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.
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
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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.
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.
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(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.
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(b)
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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 $250,000 notes (see Note 9)
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The
Company has estimated the fair value of the assets acquired and liabilities assumed as part of the acquisition and is currently
undergoing a formal valuation and will adjust these estimates, if necessary, within the one year measurement period:
Cash
|
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$
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128,063
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|
Accounts receivable
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|
|
4,800
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Intangible
assets (See Note 5)
|
|
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1,630,973
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Total
assets
|
|
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1,763,836
|
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Accounts payable
and accrued expenses
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|
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(6,244
|
)
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Credit card liability
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|
|
(153,097
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)
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Deferred
revenue
|
|
|
(288,720
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)
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Net
assets acquired
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$
|
1,315,775
|
|
|
|
|
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Cash and notes
issued, net
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$
|
850,000
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Debt discount
|
|
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(9,225
|
)
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Value of common
stock issued
|
|
|
475,000
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Total
consideration
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$
|
1,315,775
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Operating
results of DIQ for the three and six months ended June 30, 2015 follow:
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Three
Months
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Six
Months
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Ended
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Ended
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June
30, 2015
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June
30, 2015
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|
|
|
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Revenue
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$
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1,272,920
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|
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$
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2,906,540
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|
|
|
|
|
|
|
|
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Net
income (loss)
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$
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(42,173
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)
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$
|
22,006
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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 $1,630,973 upon their acquisition on October
12, 2015. The Company has estimated the fair value of the assets acquired and liabilities assumed as part of the acquisition and
is currently undergoing a formal valuation and will adjust these estimates, if necessary, within the one year measurement period.
(Note 4). The Company has determined a useful life of existing contracts and customer lists of three years and is amortizing the
cost over that period.
Intangible
assets are as follows:
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June
30, 2016
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December
31, 2015
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|
|
|
|
|
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Cost
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$
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2,774,135
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|
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$
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2,774,135
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Accumulated amortization
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(970,133
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)
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|
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(507,777
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)
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Balance
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$
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1,804,002
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|
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$
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2,266,358
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|
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Amortization
expense for the six months ended June 30, 2016 and 2015
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$
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462,356
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$
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190,526
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|
|
|
|
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|
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Amortization expense for the three
months ended June 30, 2016 and 2015
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$
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231,178
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|
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$
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95,263
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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.
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
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NOTES
PAYABLE AND LONG-TERM DEBT – RELATED PARTY
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As
of June 30, 2016 and December 31, 2015, notes payable and long-term debt due to a related party consists of:
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June
30, 2016
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December
31, 2015
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Note
payable to director due in four equal annual installments of $26,875 on April 28 of each year, non-interest bearing
|
|
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107,500
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|
|
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107,500
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|
|
|
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107,500
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|
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107,500
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Less current
portion - related party
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53,750
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|
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26,875
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Long-term
debt - related party
|
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$
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53,750
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|
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$
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80,625
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The
payment due April 28, 2016 has not been paid.
9
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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 convertible
3
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590,000
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|
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720,000
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|
|
|
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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
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101,250
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101,250
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|
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|
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Notes payable to seller of DigitizeIQ,
LLC due as noted below
1
|
|
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485,000
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|
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747,140
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|
|
|
|
|
|
|
|
|
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Senior Secured Credit Facility dated
February 24, 2016; interest at 18% per annum; interest only for two months then 16 payments of $28,306 monthly
2
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124,595
|
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|
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-
|
|
|
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|
|
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|
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Note payable
to Pinz Capital International, L.P. dated May 25, 2016 with interest at 18%
4
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100,000
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|
|
|
-
|
|
|
|
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1,469,818
|
|
|
|
1,660,096
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Less current
portion
|
|
|
1,394,288
|
|
|
|
1,104,159
|
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Long-term
debt
|
|
$
|
75,530
|
|
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$
|
555,937
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1
Notes
due seller of DigitizeIQ, LLC includes a series of notes as follows:
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●
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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).
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●
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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;
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●
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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.
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|
June
30 2016
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|
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December
31, 2015
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|
|
|
|
|
|
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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:
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Current
|
|
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Non-current
|
|
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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 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.
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.
4
Pinz
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.
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:
|
●
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Ranks
senior only to any other class or series of designated and outstanding preferred shares of the Company;
|
|
|
|
|
●
|
Bears
no dividend;
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|
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●
|
Has
no liquidation preference, other than the ability to convert to common stock of the Company;
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|
|
|
|
●
|
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.
The
Company valued these shares based upon their conversion rate of 10 shares of preferred stock for each share of common stock based
on the market price of the common stock as of March 30, 2016 of $0.18 per share. The Company recorded compensation expense in
the amount of $180,000.
COMMON
STOCK
The
Company has 100,000,000 shares of its $0.001 par value common stock authorized. At June 30, 2016 and December 31, 2015, the Company
had 46,156,977 shares and 36,130,432 shares issued and outstanding, respectively.
Effective
January 4, 2016, the Company issued 250,000 shares of its common stock pursuant to a legal services agreement. The common stock
was valued at $112,500 based on the closing price of the common stock on that date.
Effective
February 1, 2016, the Company issued 250,000 shares of its common stock pursuant to a consulting agreement. The common stock was
valued at $30,000 based on the closing price of the common stock on that date.
On
February 24, 2016, the Company issued 1,782,000 shares of its common stock for advisory fees pursuant to the Senior Secured Credit
Facility Agreement (Note 9). The stock was valued at the trading price on the date of the agreement and the resulting $300,000
was included as a reduction of the related note payable and is being amortized to interest expense over the eighteen month loan
payment period.
On
April 1, 2016, the Company issued 454,545 shares of its common stock valued at $20,000 in exchange for principal payments in that
amount due on a note payable.
On
April 1, 2016, the Company issued 100,000 shares of its common stock in exchange for cash in the amount of $10,000.
On
April 5, 2016, the Company issued 1,000,000 shares of its common stock valued at $180,000 in partial consideration for a six month
consulting agreement. The $180,000 is being amortized to expense over the term of the agreement.
On
May 10, 2016, the Company issued 1,000,000 shares of its common stock valued at $190,000 in partial consideration for a two year
consulting agreement. The $190,000 is being amortized to expense over the term of the agreement.
On
May 13, 2016, the Company issued 1,800,000 shares of its common stock as part of the Unit subscription agreement described below
for consideration of $180,000.
On
May 23, 2016, the Company issued 240,000 shares of its common stock as partial consideration for a six month public relations
consulting agreement. The shares were valued at $38,688, which is being amortized to expense over the term of the agreement.
On
June 10, 2016, the Company issued a total of 3,150,000 shares of its common stock to six employee/consultants in exchange for
prior services. The stock was valued at $516,600 and the amount is included in selling, general and administrative expense.
COMMON
STOCK OPTIONS
Pursuant
to his employment agreement with the Company, Carter Matzinger was awarded a “Performance Based Stock Option” of 3,000,000
shares of the Company’s common stock and a “Time Based Stock Option” of up to 3,000,000 shares of Common Stock
of the Company. Both sets of options come with Registration Rights and when requested by Mr. Matzinger, the Company will be required
to file a Form S-8 Registration Statement. The terms of both types of common stock option awards are described as follows:
Performance
Based Stock Options
|
●
|
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.
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.
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.
|
|
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
|
)
|