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SurgePays, Inc. - Quarter Report: 2015 September (Form 10-Q)

 

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2015

 

File No. 000-52522

 

KSIX MEDIA HOLDINGS, INC.

(Name of small business issuer in our charter)

 

Nevada   98-0550352
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification No.)

 

10624 S Eastern Ave., Ste A-910, Henderson, NV 89052

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number: (800) 760-9689

 

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]     Accelerated filer [  ]     Non-accelerated filer [  ]     Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [  ] No [X]

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 36,130,432 shares of common stock outstanding as of November 3, 2015.

 

 

 

 
   

 

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (“Commission”). While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto, contained in KSIX MEDIA HOLDINGS, INC.’s Form 8-K dated April 24, 2015 and filed on August 10, 2015.

 

TABLE OF CONTENTS

 

    Page
PART I – FINANCIAL INFORMATION (Unaudited)  
     
Item 1: Consolidated Financial Statements 3
     
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
Item 3: Quantitative and Qualitative Disclosures About Market Risk 19
     
Item 4: Controls and Procedures 19
     
PART II – OTHER INFORMATION  
     
Item 1: Legal Proceedings 20
     
Item 1A: Risk Factors 20
     
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 20
     
Item 3: Defaults upon Senior Securities 20
     
Item 4: Submission of Matters to a Vote of Security Holders 20
     
Item 5: Other Information 20
     
Item 6: Exhibits 20

 

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PART I - Financial Information

 

Item 1: Financial Statements

 

KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

 

   September 30, 2015   December 31, 2014 
ASSETS          
Current assets:          
Cash and cash equivalents  $136,072   $37,817 
Accounts receivable   257,803    281,658 
Prepaid expenses   23,342    4,462 
Total current assets   417,217    323,937 
Property and Equipment, less accumulated depreciation of $1,147 and $19, respectively         7,229             4,566    
Intangible assets less accumulated amortization of $294,141 and $8,352, respectively   849,021    1,134,810 
Total assets  $1,273,467   $1,463,313 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Current liabilities:          
Accounts payable  $155,730   $138,325 
Advance from related party   170,942    80,325 
Notes payable and current portion of long-term debt   372,121    416,645 
Total current liabilities   698,793    635,295 
Long-term debt less current installments   721,327    794,941 
Total liabilities   1,420,120    1,430,236 
Commitments and contingencies          
           
Stockholders’ equity (deficit):          
Preferred stock: $0.001 par value; 100,000,000 shares authorized; no shares issued and outstanding        -         -  
Common stock: $0.001 par value; 100,000,000 shares authorized; 34,880,432 shares and 28,000,000 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively      34,880      28,000  
Additional paid in capital   311,179    12,000 
Accumulated deficit   (492,712)   (6,923)
Total stockholders’ equity (deficit)   (146,653)   33,077 
Total liabilities and stockholders’ equity (deficit)  $1,273,467   $1,463,313 

 

See accompanying notes to consolidated financial statements

 

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KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

   Three months ended   Nine months ended 
   September 30, 2015   September 30, 2015 
         
Revenue  $357,557   $1,874,872 
Cost of revenue   183,318    1,181,236 
Gross profit   174,239    693,636 
Costs and expenses          
Depreciation and amortization   95,680    286,917 
Selling, general and administrative   263,623    801,563 
Total costs and expenses   359,303    1,088,480 
Operating loss   (185,064)   (394,844)
Other income (expense):         
Interest expense   (1,763)   (6,143)
Interest and other income, net   7    63 
Oil and gas operations, net   (46)   (85)
Total other income (expense)   (1,802)   (6,165)
Net loss  $(186,866)  $(401,009)
          
Net loss per common share, basic and diluted  $(0.01)  $(0.01)
           
Weighted average common shares outstanding   34,530,776    31,212,068 

 

See accompanying notes to consolidated financial statements.

 

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KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2015

(Unaudited)

 

   Nine months ended 
   September 30, 2015 
Operating activities     
Net loss  $(401,009)
Adjustments to reconcile net loss to net cash used in operating activities:      
Amortization and depreciation   286,917 
Common stock of Ksix Media, Inc. issued for services, pre merger   48,000 
Bad debt expense   37,406 
Changes in operating assets and liabilities:     
Accounts receivable (increase) decrease   (13,551)
Prepaid expenses (increase) decrease   (4,000)
Accounts payable and accrued expenses - increase (decrease)   (17,301)
Net cash used in operating activities   (63,538)
Investing activities     
Purchase of property and equipment   (2,001)
Net cash used in investing activities   (2,001)
Financing activities     
Sale of common stock for cash   300,065 
Advances from related party, net of repayment   90,617 
Loan repayment   (226,888)
Net cash provided by financing activities   163,794 
Net increase in cash and cash equivalents   98,255 
Cash and cash equivalents, beginning of period   37,817 
Cash and cash equivalents, end of period  $136,072 
      
Supplemental cash flow information     
Cash paid for interest and income taxes:     
Interest  $6,143 
Income taxes   - 
Non-cash investing and financing activities:     
Common stock issued for note payable  $100,000 
Common stock issued for prepaid public relation services contract   14,880 

 

See accompanying notes to consolidated financial statements

 

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KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

1 BASIS OF PRESENTATION AND BUSINESS

 

Basis of presentation

 

The accompanying consolidated financial statements include the accounts of KSIX Media Holdings, Inc. (“Holdings”) and its wholly owned subsidiaries, KSix Media, Inc. (“Media”), a Nevada corporation, KSix, LLC (“KSIX”), a Nevada limited liability company that was formed on September 14, 2011, Blvd. Media Group, LLC (“BMG”), a Nevada limited liability company that was formed on January 29, 2009 and North American Exploration, Inc. (“NAE”), a Nevada corporation that was incorporated on August 18, 2006 (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

 

On or about April 27, 2015, KSIX Media Holdings, Inc. (formerly “North American Energy Resources, Inc.” the Registrant), a Nevada corporation, (the “Company”) entered into a Share Exchange Agreement (the “Agreement”) with all of the shareholders of KSIX Media, Inc., a Nevada corporation, whose primary business is the operation of a diverse advertising network through its wholly-owned subsidiaries KSIX and BMG, both Nevada limited liability companies. Pursuant to the Agreement, the Company acquired all of the issued and outstanding shares (22,600,000 shares) of the common stock of KSIX Media, Inc. from its shareholders in exchange for 28,000,000 restricted shares of its common stock. By July 31, 2015, the Company had completed the change of its name from North American Energy Resources, Inc. to KSIX Media Holdings, Inc.

 

The share exchange agreement was accounted for as a reverse merger, whereby KSIX Media, Inc. is the accounting acquirer and KSIX Media Holdings, Inc. is the surviving reporting company. The historical financial statements represent those of KSIX Media, Inc. which was formed on November 5, 2015.

 

On December 23, 2014, Media acquired the membership interests of KSIX and BMG, as described in Note 6.

 

Prior to the consummation of the stock exchange agreement, North American Energy Resources, Inc. had an April 30 year end and KSIX Media, Inc. had a December 31 year end. The board of directors elected to change the year end to December 31 and assumed the fiscal year end of KSIX Media, Inc.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2015 and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 8-K for the year ended December 31, 2014 filed with the SEC on August 10, 2015 and amended and filed with the SEC on October 26, 2015.

 

Business description

 

KSIX and BMG are internet marketing companies. KSIX is an advertising network designed to create revenue streams for their affiliates and to provide advertisers with increased measurable audience. KSIX provides performance based marketing solutions to drive traffic and conversions within a Cost-Per-Action (“CPA”) business model. KSIX has an online advertising network that works directly with advertisers and other networks to promote advertiser campaigns and manages offer tracking, reporting and distribution.

 

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BMG provides the tools for web publishers to drive traffic and increase revenue. BMG’s mission is to monetize the Internet; promoting incentive based advertisements resulting in more clicks, greater lead generation and increased revenues. KSIX and BMG are both Las Vegas based technology companies, advertising networks, and SaaS (“Software as a Service”) developers that monetize web based content using custom developed enterprise software applications.

 

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of estimates in the presentation of financial statements

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. Actual results could differ from those estimates.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable are generally due thirty days from the invoice date. The Company has a policy of reserving for uncollectible accounts based on their best estimate of the amount of profitable credit losses in its existing accounts receivable. The Company extends credit to its customers based on an evaluation of their financial condition and other factors. The Company generally does not require collateral or other security to support accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential bad debts if required.

 

The Company determines whether an allowance for doubtful accounts is required by evaluation specific accounts where information indicates the customer may have an inability to meet financial obligations. In these cases, the Company uses assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. The Company may also record a general allowance as necessary.

 

Direct write-offs are taken in the period when the Company has exhausted their efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that the Company should abandon such efforts. The Company has determined an allowance for doubtful account is not required at September 30, 2015 and December 31, 2014.

 

Revenue recognition

 

The Company recognizes revenue in accordance with Accounting Standard Codification (“ASC”) 605-10 (previously Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition).

 

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Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The Company’s revenues are derived from online advertising sales and on a cost per thousand impressions (“CPM”), cost per lead (“CPL”), cost per action (“CPA”) and flat-fee basis.

 

  The Company earns CPM revenue from the display of graphical advertisements. An impression is delivered when an advertisement appears in pages viewed by users. Revenue from graphical advertisement impressions is recognized based on the actual impressions delivered in the period.
     
  Revenue from the display of text-based links to the websites of the Company’s advertisers is recognized on a CPC basis, and search advertising is recognized as “click-throughs” occur. A “click-through” occurs when a user clicks on an advertiser’s link.
     
  Revenue from advertisers on a CPL basis is recognized in the period the leads are accepted by the client, following the execution of a service agreement and commencement of the services.
     
  Under the CPA format, the Company earns revenue based on a percentage or negotiated amount of a consumer transaction undertaken or initiated through its websites. Revenue is recognized at the time of the transaction.
     
  Revenue from flat-fee, listings-based services is based on a customer’s subscription to the service for up to twelve months and are recognized on a straight-line basis over the term of the subscription.

 

Fair value measurements

 

The Company adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

 

The estimated fair value of certain financial instruments, including cash and cash equivalents, prepaid expenses, and accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

 

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also established a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of observable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value.

 

Level 1 – quoted prices in active markets for identical assets and liabilities

 

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

 

Income taxes

 

Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes. Deferred taxes are provided on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and tax carry forwards. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Through December 31, 2014, KSIX and BMG operated as limited liability companies with common owners and all income and losses were passed through to the owners. Beginning in 2015, the Company became wholly owned by a C corporation which is subject to Federal and state income taxes.

 

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In assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based on this assessment, management has established a full valuation allowance against all of the deferred tax assets relating to the NOLs for every period because it is more likely than not that all of the deferred tax assets will not be realized.

 

Impairment of long-lived assets

 

The Company evaluates its long-lived assets and intangible assets for impairment whenever events change or if circumstances indicate that the carrying amount of any assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the asset.

 

Reclassifications

 

Certain prior year comparatives have been reclassified to conform to the current year’s presentation.

 

Recent accounting pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material in its financial position, results of operations, and cash flows when implemented.

 

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3 GOING CONCERN

 

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern. The Company has recently sustained operating losses and has an accumulated deficit of $492,712 at September 30, 2015. In addition, the Company has negative working capital of $281,576 at September 30, 2015. These factors among others, raise substantial doubt about the ability of the Company to continue as a going concern. There is no assurance that the Company will be successful in raising additional capital or in achieving profitable operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

 

4 NOTES PAYABLE AND LONG-TERM DEBT

 

As of September 30, 2015 and December 31, 2014, notes payable and long-term debt consists of:

 

   September 30, 2015   December 31, 2014 
On October 26, 2011, the Company entered into a note payable in the amount of $362,257, relating to a Unit redemption agreement bearing interest at 6% per annum and is payable in equal monthly installments of $7,003, inclusive of interest  $104,698   $161,586 
On December 26, 2014, the Company entered into a secured promissory note in the original amount of $950,000 which is due and payable in 24 monthly installments, without interest. The balance is due on January 1, 2017. The note is secured by a pledge agreement of the holder’s former membership units that were acquired with the proceeds. If the Company pays a total of $800,000 by December 31, 2016, the remaining balance of the note will be forgiven   780,000    950,000 
Note payable to former officers due in four equal annual installments of $52,188 on April 28 of each year, non-interest bearing   208,750    - 
Bridge note payable, bearing interest at 9% per annum that matures October 15, 2015   -    100,000 
    1,093,448    1,211,586 
Less current portion   372,121    416,645 
Long-term debt  $721,327   $794,941 

 

Common stock was issued for the bridge note payable in the amount of $100,000 on April 27, 2015.

 

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5 INTANGIBLE ASSETS

 

Intangible assets consist primarily of the customer lists and related contracts of KSIX and BMG and were recorded at their fair value of $1,143,162 upon their acquisition on December 23, 2014. The Company has determined a useful life of existing contracts and customer lists of three years and is amortizing the existing cost over that period.

 

   September 30, 2015   December 31, 2014 
         
Cost  $1,143,162   $1,143,162 
Accumulated amortization   (190,526)   (8,352)
Balance  $952,636   $1,134,810 
           
Amortization expense:          
Nine months ended September 30, 2015  $285,789      
Three months ended September 30, 2015  $95,263      

 

6 ACQUISITIONS

 

On December 23, 2015, Media acquired the membership interests of KSIX and BMG, See Note 1. The consideration was paid with a cash down payment of $50,000 and a note payable in the amount of $950,000 as described in Note 4. The assets acquired and liabilities assumed are summarized as follows:

 

Cash  $31,334 
Accounts receivable   278,171 
Prepaid expenses   4,715 
Property and equipment   4,585 
Intangible assets   1,143,162 
Total assets   1,461,967 
Accounts payable and accrued expenses   (146,301)
Notes payable and long-term debt   (261,586)
Net assets acquired   1,054,080 
Gain on bargain purchase   (54,080)
Consideration  $1,000,000 

 

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KSIX and BMG operating results for the comparative three and nine months ended September 30, 2014 were as follows:

 

   Three Months Ended
September 30, 2014
   Nine Months Ended
September 30, 2014
 
         
Revenue  $680,746   $2,195,056 
           
Net income  $39,610   $60,583 

 

On April 27, 2015, Holdings (formerly North American Energy Resources, Inc., the Registrant) entered into a Share Exchange Agreement (the “Agreement”) with all of the shareholders of Media. Pursuant to the Agreement, the Company acquired the 22,600,000 issued and outstanding shares of Media and issued 28,000,000 restricted shares of the Company’s common stock in exchange. The transaction resulted in the shareholders of Media owning approximately 90% of the resulting outstanding shares at that time and accordingly, the transaction is accounted for as a reverse merger with Media being the accounting survivor of the Company.

 

7 Stockholder’s equity

 

PREFERRED STOCK

 

The Company has 100,000,000 shares of its $0.001 par value preferred stock authorized. At September 30, 2015 the Company had no preferred shares issued and outstanding.

 

COMMON STOCK

 

The Company has 100,000,000 shares of its $0.001 par value common stock authorized. At September 30, 2015 the Company had 34,832,432 shares issued and outstanding.

 

Prior to the merger between the Company and Ksix Media, Inc., Ksix Media, Inc. issued its common stock valued at $48,000 in exchange for consulting services.

 

On April 27, 2015, the Company had 3,114,812 common shares outstanding when they issued 28,000,000 shares in the acquisition of Ksix Media, Inc. On May 18, 2015, the Company sold 930,000 shares for $75,065 in cash. On June 4, 2015, the Company sold 1,053,100 shares for $85,000 in cash. On July 16, 2015, the Company sold 1,734,520 shares for $140,000 in cash.

 

On September 29, 2015, the Company issued 48,000 shares of its common stock for a public relation services contract for services to be performed in the fourth quarter. The stock was valued at the trading price on the date of the agreement and the resulting $14,880 is included in prepaid expenses in current assets.

 

8 RELATED PARTY TRANSACTIONS

 

The Company’s chief executive officer has advanced the Company an aggregate of $263,925 on a non-interest bearing basis, which is being used for working capital. The advance has no fixed maturity. It is the Company’s plan to repay the advance when funds become available. During the nine months ended September 30, 2015, $92,983 was repaid, leaving a balance of $170,942.

 

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9 SUBSEQUENT EVENTS

 

The Company has evaluated events occurring subsequent to September 30, 2015 and through the date these financial statements were available to be issued.

 

Acquisition of DigitizeIQ, LLC

 

On October 12, 2015, the Company entered into an Agreement for the Exchange of Common Stock (“Agreement”) with DigitizeIQ, LLC (“DIQ”), an Illinois Limited Liability Company and its sole owner. DIQ, whose primary business operations is a full service digital advertising agency specializing in lead generation and landing page optimization specifically designed for mass tort action lawsuits, became a wholly owned subsidiary of the Company.

 

The Agreement provided for a purchase price of $1,250,000 to be paid as follows:

 

  Upon execution of the Agreement, the Company shall pay $250,000 in cash and issue 1,250,000 shares of its restricted common stock valued at $250,000;
     
  Issue a non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which shall be due on November 12, 2015;
     
  Issue a second non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which shall be due on January 12, 2016;
     
  Issue a third non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which shall be due on March 12, 2016.

 

Pursuant to the terms of the Promissory Notes, the Company, with proper notice to the Seller, shall have a thirty (30) day grace period to cure any default resulting from the failure to pay the Seller or his assigns by the due date of each of the three listed Promissory Notes.

 

On or about October 19, 2015, the Company filed a Form 8-K (Current Report) announcing the acquisition of DIQ as described above. Pursuant to Regulation S-X (17 CFR Part 210), Article 8 (Financial Statements of Smaller Reporting Companies) Subsection 4 (17 C.F.R. §210.8.04), within 75 days of the consummation of the acquisition of DIQ, the Company will file an amended Form 8-K which shall containing DIQ’s audited financial statements and notes thereto for as of December 31, 2014 and for the period from inception July 23rd, 2014 to December 31, 2014 along with its interim unaudited financial statements as of and for the nine months ended September 30, 2015. In this amended filing, the Company will also provide pro forma financial information required by 17 C.F.R. §210.8.05.

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This statement contains forward-looking statements within the meaning of the Securities Act. Discussions containing such forward-looking statements may be found throughout this statement. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the matters set forth in this statement. The accompanying consolidated financial statements as of September 30, 2015 and for the three and nine months then ended includes the accounts of Holdings and its wholly owned subsidiaries during the period owned by Holdings. The comparative amounts below for the three and nine months ended September 30, 2014 includes the combined accounts of KSIX, LLC and Blvd Media Group, LLC before their acquisition by Media, which are not reflected in the statement of operations in the consolidated financial statements included herein.

 

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

Revenues during the three months ended September 30, 2015 and 2014 consisted of the following:

 

   2015   2014 
         
Revenue  $357,557   $680,746 
Cost of revenue   183,318    405,389 
Gross profit  $174,239   $275,357 

 

KSIX provides performance based marketing solutions to drive traffic and conversions within a Cost-Per-Action (“CPA”) business model. KSIX works directly with advertisers and other networks to promote advertiser campaigns through their affiliates. KSIX revenues decreased $289,469 (48.3%) during the three months ended September 30, 2015 as compared to the prior year period. KSIX lost a major customer during the quarter ended June 30, 2015, causing a decline in revenue.

 

BMG works with online games and web publishers utilizing our proprietary Offer Wall that promotes hundreds of different advertiser’s campaigns on a single web page. BMG revenues decreased $33,720 (41.6%) during the three months ended September 30, 2015 as compared to the prior year period. The decline in BMG revenues is primarily the result of a switch in demand from desktop games to mobile games.

 

Cost of revenue decreased $222,071 (54.8%) in the 2015 quarter as compared to the same 2014 period. This compares to an overall decline in revenues of $323,189 (47.8%). Cost of revenue was 51.3% of sales in the 2015 quarter as compared to 59.6% in the 2014 quarter.

 

Costs and expenses during the three months ended September 30, 2015 and 2014 were as follows:

 

   2015   2014 
         
Depreciation and amortization  $95,680   $- 
Selling, general and administrative   263,623    232,866 
Total  $359,303   $232,866 

 

Depreciation and amortization in the 2015 quarter is primarily the amortization of intangible assets which commenced December 23, 2014, when acquired. Selling, general and administrative expense increased $30,757 (13.2%) in the 2015 quarter as compared to the 2014 quarter.

 

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Selling, general and administrative expense during the three months ended September 30, 2015 and 2014 is as follows:

 

   2015   2014 
         
Advertising and marketing  $2,079   $11,463 
Bad debt expense   37,406    - 
Professional services   24,486    8,680 
Outside contractors and consultants   22,627    17,830 
Other   50,938    69,687 
Compensation   126,087    125,206 
Total  $263,623   $232,866 

 

Total selling, general and administrative expenses have increased $30,757 (13.2%) in the 2015 quarter as compared to the 2014 quarter. Bad debt expense amounted to $37,406 in the 2015 quarter, while the comparable amount in 2014 was recorded in the fourth quarter. Recurring compensation increased $881 (0.79%) in the 2015 quarter as compared to the 2014 quarter.

 

Other income (expense) during the three months ended September 30, 2015 and 2014 is as follows:

 

   2015   2014 
         
Interest expense  $(1,763)  $(2,881)
Interest and other income   7    - 
Oil and gas operations, net   (46)   - 
Total  $(1,802)  $(2,881)

 

Interest expense is declining as the balance on the related interest bearing note is declining. Oil and gas income and expenses began in May 2015 after the completion of the Stock Exchange Agreement discussed in Notes 1 and 6 to the consolidated financial statements.

 

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

Revenues during the nine months ended September 30, 2015 and 2014 consisted of the following:

 

   2015   2014 
         
Revenue  $1,874,872   $2,195,056 
Cost of revenue   1,181,236    1,394,526 
Gross profit  $693,636   $800,530 

 

KSIX provides performance based marketing solutions to drive traffic and conversions within a Cost-Per-Action (“CPA”) business model. KSIX works directly with advertisers and other networks to promote advertiser campaigns through their affiliates. KSIX revenues decreased $100,872 (5.6%) during the nine months ended September 30, 2015 as compared to the prior year period.

 

BMG works with online games and web publishers utilizing our proprietary Offer Wall that promotes hundreds of different advertiser’s campaigns on a single web page. BMG revenues decreased $219,312 (54.6%) during the nine months ended September 30, 2015 as compared to the prior year period. The decline in BMG revenue is primarily a result of a switch in demand from desktop games to mobile games.

 

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Cost of revenue decreased $213,290 (15.3%) in the 2015 period as compared to the same period in 2014. Cost of revenue was 63.0% of sales in the 2015 period as compared to 63.5% of sales in the 2014 period.

 

Costs and expenses during the nine months ended September 30, 2015 and 2014 were as follows:

 

   2015   2014 
         
Depreciation and amortization  $286,917   $- 
Selling, general and administrative   801,563    730,498 
Total  $1,088,480   $730,498 

 

Depreciation and amortization in the 2015 period is primarily the amortization of intangible assets which commenced on December 23, 2014. Selling, general and administrative expenses increased $371,065(9.7%) in the 2015 period as compared to the same 2014 period.

 

Selling, general and administrative expense during the nine months ended September 30, 2015 and 2014 is as follows:

 

   2015   2014 
         
Advertising and marketing  $16,791   $42,604 
Bad debt expense   37,406    - 
Professional services   43,631    62,225 
Outside contractors   85,986    60,306 
Other   170,063    163,545 
Compensation   447,686    401,818 
Total  $801,563   $730,498 

 

In total, selling, general and administrative expenses increased $71,065 (9.7%) in the 2015 period as compared to the same 2014 period. Bad debt expense amounted to $37,406 in the 2015 period, while the comparable amount in 2014 was recorded in the fourth quarter. Recurring compensation declined $2,132 (0.5%) in the 2015 period as compared to the same 2014 period. The 2015 compensation amount includes $48,000 in non-recurring consulting services paid with common stock.

 

Other income (expense) during the nine months ended September 30, 2015 and 2014 is as follows:

 

   2015   2014 
         
Interest expense  $(6,143)  $(9,448)
Interest and other income   63    - 
Oil and gas operations, net   (85)   - 
Total  $(6,165)  $(9,448)

 

Interest expense is declining as the balance of the related interest bearing note declines. Oil and gas income and expenses began in May 2015 after the completion of the Stock Exchange Agreement discussed in Notes 1 and 6 to the consolidated financial statements.

 

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LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

 

The Company has entered into loan agreements to finance the purchase of the operating business of KSIX and BMG and is currently selling common stock to assist in reducing and retiring this debt. The Company is in a growth mode, which results in receivables increasing and can cause cash shortages from time-to-time. Additionally, the Company lost a major customer in the second quarter which resulted in a decline in 2015 revenues as compared to 2014 revenues during the quarter. On October 12, 2015, the Company acquired DigitizeIQ, LLC, which has a total of $1,000,000 in cash requirements over the next 150 days.

 

At September 30, 2015 and December 31, 2014, our current assets were $417,217 and $323,937, respectively, and our current liabilities were $698,793 and $635,294, respectively, which resulted in a working capital deficit of $281,576 and $311,357, respectively.

 

Total assets at September 30, 2015 and December 31, 2014 amounted to $1,273,467 and $1,463,313, respectively. At September 30, 2015, assets consisted of current assets of $417,217, property and equipment of $7,229 and net intangible assets of $849,021, as compared to current assets of $323,937, property and equipment of $4,566 and net intangible assets of $1,134,810 at December 31, 2014.

 

At September 30, 2015, our total liabilities of $1,420,120 decreased $10,116 (0.7%) from $1,430,235 at December 31, 2014. The decrease primarily consists of a decline in notes payable and long-term debt of $118,138, partially offset by an increase in accounts payable and accrued expenses of $17,405 and additional net related party advances of $90,617.

 

At September 30, 2015, our stockholders’ equity (deficit) was ($146,653) as compared to stockholders’ equity of $33,077 at December 31, 2014. The principal reason for the decrease in stockholders’ equity (deficit) was the sale of common stock for $300,065 in cash, less the effect of operating losses. In addition, the merger of the Companies in April 2015 resulted in an increase in the stockholders’ deficit of $84,780.

 

The following table sets forth the major sources and uses of cash for the nine months ended September 30, 2015.

 

   2015 
     
Net cash used in operating activities  $(63,538)
Net cash used in investing activities   (2,001)
Net cash provided by financing activities   163,794 
Net increase in cash and cash equivalents  $98,255 

 

At September 30, 2015, the Company had the following material commitments and contingencies.

 

Acquisition – See Note 9 to the Consolidated Financial Statements.

 

Notes payable and long-term debt – $1,093,448, See Note 4 to the Consolidated Financial Statements.

 

Advances from related party – $170,942 balance owed on non-interest bearing basis. See Note 8 to the Consolidated Financial Statements.

 

Cash requirements and capital expenditures – The Company has not had any significant capital expenditures during the year through September 30, 2015, which required cash. The Company does plan to use acquisitions to grow its revenue base through use of its common stock, debt financing and available cash. The Company has initiated efforts to raise the required capital, however, there can be no assurance that it will be successful, or that any capital can be raised on terms that are not dilutive to existing common stockholders.

 

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Known trends and uncertainties – The Company is planning to acquire other businesses that are similar to its operations. The uncertainty of the economy may increase the difficulty of raising funds to support the planned business expansion.

 

Evaluation of the amounts and certainty of cash flows – The loss of a major customer during the second quarter has reduced cash flows from operations. There can be no assurance that the Company will be able to replace the lost business and be able to fund operations in the future.

 

Going Concern – Our financial statements have been presented on the basis that we continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, we incurred a net operating loss in the nine months ended September 30, 2015. These factors create an uncertainty about our ability to continue as a going concern. We are currently trying to raise capital through private offerings of common stock and longer term debt. Our ability to continue as a going concern is dependent on the success of this plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

CRITICAL ACCOUNTING ESTIMATES

 

Our significant accounting policies are described in Note 2 of the Consolidated Financial Statements. During the period ending September 30, 2015, we were not required to make any material estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue and expenses. However, if we complete an acquisition, we will be required to make estimates and assumptions typical of other companies. For example, we will be required to make critical accounting estimates related to valuation and accounting for business combinations. The estimates will require us to rely upon assumptions that were highly uncertain at the time the accounting estimates are made, and changes in them are reasonably likely to occur from period to period. Changes in estimates used in these and other items could have a material impact on our financial statements in the future. Our estimates will be based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.

 

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Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4: Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of September 30, 2015. Our management has determined that, as of September 30, 2015, the Company’s disclosure controls and procedures are not effective due to a lack of segregation of duties, lack of an audit committee, and lack of documented controls.

 

Changes in internal control over financial reporting

 

Effective April 27, 2015, the Company experienced a change in control, whereby, the Company’s new Chief Executive officer, through a stock exchange agreement acquired approximately 79% of the Company’s outstanding common stock. As a result, the Company’s principal executive officer and principal financial officer determined that the Company’s disclosure controls and procedures were not effective due to a lack of segregation of duties, lack of an audit committee and lack of documented controls. There have been no other significant changes in internal controls or in other factors that could significantly affect these controls during the quarter ended September 30, 2015, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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PART II - OTHER INFORMATION

 

Item 1: Legal Proceedings

 

None

 

Item 1A:RISK FACTORS

 

Not applicable.

 

Item 2:UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On July 16, 2015, the Company entered into a subscription agreement with an unrelated individual for the sale of 1,734,520 shares of its common stock for $140,000, or $0.080714 per share. On September 29, 2015, the Company issued 48,000 common shares pursuant to a public relation services contract for services to be rendered during the fourth quarter. The common stock was valued at $14,880 based on the trading price at that time.

 

The shares were sold pursuant to an exemption from registration under Section 4(2) promulgated under the Securities Act of 1933, as amended.

 

Item 3: Defaults upon Senior Securities.

 

None

 

Item 4: Submission of Matters to a Vote of Security Holders.

 

None

 

Item 5: Other Information.

 

None

 

Item 6: Exhibits

 

  Exhibit 31.1 Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer and Chief Financial Officer*
     
  Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer and Chief Financial Officer*
     
  101.INS XBRL Instance Document**
  101.SCH XBRL Taxonomy Extension Schema Document**
  101.CAL XBRL Taxonomy Extension Calculation Linkbase Document**
  101.DEF XBRL Taxonomy Extension Definition Linkbase Document**
  101.LAB XBRL Taxonomy Extension Label Linkbase Document**
  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document**
     
  *Filed herewith.
  **In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.

 

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Signature

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

KSIX MEDIA HOLDINGS, INC.
     
Date: November 6, 2015    
     
  By:

/s/ Carter Matzinger

    Chief Executive Officer and Chief Financial Officer

 

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