SurgePays, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2023, compared with Q1 2022. SurgePays provides subsidized mobile broadband, prepaid and fintech products, and legal-industry lead-generation services. SurgePhone and Torch Wireless, which participate in the federal Affordable Connectivity Program (ACP), generated 82.4% of Q1 revenue.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $34.78 million | $21.14 million |
| Gross profit and margin | $7.69 million; 22.1% | $2.63 million; 12.5% |
| Operating income (loss) | $4.71 million | ($1.05 million) |
| Net income (loss) attributable to common stockholders | $4.55 million | ($1.21 million) |
| Diluted earnings (loss) per share | $0.31 | ($0.10) |
| Cash from operating activities | $2.87 million | ($3.32 million) |
| Cash at period end | $8.86 million | $3.44 million |
At March 31, 2023, current assets were $34.21 million and current liabilities were $25.65 million, yielding reported working capital of $8.56 million. Total assets were $40.57 million, total liabilities $30.59 million, and stockholders’ equity $9.98 million. Inventory was $15.52 million, including $2.31 million of goods paid for in Q1 that were in transit and received in Q2.
Debt included $6.79 million of notes payable, including related-party and SBA debt, plus a $15.04 million installment-sale liability for device purchases. The installment-sale arrangement is secured by all company assets. Interest expense was $192,326, versus $169,645 in Q1 2022.
Changes versus the prior comparable period
- Revenue rose 65%, primarily as SurgePhone and Torch revenue increased to $28.66 million from $14.05 million. Management attributed this to subscriber growth to more than 250,000 from more than 75,000 a year earlier.
- LogicsIQ revenue increased to $3.17 million from $2.29 million, which management linked in part to Camp Lejeune litigation cases. Surge Fintech and ECS revenue fell 39% to $2.93 million, with management citing customer shifts to ACP services and continuing effects of COVID-19.
- Gross margin improved to approximately 22% from approximately 12%; operating results moved from a loss to profit. General and administrative expense fell 19% to $2.99 million, mainly reflecting lower compensation and insurance costs, partly offset by higher professional-service expenses.
- Cash from operations improved to $2.87 million. Working-capital movements included a $4.34 million increase in inventory and a $2.03 million increase in installment-sale liability, so operating cash generation should be considered alongside these changes.
Outlook, risks and unusual items
- Management expects positive operating income in each remaining 2023 reporting period and revenue growth quarter over quarter, particularly from ACP subscribers and active stores. These are management expectations, not formal quantified guidance; the filing cautions that Q1 results may not indicate full-year performance.
- Management says cash on hand and potential access to third-party or related-party debt or equity should cover obligations for one year from issuance of the statements. It also acknowledges a history of significant losses and that sustained profitability is not assured.
- ACP exposure is a major concentration: the program is the source of all SurgePhone and Torch segment revenue, and those receivables represented 98% of accounts receivable at quarter-end. Changes to program rules, funding, eligibility, or reimbursement could materially affect results.
- The device-financing agreement carries a 9-month repayment period, fees, a minimum outstanding-balance requirement, and a default rate of 16.2% annually; its markup may rise with the SOFR rate. The company reported compliance with its financial and subscriber covenants at quarter-end.
- Pending matters include the Blue Skies/True Wireless litigation and a putative TCPA/Florida telephone-solicitation class action against LogicsIQ. The company says potential loss in the latter cannot currently be estimated; it cites similar settlements of $100,000 or less. A separate Ambess matter was settled for $60,000, and a former-employee matter for $7,500.
- Q1 included issuance of 60,082 common shares for services, valued at $307,458. At quarter-end, 5.68 million warrants were outstanding, in addition to stock options, creating potential dilution. Management deemed disclosure controls effective but noted limited segregation of duties.
Important facts for investors to verify
- Whether ACP subscriber growth, reimbursements, program funding, and collection timing support continued revenue and cash generation.
- Inventory sell-through and obsolescence exposure, and the cash and margin effects of device purchases financed through the installment-sale agreement.
- The terms, repayment schedule, and availability of funding for related-party notes and other debt, as well as compliance with lender covenants.
- Progress and potential exposure in the Blue Skies/True Wireless and LogicsIQ legal matters.
- Actual quarterly results against management’s 2023 profitability and revenue-growth expectations, and potential dilution from warrants, options, and equity awards.