1
BASIS OF PRESENTATION AND BUSINESS
Basis
of presentation
The
accompanying consolidated financial statements include the accounts of Surge Holdings, Inc. (“Surge”), formerly Ksix
Media Holdings, Inc. (the “Holdings”), 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, Surge Blockchain, LLC (“Blockchain”), formerly 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 Surge Cryptocurrency Mining, Inc. (“Crypto”),
formerly 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 has been doing business through two of its wholly owned subsidiaries. DIQ is a full service digital advertising agency
specializing in survey generation and landing page optimization specifically designed for mass tort action lawsuits. 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.
Other
subsidiaries are inactive as of the date of this consolidated financial statement. In December 2017, the Company renamed Blockchain
and Crypto and intend to pursue the following business models.
Blockchain
is focused on expanding development and licensing for a Blockchain Service as a Software (SaaS) Payments Platform in order to
deliver a real product that improves people’s lives.
Crypto
intends to strategically mine Bitcoin, Litecoin and other cryptocurrencies. The company is working to finalize its
first mining farm of 100 Antminer L3+ machines. The mining operation will work 24/7 to both generate revenues and deliver to
the Company a commodity.
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 12 for details).
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, 2017
and 2016, the Company reported $10,000 and $36,954 of bad debt expense, respectively.
Credit
risk
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, 2017 and 2016, 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:
|
|
2017
|
|
|
2016
|
|
Balance,
beginning of year
|
|
$
|
584,168
|
|
|
$
|
-
|
|
Issued
during the year
|
|
|
22,368
|
|
|
|
1,226,020
|
|
Converted
|
|
|
(1,017,840
|
)
|
|
|
(373,616
|
)
|
Change
in fair value recognized in operations
|
|
|
504,201
|
|
|
|
(268,236
|
)
|
Balance,
end of year
|
|
$
|
92,897
|
|
|
$
|
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, 2017 and December 31, 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Estimanted
dividends
|
|
|
None
|
|
|
|
None
|
|
Expected
volatility
|
|
|
179.55
|
%
|
|
|
261.35
|
%
|
Risk
free interest rate
|
|
|
2.58
|
%
|
|
|
2.79
|
%
|
Expected
term
|
|
|
0.01-36
months
|
|
|
|
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.
Advertising
costs
Advertising
costs are expensed as incurred in accordance with ASC 720-35 “Advertising Costs”. The Company incurred advertising
costs of $2,255 and $73,924 for the years ended December 31, 2017 and 2016, respectively, which are included in selling, general
and administrative expenses on the Company’s consolidated financial statements.
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 Surge 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 2016, FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical
Expedients”. The update is to address certain issues identified by the FASB/IASB Joint Transition Resource Group for Revenue
Recognition (TRG) in the guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed
contracts and contract modifications at transition, the Board decided to add a project to its technical agenda to improve Topic
606, Revenue from Contracts with Customers, by reducing: 1) the potential for diversity in practice at initial application and
2) the cost and complexity of applying Topic 606 both at transition and on an ongoing basis. The amendments in this Update affect
entities with transactions included within the scope of Topic 606. The scope of that Topic includes entities that enter into contracts
with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration.
The amendments to the recognition and measurement provisions of Topic 606 also affect entities with transactions included within
the scope of Topic 610, Other Income. The amendments in this Update affect the guidance in Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements
for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other
Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The adoption of this guidance is not
expected to have a material impact on the Company’s Consolidated Financial Statements and related disclosures.
In
October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”,
which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity
transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective
for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the
update is permitted. The Company is currently evaluating the impact of the new standard.
In
May 2017, the FASB issued ASU 2017-09, “
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”
which provides 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. This standard is required to be adopted in the first quarter of 2018. The Company
is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
In
December 2017, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 118 (the “Bulletin”),
which provides accounting guidance regarding accounting for income taxes for the reporting period that includes the enactment
of the Tax Act. The Bulletin provides guidance in those situations where the accounting for certain income tax effects of the
Tax Act will be incomplete by the time financial statements are issued for the reporting period that includes the enactment date.
For those elements of the Tax Act that cannot be reasonably estimated, no effect will be recorded.
The
SEC has provided in the Bulletin that in situations where the accounting is incomplete for certain effects of the Tax Act, a measurement
period which begins in the reporting period that includes the enactment of the Tax Act and ends when the entity has obtained,
prepared and analyzed the information is needed in order to complete the accounting requirements. The measurement period shall
not exceed one year from enactment.
Management
does not believe that any recently issued, but not yet effective
accounting
pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
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 working capital deficiency of $2,166,906 as of December 31, 2017
incurred losses and did not generate cash from its operations for the past two years. These factors, among others, raise
substantial doubt 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 and completion of the acquisition of TW an Oklahoma Limited
Liability Company. 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.
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
INTANGIBLE ASSETS
Intangible
assets are as follows:
|
|
Term
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
DIQ
customer relationships
|
|
5
years
|
|
$
|
183,255
|
|
|
$
|
183,255
|
|
DIQ
noncompetition agreement
|
|
2
years
|
|
|
201,389
|
|
|
|
201,389
|
|
|
|
|
|
|
384,644
|
|
|
|
384,644
|
|
Accumulated
amortization
|
|
|
|
|
282,723
|
|
|
|
167,449
|
|
|
|
|
|
$
|
101,921
|
|
|
$
|
217,195
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairment
|
|
|
|
$
|
-
|
|
|
$
|
372,706
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense:
|
|
|
|
$
|
115,274
|
|
|
$
|
430,128
|
|
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 2017 and 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.
5
PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Equipment
¹
|
|
$
|
166,107
|
|
|
$
|
19,107
|
|
Accumulated
depreciation
|
|
|
8,663
|
|
|
|
4,675
|
|
Net
property and equipment
|
|
$
|
157,444
|
|
|
$
|
14,432
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$
|
3,988
|
|
|
$
|
2,990
|
|
¹
Includes costs related to equipment not placed in service as of December 31, 2017 and December 31, 2016 of $147,000 and $0, respectively.
6
CREDIT CARD LIABILITY
The
Company has utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. At December 31, 2017
and December 31, 2016, the Company’s credit card liability was $336,726 and $336,726, respectively. The credit card liability
is guaranteed by Scott Kaplan, the vice president of business development for KSIX, LLC. See Note 13.
7
LONG-TERM DEBT – RELATED PARTY
L
ong-term
debt due to related parties consists of:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Notes
payable to SMDMM Funding, LLC; interest at 8% per annum; due on demand
|
|
$
|
285,000
|
|
|
$
|
-
|
|
Notes
payable to True Wireless, LLC; non-interest bearing; due on demand
|
|
|
19,000
|
|
|
|
-
|
|
Note
payable to director due in four equal annual installments of $26,875 on April 28 of each year
|
|
|
-
|
|
|
|
107,500
|
|
|
|
|
304,000
|
|
|
|
107,500
|
|
Less
current portion - related party
|
|
|
-
|
|
|
|
53,750
|
|
Long-term
debt - related party
|
|
$
|
304,000
|
|
|
$
|
53,750
|
|
SMDMM
Funding, LLC and True Wireless, LLC are owned by the Company’s chief executive officer. Accrued interest owed to SMDMM
Funding, LLC was $1,711 at December 31, 2017.
On
April 28, 2015, the Company issued a promissory note to a director for the principal amount of $107,500. The promissory note is
due in four equal annual payments of $26,875 on April 28 each year.
The payments due April 28, 2016 and 2017 for the notes payable to a former director have not been made. Pursuant to the terms
of the note, the note began to accrue interest at 6% per annum 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 Company determined that the conversion
feature for the past due portion of the note constitutes a derivative which was bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the note. Accrued interest was $1,088 at December 31, 2016. The director
resigned in July 2017; accordingly, the note balance was included with other notes payable beginning in September 2017. See Note
8.
8
NOTES PAYABLE AND LONG-TERM DEBT
As
of December 31, 2017, 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.
This note was settled for $10,000 in February 2018.
|
|
$
|
68,973
|
|
|
$
|
-
|
|
|
$
|
68,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to former officer and director due in four equal annual installments of $26,875 beginning April 28, 2016; past due
in 2016 and 2017; accruing interest at 6% per annum since April 28, 2016 on the past due portion
|
|
|
107,500
|
|
|
|
-
|
|
|
|
107,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to former officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016 and
2017; accruing interest at 6% per annum since April 28, 2016 on the past due portion
|
|
|
101,250
|
|
|
|
-
|
|
|
|
101,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to seller of DigitizeIQ, LLC due as noted below²
|
|
|
485,000
|
|
|
|
-
|
|
|
|
485,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
-
|
|
|
|
27,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
790,223
|
|
|
|
-
|
|
|
|
790,223
|
|
Less
current portion
|
|
|
738,035
|
|
|
|
-
|
|
|
|
738,035
|
|
Long-term
debt
|
|
$
|
52,188
|
|
|
$
|
-
|
|
|
$
|
52,188
|
|
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 convertible
1
|
|
|
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 on past due portion
|
|
|
101,250
|
|
|
|
-
|
|
|
|
101,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to seller of DigitizeIQ, LLC due as noted below
2
|
|
|
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 monthly
3
|
|
|
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
|
|
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 was past due.
In
May 2017, the Company issued 6,257,459 shares of its common stock and in November 2017, the Company issued 1,750,000
shares of its common stock in exchange for the balance due on the note.
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 was also responsible for other transaction, due diligence and legal fees of $42,500 if it borrowed 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.
The
Company paid $375,000 in cash on December 7, 2017 in full payment of the note and the 1,782,000 shares held by TCA were returned
to the Company and are included in treasury stock at December 31, 2017.
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.
The
Company issued 100,000 shares of its common stock on January 24, 2017; 310,675 shares of its common stock on March 8, 2017;
512,128 shares of its common stock on October 16, 2017; and 260,000 shares of its common stock on November 15, 2017
in full payment of the note.
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 and at December 31, 2017, the debt discount is fully amortized.
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 70% of the lowest trading price of the Company’s
common stock during the previous twenty-one 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 had a debt discount of $87,379. On December 7, 2017,
the Company paid $110,000 in cash in full payment of the balances due on the notes.
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 were paid in full during 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:
|
|
December
31, 2017
|
|
December
31, 2016
|
|
|
|
|
|
Estimated
dividends
|
|
None
|
|
None
|
Expected
volatility
|
|
178.98%
to 238.94%
|
|
194.65%
to 273.69%
|
Risk
free interest rate
|
|
2.58%
to 2.89%
|
|
1.77%
to 2.86%
|
Expected
term
|
|
0.01
to 36 months
|
|
0.01
to 36 months
|
9
INCOME TAXES
The
income tax provision (benefit) consists of the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(403,900
|
)
|
|
|
(1,267,100
|
)
|
Change
in valuation allowance
|
|
|
403,900
|
|
|
|
1,267,100
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
U.S.
federal statutory rate
|
|
|
-34.0
|
%
|
|
|
-34.0
|
%
|
State
income tax, net of federal benefit
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Increase
(decrease) 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:
|
|
2017
|
|
|
2016
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
|
Net
operating losses
|
|
$
|
1,943,700
|
|
|
$
|
1,621,400
|
|
Option
compensation accrual
|
|
|
184,000
|
|
|
|
102,400
|
|
Deferred
tax assets
|
|
|
2,127,700
|
|
|
|
1,723,800
|
|
Valuation
allowance
|
|
|
(2,127,700
|
)
|
|
|
(1,723,800
|
)
|
Deferred
tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has approximately $6 million 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.
The
U.S. Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law.
Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced
earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base
erosion tax, respectively. The Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously
subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the
remaining earnings. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act,
the Company has not recorded any adjustments according to Tax Act. As we collect and prepare necessary data, and interpret the
Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may
make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes and effective
tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed
in 2018.
10
Stockholder’s equity
On
October 10, 2017, the Company effectuated an increase in its authorized shares to a total of 600,000,000 shares comprising 100,000,000
shares of Preferred Stock par value $0.001 and 500,000,000 shares of Common Stock par value $0.001.
PREFERRED
STOCK
At
December 31, 2017 and December 31, 2016 the Company had 10,000,000 shares of its Preferred Stock 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. (See Note 15). 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.
On
March 29, 2018, the Company filed a Certificate of Amendment to its Certificate of Designations for its Series A Preferred Stock
which increased the authorized Series A Preferred Stock from 10,000,000 shares to 13,000,000 shares.
COMMON
STOCK
At
December 31, 2017 and December 31, 2016, the Company had 90,057,445 shares and 57,343,901 shares of its Common Stock issued and
88,275,445 and 57,343,901 shares outstanding, respectively.
2017
Transactions
During
2017, the Company issued its common stock in the following transactions:
|
●
|
7,225,000
shares were issued for cash in the amount of $1,175,000;
|
|
|
|
|
●
|
9,823,544
shares were issued for notes payable and accrued interest in the amount of $1,916,441;
and
|
|
|
|
|
●
|
3,665,000
shares were issued in exchange for services valued at $940,173, and
|
On
March 24, 2017, 12,000,000 shares of common stock were issued 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. These shares were valued at the
fair market value on the date issued of $1,200,000.
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.
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.
|
|
(4)
|
The
Company entered into Unit subscription agreements during the period from January through August 2017. 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 2,700,000 Units ($270,000) with 1,350,000 Warrants. The Warrants are
classified as equity since they have a fixed exercise price and do not have a provision for modification.
|
|
|
|
|
(5)
|
The
Company entered into Unit subscription agreements during the period from September through December 2017. Each Unit was priced
at $0.20 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 4,525,000 Units ($905,000) with 2,262,500 Warrants. 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:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
356,502
|
|
|
$
|
318,002
|
|
New
advances
|
|
|
34,000
|
|
|
|
40,000
|
|
Repayment
|
|
|
(1,000
|
)
|
|
|
(1,500
|
)
|
Balance
at end of period
|
|
$
|
389,502
|
|
|
$
|
356,502
|
|
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. The Preferred Stock was valued at $190,000 and
recorded as compensation expense.
See
Note 7 for long-term debt due to a director and related parties.
Axia
Management, LLC (“Axia”), is wholly owned by the Company’s Chief Executive Officer, Kevin Brian Cox, and provides
a prepayment for the Company in regard to the Surge Media Division Facebook Ads and charges by use of the Axia credit card. Axia
is reimbursed for the actual amount of credit card charges. In 2017 the reimbursement amount was $138,556 and has been reimbursed
in full. Axia has not received any compensation for its accommodation.
On
May 10, 2016, the Company entered into a Consulting Agreement with Anthony P. Nuzzo, Jr., the Company’s Chief Operating
Officer and a director, for a term of two years. Pursuant to the terms of the Consulting Agreement, the Company has delivered
1,000,000 shares of Company Common Stock value at $190,000, which is being amortized over the two year term of the agreement.
The
Company contracts for call center services with CenterCom, LLC, a company which is owned by Anthony P. Nuzzo, Jr., the Chief Operating
Officer and a director of the Company and Kevin Brian Cox, the Chief Executive Officer and a director of the Company. During 2017,
the Company paid an aggregate of $6,678 to CenterCom, LLC.
12
COMMITMENTS AND CONTINGENCIES
True
Wireless, LLC (now True Wireless, Inc.)
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.
Additionally,
pursuant to the terms of the Exchange Agreement, the Company executed and entered into a “Management and Marketing Agreement”
(“Management Agreement”) with TW (see below).
Pursuant
to the Management Agreement, the Company agreed to enter into a Management Agreement with TW whereby 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 and TW would become a wholly-owned subsidiary of the Company (collectively, the “Transaction”).
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 therein to be completed by 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. 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;
|
|
|
|
|
●
|
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 issued 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 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.
|
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. On December 27, 2017, the Company and K. Brian Cox mutually agreed to terminate
the Management Agreement and cancel the $1,500,000 Promissory Note issued on July 18, 2017,
ab initio
and declared that
both the Management Agreement and the Promissory Note annulled and would be treated as if they were never consummated.
EQUITY
CLOSING (AGREEMENT AND PLAN OF REORGANIZATION)
As
of March 30, 2018, the parties to the Transaction have restructured the Transaction and intend to have an Equity Closing during
the early part of the Company’s 2
nd
fiscal quarter of 2018. In March 2018, the parties negotiated an Agreement
and Plan of Reorganization among the Company, True Wireless Acquisition, Inc., a Nevada corporation (“Acquisition Subsidiary”)
and wholly-owned subsidiary of the Company and True Wireless, Inc., an Oklahoma corporation (“TW”) (“Merger
Agreement”) which supersedes all prior agreements with respect to the terms of the Transaction. Pursuant to the terms of
the Merger Agreement, TW (successor in interest to True Wireless, LLC) will merge into Acquisition Subsidiary in a transaction
where TW will be the surviving company and become a wholly-owned subsidiary of the Company. The transaction is structured as a
tax-free reverse triangular merger. In addition to the 12,000,000 shares of Company Common Stock and $500,000 cash which has been
paid to the shareholders of TW, at the Closing of the merger transaction, the shareholders of TW will receive the following as
additional merger consideration:
|
●
|
151,707,516
shares of newly-issued Company Common Stock, which will give the shareholders of TW, on a proforma basis, a 69.5% interest
in the Company’s total Common Shares.
|
|
|
|
|
●
|
An
additional number of shares of Company Common Stock, if any, necessary to vest 69.5% of the aggregate issued and outstanding
Common Stock in the shareholders of TW at the Closing.
|
|
|
|
|
●
|
A
Promissory Note in the original face amount of $3,000,000, bearing interest at 3% per annum maturing on December 31, 2018.
|
|
|
|
|
●
|
3,000,000
shares of newly-issued Company Series A Preferred Stock
|
At
the closing of the Merger, outstanding shares 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 shall be delivered to the Company.
Pursuant
to the terms of the Merger Agreement, the parties confirmed the prior delivery of 12,000,000 shares of Company Common Stock and
$500,000 cash which was been paid to the shareholders of TW as a deposit on the Transaction.
Conditioned
upon the Parties, having completed all material requirements of the Merger 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:
Company
Investment in TW
At
the date of this filing, the Company’s investment in TW consists of the following:
|
|
Shares
|
|
|
Amount
|
|
Consideration
paid:
|
|
|
|
|
|
|
|
|
Cash
paid
|
|
|
|
|
|
$
|
500,000
|
|
Common
stock issued
|
|
|
12,000,000
|
|
|
|
1,200,000
|
|
Total
consideration paid
|
|
|
12,000,000
|
|
|
$
|
1,700,000
|
|
Consideration
to be paid:
|
|
|
|
|
|
|
|
|
Common
stock to be issued at closing
|
|
|
151,707,516
|
|
|
$
|
60,683,006
|
|
Series
A Preferred Stock to be issued at closing
|
|
|
3,000,000
|
|
|
|
120,000
|
|
Note
payable due December 31, 2018
|
|
|
|
|
|
|
1,500,000
|
|
Total
consideration to be paid
|
|
|
|
|
|
$
|
62,303,006
|
|
|
|
|
|
|
|
|
|
|
Total
consideration
|
|
|
|
|
|
$
|
64,003,006
|
|
Notes
to Table Above
:
1
Common Stock to be issued at closing at an average price of approximately $0.40 per share.
2
Series A Preferred Stock to be issued at closing at an average price of $0.04 per share.
Status
of True Wireless Transaction
As
of the date of this Report, the Transaction has not closed and the Company anticipates its closing early in the second quarter
of 2018. The terms of the Transaction are subject to change prior to closing.
13
LITIGATION
The
following is summary of threatened, pending, asserted or un-asserted claims against the Company or any of its wholly owned subsidiaries.
Claims
by River North Equity, LLC against KSIX Media Holdings, Inc.:
On
June 29, 2017, River North Equity, LLC (“River North Equity”) filed suit against the Company and Carter Matzinger
in the Circuit Court of the 18th Judicial District of DuPage County in Wheaton, IL (Case # 2017AR000989) arising out of an Equity
Purchase Agreement the Company entered into with River North Equity on July 11, 2016. The Complaint alleges that the Company entered
into a series of convertible promissory notes in the aggregate face amount of $177,500 and that these notes are presently in default.
The Complaint also alleges that the Company failed to maintain sufficient authorized capital to allow for conversion of the promissory
notes; failed to honor conversion notices delivered with respect to the promissory notes; failed to file a registration statement
with the U.S. Securities and Exchange Commission with respect to shares issuable on conversion of the promissory notes and failed
to properly disclose the existence of the promissory notes and relevant details in its filings with the U.S. Securities and Exchange
Commission. River North Equity is seeking damages in the amount of at least $27,500 plus accrued interest and such other damages
as may be proven at trial. As of the date of this Report, this matter has been settled and dismissed.
Claims
by TCA Global Credit Master Fund, L.P.
On
or about May 9, 2017, TCA Global Credit Master Fund, L.P. (“TCA”) filed a civil action in Broward County Florida against
the Company and its subsidiaries regarding an outstanding balance due under a Senior Secured Debt Facility Agreement dated February
26, 2016. This facility was fully paid on December 7, 2017. In all other respects, the action with TCA has been settled and dismissed.
Claims
by American Express Bank FSB:
On
or about August 26, 2016 American Express Bank FSB (“American Express”) filed a civil complaint against DIQ and Scott
Kaplan (an employee of the Company) in the District Court for Clark County, Nevada for approximately $336,726 due on a credit
card issued to DIQ, which was allegedly guaranteed by Scott Kaplan, the vice president of business development for KSIX, LLC.
This action was subsequently dismissed on July 19, 2017. While the Company was not a party to this action, ostensibly there could
be an obligation on the part of the Company to indemnify Mr. Kaplan on this matter. As of this date, no claim for indemnification
has been made against the Company and the Company seeks to resolve any issues relating to this matter on an amicable basis without
incurring any liability. Failure to resolve this matter could potentially have a material adverse effect on the Company and its
business. There is no guarantee that this matter can be resolved on any basis which is favorable to the Company.
West
Publishing v DigitizeIQ LLC.
On
or about September 28, 2017 West Publishing Corporation (“West Publishing”) filed a civil action in the Superior Court
of the State of California County of San Diego, Central Division (Case# 37-201700034215-CU-CL-CTL) for breach of contract and
open book account against the Company’s subsidiary DigitizeIQ, LLC (“DigitizeIQ”). West Publishingclaims an
open account of $435,700 against DigitizeIQ from an account originating in 2014 wherein DigitizeIQ provided lead-generation services
for West Publishing. The Company has retained counsel and will vigorously defend this action. The Company contends that the open
book account claimed by West Publishing is an accounting error and that, in fact, West Publishing owes DigitizeIQ for verified
lead generation services during the relevant period. This matter is still pending as of the date of this Report and the
outcome cannot be predicted.
14
CONCENTRATION
Revenue
from one customer represented 45% of total revenue for the year ended December 31, 2017.
15
SUBSEQUENT EVENTS
The
Company has evaluated events occurring subsequent to December 31, 2017 and through the date these financial statements were available
to be issued and disclosure as following:
1) On
January 4, 2018, Carter Matzinger voluntarily cancelled 10,778,761 shares of Company Common Stock he had previously held.
2) Between
January 1, 2018 and March 31, 2018, the Company sold an additional 2,300,000 shares of Company Common Stock for gross proceeds
of $460,000.
3) On
March 29, 2018, the Company filed a Certificate of Amendment to its Certificate of Designations for its Series A Preferred Stock
which increased the authorized Series A Preferred Stock from 10,000,000 shares to 13,000,000 shares.