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: June 30, 2016
File No. 000-52522
KSIX MEDIA HOLDINGS, INC.
(Name of small business issuer in our charter)
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: 46,156,977 shares of common stock outstanding as of August 10, 2016.
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 10-K dated December 31, 2015 and filed on April 14, 2016.
TABLE OF CONTENTS
PART I - Financial Information
Item 1: Financial Statements
KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
See accompanying notes to consolidated financial statements
Consolidated Statements of Operations
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
For the six months ended June 30, 2016 and 2015
Notes to Consolidated Financial Statements
June 30, 2016
Basis of presentation
The accompanying consolidated financial statements include the accounts of KSIX Media Holdings, Inc. (“Holdings”), a Nevada corporation, 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, DigitizeIQ, LLC (“DIQ”) an Illinois limited liability company that was formed on July 23, 2014 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 October 12, 2015, the Company entered into an Agreement for the Exchange of Common Stock (“Agreement”) with DIQ and its sole owner. DIQ is a full service digital advertising agency which became a wholly owned subsidiary of the Company.
On or about April 27, 2015, KSIX Media Holdings, Inc. (formerly “North American Energy Resources, Inc.”) entered into a Share Exchange Agreement (the “Agreement”) with all of the shareholders of KSIX Media, Inc. whose primary business is the operation of a diverse advertising network through its wholly-owned subsidiaries, KSIX and BMG. 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. In July 2015, the Company completed the change of its name from North American Energy Resources, Inc. to KSIX Media Holdings, Inc.
The Agreement was accounted for as a reverse merger, whereby KSIX Media, Inc. is the accounting acquirer and KSIX Media Holdings, Inc. is the legal surviving reporting company. The historical financial statements represent those of KSIX Media, Inc. which was formed on November 5, 2014.
On December 23, 2014, Media acquired the membership interests of KSIX and BMG.
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 June 30, 2016 and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2016 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 10-K for the year ended December 31, 2015 filed with the SEC on April 14, 2016.
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.
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.
DIQ is a full service digital advertising agency specializing in survey generation and landing page optimization specifically designed for mass tort action lawsuits.
We have evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”) through the date these financial statements were available to be issued and find no recent accounting pronouncements that would have a material impact on the financial statements of the Company.
The Company has not established sources of revenues sufficient to fund the development of its business, or to pay projected operating expenses and commitments for the next year. The Company has an accumulated deficit of $3,470,712 from inception through June 30, 2016, and incurred a loss of $2,042,906 for the six months then ended. These factors, among others, create an uncertainty about our ability to continue as a going concern. The Company projects that it should be cash flow positive by the 3rd quarter ended September 30, 2016 from ongoing operations by the combination of increased cash flow from its current subsidiaries, as well as lowering our current debt burden. Currently, the Company is negotiating with several institutional investors for equity investment which will be used to pay down existing debt obligations and cover any operational shortfalls in the short term. In addition, the Company plans on conducting a self underwritten private offering of equity through a series of PIPE offerings over the next 45 to 90 days. Such PIPE capital raised by the Company will be utilized to further reduce our existing debt obligations, provide capital for the stabilization and eventual expansion of our core business operations, and to provide a working capital buffer for any potential longer term shortfalls until such time as we are cash flow positive. Management can provide no assurance that the Company will be able to produce positive cash flow or obtain the financing as described. The Company’s ability to continue as a going concern is dependent on the success of this plan.
The Company’s financial statements have been presented on the basis that it continues as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company has estimated the fair value of the assets acquired and liabilities assumed as part of the acquisition and is currently undergoing a formal valuation and will adjust these estimates, if necessary, within the one year measurement period:
Operating results of DIQ for the three and six months ended June 30, 2015 follow:
KSIX and BMG - The customer lists and related contracts of KSIX and BMG 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 cost over that period.
DIQ - The customer lists and related contracts of DIQ were recorded at their fair value of $1,630,973 upon their acquisition on October 12, 2015. The Company has estimated the fair value of the assets acquired and liabilities assumed as part of the acquisition and is currently undergoing a formal valuation and will adjust these estimates, if necessary, within the one year measurement period. (Note 4). The Company has determined a useful life of existing contracts and customer lists of three years and is amortizing the cost over that period.
Intangible assets are as follows:
The Company bills in advance for services to be rendered for the majority of the business of DIQ. As of June 30, 2016 and December 31, 2015, the Company had received $493,101 and $518,240, respectively, from its customers for which services had yet to be delivered.
The Company maintains an arrangement with its bank for its DIQ operation, whereby it utilizes credit cards to pay the majority of its trade obligations. The bank charges no interest on the outstanding credit card balance, which is required to be repaid at the end of each billing cycle. In the event the payment is not timely made, the bank charges a fee equal to 2% of the outstanding balance. The Company’s credit limit is approximately $500,000. At June 30, 2016 and December 31, 2015, the Company’s credit card liability was $347,026 and $274,135, respectively.
As of June 30, 2016 and December 31, 2015, notes payable and long-term debt due to a related party consists of:
The payment due April 28, 2016 has not been paid.
As of June 30, 2016 and December 31, 2015, notes payable and long-term debt consists of:
¹Notes due seller of DigitizeIQ, LLC includes a series of notes as follows:
The $250,000 notes due January 12, 2016 and March 12, 2016 have an unpaid balance of $485,000 at June 30, 2016. The Company is renegotiating the terms of the notes. The notes bear interest at 5% per annum when in default (after the due date).
The notes were non-interest bearing until due. Accordingly, a debt discount at 5% per annum was calculated for the notes and was amortized to interest expense until the due date of the notes. The net carrying value of the notes follows.
² SENIOR SECURED CREDIT FACILITY AGREEMENT
On February 24, 2016, the Company executed a Senior Secured Credit Facility Agreement (“Senior Credit Facility”) in the maximum amount of $5,000,000 together with a Convertible Promissory Note (“Convertible Note”) in the amount of $750,000 with TCA Global Credit Master Fund, LP (“TCA”). The initial loan advance was $400,000 and requires monthly interest only payments for two months and then sixteen monthly payments of $28,306, including interest at 18% per annum. The obligation is secured by substantially all assets of the Company and its subsidiaries.
The Senior Credit Facility includes a provision for advisory fees in the amount of $300,000 which was paid when the Company issued 1,782,000 shares of its common stock to TCA (the “Advisory Shares”) on or about March 24, 2016. If TCA is unable to collect the $300,000 from sales of the Advisory Shares within twelve months, the Company is obligated to issue additional shares to TCA until TCA is able to collect the full $300,000. Should TCA still be unable to collect the full $300,000, and after at least one year, TCA can require the Company to redeem any remaining shares for an amount equal to $300,000 less the sales proceeds that TCA has collected. In the event TCA sells the Advisory Shares for more than $300,000, the excess proceeds, together with unsold common shares will be returned to the Company. As long as there is no default under the terms of the Senior Credit Facility, TCA is limited to weekly sales of the Advisory Shares equal to no more than 20% of the average weekly volume of the Company’s common stock on its principal trading market. The stock was valued at the trading price on the date of the agreement and the resulting $300,000 was included as a direct reduction from the carrying amount of the debt liability and is being amortized to interest expense over the eighteen month loan payment period.
The Convertible Note is convertible into the Common Stock of the Company upon the event of: (1) a default under any of the loan documents between the Company and TCA; or (2) mutual agreement between the Company and TCA, at which time TCA may convert all or a portion of the outstanding principal, accrued and unpaid interest into shares of the Common Stock of the Company calculated by the conversion amount divided by 85% of the lowest of the daily weighted average price of the Company’s Common Stock during five business days immediately prior to the date of the request of conversion (the “Conversion”). Pursuant to the terms of the Convertible Note, TCA is limited to beneficial ownership of not more than 4.99% of the issued and outstanding Common Stock of the Company after taking into effect the Common Stock to be issued pursuant to the Conversion.
Pursuant to ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs” and issued by the FASB in April 2015, debt issuance costs related to a recognized debt liability should be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The carrying value of the note at June 30, 2016 is as follows:
The Company is also responsible for other transaction, due diligence and legal fees of $42,500 if it draws the remaining $350,000 initially committed.
The proceeds from the loan were used to pay a $250,000 note to the seller of DIQ and for working capital.
³ The Convertible Promissory Note was modified to release the pledge of the holder’s former membership units in Ksix and BMG, to make the note convertible into the Company’s common stock and to require an extra payment of $100,000 due within 90 days. The terms of the Convertible Note provided in the event the Note was not paid prior to the Maturity Date (January 1, 2017) or that payments are not made to the holder by the due date ($10,000 on the 1st and 15th of each month), the holder shall have the right thereafter, exercisable in whole or in part, to convert the outstanding principal or payment then due into shares of the common stock of the Company. The Convertible Promissory Note provided the note conversion price was determined by taking the lowest closing price of the Company’s common stock in the previous ten trading days and then applying a 45% discount. On March 23, 2016, the parties entered into an Addendum to the Convertible Promissory Note to allow an immediate conversion of the $20,000 payments due in April 2016 at the 45% discount rate; to modify the conversion discount rate from 45% to 35% for any future conversions; and to require an additional payment of $30,000 within sixty days. The Company evaluated the embedded conversion feature for derivative treatment and determined that since there was no conversion allowed until the April payment, no derivative liability existed as of March 31, 2016.
The original note and the convertible promissory note provide for semi-monthly payments of $10,000 due on the 1st and 15thof the month, with any unpaid balance due on January 1, 2017. If the Company paid the unpaid balance on December 31, 2016, they were allowed a discount of $200,000 from the remaining balance. In addition, the modification and addendum, provided for two additional payments during 2016. Within 90 days of January 19, 2016, the Company was required to make an additional payment of $100,000 and within 60 days of March 23, 2016, the Company was required to make an additional payment of $30,000. As of June 30, 2016, the $100,000 and the $30,000 extra payments have not been made and one payment of $10,000 is past due.
4Pinz Capital International, L.P. Note – The Pinz Capital note payable is due in installments of $25,000 plus accrued interest on November 25, 2016; $18,750 plus accrued interest on December 25, 2016; $14,063 plus accrued interest on January 25, 2017 and a final payment of the unpaid balance plus accrued interest on May 25, 2017. A prepayment before November 25, 2016 would require a 5% prepayment penalty. The agreement provides for limitations on additional indebtedness. If an event of default, as defined in the agreement, occurs and if not cured within ten days, the note becomes convertible into the Company’s common stock at a rate equal to 65% of the average VWAP over the previous 5 trading days. If the event of default is for non-payment of any installment due, the amount convertible is limited to the amount of the unpaid installment.
10Stockholder’s equity
PREFERRED STOCK
The Company has 100,000,000 shares of its $0.001 par value preferred stock authorized. At June 30, 2016, the Company had 10,000,000 shares of Series A Preferred Stock issued and outstanding and at December 31, 2015, the Company had no preferred shares issued and outstanding.
Series “A” Preferred Stock
On May 6, 2016, the Company, pursuant to the consent of the Board of Directors filed a Certificate of Designation with the Nevada Secretary of State which designated 10,000,000 shares of the Company’s authorized preferred stock as Series “A” Preferred Stock, par value $0.001. The Series “A” Preferred Stock has the following attributes:
On May 6, 2016, upon filing the Certificate of Designation which designated 10,000,000 shares of the Company’s $0.001 par value preferred stock as Series “A”, the board of directors authorized the Company to issue all 10,000,000 shares of Series “A” Preferred Stock to Carter Matzinger, Chief Executive Officer and Chairman of the Board of Directors, for services previously rendered.
The Company valued these shares based upon their conversion rate of 10 shares of preferred stock for each share of common stock based on the market price of the common stock as of March 30, 2016 of $0.18 per share. The Company recorded compensation expense in the amount of $180,000.
COMMON STOCK
The Company has 100,000,000 shares of its $0.001 par value common stock authorized. At June 30, 2016 and December 31, 2015, the Company had 46,156,977 shares and 36,130,432 shares issued and outstanding, respectively.
Effective January 4, 2016, the Company issued 250,000 shares of its common stock pursuant to a legal services agreement. The common stock was valued at $112,500 based on the closing price of the common stock on that date.
Effective February 1, 2016, the Company issued 250,000 shares of its common stock pursuant to a consulting agreement. The common stock was valued at $30,000 based on the closing price of the common stock on that date.
On February 24, 2016, the Company issued 1,782,000 shares of its common stock for advisory fees pursuant to the Senior Secured Credit Facility Agreement (Note 9). The stock was valued at the trading price on the date of the agreement and the resulting $300,000 was included as a reduction of the related note payable and is being amortized to interest expense over the eighteen month loan payment period.
On April 1, 2016, the Company issued 454,545 shares of its common stock valued at $20,000 in exchange for principal payments in that amount due on a note payable.
On April 1, 2016, the Company issued 100,000 shares of its common stock in exchange for cash in the amount of $10,000.
On April 5, 2016, the Company issued 1,000,000 shares of its common stock valued at $180,000 in partial consideration for a six month consulting agreement. The $180,000 is being amortized to expense over the term of the agreement.
On May 10, 2016, the Company issued 1,000,000 shares of its common stock valued at $190,000 in partial consideration for a two year consulting agreement. The $190,000 is being amortized to expense over the term of the agreement.
On May 13, 2016, the Company issued 1,800,000 shares of its common stock as part of the Unit subscription agreement described below for consideration of $180,000.
On May 23, 2016, the Company issued 240,000 shares of its common stock as partial consideration for a six month public relations consulting agreement. The shares were valued at $38,688, which is being amortized to expense over the term of the agreement.
On June 10, 2016, the Company issued a total of 3,150,000 shares of its common stock to six employee/consultants in exchange for prior services. The stock was valued at $516,600 and the amount is included in selling, general and administrative expense.
COMMON STOCK OPTIONS
Pursuant to his employment agreement with the Company, Carter Matzinger was awarded a “Performance Based Stock Option” of 3,000,000 shares of the Company’s common stock and a “Time Based Stock Option” of up to 3,000,000 shares of Common Stock of the Company. Both sets of options come with Registration Rights and when requested by Mr. Matzinger, the Company will be required to file a Form S-8 Registration Statement. The terms of both types of common stock option awards are described as follows:
Performance Based Stock Options
Time Based Stock Options
The following assumptions were used to value the options:
No value was recorded for the performance based stock options. The time based stock options were valued at $588,283, based on the assumptions above, and an accrual of $39,219 was recorded as amortization of this amount, in compensation expense and accrued expenses at December 31, 2015. At June 30, 2016, an additional $73,536 has been accrued ($36,768 in each quarter).
UNIT SUBSCRIPTION AGREEMENT – WARRANTS
On May 13, 2016, the Company entered into a Unit subscription agreement with an individual. Each Unit was priced at $0.10 and contained: (a) one share of common stock restricted in accordance with Rule 144; and (b) two Warrants to purchase an additional share of common stock restricted in accordance with Rule 144 for $0.75 for a period of 18 months after the close of the offering. Pursuant to the Unit subscription agreement, the Company offered to the individual a minimum of 1,800,000 Units ($180,000) and a maximum of 5,000,000 Units ($500,000). The individual purchased the minimum of 1,800,000 Units ($180,000) on May 13, 2016 and has a non-transferable and irrevocable option to purchase the remaining 3,200,000 Units ($320,000) for a period of 120 days from the effective date of May 13, 2016.
The 3,600,000 Warrants were valued at $20,473 using the Black-Scholes method based on the assumptions listed above with a term of 18 months. The Warrants are classified as equity since they have a fixed exercise price and do not have a provision for modification.
The Company’s chief executive officer has advanced the Company various amounts on a non-interest bearing basis, which is being used for working capital. The advance has no fixed maturity. The activity is summarized as follows:
See Note 8 for long-term debt due to a director.
The Company has evaluated events occurring subsequent to June 30, 2016 and through the date these financial statements were available to be issued.
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 June 30, 2016 and June 30, 2015 and for the three and six months then ended includes the accounts of Holdings and its wholly owned subsidiaries during the period owned by Holdings.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2016 AND 2015
Revenues during the three months ended June 30, 2016 and 2015 consisted of the following:
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. 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. KSIX and BMG revenues amounted to $323,479 in the three months ended June 30, 2016 as compared to $520,463 in the 2015 period. The majority of the decline began in the 2015 period when the Company lost a major customer.
DIQ’s revenues from survey generation and landing page optimization amounted to $528,209 in the three months ended June 30, 2016. DIQ was acquired October 12, 2015 and accordingly, its revenues for the period ended June 30, 2015 were not a part of the Company’s consolidated revenue. DIQ’s revenue in the 2015 period was $1,272,920 while a private company. The decline in revenue is primarily a result of training new personnel to operate DIQ’s business and developing new customers.
Cost of revenue increased $470,203 (151.8%) in the 2016 quarter as compared to the same 2015 period. This compares to an overall increase in revenues of $331,225 (38.9%). Cost of revenue was 91.6% of sales in the 2016 quarter as compared to 60.3% in the 2015 quarter. The higher cost of revenue is primarily due to the impact of DIQ. DIQ’s cost of revenue was 110.7%, while KSIX and BMG were 54.5%. During the quarter, DIQ incurred cost on a project for which they were only able to receive a minor return, which resulted in the higher than expected cost of revenue. The Company is implementing procedures and controls to limit the likelihood of this occurrence in the future.
Costs and expenses during the three months ended June 30, 2016 and 2015 were as follows:
Depreciation and amortization increased $136,292 (142.5%) from $95,634 in the 2015 quarter to $231,926 in the 2016 quarter. Substantially all of the increase is the amortization of intangible assets of $135,915 acquired as a part of the DIQ acquisition on October 12, 2015.
Selling, general and administrative expense during the three months ended June 30, 2016 and 2015 is as follows:
Total selling, general and administrative expense increased $730,988 (245.5%) from $297,721 in the 2015 period to $1,028,709 in the 2016 period. The detail changes are discussed below:
Other expense (income) during the three months ended June 30, 2016 and 2015 is as follows:
Interest expense in the 2015 period was the interest on an amortizing BMG note. During the 2016 period, interest expense includes $818 for the amortizing BMG note, $50,001 in amortization of loan costs and $22,381 in current accrued interest on the notes payable described in Note 9 to the condensed consolidated financial statements. The loan cost was paid with the Company’s common stock.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2016 AND 2015
Revenues during the six months ended June 30, 2016 and 2015 consisted of the following:
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. 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. KSIX and BMG revenues amounted to $658,983 in the six months ended June 30, 2016 as compared to $1,438,452 in the 2015 period. The majority of the decline began in the 2015 period when the Company lost a major customer during the second quarter.
DIQ’s revenues from survey generation and landing page optimization amounted to $1,408,202 in the six months ended June 30, 2016. DIQ was acquired October 12, 2015 and accordingly, its revenues for the period ended June 30, 2015 were not a part of the Company’s consolidated revenue. DIQ’s revenue in the 2015 period was $2,906,540 while a private company. The decline in revenue is primarily a result of training new personnel to operate DIQ’s business and developing new customers. In addition, the 2015 revenue include a smaller number of customers with much larger amounts of revenue. In 2016, DIQ is experiencing lower revenue with an increasing number of customers.
Cost of revenue increased $910,552 (99.1%) in the 2016 period as compared to the same 2015 period. This compares to an overall increase in revenues of $628,733 (43.7%). Cost of revenue was 88.5% of sales in the 2016 period as compared to 63.9% in the 2015 period. The higher cost of revenue is primarily due to the impact of DIQ. DIQ’s cost of revenue was 103.1%, while KSIX and BMG were 57.5%. During the period, DIQ incurred cost on a project for which they were only able to receive a minor return and incurred a loss, which resulted in the higher than expected cost of revenue. The Company is implementing procedures and controls to limit the likelihood of this occurrence in the future.
Costs and expenses during the six months ended June 30, 2016 and 2015 were as follows:
Depreciation and amortization increased $272,615 (142.6%) from $191,237 in the 2015 period to $463,852 in the 2016 period. Substantially all of the increase is the amortization of intangible assets of $271,830 acquired as a part of the DIQ acquisition on October 12, 2015.
Selling, general and administrative expense during the six months ended June 30, 2016 and 2015 is as follows:
Total selling, general and administrative expense increased $1,176,060 (218.6%) from $537,980 in the 2015 period to $1,714,040 in the 2016 period. The detail changes are discussed below:
Other expense (income) during the six months ended June 30, 2016 and 2015 is as follows:
Interest expense in the 2015 period was the interest on an amortizing BMG note. During the 2016 period, interest expense includes $1,277 for the amortizing BMG note, $69,542in amortization of loan costs and $37,617 in current accrued interest on the notes payable described in Note 9 to the condensed consolidated financial statements. The loan cost was paid with the Company’s common stock.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
The Company has entered into loan agreements to finance the purchase of the operating businesses of DIQ, KSIX and BMG and is currently selling common stock to assist in reducing and retiring this debt.
At June 30, 2016 and December 31, 2015, our current assets were $587,849 and $346,043, respectively, and our current liabilities were $3,105,175 and $2,597,008, respectively, which resulted in a working capital deficit of $2,517,326 and $2,250,965, respectively.
Total assets at June 30, 2016 and December 31, 2015 amounted to $2,404,777 and $2,626,823, respectively. At June 30, 2016, assets consisted of current assets of $587,849, net property and equipment of $12,926 and net intangible assets of $1,804,002, as compared to current assets of $346,043, net property and equipment of $14,422 and net intangible assets of $2,266,358 at December 31, 2015.
At June 30, 2016, our total liabilities of $3,286,642 increased $53,072 from $3,233,570 at December 31, 2015. The increase consists of a decrease in long-term debt of $455,095 offset by an increase in current liabilities of $508,167.
At June 30, 2016, our stockholders’ deficit was ($881,865) as compared to stockholders’ deficit of ($606,747) at December 31, 2015. The principal reason for the increase in stockholders’ deficit was the common stock issued for loan costs of $300,000, legal and consulting contracts of $1,067,788 and cash of $190,000 less the loss from operations of $2,042,906.
The following table sets forth the major sources and uses of cash for the six months ended June 30, 2016 and 2015.
At June 30, 2016, the Company had the following material commitments and contingencies.
Acquisition– See Note 4 to the Consolidated Financial Statements.
Notes payable and long-term debt - $1,469,818- See Note 9 to the Consolidated Financial Statements.
Advances from related party - $358,002 balance owed on non-interest bearing basis. See Note 11 to the Consolidated Financial Statements.
Cash requirements and capital expenditures – The Company has not had any capital expenditures during the six months ended June 30, 2016, which required cash. On October 12, 2015, the Company acquired DigitizeIQ, LLC for cash in the amount of $250,000 and $750,000 in short-term notes payable. On February 24, 2016, the Company borrowed $400,000 and used $250,000 of this amount to retire $250,000 of the debt incurred to acquire DIQ. $485,000 remains unpaid. 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.
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 of 2015 has reduced cash flows from operations. The Company is still learning the business of DIQ and has experienced operating losses during the initial operation. 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 – The Company has not established sources of revenues sufficient to fund the development of its business, or to pay projected operating expenses and commitments for the next year. The Company has an accumulated deficit of $3,470,712 from inception through June 30, 2016, and incurred a loss of $2,042,906 for the period then ended. These factors, among others, create an uncertainty about our ability to continue as a going concern. The Company projects that it should be cash flow positive by the 3rd quarter ended September 30, 2016 from ongoing operations by the combination of increased cash flow from its current subsidiaries, as well as lowering our current debt burden. Currently, the Company is negotiating with several institutional investors for equity investment which will be used to pay down existing debt obligations and cover any operational shortfalls in the short term. In addition, the Company plans on conducting a self underwritten private offering of equity through a series of PIPE offerings over the next 45 to 90 days. Such PIPE capital raised by the Company will be utilized to further reduce our existing debt obligations, provide capital for the stabilization and eventual expansion of our core business operations, and to provide a working capital buffer for any potential longer term shortfalls until such time as we are cash flow positive. The Company’s ability to continue as a going concern is dependent on the success of this plan.
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 June 30, 2016, 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.
Not applicable.
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 June 30, 2016, 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 June 30, 2016, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 1A: RISK FACTORS
Item 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Effective April 1, 2016, the Company issued 454,545 shares of its common stock valued at $20,000 in exchange for principal payments in that amount due on a convertible note payable.
Effective April 1, 2016, the Company issued 100,000 shares of its common stock in exchange for cash in the amount of $10,000.
On April 5, 2016, the Company issued 1,000,000 shares of its common stock valued at $180,000 in partial consideration for a six month consulting contract. This amount is being amortized to expense over the term of the agreement.
On May 10, 2016, the Company issued 1,000,000 shares of its common stock valued at $190,000 in partial consideration for a two year consulting contract. This amount is being amortized to expense over the term of the agreement.
On May 13, 2016, the Company issued 1,800,000 shares of its common stock for cash in the amount of $180,000 pursuant to a Unit subscription agreement.
On June 10, 2016, the Company issued 3,150,000 shares of its common stock to six employee/consultants in exchange for prior services. The shares were valued at $516,600 and the amount is included in selling, general and administrative expense.
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.
Item 4: Submission of Matters to a Vote of Security Holders.
Item 5: Other Information.
Item 6: Exhibits
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.