Surgepays, Inc. (metadata) — 2016 Q3 Form 10-Q summary
Issuer discrepancy: The supplied filing is for KSIX Media Holdings, Inc., not Surgepays, Inc. The summary below describes the filing text provided and should not be attributed to Surgepays without verification.
Business context and reporting period
The unaudited report covers the quarter and nine months ended September 30, 2016. KSIX Media Holdings operated online performance-marketing and advertising businesses through KSIX and BMG, and digital advertising agency DIQ, acquired in October 2015. The company states BMG was inactive at September 30, 2016. The filing’s financial statements are consolidated and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $519,215 | $357,557 | $2,913,801 | $1,874,872 |
| Gross profit | $233,827 | $174,239 | $798,806 | $693,636 |
| Gross margin | 45.0% | 48.7% | 27.4% | 37.0% |
| Operating loss | $(516,981) | $(185,110) | $(2,129,893) | $(394,929) |
| Net loss | $(878,869) | $(186,866) | $(2,594,373) | $(401,009) |
| Basic and diluted loss per share | $(0.02) | $(0.01) | $(0.06) | $(0.01) |
For the nine months, operating cash flow was $(338,615), investing cash flow was $0, and financing cash flow was $358,340. Cash increased $19,725 to $89,214 from $69,489 at December 31, 2015. Cash interest paid was $38,892; no income taxes were paid.
At September 30, total assets were $2,114,389, total liabilities $3,377,721, and stockholders’ deficit $(1,263,332). The balance sheet reports current assets of $529,386 and current liabilities of $3,271,777, implying a working-capital deficit of $2,742,391. Cash was $89,214; accounts receivable $180,007; and prepaid expenses $260,165.
Debt included $1,300,003 of notes payable and current long-term debt, $52,194 of non-related-party long-term debt, and $107,500 of related-party debt (current and long-term portions combined). A $460,125 derivative liability was also recorded. The filing reports $357,002 owed to the CEO as a non-interest-bearing advance.
Material changes versus comparable periods
- Quarterly revenue grew 45.2%, while nine-month revenue grew 55.4%. Comparability is limited: DIQ contributed $1,952,084 of nine-month 2016 revenue but was not consolidated in the 2015 period. KSIX and BMG revenue fell to $961,717 from $1,874,872 year over year; management cites the loss of a major customer and BMG’s inactivity.
- Management attributed DIQ’s lower revenue to training new personnel and developing customers. DIQ’s reported nine-month cost of revenue was 83.6% of its sales, compared with 50.3% for KSIX and BMG. Consolidated gross margin declined to 27.4% from 37.0% for the nine-month periods.
- Nine-month selling, general and administrative expense rose to $2,232,922 from $801,648, including stock-based consultant compensation, CEO compensation, and higher professional costs. Depreciation and amortization rose to $695,777, principally reflecting DIQ acquisition-related intangible amortization.
- Nine-month interest expense increased to $373,514 from $6,143, and the company recorded a $96,810 derivative fair-value loss. Management attributes substantial interest expense to loan-cost and debt-discount amortization, original issue discount, and accrued interest.
- Common shares outstanding increased from 36,130,432 at year-end 2015 to 48,031,977 at September 30, 2016; the filing reports 50,985,376 shares outstanding on November 10, 2016. The company also issued 10 million Series A preferred shares to its CEO for prior services.
Outlook, risks, contingencies, and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing the $2,594,373 nine-month loss, accumulated deficit of $4,022,179, and inadequate established revenue sources to fund projected operating expenses and commitments. Management said it expected to become cash-flow positive by the end of Q3 2016 through subsidiary cash flow and debt restructuring, and expected a potential True Wireless acquisition to support positive cash flow. It also acknowledged there was no assurance of positive cash flow, financing, or completion of the acquisition.
- Liquidity and financing: The company relied on equity issuance, loans, and related-party advances. It described plans to raise capital for debt repayment, operating shortfalls, and acquisitions, but warned financing could be unavailable or dilutive. Operating cash flow remained negative.
- Past-due obligations: The filing states that a $100,000 and a $30,000 required extra payment on a convertible note had not been made and seven $10,000 installments were past due as of September 30. A director note installment due April 28, 2016 was unpaid; two DIQ seller notes totaling $485,000 remained unpaid and were being renegotiated. Certain other notes were past due. The TCA facility was secured by substantially all company and subsidiary assets and carried an 18% interest rate.
- Potential dilution and derivative exposure: Several convertible notes had variable-price conversion terms, which the company accounted for as derivatives. The filing also describes equity-linked financing arrangements, warrants, and consulting compensation paid in shares. After quarter-end, Salksanna received 1,953,399 common shares under a convertible note.
- Controls: Management concluded disclosure controls were ineffective as of September 30, 2016, citing lack of segregation of duties, an audit committee, and documented controls. The filing says no corrective actions or other significant control changes occurred during the quarter.
- Other: The company reported no material off-balance-sheet arrangements and no legal proceedings. The supplied filing text contains a period-reference inconsistency: a note refers to results for periods ended June 30, although the statements and report cover September 30.
Most important facts for investors to verify
- Confirm the issuer identity: the filing names KSIX Media Holdings, Inc., whereas the request identifies Surgepays, Inc.
- Reconcile the working-capital figures: the balance sheet shows current liabilities of $3,271,777, while MD&A gives $2,951,053 and a $2,421,667 deficit. These figures do not agree with the balance sheet; the filing text does not explain the discrepancy.
- Verify the status and terms of past-due notes, the senior secured facility, the debt restructuring, and any defaults or waivers.
- Assess whether the company obtained the financing, completed the proposed True Wireless acquisition, or achieved the stated cash-flow-positive objective; the filing provides no assurance that these plans would succeed.
- Evaluate DIQ’s revenue and margins, customer replacement efforts, BMG inactivity, and the extent to which reported revenue growth reflects acquisition-related consolidation rather than organic growth.
- Review dilution from common and preferred share issuance, variable-price convertible debt, warrants, and subsequent share issuances, along with the ineffective disclosure controls and procedures.