KSIX Media Holdings, Inc. — FY2015 Form 10-K
Entity and period: The supplied filing is for KSIX Media Holdings, Inc., not Surgepays, Inc. It covers the fiscal year ended December 31, 2015, and was signed April 14, 2016; it is an annual report, not a fourth-quarter filing.
Business context and reporting basis
KSIX operated digital advertising businesses focused on performance-based online, gaming, mobile and social advertising, and acquired DigitizeIQ, LLC (DIQ), a digital agency serving mass-tort litigation advertisers, on October 12, 2015. In April 2015, the former energy company acquired KSIX Media, Inc. in a reverse acquisition and later changed its name. North American Exploration, Inc. remained a subsidiary, but the filing describes the advertising business as the company’s focus.
Historical 2015 results include acquired businesses only from their acquisition dates. The 2014 historical comparison is a short period from the company’s inception, so it is not a like-for-like comparison. The filing also provides pro forma results assuming acquisitions occurred earlier.
Financial results and liquidity
| Metric | FY2015 | Comparison / context |
|---|---|---|
| Revenue | $2.833 million | Historical 2014 stub period: $31,290. Pro forma revenue: $6.554 million in 2015 versus $3.559 million in 2014. |
| Gross profit / margin | $501,000 / 17.7% | Historical 2014: $9,435 / 30.2%. Pro forma 2015 margin was 19.5%, versus 34.0% in 2014. |
| Operating loss | $1.321 million | Historical 2014 stub-period operating loss: $60,787. |
| Net loss | $1.336 million | Historical 2014 stub-period net loss: $6,923; includes a $54,080 bargain-purchase gain in 2014. |
| Cash from operations | $(225,000) | Compared with $(23,842) in the 2014 stub period. |
| Cash and current assets | $69,489 cash; $346,043 current assets | At December 31, 2015. |
| Current liabilities / working capital | $2.597 million / $(2.251) million | 2014 working capital deficit: $311,358. |
| Total liabilities / equity | $3.234 million / $(607,000) | 2014 total liabilities: $1.430 million; equity: $33,077. |
| Debt and related-party advances | $1.768 million notes and long-term debt; $318,002 related-party advances | Debt includes $747,140 carrying value of DIQ seller notes. Total debt figures exclude the separate related-party advance balance. |
Pro forma revenue increased about 84% year over year, but gross margin declined. Management attributed the margin pressure partly to DIQ’s costs, including a learning curve after takeover. On a pro forma basis, KSIX revenue declined 8.3% and BMG revenue declined 52.6%; management cited loss of a major KSIX customer and a shift in demand from desktop to mobile games, respectively. DIQ accounted for 20.8% of historical 2015 revenue and 65.7% of pro forma 2015 revenue.
Cash increased by $31,672 during 2015. Financing provided $237,862, including $300,065 from stock sales and net related-party advances, partly offset by loan repayments. Investing activities provided $18,331, including acquisition-related cash received net of cash paid.
Material changes, outlook, risks and unusual items
- Acquisitions and financing: DIQ consideration included cash, 1.25 million shares valued at $475,000 and three $250,000 seller notes. At filing, $500,000 of those notes remained unpaid and were being renegotiated; the first $250,000 note was paid on February 26, 2016. DIQ also had $518,240 of customer prepayments recorded as deferred revenue at year-end.
- Going concern: The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. The company reported a $1.336 million 2015 loss and a $1.428 million accumulated deficit. Management projected positive cash flow by the third quarter of 2016 and planned equity fundraising and debt reduction; success depended on executing those plans.
- Subsequent credit facility: On February 24, 2016, the company entered into a secured credit facility with a stated maximum of $5 million and a $750,000 convertible note with TCA Global Credit Master Fund. The disclosed initial advance was $400,000, with 18% annual interest and security over substantially all company and subsidiary assets. The filing describes additional share issuance/redemption terms related to $300,000 of advisory fees and possible conversion of the note at a discount to market price.
- Controls and governance: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2015, citing lack of segregation of duties. The auditor did not audit internal controls. The company reported no independent directors, no standing audit committee, and no adopted code of business conduct and ethics.
- Other risks: The filing identifies dependence on advertising trends, customers and third-party traffic sources; acquisition integration and funding risks; privacy, regulatory and cybersecurity exposure; and limited OTC/penny-stock trading liquidity. CEO Carter Matzinger held approximately 68.6% of voting power as of December 2015. The company said it did not anticipate paying dividends.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for KSIX Media Holdings, Inc., not Surgepays, Inc.
- Review the audited financial statements and pro forma disclosures separately; historical periods are substantially affected by acquisition timing and are not directly comparable.
- Check the status and terms of unpaid DIQ seller notes, related-party advances, and the February 2016 TCA financing, including actual amounts drawn and any share issuance or conversion consequences.
- Assess whether management’s financing and cash-flow-positive plans were achieved, given the going-concern warning and year-end working capital deficit.
- Monitor remediation of ineffective financial reporting controls and the company’s highly concentrated ownership and thinly traded OTC stock.