Surgepays, Inc. — 2015 Q2 Form 10-Q Summary
Issuer identification: The supplied filing names KSIX Media Holdings, Inc. (formerly North American Energy Resources, Inc.), not Surgepays, Inc. Verify that this is the intended filing. The unaudited report covers the quarter and six months ended June 30, 2015.
Business context and reporting period
KSIX and Blvd. Media Group (BMG) operate online advertising networks and related software services. On April 27, 2015, the reporting company completed a share exchange for KSIX Media, Inc.; the transaction was accounted for as a reverse merger, with KSIX Media treated as the accounting acquirer. The filing says the 2014 comparative results include KSIX and BMG, while the 2015 statements reflect the consolidated company. The filing cautions that the periods may not be fully comparable.
Key financial results
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Revenue | $520,463 | $1,438,452 |
| Gross profit | $210,758 | $519,397 |
| Gross margin | 40.5% | 36.1% |
| Operating loss | $(182,558) | $(209,781) |
| Net loss | $(184,590) | $(214,144) |
| Basic and diluted loss per share | $(0.01) | $(0.01) |
For the six months, operating cash flow was $(39,868); cash increased $68,225 to $106,042, primarily reflecting $108,061 of net financing cash flow. At June 30, current assets were $576,581 and current liabilities $840,890, resulting in reported negative working capital of $264,309. Total debt was $1,172,695, including $388,133 classified as current. Total liabilities were $1,625,452, and stockholders’ deficit was $90,590.
Changes versus comparable periods
- Second-quarter revenue declined 44.8% year over year, to $520,463 from $942,359. Gross profit fell to $210,758 from $271,665; gross margin improved to 40.5% from 28.8% as cost of revenue declined faster than sales.
- Six-month revenue declined 5.0%, to $1,438,452 from $1,514,310, and gross profit decreased to $519,397 from $525,172. Gross margin increased to 36.1% from 34.7%.
- The filing attributes the quarterly decline to the loss of a major KSIX customer and reduced BMG demand associated with a shift from desktop games to mobile games. For the first half, KSIX revenue rose 15.8%, but BMG revenue fell 57.8%.
- Compared with reported 2014 combined results, the 2015 quarter and first half recorded net losses of $184,590 and $214,144, respectively; 2014 net income was $5,652 and $20,973.
- 2015 results include $191,237 of depreciation and amortization, primarily amortization of acquired intangible assets. Compensation includes $48,000 of stock-paid consulting services.
Outlook, liquidity, risks and unusual items
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing operating losses, a $281,769 accumulated deficit, and negative working capital. The filing says additional capital or profitable operations are not assured.
- Management said the company was selling common stock to help reduce debt and that business growth was increasing receivables, which could cause cash shortages. No quantified revenue or earnings guidance was provided.
- A $950,000 secured note had a June 30 balance of $840,000, was due in monthly installments with the remaining balance due January 1, 2017, and included potential forgiveness of the remaining balance if $800,000 was paid by December 31, 2016. The company also had $208,750 of non-interest-bearing notes payable to former officers.
- The CEO had advanced funds for working capital; the balance due at June 30 was $160,237. In July, the company sold 1,734,520 shares for $140,000 in cash.
- Management concluded disclosure controls were not effective due to lack of segregation of duties, an audit committee, and documented controls. No corrective actions were reported for the quarter.
- The filing reports no off-balance-sheet arrangements, legal proceedings, or defaults upon senior securities. It reports no income tax payments in the six-month period.
Important facts for investors to verify
- Confirm issuer identity and filing attribution: the supplied filing is for KSIX Media Holdings, Inc., although the request names Surgepays, Inc.
- Assess customer concentration and the effects of the lost major customer and BMG’s shift in demand from desktop to mobile games.
- Review near-term liquidity, cash collection from receivables, financing needs, and the ability to meet debt installments and the note-forgiveness condition.
- Verify share issuance, dilution, and proceeds from the May and June 2015 offerings and the July 2015 sale.
- Review the reverse-merger accounting, comparability of predecessor-period results, and filing date inconsistencies in the acquisition and company-formation notes.
- Monitor remediation of the disclosed ineffective controls and the going-concern uncertainty.