Business context and reporting period
Surge Holdings, Inc. (the filing entity; the request identifies SurgePays, Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The company provides telecom, fintech, software, and digital-advertising services, principally to underserved customers and small retailers. The results include the ECS businesses acquired in 2019; in January 2020, the company also acquired ECS Prepaid, Electronic Check Services, and Central States Legal Services from their owners.
The filing was delayed under SEC COVID-19 relief. The company said remote work by employees and external auditors made financial reporting and review more difficult.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Revenue | $15.79 million | $3.94 million; up 302% |
| Gross profit / margin | $0.98 million / 6.2% | $1.46 million / 37.0% |
| Operating loss | $2.77 million | $1.11 million |
| Net loss | $3.06 million; $0.03 per share | $1.64 million; $0.02 per share |
| Operating cash flow | $(1.04) million | $(0.88) million |
| Cash, March 31 | $0.44 million | $1.42 million at March 31, 2019 |
Revenue growth primarily reflected $9.75 million from ECS and a $4.78 million increase in Surge Logics, partly offset by lower True Wireless and Surge Blockchain revenue. Gross profit fell 33%, principally because True Wireless gross profit declined. Cost of revenue was $14.81 million; selling, general and administrative expense rose 36% to $3.48 million, and depreciation and amortization increased to $0.27 million.
At March 31, 2020, current assets were $4.46 million and current liabilities $10.61 million, leaving a $6.15 million working-capital deficit. Total assets were $11.32 million; total liabilities were $18.20 million; stockholders’ deficit was $6.88 million. The company used $1.04 million in operating cash and $0.003 million in investing cash, while financing provided $1.14 million. Cash increased by $0.09 million during the quarter.
Debt and financing obligations included a $0.91 million bank line of credit, $2.21 million in related-party long-term debt, and $4.37 million in net convertible notes. The company reported $1.36 million of derivative liabilities. Disclosed future maturities of debt, before debt discounts, totaled $9.12 million. Interest expense was $0.48 million, versus $0.05 million a year earlier.
Material changes, outlook, risks and unusual items
- Acquisitions and revenue mix: ECS contributed $9.75 million of Q1 revenue. Surge Logics generated approximately $5.45 million. True Wireless revenue fell to $0.29 million from $2.37 million in Q1 2019.
- Financing, dilution and accounting items: The company raised $1.35 million in gross proceeds through convertible notes during the quarter and issued shares in connection with financing and acquisitions. Derivative fair-value and related expense, together approximately $0.38 million, and $0.54 million of settlement gains affected other income and expense. The filing reports derivative expense at slightly different amounts in different sections; the exact figure is unclear.
- Liquidity and going concern: Management said the company had a net loss of about $3.1 million and a $6.2 million working-capital deficit. It stated that, at current operating levels, the company must borrow to meet basic costs. Management projected cash-flow positivity by the end of Q3 2020, relying on operating improvement, receivable collections, and debt restructuring. It also anticipated possible further debt or equity financing, but gave no assurance it would be available or sufficient. The financial statements are prepared on a going-concern basis.
- Management outlook: Management cited ECS and wholesale-platform expansion, software integration, the SurgePays prepaid Visa card, and Surge Logics growth as priorities. It also discussed acquisitions, new distribution channels, and a possible Nasdaq Capital Market listing. These are forward-looking statements, not reported results or guaranteed outcomes.
- COVID-19: The company warned that the pandemic could disrupt operations, supply chains, sales, and access to capital. It received a $498,082 PPP loan in April 2020 and expected to use permitted proceeds and seek full forgiveness. The filing does not establish that forgiveness was granted.
- Other subsequent financing: In April, the company issued a $162,000 principal note for $150,000 proceeds, with 14% interest and shares issued as additional consideration. In June, it sold 1,442,857 shares for $505,000. These events occurred after quarter-end.
- Contingency and governance: The FCC had proposed a $5.50 million forfeiture relating to alleged ineligible subscriber lines in 2012–2013. Management disputed the claim and said any resulting amount would not materially affect the company. Management also concluded disclosure controls were ineffective, citing limited segregation of duties, no audit committee, and inadequate documented controls. Related-party dealings include management-linked debt, services, and Centercom arrangements.
Most important facts for investors to verify
- Whether the company improved gross margins and operating cash flow after adding ECS, and whether the acquired revenue converted into cash and sustainable profit.
- Collections and credit quality: one customer represented 69% of gross accounts receivable at quarter-end, despite no customer exceeding 10% of Q1 revenue.
- Near-term debt maturities, repayment terms and conversion provisions, access to additional capital, and resulting dilution; also confirm the status of the $498,082 PPP loan and any forgiveness.
- Progress toward management’s Q3 2020 cash-flow-positive target and the assumptions behind its going-concern assessment.
- Resolution or updated assessment of the FCC forfeiture matter, and remediation of ineffective disclosure controls and governance gaps.