ITEM
8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
Financial Statements of Ksix Media Holdings, Inc. together with the reports thereon of Paritz & Co., P.A. for the years
ended December 31, 2016 and December 31, 2015, is set forth as follows:
Index
to Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of directors of and Stockholders of
Ksix
Media Holdings, Inc. and Subsidiaries
We
have audited the accompanying consolidated balance sheets of Ksix Media Holdings, Inc. and Subsidiaries (“the Company”)
as of December 31, 2016 and 2015, and the related statements of operations, stockholders’ deficit, and cash flows for the
years ended December 31, 2016 and 2015. The Company’s management is responsible for these financial statements. Our responsibility
is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Ksix Media Holdings, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash
flows for the years ended December 31, 2016 and 2015 in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed
in Note 3 to the consolidated financial statements, the Company has a stockholders’ deficit of $1,815,049 and a working
capital deficiency of $3,301,057 as of December 31, 2016 and incurred losses for the past two years. 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. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
/s/
Paritz & Company, P.A.
|
|
|
|
Hackensack,
New Jersey
|
|
December
11, 2017
|
|
KSIX
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
December
31 2016
|
|
|
December
31 2015
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
63,709
|
|
|
$
|
69,489
|
|
Accounts
receivable, less allowance for doubtful accounts of $17,000 and $148, respectively
|
|
|
126,428
|
|
|
|
275,092
|
|
Prepaid
expenses
|
|
|
568,700
|
|
|
|
1,462
|
|
Total
current assets
|
|
|
758,837
|
|
|
|
346,043
|
|
Property
and Equipment, less accumulated depreciation of $4,675 and $1,685, respectively
|
|
|
14,432
|
|
|
|
14,422
|
|
Intangible
assets less accumulated amortization of $167,449 and $507,777, respectively
|
|
|
217,195
|
|
|
|
2,266,358
|
|
Goodwill
|
|
|
866,782
|
|
|
|
-
|
|
Deposits
on acquisition
|
|
|
500,000
|
|
|
|
-
|
|
Total
assets
|
|
$
|
2,357,246
|
|
|
$
|
2,626,823
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
775,624
|
|
|
$
|
355,597
|
|
Credit
card liability
|
|
|
336,726
|
|
|
|
274,135
|
|
Deferred
revenue
|
|
|
165,000
|
|
|
|
518,240
|
|
Derivative
liability
|
|
|
584,168
|
|
|
|
-
|
|
Advances
from related party
|
|
|
356,502
|
|
|
|
318,002
|
|
Current
portion of long-term debt - related party, net of discount of $0 and $0, respectively
|
|
|
53,750
|
|
|
|
26,875
|
|
Notes
payable and current portion of long-term debt, net of discount of $8,774 and $0, respectively
|
|
|
1,788,124
|
|
|
|
1,104,159
|
|
Total
current liabilities
|
|
|
4,059,894
|
|
|
|
2,597,008
|
|
Long-term
debt - related party, net of discount of $0 and $0, respectively
|
|
|
53,750
|
|
|
|
80,625
|
|
Long-term
debt net of discount of $87,379 and $0, respectively
|
|
|
58,651
|
|
|
|
555,937
|
|
Total
liabilities
|
|
|
4,172,295
|
|
|
|
3,233,570
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
|
|
|
|
Preferred
stock: $0.001 par value; 100,000,000 shares authorized; 10,000,000 and no shares issued and outstanding at December 31, 2016
and 2015, respectively
|
|
|
10,000
|
|
|
|
-
|
|
Common
stock: $0.001 par value; 100,000,000 shares authorized; 57,343,901 shares and 36,130,432 shares issued and outstanding at
December 31, 2016 and December 31, 2015, respectively
|
|
|
57,344
|
|
|
|
36,130
|
|
Additional
paid in capital
|
|
|
4,145,589
|
|
|
|
784,929
|
|
Accumulated
deficit
|
|
|
(6,027,982)
|
|
|
|
(1,427,806
|
)
|
Total
stockholders’ deficit
|
|
|
(1,815,049)
|
|
|
|
(606,747
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
2,357,246
|
|
|
$
|
2,626,823
|
|
See
accompanying notes to consolidated financial statements
KSIX
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
Years
ended December 31, 2016 and December 31, 2015
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,296,747
|
|
|
$
|
2,832,853
|
|
Cost
of revenue
|
|
|
2,328,467
|
|
|
|
2,332,194
|
|
Gross
profit
|
|
|
968,280
|
|
|
|
500,659
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
433,118
|
|
|
|
501,091
|
|
Asset
impairment
|
|
|
372,706
|
|
|
|
-
|
|
Selling,
general and administrative
|
|
|
3,269,270
|
|
|
|
1,320,535
|
|
Total
costs and expenses
|
|
|
4,075,094
|
|
|
|
1,821,626
|
|
Operating
loss
|
|
|
(3,106,814
|
)
|
|
|
(1,320,967
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,660,338
|
)
|
|
|
(15,201
|
)
|
Other
income
|
|
|
5,844
|
|
|
|
65
|
|
Gain
on change in fair value of derivatives
|
|
|
268,236
|
|
|
|
-
|
|
Loss
on debt settlement
|
|
|
(107,104
|
)
|
|
|
-
|
|
Total
other income (expense)
|
|
|
(1,493,362
|
)
|
|
|
(15,136
|
)
|
Net
loss before provision for income tax
|
|
|
(4,600,176
|
)
|
|
|
(1,336,103
|
)
|
Provision
for income tax
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
$
|
(4,600,176
|
)
|
|
$
|
(1,336,103
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
44,796,318
|
|
|
|
33,221,122
|
|
See
accompanying notes to consolidated financial statements
KSIX
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statement of Stockholders’ Deficit
Years
ended December 31, 2016 and December 31, 2015
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
28,000,000
|
|
|
$
|
28,000
|
|
|
$
|
12,000
|
|
|
$
|
(6,923
|
)
|
|
$
|
33,077
|
|
Stock issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Ksix Media, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
3,114,812
|
|
|
|
3,114
|
|
|
|
(12,000
|
)
|
|
|
(84,780
|
)
|
|
|
(93,666
|
)
|
Cash
|
|
|
-
|
|
|
|
-
|
|
|
|
3,717,620
|
|
|
|
3,718
|
|
|
|
296,347
|
|
|
|
-
|
|
|
|
300,065
|
|
Consulting
contract
|
|
|
-
|
|
|
|
-
|
|
|
|
48,000
|
|
|
|
48
|
|
|
|
14,832
|
|
|
|
-
|
|
|
|
14,880
|
|
Acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
1,250,000
|
|
|
|
1,250
|
|
|
|
473,750
|
|
|
|
-
|
|
|
|
475,000
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,336,103
|
)
|
|
|
(1,336,103
|
)
|
Balance,
December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
36,130,432
|
|
|
|
36,130
|
|
|
|
784,929
|
|
|
|
(1,427,806
|
)
|
|
|
(606,747
|
)
|
Stock issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
-
|
|
|
|
-
|
|
|
|
8,750,000
|
|
|
|
8,750
|
|
|
|
848,750
|
|
|
|
-
|
|
|
|
857,500
|
|
Services
|
|
|
10,000,000
|
|
|
|
10,000
|
|
|
|
7,890,000
|
|
|
|
7,890
|
|
|
|
1,389,898
|
|
|
|
-
|
|
|
|
1,407,788
|
|
Loan
costs
|
|
|
-
|
|
|
|
-
|
|
|
|
1,782,000
|
|
|
|
1,782
|
|
|
|
298,218
|
|
|
|
-
|
|
|
|
300,000
|
|
Convertible
notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
2,791,469
|
|
|
|
2,792
|
|
|
|
507,963
|
|
|
|
-
|
|
|
|
510,755
|
|
Warrant
issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
389,698
|
|
|
|
-
|
|
|
|
389,698
|
|
Option
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
301,133
|
|
|
|
-
|
|
|
|
301,133
|
|
Measurement
period adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(375,000
|
)
|
|
|
-
|
|
|
|
(375,000
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,600,176
|
)
|
|
|
(4,600,176
|
)
|
Balance,
December 31, 2016
|
|
|
10,000,000
|
|
|
$
|
10,000
|
|
|
|
57,343,901
|
|
|
$
|
57,344
|
|
|
$
|
4,145,589
|
|
|
$
|
(6,027,982
|
)
|
|
$
|
(1,815,049
|
)
|
See
accompanying notes to consolidated financial statements
KSIX
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2016 and December 31, 2015
|
|
2016
|
|
|
2015
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,600,176
|
)
|
|
$
|
(1,336,103
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization
and depreciation
|
|
|
433,118
|
|
|
|
501,091
|
|
Common
stock and warrants issued for services
|
|
|
1,531,380
|
|
|
|
62,880
|
|
Change
in fair value of derivatives
|
|
|
(268,236
|
)
|
|
|
-
|
|
Loss
on debt settlement
|
|
|
107,105
|
|
|
|
-
|
|
Bad
debt expense
|
|
|
36,954
|
|
|
|
97,406
|
|
Non-cash
interest
|
|
|
1,466,550
|
|
|
|
6,365
|
|
Loan
penalty
|
|
|
30,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Asset
impairment
|
|
|
372,706
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
111,711
|
|
|
|
(86,040
|
)
|
Prepaid
expenses
|
|
|
-
|
|
|
|
3,000
|
|
Deferred
revenue
|
|
|
(353,240
|
)
|
|
|
229,520
|
|
Accounts
payable and accrued expenses
|
|
|
427,660
|
|
|
|
176,322
|
|
Credit
card liability
|
|
|
62,591
|
|
|
|
121,038
|
|
Net
cash used in operating activities
|
|
|
(641,877
|
)
|
|
|
(224,521
|
)
|
Investing
activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(3,000
|
)
|
|
|
(9,732
|
)
|
Cash
paid in acquisition, net of refund
|
|
|
-
|
|
|
|
(100,000
|
)
|
Cash
paid as deposit on acquisition
|
|
|
(500,000
|
)
|
|
|
-
|
|
Cash
acquired in acquisition
|
|
|
-
|
|
|
|
128,063
|
|
Net
cash provided by (used in) investing activities
|
|
|
(503,000
|
)
|
|
|
18,331
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock for cash
|
|
|
857,500
|
|
|
|
300,065
|
|
Advances
from related party, net of repayment
|
|
|
38,500
|
|
|
|
237,677
|
|
Loan
proceeds
|
|
|
770,000
|
|
|
|
-
|
|
Loan
repayment
|
|
|
(526,903
|
)
|
|
|
(299,880
|
)
|
Net
cash provided by financing activities
|
|
|
1,139,097
|
|
|
|
237,862
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(5,780
|
)
|
|
|
31,672
|
|
Cash
and cash equivalents, beginning of year
|
|
|
69,489
|
|
|
|
37,817
|
|
Cash
and cash equivalents, end of year
|
|
$
|
63,709
|
|
|
$
|
69,489
|
|
See
accompanying notes to consolidated financial statements
KSIX
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2016 and December 31, 2015, Continued
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
30,268
|
|
|
$
|
7,158
|
|
Income
taxes
|
|
|
-
|
|
|
|
-
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Common
stock issued for public relation services contract
|
|
$
|
-
|
|
|
$
|
14,880
|
|
Notes
payable issued in acquisition
|
|
|
-
|
|
|
|
750,000
|
|
Common
stock issued in acquisition
|
|
|
-
|
|
|
|
475,000
|
|
Common
stock issued for services to be rendered recorded as prepaid expenses
|
|
|
218,111
|
|
|
|
-
|
|
Warrant
issued for prepaid services
|
|
|
349,127
|
|
|
|
-
|
|
Common
stock issued in exchange for notes payable
|
|
|
510,754
|
|
|
|
-
|
|
See
accompanying notes to consolidated financial statements
KSIX
MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2016
1
BASIS OF PRESENTATION AND BUSINESS
Basis
of presentation
The
accompanying consolidated financial statements include the accounts of Ksix Media Holdings, Inc. (the “Company”),
incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, Ksix Media, Inc. (“Media”), incorporated
in Nevada on November 5, 2014, Ksix, LLC (“KSIX”), a Nevada limited liability company that was formed on September
14, 2011, Blvd. Media Group, LLC (“BLVD”), 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.
Business
description
The
Company is doing business through two of its wholly owned subsidiaries. KSIX is an Internet marketing company. KSIX is an advertising
network designed to create revenue streams for its affiliates and to provide advertisers with increased measurable audience. KSIX
provides performance based marketing solutions to drive traffic and conversions within a Cost-Per-Lead (“CPL”)
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.
DIQ
is a full service digital advertising agency specializing in survey generation and landing page optimization specifically designed
for mass tort action lawsuits.
Other subsidiaries are
inactive as of the date of this consolidated financial statement.
Effective
December 7, 2016, the Company executed a Master Exchange Agreement for the exchange of Common Stock, Management and Control (the
“Exchange Agreement”) with True Wireless, LLC (“TW”) and Kevin Brian Cox (“Cox”), the sole
owner of TW’s issued and outstanding membership interests. TW’s primary business operation is a full-service telecommunications
company specializing in the Lifeline program which provides subsidized mobile phone service for low income individuals. The acquisition
has not closed as of the date of these financial statements (See Note 13 for details).
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 (see Note
4).
On
or about April 27, 2015, the Company entered into a Share Exchange Agreement (the “Agreement”) with all of the shareholders
of Media, whose primary business is the operation of a diverse advertising network through its wholly-owned subsidiaries KSIX
and BLVD. Pursuant to the Agreement, the Company acquired all of the issued and outstanding shares (22,600,000 shares) of the
common stock of Media from Media’s shareholders in exchange for 28,000,000 restricted shares of the Company’s common
stock. The acquisition was accounted for as a reverse merger, whereby Media is the accounting acquirer and the Company is the
legal surviving reporting company. The historical financial statements represent those of Media since its inception on November
5, 2014.
In
July 2015, the Company completed the change of its name from North American Energy Resources, Inc. to Ksix Media Holdings, Inc.
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. For the years ended December 31, 2016
and 2015, the Company reported $36,954 and $97,406 of bad debt expense.
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 December 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. 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.
Business
combinations
We
allocate the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based
on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable
assets and liabilities is recorded as goodwill.
Such
valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant
estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users,
acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management’s
estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable
and, as a result, actual results may differ from estimates.
Goodwill
Goodwill
is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses
acquired. Goodwill is not being amortized, but is reviewed at least annually for impairment. In our evaluation of goodwill impairment,
we perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less
than its carrying amount. If the qualitative assessment is not conclusive, we proceed to a two-step process to test goodwill for
impairment including comparing the fair value of the reporting unit to its carrying value (including attributable goodwill). Fair
value for our reporting units is determined using an income or market approach incorporating market participant considerations
and management’s assumptions on revenue growth rates, operating margins, discount rates and expected capital expenditures.
Fair value determinations may include both internal and third-party valuations. Unless circumstances otherwise dictate, we perform
our annual impairment testing in the fourth quarter.
We
perform the allocation based on our knowledge of the market in which we operate, and our overall knowledge of the industry.
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 lead (“CPL”) basis. 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.
Deferred
revenue
DIQ
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 DIQ delivers the surveys contracted. At that time revenue is recognized and the deferred
revenue liability is reduced.
Fair
value measurements
The
Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value
as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair
value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, 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. The carrying amounts of our short and long term credit obligations approximate fair value because the effective
yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances
of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
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 establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable 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 or 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).
|
The
derivative liability in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, is
the only financial liability measure at fair value on a recurring basis.
The
change in the Level 3 financial instrument is as follows:
Issued during the year ended December 31, 2016
|
|
$
|
1,226,020
|
|
Converted
|
|
|
(373,616
|
)
|
Change in fair value recognized in operations
|
|
|
(268,236
|
)
|
Total
|
|
$
|
584,168
|
|
The
estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following
assumptions as of December 31, 2016:
Estimated
dividends
|
|
|
None
|
|
Expected
volatility
|
|
|
261.35
|
%
|
Risk
free interest rate
|
|
|
2.79
|
%
|
Expected
term
|
|
|
0.01-36
months
|
|
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives
and Hedging Activities”. Applicable GAAP requires companies to bifurcate conversion options from their host instruments
and account for them as freestanding derivative financial instruments according to certain criteria. The criteria include circumstances
in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related
to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative
instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings
as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative
instrument.
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 BLVD 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
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09 (ASU2014-09),
Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance
under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09
also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from
customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain
or fulfill a contract. Based on the FASB’s Exposure Draft Update issued on April 29, 2015, and approved in July 2015, Revenue
from Contracts With Customers (Topic 606): Deferral of the Effective Date, ASU 2014-09 is now effective for reporting periods
beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December
15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard
either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 is not expected
to have any impact on the Company’s financial statement presentation or disclosures.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”
The amendments in this guidance are clarifying the definition of a business to assist entities when determining whether an integrated
set of assets and activities meets the definition of a business. The update provides that when substantially all the fair value
of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not
a business. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years. The adoption of this new guidance is not expected to have a material impact on our consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. The amendments in this guidance to eliminate the requirement to calculate the implied fair value of goodwill to measure
goodwill impairment charge (Step 2). As a result, an impairment charge will equal the amount by which a reporting unit’s
carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. An entity still
has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. The amendment should be applied on a prospective basis. The guidance is effective for goodwill impairment tests in
fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed after January
1, 2017. The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.
In
May 2017, the FASB issued Accounting Standards Update No. 2017-09 (ASU 2017-09), Compensation — Stock Compensation (Topic
718) Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions
of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of ASU 2017-09 which
will become effective for annual periods beginning after December 15, 2017 and for interim periods within those annual periods,
is not expected to have any impact on the Company’s financial statement presentation or disclosures.
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 a stockholders’ deficit of $1,815,049, has a working capital
deficiency of $3,301,057 as of December 31, 2016 and incurred losses for the past two years. 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 after the end of the 2nd quarter ended June 30, 2018 from ongoing operations by the combination
of increased cash flow from its current subsidiaries, as well as restructuring our current debt burden. The Company has executed
an agreement with a FINRA licensed broker, as well as several institutional investors, to bring in equity investments to pay down
existing debt obligations, cover short term shortfalls, and complete proposed acquisitions. Additionally, the Company is negotiating
the closing of the acquisition of True Wireless, LLC, (“TW”) an Oklahoma Limited Liability Company. Upon the completion
of the potential acquisition of TW as a wholly owned subsidiary, the Company believes it will become 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, the Company 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 ($150,000 was refunded due to renegotiation
of the agreement) and three $250,000 notes (see Note 9). The acquisition was accounted
for under the acquisition method of accounting. The purchase price was allocated to the
fair value of the tangible and intangible assets acquired and liabilities assumed. The
Company completed an appraisal of DIQ amounts during the fourth quarter of 2017. The
resulting adjustments from the amounts determined by the Company to the fair value of
the assets acquired and liabilities assumed per the appraisal is as follows:
|
|
|
Preliminary
Amounts estimated by the Company
|
|
|
Adjustments
|
|
|
Appraised
Value of Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
128,063
|
|
|
|
-
|
|
|
$
|
128,063
|
|
Accounts
receivable
|
|
|
4,800
|
|
|
|
-
|
|
|
|
4,800
|
|
Intangible
assets (See Note 5)
|
|
|
1,630,973
|
|
|
|
(1,246,329
|
)
|
|
|
384,644
|
|
Goodwill
|
|
|
-
|
|
|
|
866,782
|
|
|
|
866,782
|
|
Total
assets
|
|
|
1,763,836
|
|
|
|
(379,547
|
)
|
|
|
1,384,289
|
|
Accounts
payable and accrued expenses
|
|
|
(6,244
|
)
|
|
|
(4,978)
|
|
|
|
(11,222
|
)
|
Credit
card liability
|
|
|
(153,097
|
)
|
|
|
-
|
|
|
|
(153,097
|
)
|
Deferred
revenue
|
|
|
(288,720
|
)
|
|
|
-
|
|
|
|
(288,720
|
)
|
Net
assets acquired
|
|
$
|
1,315,775
|
|
|
$
|
(384,525
|
)
|
|
$
|
931,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and notes issued
|
|
$
|
840,775
|
|
|
|
(9,525)
|
|
|
$
|
831,250
|
|
Value
of common stock issued
|
|
|
475,000
|
|
|
|
(375,000
|
)
|
|
|
100,000
|
|
Total
consideration
|
|
$
|
1,315,775
|
|
|
$
|
(384,525
|
)
|
|
$
|
931,250
|
|
The
adjustment in assets acquired and liabilities assumed resulted in a decrease in amortization expense of $494,584, of which $88,270
relates to 2015 operations and $406,315 relates to 2016 operations. In addition, selling, general and administrative expense
declined by $4,978 and interest expense increased by $9,525 in 2016.
Proforma operating results
for the period from January 1, 2015 through December 31, 2015 as if the acquisition had occurred on January 1, 2015 are
as follows:
|
|
2015
|
|
|
|
|
|
Revenue
|
|
$
|
3,720,955
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(250,664
|
)
|
5
INTANGIBLE ASSETS
Intangible
assets are as follows:
Ksix
and BLVD - The customer lists and related contracts of KSIX and BLVD were recorded at their fair value of $1,143,162
upon their acquisition on December 23, 2014. The Company determined a useful life of existing contracts and customer lists of
three years and began amortizing the cost over that period.
DIQ
- The customer lists and related contracts of DIQ were recorded at their initial estimated fair value of $1,630,973 upon their
acquisition on October 12, 2015. After completing the appraisal (see Note 4), the Company made measurement period adjustments.
|
|
Term
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
KSIX
and BLVD customer lists and related contracts
|
|
|
3
years
|
|
|
$
|
-
|
|
|
$
|
1,143,162
|
|
DIQ
initial customer lists and contracts
|
|
|
3
years
|
|
|
$
|
-
|
|
|
$
|
1,630,973
|
|
DIQ
customer relationships
|
|
|
5
years
|
|
|
$
|
183,255
|
|
|
$
|
-
|
|
DIQ
noncompetition agreement
|
|
|
2
years
|
|
|
$
|
201,389
|
|
|
$
|
-
|
|
|
|
|
|
|
|
$
|
384,644
|
|
|
$
|
2,774,135
|
|
Accumulated
amortization
|
|
|
|
|
|
$
|
167,449
|
|
|
$
|
507,777
|
|
|
|
|
|
|
|
$
|
217,195
|
|
|
$
|
2,266,358
|
|
Asset
impairment
|
|
|
|
|
|
$
|
372,706
|
|
|
$
|
-
|
|
Amortization
expense
|
|
|
|
|
|
$
|
430,128
|
|
|
$
|
499,425
|
|
Effective April 1, 2016,
the Company temporarily suspended its BLVD business operations and is reviewing a potential discontinuation of the business. BLVD
had only nominal operations in 2016. In addition, the Company evaluated the operations of KSIX at the end of 2016 and determined
that, due to declining cash flows, the unamortized balance of the intangible assets associated with KSIX and BLVD should
be impaired. An impairment of $372,706 was recorded.
Goodwill:
The
Company completed the appraisal of assets acquired and liabilities assumed in the acquisition of DIQ (see Note 4) and recognized
goodwill in the amount of $866,782.
6
DEFERRED REVENUE
The
Company bills in advance for services to be rendered for the majority of the business of DIQ. As of December 31, 2016 and December
31, 2015, the Company had received $165,000 and $518,240 from its customers for which services had yet to be delivered,
respectively.
7
CREDIT CARD LIABILITY
The
Company has utilized a credit card issued in the name of DIQ operation to pay for certain of its trade obligations. At December
31, 2016 and December 31, 2015, the Company’s credit card liability was $336,726 and $274,135, respectively. 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 consistent with its billing agreement
.
The credit card liability is
guaranteed by Scott Kaplan, the vice president of business
development for KSIX, LLC
.
8
LONG-TERM DEBT – RELATED PARTY
As
of December 31, 2016 and December 31, 2015, long-term debt due to a related party consists of:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Note
payable to director due in four equal annual installments of $26,875 on April 28 of each year
|
|
|
107,500
|
|
|
|
107,500
|
|
Less
debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
|
107,500
|
|
|
|
107,500
|
|
Less
current portion - related party
|
|
|
53,750
|
|
|
|
26,875
|
|
Long-term
debt - related party
|
|
$
|
53,750
|
|
|
$
|
80,625
|
|
On
April 28, 2015, the Company issued a promissory note to a director for principal amount of $107,500. The promissory note is due
in four equal annual payment of $26,875 on April 28 each year. Pursuant to the terms of the note, the note begins to accrue interest
at 6% per annum on the portion of the note that falls in default and the past due portion is convertible into the Company’s
common stock at a conversion price equal to 70% of the current price of the common stock.
The
payment due April 28, 2016 has not been made. The Company has determined that the conversion feature for the past due portion
of the note constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding
discount recorded to the note on the date of default. Accrued interest was $1,088 at December 31, 2016 and zero at December
31, 2015.
9
NOTES PAYABLE AND LONG-TERM DEBT
As
of December 31, 2016, notes payable and long-term debt consists of:
|
|
|
|
|
|
|
|
|
|
Note
Balance
|
|
|
Debt
Discount
|
|
|
Carrying
Value
|
|
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, past due
|
|
$
|
68,973
|
|
|
$
|
-
|
|
|
$
|
68,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 convertible¹
|
|
|
590,000
|
|
|
|
-
|
|
|
|
590,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to former officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016; accruing
interest at 6% per annum since April 28, 2016
|
|
|
101,250
|
|
|
|
-
|
|
|
|
101,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to seller of DigitizeIQ, LLC due as noted below²
|
|
|
485,000
|
|
|
|
-
|
|
|
|
485,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Credit Facility dated February 24, 2016; interest at 18% per annum; interest only for two months then 16 payments
of $28,306 monthly³
|
|
|
261,043
|
|
|
|
-
|
|
|
|
261,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Calvary Fund I. LP dated May 25, 2016 with interest at 18%
4
|
|
|
130,000
|
|
|
|
-
|
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
note payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible
into common stock
5
|
|
|
27,500
|
|
|
|
8,774
|
|
|
|
18,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory notes payable to Salksanna, LLC dated October 7, 2016 and December 21, 2016 with interest at 10% per annum; due
March 13, 2018; convertible into common stock
6
|
|
|
95,405
|
|
|
|
87,379
|
|
|
|
8,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital notes
7
|
|
|
183,757
|
|
|
|
-
|
|
|
|
183,757
|
|
|
|
|
1,942,928
|
|
|
|
96,153
|
|
|
|
1,846,775
|
|
Less
current portion
|
|
|
1,796,898
|
|
|
|
8,774
|
|
|
|
1,788,124
|
|
Long-term
debt
|
|
$
|
146,030
|
|
|
$
|
87,379
|
|
|
$
|
58,651
|
|
As
of December 31, 2015, notes payable and long-term debt consists of:
|
|
|
|
|
|
|
|
|
|
Note
Balance
|
|
|
Debt
Discount
|
|
|
Carrying
Value
|
|
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, past due
|
|
$
|
91,706
|
|
|
$
|
-
|
|
|
$
|
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 convertible¹
|
|
|
720,000
|
|
|
|
-
|
|
|
|
720,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to former officer due in four equal annual installments of $25,313 on April 28 of each year, non-interest bearing;
past due in 2016
|
|
|
101,250
|
|
|
|
-
|
|
|
|
101,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to seller of DigitizeIQ, LLC due as noted below²
|
|
|
750,000
|
|
|
|
2,860
|
|
|
|
747,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,662,956
|
|
|
|
2,860
|
|
|
|
1,660,096
|
|
Less
current portion
|
|
|
1,107,019
|
|
|
|
2,860
|
|
|
|
1,104,159
|
|
Long-term
debt
|
|
$
|
555,937
|
|
|
$
|
-
|
|
|
$
|
555,937
|
|
¹
The
Convertible Promissory Note
was modified on January 19, 2016 to release the pledge of the holder’s former membership
units in Ksix and BLVD, 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 the debt discount is fully amortized at December
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 January
1, 2017 the total balance is past due.
²
Notes due seller of DigitizeIQ, LLC includes a series of notes as follows
:
|
●
|
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).
|
|
●
|
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; (Balance at December 31, 2016 - $235,000)
|
|
●
|
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 (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 was
amortized to interest expense until the due date of the notes.
³
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 payment due August 29, 2016 was acquired by Salksanna LLC on September 13, 2016 (See ⁶ below). The payment due September
29, 2016 was acquired by Salksanna, LLC on October 7, 2016 and the payment due October 29, 2016 was acquired by Salksanna, LLC
on December 21, 2016. (See ⁶ below).
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 was fully amortized at December 31, 2016.
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.
The
TCA note was restructured effective August 29, 2016, September 29, 2016 and October 29, 2016 to accommodate the payment of the
amounts due on those dates by Salksanna, LLC and the issue by the Company of convertible notes payable to Salksanna for the amounts
of those payments. (See
6
below.) The restructured note to TCA added $25,146 to each payment for the loan fee originally
paid with common stock. When the fee is paid in full, the 1,782,000 shares will be returned to the Company. The payments due TCA
on November 29, 2016 and December 29, 2016 are currently unpaid and this default resulted in the note becoming convertible
into common stock of the Company.
The
Company evaluated the resulting embedded conversion feature for derivative treatment and recorded an initial derivative liability
and debt discount of $163,883. The debt discount was fully amortized at December 31, 2016.
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.
4
Calvary Fund I, LP Note –
The Calvary note payable was 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. 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. Pinz Capital is controlled by a director of the Company. Calvary Fund I, LP acquired the note from
Pinz Capital in December 2016.
The payments due November
25, 2016 and December 25, 2016 were not made. As a result, the Company was penalized $30,000, which was added to the note balance
and due to other past due obligations, it was determined the total balance was in default and due, making the note convertible.
Accordingly, a debt discount for the derivative liability was recorded on November 25, 2016 for $52,889. At December 31,
2016, the debt discount was fully amortized.
5
Convertible note payable to River North Equity, LLC (“RNE”)-
The Company evaluated the embedded conversion for derivative treatment and recorded an initial derivative liability and debt discount
of $23,339. The debt discount has been amortized to a balance of $8,774 at December 31, 2016.
The
Company has entered into a number of agreements with RNE wherein RNE has agreed to invest up to $3,000,000 in the common stock
of the Company. These agreements require an effective Registration Statement to be on file by the Company and would allow the
Company to require RNE to purchase the Company’s common stock at 90% of the lowest trading price of the Company’s
common stock during the previous five trading days. The Company has not yet filed a Registration Statement with the SEC.
6
The Company issued three convertible notes to Salksanna, LLC in exchange for payments made by Salksanna to TCA. The first
note in the amount of $53,452 was converted into 1,953,399 shares of the Company’s common stock. The second note in the
original amount of $53,452 was partially converted with $11,500 in principal and $44 in accrued interest converted into 383,525
shares of the Company’s common stock. The conversion of the first note and the partial conversion of the second note resulted
in a loss on debt extinguishment of $107,104.
At
December 31, 2016, the remaining notes with a principal balance of $95,405 have a debt discount of $87,379.
7
In November 2016, the Company entered into four working capital notes in the original amount of $245,000 which require daily
payments aggregating $2,956. The notes will be repaid between March 31, 2017 and July 31, 2017.
Derivative
liability
The
Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion
amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding
discount recorded to the associated debt. The excess of the derivative value over the face amount of the note, if any, is recorded
immediately to interest expense at inception.
The
estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following
assumptions:
Estimated dividends
|
None
|
Expected volatility
|
194.65% to 273.69%
|
Risk free interest rate
|
1.77% to 2.86%
|
Expected term
|
.01 to 36 months
|
10
INCOME TAXES
The
income tax provision (benefit) consists of the following:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(1,267,100
|
)
|
|
|
(454,300
|
)
|
Change in valuation allowance
|
|
|
1,267,100
|
|
|
|
454,300
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company’s income is earned in Nevada, and is thus not subject to state income tax.
The
expected tax benefit based on the statutory rate is reconciled with actual tax benefit as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
U.S.
federal statutory rate
|
|
|
-34.0
|
%
|
|
|
-34.0
|
%
|
State
income tax, net of federal benefit
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Increase in valuation allowance
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred
tax assets consist of the effects of temporary differences attributable to the following:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
1,621,400
|
|
|
$
|
443,400
|
|
Option compensation accrual
|
|
|
102,400
|
|
|
|
13,300
|
|
Deferred tax assets
|
|
|
1,723,800
|
|
|
|
456,700
|
|
Valuation allowance
|
|
|
(1,723,800
|
)
|
|
|
(456,700
|
)
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has approximately
$4,768,000 of net operating losses (“NOL”) carried forward to offset taxable income in future years which expire commencing
in fiscal 2034. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making
this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred tax
assets relating to NOLs for every period because it is more likely than not that all of the deferred tax assets will not be realized.
11
Stockholder’s equity
PREFERRED
STOCK
The
Company has 100,000,000 shares of its $0.001 par value preferred stock authorized. At December 31, 2016 the Company had 10,000,000
issued and outstanding and at December 31, 2015, the Company had no preferred shares issued and outstanding.
Series
“A” Preferred Stock
On
May 6, 2016, the Company, pursuant to the consent of the Board of Directors filed a Certificate of Designation with the Nevada
Secretary of State which designated 10,000,000 shares of the Company’s authorized preferred stock as Series “A”
Preferred Stock, par value $0.001. The Series “A” Preferred Stock has the following attributes:
|
●
|
Ranks
senior only to any other class or series of designated and outstanding preferred shares of the Company;
|
|
●
|
Bears
no dividend;
|
|
●
|
Has
no liquidation preference, other than the ability to convert to common stock of the Company;
|
|
●
|
The
Company does not have any rights of redemption;
|
|
●
|
Voting
rights equal to ten shares of common stock for each share of Series “A” Preferred Stock;
|
|
●
|
Entitled
to same notice of meeting provisions as common stock holders;
|
|
●
|
Protective
provisions require approval of 75% of the Series “A” Preferred Shares outstanding to modify the provisions or
increase the authorized Series “A” Preferred Shares; and
|
|
●
|
Each
ten Series “A” Preferred Shares can be converted into one common share at the option of the holder.
|
On
May 6, 2016, upon filing the Certificate of Designation which designated 10,000,000 shares of the Company’s $0.001 par value
preferred stock as Series “A”, the board of directors authorized the Company to issue all 10,000,000 shares of Series
“A” Preferred Stock to Carter Matzinger, Chief Executive Officer and Chairman of the Board of Directors, for services
previously rendered.
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 $0.19 per share. The Company recorded compensation expense
in the amount of $190,000.
COMMON
STOCK
The
Company has 100,000,000 shares of its $0.001 par value common stock authorized. At December 31, 2016 and December 31, 2015, the
Company had 57,343,901 shares and 36,130,432 shares issued and outstanding, respectively.
2016
Transactions
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 was fully amortized at December 31, 2016.
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 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 was amortized to expense over the term of the agreement.
On
April 18, 2016, the Company issued 100,000 shares of its common stock in exchange for cash in the amount of $10,000.
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 with a director. 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 in
(1) 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 was 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.
On
August 17, 2016, the Company issued 1,000,000 shares of its common stock valued at $100,000 in consideration for a one year consulting
agreement. The amount is being amortized to expense over the term of the agreement.
On
September 19, 2016, the Company issued 250,000 shares of its common stock in exchange for cash consideration of $20,000.
On
September 22, 2016, the Company issued 625,000 shares of its common stock as part of the Unit Subscription Agreement described
in (2) below for consideration of $50,000.
Effective
October 6, 2016, the Company issued 1,000,000 shares of its common stock valued at $50,000 in partial consideration for a six-month
consulting contract. This amount is being amortized to expense over the term of the agreement.
Effective
October 26, 2016, the Company issued 1,953,399 shares of its common stock in exchange for the Company’s convertible note
payable in the amount of $53,452 plus accrued interest of $5,345.
Effective
October 26, 2016, the Company issued 383,525 shares of its common stock in exchange for a portion of the Company’s convertible
note payable in the amount of $11,500 plus accrued interest of $44.
On
November 23, 2016, the Company entered into a one year consulting agreement with an individual which called for compensation with
a cashless warrant for 1,500,000 shares of the Company’s common stock. The warrant was valued at $389,699, which amount
was included in repaid expense and additional paid in capital. The prepaid expense is being amortized over the one year term of
the agreement.
During
November and December 2016 the Company sold 5,975,000 Units at a price of $0.10 per Unit and consisting of one share of common
stock and one-half warrant to purchase additional common stock at a purchase price of $0.50 per share for a period of three years
as described in (3) below for consideration of $597,500.
2015
Transactions
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.
On
April 27, 2015, the Company had 3,114,812 common shares outstanding when they issued 28,000,000 shares in the acquisition of Ksix
Media, Inc. On May 18, 2015, the Company sold 930,000 shares for $75,065 in cash. On June 4, 2015, the Company sold 1,053,100
shares for $85,000 in cash. On July 16, 2015, the Company sold 1,734,520 shares for $140,000 in cash.
On
September 29, 2015, the Company issued 48,000 shares of its common stock for a public relation services contract for services
to be performed in the fourth quarter. The stock was valued at the trading price on the date of the agreement and the resulting
$14,880 was included in consulting expense.
On
October 12, 2015, the Company issued 1,250,000 shares of its common stock as a portion of the consideration for the acquisition
of DIQ, see Note 4. The stock was valued at $475,000 based on its trading price on the date of the agreement.
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 Time Based Stock Options vested on September 24, 2016 on the one year anniversary
of Mr. Matzinger’s employment contract. 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 $10,000,000 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 $15,000,000 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 $20,000,000 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
|
|
|
398.18
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
1.44
|
%
|
Expected annual forfeiture rate
|
|
|
0
|
%
|
No value was recorded
for the performance based stock options. The time based stock options were valued at $959,940 using Black-Scholes model,
based on the assumptions above, which was amortized over the service period of four years.
UNIT
SUBSCRIPTION AGREEMENT – WARRANTS
|
(1)
|
On May 13, 2016, the Company entered into a Unit subscription
agreement with BCAN Holdings, LLC, which is controlled by the Chief Strategy Officer of the Company. 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 had 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, which expired on September 10, 2016. The Warrants
are classified as equity since they have a fixed exercise price and do not have a provision for modification.
|
|
|
|
|
(2)
|
On September 16, 2016, the Company entered into a Unit subscription
agreement with BCAN Holdings, LLC, which is controlled by the Chief Strategy Officer of the Company. Each Unit
was priced at $0.08 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 $0.50 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 625,000 Units ($50,000) and a maximum of 4,000,000 Units ($320,000). The individual purchased the minimum of 625,000 Units
($50,000) on September 22, 2016 and has a non-transferable and irrevocable option to purchase the remaining 3,375,000 Units
($270,000) for a period of 45 days from the effective date of September 22, 2016. The option expired on November 14, 2016.
The Warrants are classified as equity since they have a fixed exercise price and do not have a provision for modification.
|
|
|
|
|
(3)
|
During November and December 2016, the Company entered into Unit subscription agreements with seventeen unrelated companies and individuals. Each Unit was priced at $0.10 and contained: (a) one share of common stock restricted in accordance with Rule 144; and (b) one-half Warrant to purchase an additional share of common stock restricted in accordance with Rule 144 for $0.50 for a period of three years after the close of the offering. The parties purchased 5,975,000 Units ($597,500) during November and December 2016. The Warrants are classified as equity since they have a fixed exercise price and do not have a provision for modification.
|
12
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:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
318,002
|
|
|
$
|
80,325
|
|
New
advances
|
|
|
40,000
|
|
|
|
407,000
|
|
Repayment
|
|
|
(1,500
|
)
|
|
|
(169,323
|
)
|
Balance
at end of year
|
|
$
|
356,502
|
|
|
$
|
318,002
|
|
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
with a director. The $190,000 is being amortized to expense over the term of the agreement.
On
May 6, 2016, the Company issued 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. (see Note 11).
See Note 8 for long-term
debt due to a director.
13
COMMITMENTS AND CONTINGENCIES
True
Wireless, LLC
Master
Agreement for the Exchange of Common Stock, Management, and Control
On
or about December 7, 2016, the Company, entered into a Master Agreement for the Exchange of Common Stock, Management, and Control
(the “Exchange Agreement”) with True Wireless, LLC, an Oklahoma Limited Liability Company (“TW”) and the
members of TW (the “Members”). Hereinafter, the Company, TW, and its Members may be referred to as a “Party”
individually or collectively as the “Parties”.
TW’s
primary business operation is a full-service telecommunications company specializing in the Lifeline program as set forth by the
Telecommunications Act of 1996, and regulated by the FCC which provides subsidized mobile phone services for low income individuals
(“Lifeline Services”). TW currently has an FCC license to offer Lifeline Services in the following states: Oklahoma,
Rhode Island, Maryland, Texas, and Arkansas.
Kevin
Brian Cox (“Cox”), a resident of the State of Tennessee, is the sole owner of all of TW’s issued and outstanding
membership interests, either directly or indirectly through EWP Communications, LLC, a Tennessee limited liability company, the
beneficial owner of which is Cox.
Pursuant to the agreement,
the Company will issued 12 million shares of restricted common stock and make cash payment of $6 million and a one-year promissory
note for $6 million upon closing. The acquisition has not closed as of the date of the consolidated financial statements issued.
On December 7, 2016,
the company made cash payment of $500,000 o the owner of TW as a deposit on acquisition.
Additionally, pursuant
to the terms of the Exchange Agreement, the Company executed and entered into a “Management and Marketing Agreement”
(“Management Agreement”) with TW.
Pursuant to the Management
Agreement, the Company would act as the manager of TW until such time as the Exchange Agreement and the transactions contemplated
thereunder are approved by the FCC. Following such approval (which has not occurred as of the date of this Report), the Parties
will hold a final closing of the Exchange Agreement will occur and TW would become a wholly-owned subsidiary of the Company.
Neither the Exchange
Agreement nor the Management Agreement had closed as of December 31, 2016 (see Note 14 Subsequent Event).
Company
Investment in TW
At
the date of this filing, the Company’s investment in TW consists of the following:
|
|
Shares
|
|
|
Amount
|
|
Cash paid
|
|
|
|
|
|
$
|
500,000
|
|
|
|
|
|
|
|
$
|
500,000
|
|
Contingent consideration to be paid:
|
|
|
|
|
|
|
|
|
Cash at closing
|
|
|
|
|
|
$
|
1,500,000
|
|
Common stock to be issued prior to closing
|
|
|
13,200,000
|
|
|
|
5,304,000
|
|
Common stock to be issued at closing
|
|
|
103,200,000
|
|
|
|
51,600,000
|
|
Note payable due December 31, 2018
|
|
|
|
|
|
|
1,500,000
|
|
Total contingent consideration
|
|
|
|
|
|
$
|
59,904,000
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
|
|
|
|
$
|
60,404,000
|
|
Note
to Table Above
:
1
Common Stock to be issued upon prior to closing at an average price of approximately $0.40 per share.
2
Common Stock to be issued at closing at an average price of $0.50 per share.
Upon the TW Closing described above, the Company will also: (1) issuer Warrants to purchase 45,000,000 shares of Company Common
Stock on a “cashless” basis exercisable at $0.50 per share for a period of five years; (2) Cox and his assigns shall
also be issued such additional Common Stock of KSIX as are required pursuant to the Anti-Dilution Provision.
14
SUBSEQUENT EVENTS
The
Company has evaluated events occurring subsequent to December 31, 2016 and through the date these financial statements were available
to be issued and disclosure as following:
Common
stock issued and conversion
Effective
January 1, 2017, the Company agreed to issue 320,000 shares of its common stock in exchange for PR services to be performed over
the following nine months. On March 24, 2017, the Company issued one-half of the shares owed.
On
January 24, 2017, Calvary Fund I LP was issued 100,000 shares of our common stock in exchange for conversion of $3,200 in accrued
interest and $4,800 in principal of our note payable obligation to them.
On
March 8, 2017, the Company issued 310,675 shares of its common stock to Calvary Fund I LP in exchange for $7,500 in principal
and $5,000 in accrued interest owed to Calvary.
On
March 24, 2017, the Company issued 600,000 shares of its common stock pursuant to a consulting agreement with Anthony P. Nuzzo,
a director of the Company. The shares were valued at $252,000 and this amount is included as a part of the deposit for the acquisition
of TW.
On
March 24, 2017, the Company issued 600,000 shares of its common stock pursuant to a modification of a consulting agreement. The
shares were valued at $252,000 and this amount is included as a part of the deposit for the acquisition of TW.
On
March 24, 2017, the Company issued 12,000,000 shares of its common stock to Brian Cox pursuant to a Master Agreement for the Exchange
of Common Stock, Management and Control as a part of the planned acquisition of True Wireless, LLC.
On
March 24, 2017, the Company issued 800,000 shares of its common stock to its attorney for legal fees in the amount of $76,250
which are included in accrued expense at December 31, 2016.
On
March 24, 2017, the Company issued 800,000 shares of its common stock to a consultant for consulting fees in the amount of $152,355
which are included in accrued expenses at December 31, 2016.
On
March 31, 2017, the Company issued 250,000 shares of its common stock to a consultant for consulting fees in the amount of $20,000
which are included in accrued expenses at December 31, 2016.
On
May 3, 2017, the Company accepted a notice to convert $60,000 in principal of a convertible note payable into 1,923,077 shares
of its common stock. The stock was valued at $96,346 on the conversion date.
On
May 10, 2017, the Company accepted a notice to convert $30,000 in principal of a convertible note payable into 652,173 shares
of its common stock. The stock was valued at $85,435 on the conversion date.
On
May 15, 2017, the Company accepted a notice to convert $100,000 in principal of a convertible note payable into 1,508,296 shares
of its common stock. The stock was valued at $218,703 on the conversion date.
On
October 10, 2017, the Company effectuated an increase in its authorized capital to a total of 600,000,000 shares comprising 500,000,000
shares of Common Stock par value $0.001 and 100,000,000 shares of Preferred Stock par value $0.001.
Acquisition
of TW
First
Addendum to Master Agreement for the Exchange of Equity, Management, and Control
On
March 30, 2017, the Parties executed a First Addendum to the Exchange Agreement extending the time for all material deadlines
contemplated for the transactions related to the acquisition of TW to May 1, 2017.
Amended
Master Agreement for the Exchange of Common Stock, Management, and Control
On
July 18, 2017, the Parties entered into an Amended Master Agreement for the Exchange of Common Stock, Management, and Control
(the “Amended Exchange Agreement”) which amended and restated the Exchange Agreement and First Amendment thereto.
The Amended Exchange Agreement reset certain of the milestones and timetables detailed in the Exchange Agreement. The material
terms of the Amended Exchange Agreement are as follows:
TERMS
|
●
|
The
Management Agreement would commence on July 18, 2017, concurrent with the execution of the Amended Exchange Agreement (the
“Management Closing”);
|
|
|
|
|
●
|
All
other terms and conditions with respect to the Transaction set forth in this Amended Exchange Agreement required to be completed
by the Parties would occur only after all required governmental and regulatory approvals of the Transaction have been delivered.
At that time, the Parties agreed to complete the Company’s acquisition of TW (the “Equity Closing”). The
Parties agreed to expedite preparation of all financial information and audits to be completed at the earliest feasible time.
|
|
|
|
|
●
|
The
Equity Closing is subject to the completion of due diligence by all Parties to the Amended Exchange Agreement;
|
|
|
|
|
●
|
The
Transaction (including the Equity Closing) is subject to delivery by the Parties of all documents required under the Amended
Exchange Agreement;
|
|
|
|
|
●
|
The
Company and TW agreed to take all necessary corporate actions to authorize the Management and Equity Closings; and
|
|
|
|
|
●
|
It
was intended that the transaction underlying the Amended Exchange Agreement would qualify for United States federal income
tax purposes as a re-organization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended. However,
both Parties recognized that in the event the transaction underlying this Agreement does not qualify for United States federal
income tax purposes as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended,
each party is separately responsible for any tax consequences and indemnifies and holds harmless the other party from and
against any and all claims, demands, actions, suits, proceedings, assessments, judgments, damages, costs, losses and expenses,
resulting from the that Parties failure to pay their tax liability for this transaction.
|
CLOSINGS
THE
MANAGEMENT CLOSING
The
Management Closing occurred on July 18, 2017 pursuant to the following material terms or actions which were approved by the Parties:
|
●
|
The
Company agreed, upon execution of the Amended Exchange Agreement, to deliver (a) $1.5 Million Promissory Note issued by the
Company in favor of Cox; and (b) undertake to authorize an additional number of shares of common stock as required to fulfill
the terms and conditions of the transactions between the parties;
|
|
●
|
Upon
the Equity Closing (which has not yet occurred), the Company agreed to issue to Cox and/or his assigns, approximately 114
million shares of Company Common Stock and Warrants to purchase 45 million Company Common Shares for a period of five years
at a purchase price of $0.50 per share (subject to adjustment) which can be exercised on a “cashless” basis. As
of the date of this Report, 12 million shares of Company Common Stock have been issued to Cox and assigns and an additional
102 Million shares of Company Common Stock will be delivered (as directed by Cox) at the Equity Closing;
|
|
●
|
The
Company also agreed to an anti-dilution provision (the “Anti-Dilution Provision”) whereby it would issue such
number of additional shares at the Equity Closing as would be necessary to maintain Cox’s percentage ownership of Company
Common Stock at the time of the Equity Closing at 69.5% (“Cox Percentage”). This provision applies with respect
to any additional stock, warrants or other security by the Company prior to the Equity Closing;
|
|
●
|
It
was agreed that 75% of Carter Matzinger’s (“Matzinger”) Series “A” Preferred Stock (“Series
A Preferred Stock”) containing specified majority common stock voting rights of the Company would be transferred by
Matzinger to Cox upon execution of the Amended Exchange Agreement. This agreement was subsequently amended to provide for
the transfer of 100% of the Series A Preferred Stock by Matzinger to Cox;
|
|
●
|
It
was agreed that, at the Post Equity Closing, Matzinger would submit for cancellation and retirement all of his (or his assigns)
shares of Company Common Stock in excess of 14 million shares. As a result thereof, Matzinger would hold no more than 14 million
shares of Company Common Stock following the Equity Closing.
|
EQUITY
CLOSING.
Conditioned
upon the Parties, having completed all material requirements of the Amended Exchange Agreement, including all delivery of all
Exhibits and Collateral Agreements contemplated thereby, and the receipt of any required third party approvals, the Parties agreed
to proceed with the Equity Closing, as follows:
At
the Equity Closing, the Company agreed to Issue to the Members:
|
●
|
$1,500,000
cash (as payment for the Promissory Note (see above); and
|
|
●
|
Any
additional Cox Stock required to be issued pursuant to the Anti-Dilution Provision.
|
TW
and the Members agreed to issue to the Company:
|
●
|
All
outstanding Membership Interests in TW together with all documentation to reflect the intent of the Parties such that TW would
become a wholly owned subsidiary of the Company.
|
Management
and Marketing Agreement
On
or about July 18, 2017, the Company executed and entered into a “Management and Marketing Agreement” (“Management
Agreement”) with Cox. Pursuant to the Management Agreement, the Company is obligated to provide certain management services
to Cox as detailed in the Management Agreement.