,111 )     (10,609 )     (137,851 )     (24,329 )     103,287  
Net loss
  $ (248,449 )     (152,181 )     (556,424 )     (462,062 )     (8,272,110 )
                                         
Other comprehensive income (loss)
                                       
Gain (loss) on foreign currency translation
    (2,424     (4,869 )     1,683       (4,903 )     (1,561
Total comprehensive loss
  $ (250,873 )   $ (157,050 )   $ (557,985 )   $ (466,965 )   $ (8,273,671 )
                                         
Net loss per common share – basic and diluted
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )        
                                         
Weighted average common shares outstanding - basic and diluted
    119,621,159       60,273,333       80,273,333       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, 2013 and 2012
and For the Period from Inception (May 11, 2006) to September 30, 2013
(Unaudited)

   
Nine Months Ended September 30,
   
Inception
(May 11, 2006) to September 30,
 
   
2013
   
2012
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
                   
Net loss
 
$
(556,424)
   
$
(462,062
)
 
$
(8,272,110
)
Adjustments to reconcile net loss to net cash used by operating activities:
                       
Depreciation and amortization expense
   
-
     
-
     
11,277
 
Amortization of debt discount
   
111,619
     
-
     
172,564
 
Share-based compensation
   
193,624
     
207,579
     
2,106,609
 
Impairment of oil & gas properties
   
-
     
-
     
3,771,001
 
Loss on sale of assets
   
-
     
-
     
1,161
 
Changes in operating assets and liabilities:
                       
Accounts payable and accrued liabilities
   
123,555
     
18,136
     
164,679
 
Accounts payable - related parties
   
121,408
     
169,105
     
632,903
 
Net cash used in operating activities
   
(6,218)
     
(67,242
)
   
(1,411,916
)
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Investment in restricted cash
   
(129,000)
     
-
     
(129,000
)
Website
   
-
     
-
     
(10,000
)
Acquisition of unproved oil and gas properties
   
-
     
-
     
(1,108,551
)
Net cash used in investing activities
   
(129,000)
     
-
     
(1,247,551
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from issuance of common stock and warrants
   
129,000
     
-
     
2,192,250
 
Proceeds from notes payable
   
-
     
30,000
     
185,000
 
Proceeds from advances from officer and Spotlight
   
7,925
     
23,433
     
190,706
 
Proceeds from issuance of convertible debt - related parties
   
-
     
-
     
95,227
 
Net cash provided by financing activities
   
136,925
     
53,433
     
2,663,183
 
                         
Effect of exchange rate changes on cash
   
(1,855
   
2,261
     
594
 
                         
Increase (decrease) in cash during the period
   
(148)
     
(11,548
)
   
4,310
 
Cash, beginning of the period
   
4,458
     
16,513
     
-
 
                         
Cash, end of the period
 
$
4,310
   
$
4,965
   
$
4,310
 
                         
Supplemental cash flow information:
                       
Taxes paid
 
$
-
   
$
-
   
$
-
 
Interest paid
 
$
-
   
$
-
   
$
-
 
                         
NON-CASH INVESTING AND FINANCING TRANSACTIONS
                       
Common stock issued for oil and gas property
 
$
-
   
$
-
   
$
2,664,750
 
Cancellation of loan from director
 
$
-
   
$
-
   
$
5,000
 
Cancellation of shares
 
$
-
   
$
-
   
$
86,139
 
Conversion of accrued interest to convertible debt
 
$
14,642
   
$
-
   
$
14,642
 
Reclassification from payables to advances for the amount paid by Spotlight
 
$
51,105
   
$
-
   
$
51,105
 
Beneficial conversion feature associated with convertible debt
 
$
111,619
   
$
-
   
$
111,619
 
Reclassification of convertible notes – related party to third party convertible notes
 
$
111,619
   
$
 -    
$
111,619
 

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, 2012.

The Company was originally incorporated under the laws of the state of Nevada on May 11, 2006. The Company’s current focus is oil and gas exploration and development. The Company has limited operations, is considered an exploration stage company, and has had no revenues from operations to date.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those regarding the recoverability of the Company’s unevaluated oil and gas properties and valuation of option and warrant transactions.

Reclassification

Certain amounts for prior periods have been reclassified to conform to the current period presentation.

Income (Loss) per Common Share

Basic net loss per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants or the assumed conversion of convertible debt instruments, using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.

For the nine months ended September 30, 2013 and 2012, the dilutive effect of options to purchase 2,600,000 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, 2013, the Company had no proved properties and the exploratory well on the Company’s properties has previously been fully impaired pending future development.

Foreign Exchange and Currency Translation

For the periods presented, the Company maintained cash accounts in Canadian and U.S. dollars, and incurred certain expenses denominated in Canadian dollars. The Company's functional and reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are translated using exchange rates at the end of each period. Exchange gains or losses on transactions are included in earnings. Adjustments resulting from the translation process are reported in a separate component of other comprehensive income and are not included in the determination of the results of operations.

Comprehensive Income

Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of non-vested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates, if historical forfeiture rates are available. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital.
  
 
6

 
 
Subsequent Events

The Company evaluated all material subsequent events from September 30, 2013 through the date of the issuance of these consolidated financial statements for disclosure consideration.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company’s operations, financial position or cash flows.

NOTE 2. GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has incurred net losses for the period from inception to September 30, 2013 of $8,272,954 and has negative working capital of $1,132,498 at September 30, 2013; and is currently in default on certain outstanding debt obligations. Accordingly, there is substantial doubt as to the ability of the Company to continue as a going concern. The Company intends to fund initial operations through equity financing or debt arrangements.

The ability of the Company to emerge from the exploration stage is dependent upon the Company’s successful efforts to raise sufficient capital and then attain profitable operations. There can be no assurances, however, that management’s expectations of future revenues will be realized.

NOTE 3. SPOTLIGHT MERGER AGREEMENT

On February 12, 2013, the Company entered into a merger agreement (the “Spotlight Merger Agreement”) with Spotlight Innovation LLC, a limited liability company based in the State of Iowa ("Spotlight"). Completion of the merger is dependent upon certain conditions which have not been met as of September 30, 2013. In accordance with the terms and provisions of the Spotlight Merger Agreement, all of the issued and outstanding membership interests of Spotlight (the "Membership Interests") will be converted into the right to receive an aggregate of 7,500,000 fully paid and non-assessable shares of its restricted common stock on a post reverse split basis. Certain conditions were contemplated to be satisfied prior to closing of the Spotlight Merger Agreement which include, but are not limited to, the following: (i) Spotlight shall have completed and be satisfied with its due diligence review of the Company; (ii) the Company shall have received financing in an amount of at least $237,500 on terms approved by our Board of Directors, which shall be utilized to pay off certain of our liabilities; (iii) the Company shall have completed a 100:1 reverse stock split of our common stock; (iv) the Company shall have amended its certificate of incorporation to change its name to Spotlight Innovation, Inc.; (v) the Company shall have received approval from a majority of its shareholders of the Merger Agreement and the transactions contemplated therein; (vi) the current Board of Directors shall appoint Cris Grunewald as the sole member of the Board of Directors and the President/Chief Executive Officer and Secretary and a person to be designated by Spotlight as the Treasurer/Chief Financial Officer; and (vii) the Company’s current officers and directors shall resign upon closing of the transactions contemplated in the Merger Agreement. The contemplated stock split of 100:1 was subsequently amended to a ratio of 500:1.

The Company is currently closing the merger transaction with Spotlight and anticipates the final closing date to be November 25, 2013.

Once the merger is completed, the Company will change its business plan to Spotlight’s business plan. Spotlight was founded to identify, validate and finance healthcare-focused companies founded for the purpose of commercializing intellectual property developed by major centers of academia in the United States. Spotlight provides strategic partners the opportunity to participate in the financing of a preferred search for, acquisition of, and/or funding of companies holding licenses for the commercialization of intellectual property developed by academic institutions. The principals of Spotlight have been involved in all stages of the commercialization of healthcare intellectual property over the last eight years.
 
7

 
 
NOTE 4. RELATED PARTY TRANSACTIONS

Accounts Payable – Related Parties

As of September 30, 2013, the Company owed an aggregate of $555,250 of compensation to its CEO and CFO.

Short-term Notes Payable – Directors

As of September 30, 2013, former directors of the Company had outstanding loans to the Company of $87,952 that were used to pay operating expenses of the Company. Average interest of 10% per annum has been accrued to the lenders and the loans are due upon demand. All of these loans are unsecured and no interest has been paid to date. Accrued interest as of September 30, 2013, was $37,529.
 
Convertible Note – Related Party

A 5% unsecured convertible debenture, due January 13, 2010, was also issued by the Company to a third party on October 13, 2009 for CDN $100,000 (USD $96,977). The unpaid principal amount can be converted at the option of the holder, into common stock at the price of $0.50 per share. The convertible note was not redeemed or converted at the maturity date.
 
During the nine-months ended September 30, 2013, the Company determined that the holder of the 5% unsecured convertible debenture was no longer a related party as defined by ASC 850-10.  Accordingly, the Company reclassified the note to third party current liabilities.  See footnote 5.
 
Short-term Notes Payable - Mainland Resources

In September 2010, the Company borrowed $60,000 from Mainland Resources to pay the Company’s operating costs during the merger period. The note bears interest at 12% and was due on December 31, 2010. The Company entered into multiple extensions of the note during the period the Company was contemplating its merger with Mainland. On December 21, 2011, the Company and Mainland Resources entered into a new promissory note (the “New Promissory Note”), which superseded and replaced the Original Promissory Note. The New Promissory Note evidenced the Corporation’s current obligation to pay to Mainland Resources $81,000, comprised of $60,000 in principal and $21,000 in accrued interest. The New Promissory Note is due on demand and bears interest at 12% per annum. As of September 30, 2013, through the date of this filing, the Company has not received a demand notice from Mainland Resources for payment of this note payable.

Advances from Officer and Spotlight

As of September 30, 2013, the Company’s CEO has made total advances to the Company of $23,433. The Company also owes $62,530 in advances to Spotlight.

As of September 30, 2013, through the date of this filing, the Company has not received a demand notice from any of the related party lenders noted above for payment of these notes payable.

 
8

 
 
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
                  $ 155,000        

On April 28, 2012, the Company borrowed $30,000 pursuant to a note payable agreement with another unrelated third party. The note is due on demand and accrues interest at 10% per annum.

As of September 30, 2013, and through the date of this filing, the Company has not received a demand notice from the lender noted above for payment of principal or interest of these notes payable.

Convertible Notes Payable

In September 2013, the Company entered into an amendment to the convertible debenture.  The amended convertible debenture has a face amount of $115,098 CDN (USD $111,619) which combines prior principal and accrued interest as of June 30, 2013. The exercise price in the amended convertible debenture for the conversion feature was reduced to 50% of the market value of the Company’s stock on the date of conversion with a floor of $0.001 per share and the holder has the ability to convert at any time.  No other terms were modified.  The amended convertible debenture is due on demand.

The Company evaluated the modifications of the convertible debenture under ASC 470-50 “Debt – Modification and Extinguishments” and determined that the change in the conversion feature was significant and resulted in an extinguishment of the liability.  The Company estimated the fair value of the amended convertible debenture approximated the carrying value of the old convertible debenture.  Accordingly, the Company did not recognize a gain or loss on extinguishment.

The Company evaluated the conversion feature in the amended convertible debenture and determined that it created a beneficial conversion feature.  The beneficial conversion feature was determined to be equal to the carrying value of the convertible debenture.  Accordingly, the Company recorded a debt discount of $115,098 which was expensed immediately as interest expense due to the convertible debenture being due on demand and convertible at any time.

On September 30, 2013, the holder of the convertible debenture informed the Company that he had entered into convertible note purchase agreements (collectively, the "Note Purchase Agreements") with three separate unrelated purchasers (collectively, the Purchasers"), pursuant to which the Purchasers agreed to purchase all of the principal of the unsecured convertible debenture and accrued interest equal to $111,619.

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, 2013, the Company’s deferred tax assets consist primarily of net operating loss carry forwards. For the nine months ended September 30, 2013, the material reconciling items between the tax benefit computed at the statutory rate and the actual benefit recognized in the financial statements consisted of expenses related to share-based compensation and the change in the valuation allowance during the applicable period. At September 30, 2013, the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.

As of September 30, 2013 and December 31, 2012, the Company has a net operating loss carry forward of approximately $6.1 million and $5.7 million, respectively, which will expire between years 2026 and 2032. Due to the change in ownership provisions of the Tax Reform Act of 1986, the Company’s net operating loss carry forwards could be subject to annual limitations should a change in ownership occur.

 
9

 
 
NOTE 7. EQUITY TRANSACTIONS

Common Stock:

On July 8, 2013, the Company executed a stock purchase agreement (the “Stock Purchase Agreement”) with Orange Investments for aggregate proceeds of $129,000. The proceeds were placed by Orange Investments in escrow on July 1, 2013 and are restricted until the closing of the merger with Spotlight.  In exchange for the proceeds the Company issued 60,000,000 shares of its restricted common stock at a per share price of $0.00215 (“Purchase Price”). Should the market price of the 60,000,000 shares of common on January 8, 2014, be less than $0.00215, based on the 5 day weighted average trading price per share times 50% (the “Future Price”), the Company shall pay to Orange Investments, the difference in the Purchase Price and the Future Price, with shares at the then current 5 day weighted average trading price per share times 50%. 

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 $622,737 related to these options during the nine-month periods ended September 30, 2013 and 2012.

On March 14, 2011, 100,000 options with an exercise price of $0.13 per share, a ten year life and immediate vesting were granted to two directors of the Company. The fair value of the options granted was $14,928, or $0.15 per share, and was calculated in accordance with the Black-Scholes valuation model based on the following assumptions: (a) risk free interest rate 3.36%, (b) expected volatility of 173.17% (c) expected life of 5 years, and (d) zero expected future dividends. These options vested immediately and $14,928 of share-based compensation was recognized during the nine months ended September 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.

 
10

 
 
A summary of stock option activity for the three months ended September 30, 2013 is presented below:

   
Options
   
Weighted-Average Exercise
Price
   
Aggregate
Intrinsic
Value
 
Outstanding at January 1, 2012
    3,900,000     $ 0.58     $ -  
Granted
    -       -       -  
Exercised
    -       -       -  
Expired
    (1,300,000 )     0.31       -  
Outstanding at September 30, 2013
    2,600,000     $ 0.72     $ -  
Exercisable at September 30, 2013
    1,850,000     $ 0.68     $ -  

The Company recognized total stock-based compensation expense of $193,624 related to these options during the nine months ended September 30, 2013. As of September 30, 2013, the total unrecognized stock-based compensation expense related to non-vested stock options was $441,906. The unrecognized stock-based compensation is expected to be ratably amortized to expense over a weighted average period of 1.96 years. The weighted average remaining contractual term of the outstanding options and exercisable options at September 30, 2013 is 6.15 years.
 
Stock Warrant:

There were no stock warrant activities during the three months ended September 30, 2013 and 2012. As of September 30, 2013, there were no stock warrants outstanding.

NOTE 8. SUBSEQUENT EVENTS

On October 31, 2013, the Company received notices of conversion dated October 31, 2013 from the Purchasers of 5% unsecured convertible debenture, pursuant to which the Purchasers each elected to convert $1,500 of the convertible debentures into 750,000 shares of common stock at a conversion price of $0.002 per share, based on 50% of the market value of the Company’s common stock on the date of conversion.
 
 
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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 have been an exploration stage company engaged in the acquisition, exploration and development of oil and gas properties in North America, primarily in the United States. Our primary focus was the acquisition of mineral leases located in Mississippi. However, we anticipate changing our business operations as described below (see Section entitled “Spotlight Merger Agreement”), which shall include commercialization of healthcare intellectual property.
 
Spotlight Business
 
Spotlight Innovations LLC (the “Company”) was incorporated under the laws of the State of Iowa on March 23, 2012 (“inception”). The Company was founded to identify, validate and finance healthcare-focused companies founded for the purpose of commercializing intellectual property developed by major centers of academia in the United States. Spotlight provides strategic partners the opportunity to participate in the financing of a preferred search for, acquisition of, and/or funding of companies holding licenses for the commercialization of intellectual property developed by academic institutions. The principals of Spotlight have been involved in all stages of the commercialization of healthcare intellectual property over the last eight years.
 
Spotlight Merger Agreement

On February 12, 2013, we entered into a merger agreement (the “Spotlight Merger Agreement”) with Spotlight Innovation LLC, a limited liability company based in the State of Iowa ("Spotlight"). Completion of the merger is dependent upon certain conditions which have not been met as of June 30, 2013. In accordance with the terms and provisions of the Spotlight Merger Agreement, all of the issued and outstanding membership interests of Spotlight (the "Membership Interests") will be converted into the right to receive an aggregate of 7,500,000 fully paid and non-assessable shares of our restricted common stock on a post reverse split basis. Certain conditions were contemplated to be satisfied prior to closing of the Spotlight Merger Agreement which include, but are not limited to, the following: (i) Spotlight shall have completed and be satisfied with its due diligence review of us; (ii) we shall have received financing in an amount of at least $237,500 on terms approved by our Board of Directors, which shall be utilized to pay off certain of our liabilities; (iii) we shall have completed a 100:1 reverse stock split of our common stock; (iv) we shall have amended our certificate of incorporation to change our name to Spotlight Innovation, Inc.; (v) we shall have received approval from a majority of our shareholders of the Merger Agreement and the transactions contemplated therein; (vi) the current Board of Directors shall appoint Cris Grunewald as the sole member of the Board of Directors and the President/Chief Executive Officer and Secretary and a person to be designated by Spotlight as the Treasurer/Chief Financial Officer; and (vii) our current officers and directors shall resign upon closing of the transactions contemplated in the Merger Agreement. The contemplated stock split of 100:1 was subsequently amended to a ratio of 500:1.

Stock Purchase Agreement

On July 8, 2013, our Board of Directors authorized the execution of that certain stock purchase agreement (the “Stock Purchase Agreement”) with Orange Investments Ltd, a Bahamian limited liability company ("Orange Investments"). In accordance with the terms and provisions of the Stock Purchase Agreement, we agreed to sell to Orange Investments up to an aggregate of 60,000,000 shares of our restricted common stock at a purchase price based on the five (5) day weighted average trading price per share times 50% as quoted by the OTC Markets (the "Purchase Price").  In further accordance of the terms and provisions of the Stock Purchase Agreement, once the cash for the Purchase Price is placed in an escrow account by Orange Investments, certificates evidencing the shares of common stock of the Company would be delivered to Orange Investments. As of July 2, 2013, an aggregate of $129,000.00 had been placed by Orange Investments in escrow for the purchase of 60,000,000 shares of common stock of the Company at a per share price of $0.00215.  The proceeds from the sale are restricted to use post merger and have been classified as restricted cash in the Company’s balance sheet. In the event the price of the purchase shares of common stock in six months is less than the Purchase Price, we shall be obligated to make up the difference in the price with shares of our common stock at the then current five day weighted average trading price per share times 50%.
 
 
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Information Statement on Form 14C

On August 1, 2013, we filed an Information Statement on Form 14(c) with the Securities and Exchange Commission, which will be furnished to all holders of our common stock as of July 22, 2013, in connection with the action taken by written consent of holders of a majority of the outstanding voting power of the Company to authorize the following: (i) ratification of the Spotlight Merger Agreement; (ii) ratification of the appointment of Cristopher Grunewald as a member of the Board of Directors and as the President of the Company; (iii) ratification of an amendment to the articles of incorporation (the "Name Change Amendment") to change our name from "American Exploration Corporation" to "Spotlight Innovation Inc."; (iv) ratification of an amendment to the articles of incorporation (the "Authorized Capital Amendment") to increase the total authorized capital from 2,100,000,000 shares of common stock, par value $0.001, to 4,000,000,000 shares of common stock, par value $0.001 (the "Increase in Authorized Capital"); (v) ratification of an amendment to the articles of incorporation to authorize 5,000,000 shares of preferred stock, including two new series of preferred stock, and blank check preferred stock (the “Preferred Stock Amendment”) and (vi) ratification of a reverse stock split of one for five hundred (1:500) of our shares of common stock (the "Reverse Stock Split").
 
The names of the shareholders of record who hold in the aggregate a majority of our total issued and outstanding common stock and who signed the written consent of stockholders are: (i) Orange Investments Ltd. holding of record 60,000,000 shares of common stock (49.8%); (ii) Steve Harding holding of record 2,150,000 shares of common stock (1.8%); (iii) Brian Manko holding of record 300,000 shares of common stock (.2%); and (iv) Devinder Randhawa holding of record 3,200,000 shares of common stock (2.7%).

These actions were approved by written consent on July 22, 2013 by our Board of Directors and a majority of holders of our voting capital stock, in accordance with Nevada Revised Statutes. Our directors and majority of the shareholders of our outstanding capital stock, as of the record date of July 22, 2013, have approved the Merger Agreement, the Name Change Amendment, the Authorized Capital Amendment, the Preferred Stock Amendment, the Reverse Split and ratified the appointment of Cristopher Grunewald as determined were in the best interests of our Company and shareholders.

After review by the Securities and Exchange Commission, we filed the definitive Information Statement on October 29, 2013. As of the date of this Quarterly Report, the definitive Information Statement has been mailed and distributed to our shareholders of record. We anticipate that the Merger with Spotlight will be consummated by the end of November 2013. We also anticipate that the Name Change Amendment, Increase in Authorized Capital Amendment and Preferred Stock Amendment will be filed with the Nevada Secretary of State by December 1, 2013.

Therefore, our business operations will change to the business operations of Spotlight. Spotlight was founded to identify, validate and finance healthcare-focused companies founded for the purpose of commercializing intellectual property developed by major centers of academia in the United States. Spotlight provides strategic partners the opportunity to participate in the financing of a preferred search for, acquisition of, and/or funding of companies holding licenses for the commericalization of intellectual property developed by academic institutions. The principals of Spotlight have been involved in all stages of the commercialization of healthcare intellectual property over the last eight years. There is no guarantee that the business operations of Spotlight will be successful.

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, 2013 Compared to Nine-Month Period Ended September 30, 2012.

Our net loss for the nine-month period ended September 30, 2013 was $557,268 compared to a net loss of $462,062 during the nine-month period ended September 30, 2012, a increase of $95,206. We generated no revenue for the nine-month periods ended September 30, 2013 and September 30, 2012.

During the nine-month period ended September 30, 2013, we incurred operating expenses of $418,573 compared to $437,733 incurred during the nine-month period ended September 30, 2012, a decrease of $19,160. During the nine-month period ended September 30, 2013, general and administrative expenses generally consisted of professional fees of $376,691 (2012: $381,079), which included auditor, edgarizing and transfer agent fees, legal fees of $6,500 (2012: $13,750). Operating expenses decreased during the nine-month period ended September 30, 2013 generally due to reduced corporate activity.

Loss from operations for the nine-month period ended September 30, 2013 was $418,573 compared to loss from operations of $437,733 during the nine-month period ended September 30, 2012.
 
 
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During the nine-month period ended September 30, 2013, we incurred interest expense of $138,695 (2012: $24,329). The increase was primarily due to amortization of the deferred financing cost associated with the convertible note in the amount of 109,684.

During the nine-month period ended September 30, 2013, we recorded a gain of $4,462 (2012: loss $4,903) on foreign currency translation. Therefore, our comprehensive loss during the nine-month period ended September 30, 2013 was $552,806 or $0.01 per share compared to a comprehensive loss of $466,965 or $0.01 during the nine-month period ended September 30, 2012. The weighted average number of shares outstanding was 80,273,333 and 60,273,333 for the nine-months ended September 30, 2013 and 2012, respectively.

Three Month Period Ended September 30, 2013 Compared to Three-Month Period Ended September 30, 2012.

Our net loss for the three-month period ended September 30, 2013 was $249,293 compared to a net loss of $152,181 during the three-month period ended September 30, 2012, an increase of $97,112. We generated no revenue for the three-month periods ended September 30, 2013 and September 30, 2012.

During the three-month period ended September 30, 2013, we incurred operating expenses of $127,338 compared to $141,572 incurred during the three-month period ended September 30, 2012, a decrease of $14,234. During the three-month period ended September 30, 2013, general and administrative expenses generally consisted of professional fees of $122,443 (2012: $141,572), which included auditor, edgarizing and transfer agent fees, legal fees of $2,500 (2012: $13,750). Operating expenses decreased slightly during the three-month period ended September 30, 2013 generally due to reduced corporate activity.

Loss from operations for the three-month period ended September 30, 2013 was $127,338 compared to loss from operations of $141,572 during the three-month period ended September 30, 2012.
 
During the three-month period ended September 30, 2013, we incurred interest expense of $121,955 (2012: $10,609). The increase was primarily due to amortization of the deferred financing cost associated with the convertible note in the amount of 109,684.

During the three-month period ended September 30, 2013, we recorded a gain of $356 (2012: loss $4,869) on foreign currency translation. Therefore, our comprehensive loss during the three-month period ended September 30, 2013 was $248,937 or $0.00 per share compared to a comprehensive loss of $157,050 or $0.00 during the three-month period ended September 30, 2012. The weighted average number of shares outstanding was 119,621,159 and 60,273,333 for the three-months ended September 30, 2013 and 2012, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2013, our current assets were $133,310 and our current liabilities were $1,265,808, which resulted in a working capital deficit of $1,132,498. As of September 30, 2013, current assets were comprised of $4,310 in cash and cash equivalents and $129,000 in restricted cash and current liabilities were comprised of: (i) $120,469 in accounts payable and accrued liabilities; (ii) $614,805 in accounts payable–related parties; (iii) $192,952 in short-term notes payable; (iv) $140,000 in short-term notes payable – related parties; (v) $111,619 in convertible notes – short term; and (vi) $85,963 in advances from officer and Spotlight.

As of September 30, 2013, our total assets were $133,310 comprised of current assets compared to $4,458 at December 31, 2012.

As of September 30, 2013, our total liabilities were $1,265,808 comprised entirely of current liabilities. The increase in liabilities during the nine month period ended September 30, 2013 from fiscal year ended December 31, 2012 was primarily due to the increase in accounts payable and accrued liabilities and accounts payable – related parties for accrued salaries to our CEO and CFO.

Stockholders’ deficit increased from $1,012,000 as of December 31, 2012 to $1,132,498 as of September 30, 2013.

 
14

 
 
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, 2013, net cash flows used in operating activities was $6,218 compared to $67,242 used during the nine month period ended September 30, 2012. Net cash flows used in operating activities consisted primarily of a net loss of $556,424 (2012: $462,062), which was adjusted by $193,624 (2012: $207,579) in share-based compensation, $111,619 in amortization of deferred financing cost and further changed by $123,555 (2012: $18,136) in accounts payable and accrued liabilities and $121,408 (2012: $169,105) in accounts payable - related parties.

Cash Flows from Investing Activities

For the nine month periods ended September 30, 2013 and 2012, net cash flows related to investing activities was $129,000 and 0, respectively.  During the nine-months ended September 30, 2013, the Company invested $129,000 in restricted cash from the proceeds of the Orange Investment.

Cash Flows from Financing Activities

We have financed our operations primarily from debt or the issuance of equity instruments. For the nine month periods ended September 30, 2013, net cash flows provided from financing activities was $136,925 consisting of proceeds from sale of stock in the amount of $129,000 and advances from Spotlight in the amount of $7,925 compared to $53,433 consisting of proceeds from notes payable of $30,000 and $23,433 advances from our officer and Spotlight during the nine month period ended September 30, 2012.

PLAN OF OPERATION AND FUNDING

A substantial portion of the nine month period ended September 30, 2013 was dedicated to negotiating the Spotlight Merger Agreement and drafting and filing the Information Statement. As of the date of this Quarterly Report, management anticipates that the Spotlight Merger Agreement will be consummated and, therefore, the business plan will change to that of Spotlight. Possible further advances from related parties and the sale of securities will thus be required to fund our operations over the next six months. We have no lines of credit or other bank financing arrangements. Generally, we have financed operations to date through the proceeds of the private placement of equity and debt instruments. In connection with our future business plan involving the operations of Spotlight, management anticipates additional increases in operating expenses and capital expenditures relating to commencing and structuring new business operations. We would finance these expenses with further issuances of equity securities and debt issuances. We expect we would need to raise additional capital and generate revenues to meet long-term operating requirements. Additional issuances of equity or convertible debt securities could result in dilution to our current shareholders. Further, such securities may have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all.

PURCHASE OF SIGNIFICANT EQUIPMENT

We do not intend to purchase any significant equipment during the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this Quarterly Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

GOING CONCERN

There is substantial doubt about our ability to continue as a going concern. The financial statements have been prepared assuming that we will continue as a going concern, which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business.

 
15

 
 
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 IV. 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, 2013 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. Cristopher Grunewald was appointed President of the Company, post-reporting period.

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 anticipation of consummation of the Spotlight Merger Agreement, we intend to establish an audit committee during the fiscal year 2013/2014. 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

STOCK PURCHASE AGREEMENT

On July 8, 2013, our Board of Directors authorized the execution of the Stock Purchase Agreement with Orange Investments pursuant to which an aggregate of $129,000 had been placed by Orange Investments in escrow for the purchase of 60,000,000 shares of our restricted common stock at a per share price of $0.00215. Therefore, on July 2, 2013, our Board of Directors authorized the issuance of 60,000,000 shares of common stock to Orange Investments. The shares were issued pursuant to an exemption from registration under Regulation S under the Securities Act of 1933, as amended. The shares were issued in private transaction to Orange Investments. Orange Investments had the opportunity to ask questions of and receive answers from our management concerning any and all matters related to their respective acquisitions of our securities Orange Investments was aware that the shares of common stock offered had not been registered under the Securities Act or under any state securities laws and could not be re-offered or re-sold without registration with the SEC or without an applicable exemption from the registration requirements. Orange Investments understood the economic risk of an investment in our securities. Neither we nor any person acting on its behalf offered or sold the securities by any form of general solicitation or general advertising.

SETTLEMENT OF DEBT

In September 2013, we entered into an amendment to the convertible debenture.  The amended 5% unsecured convertible debenture has a face amount of $115,098 CDN (USD $111,619) which combines prior principal and accrued interest as of June 30, 2013. The exercise price in the amended convertible debenture for the conversion feature was reduced to 50% of the market value of our stock on the date of conversion with a floor of $0.001 per share and the holder has the ability to convert at any time.  No other terms were modified.  The amended convertible debenture is due on demand.

We evaluated the modifications of the convertible debenture under ASC 470-50 “Debt – Modification and Extinguishments” and determined that the change in the conversion feature was significant and resulted in an extinguishment of the liability. We estimated the fair value of the amended convertible debenture approximated the carrying value of the old convertible debenture.  Accordingly, we did not recognize a gain or loss on extinguishment.

 
17

 
 
We evaluated the conversion feature in the amended convertible debenture and determined that it created a beneficial conversion feature.  The beneficial conversion feature was determined to be equal to the carrying value of the convertible debenture.  Accordingly, we recorded a debt discount of $115,098 which was expensed immediately as interest expense due to the convertible debenture being due on demand and convertible at any time.
 
On September 30, 2013, the holder of the convertible debenture informed the Company that he had entered into convertible note purchase agreements (collectively, the "Note Purchase Agreements") with three separate unrelated purchasers (collectively, the Purchasers"), pursuant to which the Purchasers each respectively agreed to purchase all of the principal of the unsecured convertible debenture and accrued interest equal to $34,529. As a result of receiving this notification, we reclassified principal balance of $103,588 CDN ($111,619 USD) from related party liability to third party liabilities. On October 31, 2013, we received notices of conversion dated October 31, 2013 from the Purchasers (collectively, the "Notices of Conversion"), pursuant to which the Purchasers each elected to convert $1,500 of the Note Portion into 750,000 shares of common stock at a conversion price of $0.002 per share, based on the market value of our common stock on the date of conversion.
 
The Company issued an aggregate of 2,250,000 shares of its common stock to the Purchasers. These were issued to three non-United States residents in reliance on Regulation S promulgated under the United States Securities Act of 1933, as amended (the “Securities Act”). The shares of common stock have not been registered under the Securities Act or under any state securities laws and may not be offered or sold without registration with the United States Securities and Exchange Commission or an applicable exemption from the registration requirements. Each Purchaser acknowledged that the securities to be issued have not been registered under the Securities Act, that they understood the economic risk of an investment in the securities, and that they had the opportunity to ask questions of and receive answers from our management concerning any and all matters related to acquisition of the securities.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

N/A.

ITEM 4. MINE SAFETY DISCLOSURES

No report required.

ITEM 5. OTHER INFORMATION

No report required.

 
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ITEM 6. EXHIBITS
 
The following exhibits are filed as part of this Quarterly Report.
 
EXHIBIT NO.   DOCUMENT
     
3.1   Articles of Incorporation (1)
     
3.1.2   Articles of Incorporation as amended.
     
3.1.3   Articles of Merger between Minhas Energy Consultants and American Energy Corp. (2)
     
3.2   Bylaws (1)
     
10.1   Option Agreement between American Energy Corporation and Westrock Land Corporation dated October 2008. (3)
     
10.2   5% Convertible Debenture dated October 13, 2009 between American Exploration Corporation and DMS Ltd. (4)
     
10.3   Stock Option Plan of American Exploration Corporation dated September 14, 2009. (5)
     
10.4   Merger Agreement and Plan of Merger dated March 22, 2010 between American Exploration Corporation and Mainland Resources Inc.
     
10.5   Merger Agreement dated February 15, 2013 between American Exploration Corp. and Spotlight Innovations LLC. (8)
     
10.6   Stock Purchase Agreement dated May 16, 2013 between American Exploration Corporation and Orange Investments Ltd. (9)
     
16. 1   Letter from Moore & Associates dated August 11, 2009. (6)
     
16. 2   Letter from Seale & Beers, CPAs dated November 2, 2009. (7)
     
31.1   Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act.
     
31.2   Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act.
     
32.1   Certification of Chief Executive Officer and Chief Financial Officer Under Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
19

 
 
101.INS **
 
XBRL Instance Document
     
101.SCH **
 
XBRL Taxonomy Extension Schema Document
     
101.CAL **
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF **
 
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB **
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE **
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
(1) Incorporated by reference from our Registration Statement on Form SB-2 filed with the Commission on March 5, 2006.

(2) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on August 8, 2008.

(3) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 6, 2008 and our Amendment No. 1 to Current Report filed with the Commission on January 25, 2009.

(4) Incorporated by reference from Form Current Report on Form 8-K filed with the Commission on October 19, 2009.

(5)  Incorporated by reference from Quarterly Report on Form 10-Q filed with the Commission on November 20, 2009.

(6)  Incorporated by reference from Current Report on Form 8-K filed with the Commission on August 17, 2009.

(7)  Incorporation by referenced from Current Report on Form 8-K filed with the Commission November 4, 2009.

(8) Incorporation by reference from Current Report on Form 8-K filed with the Commission February 15, 2013.

(9)  Incorporation by reference from Current Report on form 8-K filed with the Commission July 10, 2013.
 
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
20

 

AMERICAN EXPLORATION CORPORATION
 
SIGNAUTRES

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: November 19, 2013
By:
/s/ STEVE HARDING
 
   
Steve Harding, Chief
 
   
Executive Officer
 
       
       
Dated: November 19, 2013
By:
/s/ BRIAN MANKO
 
   
Brian Manko, Chief Financial Officer
 

 
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