Surgepays, Inc. quarterly report, Q3 FY2015

Business context and reporting period

This is KSIX Media Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015; the filing does not identify the issuer as Surgepays, Inc. KSIX operates online advertising and marketing businesses through KSIX and Blvd. Media Group, using performance-based advertising and publisher monetization. An April 2015 share exchange was accounted for as a reverse merger, with KSIX Media, Inc. as the accounting acquirer. Comparative operating results are for KSIX and Blvd. Media Group before their acquisition and may not be directly comparable to the 2015 consolidated presentation.

Financial results and position

For the nine months, operating cash outflow was $63,538; investing cash outflow was $2,001; and financing cash inflow was $163,794. Cash increased by $98,255 to $136,072. Financing included $300,065 from common stock sales and $90,617 in net related-party advances, partly offset by $226,888 of loan repayments.

At September 30, 2015, current assets were $417,217 and current liabilities were $698,793, a working-capital deficit of $281,576 and a current ratio of about 0.60. Total liabilities were $1,420,120, including $1,093,448 of notes and long-term debt and $170,942 owed to a related party. Stockholders’ equity was a deficit of $146,653; accumulated deficit was $492,712. Total assets were $1,273,467. Intangible assets were a significant asset, but the balance sheet and note disclose different net values.

Material changes versus the prior comparable period

Third-quarter revenue fell 47.8% from $680,746 in 2014, and gross profit declined from $275,357 to $174,239. Nine-month revenue fell 14.6% from $2,195,056, while gross profit declined from $800,530 to $693,636. Gross margin improved to 48.7% from 40.4% in the quarter and to 37.0% from 36.5% for the nine months. The company reported comparative 2014 net income of $39,610 for the quarter and $60,583 for the nine months, versus 2015 net losses.

Management attributed the revenue decline principally to the loss of a major KSIX customer in the second quarter and reduced BMG demand as usage shifted from desktop to mobile games. Nine-month depreciation and amortization was $286,917, primarily from amortization of acquired customer lists and contracts. Selling, general and administrative expense was $801,563, up from $730,498; it included $37,406 of bad-debt expense and $48,000 of stock-paid consulting services.

Outlook, risks, contingencies and unusual items

Management stated that recent operating losses, the accumulated deficit and negative working capital raise substantial doubt about the company’s ability to continue as a going concern. It was seeking capital through common-stock offerings and longer-term debt, with no assurance of success or of financing on terms that would avoid dilution. Management also warned that the lost customer reduced cash flows and might not be replaced. No quantified operating guidance was provided.

On October 12, 2015, after quarter-end, the company acquired DigitizeIQ, LLC for stated consideration of $1.25 million: $250,000 cash, 1,250,000 restricted shares valued at $250,000, and three $250,000 non-interest-bearing notes due November 2015, January 2016 and March 2016. Management disclosed $1 million of cash requirements over the next 150 days. The company also reported plans to pursue further acquisitions and acknowledged uncertainty in raising funds to support expansion.

Management said disclosure controls were not effective as of September 30, 2015, citing lack of segregation of duties, an audit committee and documented controls; it reported no corrective actions during the quarter. The filing reported no legal proceedings, defaults upon senior securities or material off-balance-sheet arrangements. It states that required interactive data files were not submitted and posted as indicated on the cover page.

Important facts for investors to verify

• Confirm the correct issuer and reporting entity: the supplied filing is for KSIX Media Holdings, Inc., while the request metadata names Surgepays, Inc.
• Reconcile reported intangible assets: the balance sheet shows $849,021, while the related note reports a net balance of $952,636.
• Reconcile common-share counts: the balance sheet reports 34,880,432 shares at September 30, while a stockholders’ equity note reports 34,832,432; the cover page reports 36,130,432 as of November 3.
• Assess near-term liquidity and funding needs, including the $281,576 working-capital deficit, related-party advances, debt maturities and DigitizeIQ’s disclosed payment obligations.
• Evaluate customer concentration and the prospects of replacing the lost major customer and adapting BMG to mobile-game demand.
• Review the going-concern disclosure and the ineffective-controls finding, including whether control deficiencies were subsequently addressed.