Surge Holdings, Inc. (SurgePays) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The filing’s registrant name is Surge Holdings, Inc. Financial statements are unaudited. The company operates in wireless/telecom and financial services for underserved customers, alongside digital media and other businesses.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $3.94 million | $3.43 million |
| Gross profit / margin | $1.46 million / 37.1% | $1.68 million / 49.0% |
| Operating income (loss) | ($1.11 million) | $408,520 |
| Net income (loss) | ($1.64 million) | $401,003 |
| Operating cash flow | ($877,950) | ($7,199) |
| Cash at period-end | $1.42 million | $941,720 |
- Revenue increased $507,875, or 14.8%, while gross profit fell $220,625, or 13.2%. Reported year-over-year comparisons are not fully comparable: Q1 2019 includes Surge operations, while the 2018 comparative results reflect True Wireless; the filing treats the April 2018 merger as a reverse acquisition.
- Cost of revenue rose to $2.48 million from $1.75 million. Selling, general and administrative expense approximately doubled to $2.56 million from $1.27 million. The company attributed much of the increase to the merger, added Surge-company expenses, and higher marketing spending.
- Cash increased by $972,023 during the quarter, principally because financing activities provided $1.85 million; operating activities used $877,950. Financing included $565,000 from stock sales, net line-of-credit advances, and related-party borrowing.
- At March 31, current assets were $3.55 million and current liabilities were $5.05 million, a working-capital deficit of $1.50 million. Total liabilities were $6.66 million, versus assets of $4.77 million; stockholders’ deficit was $1.89 million.
- Outstanding line-of-credit borrowings were $930,973. Notes payable and current long-term debt were $562,500, related-party long-term debt was $1.05 million, and long-term trade payables were $555,965. The line of credit is secured by essentially all company assets.
Material changes, outlook, and risks
- The quarter included a $507,500 loss on settlement of liabilities, recorded when 875,000 common shares were issued to settle a consultant obligation. The company also sold 1,671,428 common shares and 621,430 warrants for $565,000 in gross proceeds.
- The company acquired a 40% interest in Centercom in January 2019, recording a $178,508 investment and $21,966 of equity-method gain. A company director, officer, and minority owner has a controlling interest in Centercom; Centercom also provides services to the company.
- Management projected that the company could become cash-flow positive from ongoing operations by the end of fiscal 2019, citing anticipated revenue growth and debt restructuring. It also said it had arrangements with a FINRA-licensed broker and institutional investors to pursue equity financing for debt repayment, short-term needs, and proposed acquisitions. These plans are uncertain; management stated there can be no assurance of adequate revenue, cost control, or financing.
- Management disclosed substantial doubt-related liquidity pressures: the company reported an operating loss of about $1.1 million and said it must borrow to meet basic operating costs. Its ability to continue as a going concern depends on executing its plan, generating revenue, controlling expenses, and obtaining financing.
- After quarter-end, the company sold 5,264,285 shares at $0.35 per share for approximately $1.8 million gross proceeds.
- A pending FCC notice proposed a $5.50 million forfeiture over allegedly ineligible subscriber lines in 2012–2013. Management disputes the claim and believes any resulting amount would not materially affect financial position. The filing also describes a pending warrant dispute; its outcome could not be predicted.
- Disclosure controls and procedures were deemed ineffective because of insufficient segregation of duties, no audit committee, and inadequate documented controls. Management said it was developing controls.
- Other stated risks include intense competition, changing consumer demand, variability in sales and earnings, and difficulty raising capital for planned expansion. The filing says there were no material off-balance-sheet arrangements.
Key facts for investors to verify
- Whether revenue growth and gross-margin trends persist on a comparable basis, given the merger-related change in reporting scope.
- Progress toward positive operating cash flow, reduction of the working-capital deficit, and the availability and terms of additional financing.
- The status and terms of the post-quarter share issuance, related dilution, and remaining potential dilution from warrants and convertible preferred stock.
- Developments in the FCC matter, the pending warrant dispute, and overdue or renegotiated debt obligations.
- Whether management remediates the disclosed control deficiencies and how related-party transactions are governed.