SurgePays, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited consolidated financial statements. SurgePays provides mobile broadband and prepaid telecom services, fintech and wholesale products to underserved customers, and lead-generation services. Its MVNO segment, including subsidized ACP services, generated about 92% of quarterly revenue.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Revenue | $31.43 million | $34.78 million; down 9.6% |
| Gross profit / margin | $8.18 million / 26.0% | $7.69 million / 22.1% |
| Operating income / margin | $1.75 million / 5.6% | $4.71 million / 13.5% |
| Net income available to common stockholders | $1.22 million; $0.07 per diluted share | $4.55 million; $0.31 per diluted share |
| Cash provided by operations | $4.04 million | $2.87 million |
| Cash and working capital at March 31 | $42.95 million cash; $49.63 million working capital | Cash was $14.62 million and working capital $20.66 million at December 31, 2023 |
| Total liabilities / debt | $13.40 million total liabilities; $5.19 million notes payable, including related-party and SBA debt | Total liabilities were $13.52 million at December 31, 2023 |
Cash increased $28.32 million during the quarter, chiefly from $17.25 million of gross stock-sale proceeds and $8.80 million from cash warrant exercises, as well as operating cash generation. The stock offering incurred $1.40 million of direct costs. Total stockholders’ equity was $56.19 million at quarter-end.
Material changes and business developments
- MVNO revenue rose 0.8% to $28.89 million, while lead-generation revenue fell from $3.17 million to zero following management’s decision to scale back that business. Comprehensive Platform Services revenue declined 13.8% to $2.53 million.
- Gross margin improved to 26.0%, but operating income fell 62.8%. General and administrative expense more than doubled to $6.43 million, including higher compensation, legal and consulting costs. Management attributed a substantial part of compensation growth to executive stock compensation and bonus accruals.
- On January 5, SurgePays acquired ClearLine Mobile’s software development for $2.5 million, recorded as goodwill; related payments were scheduled in installments, including $800,000 due in April and $800,000 in July 2024.
- The company issued 3.08 million shares for $17.25 million gross proceeds and 1.86 million shares through cash warrant exercises for $8.80 million. Shares issued and outstanding were reported as 19.43 million at March 31; the cover page reports 19.41 million outstanding on May 7.
- A CEO-related note was consolidated and restructured in March: the filing describes a $5.08 million note at 10% interest, with a 15% default rate, payable over 36 months. The March 31 balance-sheet classification shows $1.57 million current and $3.15 million long-term related-party debt. SBA debt was $477,000.
Outlook, risks and other notable matters
- ACP dependency: The ACP stopped accepting new applications on February 7, 2024. The filing says funding would cease after April 2024 in one discussion and after May 20, 2024 in another; elsewhere it says the program had not been funded by Congress as of filing. Management stated that continued funding could support revenue growth and positive operating income, but nonrenewal could substantially reduce revenue and result in a 2024 loss.
- Transition plans: Management planned to roll out non-subsidized LinkUp Mobile in Q2 2024, pursue convenience-store distribution and expand Comprehensive Platform Services. The company expected this platform segment to be its largest year-over-year revenue-growth opportunity for the remainder of 2024. Management planned to decide in Q2 whether to maintain or discontinue lead generation.
- Liquidity: Management said available cash was sufficient to meet current obligations for one year from issuance of the financial statements and did not anticipate borrowing for basic operating costs. It also cautioned that past profitability may not continue and that expansion plans and economic uncertainty may affect financing.
- Legal matters: The Blue Skies/True Wireless litigation remained in discovery, with trial anticipated in January 2025; the company reported no accrual for the described matters. Confidential settlements were reached in April 2024 in the Aliotta-related and Consumer Attorney Marketing Group matters, pending court dismissal orders. The company said potential loss in the Aliotta matter had previously been difficult to estimate.
- Other items: The $176,851 note receivable from Blue Skies was in default, and the company said it believed it collectible. On May 8, 2024, President Jeremy Gies resigned as an officer and CEO Kevin Brian Cox was appointed President. Management said disclosure controls were effective, while noting a lack of segregation of duties relative to larger companies.
Key facts for investors to verify
- Current ACP funding status, reimbursement timing and subscriber retention prospects; clarify the filing’s differing stated program-funding end dates.
- Post-ACP economics and execution of LinkUp Mobile, convenience-store expansion and the Comprehensive Platform Services growth plan.
- Drivers and sustainability of elevated G&A, including executive compensation, stock awards, bonuses, legal expense and potential future dilution.
- Related-party note payment schedule, interest burden and remaining maturities, as well as ClearLine’s outstanding installment payments.
- Developments in the Blue Skies litigation, April settlements and collection of the defaulted note receivable.
- Reconcile the reported March 31 share count with the May 7 cover-page count and review outstanding warrants and equity awards.