Surge Holdings, Inc. (formerly KSIX Media Holdings, Inc.) — Q2 2017 Form 10-Q
The filing is for the quarter and six months ended June 30, 2017; the interim financial statements are unaudited. The registrant changed its name to Surge Holdings, Inc. on December 20, 2017. The request metadata names Surgepays, Inc., which is not the registrant name shown in this filing.
Business context and financial performance
The company’s operating businesses were KSIX, an online performance-marketing network, and DigitizeIQ (DIQ), a digital advertising agency focused on survey generation and landing-page optimization.
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2017 | $373,482 | $823,882 |
| Revenue, 2016 | $1,007,039 | $2,394,586 |
| Gross profit, 2017 | $216,556 | $515,531 |
| Gross margin, 2017 vs. 2016 | 58.0% vs. 22.6% | 62.6% vs. 23.6% |
| Operating loss, 2017 | $(352,787) | $(1,122,087) |
| Net loss, 2017 vs. 2016 | $(1,019,948) vs. $(1,100,860) | $(1,987,525) vs. $(1,715,505) |
| Basic and diluted loss per share, 2017 | $(0.01) | $(0.03) |
For the quarter, revenue fell about 63%; for the six-month period it fell about 66%. Management attributed declines to limited funding, a major DIQ customer discontinuing business, and the effort to replace lost customers. Higher gross margins partly offset reduced revenue. The quarterly net loss narrowed, while the six-month net loss increased.
Six-month operating expenses were $1.64 million, including $70,122 of depreciation and amortization and $1.57 million of selling, general and administrative expense. Six-month other expense was $865,438, including $587,548 from the increase in fair value of derivative liabilities and $280,803 of interest expense. Comparatives for 2016 are identified as restated.
Cash flow, debt and liquidity
- Cash was $66,181 at June 30, 2017. Current assets were $456,231 and current liabilities were $3,728,194, producing a $3,271,963 working-capital deficit.
- Total liabilities were $3,780,382; stockholders’ deficit was $595,864. Accumulated deficit was $8,015,507.
- For the six months, operating cash use was $205,265, financing provided $207,737, and cash increased $2,472. Investing cash flow was zero. Financing included $240,000 from common-stock sales, $200,000 of loan proceeds, $265,263 of loan repayments, and $33,000 of net related-party advances.
- The filing’s MD&A identifies $1,594,912 of notes payable and long-term debt commitments, plus $389,502 owed to a related party. Debt includes past-due obligations and notes bearing rates as high as 18%; some convertible features create derivative liabilities. The balance-sheet debt presentation and the MD&A commitment figure are not directly reconciled in the supplied text.
- Non-cash share issuances included $804,545 for debt conversions, $248,605 to settle accrued expenses, and $1.2 million recorded as a deposit on the proposed True Wireless acquisition.
Material changes, outlook and risks
- Common shares issued and outstanding rose from 57,343,901 at December 31, 2016 to 81,782,035 at June 30, 2017; 85,057,035 were reported outstanding as of December 13, 2017. The company also issued shares and warrants for cash and converted debt into shares.
- The company had paid $500,000 cash and issued 12 million shares valued at $1.2 million toward a proposed True Wireless, LLC (TW) acquisition. At June 30, the $1.7 million was reported as deposits on investments. The proposed transaction remained subject to regulatory approvals, due diligence and closing conditions; later amendments and terms described in the filing were subsequent events, not completed Q2 results.
- Management stated that operating revenues were insufficient to fund development, expenses and commitments, and warned that the company’s ability to continue as a going concern depended on raising equity, reducing debt and executing its plans. The filing gives different cash-flow-positive target dates: after Q2 2018 in the going-concern note and by Q3 2018 in MD&A.
- Subsequent to June 30, the company reported December 2017 settlements: $110,000 cash to settle Salksanna obligations and $375,000 cash to settle TCA obligations, with related litigation dismissed and TCA security interests and guarantees released. These payments occurred after the reporting period.
- Management concluded disclosure controls were ineffective due to inadequate segregation of duties, no audit committee and insufficiently documented controls. The filing also checked “No” for having filed all required Exchange Act reports during the preceding 12 months.
- The company said it had no material off-balance-sheet arrangements. It listed no legal proceedings in Part II, while separately disclosing debt-related litigation and subsequent settlements in the notes.
Investor verification priorities
- Confirm the registrant and filing identity, the restatement status of 2016 comparatives, and the completeness and timeliness of required SEC filings.
- Reconcile debt balances, past-due/defaulted obligations, derivative-liability valuation and the effect of the subsequent TCA and Salksanna settlements on liquidity.
- Verify the status, approvals, consideration, dilution and funding requirements of the proposed TW acquisition; the filing reports it was not closed at June 30.
- Assess whether available financing and operating cash generation can address the $3.27 million working-capital deficit and the going-concern uncertainty, and clarify management’s inconsistent cash-flow-positive target dates.
- Track customer replacement and revenue trends at KSIX and DIQ, share-count dilution, and remediation of ineffective disclosure controls.