SurgePays, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. SurgePays provides fintech and prepaid products to underserved communities, alongside subsidized broadband through SurgePhone and Torch Wireless. Torch became wholly owned effective January 1, 2022. The report was filed November 14, 2022.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $36.17 million | $14.54 million | $85.32 million | $36.91 million |
| Gross profit (calculated) | $1.92 million | $1.90 million | $6.75 million | $4.36 million |
| Gross margin (calculated) | 5.3% | 13.1% | 7.9% | 11.8% |
| Operating loss | $1.01 million | $1.01 million | $2.91 million | $5.90 million |
| Net loss available to common stockholders | $1.54 million | $1.66 million | $3.73 million | $6.69 million |
| Basic and diluted loss per share | $0.12 | $0.51 | $0.30 | $2.21 |
Revenue increased 149% year over year in Q3 and 131% for the first nine months, primarily from the ACP broadband business. SurgePhone and Torch contributed $27.35 million of Q3 revenue and $61.46 million for the nine-month period. Cost of revenue grew substantially with program activity, and gross margin declined from the comparable periods. Q3 operating loss was essentially unchanged; nine-month operating loss narrowed, while the nine-month net loss also benefited from lower interest expense and a $524,143 PPP loan-forgiveness gain.
For the nine months, operating cash use was $3.95 million, versus $7.14 million in 2021. Investing cash use was $1.11 million, including $800,000 for Torch and $300,000 cash paid for software. Financing provided $6.67 million, mainly from $6.7 million of note proceeds. Cash increased by $1.61 million to $7.89 million.
Financial position and material changes
- At September 30, cash was $7.89 million, accounts receivable $9.47 million, and inventory $9.49 million. Current assets were $26.98 million and current liabilities $26.93 million. The balance-sheet figures imply working capital of $53,234; the filing elsewhere gives $52,244, so the reported amount is inconsistent.
- Total assets were $33.36 million and total liabilities $32.90 million, compared with $19.50 million and $15.95 million, respectively, at year-end 2021. Total stockholders’ equity fell to $464,086 from $3.55 million.
- Borrowings included $6.68 million of notes payable, $6.06 million of related-party loans, and $582,226 of SBA debt. The $5 million revolving facility is secured by all company assets, bears 24% annualized interest, and is limited by eligible receivables. Other new notes carry rates of 19% or 24%; certain related-party notes bear 10%.
- Receivables and inventory increased by $6.22 million and $5.18 million, respectively, contributing to operating cash use. Accounts payable and accrued expenses, including related-party amounts, rose by $9.25 million; deferred revenue increased by $1.62 million.
- At November 10, 2022, 12,530,928 common shares were outstanding. The filing’s balance sheet and equity statement show differing September 30 share counts; see investor verification items below.
Outlook, risks, and unusual items
- Management stated it expected ACP revenue to increase month over month through the rest of 2022, planned to pursue a line of credit to support ACP growth, and intended to shift additional attention toward onboarding merchants to the fintech platform. These are management expectations, not quantified formal guidance.
- The company disclosed substantial doubt about its ability to continue as a going concern within the twelve months after the financial statements were issued. It reported recurring losses, $3.95 million of operating cash use for the nine-month period, and stated it must borrow at its current operating level. Management’s plans include growing ACP revenue and pursuing credit and distribution opportunities.
- Related-party expenses were $14.32 million for the first nine months, including $11.55 million paid to 321 Communications; management attributed the increase primarily to ACP data-plan costs. The filing also reports substantial related-party payables and loans.
- LogicsIQ revenue fell as older litigation cases matured and newer cases were established; the segment moved from operating income to operating loss. Surge Fintech/ECS revenue declined 31%, which management attributed to COVID-19 effects and a salesforce transition.
- Legal matters include ongoing Terracom and Blue Skies/True Wireless disputes; the latter seeks damages and other relief, with no clear quantified demand in the filing text. Ambess alleges approximately $73,000 in damages plus fees and interest. Management says it has a strong defense in the Juno matter and recorded no reserve.
- Management identified COVID-19, competition, demand variability, supply-chain and economic disruption, and access to capital as risks. Disclosure controls were deemed effective, but management noted a lack of segregation of duties.
Key facts for investors to verify
- Reconcile the filing’s $52,244 working-capital disclosure with the $53,234 amount implied by current assets less current liabilities.
- Reconcile September 30 common shares reported in the balance sheet (12,348,834) and equity statement (12,495,987), and compare with 12,530,928 shares reported outstanding on November 10.
- Review the terms, maturity dates, collateral, and repayment requirements of the high-cost notes and $5 million receivables-based revolver, including whether eligible receivables support continued availability.
- Assess ACP subscriber growth, collections, device and data costs, commissions, and the program’s contribution to cash generation and margins.
- Monitor the company’s going-concern liquidity needs, related-party balances and transactions, and the status and potential exposure of pending litigation.