I was recently introduced to SURG on another board and since it is an OTCQB listed stock, I thought it would be worth looking into. The following is a standard breakdown I do for all stocks to see if they are “investment” worthy. All numbers are from the second quarter 10Q filing, for the period ending June 30th 2020 unless otherwise specified.
Balance Sheet: The key takeaway from a Balance Sheet is to find out if a company is financially stable or on the road to bankruptcy. In order to avoid bankruptcy, companies will sell more shares into the markets, known as dilution, disrupting the supply/demand dynamic of the shares, driving down the share price and hurting its shareholders; more on this later. I use Cash, Cash Equivalents and Receivables and compare them to the Current Liabilities (due within 12 months) and Total Liabilities. SURG has $1,169,334 in cash available vs. Current Liabilities of $11,061,927 and Total Liabilities of $15,127,709. Having Current Liabilities roughly 10x available cash is certainly not a good start, but maybe the Income Statement will paint a brighter picture.
Income Statement: The key takeaway from an Income Statement is Growth, Revenue Growth first, followed by Margin Growth, then hopefully Net Income Growth (profit). The growth on the income statement is what creates the Demand for shares in the Supply/Demand dynamic. SURG’s Revenue growth was nice, moving from $3,454,420 in Q2 2019 to $14,514,796 in Q2 2020; this is a 320% growth rate from the Year over Year Quarter (YoYQ). Gross Margins (Gross Profit/Revenue) took a big hit however, dropping from 33% in 2019 to 7.68% in 2020; a significant drop in a short period of time. Due to this drop in Gross Margins, the Gross Profit was actually less than last year even with the large Revenue increase. Operating profit (loss) is my preferred measure of a company’s performance as it avoids the “Other” Income (expense) category which is highly variable and includes many items that have little to do with company operations, such as fair value changes in derivatives etc. SURG’s Operating loss increased from ($2,531,704) in 2019 to ($3,942,462) in 2020. Net Loss was ($2,425,339) nearly even with last year’s ($2,474,023) due to a gain on settlement of liabilities of $2,108,543.
Cash Flow Statement: The primary thing I look for on a Cash Flow Statement is Cash Flows from Financing Activities. Companies that are not profitable yet need to get money from somewhere, the Financing Activities Section tells where it is coming from. Keep in mind that the columns can vary in timeline, they are often six or nine months, not necessarily the current quarter. SURG’s columns are six months, in which they raised $2,227,582 from Financing Activities. Most of which was from selling Convertible Notes and issuance of shares and Warrants. Remember, the word "Convertible" means they convert into shares (dilution).
Share Structure: This is the Supply side in the Supply/Demand dynamic. Share structure has three terms to understand; Authorized (how many they can issue), Outstanding (how many they have issued) and Float (Outstanding shares minus Restricted shares, which are not available to trade yet). The Authorization and Outstanding can be found near the bottom of the Balance Sheet and is 500m and 112,923,912 respectively as of 30 June 2020. The Outstanding can also be found at the bottom of the Income Statement for easy comparison to the YoYQ. It is obvious that the Quarterly Filing is not Audited as the numbers don’t match, showing only 106,063,237 for 30 June 2020. Using the Income Statement number, it is an increase of 13.4% from the 93,511,061 shares from the comparable quarter.
Summary: SURG had an Operational Loss of nearly $4m and a Net Loss of $2.4m for the last quarter. Considering they only had $1.2m in cash, this gives them roughly 6 weeks of cash (from June 30th) until it runs out, yes, it’s gone by now. The only way to prevent from going broke is to issue more shares (dilution). This adds Supply to the Supply/Demand dynamic and will push the share price down unless there is a catalyst to create Demand. Growth is the Demand catalyst; however, we have already seen that even with recent strong Revenue Growth, they are actually losing more money Operationally due to the shrinking Margins. So, any share price pop due to a growth headline, will be quickly overwhelmed by the dilution required to avoid bankruptcy. It is also notable that the little Gross Profit they had $1,114,785 is being largely consumed by the Interest Expense ($701,044) of their excessive Debt.
This is certainly not an investment worthy company,
All the best,
Knife
AI
