1 - Principal Business Activities
Interim Financial Statements
The unaudited financial statements of JMG Exploration, Inc. (JMG, or the Company), a development stage 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, 2011 was derived from the audited financial statements included in Form 8-K/A filed October 15, 2012. These interim financial statements should be read in conjunction with that report.
JMGs wholly owned subsidiary, Ad-Vantage Networks, Inc. (Ad-Vantage), is a development stage company engaged in digital advertising technology services. Ad-Vantage was formed as a Delaware Limited Liability Corporation (LLC) on February 23, 2010 and on July 7, 2010 was converted to a Delaware Corporation.
On July 6, 2010, Ad-Vantage completed a reorganization in which the predecessor to the Company, Ad-Vantage Networks, LLC, was converted into Ad-Vantage (the Conversion). As part of the Conversion, Ad-Vantage issued 10,000,000 shares of common stock.
The Company faces certain risks and uncertainties which are present in many emerging intellectual 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.
As of September 30, 2012, the Company had an accumulated deficit of $5,439,476 and had insufficient working capital to fund development of our technology. In November 2012 (Note 6) the Company received proceeds of $1,000,000 pursuant to the issuance of promissory notes. Absent the exercise of outstanding warrants or securing additional working capital from other sources, the Company may be forced to scale back its product development efforts.
Merger with Ad-Vantage
On August 31, 2012, Ad-Vantage consummated a reverse triangular merger with a wholly owned subsidiary of JMG pursuant to which Ad-Vantage became the surviving entity of the Merger and Ad-Vantage became a wholly owned subsidiary of JMG. The transaction has been accounted for as a reverse acquisition and the accompanying financial statements are those of Ad-Vantage. As required by accounting guidance, authorized shares, issued and outstanding shares and per share amounts have been retroactively restated throughout these consolidated financial statements and the accompanying notes to reflect JMGs capital structure.
JMG did not have any ongoing business operations. Assets consisting primarily of cash and oil and gas properties totaling $1,522,737 were acquired and certain current liabilities of $401,864 were assumed from JMG. Because JMG had no operations and only net monetary assets, the Reverse Triangular Merger is being treated as a capital transaction, whereby Ad-Vantage Networks, Inc. acquired the net monetary assets of JMG, accompanied by a recapitalization of Ad-Vantage Networks. Inc. As such, no fair value adjustments were necessary for any of the assets acquired or liabilities assumed.
The net equity acquired from JMG as the result of the Merger was $1,054,042 and was recorded as an addition to additional paid in capital. Pursuant to and in connection with the Amended and Restated Merger Agreement and the Merger:
· JMG issued 169,973.88 shares of Class M Preferred Stock (the Class M Preferred), a newly authorized class of JMG preferred stock, as consideration for the Merger. Each issued and outstanding share of Ad-Vantage common stock and Ad-Vantage preferred stock (collectively, Ad-Vantage Capital Stock) was exchanged for 0.01 fully paid and nonassessable share of Class M Preferred (the Exchange Ratio).
· JMG covenanted, as soon as reasonably practicable following the consummation of the Merger and subject to compliance with applicable law, to (i) cause its authorized number of shares of common stock to be increased from 25,000,000 to 100,000,000 (the Authorized Share Increase) and (ii) effect a one-for-two reverse stock split of its issued and outstanding shares of common stock (the Reverse Stock Split).
· Upon the consummation of the Authorized Share Increase and the Reverse Stock Split, the shares of Class M Preferred issued in exchange for the shares of Ad-Vantage Capital Stock shall automatically convert (the Automatic Conversion) into shares of JMGs common stock, at the ratio of 100 shares of common stock for each share of Class M Preferred (the Conversion Ratio). The Automatic Conversion is currently expected to occur in December, 2012.
· After giving effect to the Reverse Stock Split and the Automatic Conversion, JMG will have approximately 19,726,603 shares of common stock outstanding, of which 16,997,388 shares will have been issued (giving effect to the Automatic Conversion) to complete the Merger.
· All issued and outstanding options to acquire shares of Ad-Vantage common stock (collectively, Ad-Vantage Options) were converted into options 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 Ad-Vantage 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 JMG common stock, with such conversion occurring at the Conversion Ratio. No Ad-Vantage Option shall have accelerated vesting in connection with the Merger.
· JMG will extend the term of its three classes of warrants with exercise prices, respectively, of $8.50, $10.00, and $12.00 (such prices giving effect to the Reverse Stock Split) for a period of 18 months from the consummation of the Merger.
· Each of those persons serving prior to the Merger as a director of JMG resigned from the Board, with such resignations becoming effective as of September 16, 2012 (upon expiration of the applicable waiting period in compliance with the provisions of Rule 14f-1 (Rule 14f-1) of the Exchange Act of 1934, as amended (the Exchange Act)).
· Each of David S. Grant and Sanjeev Kuwadekar became directors of JMG, effective upon the consummation of the Merger, and each of Donald Wells, Ed Cerkovnik and Robert Burg became directors of JMG as of September 16, 2102 upon expiration of the applicable waiting period in compliance with the provisions of Rule 14f-1.
· Those persons serving as officers of JMG prior to the Merger resigned upon the consummation of the Merger and those persons serving as officers of Ad-Vantage became officers of JMG.
· The Merger resulted in the pre-Merger stockholders of JMG owning approximately 13.8% of Ad-Vantage and the Ad-Vantage Stockholders, as a group, owning the balance.
· Certain members of the Ad-Vantage executive team agreed to lock-up, for a period of 12 months following the closing of the Merger, the shares of JMGs Class M Preferred to be received by them in connection with the Merger, and the shares of JMGs common stock which those shares of Class M Preferred will convert into at the Automatic Conversion.