Surge Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. The filing identifies the registrant as Surge Holdings, Inc. (formerly Ksix Media Holdings), although the request identifies SurgePays, Inc.
Business context and financial performance
The company serves financially underserved customers through wireless, fintech, merchant software and digital advertising businesses. It acquired the ECS businesses on September 30, 2019 and held a 40% interest in Centercom, a related-party service provider.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $4.90 million | $4.05 million | $12.30 million | $11.54 million |
| Gross profit | $1.88 million | $1.81 million | $4.48 million | $5.38 million |
| Gross margin | 38.3% | 44.7% | 36.4% | 46.6% |
| Operating loss | $1.14 million | $0.40 million | $4.78 million | $0.18 million |
| Net loss | $1.15 million | $0.43 million | $5.27 million | $0.40 million |
Revenue rose 21.0% in Q3 and 6.6% for the nine-month period. Growth in Surge Blockchain and Surge Logics was offset by lower True Wireless revenue. For nine months, True Wireless revenue fell 44.4%; SG&A increased 69.0% to $9.22 million, contributing to the sharply higher operating loss. Basic and diluted loss per share was $0.01 for Q3 and $0.06 for nine months.
Cash flow, liquidity and debt
- Cash was $143,903 at September 30, down from $444,612 at year-end. Current assets were $6.08 million and current liabilities $7.82 million, resulting in a $1.74 million working-capital deficit. Accounts receivable increased to $5.37 million from $206,679.
- Nine-month operating cash outflow was $4.99 million, versus $187,951 provided in 2018. Investing cash outflow was $222,000; financing provided $4.91 million. Ending cash decreased by $300,709.
- Reported liabilities totaled $14.42 million, versus assets of $12.73 million; stockholders’ deficit was $1.68 million. Debt and credit included a $912,870 line of credit, $4.23 million in convertible notes (including the $4 million GBT note), $1.32 million of long-term related-party debt, and $512,500 of current notes and debt.
- Management stated the company must borrow to meet basic operating costs. It reported $750,000 in gross proceeds from debt agreements after quarter-end to support working capital.
Material changes, outlook and risks
- ECS acquisition: The $5 million purchase price comprised a $4 million, non-interest-bearing convertible note and 3,333,333 restricted common shares. The note has an 18-month term, a conversion-price range of $0.10–$0.70 and a 4.99% beneficial-ownership conversion limit. The purchase-price allocation had not been completed. ECS was described as serving 9,800-plus retail locations and generating approximately $46.5 million in annualized revenue; these are ECS business figures, not reported Surge results.
- Growth investments: Management cited more than $2.8 million in purchase orders fulfilled during Q3, rollout plans involving the AATAC retail network, and the launch of the SurgePays prepaid Visa card. It projected cash flow positivity by the end of Q1 2020, dependent on revenue growth, expense control, receivable collections and debt restructuring. Management said additional financing might be available but gave no assurance.
- Going concern: The company reported a $5.3 million nine-month net loss and significant liquidity constraints. Its ability to continue depends on executing its plan, generating sufficient revenue, controlling costs and accessing financing.
- Financing and dilution: The company raised $3.19 million in nine-month common-stock and warrant sales. The GBT note and other convertible financing may add dilution. Subsequent to quarter-end, it also disclosed $375,000 in note purchase proceeds and a separate $250,000 note bearing 18% interest, with 100,000 shares issued.
- Contingencies and governance: The FCC had proposed a $5.50 million forfeiture concerning alleged ineligible subscriber lines from 2012–2013; management considered it without merit and recorded a $40,000 loss contingency. A warrant-enforcement lawsuit remained pending. Disclosure controls were deemed ineffective due to lack of segregation of duties, an audit committee and documented controls. Related-party relationships include Centercom, Axia Management and 321 Communications.
Most important facts for investors to verify
- Whether operating cash flow, collections and access to financing improved after September 30, and whether the Q1 2020 cash-flow-positive projection was achieved.
- Recoverability and timing of the $5.37 million receivable balance, given low cash and the working-capital deficit.
- Integration results, purchase-price allocation and actual contribution of the ECS businesses, distinct from the seller’s stated annualized revenue.
- Terms, balances, conversion effects and dilution from the GBT note, subsequent notes, related-party debt and equity/warrant issuances.
- Resolution or exposure related to the FCC matter and pending lawsuit, and progress in remediating ineffective disclosure controls.
- The filing’s cash-flow financing figure differs between the cash-flow statement ($4.91 million) and MD&A table ($4.98 million); investors should verify the correct amount.