Business context and reporting period
This is KSIX Media Holdings, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016—not a filing identified in its text as Surgepays, Inc. The company operated performance-based online advertising businesses KSIX and BMG, and digital advertising agency DigitizeIQ (DIQ), acquired in October 2015.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Revenue | $851,688 | $2,067,185 |
| Gross profit / margin | $71,780 / 8.4% | $237,578 / 11.5% |
| Operating loss | $(1,188,855) | $(1,940,314) |
| Net loss | $(1,256,211) | $(2,042,906) |
| Net loss per common share, basic and diluted | $(0.03) | $(0.05) |
- For the six months, operating cash flow was $(293,608), investing cash flow was $0, and financing cash flow was $287,320. Cash declined by $6,288 to $63,201.
- At June 30, current assets were $587,849 and current liabilities were $3,157,362 on the balance sheet; total liabilities were $3,286,642. Stockholders’ deficit was $881,865.
- Notes payable and long-term debt, excluding related-party debt, totaled $1,469,818; related-party debt was $107,500, and a further $358,002 was owed to the CEO as a non-interest-bearing advance with no fixed maturity.
Material changes versus prior comparable periods
- Second-quarter revenue rose 38.9% year over year, while six-month revenue rose 43.7%. DIQ contributed $528,209 in the quarter and $1,408,202 in the half year; it was not consolidated in the 2015 periods. KSIX and BMG revenue declined to $323,479 for the quarter and $658,983 for the half year, with management citing the loss of a major customer.
- Gross profit fell from $210,758 to $71,780 in the quarter and from $519,397 to $237,578 for the half year. Cost of revenue was 91.6% of quarterly sales and 88.5% of six-month sales, versus 60.3% and 63.9%, respectively, in 2015.
- Management attributed DIQ’s high costs partly to a project that generated only a minor return; DIQ’s cost of revenue exceeded its revenue in both reported 2016 comparisons. Management said it was implementing procedures to reduce the likelihood of a recurrence.
- Six-month selling, general and administrative expense increased to $1,714,040 from $537,980. The filing cites stock-based consulting and other service costs, public-company professional fees, and CEO compensation, including $180,000 for preferred shares issued for prior services. Depreciation and amortization rose to $463,852, largely reflecting DIQ-related intangible amortization.
- Common shares outstanding increased from 36,130,432 at December 31, 2015 to 46,156,977 at June 30, 2016. The company also issued 10 million Series A preferred shares to its CEO; each share carries ten votes and is convertible into one-tenth of a common share.
Outlook, risks, contingencies and unusual items
- Management stated that the company lacked sufficient revenue to fund development, projected expenses and commitments for the next year. It reported a $3,470,712 accumulated deficit and a $2,042,906 six-month loss, and disclosed substantial doubt about its ability to continue as a going concern.
- Management projected positive cash flow from operations by the quarter ending September 30, 2016, depending on improved subsidiary cash flow and debt reduction. It was negotiating with institutional investors and planned self-underwritten PIPE offerings over the following 45–90 days. The filing gives no assurance that financing or positive cash flow would be achieved.
- The TCA senior secured facility bears 18% interest and is secured by substantially all company and subsidiary assets. The filing reports a $5 million maximum facility, but the displayed carrying value at June 30 was $124,595 after unamortized loan costs. TCA’s conversion rights may apply upon default or mutual agreement.
- Several payment obligations were overdue or unpaid: the April 2016 payment on related-party debt, two DIQ seller notes with a $485,000 unpaid balance, and specified additional and scheduled payments on a convertible note. The company said it was renegotiating the seller notes.
- Disclosure controls and procedures were deemed ineffective because of lack of segregation of duties, an audit committee and documented controls; the filing reported no significant corrective changes during the quarter. No legal proceedings or material off-balance-sheet arrangements were reported.
Most important facts to verify
- Confirm the issuer and reporting entity: the supplied filing names KSIX Media Holdings, Inc., not Surgepays, Inc.
- Reconcile the liquidity figures: the balance sheet shows current liabilities of $3,157,362, but MD&A states $3,105,175 and a $2,517,326 working-capital deficit. The balance-sheet figures imply a different deficit.
- Check the status of overdue debt payments, the DIQ seller-note renegotiation, and the TCA facility’s collateral, conversion terms and remaining availability.
- Assess whether the planned equity financing closed and whether management’s forecast of positive operating cash flow by the third quarter of 2016 was achieved.
- Evaluate the sustainability of DIQ’s project economics, customer recovery at KSIX and BMG, and the effects of share issuance and preferred-stock voting rights on dilution and control.