Business Context and Reporting Period
Company: KSIX Media Holdings, Inc. (formerly North American Energy Resources, Inc.)
Filing Date: August 13, 2015 (Form 8-K)
Reporting Period: Financial data presented for the three months ended March 31, 2015, compared to the same period in 2014.
Business Overview: A digital advertising agency conglomerate operating through subsidiaries KSIX, LLC (performance-based marketing/CPA) and Blvd Media Group, LLC (offer walls for online games/publishers).
Key Event: On April 27, 2015, the Company acquired 100% of KSIX Media, Inc. via a share exchange. The Company also changed its fiscal year-end from April 30 to December 31, effective April 27, 2015.
Key Financial Metrics (Three Months Ended March 31, 2015)
| Metric | 2015 | 2014 |
|---|---|---|
| Total Revenue | $917,989 | $571,951 |
| Cost of Revenue | $609,350 | $318,443 |
| Gross Margin | 33.6% | 44.3% |
| Operating Loss | $(27,223) | Not explicitly stated (Net Income $15,321) |
| Net Loss | $(29,554) | $15,321 |
| Cash and Equivalents (End of Period) | $27,833 | $37,817 |
| Total Debt (Current + Long-term) | $1,142,906 | $1,211,586 |
| Stockholders' Equity | $27,601 | $57,155 |
Cash Flow: Net cash used in operating activities was $(122,804). Net cash provided by financing activities was $112,820, primarily driven by a $183,600 advance from a related party.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 60.5% ($346,038). KSIX, LLC revenue surged 80.2% to $833,359, while Blvd Media Group revenue declined 22.8% to $84,630 due to a shift in demand from desktop to mobile games.
- Margin Compression: Cost of revenue increased 91.4%, outpacing revenue growth. Gross margin percentage dropped from 44.3% in 2014 to 33.6% in 2015.
- Non-Cash Expenses: Depreciation and amortization increased to $95,603 in 2015 (from $0 in 2014) due to the amortization of intangible assets (customer lists/contracts) acquired effective January 1, 2015.
- Profitability: The Company moved from a net income of $15,321 in Q1 2014 to a net loss of $(29,554) in Q1 2015, primarily due to increased costs and amortization.
- Liquidity: Accounts receivable increased significantly from $281,658 to $725,816, contributing to cash shortages despite revenue growth.
Outlook, Risks, and Management Commentary
- Liquidity Strategy: The Company is in a growth mode causing cash shortages due to increasing receivables. Management is attempting to sell common stock to retire debt and expects to obtain credit lines to assist in the transition.
- Debt Obligations: Significant debt includes a $950,000 secured promissory note (due Jan 1, 2017) and a $100,000 bridge note (due Oct 15, 2015). A portion of the $950,000 note may be forgiven if $800,000 is paid by Dec 31, 2016.
- Related Party Transactions: The CEO advanced $246,100 to the Company for working capital as of March 31, 2015.
- Risks: Concentration of credit risk in accounts receivable; reliance on related party financing; potential inability to realize deferred tax assets (full valuation allowance established).
Investor Verification Checklist
- Debt Covenants: Verify the terms of the $950,000 secured note and the $100,000 bridge note maturing in October 2015 to assess immediate refinancing needs.
- Receivables Quality: Investigate the $725,816 accounts receivable balance (up 157% YoY) to confirm collectability and potential bad debt risks.
- Capital Raise Status: Confirm progress on the planned common stock sale intended to reduce debt and improve liquidity.
- Margin Sustainability: Analyze if the 33.6% gross margin is sustainable given the 91.4% increase in cost of revenue.
- Fiscal Year Transition: Review the upcoming Form 10-K for the fiscal year ended December 31, 2015, which will cover the transition period.