U.S. 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: March 31, 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: 39,412,432 shares of common stock outstanding as of May 16, 2016.

 

 

 

Explanatory Note

 

We filed our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 on May 20, 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 March 31, 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.

 

 

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	20
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

 

 

PART I - Financial Information

Item 1: Financial Statements

 

KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES      

Consolidated Balance Sheets      

(Unaudited)      

 

		March 31, 2016				December 31, 2015
		(Restated)
ASSETS
Current assets:
Cash and cash equivalents		$	147,135			$	69,489
Accounts receivable			296,011				275,092
Prepaid expenses			1,462				1,462
Total current assets			444,608				346,043
Property and Equipment, less accumulated depreciation of
$2,433 and $1,685, respectively,			13,674				14,422
Intangible assets less accumulated amortization of $738,955 and $507,777, respectively			2,035,180				2,266,358
Total assets		$	2,493,462			$	2,626,823
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses		$	635,614			$	355,597
Credit card liability			455,746				274,135
Deferred revenue			324,539				518,240
Advance from related party			318,002				318,002
Current portion of long-term debt - related party			26,875				26,875
Notes payable and current portion of long-term debt			1,300,096				1,104,159
Total current liabilities			3,060,872				2,597,008
Long-term debt less current installments - related party			80,625				80,625
Long-term debt less current installments			130,856				555,937
Total liabilities			3,272,353				3,233,570
Commitments and contingencies
Stockholders' deficit:
Preferred stock: $0.001 par value; 100,000,000 shares authorized; no shares issued and outstanding			-				-
Common stock: $0.001 par value; 100,000,000 shares authorized; 38,412,432 shares and 36,130,432 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively			38,412				36,130
Additional paid in capital			1,225,147				784,929
Accumulated deficit			(2,042,450	)			(1,427,806	)
Total stockholders' deficit			(778,891	)			(606,747	)
Total liabilities and stockholders' deficit		$	2,493,462			$	2,626,823

 

See accompanying notes to consolidated financial statements

 

 

KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES        

Consolidated Statements of Operations        

(Unaudited)        

 

		Three months ended
		March 31, 2016				March 31, 2015
		(Restated)
Revenue		$	1,387,547			$	917,989
Cost of revenue			1,049,699				609,350
Gross profit			337,848				308,639
Costs and expenses
Depreciation and amortization			231,926				95,603
Selling, general and administrative			685,331				240,259
Total costs and expenses			917,257				335,862
Operating loss			(579,409	)			(27,223	)
Other expense:
Interest expense			35,236				2,331
Total other expense			35,236				2,331
Net loss		$	(614,645	)		$	(29,554	)
Net loss per common share, basic and diluted		$	(0.02	)		$	(0.00	)
Weighted average common shares outstanding			37,236,498				28,000,000

 

See accompanying notes to consolidated financial statements.                

 

 

KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES      

Consolidated Statements of Cash Flows      

For the three months ended March 31, 2016 (Restated Note 13) and March 31, 2015    

(Unaudited)      

 

		Three months ended
		March 31, 2016				March 31, 2015
		(Restated)
Operating activities
Net loss		$	(614,645	)		$	(29,554	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization and depreciation			231,926				95,603
Common stock issued for services			142,500				-
Amortization of debt discount			2,860				-
Changes in operating assets and liabilities:
Accounts receivable (increase)			(20,918	)			(444,158	)
Prepaid expenses decrease			19,541
Deferred revenue - (decrease)			(193,701	)
Credit card liability - increase			181,611
Accounts payable and accrued expenses - increase			280,016				255,305
Net cash provided by (used in) operating activities			29,190				(122,804	)
Financing activities
Loan proceeds			400,000				-
Advances from related party, net of repayment			-				181,500
Loan repayment			(351,545	)			(68,680	)
Net cash provided by financing activities			48,455				112,820
Net increase (decrease) in cash and cash equivalents			77,645				(9,984	)
Cash and cash equivalents, beginning of period			69,489				37,817
Cash and cash equivalents, end of period		$	147,134			$	27,833
Supplemental cash flow information
Cash paid for interest and income taxes:
Interest		$	459			$	2,331
Income taxes			-				-
Non-cash investing and financing activities:
Common stock issued for loan costs		$	300,000			$	-

 

See accompanying notes to consolidated financial statements

 

 

KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

March 31, 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.” the Registrant) 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 March 31, 2016 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 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.

 

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of estimates in the presentation of financial statements

 

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

 

Accounts receivable and allowance for doubtful accounts

 

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

 

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

 

Direct write-offs are taken in the period when the Company has exhausted their efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that the Company should abandon such efforts.

 

Credit risk

 

In 2016 and 2015, the Company had cash deposits in certain banks that at times may have exceeded the maximum insured by the Federal Deposit Insurance Corporation. The Company monitors the financial condition of the banks and has experienced no losses on these accounts.

 

Earnings (loss) per common share

 

The Company is required to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potential dilutive shares outstanding. At March 31, 2016 and 2015, there were no potentially dilutive common stock equivalents. Accordingly, basic and diluted earnings (loss) per share are the same for each of the periods presented.

 

 

Contingencies

 

Certain conditions may exist as of the date financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. Company management and its legal counsel assess such contingencies related to legal proceeding that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a liability has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or if probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable would be disclosed.

 

Share-Based Compensation

 

The Company accounts for share-based compensation in accordance with Financial Accounting Standards Board (“FASB”) ASC 718, “Compensation-Stock Compensation.” Under the fair value recognition provisions of this pronouncement, share-based compensation cost is measured at the grant date based on the fair value of the award, reduced as appropriate based on estimated forfeitures, and is recognized as expense over the applicable vesting period of the stock award using the accelerated method. The excess tax benefit associated with stock compensation deductions have not been recorded in additional paid-in capital. When evaluating whether an excess tax benefit has been realized, share based compensation deductions are not considered realized until NOLs are no longer sufficient to offset taxable income. Such excess tax benefits will be recorded when realized.

 

Property and equipment

 

Property and equipment and software development costs are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets (generally three to seven years). Leasehold improvements are amortized over the life of the lease if it is shorter than the estimated useful life. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. Computer and office equipment is generally three to five years and office furniture is generally seven years.

 

Revenue recognition

 

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

 

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

 

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

 

 

Deferred revenue

 

The Company generally requires prepayment of the initial contract amount in advance of services being performed. As such, the advance payment is deferred as a current liability until the Company delivers the surveys contracted. At that time revenue is recognized and the deferred revenue liability is reduced.

 

Fair value instruments

 

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

 

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

 

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

 

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

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

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

 

Income taxes

 

We use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.

 

Through December 23, 2014, KSIX and BMG operated as limited liability companies and all income and losses were passed through to the owners. Through October 12, 2015, DIQ operated as a limited liability company and all income and losses were passed through to its owner. Subsequent to the acquisition dates, these limited liability companies were owned by Ksix Holdings and became subject to income tax.

 

ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.

 

Asset impairment and disposal of long-lived assets

 

Long-lived assets, such as property, equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets or asset groups to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Assets to be disposed would be presented separately in the Consolidated Balance Sheet.

 

 

Reclassifications

 

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

 

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 $2,042,450from inception through March 31, 2016, and incurred a loss of $614,645for the quarter 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.

 

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)

 

 

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 for the three months ended March 31, 2015 follow:

 

		2015
Revenue		$	1,633,620
Net income		$	64,179

 

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.

 

Intangible assets are as follows:

 

		March 31, 2016				December 31,2015
Cost		$	2,774,135			$	2,774,135
Accumulated amortization			(738,955	)			(507,777	)
Balance		$	2,035,180			$	2,266,358
Amortization expense for the three months ended March 31, 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 March 31, 2016 and December 31, 2015, the Company had received $324,539 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 March 31, 2016 and December 31, 2015, the Company’s credit card liability was $455,716 and $496,589, respectively.

 

8 NOTES PAYABLE AND LONG-TERM DEBT – RELATED PARTY

 

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

 

		March 31, 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			26,875				26,875
Long-term debt - related party		$	80,625			$	80,625

 

 

9 NOTES PAYABLE AND LONG-TERM DEBT

 

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

 

		March 31, 2016				December 31, 2015
On October 26, 2011, the Company entered into a note payable in the amount of $362,257, relating to a Unit redemption agreement bearing interest at 6% per annum and is payable in equal monthly installments of $7,003, inclusive of interest		$	85,161			$	91,706
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			640,000				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			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			119,541				-
			1,430,952				1,660,096
Less current portion			1,300,096				1,104,159
Long-term debt		$	130,856			$	555,937

 

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

 

¹ 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.

 

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

 

The $250,000 notes due January 12, 2016 and March 12, 2016 remain unpaid. 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 is being amortized to interest expense. The net carrying value of the notes follows.

 

		March 31, 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

 

 

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 in prepaid expense 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 is as follows:

 

		Current				Non-current				Total
Face value of notes		$	264,622			$	135,378			$	400,000
Unamortized loan costs			(200,000	)			(80,459	)			(280,459	)
Carrying value of notes		$	64,622			$	54,919			$	119,541

 

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 1^st and 15^th 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 1^st and 15^th 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.

 

10       Stockholder’s equity

 

PREFERRED STOCK

 

The Company has 100,000,000 shares of its $0.001 par value preferred stock authorized. At March 31, 2016 and December 31, 2015, the Company had no preferred shares issued and outstanding.

 

COMMON STOCK

 

The Company has 100,000,000 shares of its $0.001 par value common stock authorized. At March 31, 2016 and December 31, 2015, the Company had 38,412,432 shares and 36,130,432 shares issued and outstanding, respectively.

 

In April 2015, and prior to the merger between the Company and Ksix Media, Inc., Ksix Media, Inc. issued its common stock valued at $48,000 in exchange for consulting services and issued 1,000,000 Ksix Media common shares in exchange for a $100,000 convertible note payable.

 

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 in prepaid expense and is being amortized to interest expense over the eighteen month loan payment period.

 

 

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

 

	●	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 March 31, 2016, an additional $36,768 was accrued.

 

 

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:

 

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

 

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

 

12 SUBSEQUENT EVENTS

 

The Company has evaluated events occurring subsequent to March 31, 2016 and through the date these financial statements were available to be issued.

 

Hall Strategy, LLC Consulting Agreement

 

Effective April 1, 2016, the Company entered into a Consulting Services Agreement (“Agreement”) with Hall Strategy, LLC (“HS”). HS is in the business of providing strategic planning, business development and marketing advisory services. The Agreement is for a term of one-year, cancellable after six-months, and provides that in exchange for the services provided by HS, the Company will compensate HS as follows:

 

	●	1,000,000 shares of common stock governed by Rule 144 to be issued immediately;
	●	Cash compensation of $10,000 per month;
	●	Assuming the Agreement has not been cancelled, an additional 1,000,000 shares of common stock governed by Rule 144;
	●	Reimbursement of necessary expenses; and
	●	Bonuses, to be agreed upon, payable to HS for successful achievement of benchmarks above and beyond those outlined in plans of action.

 

Notice of Conversion for payments due on convertible note

 

On April 1, 2016, the Company received and accepted a notice of conversion from a convertible note holder to convert $20,000 owed under the note into 454,545 shares of the common stock of the Company.

 

Stock subscription

 

On April 8, 2016, an unrelated individual subscribed and paid for 100,000 shares of the common stock of the Company at $0.10 per share in cash.

 

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.

 

 

Issuance of Series “A” Preferred Stock

 

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 has recorded accrued compensation expense for the three months ended March 31, 2016 in the amount of $180,000.

 

13 RESTATEMENT OF MARCH 31, 2016 FINANCIAL INFORMATION

 

These condensed consolidated financial statements restate certain items previously reported by the Company for the three months ended March 31, 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 months ended March 31, 2016 and filed on May 20, 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.

 

		As Previously
		Reported				Adjustment				As Restated
Consolidated Balance Sheets
Deferred revenue		$	496,589			$	(172,050	)		$	324,539
Accumulated deficit		$	(2,214,500	)		$	172,050			$	(2,042,450	)
Consolidated Statement of Operations
Revenue		$	1,215,497			$	172,050			$	1,387,547
Net loss		$	(786,695	)		$	172,050			$	(614,645	)
Net loss per common share, basic and diluted		$	0.02							$	0.02
Consolidated Statement of Cash Flows
Net loss		$	(786,695	)		$	172,050			$	(614,645	)
Deferred revenue (decrease)		$	(21,651	)		$	(172,050	)		$	(193,701	)

 

 

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 March 31, 2016 and March 31, 2015 and for the three months then ended includes the accounts of Holdings and its wholly owned subsidiaries during the period owned by Holdings.

 

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2016 AND 2015

 

Revenues during the three months ended March 31, 2016 and 2015 consisted of the following:

 

		2016				2015
Revenue		$	1,387,547			$	917,989
Cost of revenue			1,049,699				609,350
Gross profit		$	337,848			$	308,639

 

KSIX provides performance based marketing solutions to drive traffic and conversions within a Cost-Per-Action (“CPA”) business model. KSIX works directly with advertisers and other networks to promote advertiser campaigns through their affiliates. KSIX revenues decreased $501,539 (60.2%) during the three months ended March 31, 2016 as compared to the prior year period. KSIX lost a major customer during the quarter ended June 30, 2015, causing a decline in revenue and experienced an unusually slow period during January and February 2016.

 

BMG works with online games and web publishers utilizing our proprietary Offer Wall that promotes hundreds of different advertiser’s campaigns on a single web page. BMG revenues decreased $80,946 (95.6%) during the three months ended March 31, 2016 as compared to the prior year period. The decline in BMG revenues is the result of a switch in demand from desktop games to mobile games and a server problem in the 2016 period which effectively had BMG shut down for the majority of the period. The problem has now been resolved.

 

DIQ’s revenues from survey generation and landing page optimization amounted to $1,052,043 in the three months ended March 31, 2016. DIQ was acquired October 12, 2015 and accordingly, its revenues for the period ended March 31, 2015 were not a part of the Company’s consolidated revenue. DIQ’s revenue in the 2015 period was $1,633,620 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 Company issued a credit of $161,380 to a customer as a result of a problem encountered with its software. The software problem was resolved in March 2016.

 

Cost of revenue increased $440,349 (72.3%) in the 2016 quarter as compared to the same 2015 period. This compares to an overall increase in revenues of $469,558 (51.2%). Cost of revenue was 75.7% of sales in the 2016 quarter as compared to 66.4% in the 2015 quarter. The higher cost of revenue is primarily due to the impact of DIQ. DIQ’s cost of revenue was 82.4%, 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 March 31, 2016 and 2015 were as follows:

 

		2016				2015
Depreciation and amortization		$	231,926			$	95,603
Selling, general and administrative			685,331				240,259
Total		$	917,257			$	335,862

 

Depreciation and amortization increased $136,323 (142.6%) from $95,603 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 March 31, 2016 and 2015 is as follows:

 

		2016				2015
Compensation		$	352,734			$	134,312
Professional services			169,583				9,013
Outside contractors and consultants			87,970				14,792
Other			61,562				73,860
Advertising and marketing			13,482				8,282
Total		$	685,331			$	240,259

 

Total selling, general and administrative expense increased $265,072 (109.3%) from $240,259 in the 2015 period to $505,331 in the 2016 period. The detail changes are discussed below:

 

	●	Compensation increased $218,422 (162.6%) from the 2015 amount of $134,312 to the 2016 amount of $352,734. The increase in the 2016 period is primarily a result of accruing $36,768 in option compensation and $180,000 in compensation related to the May 2016 issue of preferred stock to the Company’s CEO.
	●	Professional services increased from $9,013 in the 2015 period to $169,583 in the 2016 period. The 2016 amounts includes a legal services agreement that provided for issuance of 250,000 shares of common stock, which was valued at $112,500 based on the trading price of the common stock on the date of the agreement. The remainder of the increase is primarily due to being a public company with higher professional costs that a private company.
	●	Outside contractors and consultants increased from $14,792 in the 2015 period to $87,970 in the 2016 period. The 2016 period includes a consulting agreement which provided for 250,000 shares of common stock which was valued at $30,000 based on the trading price of the stock on the date of the agreement. The remainder of the increase is mostly due to $40,270 in cost at DIQ which was not included in the 2015 period.
	●	Other costs declined $12,298 from $73,860 in the 2015 period to $61,562 in the 2016 period.
	●	Advertising and marketing costs increased $5,200 from $8,282 in the 2015 period to $13,482 in the 2016 period. This is a result of an increase in DIQ costs of $8,500 partially offset by a reduction in KSIX and BMG costs of $3,300.

 

 

Other expense during the three months ended March 31, 2016 and 2015 is as follows:

 

		2016				2015
Interest expense		$	35,236			$	2,331
Total		$	35,236			$	2,331

 

Interest expense in the 2015 period was the interest on an amortizing BMG note. During the 2016 period, interest expense includes $459 for the amortizing BMG note, $19,541 in amortization of loan costs and $7,082 in accrued interest associated with the TCA loan and $2,860 in debt discount amortization and $5,294 in default interest on the notes associated with the DIQ purchase. The 2016 costs will continue as long as the related notes are outstanding.

 

LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

 

The Company has entered into loan agreements to finance the purchase of the operating business of KSIX and BMG and is currently selling common stock to assist in reducing and retiring this debt.

 

At March 31, 2016 and December 31, 2015, our current assets were $444,608 and $346,043, respectively, and our current liabilities were $3,060,872 and $2,597,008, respectively, which resulted in a working capital deficit of $2,616,264 and $2,250,965, respectively.

 

Total assets at March 31, 2016 and December 31, 2015 amounted to $2,493,462 and $2,626,823, respectively. At March 31, 2016, assets consisted of current assets of $444,608, net property and equipment of $13,674 and net intangible assets of $2,035,180, 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 March 31, 2016, our total liabilities of $3,272,353 increased $38,783 from $3,233,570 at December 31, 2015. The increase consists of a decrease in long-term debt of $425,081 offset by an increase in current liabilities of $463,864.

 

At March 31, 2016, our stockholders’ deficit was ($789,561) as compared to stockholders’ deficit of ($606,747) at December 31, 2015. The principal reason for the decrease in stockholders’ deficit was the common stock issued for loan costs of $300,000 and legal and consulting contracts of $142,500 less the loss from operations of $614,645.

 

The following table sets forth the major sources and uses of cash for the three months ended March 31, 2016 and 2015.

 

		2016				2015
Net cash provided by (used in) operating activities		$	29,190			$	(122,804	)
Net cash used in investing activities			-				-
Net cash provided by financing activities			48,455				112,820
Net increase (decrease) in cash and cash equivalents		$	77,645			$	(9,984	)

 

At March 31, 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 - $1,538,452 - See Notes 8 and 9 to the Consolidated Financial Statements.

 

Advances from related party - $318,002 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 three months ended March 31, 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 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 $2,042,450 from inception through March 31, 2016, and incurred a loss of $614,645 for the quarter 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 March 31, 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.

 

 

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 March 31, 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 March 31, 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

 

Not applicable.

 

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

 

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 trading price at that time.

 

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 trading price at that time.

 

On February 24, 2016, the Company issued 1,782,000 shares of its common stock pursuant to an Advisory Services contract associated with its Senior Secured Credit Facility Agreement (Note 9 to Consolidated Financial Statements). The common stock was valued at $300,000 based on the trading price at that time.

 

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

 

Item 3: Defaults upon Senior Securities.

 

None

 

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

 

None

 

Item 5: Other Information.

 

None

 

Item 6: Exhibits

 

	Exhibit 31.1	Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer and Chief Financial Officer*
	Exhibit 32.1	Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer and Chief Financial Officer*
	101.INS	XBRL Instance Document**
	101.SCH	XBRL Taxonomy Extension Schema Document**
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document**
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document**
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document**
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document**

 

*Filed herewith.

 

**In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.

 

 

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