SurgePays, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2022, compared with the same 2021 period. SurgePays operates telecom and subsidized broadband businesses, fintech and prepaid services, wholesale distribution, and legal-marketing software. Growth in subsidized broadband, including Affordable Connectivity Program (ACP) activity, was the primary driver of the revenue increase. Torch Wireless was consolidated as a variable interest entity from January 1, 2022; SurgePays acquired its 100% equity interest on April 6, after quarter-end.
Key financial metrics
| Metric | Q1 2022 / March 31, 2022 | Prior comparable period / December 31, 2021 |
|---|---|---|
| Revenue | $21.14 million | $10.99 million in Q1 2021; up 92% |
| Gross profit and gross margin | $2.63 million; 12.5% | $1.13 million; 10.3% in Q1 2021 |
| Operating loss | $1.05 million | $2.11 million in Q1 2021 |
| Net loss | $1.24 million including non-controlling interest; $1.21 million attributable to common stockholders | $4.82 million attributable to common stockholders in Q1 2021 |
| Loss per share | $0.10 basic and diluted | $1.85 in Q1 2021 |
| Operating cash flow | Cash used: $3.32 million | Cash used: $3.44 million in Q1 2021 |
| Cash | $3.44 million | $6.28 million at December 31, 2021 |
| Current assets / current liabilities | $12.40 million / $8.92 million; working capital of $3.49 million | $13.89 million / $10.00 million at December 31, 2021 |
| Total assets / liabilities | $17.80 million / $15.45 million | $19.50 million / $15.95 million at December 31, 2021 |
| Stockholders’ equity | $2.35 million | $3.55 million at December 31, 2021 |
Recorded debt, excluding operating lease liabilities, totaled approximately $7.65 million: $6.06 million in related-party loans, $1.13 million in SBA notes, and $0.46 million in other notes payable. Operating lease liabilities were $0.47 million. The quarter’s cash decline was $2.84 million; financing provided $0.49 million, while investing used $0.01 million.
Material changes versus the prior period
- SurgePhone Wireless generated $10.99 million of revenue, compared with $1,077 in Q1 2021, and reported $2.16 million of operating income. Management attributed the change to EBB/ACP business.
- Torch Wireless contributed $3.06 million of revenue and reported a $57,187 operating loss. Its consolidation and the timing of the April acquisition affect comparability.
- Surge Fintech and ECS revenue declined 31% to $4.77 million; management cited COVID-19 effects and a shift from independent contractors to employed sales staff.
- LogicsIQ revenue fell $1.12 million to $2.29 million and its operating result shifted from $85,820 income to a $367,242 loss.
- General and administrative expense rose 14% to $3.68 million. Management cited higher compensation, including one-time management bonuses, and higher insurance costs; lower professional-services and advertising costs partly offset the increases.
- Interest expense decreased to $169,645 from $599,636, largely due to repayment of notes during 2021. The prior-year period also included derivative and debt-discount expenses that did not recur.
Outlook, liquidity, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern within the twelve months following issuance. The filing cites recurring losses, $3.32 million of quarterly operating cash use, and dependence on additional capital if operating revenues are insufficient. Management said it was monitoring cash and expenses and might need to reduce development or cease operations if it cannot obtain capital.
- Management outlook: The company expected net income for the quarter ending June 30, 2022 and improving income for the remainder of 2022, with ACP revenue expected to increase month over month. It planned to expand merchant onboarding and geographic reach, pursue distribution and partnership opportunities, and seek a line of credit to support ACP growth. It did not anticipate an equity raise at that time. These are forward-looking statements, not reported results.
- Subsequent financing: In April 2022, the company executed financing arrangements totaling $3.5 million. Up to $3.0 million is available under a revolving facility at 2% monthly (24% annualized), secured by company assets and limited to the lesser of $3.0 million or 80% of eligible receivables. A separate $500,000 unsecured, six-month note bears 19% interest and 26% default interest and was issued with 15,000 warrants.
- Other subsequent events: On April 27, 2022, a $524,144 PPP loan was forgiven; the company expected to recognize the forgiveness in Q2. The Torch acquisition consideration was $800,000, with additional monthly customer residual payments specified in the agreement. LogicsIQ confidentially submitted a draft S-1 for a proposed IPO on April 29; completion is subject to SEC review and market conditions.
- Legal matters: The filing describes ongoing litigation, including a Blue Skies/True Wireless dispute seeking injunctive and monetary relief, an Ambess claim for approximately $73,000 plus fees and interest, and other matters. Management states it believes it has defenses; outcomes and potential exposure are uncertain. The AltCorp-related matters were settled and dismissed in January 2022 after a $4.2 million settlement payment.
- Other governance and compensation items: The filing reports the March 2022 death of officer and director Anthony Nuzzo. A May 13, 2022 CEO employment agreement provides a $475,000 annual base salary, potential cash bonuses, substantial milestone-based stock awards and options, and specified benefits and severance provisions.
- Controls: Management assessed disclosure controls as effective but disclosed a lack of segregation of duties, which it described as common for companies of its size.
- COVID-19: The company said it had not experienced a significant negative economic impact to date, while warning that future supply-chain, demand, labor, and capital-market effects remained uncertain.
Important facts for investors to verify
- Whether ACP subscriber growth, reimbursements, device costs, and commissions translate into sustainable positive cash flow and margins.
- Cash runway and the availability, borrowing base, costs, collateral terms, and repayment requirements of the April financing, in light of the going-concern disclosure.
- The financial contribution and acquisition accounting for Torch, including the $800,000 purchase price and ongoing customer residual payments.
- The status, potential costs, and any required reserves for pending litigation and other contingencies.
- Potential dilution: the filing reports approximately 6.08 million warrants outstanding at March 31, 2022, in addition to other equity awards; confirm subsequent changes and the effect of the CEO’s equity incentives.
- Reconcile the filing’s working-capital narrative: the balance sheet shows positive working capital of $3.49 million at March 31, 2022 and positive $3.89 million at December 31, 2021, while MD&A calls the December balance a deficit.
- Reconcile minor comparative operating-loss figures: the statement of operations reports a Q1 2021 operating loss of $2.11 million, while portions of MD&A show different figures.