UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

 

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)

 

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: 46,156,977 shares of common stock outstanding as of August 10, 2016.

 

 

 

   
  

 

Explanatory Note

 

We filed our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 on August 23, 2016 (the “Original Report”). We are filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to make the following changes:

 

  To add Note 13 for the restatement;
  To update management discussion and analysis in Item 2;
  To restate financial statements as required;
  To add restated references in the financial statements; and
  To provide currently dated Exhibit Nos. 31-1 and 32-1.

 

No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

 

On November 15, 2016, the board of directors of the Company, upon recommendation of the Company’s management, determined that the Company’s Consolidated Financial Statements for its fiscal quarter ended June 30, 2016, as originally filed in the Form 10-Q, could no longer be relied on. See Note 13.

 

We have made no attempt in this Amendment to modify or update the disclosures presented in the Original Report other than as noted in the previous paragraphs. Also, this Amendment does not reflect events occurring after the filing of the Original Report. Accordingly, this Amendment should be read in conjunction with the Original Report and our other filings with the SEC subsequent to the filing of the Original Report.

 

 2  
  

 

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

 

    Page
     
PART I – FINANCIAL INFORMATION (Unaudited)  
     
Item 1: Restated Consolidated Financial Statements 4
     
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3: Quantitative and Qualitative Disclosures About Market Risk 24
     
Item 4: Controls and Procedures 24
     
PART II - OTHER INFORMATION  
     
Item 1: Legal Proceedings 25
     
Item 1A: Risk Factors 25
     
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 25
     
Item 3: Defaults upon Senior Securities 25
     
Item 4: Submission of Matters to a Vote of Security Holders 25
     
Item 5: Other Information 25
     
Item 6: Exhibits 25

 

 3  
  

 

PART I - Financial Information

 

Item 1: Financial Statements.

 

KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)

 

   June 30, 2016   December 31, 2015 
   (Restated)     
ASSETS          
Current assets:          
Cash and cash equivalents  $63,201   $69,489 
Accounts receivable   218,886    275,092 
Prepaid expenses   305,762    1,462 
Total current assets   587,849    346,043 
Property and Equipment, less accumulated depreciation of $3,181 and $1,685, respectively,   12,926    14,422 
Intangible assets less accumulated amortization of $970,133 and $507,777, respectively   1,804,002    2,266,358 
Total assets  $2,404,777   $2,626,823 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current liabilities:          
Accounts payable and accrued expenses  $511,195   $355,597 
Credit card liability   347,026    274,135 
Deferred revenue   165,700    518,240 
Advance from related party   358,002    318,002 
Current portion of long-term debt - related party   53,750    26,875 
Notes payable and current portion of long-term debt   1,394,288    1,104,159 
Total current liabilities   2,829,961    2,597,008 
Long-term debt less current installments - related party   53,750    80,625 
Long-term debt less current installments   75,530    555,937 
Total liabilities   2,959,241    3,233,570 
Commitments and contingencies          
           
Stockholders' deficit:          
Preferred stock: $0.001 par value; 100,000,000 shares authorized; 10,000,000 shares issued and outstanding at June 30, 2016 and none at December 31, 2015   10,000     
Common stock: $0.001 par value; 100,000,000 shares authorized; 46,156,977 shares and 36,130,432 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively   46,157    36,130 
Additional paid in capital   2,532,690    784,929 
Accumulated deficit   (3,143,311)   (1,427,806)
Total stockholders' deficit   (554,464)   (606,747)
Total liabilities and stockholders' deficit  $2,404,777   $2,626,823 

 

See accompanying notes to consolidated financial statements

 

 4  
  

 

KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

 

   Three months ended   Six months ended 
   June 30, 2016   June 30, 2015   June 30, 2016   June 30, 2015 
   (Restated)       (Restated)     
                 
Revenue  $1,007,039   $520,463   $2,394,586   $1,438,452 
Cost of revenue   779,908    309,705    1,829,607    919,055 
Gross profit   227,131    210,758    564,979    519,397 
Costs and expenses                    
Depreciation and amortization   231,926    95,634    463,852    191,237 
Selling, general and administrative   1,028,709    297,721    1,714,040    537,980 
Total costs and expenses   1,260,635    393,355    2,177,892    729,217 
Operating loss   (1,033,504)   (182,597)   (1,612,913)   (209,820)
Other expense (income):                    
Interest expense   73,200    1,993    108,436    4,324 
Other income   (5,844)   -    (5,844)   - 
Total other expense   67,356    1,993    102,592    4,324 
Net loss  $(1,100,860)  $(184,590)  $(1,715,505)  $(214,144)
                     
Net loss per common share, basic and diluted  $(0.03)  $(0.01)  $(0.04)  $(0.01)
                     
Weighted average common shares outstanding   42,208,356    31,033,659    39,722,427    29,525,210 

 

See accompanying notes to consolidated financial statements.

 

 5  
  

 

KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30, 2016 and June 30, 2015
(Unaudited)

 

   Six months ended 
   June 30, 2016   June 30, 2015 
   (Restated)     
           
Operating activities          
Net loss  $(1,715,505)  $(214,144)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Amortization and depreciation   463,852    191,237 
Common stock issued for services   1,025,029    48,000 
Amortization of debt discount   2,860    - 
Changes in operating assets and liabilities:          
Accounts receivable (increase) decrease   56,207    (184,332)
Prepaid expenses increase   (2,000)   - 
Deferred revenue - (decrease)   (352,540)   - 
Credit card liability - increase   72,892    - 
Accounts payable and accrued expenses - increase   155,597    119,371 
Net cash used in operating activities   (293,608)   (39,868)
Investing activities          
Cash received in excess of cash paid in acquisition by Ksix Media   -    32 
Net cash provided by investing activities   -    32 
Financing activities          
Issuance of common stock for cash   190,000    160,065 
Advances from related party, net of repayment   40,000    95,637 
Loan proceeds   500,000    - 
Loan repayment   (442,680)   (147,641)
Net cash provided by financing activities   287,320    108,061 
Net increase (decrease) in cash and cash equivalents   (6,288)   68,225 
Cash and cash equivalents, beginning of period   69,489    37,817 
Cash and cash equivalents, end of period  $63,201   $106,042 
           
Supplemental cash flow information          
Cash paid for interest and income taxes:          
Interest  $23,665   $4,380 
Income taxes   -    - 
Non-cash investing and financing activities:          
Common stock issued for notes payable  $-   $100,000 
Common stock issued for loan fees   300,000    - 

 

See accompanying notes to consolidated financial statements

 

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KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2016

(Unaudited)

 

1 BASIS OF PRESENTATION AND BUSINESS

 

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.

 

 7  
  

 

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.

 

2 RECENT ACCOUNTING PRONOUNCEMENTS

 

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.

 

3 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 $3,143,311 from inception through June 30, 2016, and incurred a loss of $1,715,505 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.

 

4 ACQUISITIONS

 

  (a) 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.
     
  (b) On October 12, 2015, the Company entered into an Agreement for the Exchange of Common Stock (“Agreement”) with DIQ and its sole owner. DIQ, whose primary business operation is a full service digital advertising agency specializing in survey generation and landing page optimization specifically designed for mass tort action lawsuits, became a wholly owned subsidiary of the Company. The consideration included 1,250,000 shares of the Company’s common stock, a cash payment of $250,000 and three $250,000 notes (see Note 9)

 

 8  
  

 

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:

 

Cash  $128,063 
Accounts receivable   4,800 
Intangible assets (See Note 5)   1,630,973 
Total assets   1,763,836 
Accounts payable and accrued expenses   (6,244)
Credit card liability   (153,097)
Deferred revenue   (288,720)
Net assets acquired  $1,315,775 
      
Cash and notes issued, net  $850,000 
Debt discount   (9,225)
Value of common stock issued   475,000 
Total consideration  $1,315,775 

 

Operating results of DIQ for the three and six months ended June 30, 2015 follow:

 

   Three Months   Six Months 
   Ended   Ended 
   June 30, 2015   June 30, 2015 
         
Revenue  $1,272,920   $2,906,540 
           
Net income (loss)  $(42,173)  $22,006 

 

5 INTANGIBLE ASSETS

 

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.

 

 9  
  

 

Intangible assets are as follows:

 

   June 30, 2016   December 31, 2015 
         
Cost  $2,774,135   $2,774,135 
Accumulated amortization   (970,133)   (507,777)
Balance  $1,804,002   $2,266,358 
           
Amortization expense for the six months ended June 30, 2016 and 2015  $462,356   $190,526 
           
Amortization expense for the three months ended June 30, 2016 and 2015  $231,178   $95,263 

 

6 DEFERRED REVENUE

 

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 $165,700 and $518,240, respectively, from its customers for which services had yet to be delivered.

 

7 CREDIT CARD LIABILITY

 

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.

 

8 NOTES PAYABLE AND LONG-TERM DEBT – RELATED PARTY

 

As of June 30, 2016 and December 31, 2015, notes payable and long-term debt due to a related party consists of:

 

   June 30, 2016   December 31, 2015 
Note payable to director due in four equal annual installments of $26,875 on April 28 of each year, non-interest bearing   107,500    107,500 
    107,500    107,500 
Less current portion - related party   53,750    26,875 
     Long-term debt - related party  $53,750   $80,625 

 

The payment due April 28, 2016 has not been paid.

 

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9 NOTES PAYABLE AND LONG-TERM DEBT

 

As of June 30, 2016 and December 31, 2015, notes payable and long-term debt consists of:

 

Convertible Promissory Note - Non-interest bearing; on January 19, 2016, the Company modified the terms of a secured note payable in the original amount of $950,000 and made the $700,000 balance convertible3   590,000    720,000 
           
Note payable to former officer due in four equal annual installments of $25,313 on April 28 of each year, non-interest bearing; past due in 2016   101,250    101,250 
           
Notes payable to seller of DigitizeIQ, LLC due as noted below 1   485,000    747,140 
           
Senior Secured Credit Facility dated February 24, 2016; interest at 18% per annum; interest only for two months then 16 payments of $28,306 monthly2   124,595    - 
           
Note payable to Pinz Capital International, L.P. dated May 25, 2016 with interest at 18% 4   100,000    - 
    1,469,818    1,660,096 
Less current portion   1,394,288    1,104,159 
Long-term debt  $75,530   $555,937 

 

1Notes due seller of DigitizeIQ, LLC includes a series of notes as follows:

 

  Issue a non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on November 12, 2015; (Paid February 26, 2016).
     
  Issue a second non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which was 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 was due on March 12, 2016.

 

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.

 

   June 30 2016   December 31, 2015 
         
Face value of notes  $485,000   $750,000 
Unamortized debt discount   -    (2,860)
Carrying value of notes  $485,000   $747,140 

 

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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:

 

   Current   Non-current   Total 
             
Face value of notes  $299,690   $55,363   $355,053 
Unamortized loan costs   (200,000)   (30,458)   (230,458)
Carrying value of notes  $99,690   $24,905   $124,595 

 

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.

 

 12  
  

 

The original note and the convertible promissory note provide for semi-monthly payments of $10,000 due on the 1st and 15th of 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.

 

10 Stockholder’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:

 

  Ranks senior only to any other class or series of designated and outstanding preferred shares of the Company;
     
  Bears no dividend;
     
  Has no liquidation preference, other than the ability to convert to common stock of the Company;
     
  The Company does not have any rights of redemption;
     
  Voting rights equal to ten shares of common stock for each share of Series “A” Preferred Stock;
     
  Entitled to same notice of meeting provisions as common stock holders;
     
  Protective provisions require approval of 75% of the Series “A” Preferred Shares outstanding to modify the provisions or increase the authorized Series “A” Preferred Shares; and
     
  Each ten Series “A” Preferred Shares can be converted into one common share at the option of the holder.

 

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.

 

 13  
  

 

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:

 

 14  
  

 

Performance Based Stock Options

 

  Stock Option #1 (Vests after revenues resulting in $10M in Annual Sales) to purchase up to 1,000,000 shares of the common stock of the Company (good for 3 years from vesting) at $0.12 per share.
     
  Stock Option #2 (Vests after revenues resulting in $15M annual sales) to purchase 1,000,000 shares of the common stock of the Company (good for 3 years from vesting) at $0.30 per share.
     
  Stock Option #3 (Vests after revenues resulting in $20M annual sales) to purchase 1,000,000 shares of the common stock of the Company (good for 3 years from vesting) at $0.50 per share.

 

Time Based Stock Options

 

  Stock Option #4 (Vests One Year from date of Employment Agreement) to purchase 1,000,000 shares of the common stock of the Company (good for 3 years from vesting) at a price of $0.12 per share.
     
  Stock Option #5 (Vests One Year from date of Employment Agreement) to purchase 1,000,000 shares of the common stock of the Company (good for 3 years from vesting) at a price of $0.30 per share.
     
  Stock Option #6 (Vests One Year from date of Employment Agreement) to purchase 1,000,000 shares of the common stock of the Company (good for 3 years from vesting) at a price of $0.50 per share.

 

The following assumptions were used to value the options:

 

Expected term   4 years 
Expected average volatility   75%
Expected dividend yield   0%
Risk-free interest rate   3.5%
Expected annual forfeiture rate   0%

 

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.

 

 15  
  

 

11 RELATED PARTY TRANSACTIONS

 

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:

 

   June 30, 2016   December 31, 2015 
         
Balance at beginning of period  $318,002   $80,325 
New advances   40,000    407,000 
Repayment   -    (169,323)
Balance at end of period  $358,002   $318,002 

 

See Note 8 for long-term debt due to a director.

 

12 SUBSEQUENT EVENTS

 

The Company has evaluated events occurring subsequent to June 30, 2016 and through the date these financial statements were available to be issued.

 

13 RESTATEMENT OF JUNE 30, 2016 FINANCIAL INFORMATION

 

These condensed consolidated financial statements restate certain items previously reported by the Company for the three and six months ended June 30, 2016.

 

Restated balances for 2016 financial information items have been identified with the notation “Restated” where appropriate and applicable.

 

Other than the revising of the previously filed condensed consolidated financial statements relating to the restatement, these notes to the condensed consolidated financial statements speak as of the filing date of the Company’s original Form 10-Q for the three and six months ended June 30, 2016 and filed on August 23, 2016, and these notes to the condensed consolidated financial statements have not been updated to reflect other events occurring subsequent to the original filing date. These notes to the condensed consolidated financial statements should be read in their historical context, except to the extent revised as a result of this restatement.

 

Since its acquisition on October 12, 2015, and until the end of the second quarter of 2016, the accounting records of DigitizeIQ, LLC (“DIQ”) were maintained by a third-party bookkeeping service pursuant to a contract with DIQ’s prior owner. During the process of converting the DIQ records from the software used by this bookkeeping service to the software used by the Company, certain differences were noted. During the review of the balances in the deferred revenue accounts for the Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, it was noted that a correction was necessary as of March 31, 2016 and June 30, 2016. It was determined that deferred revenue was overstated $172,050 and revenue was understated by $172,050 at March 31, 2016 and that deferred revenue was overstated and revenue was understated by an additional $155,351 at June 30, 2016. The following tables summarize the changes.

 

 16  
  

 

   As Previously         
   Reported   Adjustment   As Restated 
Consolidated Balance Sheets               
Deferred revenue  $493,101   $(327,401)  $165,700 
                
Accumulated deficit  $(3,470,712)  $327,401   $(3,143,311)
                
Consolidated Statement of Operations Three months ended June 30, 2016               
Revenue  $851,688   $155,351   $1,007,039 
                
Net loss  $(1,256,211)  $155,351   $(1,100,860)
                
Net loss per common share, basic and diluted  $(0.03)       $(0.03)
                
Six months ended June 30, 2016               
Revenue  $2,067,185   $327,401   $2,394,586 
                
Net loss  $(2,042,906)  $327,401   $(1,715,505)
                
Net loss per common share, basic and diluted  $(0.05)  $0.01   $(0.04)
                
Consolidated Statement of Cash Flows Six months ended June 30, 2016               
Net loss  $(2,042,906)  $327,401   $(1,715,505)
                
Deferred revenue (decrease)  $(25,139)  $(327,401)  $(352,540)

 

 17  
  

 

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 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:

 

   2016   2015 
         
Revenue  $1,007,039   $520,463 
Cost of revenue   779,908    309,705 
Gross profit  $227,131   $210,758 

 

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 $683,559 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 $486,576 (93.5%). Cost of revenue was 77.4% 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 85.6%, 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:

 

   2016   2015 
         
Depreciation and amortization  $231,926   $95,634 
Selling, general and administrative   1,028,709    297,721 
Total  $1,260,635   $393,355 

 

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.

 

 18  
  

 

Selling, general and administrative expense during the three months ended June 30, 2016 and 2015 is as follows:

 

   2016   2015 
         
Outside contractors and consultants  $743,440   $14,364 
Compensation   124,312    187,287 
Professional services   38,825    20,632 
Officer option compensation   36,768    - 
Advertising and marketing   24,342    6,430 
Other   16,171    31,623 
Insurance   13,983    15,660 
Dues and subscriptions   13,533    5,798 
Webhosting and Internet   12,310    8,627 
Rent   5,025    7,300 
Total  $1,028,709   $297,721 

 

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:

 

  Outside contractors and consultants increased from $14,364 in the 2015 period to $743,440 in the 2016 period. The 2016 period includes several consulting agreement which provided for issuance of 5,390,000 shares of common stock which was valued at $925,288 based on the trading price of the stock on the dates of the agreements. At June 30, 2016 a total of $302,301 of this cost is included in prepaid expense and is being amortized over the life of the agreement. In addition cash consulting fees of approximately $69,000 were new in the quarter along with $36,000 in outside contractor fees paid by DIQ, which was not included in the 2015 period.
     
  Compensation decreased $62,975 (33.6%) from the 2015 amount of $187,287 to the 2016 amount of $124,312. The decrease in the 2016 period is primarily a result of a reduction in payroll which will be partially offset by higher outside contractor costs.
     
  Professional services increased from $20,632 in the 2015 period to $38,825 in the 2016 period, a total of $18,193 (88.2%). The majority of the increase is primarily due to being a public company with higher professional costs than a private company.
     
  Officer option compensation increased to $36,768 in the 2016 period. This cost began accruing in October 2015 after the Company’s CEO was granted options as a part of his compensation.
     
  Advertising and marketing costs increased $17,912 from $6,430 in the 2015 period to $24,342 in the 2016 period. This is primarily a result of an increase in DIQ costs of $14,048.
     
  Other costs declined from $31,623 in the 2015 period to $16,171 in the 2016 period.
     
  Insurance costs declined from $15,660 in the 2015 period to $13,983 in the 2016 period. The decline is primarily a result of fewer employees and a resulting lower health care cost.
     
  Dues and subscriptions increased from $5,798 in the 2015 period to $13,533 in the 2016 period. This increase is due to including DIQ in the 2016 period.
     
  Webhosting and Internet costs increased from $8,627 in the 2015 period to $12,310 in the 2016 period, primarily due to the addition of DIQ in 2016.
     
  Rent declined from $7,300 in the 2015 period to $5,025 in the 2016 period. The 2015 amount included a catch up payment. The 2016 amount is the current cost.

 

 19  
  

 

Other expense (income) during the three months ended June 30, 2016 and 2015 is as follows:

 

   2016   2015 
         
Interest expense  $73,200   $1,993 
Other income   (5,844)   - 
Total  $67,356   $1,993 

 

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:

 

   2016   2015 
         
Revenue  $2,394,586   $1,438,452 
Cost of revenue   1,829,607    919,055 
Gross profit  $564,979   $519,397 

 

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 $1,735,602 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 $956,134 (66.5%). Cost of revenue was 76.4% 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 83.6%, 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.

 

 20  
  

 

Costs and expenses during the six months ended June 30, 2016 and 2015 were as follows:

 

   2016   2015 
         
Depreciation and amortization  $463,852   $191,237 
Selling, general and administrative   1,714,040    537,980 
Total  $2,177,892   $729,217 

 

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:

 

   2016   2015 
         
Outside contractors and consultants  $850,660   $30,356 
Compensation   260,277    321,599 
Professional services   185,473    35,645 
Officer compensation   263,536    - 
Advertising and marketing   37,824    14,712 
Other   45,424    59,547 
Insurance   19,988    29,868 
Dues and subscriptions   23,366    12,036 
Webhosting and Internet   18,877    26,059 
Rent   8,615    8,158 
Total  $1,714,040   $537,980 

 

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:

 

  Outside contractors and consultants increased from $30,356 in the 2015 period to $850,660 in the 2016 period. The 2016 period includes several consulting agreement which provided for issuance of 5,890,000 shares of common stock which was valued at $1,067,788 based on the trading price of the stock on the dates of the agreements. At June 30, 2016 a total of $302,301 of this cost is included in prepaid expense and is being amortized over the life of the agreement. In addition cash consulting fees of approximately $69,000 were new in the period along with $76,270 in outside contractor fees paid by DIQ, which was not included in the 2015 period.
     
  Compensation decreased $61,322 (19.1%) from the 2015 amount of $321,599 to the 2016 amount of $260,277. The decrease in the 2016 period is primarily a result of a reduction in payroll which will be partially offset by higher outside contractor costs.
     
  Professional services increased from $35,645 in the 2015 period to $185,473 in the 2016 period, a total of $149,828 (420.3%). The increase is primarily due to being a public company with higher professional costs than a private company and a professional services contract with an attorney that included common stock in the amount of $112,500 as a part of the consideration.
     
  Officer compensation increased to $263,536 in the 2016 period. This cost began accruing in October 2015 after the Company’s CEO was granted options as a part of his compensation. In addition, $180,000 is included for the value of preferred stock issued to the Company’s CEO for prior services.
     
  Advertising and marketing costs increased $23,112 from $14,712 in the 2015 period to $37,824 in the 2016 period. This is primarily a result of an increase in DIQ costs of $22,548.
     
  Other costs declined from $59,547 in the 2015 period to $45,424 in the 2016 period.

 

 21  
  

 

  Insurance costs declined from $29,868 in the 2015 period to $19,988 in the 2016 period. The decline is primarily a result of fewer employees and a resulting lower health care cost.
     
  Dues and subscriptions increased from $12,036 in the 2015 period to $23,366 in the 2016 period. This increase is due to including DIQ in the 2016 period.
     
  Webhosting and Internet costs decreased from $26,059 in the 2015 period to $18,877 in the 2016 period primarily due to incurring certain set up costs in the 2015 period.
     
  Rent increased from $8,158 in the 2015 period to $8,615 in the 2016 period.

 

Other expense (income) during the six months ended June 30, 2016 and 2015 is as follows:

 

   2016   2015 
         
Interest expense  $108,436   $4,324 
Other income   (5,844)   - 
Total  $102,592   $4,324 

 

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 $2,959,241 decreased $274,329 from $3,233,570 at December 31, 2015. The decrease consists of a decrease in long-term debt of $455,095 partially offset by an increase in current liabilities of $232,953.

 

At June 30, 2016, our stockholders’ deficit was ($554,464) 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 $1,715,505.

 

The following table sets forth the major sources and uses of cash for the six months ended June 30, 2016 and 2015.

 

   2016   2015 
         
Net cash provided by (used in) operating activities  $(293,608)  $(39,868)
Net cash provided by investing activities   -    32 
Net cash provided by financing activities   287,320    108,061 
Net increase (decrease) in cash and cash equivalents  $(6,288)  $68,225 

 

 22  
  

 

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 - $1,577,318 - See Notes 8 and 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 $3,143,311 from inception through June 30, 2016, and incurred a loss of $1,715,505 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.

 

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.

 

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.

 

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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 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.

 

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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.

 

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 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 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.

 

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: January 9, 2017      
       
    By: /s/ Carter Matzinger
      Chief Executive Officer and
      Chief Financial Officer

 

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