Note 2 – Agreement and Plan of Merger
On May 5, 2011, GRC entered into a Stock Exchange Agreement dated April 29, 2011, as amended June 3, 2011, with American Sands Energy Corp. (formerly Millstream Ventures, Inc.) (“ASEC”), a publicly held company, pursuant to which ASEC agreed to issue 11,334,601 shares of its common stock to the stockholders of GRC in exchange for all of the outstanding equity securities of GRC. ASEC also agreed to issue up to 5,492,196 shares of its common stock upon exercise of warrants assumed at closing and 535,704 common shares upon conversion of a promissory note to Bleeding Rock.
On June 3, 2011, GRC and ASEC closed the merger transaction described above. As a result of the merger, stockholders of GRC obtained a 56% interest in ASEC. Because the stockholders of GRC obtained a majority ownership in ASEC through the merger, the transaction has been accounted for as a reverse merger. Accordingly, the historical financial statements reflect the operations of GRC through June 3, 2011 and reflect the consolidated operations of GRC and ASEC from June 3, 2011 through September 30, 2011. As a result of the merger, GRC received approximately $853,000 in cash to fund operations. In connection with the agreement, GRC lenders exchanged $175,000 plus accrued interest of $13,000 in notes payable for 437,500 shares of ASEC common stock.
On September 15, 2011, stockholders owning a majority of the voting control of the Company authorized, by
written consent, an amendment to the articles of incorporation to change the name of the Company to “American
Sands Energy, Corp.” and authorized the change of domicile of the Company from the State of Nevada to the State of Delaware through the merger of the Company with and into a Delaware corporation to be formed for the purpose of changing domicile. The effective date of the change of domicile was October 19, 2011.
American Sands Energy Corp.
(Formerly Millstream Ventures, Inc.)
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(Expressed in US Dollars)
The Company is a development stage company engaged in the clean extraction of bitumen from oil sands prevalent in the Mountain West region of North America using proprietary technology. Based on the reverse merger transaction, the public company, ASEC, is no longer considered to be a shell company.
Note 3 – Significant Accounting Policies
These unaudited interim financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information, as well as the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the interim financial statements have been included.
The preparation of financial statements in accordance with US GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company’s condensed consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of the Company’s consolidated financial position and results of operations. Operating results for the three and six months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the full fiscal year ending March 31, 2012.
For further information, refer to the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K, as amended, for the year ended March 31, 2011.
a) Principles of Consolidation
The consolidated financial statements include the accounts and operations of GRC, its wholly owned subsidiary, GRI, and the operations of ASEC from the date of the reverse merger, June 3, 2011, through September 30, 2011. All significant intercompany balances and transactions have been eliminated in consolidation.
b) Mineral Leases
In certain cases, the Company capitalizes costs related to investments in mineral lease interests on a property-by-property basis. Such costs include mineral lease acquisition costs. Costs are deferred until such time as the extent of proved developed reserves has been determined and mineral lease interests are either developed, the property sold or the mineral lease rights are allowed to lapse. To date all exploration and lease costs have been expensed.
c) Income Taxes
The Company applies the guidance in ASC 740,
Income Taxes
, which requires an asset and liability approach for financial accounting and reporting for income taxes, and the recognition of deferred income tax assets and liabilities for the temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.
ASC 740 clarifies the accounting and disclosure for uncertainty in tax positions, as defined. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial position, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded.
American Sands Energy Corp.
(Formerly Millstream Ventures, Inc.)
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(Expressed in US Dollars)
d) Reverse Stock Split
As more fully described in Note 14, effective October 19, 2011, the Company implemented a 1-for-2 reverse stock split of its issued and outstanding common stock. All common share and per common share information in the accompanying condensed consolidated financial statements have been retroactively restated to reflect the reverse common stock split.
e) Stock-based Compensation
The Company measures and records the costs of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award, recognized over the period during which an employee is required to provide services in exchange for such award.
The Company uses the Black-Scholes option-pricing model to determine the grant date fair-value of stock-based awards.
f) Net Loss Per Common Share
Basic earnings or loss per common share is computed on the basis of the weighted average number of shares outstanding during the periods. Diluted earnings or loss per common share is calculated on the basis of the weighted average number of common shares outstanding during the period plus the effect of potential dilutive shares during the period. Potential dilutive shares include outstanding stock options and warrants and convertible debt instruments. For periods in which a net loss is reported, potential dilutive shares are excluded because they are antidilutive. Therefore, basic loss per common share is the same as diluted loss per common share for the periods ended September 30, 2011 and 2010.
g) Recent Accounting Pronouncements
On January 21, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06,
Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
, which amends ASC 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The ASU also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. Further, the ASU amends guidance on employers’ disclosures about post-retirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The ASU was effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU 2009-06 did not have a material impact on the condensed consolidated financial statements.
Note 4 – Going Concern
The Company does not have positive cash flows from operating activities and its ability to continue as a going concern is dependent on obtaining additional financing or the continuing financial support of its stockholders and other related parties. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. The Company plans to obtain additional financing through the sale of equity or debt securities in order to finance operations until it can generate positive cash flows from operating activities. There can be no assurance that the Company will be successful in its efforts to obtain financing through the sale of equity or debt securities. If the Company is not able to obtain additional financing, it will be unable to construct the plant and bring it to an operational phase, and will be required to cease operations.
American Sands Energy Corp.
(Formerly Millstream Ventures, Inc.)
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(Expressed in US Dollars)
Note 5 – Accrued Expenses
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
Payroll
|
|
$
|
1,141,044
|
|
|
$
|
1,137,695
|
|
|
Fees payable to Bleeding Rock
|
|
|
1,371,551
|
|
|
|
1,521,551
|
|
|
Mineral lease payable
|
|
|
49,556
|
|
|
|
195,213
|
|
|
Legal and professional fees
|
|
|
-
|
|
|
|
35,126
|
|
|
Income tax payable
|
|
|
-
|
|
|
|
700
|
|
|
Reports and engineering
|
|
|
-
|
|
|
|
21,273
|
|
|
Interest
|
|
|
-
|
|
|
|
13,592
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
2,562,151
|
|
|
$
|
2,925,150
|
|
Note 6 – Mineral Leases
During 2005, the Company acquired two tar sand mineral leases; one covering an undivided 40% interest and the other covering an undivided 20% interest in an 1,120 acre parcel. Additionally, an undivided 16.666% interest in a 640 acre tract was acquired. These leases are located in Carbon County, Utah, have a six-year life, and require minimum yearly lease payments of $151,503, increasing to $224,579 on the fifth anniversary of the lease date if the properties have not reached commercial production. In January 2009, the lease terms were extended through 2013.
In 2009, a third lease was entered into with William G. Gibbs, a relative of the president of the Company, for an additional undivided 5% interest in the 640 acre tract (for a total 21.666% undivided interest in the 640 acre tract). This lease is located in Carbon County, Utah, adjacent to the 1,120 acre tract. This lease has a six-year life with a minimum yearly lease payment of $7,965 and is scheduled to terminate by October 2015 if the property has not reached commercial production.
Upon commencement of operations, each lease requires a production royalty of 10% of the market value of the minerals sold, net of applicable costs and expenses. Through September 30, 2011, no production royalties were accrued or paid because production on these properties had not commenced. After three consecutive calendar years of production on the 1,120 acre parcel, the production royalty on the 1,120 acre parcel shall be the greater of the 10% royalty or $1,000,000 annually.
Future minimum lease payments are as follows for the years ending:
|
September 30,
|
|
|
|
|
2012
|
|
$
|
232,562
|
|
|
2013
|
|
|
232,562
|
|
|
2014
|
|
|
176,413
|
|
|
2015
|
|
|
-
|
|
|
2016
|
|
|
-
|
|
|
Therafter
|
|
|
-
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
641,537
|
|
American Sands Energy Corp.
(Formerly Millstream Ventures, Inc.)
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(Expressed in US Dollars)
Note 7 – Notes Payable
On June 3, 2011, outstanding notes payable of $150,000, related-party notes payable of $25,000, and approximately $13,000 of accrued interest, were converted into 437,500 shares of common stock in connection with the Company’s reverse merger.
Note 8 – Convertible Notes Payable
As a result of the reverse merger transaction described above, the Company assumed convertible notes payable of $770,000 on June 3, 2011. In addition, the Company has issued $400,000 of convertible notes payable subsequent to the reverse merger, including $250,000 during the three months ended September 30, 2011. These notes were issued pursuant to a $1,750,000 private offering. As of September 30, 2011, there was $1,170,000 of convertible notes payable outstanding with accrued interest of $35,639.
The notes bear interest at 10% per annum and all principal and interest are due and payable by April 30, 2014. The notes and all accrued interest are convertible into the Company’s common stock at any time by the lender at approximately $0.50 per common share until the due date. The notes automatically convert upon completion of a financing of $10,000,000 or more.
In connection with the terms of the offering, holders of the notes also received 100,286 warrants for each $50,000 loaned to the Company. During the six months ended September 30, 2011, the Company granted 2,346,701 warrants in connection with this offering of which 501,430 warrants were issued during the quarter ended September 30, 2011. The Company recorded a debt discount related to the warrants and resulting beneficial conversion of $674,838. For the 501,430 warrants issued during the quarter ended September 30, 2011, the Company valued the warrant discount using the Black-Scholes pricing model with the following assumptions: term of three years, an average risk free interest rate of 0.83%, a dividend yield of 0%, and volatility of 158.21%. For the 1,845,263 warrants issued in the quarter ended June 30, 2011, the Company valued the warrant discount using the Black-Scholes pricing model with the following assumptions: term of three years, an average risk free interest rate of 1.03%, a dividend yield of 0%, and volatility of 149.76%.
Note 9 – Convertible Note Payable, Related Party
On May 31, 2011, the Company converted $214,281 of its outstanding balance with a related party, Bleeding Rock LLC, into a 6% convertible promissory note. The note is convertible into 535,704 shares of the Company’s common stock. The Company expects to issue the shares and convert the note during the third quarter of fiscal 2012. As of September 30, 2011, the carrying balance of the note was $218,861 including accrued interest of $4,580.
Note 10 – Warrants
The Company has three classes of warrants, namely, special warrants, bridge warrants, and convertible debt warrants.
a)
Special Warrants
The Company has issued 5,247,776 warrants from its inception in exchange for cash totaling $1,826,408. Each warrant issued, entitles the holder, without payment of additional consideration, to acquire fully paid and non-assessable common shares. The warrants can be exercised by the holder at any time. As of September 30, 2011 and March 31, 2011, there were 5,247,776 special warrants outstanding.
b)
Bridge Warrants
In connection with the issuance of certain notes payable (see note 7), the Company granted bridge warrants to the note holders. These bridge warrants give the holder the right to purchase shares of the Company’s common stock at $0.40 per share. As of September 30, 2011 and March 31, 2011, there were 244,420 bridge warrants issued and outstanding.
c)
Convertible Debt Warrants
In connection with the Company’s $1,750,000 private convertible note offering, the Company granted warrants to the note holders. These warrants give the holder the right to purchase shares of the Company’s common stock at approximately $0.50 per share. The warrants expire on April 30, 2014. As of September 30, 2011 and March 31, 2011, there were 2,346,701 and zero warrants outstanding, respectively.
American Sands Energy Corp.
(Formerly Millstream Ventures, Inc.)
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(Expressed in US Dollars)
Note 11 – Stock Option Plan
In April 2011, the Company adopted the 2011 Long-Term Incentive Plan (the “2011 Plan”) which reserves for the issuance of up to 3,500,000 shares of the Company’s common stock. During the six months ended September 30, 2011, the Company issued 3,087,500 options to officers and directors of the Company. The options vest immediately, have an exercise price of $0.40 per share, and expire on March 31, 2018. The Company recorded $584,061 of compensation expense during the six months ended September 30, 2011 in connection with issuing the options. No options pursuant to the 2011 Plan were issued during the quarter ended September 30, 2011.
Prior to the Company’s adoption of the 2011 Plan, from time to time the Company issued stock options to certain key employees and officers and directors. The Company had authorized a total of 1,775,000 shares of its common stock for grant as stock options. Options to purchase shares of the Company’s common stock were granted at a price not less than 100% of the estimated market price on the date of grant. The Company had options that vest immediately and may be exercised immediately after the date granted and options that vest over a three-year period, one third on the grant date and one third each year thereafter. As of March 31, 2011, the Company had granted 1,537,500 options under these terms. In connection with the amended Stock Exchange Agreement dated May 31, 2011, all of the stock options issued by the Company prior to June 3, 2011 were cancelled and exchanged for options issued under the 2011 Plan in connection with the Company’s reverse merger with ASEC. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions noted below:
|
Assumption
|
|
|
Dividend yield
|
-
|
|
Weighted average volatility
|
149.76%
|
|
Risk-free interest rate
|
1.03%
|
|
Expected life (years)
|
4
|
The summary of option activity for the six months ended September 30, 2011 is presented below:
|
|
|
Shares
|
|
|
Weighted average
exercise
price
|
|
|
Weighted average
remaining
life (years)
|
|
|
Balance as of March 31, 2011
|
|
|
1,537,500
|
|
|
$
|
0.68
|
|
|
|
1.00
|
|
|
Options granted
|
|
|
3,087,500
|
|
|
|
0.40
|
|
|
|
7.00
|
|
|
Options cancelled
|
|
|
(1,537,500
|
)
|
|
|
0.68
|
|
|
|
1.00
|
|
|
Balance as of September 30, 2011
|
|
|
3,087,500
|
|
|
|
0.40
|
|
|
|
6.75
|
|
As of September 30, 2011, 3,087,500 options were exercisable. The weighted-average grant-date fair value of options granted during the six months ended September 30, 2011 was $0.34. There were no options granted during the six months ended September 30, 2010.
American Sands Energy Corp.
(Formerly Millstream Ventures, Inc.)
(A Development Stage Company)
Notes to Unaudited Condensed Consolidated Financial Statements
(Expressed in US Dollars)
As of September 30, 2011, the intrinsic value of outstanding and vested stock options was $0.
Expected option lives were based on historical data of the Company. Expected stock price volatility was based on data from comparable public companies. The risk free interest rate was calculated using U.S. Treasury constant maturity rates similar to the expected lives of the options, as published by the Federal Reserve. The Company has no plans to declare any future dividends.
Note 12 – Related-Party Transactions
From inception, pursuant to the terms of the Operating Agreement (see note 1), the Company has entered into transactions with Bleeding Rock. The Company also pays Bleeding Rock a fee as required by the Operating Agreement. Accrued fees as of September 30, 2011 and March 31, 2011 were $1,371,551 and $1,521,551, respectively. The president of the Company is also the managing executive of Bleeding Rock. On May 31, 2011, the Company converted $214,281 of the accrued fees into a 6% convertible promissory note. The note is convertible into 535,704 shares of the Company’s common stock. The Company expects to issue the shares and convert the note during the third quarter of fiscal 2012. As of September 30, 2011, the carrying balance of the note was $218,861 including accrued interest of $4,580.
In 2009, the Company entered into a mineral lease with William G. Gibbs, a relative of the president of the Company, for an additional undivided 5% interest in the 640 acre tract (for a total 21.666% undivided interest in the 640 acre tract). This lease is located in Carbon County, Utah, adjacent to the 1,120 acre tract. This lease has a six-year life with a minimum yearly lease payment of $7,965 and is scheduled to terminate by October 2015 if the property has not reached commercial production.
Note 13 – Commitments
On August 1, 2007, the Company entered into an employment contract with the president, with a term through December 31, 2013, that provides for a minimum annual salary of $400,000 plus benefits. Under the terms of the agreement, unpaid amounts are accrued until the Company receives funding of $1,000,000 or more, at which time the payment of the president’s salary will start. If the accrued salary is not paid within six months of funding, the president will have the right to convert accrued and unpaid amounts into common stock of the Company. On August 12, 2009, the term of the employment agreement was extended to December 31, 2015. As of September 30, 2011 and March 31, 2011, the total accrued commitment was $1,070,207 and $1,046,884, respectively, which is included as accrued expenses and selling, general and administrative expense in the accompanying condensed consolidated financial statements.
On March 31, 2011, the Company entered into an employment agreement with the Chief Operating Officer, replacing all previous employment agreements, that provides for initial compensation at an hourly rate of $175 and expense reimbursements. Upon the completion of a financing by the Company of not less than $10,000,000, his compensation will increase to $300,000 annually plus all other benefits normally provided to an employee.
This employment agreement is effective March 31, 2011 and terminates March 31, 2014. If certain financing benchmarks are not met on or before March 31, 2012, the employment agreement becomes null and void.
Note 14 – Subsequent Events
Effective October 19, 2011, the Company changed its state of domicile to the State of Delaware by merging with and into American Sands Energy Corp., a Delaware corporation incorporated on September 13, 2011, for the sole purpose of effecting the change of domicile from the State of Nevada. As a result of the merger, the name of the Company was changed to American Sands Energy Corp. Concurrent with the change of domicile, the Company effected a one-for-two reverse split of its outstanding common stock, with fractional shares being rounded up to the next whole share.