Surge Holdings, Inc. (formerly KSIX Media Holdings, Inc.) — Form 10-Q
Reporting period: Three months ended March 31, 2017. The filing was signed January 2, 2018, and reports the company’s later name change to Surge Holdings, Inc. on December 20, 2017. The filing describes the company’s businesses as performance-based online marketing and digital advertising services.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $450,400 | $1,387,547 |
| Gross profit / gross margin | $298,975 / 66.4% | $337,848 / 24.4% |
| Operating loss | $(769,300) | $(579,409) |
| Net loss | $(967,577) | $(614,645), restated |
| Basic and diluted loss per share | $(0.02) | $(0.02), restated |
| Operating cash flow | $(57,677) | $29,190 |
| Financing cash flow | $77,420 | $48,455 |
| Cash at period end | $83,452 | $147,134 |
At March 31, 2017, total assets were $3.34 million, total liabilities $3.98 million, and stockholders’ deficit $630,157. Current assets of $581,629 compared with current liabilities of $3.84 million, producing a $3.26 million working-capital deficit and a current ratio of approximately 0.15. Debt and related-party notes were reported at approximately $1.95 million in commitments; the balance sheet also lists a $336,726 credit-card liability and $391,502 in advances from a related party.
Changes versus the prior-year quarter
- Revenue fell 67.5% overall. Management attributed KSIX’s decline to lack of funding and DIQ’s decline to staff training, customer development, and lack of funding.
- Gross profit decreased by $38,873 despite the substantially higher gross margin, reflecting the sharp reduction in revenue and cost of revenue.
- Operating expenses rose to $1.07 million from $917,257. Selling, general and administrative expense increased 50.8%, chiefly due to stock-based contractor and consulting costs, including services related to the proposed True Wireless acquisition.
- Interest expense increased to $143,840 from $35,236. Q1 2017 also included a $50,199 derivative fair-value loss and a $4,238 loss on debt settlement.
- Operating cash flow turned negative. Financing inflows included $140,000 of loan proceeds, $55,000 from stock sales, and $35,000 in net related-party advances, partly offset by $152,580 of loan repayments.
Outlook, risks and notable items
- Going concern: Management said revenue sources were insufficient to fund operations and commitments, citing the working-capital deficit, accumulated deficit of $6,995,559, and recurring losses. Continued operations depend on raising financing, reducing debt, and executing the business plan. Management projected positive cash flow after Q2 2018 in one note, but by Q3 2018 in MD&A; the filing does not provide a consistent target.
- True Wireless transaction: At March 31, the proposed acquisition had not closed and remained subject to approvals and other conditions. The company had paid a $500,000 cash deposit and issued 12 million shares recorded as a $1.2 million investment deposit. The filing describes substantial additional consideration, including cash, shares, a note, and—under later amended terms—warrants. The acquisition’s completion and funding were uncertain.
- Debt and liquidity: The filing describes multiple past-due or defaulted obligations, including convertible debt with variable-price conversion provisions, secured borrowing, and notes to the DIQ seller. These terms create repayment, dilution, and refinancing risks. Management planned to seek equity financing to repay debt and cover near-term shortfalls.
- Subsequent settlements: In December 2017 the company reported paying Salksanna $110,000 and TCA $375,000 to settle disputes and obligations; TCA also canceled 1,782,000 shares and released security interests and guarantees.
- Controls: Management concluded disclosure controls were ineffective due to lack of segregation of duties, an audit committee, and documented controls. Management said it was developing controls following a change in management.
- The company reported no material off-balance-sheet arrangements and no legal proceedings in the legal-proceedings section, though later-described debt litigation was settled in December 2017.
Important facts for investors to verify
- Reconcile the acquisition share valuation: the financial statements and investment schedule value the 12 million shares issued for True Wireless at $1.2 million, while the unregistered-sales section says $4.8 million.
- Confirm the final True Wireless transaction terms, regulatory approvals, closing status, total consideration, and funding requirements; the filing presents changing terms and an unclosed transaction.
- Resolve the differing cash-flow-positive forecasts (after Q2 versus by Q3 2018) and assess the availability of committed financing.
- Review the debt maturities, defaults, conversion prices, and subsequent settlements, including any obligations not covered by the reported settlements.
- Check the revenue discussion against the statements: MD&A says KSIX revenue declined $179,314, while the reported total revenue fell by $937,147 and DIQ revenue alone declined by $926,199. The segment discussion does not clearly reconcile to consolidated revenue.
- Assess dilution and share-count accuracy. The filing reports 73,514,576 common shares outstanding at March 31, 2017, but also gives 82,582,035 shares as of December 13, 2017 and describes extensive later issuances and proposed acquisition shares.