Surge Holdings, Inc. (formerly KSIX Media Holdings, Inc.) — Q3 2017 Form 10-Q
Business context and period: The unaudited report covers the quarter and nine months ended September 30, 2017. The company operated KSIX, an internet performance-marketing business, and DigitizeIQ (DIQ), a digital advertising agency focused on survey generation and landing-page optimization. The filing reports that the company changed its name to Surge Holdings, Inc. in December 2017; the supplied company metadata says Surgepays, Inc.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $453,499 | $519,215 | $1,277,381 | $2,913,801 |
| Gross profit | $269,511 | $233,827 | $785,042 | $798,806 |
| Gross margin | 59.4% | 45.4% | 61.5% | 27.4% |
| Operating loss | $(301,891) | $(516,981) | $(1,423,978) | $(2,129,893) |
| Net loss | $(276,251) | $(878,869) | $(2,263,776) | $(2,594,373) |
- Revenue fell about 13% year over year in Q3 and 56% for the first nine months. KSIX revenue declined 52.5% in Q3 and 56.6% year to date; management attributed the declines primarily to inadequate funding. DIQ revenue grew in Q3 but declined year to date, reflecting the loss of a major customer and efforts to find replacement customers.
- Q3 gross profit and margin improved despite lower revenue. Management attributed the margin improvement largely to customer turnover that had depressed the 2016 comparison. Lower depreciation and amortization also contributed to the narrower operating and net losses.
- Nine-month other expense was $839,798, including a $460,343 loss from revaluing derivative liabilities. Q3 included a $127,205 derivative valuation gain, partly offset by $101,565 of interest expense; these valuation changes make reported earnings volatile.
- Cash was $146,376 at September 30, 2017, versus $63,709 at December 31, 2016. Nine-month operating cash use was $245,576, offset by $328,243 of financing cash inflows. Cash paid for interest was $142,440.
- Current assets were $395,292 and current liabilities $3,717,634, leaving a $3,322,342 working-capital deficit. Total liabilities were $3,769,821; reported notes and long-term debt were approximately $1,623,222, in addition to $389,502 in related-party advances. Stockholders’ deficit was $682,119; accumulated deficit was $8,291,758.
- Shares outstanding rose from 57,343,901 at year-end 2016 to 82,582,035 at September 30, 2017. The filing reports 85,057,035 shares outstanding as of December 13, 2017.
Material changes, outlook, and risks
- Management said cash flow from operations was expected to turn positive by the end of Q3 2018, based on improved subsidiary cash flow, reducing debt, and completing the proposed True Wireless (TW) acquisition. This was a projection dependent on execution and financing, not a reported result.
- The TW acquisition had not closed. The company reported $1.7 million of investment deposits, comprising $500,000 cash and 12 million shares valued at $1.2 million. The amended agreement contemplated substantial additional consideration, including cash, shares, warrants, and a note; regulatory approvals and other closing conditions remained outstanding. The filing’s stated total consideration was $55.7 million.
- Management stated that operations required borrowing to meet basic costs and that debt and equity financing were planned for operating shortfalls and the TW transaction. It warned that its ability to continue as a going concern depended on the success of these plans. The auditor’s opinion is not included in the supplied filing text.
- Several obligations were past due or in default, including debt with high interest rates and variable-price conversion features. These features generated a material derivative liability of $641,402 at September 30, 2017. A former director’s past-due note and other lender obligations also carried conversion or default terms.
- After quarter-end, the company reported settling Salksanna-related obligations for $110,000 and settling with TCA for $375,000; the TCA settlement also canceled 1,782,000 shares and released security interests and guarantees. These were subsequent events, not September 30 cash or debt balances.
- Management concluded disclosure controls were not effective, citing inadequate segregation of duties, no audit committee, and insufficiently documented controls. The company said it was developing controls. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the TW transaction closed, what final consideration and dilution resulted, and whether the required regulatory approvals were obtained.
- Whether the projected Q3 2018 operating cash-flow target was achieved and whether sufficient financing was secured to fund operations and debt obligations.
- Current status and terms of past-due debt, derivative liabilities, and the post-quarter Salksanna and TCA settlements.
- Whether the sharp year-to-date revenue decline was reversed, particularly at KSIX and DIQ, and whether customer concentration or funding constraints persisted.
- Whether internal-control weaknesses were remediated. The filing text also contains an apparent date inconsistency: the signature is dated January 8, 2017, despite reporting September 30, 2017 results and describing later events; verify the correct filing/signature date.