Business context and reporting period
This unaudited Form 10-Q covers the three months ended March 31, 2016. The filing is for KSIX Media Holdings, Inc., not Surgepays, Inc.; verify that this is the intended filing. KSIX operated online advertising businesses KSIX and BMG, and digital advertising agency DigitizeIQ (DIQ), acquired in October 2015. The 2015 consolidated comparison excludes DIQ.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $1.215 million | $918,000 |
| Gross profit / margin | $166,000 / 13.6% | $309,000 / 33.6% |
| Operating loss | $751,000 | $27,000 |
| Net loss | $787,000 | $30,000 |
| Operating cash flow | $29,000 provided | $123,000 used |
| Cash at period end | $147,000 | $69,000 at December 31, 2015 |
| Total assets | $2.493 million | $2.627 million at December 31, 2015 |
SG&A rose to $685,000 from $240,000, while depreciation and amortization rose to $232,000 from $96,000, substantially reflecting DIQ-related intangible amortization. Interest expense was $35,000 versus $2,000. The balance sheet reports current assets of $445,000 and current liabilities of $3.233 million, indicating a working-capital deficit of approximately $2.788 million. Cash-flow-statement ending cash is $147,134, while the balance sheet reports $147,135.
At March 31, the balance sheet reports total liabilities of $3.444 million and stockholders’ deficit of $951,000. It lists $1.430 million in notes payable and long-term debt, plus $107,500 of related-party debt and $318,002 owed to a related party as an advance. Most assets were intangible assets, reported at $2.035 million.
Material changes and operating developments
- Consolidated revenue increased 32.4%, but this comparison reflects DIQ’s inclusion in 2016 and exclusion from 2015. KSIX revenue fell 60.2% year over year, following the loss of a major customer in 2015 and a slow start to 2016. BMG revenue fell 95.6%; a server issue disrupted most of the quarter and was reported resolved.
- DIQ generated $880,000 in Q1 2016 revenue. Management attributed weaker DIQ performance relative to its standalone Q1 2015 results to staff training, customer development and a $161,380 customer credit relating to a software issue, which was resolved in March.
- Cost of revenue reached 86.4% of sales, compared with 66.4% a year earlier. Management cited DIQ’s 98.5% cost ratio and a project with limited return; it said procedures were being implemented to reduce the risk of similar results.
- Operating cash flow was positive despite the net loss, with increases in accounts payable and credit-card liabilities contributing to cash generation. Financing provided $48,000 net; the company borrowed $400,000 and repaid $352,000 of loans.
Outlook, financing, risks and unusual items
- Management disclosed substantial doubt about the company’s ability to continue as a going concern. It projected becoming cash-flow positive by Q3 2016, relying on improved subsidiary cash flows, debt reduction, institutional equity investment discussions and planned PIPE offerings. These plans were not assured.
- The February 2016 TCA facility provided an initial $400,000 advance under a facility with a stated maximum of $5 million. It carries 18% interest, is secured by substantially all company and subsidiary assets, and includes a convertible note. The company issued 1,782,000 shares valued at $300,000 for advisory fees, amortized as loan costs; additional transaction and legal fees may apply if it draws the remaining initially committed $350,000.
- Two $250,000 DIQ seller notes due in January and March 2016 remained unpaid at quarter-end, and the company said it was renegotiating them. The notes bear 5% interest while in default. The filing also describes a modified convertible note with scheduled payments and additional payments due in 2016.
- Controls and procedures were reported ineffective due to lack of segregation of duties, an audit committee and documented controls. The filing says there were no corrective actions during the quarter.
- Subsequent events included a CEO share conversion notice, a 100,000-share subscription at $0.10, and designation and issuance authorization of 10 million Series A preferred shares to the CEO for prior services. The preferred shares carry ten votes each and convert at ten preferred shares for one common share; the filing records $180,000 of compensation expense for the quarter.
The filing contains conflicting balance-sheet and MD&A totals: MD&A reports current liabilities of $3.072 million, total liabilities of $3.283 million and stockholders’ deficit of $790,000, which do not match the financial statements. The filing text does not provide a clear reconciliation.
Most important facts for investors to verify
- Confirm the issuer: this filing identifies KSIX Media Holdings, Inc., not Surgepays, Inc.
- Reconcile the conflicting liabilities, working-capital deficit and stockholders’ deficit figures between the financial statements and MD&A.
- Check the status and terms of overdue DIQ seller notes, the modified convertible debt, and the secured TCA facility, including any defaults, conversions or further draws.
- Assess whether the proposed equity financing occurred and whether liquidity improved sufficiently to address the going-concern uncertainty.
- Review customer retention, DIQ project economics, BMG’s recovery after the server disruption, and progress on internal-control remediation.