Surgepays, Inc. annual report, FY2016

Business context and reporting period

Important identity and period note: The request identifies SurgePays, Inc., but the supplied filing is KSIX Media Holdings, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed December 11, 2017. The filing does not report a standalone fourth quarter. Its financial statements cover the years ended December 31, 2016 and 2015.

KSIX operated digital advertising businesses, principally KSIX and DigitizeIQ (DIQ). It suspended BLVD operations effective April 1, 2016. The company was pursuing an acquisition of True Wireless, a Lifeline telecommunications provider; the equity acquisition had not closed as of the filing date.

Financial results and position

The historical revenue comparison is affected by DIQ being included only from its October 2015 acquisition date. On a pro forma basis, 2015 revenue was $6.55 million; 2016 revenue declined 49.8% against that comparator. Management attributed declines to a major advertiser loss at DIQ, a shift in advertisers and affiliates at KSIX, and reduced demand for BLVD’s desktop-game offerings. Gross profit improved from historical 2015, but remained insufficient to cover operating costs and financing expense.

• Expenses and unusual items: Selling, general and administrative expense was $3.27 million, including substantial stock-based compensation and consultant costs. The company recorded a $372,706 impairment of KSIX/BLVD intangible assets. Interest expense was $1.66 million, including $1.47 million of noncash debt-discount and loan-cost amortization; a $268,236 derivative fair-value gain partly offset expense, while debt settlement generated a $107,104 loss.
• Liquidity: Year-end cash was $63,709. Current assets of $758,837 versus current liabilities of $4.06 million produced a $3.30 million working-capital deficit. Total liabilities were $4.17 million, compared with assets of $2.36 million; stockholders’ deficit was $1.82 million.
• Debt: Notes payable and long-term debt totaled approximately $1.95 million, including $1.80 million classified as current; $107,500 was related-party debt. Management stated that most debt was past due. The $485,000 remaining DIQ acquisition notes were in default. The company also reported a $584,168 derivative liability related to convertible debt.
• Cash flows: Operating and investing activities used $641,877 and $503,000, respectively; financing provided $1.14 million, primarily through equity and borrowing. Cash decreased by $5,780 during the year.

Material changes, outlook, and risks

Compared with historical 2015, revenue rose 16.4%, but this comparison is not like-for-like because DIQ was consolidated for a longer period in 2016. Against pro forma 2015, revenue fell nearly half. Net loss worsened materially, reflecting higher operating costs and financing-related charges. Total liabilities increased 29% year over year, and the working-capital deficit widened from $2.25 million to $3.30 million.

The auditor’s report presents substantial doubt about the company’s ability to continue as a going concern. Management said it needed to raise $1–$1.5 million of capital, restructure debt, and complete the True Wireless transaction; it projected positive cash flow after June 30, 2018 if its plans succeeded. There is no assurance that financing, debt restructuring, or the acquisition would be completed.

The True Wireless transaction changed after year-end. The original agreement described $6 million cash, a $6 million one-year note, and 12 million shares; subsequent amended terms described a $1.5 million promissory note, substantial additional share issuance, warrants for 45 million shares, and anti-dilution protections. The July 2017 management closing occurred, but the equity closing remained subject to regulatory approvals and other conditions. The filing’s transaction terms and consideration should therefore be checked against subsequent disclosures.

Other material risks include litigation and disputed debt: River North Equity sued over convertible notes and alleged defaults; TCA Global Credit Master Fund sued over a secured facility balance the company disputed and counterclaimed; and the DIQ seller’s notes remained unpaid. The filing also reports ineffective disclosure controls and internal control over financial reporting due to lack of segregation of duties. KSIX shares traded on the OTC Pink market, with management noting limited liquidity and penny-stock trading constraints.

Most important facts for investors to verify

• Whether this KSIX filing is relevant to the requested SurgePays, Inc.; the registrant names do not match.
• Current liquidity, debt balances, defaults, financing availability, and subsequent debt settlements or litigation outcomes.
• The final status, regulatory approvals, total consideration, dilution, and closing of the True Wireless transaction.
• Whether DIQ customer concentration and the loss of a major advertiser were offset by replacement business, and whether revenue trends improved after 2016.
• Any remediation of control deficiencies and subsequent auditor or going-concern developments.
• Share counts, warrants, preferred-stock voting rights, and dilution from subsequent issuances; the filing reports 80,907,035 common shares outstanding as of October 30, 2017.