Surge Holdings, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018, compared with FY 2017. The filing is by Surge Holdings, Inc. (the company identified in the request as Surgepays, Inc.). Its April 2018 merger with True Wireless, Inc. was accounted for as a reverse acquisition; FY 2018 results include True Wireless after closing, so the year-over-year comparison is not fully like-for-like.
Business context
The company’s stated focus shifted toward telecommunications and financial services for underserved customers, alongside digital advertising and lead generation. Its wholly owned True Wireless subsidiary provides subsidized wireless service; other initiatives included SurgePhone, the SurgePays merchant portal and debit card, and digital-asset activities. At year-end, the company reported 15 full-time employees.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $15.24 million | $13.46 million |
| Gross profit / gross margin | $6.67 million / 43.8% | $5.36 million / 39.9% |
| Operating income (loss) | $(1.54) million | $204,285 |
| Net income (loss) | $(1.54) million | $2.77 million |
| Net cash from (used in) operations | $(1.02) million | $227,802 |
| Net cash used in investing | $(278,035) | $0 |
| Net cash from financing | $464,101 | $607,087 |
| Cash at year-end | $444,612 | $1.27 million |
| Current assets / current liabilities | $3.06 million / $4.79 million | $2.99 million / $2.81 million |
| Total liabilities | $6.07 million | $3.69 million |
| Stockholders’ deficit | $(1.99) million | $(617,240) |
Revenue increased 14%, primarily attributed to the True Wireless merger. Gross profit rose 25%, which management attributed mainly to renegotiated True Wireless supply contracts. SG&A increased 56% to $8.06 million, reflecting the merger, expanded operations and new-product marketing. The operating loss equaled about 10.1% of revenue; FY 2017 operating margin was about 1.5%. FY 2017 net income included a $2.59 million gain on settlement of liabilities; the comparable gain was $43,117 in 2018.
Debt and liquidity were strained: working capital was negative $1.73 million at year-end, versus a $178,891 surplus a year earlier. The filing says the company needed to borrow to meet basic operating costs. Reported debt included $680,000 of related-party long-term debt and $582,500 of notes payable/current long-term debt; total liabilities also included substantial payables and other obligations.
Material changes, outlook and risks
- Merger and financing: True Wireless became a wholly owned subsidiary in April 2018. The merger materially changed the business and financial statements. The company also issued Series C preferred stock in exchange for a $3.0 million note and accrued interest, and settled liabilities through share issuances.
- Cash outlook: Management projected positive operating cash flow by the end of FY 2019, relying on revenue growth, cost control and debt restructuring. It also cited an agreement with a FINRA-licensed broker and institutional investors to pursue equity financing. The filing cautions that funding and execution are not assured.
- Business plans: Management described plans to scale wireless and merchant-portal services and launch or expand financial products. It announced a 40% interest in Centercom in January 2019 and cited a goal of onboarding the portal into more than 40,000 retail locations. These are plans, not reported FY 2018 results.
- Going concern: The operating loss, cash shortfall and working-capital deficit create substantial funding and execution risk. Management’s ability to continue as a going concern depends on implementing its plan, generating sufficient revenue, controlling expenses and obtaining financing.
- Other risks and contingencies: A 2013 FCC notice proposed a $5.50 million forfeiture concerning allegedly ineligible subscriber lines; management disputed the claim and said it did not expect a material effect. The filing also describes a pending warrant lawsuit and settlements, including a West Publishing payment agreement.
- Governance and controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2018 because of insufficient segregation of duties. The auditor gave an unqualified opinion on the financial statements but did not audit or opine on internal-control effectiveness.
- Related parties: The filing reports significant payments and balances involving entities connected to company insiders, including $1.02 million paid to Axia Management and $2.13 million billed by Centercom for services in 2018.
Investor verification priorities
- Confirm the cash runway, near-term debt and payable maturities, and whether the planned financing was completed on acceptable terms.
- Track whether operating cash flow improved as management projected, and whether growth in revenue translated into sustainable profitability.
- Verify execution and economics of the merchant-portal rollout, wireless growth and planned financial products, including the status of the Centercom investment.
- Review the terms, voting power and potential dilution associated with preferred stock, warrants and other share issuances.
- Monitor resolution and potential exposure from the FCC matter, litigation, and other settlement obligations.
- Check whether the company remediated the disclosed segregation-of-duties weakness and improved related-party transaction oversight.