ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. In addition to historical financial information, 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 these differences include those discussed below and elsewhere in this Quarterly Report. See also “Risk Factors” contained in our form 10-K filed with the Securities and Exchange Commission on April 1, 2013.
Sovereign Lithium, Inc., formerly Great American Energy, Inc. (“Sovereign Lithium” or the “Registrant”) was incorporated in Delaware on February 22, 2007 (originally under the name Southern Bella, Inc.). The Registrant was organized to acquire catering companies throughout the United States. The first catering company acquired by the Registrant was Dupree Catering, Inc. (“Dupree”). Dupree is a Kentucky corporation, formed on October 28, 1991. On March 1, 2007, the Registrant acquired all of the shares of stock of Dupree for $110,000 and Dupree became the wholly-owned subsidiary of the Registrant. The Registrant sold all of the assets of Dupree on July 1, 2008.
On December 17, 2010 the Registrant, closed a reverse take-over transaction by which it acquired 100% of the issued and outstanding common stock of Uptone Pictures, Inc., a North Carolina corporation (“Uptone”) which specializes in the creation, production and distribution of entertainment content.
On May 13, 2011, the Registrant entered into a Subsidiary Put Option Agreement (the “Put Option Agreement”) with Wendi and Michael Davis (the “Purchasers”). As of May 13, 2011, the Purchasers were members of the Registrant’s Board of Directors (the “Board”). On such date, the Purchasers were the beneficial holders of 8,166,667 pre-reverse split shares of the Registrant’s pre-consolidation common stock, par value $0.000001 per share, or 94% of the Registrant’s issued and outstanding common stock (the “Davis Shares”). Subsequently, the Davis Shares were sold to Geoff Evett pursuant to the terms of a stock purchase agreement further described below. Under the terms of the Put Option Agreement, the Registrant acquired a put option (the “Put Option”) obligating the Purchasers to purchase the Registrant’s holdings of 100 shares of common stock of Uptone, such shares constituting all of the issued and outstanding shares of Uptone (the “Uptone Shares”) for a total price of $100. Under the terms of the Put Option, the Registrant is required to obtain Board and stockholder approval prior exercising the Put Option. The Put Option will expire on May 13, 2014 (the “Option Termination Date”), unless it is terminated earlier under the terms of the Put Option Agreement.
Pursuant to the terms of the Put Option Agreement, the Purchasers agreed to indemnify the Registrant for any costs, expenses, liabilities or claims incurred by Uptone before, by and through and after the option period (the period from May 13, 2011 to the Option Termination Date or earlier termination as provided in the Put Option Agreement).
We entered into the Put Option Agreement in connection with a stock purchase agreement that the Purchasers separately entered into with Geoff Evett on May 13, 2011 (the “Stock Purchase Agreement”), which closed on May 16, 2011 (the “SPA Closing”). On the SPA Closing, the Purchasers sold 100% of the Davis Shares to Mr. Evett for an aggregate cash payment of $220,000. On the SPA Closing, the Purchasers, who were previously our officers, resigned from such positions and Mr. Evett was appointed as President, Chief Executive Officer, Chief Financial Officer and Secretary. On the Closing, the Purchasers submitted resignation letters from their positions as directors which were effective 10 days after the filing and mailing to our stockholders of an Information Statement pursuant to Section 14(f) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14f-1 promulgated thereunder. Mr. Evett became our sole director on May 27, 2011.
On June 29, 2011, we entered into a contribution agreement (the “Contribution Agreement”) with Geoff Evett, our sole director, president, and largest shareholder. Pursuant to the Contribution Agreement, Mr. Evett returned 7,566,667 pre-reverse split shares of our common stock to us as a contribution to our capital. Prior to the execution of the Contribution Agreement, Mr. Evett held 8,166,667 pre-reverse split shares of our common stock representing approximately 94.23% of our issued and outstanding shares. Following the execution of the Contribution Agreement, Mr. Evett held 600,000 shares of our pre-reverse split common stock representing approximately 54.54% of our issued and outstanding shares.
On June 29, 2011, we approved the Certificate of Amendment to change our name to Great American Energy, Inc. The name change was effective as of August 26, 2011.
On August 30, 2011, we effected a 79-for-1 stock-on-stock dividend for all of the issued and outstanding shares of our common stock on the record date of August 29, 2011 (the “Dividend”). Following the Dividend, we had 44,000,000 shares (88,000,000 pre-reverse split) of our common stock outstanding.
On April 19, 2012, our then Chief Executive Officer, Mr. Evett, tendered his resignation and our Board appointed Mr. Felipe Pimienta Barrios as our Chief Executive Officer and member of our Board. Mr. Evett remains on our Board.
On June 29, 2012, we exercised the above-described Put Option and the Company divested itself of the Uptone Shares. In connection with this exercise, all of the assets and liabilities of Uptone have been transferred to the Purchasers and as of June 29, 2012, the Company no longer has any subsidiaries and the operations of Uptone are no longer the operations of the Company.
Effective July 11, 2013 the Company changed its name from Great American Energy, Inc. to Sovereign Lithium, Inc. and effected a reverse stock split on a 1-for-2 basis by filing its Amended and Restated Certificate of Incorporation with the Delaware Secretary of State. All common shares and warrants outstanding have been retroactively restated on a 1-for-2 basis unless otherwise noted as pre-reverse split shares.
RECENT DEVELOPMENTS
Advisory Agreement
On May 20, 2013, the Company entered into an Advisory Agreement (“Advisory Agreement”) with Mr. John Rud, the founder and principal of GeoXplor Corp. (“Mr. Rud”). Pursuant to the terms of the Advisory Agreement, Mr. Rud agreed to use his expertise in mining and exploration to provide advisory services to the Board of Directors. As compensation for Mr. Rud’s advisory services, the Company agreed to issue Mr. Rud or his designee one hundred thousand shares of restricted common stock of the Company. The Advisory Agreement has a term of one year and can be extended for additional terms upon mutual agreement. On May 24, 2013, the Company issued 50,000 shares of restricted common stock valued at $50,000. The issuance of the common stock was exempt from registration pursuant to Section 4(2) of the Act.
Financing
During the quarter ended June 30, 2013, we entered into two separate Regulation S Subscription Agreements (the “Subscription Agreements”) with Pacific Oil & Gas Investments Ltd. (“Pacific Oil”). Pursuant to the terms of the respective Subscription Agreement, we sold (i) 30,380 Units for an aggregate purchase price $48,000, or $1.58 per Unit, with each “Unit” consisting of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock exercisable for $2.60 per share for a three year period, and (2) 208,334 Units for an aggregate purchase price $200,000, or $0.96 per Unit, with each “Unit” consisting of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock exercisable for $1.50 per share for a three year period. The issuance of the units to Pacific Oil pursuant to the Subscription Agreement was exempt from registration pursuant to Regulation S under the Securities Act of 1933 (the “Act”). The Company made this determination based on the representations of Pacific Oil which included, in pertinent part, that Pacific Gas is not a “U.S. Person” as that term is defined in Regulation S under the Act. As of June 30, 2013 we had 44,938,356 shares of common stock outstanding giving effect to the reverse stock split..
Corporate Actions- Name Change and Reverse Stock Split
On May 23, 2013, the Board of Directors of the Company unanimously approved, and on May 28, 2013 (the “Record Date”), the holder of at least a majority of the voting power of our issued and outstanding common stock as of such Record Date, approved by written consent pursuant to Section 228 of the Delaware General Corporation Law (the “DGCL”), the following corporate actions to be effected through the filing of the Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware (collectively, the “Corporate Actions”): (i) that the Certificate of Incorporation of the Company be amended and restated to change its name to “Sovereign Lithium, Inc.” (the “Name Change”); (ii) that the Certificate of Incorporation of the Company be amended and restated to authorize that 20,000,000 shares of preferred stock, par value $.000001 per share, may be issued in one or more series, and with such designation and authorized number of such shares of each series to be determined by the Board (“Blank Check Preferred Stock”); (iii) that the Certificate of Incorporation of the Company be amended and restated to effect a reverse stock split of the issued and outstanding common stock of the Company, at a reverse stock split ratio of 1-for-2, with each stockholder otherwise entitled to receive a fractional share of common stock as a result of the reverse stock split receiving one full share of common stock in lieu of the Company issuing such fractional share or paying cash in respect thereof (the “Reverse Stock Split”); (iv) that the Certificate of Incorporation of the Company be amended and restated to give the Board the authority and power to change the Bylaws of the Company without requiring a vote of the stockholders; (v) that the Certificate of Incorporation of the Company be amended and restated to include a provision to limit the personal liability of its directors to the fullest extent permitted under Section 102 of the DGCL; and (v) that the Certificate of Incorporation of the Company be amended and restated to pro
vide indemnification and advancement of expenses to its officers, directors, employees and agents to the fullest extent permitted by Section 145 of DGCL.
In connection with the Corporate Actions, on June 21, 2013, the Company mailed an Information Statement to its stockholders of record as of the Record Date. On July 11, 2013, the Company filed the Amended and Restated Certificate of Incorporation with the Delaware Secretary of State to effect the Corporation Actions, including the name change to “Sovereign Lithium, Inc.” and the Reverse Stock Split. The Name Change and Reverse Stock Split was approved by Financial Industry Regulatory Authority (“FINRA”). Effective at the beginning of trading on July 12, 2013, the Company's name was changed to Sovereign Lithium, Inc. and the Company's shares began trading on a split-adjusted basis. A new CUSIP number was assigned to the Company's common stock as a result of the Name Change and Reverse Stock Split.
Transition to Mineral Exploration and Development Industry
As disclosed in previous quarterly and annual reports, the Company has been working on transitioning its operations to focus on the mineral exploration and development industry. In connection with this transition, during the quarter ended June 30, 2013 and the year ended December 31, 2012, we took the actions described below.
On June 7, 2012, we entered into the Mineral Property Option Agreement (the “Agreement”) with Mr. David A. Wallach of 0911325 BC, Ltd. (“Wallach”) with an effective date of April 28, 2012. Pursuant to the Agreement, Wallach has granted us the exclusive right to acquire an undivided 60% interest in 10 mining claims consisting of approximately 2,958 hectares of property located near Trail, British Columbia, Canada (the “Wallach Option”).
To exercise the Wallach Option, we must (i) make cash payments to Wallach totaling $350,000, inclusive of $25,000 for staking additional claims within the area of mutual interest, (ii) fund improvement and mineral exploration projects on the property totaling $350,000, and (iii) if the mineral and exploration projects provide evidence that there is the equivalent of at least $1 billion of gross value on the property, we must issue 1,000,000 shares of our common stock to Wallach.
The Company must satisfy the above-described conditions and exercise the Wallach Option no later than April 30, 2015. After exercise of the Option, Wallach will retain a 2% net smelter royalty for any and all minerals mined and delivered from the property. We and Wallach have also agreed to cooperate in acquiring mining claims in the area within an 8.5 kilometer radius of the property, with such acquisitions to be subject to the terms of the Agreement.
As of June 30, 2013 the Company has paid $325,000 in cash payments and incurred $55,000 in exploration costs. The parties have not pursued staking additional claims within the area of mutual interest. As of August 5, 2013 the Company is in compliance with the Wallach Agreement.
We intend to conduct an exploration program to evaluate the distribution and amounts of rare earth elements which we believe may be found on this property. Preliminary samplings have indicated the presence of Scandium, Neodymium, Samarium, and Europium on this property. Additionally, smelting facilities are located within 15 kilometers of this property and we believe that the infrastructure in the region surrounding the property could support mining operations.
On June 13, 2012, we entered into the Mineral Property Option Agreement (the “GeoXplor Option Agreement”) with GeoXplor Corporation, a Nevada corporation (“GeoXplor”). Pursuant to the Option Agreement, GeoXplor has granted us the exclusive right to acquire a 100% interest in and to 48 unpatented mining claims comprising approximately 7,680 acres of property located in and around Esmeralda County, Nevada, United States of America (the “GeoXplor Option”).
To exercise the GeoXplor Option, we must make cash payments to GeoXplor totaling $575,000 and fund improvement and mineral exploration projects on the property totaling $800,000. We must satisfy the above-described conditions and exercise the Option no later than July 1, 2015. After exercise of the GeoXplor Option, GeoXplor will be granted a 3% net smelter royalty for any and all minerals mined and delivered from the property.
As of June 30, 2013 we have paid $450,000 in cash and incurred $100,000 in exploration costs. As of August 5, 2013, the Company is in compliance with the GeoXplor Option agreement.
We intend to conduct an exploration program to evaluate the distribution and amounts of lithium on this property. This property is adjacent to an operating lithium mine and the United States Geological Survey has indicated that the region containing this property may contain significant lithium deposits. As part of the United States Geological Survey drill program, one hole was drilled on this property which intersected geochemically anomalous concentrations of lithium in water and sediments. The gravity surveys over the region confirmed the existence of various structures that may have created topography favorable for evaporite accumulation and subsequent traps, which potentially could host mineral rich brines.
GOING CONCERN UNCERTAINTY
The condensed financial statements of the Company are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of management to raise additional equity capital through private and public offerings of its common stock, and the attainment of profitable operations. As of June 30, 2013, the Company had working capital of $34,032 and an accumulated deficit of $1,549,120.
As more fully described in the Notes to Condensed Consolidated Financial Statements and elsewhere in this quarterly report, we currently have entered into options for the acquisition of various mineral properties. None of these mineral properties currently have proven or probable reserves. We will be required to raise significant additional capital to complete the acquisition of the interests in and further the exploration, evaluation and development of each of these mineral properties. There can be no assurance that we will be successful in raising the required capital or that any of these mineral properties will ultimately attain a successful level of operations. If the Company is unable to raise sufficient capital to pay its obligations, or is unable to successfully complete the development of current mineral projects and obtain profitable operations and positive operating cash flows, the Company may be forced to scale back its mineral property acquisition and development plans or to significantly reduce or terminate operations and file for reorganization or liquidation under the bankruptcy laws.
These factors together raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
On June 29, 2012, we exercised the above-described Put Option and the Company divested itself of its subsidiary, Uptone Pictures, Inc. (“Uptone”). Accordingly, the revenues and expenses from Uptone are presented as net income from discontinued operations. The revenues and expenses from Uptone in 2012 are also presented as discontinued operations for comparison purposes.
Continuing Operations
. Revenue from continuing operations was $0 for the three and six month periods ended June 30, 2013 and $0 during the same periods ended June 30, 2012. Cost of revenues for the three and six month periods ended June 30, 2013 and ended June 30, 2012 was $0.
Net Loss.
Net income (loss) for the three month period ended June 30, 2013 and 2012 were ($217,244) and ($110,175), respectively. Net income (loss) for the six month period ended June 30, 2013 and 2012 were ($361,240) and ($188,099), respectively. Losses increased primarily due to increased general and administrative expenses and the acquisition of mineral options.
Discontinued Operations
. The income (loss) from the discontinued operations of Uptone was $0 for the three and six month periods ended June 30, 2013 and $110,175 and $188,099 for the three and six month periods ended June 30, 2012, respectively.
Expenses
Officers Compensation.
Officers’ compensation was $28,500 for the three month period ended June 30, 2013 and $0 for the three month period ended June 30, 2012. Officers’ compensation was $57,000 for the six month period ended June 30, 2013 and $0 for the six month period ended June 30, 2012. The increase is due to an increase in the compensation of officers in connection with commencing new operations.
General and Administrative Expens
es. General and administrative expenses were $93,669 for the three month period ended June 30, 2013 and $0 for the three month period ended June 30, 2012. General and administrative expenses were $154,165 for the six month period ended June 30, 2013 and $0 for the six month period ended June 30, 2012.The increases during the three and six months ended June 30, 2013 were due to increased general and administrative expenses relating to recent corporate transactions.
Exploration and Evaluation Expenses
. We incurred $95,075 in exploration and evaluation expenses in the three month period ended June 30, 2013 compared to $0 for the three month period ended June 30, 2012. We incurred $150,075 in exploration and evaluation expenses in the six month period ended June 30, 2013 compared to $0 for the six month period ended June 30, 2012. The increase is a result of the commencement of our exploration activity during the third quarter of 2012.
Liquidity and Capital Resources
We generated net losses for the periods ending June 30, 2013 and June 30, 2012 of ($361,240) and ($110,175) respectively, and had an accumulated deficit of $1,549,120 at June 30, 2013. We had a working capital surplus of $34,032 for the period ending June 30, 2013 and a working capital surplus of $4,218 for the year ended December 31, 2012. We have no long term obligations other than our mineral property obligations as described herein.
We had a cash balance of $76,879 at June 30, 2013 and $22,418 at December 31, 2012. For the six month period ended June 30, 2013 we had net cash inflows of $54,461 versus $59,514 in the six months ended June 30, 2012. Cash flows used in operations for the six month period ended June 30, 2013 were ($331,039) compared with ($163,901) used for discontinued operations in the same period in 2012. The increase in use of cash for operations is primarily attributable to increased general and administrative costs and exploration costs for mineral options. Cash flows used in operations for the six month period ending June 30, 2013 consisted primarily of a net loss from operations of ($361,240) compared with $0 from operations and ($188,099) from discontinued operations for the same period in 2012. The increase in loss was primarily because of the change in the nature of our business and, our expenditures of $150,075 on exploration properties and increased general and administrative expenses. We had net cash provided by financing activities of $680,500 for the six month period ended June 30, 2013, compared with $0 for the same period in 2012, an increase attributable to proceeds of sales of our stock. Cash flows used in investing activities were $295,000 for the six month period ending June 30, 2013 compared with $151,988 for the same period in 2012. The increase was primarily due to cash paid for mineral options.
During the next 12 months we expect that our operations will be funded by further equity financing activities. However, there is no assurance that we will be able to obtain sufficient funds to support our operations as planned. We are dependent on the continued support of our creditors and our ability to raise further capital to fund ongoing expenditures. In current market conditions there is uncertainty that the necessary funding can be obtained as needed, raising substantial doubt as to our ability to continue operating as a going concern. In the event we are unable to raise additional capital, we will not be able to meet our obligations and will be required to further curtail or terminate some of our projects and/or activities. If we fail to secure such funding, we may fail to meet our reporting obligations as a public company and could lose our eligibility for the quotation of our stock on the over the counter bulletin board. Should this occur, investors may have increased difficulty selling their stock.
Our independent auditors have indicated in their audit report for the year ended December 31, 2012 that there is substantial doubt about our ability to continue as a going concern over the next twelve months.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements.
