10-Q 1 mshf_10q.htm QUARTERLY REPORT 10Q

UNITED STATES

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 June 30, 2013

 

or

 

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

 

Commission File No. 001-32438


MediaShift, Inc

(Exact Name of Registrant as Specified in its Charter)


Nevada

 

20-1373949

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

20062 SW Birch St. #220,

 

 

Newport Beach, CA

 

92660

(Address of principal executive offices)

 

(Zip Code)


Registrant’s telephone number, including area code: (949) 407-8488


________________

Former name, former address and former fiscal year, if changed from last report.


     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [  ]


     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer [  ]

Accelerated filer [  ]

Non-accelerated filer [  ]

(Do not check if a smaller reporting company)

Smaller reporting company [X]


     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]   No [X]


     The number of shares outstanding of Registrant’s common stock, par value $0.001, as of August 14, 2013, was 22,381,860.




MediaShift, Inc.
Index to Form 10-Q Quarterly Report
to the Securities and Exchange Commission


 

 

 

Page

 

 

 

No.

 

Part I  Financial Information

 

 

 

 

 

 

Item 1

Consolidated Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012

 

3

 

 

 

 

 

Consolidated Statements of Operations (unaudited) for the three month and six month periods ended June 30, 2013 and 2012

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for three month and six month periods ended June 30, 2013 and 2012

 

5

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity (unaudited) for the six month period ended June 30, 2013

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

7 - 22

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23 - 27

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

Item 4T

Controls and Procedures

 

27

 

 

 

 

 

Part II Other Information

 

 

 

 

 

 

Item 1

Legal Proceedings

 

28

 

 

 

 

Item 1A

Risk Factors

 

28

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

 

Item 3

Defaults Upon Senior Securities

 

28

 

 

 

 

Item 4

Mine Safety Disclosures

 

28

 

 

 

 

Item 5

Other Information

 

28

 

 

 

 

Item 6

Exhibits

 

29






2



PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS


MediaShift, Inc.

CONSOLIDATED BALANCE SHEETS

(unaudited)


 

June 30,

2013

December

31, 2012 *

ASSETS

(unaudited)

 

Current Assets

 

 

Cash and cash equivalents

$

1,292,069

$

902,701

Accounts receivable, net

 

2,645,364

 

6,240

Prepaid expenses

 

92,883

 

57,625

  Total current assets

 

4,030,316

 

966,566

Property and equipment, net of depreciation

 

509,295

 

163,819

Discontinued operations: assets held for sale

 

10,542

 

10,542

Patents, net

 

277,968

 

215,070

Deposits

 

117,825

 

10,250

Intangible Assets, net

 

5,625,807

 

-

Other assets

 

1,726

 

434

  Total Assets

$

10,573,479

$

1,366,681

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

Current Liabilities

 

 

 

 

Accounts payable and accrued expenses

$

2,373,405

$

294,632

Contingent Liability

 

980,000

 

-

Liabilities directly associated with assets held for sale

 

379,422

 

378,296

  Total Current Liabilities

 

3,732,827

 

672,928

Long-Term Liabilities:

 

 

 

 

Note Payable, less discount of $356,167 and  $750,292 in 2013 and 2012

 

2,704,332

 

249,707

  Total Long-Term Liabilities

 

2,704,332

 

249,707

  Total Liabilities

 

6,437,159

 

922,635

Commitments and Contingencies (note 4)

 

 

 

 

Stockholders’ equity

 

 

 

 

Series A preferred stock,  $0.001 par value

 

-

 

-

Series B preferred stock,  $0.001 par value

 

-

 

-

Class M preferred stock, $0.001 par value, 0 and 169,973.88 issued and

outstanding at June 30, 2013 (unaudited) and December 31, 2012;

no liquidation preference as of December 31, 2012

 

-

 

1,700

Common stock - 100,000,000 and 25,000,000 shares authorized,

$0.001 par value, 22,381,860 and 2,771,705  shares issued and outstanding

at June 30, 2013 (unaudited) and December 31, 2012, respectively

 

22,382

 

5,543

Additional paid-in capital

 

24,637,773

 

10,430,087

Accumulated deficit

 

(20,523,835)

 

(9,993,284)

  Total Stockholders’ Equity

 

4,136,320

 

444,046

  Total Liabilities and Stockholders’ Equity

$

10,573,479

$

1,366,681


* Amounts derived from the audited financial statements for the year ended December 31, 2012


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


3



MediaShift, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


 

For the three month period

ended

June 30,

 

 

For the six months period ended

 June 30,

 

 

2013

 

2012

 

2013

 

2012

 

Revenues

$

2,037,188

 

$

1,578

 

$

3,550,500

 

$

6,365

 

Cost of goods sold

 

(1,635,672)

 

 

(862)

 

 

(2,475,841)

 

 

(5,579)

 

Gross profit

 

401,516

 

 

716

 

 

1,074,659

 

 

786

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

2,941,808

 

 

510,374

 

 

5,235,574

 

 

895,353

 

Depreciation and Amortization

 

95,990

 

 

5,806

 

 

151,969

 

 

9,960

 

Research and development expenses

 

125,011

 

 

43,636

 

 

191,583

 

 

94,184

 

     Total expenses

 

3,162,809

 

 

559,816

 

 

5,579,126

 

 

999,497

 

     Total operating loss

 

(2,761,293)

 

 

(559,100)

 

 

(4,504,467)

 

 

(998,711)

 

Other Income and Expense

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

26

 

 

-

 

 

47

 

 

-

 

Other income

 

391,283

 

 

-

 

 

410,719

 

 

-

 

Interest expense

 

(617,267)

 

 

-

 

 

(781,525)

 

 

-

 

Fair value adjustment on derivative liability

 

35,131

 

 

-

 

 

(659,787)

 

 

-

 

Loss on debt extinguishment

 

(281,090)

 

 

-

 

 

(4,991,513)

 

 

-

 

Total other income and expense

 

(471,917)

 

 

-

 

 

(6,022,059)

 

 

-

 

Net loss before taxes

 

(3,233,210)

 

 

 

 

 

(10,526,526)

 

 

(998,711)

 

Taxes

 

(3,225)

 

 

-

 

 

(4,025)

 

 

(1,200)

 

Net loss from continuing operations

 

(3,236,435)

 

 

(559,100)

 

 

(10,530,551)

 

 

(999,911)

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Gain from discontinued operations

 

-

 

 

-

 

 

-

 

 

-

 

Net loss

 

(3,236,435)

 

 

(559,100)

 

 

(10,530,551)

 

 

(999,911)

 

Net loss applicable to common shareholders

$

(3,236,435)

 

$

(559,100)

 

$

(10,530,551)

 

$

(999,911)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares outstanding

 

14,426,692

 

 

10,501,912

 

 

14,426,692

 

 

10,501,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Amounts applicable to common shareholders for the period per share, basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) from continuing operations

$

(0.224)

 

$

(0.053)

 

$

(0.730)

 

$

(0.095)

 

(Loss) from discontinued operations

$

(0.000)

 

$

(0.000)

 

$

(0.000)

 

$

(0.000)

 

(Net Loss) per share

$

(0.224)

 

$

(0.053)

 

$

(0.730)

 

$

(0.095)

 



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




4



MediaShift, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


 

Three month period

 ended

June 30,

Six month period

ended

June 30,

 

 

2013

 

 

2012

2013

 

2012

OPERATING

 

 

 

 

 

 

 

 

Net loss

$

(3,236,435)

 

$

(559,100)

$

(10,530,551)

 

$

(999,912)

Adjustments to reconcile net loss to cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

95,990

 

 

5,806

 

151,969

 

 

9,960

Fair value of common stock and common stock warrants issued for services rendered

 

-

 

 

-

 

-

 

 

-

Loss on derivative liability

 

(35,131)

 

 

-

 

659,787

 

 

-

Loss on debt extinguishment

 

281,090

 

 

-

 

4,991,513

 

 

-

Stock based compensation

 

206,950

 

 

19,030

 

414,304

 

 

30,092

Amortization of Note Discount

 

484,271

 

 

-

 

539,806

 

 

-

    Decrease in Contingent Liability

 

(393,367)

 

 

-

 

(393,367)

 

 

-

Changes in operating assets and liabilities, net of balances from business combinations: increase (decrease):

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

180,054

 

 

3,126

 

76,876

 

 

1,223

Other assets

 

(4)

 

 

(1,006)

 

(1,291)

 

 

(1,006)

Prepaid expenses

 

50,060

 

 

7,229

 

(30,258)

 

 

3,376

Security deposits

 

-

 

 

(100)

 

(107,575)

 

 

(9,950)

Accounts payable and accrued expenses

 

(588,238)

 

 

52,999

 

(189,868)

 

 

124,261

Liabilities directly associated with assets held for sale

 

-

 

 

-

 

1,126

 

 

-

Cash used in operating activities

 

(2,954,760)

 

 

(472,016)

 

(4,417,529)

 

 

(841,956)

INVESTING

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment, leasehold improvements and furniture

 

(223,239)

 

 

(4,782)

 

(300,192)

 

 

(46,742)

Net cash paid in acquisition of certain assets of Travora Media Inc.

 

-

 

 

-

 

(804,451)

 

 

-

Patent costs

 

(28,926)

 

 

(31,218)

 

(65,804)

 

 

(67,096)

Cash used in investing activities

 

(252,165)

 

 

(36,000)

 

(1,170,447)

 

 

(113,838)

FINANCING

 

 

 

 

 

 

 

 

 

 

Loan proceeds

 

822,994

 

 

657,796

 

7,767,344

 

 

657,796

Payments on Note Payable

 

(20,000)

 

 

-

 

(1,790,000)

 

 

-

Cash provided by financing activities

 

802,994

 

 

657,796

 

5,977,344

 

 

657,796

Net (decrease) increase in cash and cash equivalents

 

(2,403,931)

 

 

149,780

 

389,368

 

 

(297,998)

Cash and cash equivalents, beginning of period

 

3,696,000

 

 

200,693

 

902,701

 

 

648,471

Cash and cash equivalents, end of period

 

1,292,069

 

 

350,473

$

1,292,069

 

$

350,473

Cash paid during the year for:

 

 

 

 

 

 

 

 

 

 

   Interest

$

86,807

 

$

-

$

152,715

 

$

-

   Income taxes

 

825

 

 

-

 

4,025

 

$

1,200

Non Cash Transactions

 

 

 

 

 

 

 

 

 

 

    Extinguishment of debt via issuance of common stock

$

1,210,793

 

$

-

$

11,604,760

 

$

-




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




5



MediaShift, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ Equity

From December 31, 2012 through June 30, 2013

(unaudited)


 

Preferred Stock

Class M Preferred

Common Stock

Additional

Paid in Capital

Accumulated

Deficit

Total

 

Shares

$

Shares

$

Shares

$

$

$

$

  Balance at December 31, 2012

-

-

169,974

1,700

2,771,705

5,543

10,430,087

(9,993,284)

444,046

Conversion of Class M Preferred to Common Stock

-

-

(169,974)

(1,700)

16,997,388

16,997

(15,297)

-

-

Par adjustment stock split

-

-

-

-

-

(2,771)

2,771

-

-

Stock based compensation

-

-

-

-

-

-

414,304

-

414,304

Issuance of warrant with debt

-

-

-

-

-

-

2,203,761

-

2,203,761

Issuance of shares to extinguish debt

-

-

-

-

2,610,903

2,611

11,602,149

-

11,604,760

Exercised options

-

-

-

-

1,864

2

(2)

-

-

Net loss for the six month period ended June 30, 2013

-

-

-

 

-

-

-

(10,530,551)

(10,530,551)

  Balance at June 30, 2013 (unaudited)

-

-

-

-

22,381,860

22,382

24,637,773

(20,523,835)

4,136,320






































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




6



MediaShift, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1 - Principal Business Activities


Interim Financial Statements


The financial statements of MediaShift, Inc. (“MediaShift”, or the “Company”), have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and the results of operations.  Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year.  The balance sheet information as of December 31, 2012 was derived from the audited financial statements included in Form 10-K filed March 13, 2013. These interim financial statements should be read in conjunction with that report.


Organization and Business


MediaShift, Inc. (the "Company") was originally incorporated under the laws of the state of Nevada in July 2004 as JMG Exploration, Inc. (“JMG”).  At a Special Meeting of Shareholders (the "Meeting") of JMG Exploration, Inc held on March 4, 2013, JMG shareholders approved the following:


·

An increase in the authorized number of shares of common stock from 25,000,000 to 100,000,000 (the Authorized Share Increase);


·

A change in the name from JMG Exploration, Inc. to MediaShift, Inc. (the Name Change); and


·

A reverse stock split of common stock of one share for every two (1-for-2) shares outstanding.


All share and per share information, including earnings per share, in this Form 10-Q have been retroactively adjusted to reflect this reverse stock split and certain items in prior period financial statements have been revised to conform to the current presentation.


All continuing operations are being conducted by MediaShift’s wholly owned subsidiaries, Ad-Vantage Networks, Inc. (“ADVN”) and Travora Networks, Inc. (“TNI”). ADVN provides digital advertising software and service solutions that enable access providers and network operators to generate advertising revenues on their free and fee-based networks. TNI operates a leading digital advertising network, where it engages in the marketing and selling of online advertiser ads to travel service providers through a proprietary network of web publishers.


TNI was formed on January 14, 2013 as a Delaware Corporation. TNI acquired assets from Travora Media., Inc. related to Travora Media’s ad network business in an Asset Purchase Agreement which was effective on February 1, 2013 and which closed February 6, 2013 and therefore the financial information presented as of and for the six month period ended June 30, 2013 represents only five months of TNI operations.


Liquidity


The Company faces certain risks and uncertainties which are present in many emerging technology companies regarding product development, future profitability, ability to obtain future capital, protection of patents and property rights, competition, rapid technological change, government regulations, recruiting and retaining key personnel, and third party vendors and manufacturers.



7



At June 30, 2013 and December 31, 2012, we had $1,292,069 and $902,701 in cash and cash equivalents, respectively. From our incorporation through June 30, 2013, we have financed our operating cash flow needs principally through private offerings of equity securities and convertible debt.


As of June 30, 2013 and December 31, 2012, we had an accumulated deficit of $20,523,835 and $9,993,284, respectively, and had limited working capital to fund development of our technology. On November 5, 2012, the Company issued an aggregate of $500,000 in two year 10% convertible notes to two investors, and on November 7, 2012 the Company issued an aggregate of $500,000 in two year 10% convertible notes to three additional investors. The notes may be prepaid by the Company with fifteen days’ notice, and may be converted into the Company’s common stock at the lesser of 80% of the Company’s fair market value at the time of conversion or $8.00 per share. The notes were issued with two year warrants to purchase an aggregate of 100,000 common shares at $6.50 per share.


During March of 2013, the company received $6,944,350 pursuant to a private placement of 8% convertible promissory notes and warrants (see notes 5 and 6). A total of $2,250,000 of the proceeds was used to finance the TNI acquisition (note 3). The company will use the balance of the proceeds to finance the remaining financial commitments pursuant to the TNI acquisition and for working capital purposes. On March 27, 2013, all convertible notes received during the quarter from this private placement, along with accrued interest, net of discount, totaling $7,007,170, were converted into 2,335,723 common shares of the company.


On March 20, 2013, the Company received consent from the outstanding 8% promissory note holders to increase the maximum issuance from $7,000,000 to $8,500,000. The private placement was closed on April 19, 2013, and an additional $822,994 in 8% convertible promissory notes were issued. On April 26, 2013, the principal raised between March 31, 2013 and the final closing of the private placement on April 26, 2013, along with accrued interest, net of discount totaling $825,540 was converted into 275,180 common shares of the Company.


The Company anticipates being active in the capital markets in the third and fourth quarters to ensure working capital needs are met.

  


2 - Summary of Significant Accounting Policies


Interim  Financial Statements


The accompanying financial statements and related notes for the three month and six month periods ended June 30, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim periods should not be considered indicative of results for a full year. The accounting policies used in preparing these interim financial statements is the same as those for the year ended December 31, 2012. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included.


Presentation  


The accompanying consolidated financial statements include the accounts of MediaShift, Inc. and our subsidiary Ad-Vantage Networks, Inc. and Travora Networks, Inc. Intercompany balances have been eliminated in consolidation. On March 4, 2013, the Company announced the effectiveness of a one-for-two reverse stock split. All share and per share information, including earnings per share, in this Form 10-Q have been retroactively adjusted to reflect this reverse stock split and certain items in prior period financial statements have been revised to conform to the current presentation. Our net loss is equivalent to our comprehensive loss so we have not presented a separate statement of comprehensive loss.



8




Revenue Recognition


The Company recognizes revenue when persuasive evidence of an arrangement exits, collection of the related receivable is reasonably assured, the fees are fixed or determinable, and as services are provided.  Income is recognized as earned when an ad is either placed for viewing by a visitor to a member network publisher or internet access providers’ proprietary networks or when the customer “clicks through” on the ad, depending on the terms with the individual advertisers.  In certain cases, the Company records revenue based on available preliminary information from third parties.  Collection on the receivable may vary from the preliminary information based upon third party refinement of the estimated and reported amounts owed that occurs in subsequent periods.  The Company accrues any revenue sharing percentage with the network provider at the same time.  


Concentration of Credit Risk


The Company conducts business with companies in Canada, New Zealand, England, Europe and Australia as part of its ongoing advertising business. This results in a number of receivables denominated in the currencies of those countries, with about $325,000 in receivables outstanding at any time. The company does not engage in hedging activities to offset the risk of exchange rate fluctuations on these payables. During the reporting period, the company incurred foreign exchange losses of $12,116.


Allowance for Doubtful Accounts - The allowance is established through a provision for bad debts charged to expense. Receivables are charged against the allowance for uncollectible accounts when management believes that collectability is unlikely. The allowance is an amount that management believes will be adequate to absorb estimated losses on existing receivables, based on an evaluation of the collectability of accounts receivable, overall accounts receivable quality, review of specific problem accounts receivable, and current economic conditions that may affect the customer’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. Recoveries of receivables previously written off are recorded when received.


The company also estimates an allowance for sales credits based on historical credits.  The allowance for sales credits is the Company’s best estimate of expected future reductions in advertisers’ payment obligations for delivered services.


Income Taxes


The Company accounts for income taxes using the asset and liability method of accounting for deferred income taxes.


The provision for income taxes includes federal and state income taxes currently payable and deferred taxes resulting from temporary differences between the financial statement and tax bases of assets and liabilities.  Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.


With respect to uncertain tax positions, the Company would recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits to be recognized in the financial statements from such a position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company’s reassessment of its tax positions did not have a material impact on its results of operations and financial position.




9



Advertising


Advertising costs are charged to expense as incurred and were $149,881 and $204,768 for the three and six months ended June 30, 2013 and $0 and $15,300 for the three and six months ended June 30, 2012, respectively.


Research and Development


Research and development costs are expensed as incurred and were $125,011 and $191,583 for the three and six months ended June 30, 2013 and $43,636 and $94,184 for the three and six months ended June 30, 2012 respectively.


Stock-based compensation


The Company accounts for the cost of Director/employee/adviser services received in exchange for the award of common stock options or warrants based on the fair value of the award on the date of grant. The fair value of each stock option grant or warrant was estimated on the date of grant using the Black-Scholes option-pricing model. The expected life assumption is based on the expected life assumptions of similar entities. Expected volatility is based on actual share price volatility of the Company’s stock of the preceding twelve months. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the input to the Black-Scholes model. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods as options vest, if actual forfeitures differ from those estimates.


The Company recognizes stock-based compensation expense as a component of salary and other compensation expenses in the statements of operations and was $206,950 and $414,304 for the three and six months ended June 30, 2013 and $19,030 and $30,092 for the three and six months ended June 30, 2012, respectively.


Fair Value Measurements


The fair value hierarchy established by ASC 820 “Fair Value Measurements and Disclosures” prioritizes the inputs used in valuation techniques into three levels as follows:


·

Level 1 - Observable inputs - unadjusted quoted prices in active markets for identical assets and liabilities;


·

Level 2 - Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and


·

Level 3 - Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable.


Net Loss per Common Share


Loss per share ("EPS") is computed based on weighted average number of common shares outstanding and excludes any potential dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock, which would then share in the earnings of the Company. The shares issuable upon the exercise of stock options and warrants are excluded from the calculation of net loss per share for the three and six months ended June 30, 2013 and 2012 because their effect would be antidilutive. The following shares were accordingly excluded from the net income/loss per share calculation.



10




 

Six month periods ended

June 30,

 

2013

2012

Stock warrants

4,720,390

0

Stock options

4,109,916

589,917

Total shares excluded

8,830,306

589,917


New Accounting Pronouncements


In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Fair Value Measurement (“ASU 2011-04”), which amended ASC 820, Fair Value Measurements (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements. ASU 2011-04 will be effective for us beginning January 1, 2012. The adoption of ASU 2011-04 did not have a material effect on our financial statements or disclosures.


Management evaluates events occurring to the date of the financial statements in determining the accounting for and disclosure of transactions and events that affect the financial statements. Subsequent events have been evaluated through August 14, 2013, which is the date financial statements were available to be issued.


3 - Business Combination - Acquisition of Ad Network Assets of Travora Media


On February 6, 2013, Travora Networks, Inc. (“TNI”), a wholly owned subsidiary of MediaShift, Inc. executed an asset purchase agreement with Travora Media, Inc. (“Travora” or “Seller”) to acquire Travora’s digital advertising network business, which was effective on February 1, 2013.  Activity from February 1st to February 6th was immaterial. Headquartered in New York City, Travora provides an established publishing network, advertiser and agency relationships, and an experienced ad sales and ad operations team. Travora represents over 300 established travel brands across desktop, tablet, and mobile platforms, including Viator, and Vayama. Travora achieved revenues of approximately $13.0 million and $10.9 million in 2011 and 2012 respectively. TNI will retain approximately 20 of Travora’s former employees and will continue to operate out of New York City.


The acquisition was accounted for using the acquisition method of accounting.  Accordingly, the assets acquired and liabilities assumed were measured at their estimated fair value at the acquisition date.  Travora’s results of operations will be included in the Company’s consolidated financial statements from February 1, 2013.


The preliminary allocation of the purchase price based on the fair value of the acquired assets, less liabilities assumed, as of February 6, 2013, amounted to $5,782,828.






11




The fair value of the consideration to Seller is as follows:

 

Cash consideration to Seller

 

$     500,000

Payment of Eastward Capital Partners debt

 

1,750,000

Assumption of Eastward Capital Partners debt

 

2,250,000

Balance of consideration to be paid in MediaShift common stock

700,000

 

Less allowance for audit expenses

(70,000)

 

Less amount of Aged Accounts Payable

(138,000)

 

Less estimated reduction for Target Working Capital deficiency

(592,000)

(100,000)

 

 

 4,400,000

Contingent consideration:

 

 

Earn-out consideration for publisher retention

 

67,747

Earn-out consideration for revenue targets

 

1,315,081

Total consideration

 

$ 5,782,828


As part of the purchase price paid in the transaction, TNI assumed Seller’s $4,000,000 obligations to Eastward Capital Partners.


Following the closing date, TNI prepared and delivered to the Seller a closing statement and its calculation of the working capital deficit.  The closing statement was prepared in accordance with GAAP, certified by an officer of TNI and prepared applying the same methodology as was applied by TNI and the Seller in calculating the Target Working Capital.


Following the determination of the closing statement, there is a working capital deficit, the Seller shall pay to TNI an amount equal to such working capital deficit by a reduction and forfeiture of the number of Closing Shares equal to the dollar value of such working capital deficit, or if the value of the Closing Shares is less than such working capital deficit, TNI shall reduce the amount of earnout payments owed or payable to Seller by an amount equal to the amount by which such working capital deficit exceeds the value of the Closing Shares. The analysis of working capital as of the closing date indicates that the working capital deficit (as defined in the Asset Purchase Agreement) is $796,092. Consequently, no Closing Shares will be issued to the Seller in this transaction.


The significant identifiable tangible assets acquired include primarily accounts receivable and property, plant and equipment.  Intangible assets include contracts, business relationships, trademarks and domain names.


Earnout Consideration


As part of the acquisition, TNI agreed to issue additional cash to the sellers, contingent upon TNI meeting certain operating performance targets: publisher retention goals for 360 days following the acquisition date and revenue goals for the year ending December 31, 2013. As discussed in Note 4 - “Contingent Earnout Liabilities - Travora Earnout Consideration”, the estimated fair value of the contingency was $1,382,828 on the acquisition date and $980,000 as of June 30, 2013. The change of $393,367 was recorded as a gain on Contingent Liability and is included in Other Income on the Income Statement.


Intangible Assets


Mediashift management determined the estimated fair value of intangibles acquired based on the methods described below. Based on the preliminary assessment, the acquired intangible asset categories, fair value and amortization periods, generally on a straight line basis are as follows:



12




 

Fair

Value at

2/6/2013

 

Amortization

Period

Trademark Portfolio

$   856,890

 

Indefinite

Publisher Relationships

3,573,596

 

15 years

Goodwill

991,936

 

N/A

Total Intangible

$5,422,422

 

 


·

The fair value of the Trademark portfolio was determined based on the “relief from royalty” method, an approach under which fair value is estimated to be the present value of royalties saved because we own the intangible asset and therefore do not have to pay a royalty for its use.  The fair value for the publisher relationships was determined based on the “excess earning method”, of income approach.  Estimated discounted cash flows associated with existing customers and projects were based on historical and market participant data.


·

The Company amortizes the intangible assets over the estimated useful lives noted above. For the publisher relationship assets, as the pattern of consumption of the economic benefits of the intangible assets cannot be reliably determined, the Company amortizes these acquired intangible assets over their estimated useful lives on a straight-line basis. Amortization commences once the asset has been placed in service.


·

These valuations are preliminary and subject to change.


The following table summarizes the fair value of the assets acquired and the liabilities assumed in thousands:


Accounts receivable

 $

2,716

 

 

Prepaid expenses & deposits

 

5

 

 

Fixed assets

 

91

 

 

Intangible assets

 

5,422

 

 

Accounts payable

 

(1,856)

 

 

Other accrued expense

 

(596)

 

 

Net assets acquired

$

5,782

 

 


The significant identifiable tangible assets acquired include primarily accounts receivable and fixed assets.  The Company determined that the book value of accounts receivable reflected fair value of those assets.  The Company determined the book value of the fixed assets reflected fair value of those assets.


Supplemental Pro Forma Information for the three and six month period ended June 30, 2012

 

The following pro forma information for the three and six month period ended June 30, 2013 and 2012 presents the results of operations as if the TNI acquisition had occurred January 1, 2012. The supplemental pro forma information has been adjusted to include:

 

·

the pro forma impact of amortization of intangible assets and depreciation of property, plant and equipment, based on the purchase price allocation;

·

the pro forma impact of interest expense on the assumption of the Eastward Debt of $2,250,000







13




The pro forma results are presented for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the transaction been completed on January 1, 2012 or that may be achieved in the future.  The pro forma results do not reflect any operating efficiencies and associated cost savings that the Company may, or may not, achieve with respect to the combined companies.


 

Three month

Period ended

June 30,

Six month

Period ended

June 30,

 

 

2013

2012

2013

2012

 

Revenues

 $2,037,188

$2,877,219

$4,165,995

$5,433,476

 

Income from continuing operations, before provision for income taxes

 $(3,233,210)

$(723,320)

(10,716,404)

$(1,984,306)

 

Income from continuing operations

 $(3,236,435)

$(729,832)

(10,720,429)

$(1,992,817)

 

Net income

 $(3,236,435)

$(729,832)

(10,720,429)

$(1,992,817)

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 14,426,692

10,501,912

14,426,692

10,501,912

 

Diluted

 14,426,692

10,501,912

14,426,692

10,501,912

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic - income from continuing operations

 (0.2241)

$(0.0689)

$(0.7428)

$(0.1899)

 

Basic - net income

 (0.2243)

$(0.0695)

$(0.7431)

$(0.1898)

 

Diluted - income from continuing operations

 (0.2241)

$(0.0689)

$(0.7428)

$(0.1899)

 

Diluted - net income

 (0.2243)

$(0.0695)

$(0.7431)

$(0.1898)

 


4 - Commitments and Contingencies


Contingent Earnout Liabilities - Travora Earnout Consideration


As part of the Travora Networks, Inc. (“TNI”) acquisition on February 6, 2013, the Company agreed to issue additional cash to the sellers, contingent upon TNI meeting certain publisher retention goals and revenue performance targets.


Publisher Retention Earnout Payments


The Seller shall be entitled to receive, in two installments, Publisher Retention Earnout Payments equaling, in the aggregate, up to $1,000,000.   In the event that the number of Publishers retained by TNI for the initial 180 day period following the Closing Date is equal to or exceeds eighty-five percent (85%) of the Baseline Number of Publishers, the Company shall pay to the Seller an amount equal to the product of $500,000 multiplied by a fraction, the numerator of which is the actual number of Publishers retained by the Company and the denominator of which is the Baseline Number of Publishers.


In the event that the number of Publishers retained by the Company for the second 180 day period following the Closing Date is equal to or exceeds the Baseline Number of Publishers, the Company shall pay to the Seller an amount equal to the product of $500,000 multiplied by a fraction, the numerator of which is the actual number of Publishers retained and the denominator of which is Baseline Number of Publishers.




14




Notwithstanding the foregoing, if any three (3) of the Seller’s Major Publishers, in the aggregate, cease doing business with TNI during the initial publisher retention earnout period, then no initial publisher retention earnout payment or second publisher retention earnout payment shall be paid to the Seller and if during the second publisher retention earnout period, then no second publisher retention earnout payment shall be paid to the Seller.


The estimated fair value of the Publisher Retention Earnout Payments contingent earnout consideration on the acquisition date was $67,747 on the acquisition date and $980,000 as of June 30, 2013.


Revenue Goal Earnout Payments


The Seller shall be entitled to receive, in two installments, Revenue Goal Earnout Payments equaling, in the aggregate, up to $2,000,000.  In the event that Ad Network Revenue for the period beginning on January 1, 2013 and ending on June 30, 2013 is equal to or exceeds $5,159,700, the Company shall pay to the Seller an amount equal to the lesser of the product of $1,000,000 multiplied by a fraction, the numerator of which is the actual Ad Network Revenue achieved during the Initial Revenue Goal Earnout Period and the denominator of which is $5,733,000 and $1,000,000.


In the event that Ad Network Revenue for the period beginning on July 1, 2013 and ending on December 31, 2013 is equal to or exceeds $6,407,100, the Company shall pay to the Seller an amount equal to the lesser of the product of $1,000,000 multiplied by a fraction, the numerator of which is the actual Ad Network Revenue achieved during the Second Revenue Goal Earnout Period and the denominator of which is $7,119,000 and $1,000,000.


The estimated fair value of the Revenue Goal Earnout Payments contingent consideration on the acquisition date was $1,315,081 on the acquisition date and $0 as of June 30, 2013.


Operating Leases - In January 2012, the Company entered into an operating lease agreement that commenced February 2012 for its office facility in Glendale which expires on February 19, 2014. In March, 2013, the Company entered into an operating lease agreement that commenced on May 15th for its office facility in New York which expires June 15, 2018.  On May 1st, the Company entered into an operating lease agreement that commenced on May 1, 2013 for its office facility in Newport Beach which expires on April 30, 2014.


5 - Notes Payable


8% Convertible Promissory Notes


During March of 2013, we received $6,944,350 pursuant to a private placement of 8% convertible promissory notes (the “8% Notes”). On March 20, 2013, the Company’s Board of Directors authorized an increase from maximum proceeds of $7,000,000 to maximum proceeds of $8,500,000, with a new closing date of April 5, 2013, subject to a ten business day extension at the Company’s option. As of the final closing date of April 19, 2013, a total of $7,767,344 in proceeds had been raised. On March 27, 2013, the Company exercised its option to convert all principal and accrued interest received prior to the end of the quarter to common shares (see below). On April 26, 2013, the Company exercised its option to convert all principal received following the end of the quarter and prior to the final closing date of the financing to common shares.  A total of $2,250,000 of the proceeds was used to finance the Travora acquisition. The Company will use the balance of the proceeds to finance the remaining financial commitments pursuant to the Travora acquisition and for working capital purposes. The terms of the 8% Notes are as follows:


·

Bearing interest at 8% per annum,




15




·

Principal and interest due and payable on or before February 15, 2015,


·

Prepayable by the Company upon 30 days notice,


·

The 8% Notes are convertible into MediaShift common stock at the rate of $3.00 per share subject to antidilution provisions which provide that if the Company issues securities at a price below the conversion price of the 8% Notes, the conversion price will be reduced to the lower amount,


·

The 8% Notes may be converted at any time prior to maturity date at the option of the holder or the Company, and


·

8% Note holders received warrants to purchase MediaShift common stock in an amount equal to the number of shares the 8% Notes are convertible into. Half of the warrants are exercisable at $4.00 per share up to July 31, 2013 and half are exercisable at $6.00 per share up to July 31, 2014.


The maximum number of common shares that may be issued through, as applicable, the conversion of the 8% Notes and accrued interest and the exercise of the warrants which were sold in this private placement, is 5,193,346 shares. The 8% Notes were offered and sold by officers and directors of the Company who received no remuneration for the sale of the securities, as well as by three placement agents who received commission of 6% of principal raised by those agents. Sales of the 8% Notes were made pursuant to Section 4(a)(5) and Section 4(a)(2) of the Securities Act, and Rule 506 promulgated thereunder, solely to “accredited investors” as defined in Rule 501(a) of Regulation D.  The securities sold in this transaction were not registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

The 8% Note’s conversion feature was determined to be an embedded derivative liability and therefore was bifurcated from the note and recorded at fair value at issuance and is required to be adjusted to fair value at the end of each reporting period. The collective fair value of the conversion feature at the date of issuance calculated using the Black Scholes model totaled $3,114,596. The Company recorded the fair value of the conversion feature as a contra liability offsetting the respective term loan amounts and a corresponding derivative liability, that will be marked to market at each reporting period. The 8% Notes were issued with two year warrants to purchase an aggregate of 1,294,557 common shares at $3.00 per share and 1,294,557 common shares at $6.00. The warrants are exercisable immediately after issuance and expire in 2 years. The fair value of the warrants of $4,368,649 was calculated using the Black-Scholes option pricing model at the date of issuance using the following assumptions: dividend yield of 0%, expected volatility ranging from 173% to 235%, risk free interest rate ranging from 0.09% to 0.20%, and a contractual life of two years. The Company recorded the relative fair value of the warrants of $2,203,761 to loan warrant discount as a contra liability offsetting the respective term loan amounts. The total discount attributable to the issuance of the 8% Notes was $4,928,713.  The debt discount that was amortized was $484,271, and was included as interest expense on the Income Statement. On March 27, 2013, and April 26, 2013, the 8% Notes were extinguished by the company, on those dates the collective fair value of the conversion feature was $3,114,596. Accordingly, the Company recorded the change in fair value of $659,787 as a loss on derivative liabilities for the six month period ended June 30, 2013. The 8% Notes were extinguished via the issuance of 2,610,903 shares of common stock with a fair value of $11,604,760.  The net carry value of the related debt and conversion feature was $6,613,014.  Accordingly the company recorded a $4,991,513 loss on extinguishment of debt.





16




10% Convertible Notes


On November 5, 2012, the Company issued an aggregate of $500,000 in two year 10% convertible notes (the “10% Notes”) to two investors, and on November 7, 2012 the Company issued an aggregate of $500,000 in two year 10% convertible notes to three additional investors. The 10% Notes may be prepaid by the Company with fifteen days’ notice, and may be converted into the Company’s common stock at the lesser of 80% of the Company’s fair market value at the time of conversion or $8.00 per share. The 10% Notes were issued with two year warrants to purchase an aggregate of 100,000 common shares at $6.50 per share. The warrants are exercisable immediately after issuance and expire in 2 years. The fair value of the warrants of $284,251 was calculated using the Black-Scholes option pricing model at the date of issuance using the following assumptions: dividend yield of 0%, expected volatility of 102% and 104%, risk free interest rate of 0.28% and 0.27% and a contractual life of two years. The Company recorded the fair value of the warrants of $284,251 to loan warrant discount as a contra liability offsetting the respective term loan amounts on the Balance Sheet.


The fair value of the conversion feature on December 31, 2012 calculated using the Black Scholes model totaled $534,251 and is reflected as a discount to the 10% Notes. The discount attributable to the issuance date aggregate fair value of the conversion options and warrants, totaling $750,292, was amortized using the straight line interest method over the term of the 10% Notes. The intrinsic value of the conversion option in the 10% Notes totaling $534,251 was calculated in accordance with ASC 470 and recorded, on the issuance date, as additional paid in capital and a corresponding reduction of the carrying value of the 10% Notes.  The discount remaining was $356,167 and $750,292 as of June 30, 2013 and December 31, 2012 respectively.


Line of Credit


In March 2011, the Company entered into a lending facility that provides for advances of up to $500,000 with interest at 12% per annum payable monthly. The facility was provided by an investor in our preferred stock.  As of June 30, 2013 and December 31, 2012, there was no balance outstanding on the facility.


In June, 2013, the Company entered into a loan agreement that provides for advances of up to $250,000 with interest at 10% per annum payable monthly, plus an origination fee of 2.5% added to the principal amount.  As of June 30, 2013, there was no balance outstanding on the agreement.


6 - Stockholders’ Equity


Common Stock


The Company is authorized to issue up to 100,000,000 shares of Common Stock.  As of June 30, 2013, there are 22,381,860 shares of Common Stock issued and outstanding. All shares of Common Stock are entitled to participate in any distributions or dividends that may be declared by the Board of Directors, subject to any preferential dividend rights of outstanding shares of our Preferred Stock, if any. Subject to prior rights of creditors, all shares of Common Stock are entitled, in the event of our liquidation, dissolution or winding up, to participate ratably in the distribution of all our remaining assets. Our Common Stock has no preemptive or conversion rights or other subscription rights.


Preferred Stock


There are 10,000,000 shares of Preferred Stock authorized for issuance. As of June 30, 2013, there are no shares of Preferred Stock issued and outstanding.




17




Series M Preferred Stock


In connection with the ADVN merger and pursuant to the filing of a Certificate of Designation with the Nevada Secretary of State on August 28, 2012, the Board of Directors of the Company authorized the issuance of Class M Preferred Stock. Pursuant to the Merger Agreement, the Company agreed to issue shares of its Class M Preferred to the ADVN Owners in exchange for the shares of ADVN common stock and preferred stock (and to issue new options for shares of ADVN common stock underlying ADVN options).


Holders of the Class M Preferred were entitled, on a post-Automatic Conversion basis, to the same rights and privileges, including voting rights, as holders of our common stock. The holders of our Class M Preferred Stock were entitled to 100 votes per share and one vote per common share on a post-Automatic Conversion and post-Reverse Stock Split basis on all matters to be voted on by the stockholders.  Pursuant to the Merger Agreement, the Company increased the number of shares of common stock that the Company is authorized to issue from 25,000,000 shares to 100,000,000 shares (the “Authorized Share Increase”). The Authorized Share Increase was affected by the Company filing an amendment to its Articles of Incorporation pursuant to a special meeting of shareholders on March 4, 2013.  Upon the effectiveness of the Authorized Share Increase on March 4, 2013, all of the issued and outstanding shares of Class M Preferred automatically converted into shares of the Company’s common stock at the Exchange Ratio of 100:1.


Warrants and Options


As of June 30, 2013, we have the following warrants and options outstanding:


Common Stock Warrants

 

Warrant summary

Number

of warrants

outstanding

Exercise

price

Maximum

proceeds

Expiration

Date

Warrants issued in the preferred stock private placement

184,625

$ 12.00

2,215,500

02/28/2014

Warrants issued upon conversion of preferred stock

869,750

$   8.50

7,392,875

02/28/2014

Warrants issued our initial public offering

881,901

$ 10.00

8,819,010

02/28/2014

Warrants issued to our underwriters

95,000

$ 14.00

1,330,000

02/28/2014

Warrants issued with 10% convertible notes

100,000

$   6.50

650,000

11/05/2014

Warrants issued with 8% convertible notes

1,294,557

$   4.00

5,178,228

07/31/2013

Warrants issued with 8% convertible notes

1,294,557

$   6.00

7,767,342

07/31/2014

Total

4,720,390

various

33,352,955

various


Options


We assumed the option plan of Ad-Vantage, under which options for the purchase of 3,729,916 shares of ADVN common stock were outstanding at the closing of the Merger (the “Outstanding ADVN Options”).  The Outstanding ADVN Options were converted into options to purchase 3,729,916 shares of the Company’s Common Stock after giving effect to the Automatic Conversion of the Class M Preferred stock and expire in 2021 and 2022.  At the closing of the Merger, there were 42,500 options outstanding to purchase the Company’s Common Stock which were exercised in October, 2012. Following the Merger, a total of 390,000 incentive stock options to purchase common stock were granted in October, 2012. As of June 30, 2013, there were 4,109,916 options outstanding to purchase the Company’s Common Stock.



18




The ADVN Board of Directors adopted the ADVN Plan in September 2010. The ADVN Plan provided long-term incentives to employees, members of the Board, and advisers and consultants of the Company who were able to contribute towards the creation of or have created stockholder value by providing them stock options and other stock and cash incentives. Provisions such as vesting, repurchase and exercise conditions and limitations were determined by the ADVN Board of Directors on the grant date. The total number of shares that could be issued pursuant to the ADVN Plan could not exceed 1,250,000 shares, subject to adjustment in the event of certain recapitalizations, reorganizations, and similar transactions.


As of December 31, 2012, 1,115,521 options had been granted under the ADVN Plan, and 929,917 remained outstanding at the time of the Merger, at which time they were converted into options to purchase 929,917 shares of the Company’s Common Stock for after giving effect to the Automatic Conversion of the Class M Preferred stock. No options will be granted under the ADVN Plan following the Merger.


A total of 390,000 common stock options were granted under the Company’s premerger option plan (JMG Exploration, Inc. Equity Compensation Plan - the “JMG Plan”) during the three month period ended December 31, 2012, which are exercisable at $7.96 per share with 25% vesting on October 1st, 2013, and 1/36 of the remainder vesting on the first of each month thereafter. Options granted by the Company following the Merger will be granted under the JMG Plan.


The following summaries information concerning outstanding and exercisable common stock options:

 

 

Number of

Options

 

Weighted

average

exercise

price per

share

Weighted-

Average

Remaining

Contractual

Life

Outstanding at December 31, 2012

 390,000

$

7.96

6.79 years

Exercised

-

 

 

 

Granted

-

 

 

 

Conversion of Class M Preferred options

 

 

 

 

Outstanding June 30, 2013

390,000

$

7.96

6.30 years

Exercisable at June 30, 2013

-

 

-

-


Class M Preferred Stock options


Upon the merger, all issued and outstanding options, warrants and other rights to acquire shares of ADVN common stock (collectively, “ADVN Options”) were converted into options, warrants or other rights to acquire shares of Class M Preferred (collectively, “Parent Class M Preferred Stock Options”) at the Exchange Ratio, with such Class M Preferred Stock Options having the same terms and being subject to the same conditions as the ADVN Options, provided, however, that upon the consummation of the Authorized Share Increase and the Reverse Stock Split all of the Class M Preferred Stock Options shall, without the requirement of any further action, convert into options for shares of MediaShift common stock, with such conversion occurring at the Conversion Ratio.  No ADVN Option has accelerated vesting in connection with the Merger.






19




During the year ended December 31, 2012, ADVN granted 518,837 (5,188.37 of Class M Preferred) stock options under the ADVN Plan to certain employees, directors, and advisers, respectively. A total of 150,000 (1,500 of Class M Preferred) options vest monthly over a 24 month period and 368,837 (3,688.37 Class M Preferred) options vest one quarter (1/4) after one year and the balance over a 36 month period. ADVN also issued 2,799,999 non-qualified stock options outside the ADVN Plan to be allocated among senior management, fully vesting at the closing of the Merger with JMG and exercisable at $1.14 per share. These stock options were converted into options to purchase 2,799,999 shares of the Company’s common stock (27,999.99 shares of Class M Preferred). Upon the consummation of the Authorized Share Increase and the Reverse Stock Split on March 12, 2013, all 37,299 Class M Preferred Stock options were converted to 3,729,916 common stock options.


A summary of ADVN Class M Preferred stock option activity from December 2012 through June 30, 2013 is as follows:

 

 

Number of

Options

Weighted

Average

exercise

price per

share

Weighted-

Average

Remaining

Contractual

Life

Outstanding at December 31, 2012, Class M Preferred

 

37,299

$

1.0493

 

6.47 years

Conversion of Class M Preferred options to common stock options

 

3,682,617

 

 

 

 

Outstanding at June 30, 2013, common stock

 

3,719,916

 

1.0490

 

5.98 years


The exercise price and vesting period of each stock option is specified by the Board of Directors at the time of grant. The stock options expire seven years after the grant date, except for the stock options vesting upon the Merger, which expire six years after the vesting date.


The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected life assumption is based on the expected life assumptions of similar entities. Expected volatility is based on actual share price volatility of similar companies of the preceding twelve months. The risk-free interest rate is the yield currently available on U.S. Treasury zero-coupon issues with an expected term ranging from 2.5 to 5 years used as the input to the Black-Scholes model. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods as options vest, if actual forfeitures differ from those estimates. During the years ended December 31, 2012 and 2011, the Company experienced no forfeitures. No options were granted in 2013 as of June 30, 2013.


The weighted average grant date fair value of options granted during 2012 amounted to $0.654 per option using the Black Scholes pricing model using the following assumptions:

 

Weighted average risk-free interest rate

0.90%

Expected life in years

7.00

Expected volatility

78%

Expected dividends

0


As of June 30, 2013 there was $2,476,636 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of approximately 3.43 years.






20




7 - Income Taxes


ADVN files income tax returns in the U.S. federal jurisdiction and the state of California. There are currently no income tax examinations underway for these jurisdictions since December 31, 2010 is the initial tax filing period.


ADVN provides deferred income taxes for differences between the tax reporting bases and the financial reporting bases of assets and liabilities. ADVN had no unrecognized income tax benefits. Should ADVN incur interest and penalties relating to tax uncertainties, such amounts would be classified as a component of interest expense and operating expense, respectively. Unrecognized tax benefits are not expected to increase or decrease within the next twelve months.


As of December 31, 2012, ADVN has net operating losses for federal and state income tax purposes of approximately 3,639,000 which are available for application against future taxable income and which will start expiring in 2031. The benefit associated with the net operating loss carry forward will more likely than not go unrealized unless a future operation is successful. Since the success of future operations is indeterminable, the potential benefits resulting from these net operating losses have not been recorded in the financial statements.


8 - Related Party Transactions


The Company utilizes the programming services of a company managed by its Chief Technology Officer. Payments to this company were $42,076 and $81,034 for the three and six month periods ended June 30, 2013 and $44,745 and $83,754 for the three and six month periods ended June 30, 2012, respectively.


9 - Discontinued Operations


In connection with the Merger between JMG and Ad-Vantage, the Company agreed to, as soon as practicable after the Closing, sell all of the “Oil and Gas Properties” identified in the Company’s most recent 10-K filed with the SEC (the “O&G Operations” and the “O&G Sale”) or at its option cause the O&G Operations to be spun off for the benefit of the Company’s pre-Merger stockholders as soon as may be practicable following completion of the Merger (the “O&G Spinoff”).


Effective November 21, 2012, the Board of Directors authorized management to pursue the spin-off of the Oil and Gas operations (“O&G Operations”) following management’s determination that the O&G Operations were not material to the operations, assets or future commercial activity of MediaShift. The following steps are expected to occur in connection with the proposed spin-off:


1.

The O&G Operations, including all related assets and liabilities, will be contributed to a new corporation, to be domiciled in Nevada ("JMG Oil") in exchange for 500,000 shares of JMG Oil. Thereafter JMG Oil intends also to issue 4,500,000 of its shares to unrelated accredited investors for $50,000 and certain indemnities relating to the O&G Operations.


2.

The Company proposes to spin off its 500,000 shares of JMG Oil (the "Dividend") to Pre-Merger JMG Stockholders. Based on the Corporation having 5,458,405 shares of its common stock outstanding immediately prior to the Merger, the Corporation anticipates that on distribution the Pre-Merger JMG Stockholders will receive 0.0916019 of a share of JMG Oil for each share of the Corporation's common stock owned by them prior to the Merger.


3.

JMG Oil will bear the costs and expenses of these transactions.




21




The completion of the spin-off transaction outlined above is deemed to be in the best interests of the Company, may require regulatory approvals and is subject to execution of definitive agreements. No assurance can be given that the spin-off of the Oil and Gas operations will occur or, if it does occur, that the shares of JMG Oil will have any liquidity or value to JMG shareholders.



10 - Subsequent Events


On July 25, 2013, the Company received consent from the Board of Directors to approve the 2013 Stock Incentive Plan.  2,000,000 shares are authorized under the plan.  1,750,000 of those shares were authorized and issued on July 25, 2013, with a strike price of $4.30, the closing price on that date.


On July 25, 2013, the Company received consent from the Board of Directors to approve an extension of the warrants of the 8% Convertible Notes to July 31, 2014.  In addition, any warrants exercised on or before September 20, 2013 shall be granted a new warrant to purchase additional common stock at $4 per share on or before July 31, 2014.






































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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The unaudited financial statements of MediaShift, Inc. (“MediaShift”, or the “Company”), have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and the results of operations.  Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year.  The balance sheet information as of December 31, 2012 was derived from the audited financial statements included in Form 10-K filed March 13, 2013. These interim financial statements should be read in conjunction with that report.


Forward-Looking Statements


This report includes forward-looking statements. All statements other than statements of historical facts contained herein, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions as described in “Risk Factors.”


Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statements contained in this Report are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except in accordance with applicable securities laws. The forward-looking statements contained in this Report are expressly qualified by this cautionary statement.


Overview


MediaShift, Inc. (the "Company") was originally incorporated under the laws of the state of Nevada in July 2004 as JMG Exploration, Inc. (“JMG”).  At a Special Meeting of Shareholders (the "Meeting") of JMG Exploration, Inc held on March 4, 2013, JMG shareholders approved the following:


·

An increase in the authorized number of shares of common stock from 25,000,000 to 100,000,000 (the Authorized Share Increase);

·

A change in the name from JMG Exploration, Inc. to MediaShift, Inc. (the Name Change); and

·

A reverse stock split of common stock of one share for every two (1-for-2) shares outstanding.





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All share and per share information, including earnings per share, in this Form 10-Q have been retroactively adjusted to reflect this reverse stock split and certain items in prior period financial statements have been revised to conform to the current presentation.


All continuing operations are being conducted by MediaShift’s wholly owned subsidiaries, ADVN Networks, Inc. (“ADVN”) and Travora Networks, Inc. (“TNI”). ADVN provides digital advertising software and service solutions that enable access providers and network operators to generate advertising revenues on their free and fee-based networks. TNI operates a leading digital advertising network.


ADVN’s predecessor was formed as a Delaware Limited Liability Company on February 23, 2010 and on July 6, 2010 ADVN completed a reorganization in which the predecessor to the Company, Ad-Vantage Networks, LLC, was converted into ADVN, a Delaware Corporation (the “Conversion”). In the Conversion, ADVN issued 10,000,000 shares of common stock to the members of the predecessor LLC. In August 2012, ADVN consummated a reverse triangular merger with a wholly owned subsidiary of MediaShift, Inc. (previously JMG Exploration, Inc.) The transaction has been accounted for as a reverse acquisition and the accompanying financial statements are those of ADVN.


TNI was acquired in February 2013 and therefore the financial information presented as of and for the six month period ended June 30, 2013 represents only five months of TNI operations.


Results of operations for the six month periods ended June 30, 2013 and 2012


Revenue. The Company earns revenue from ads placed on web pages viewed on internet access providers’ proprietary networks. Revenues are earned when end users view the advertisements. Revenues were $2,037,188 and $1,578 for the three months ended June 30, 2013 and 2012, and $3,550,500 and $6,365 for the six months ended June 30, 2013 and 2012.  $2,024,101 of the revenue for the three months ended June 30, 2013 and $3,533,335 of the revenue for the six months ended June 30, 2013 is a result of the acquisition.


Cost of Goods Sold.  The Company pays publishers and network providers for a share of the advertisements they placed on publisher sites and proprietary networks.  Cost of Goods Sold were $1,635,672 and $862 for the three months ended June 30, 2013 and 2012 and $2,475,841 and $5,579 for the six months ended June 30, 2013 and 2012.


General and administrative expense. General and administrative expense relates to compensation and overhead for executive officers and fees for general operational and administrative services. For the three months ending June 30, 2013 and 2012, general and administrative expenses were $2,941,808 and $510,374, respectively, and $5,235,574 and $895,353 for the six months ended June 30, 2013 and 2012. Expenses consist principally of salaries, consulting fees and office costs. Salary expense for the three months ending June 30, 2013 and 2012, including stock based compensation, was $2,060,592 and $280,232, respectively, and for the six months ended June 30, 2013 and 2012, $3,420,645 and $491,280.


Depreciation and Amortization.  Depreciation and Amortization expense for the three months ending June 30, 2013 and 2012 was $95,990 and $5,806, respectively, and for the six months ending June 30, 2013 and 2012, $151,969 and $9,960.  The increase in 2013 was primarily due to the amortization of publisher relationships related to the acquisition and an increase in depreciable property.


Research and Development. Research and development costs are expensed as incurred and were $125,011 and $43,636 for the three months ended June 30, 2013 and 2012 respectively and $191,583 and $94,184 for the six months ended June 30, 2013 and 2012.





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Interest expense. Interest expense for the three months ending June 30, 2013 and 2012 was $617,267 and $0, respectively, and for the six months ended June 30, 2013 was $781,525 and $0. The increase in 2013 was principally due to the issuance of $1,000,000 of two year 10% convertible notes to five investors in November, 2012, $7,767,344 of 8% convertible notes to multiple investors during the first and second quarter of 2013, and a $2,250,000 loan assumed in the acquisition of TNI and amortization of Note Discount of $484,271 related to the 8% Notes.


Fair Value adjustment on derivative liability. The fair value adjustment on the derivative liability was $(35,131) and $0 for the three month ended June 30, 2013 and 2012 and $659,787 and $0 for the six months ended June 30, 2013 and 2012.  The loss in 2013 is related to the conversion of the 8% convertible debt. (note 5)  


Loss on debt extinguishment.  Loss on extinguishment for the three months ending June 30, 2013 and 2012 was $281,090 and $0 and for the six months ended June 30, 2013 and 2012 was $4,991,513 and $0.  The loss in 2013 is related to the conversion of the 8% convertible debt (note 5)


Interest income. Interest for the three months ending June 30, 2013 and 2012 was $26 and $0, respectively, and $47 and $0 for the six months ended June 30, 2013. Interest income is from temporary investment of operating cash.


Other Income.  Other income for the three months ending June 30, 2013 and 2012 was $391,283 and $0, respectively and $410,719 and $0 for the six months ended June 30,2013.  The other income in 2013 is related to funds in a bank account related the reverse merger with JMG that was not previously disclosed, and a gain on the contingent liability.


Income taxes. The Company files income tax returns in the U.S. federal jurisdiction and California. There are currently no income tax examinations underway for these jurisdictions, although the tax years ended December 31, 2012 and 2011 are all still open for examination.  Beginning in 2013, returns will also be filed in Florida, Illinois, Georgia and New York.


The Company provides for income taxes in accordance with ASC 740 “Income Taxes” (ASC 740). ASC 740 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities. Where it is more likely than not that a tax benefit will not be realized, a valuation allowance is recorded to reduce the deferred tax asset to its realizable value.


A valuation allowance has been provided against the Company’s net deferred tax assets as the Company believes that it is more likely than not that the net deferred tax assets will not be realized. As a result of this valuation allowance, the effective tax rate for the years ended December 31, 2012 and 2011 is zero percent.


Liquidity and capital resources


Cash flows and capital expenditures


At June 30, 2013 and December 31, 2012, we had $1,292,069 and $902,701 in cash and cash equivalents, respectively. Since our incorporation through June 30, 2013, we have financed our operating cash flow needs principally through private offerings of equity securities and convertible debt.





25




As of June 30, 2013 and December 31, 2012, we had an accumulated deficit of $20,523,835 and $9,993,284, respectively, and had limited working capital to fund development of our technology. On November 5, 2012, the Company issued an aggregate of $500,000 in two year 10% convertible notes to two investors, and on November 7, 2012 the Company issued an aggregate of $500,000 in two year 10% convertible notes to three additional investors. The notes may be prepaid by the Company with fifteen days’ notice, and may be converted into the Company’s common stock at the lesser of 80% of the Company’s fair market value at the time of conversion or $8.00 per share. The notes were issued with two year warrants to purchase an aggregate of 100,000 common shares at $6.50 per share.


During the first and second quarter of 2013, we have received approximately $7,700,000 pursuant to a private placement of 8% convertible promissory notes to multiple investors. A total of $2,250,000 of the proceeds was used to finance the Travora acquisition. We will use the balance of the proceeds to finance our remaining financial commitments pursuant to the Travora acquisition and for working capital purposes. On March 27, 2013 and April 26, 2013, all convertible notes, including $65,366 of accrued interest, net of discount, from this private placement were converted to common stock.


The Company anticipates being active in capital markets in the third and fourth quarters to increase our working capital position.


We have the following warrants outstanding as of June 30, 2013:


Warrant summary

Number

of warrants

outstanding

Exercise

price

Maximum

proceeds

Expiration Date

Warrants issued in the preferred stock private placement

184,625

$ 12.00

2,215,500

02/28/2014

Warrants issued upon conversion of preferred stock

869,750

$   8.50

7,392,875

02/28/2014

Warrants issued our initial public offering

881,901

$ 10.00

8,819,010

02/28/2014

Warrants issued to our underwriters

95,000

$ 14.00

1,330,000

02/28/2014

Warrants issued with 10% convertible notes

100,000

$   6.50

650,000

11/05/2014

Warrants issued with 8% convertible notes

1,294,557

$   4.00

5,178,228

07/31/2013

Warrants issued with 8% convertible notes

1,294,557

$   6.00

7,767,342

07/31/2014

Total

4,720,390

various

33,352,955

various


Cash flow used in operations.


Cash utilized by operating activities was $2,954,760 for the three months ended June 30, 2013. The use of cash was included in the net loss for the period of $3,236,435, but offset by a decrease in accounts payable and accrued liabilities of $588,238. The use of cash was a smaller contributor to net loss than non-cash components: stock based compensation of $206,950, depreciation of $95,990, note discount amortization of $484,271, the gain on derivative liability of $35,131, loss on debt extinguishment of $281,090 and gain on contingent liability of $393,367. Further uses of cash included the following: $180,054 decrease in accounts receivable, $4 increase in other assets, $50,060 decrease in prepaid expenses.


Cash utilized by operating activities was $472,016 for the three months ended June 30, 2012. The use of cash was included in the net loss for the period of $559,100, but offset by an increase in accounts payable and accrued liabilities of $52,999. The use of cash was a smaller contributor to net loss than non-cash components: stock based compensation of $19,030, depreciation of $5,806. Further uses of cash included the following: $3,126 decrease in accounts receivable, $7,229 decrease in prepaid expenses, $1,006 increase in other assets and $100 decrease in security deposits.




26




Cash flow provided by investing activities.


Cash used by investing activities was $252,165 for the three months ended June 30, 2013. The use of cash was attributable to capitalized patent costs of $28,926, and $223,239 for purchase of computer equipment, leasehold improvements, and furniture.


Cash used by investing activities was $36,000 for the three month ended June 30, 2012. The use of cash was attributable to capitalized patent costs of $31,218 and $4,782 for purchase of computer equipment, leasehold improvements, and furniture.


Cash flow provided by financing activities.


Cash provided by financing activities was $802,994 for the three months ended June 30, 2013. The proceeds of cash were principally attributable to the proceeds from the private placement of 8% convertible promissory notes of $822,994 and note repayments of $20,000.


Cash provided by financing activities was $657,796 for the three months ended June 30, 2012.  The proceeds of cash were principally attributable to the sale of preferred stock and warrants.


Discontinued Operations - Spin-off of Oil and Gas Properties


In connection with the Merger, the Company agreed to sell the existing oil and gas properties identified in its 2011 form 10-K as soon as practible following the Merger or, at its option, spin those assets off to the benefit of Company's pre-Merger shareholders. As of November 21, 2012, the Board of Directors authorized management, following a determination that the Oil and Gas properties were not material to the Company's operations, assets or future commercial activity, to undertake a spin-off of those properties. A new corporation, JMG Oil, has been formed to facilitate the spinoff, and the Company is in negotiations with external sources of financing to provide funding to JMG Oil following the transfer of the Oil and Gas properties to JMG Oil in exchange for equity ownership in that company. We anticipate that we will complete the spinoff during the second or third quarter of 2013.


Item 3. Quantitative and Qualitative Disclosures About Market Risk


Not Applicable


Item 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures


Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of March 31, 2013. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to our Company required to be included in our reports filed or submitted under the Exchange Act.


Changes in Internal Controls


There were no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the quarter June 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

27



Part II. Other Information


Item 1. Legal Proceedings


There are no material outstanding or threatened legal claims by or against us.


Item 1A. Risk Factors


Except as follows, there have been no material changes to the information included in response to Item 1A. “Risk Factors” in our 2012 Annual Report on Form 10-K.


Our revenue could decline if we fail to effectively manage our existing advertising space and our growth could be impeded if we fail to acquire new advertising space


Our success depends in part on our ability to effectively manage our existing advertising space as well as successfully access additional advertising space through web publishers, network providers, and on ad exchanges. The web publishers and network providers that we sell advertising for are not typically bound by long-term contracts that ensure us a consistent supply of advertising space, which we refer to as inventory. In addition, web publishers and network providers can change the amount of inventory they make available to us at any time. If a web publisher or network provider decides not to make advertising space from its websites or network available to us, we may not be able to replace this advertising inventory with advertising inventory from other web publishers or network providers that have comparable traffic patterns and user demographics quickly enough to fulfill our advertisers' requests. This would result in lost revenue.


Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities


None


Item 3. Defaults Upon Senior Securities


None


Item 4. Mine Safety Disclosures


None


Item 5. Other Information


None
















28




Item 6. Exhibits


(a) Exhibits required by Item 601 of Regulation S-K are as follows:


Designation

 of Exhibits

 in This

Report

  

Description of Exhibit

31.1

  

Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e).*

31.2

  

Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e).*

32.1

  

Certification by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.*

32.2

  

Certification by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.*

101.INS

  

XBRL Instance Document**

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document**

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document**

101.LAB

  

XBRL Taxonomy Extension Labels Linkbase Document**

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document**

101.SCH

  

XBRL Taxonomy Extension Schema Document**


*filed herewith


**Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections























29



SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


  

 

MediaShift, Inc

 

 

 

 

 

Date: August 14, 2013

 

By:/s/David Grant

 

  

 

David Grant

 

  

 

Chief Executive Officer

 

 

 

 

 

 




































30