SurgePays, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results. SurgePays operates fintech, prepaid wireless and broadband businesses serving underserved communities. Shares trade on Nasdaq as SURG; warrants as SURGW.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $28.01 million | $11.38 million | $49.15 million | $22.37 million |
| Gross profit | $2.19 million | $1.33 million | $4.82 million | $2.46 million |
| Gross margin | 7.8% | 11.7% | 9.8% | 11.0% |
| Operating loss | $(0.85) million | $(1.41) million | $(1.90) million | $(3.52) million |
| Net loss available to common stockholders | $(0.97) million | $(0.21) million | $(2.19) million | $(5.03) million |
| Basic and diluted loss per share | $(0.07) | $(0.07) | $(0.18) | $(1.73) |
Q2 revenue rose 146%, and first-half revenue rose 120%. Growth primarily reflected subsidized broadband revenue from SurgePhone and the newly acquired Torch Wireless. Despite higher gross profit, gross margin contracted as costs of broadband devices, data service and commissions grew. SurgePhone generated operating income of $1.42 million in Q2; Torch recorded an operating loss of $78,458. Fintech/ECS and LogicsIQ revenue declined year over year.
- Cash flow: First-half operating cash outflow was $3.15 million, versus $4.86 million a year earlier. Investing cash outflow was $1.11 million; financing provided $6.68 million, including $6.70 million of note proceeds. Cash increased to $8.70 million from $6.28 million at year-end.
- Liquidity: Current assets were $22.75 million and current liabilities $21.33 million, leaving working capital of $1.42 million, down from $3.89 million at December 31, 2021. Accounts receivable increased to $8.32 million from $3.25 million; inventory rose to $5.68 million from $4.36 million.
- Debt and leases: Balance-sheet debt included $6.62 million of notes payable, $6.06 million of related-party loans and $593,522 of SBA loans. Operating lease liabilities totaled $457,307. The company also had a $5 million secured revolving facility, bearing 24% annualized interest and limited to the lesser of $5 million or 80% of eligible receivables.
- Equity: Total stockholders’ equity was $2.17 million, down from $3.55 million at year-end. Common shares outstanding were 12,348,834 at June 30; 12,412,767 were outstanding August 11, 2022.
Material changes and unusual items
- Torch Wireless became a wholly owned subsidiary effective January 1, 2022. SurgePays paid $400,000 of the $800,000 purchase price by June 30; the remaining $400,000 was paid in August. The acquisition added $800,000 of goodwill and expanded ACP broadband authorization to all 50 states. Sellers are also entitled to monthly customer residual payments through 2022.
- SurgePays acquired the MVNO Cloud Services software platform, rebranding it ShockWave CRM, for stated consideration of $711,400: $300,000 cash and 85,000 shares valued at $411,400.
- Q2 included a $524,143 gain from forgiveness of a PPP loan. First-half results also reflect lower interest expense than in 2021, when debt-related derivative charges and gains affected comparisons.
- Management attributed higher first-half compensation partly to one-time management bonuses and higher “other” expense largely to insurance and Nasdaq-listing costs. A provision for inventory obsolescence of $51,718 was recorded in first-half 2022.
Outlook, risks and contingencies
Management stated it believed the company would be profitable in Q3 2022 and expected income to increase through the rest of 2022, with ACP revenue growing month over month. It planned to expand merchant onboarding and the fintech platform, pursue distribution opportunities, and seek a line of credit to support ACP growth. Management said it did not then anticipate raising equity. These are forward-looking expectations, not a formal quantified earnings forecast.
The filing explicitly states that substantial doubt exists about the company’s ability to continue as a going concern during the twelve months after issuance, citing recurring losses and operating cash use. Management said it needs to borrow to meet basic operating costs at current activity levels. The filing also cites competition, demand and economic volatility, potential supply-chain disruption, and uncertainty around raising capital. Management reported no significant negative economic impact from COVID-19 to date, while warning that future effects could be material.
- Pending matters include litigation involving Terracom and Blue Skies/True Wireless, plus an Ambess contract claim seeking approximately $73,000 plus fees, costs and interest. A July 2022 mediation in the Blue Skies matter did not settle; plaintiffs seek injunctive and monetary relief. Management disputes the claims. In the Juno matter, management said counsel identified a good defense and no reserve was recorded.
- On August 8, 2022, the company entered a five-year CFO employment agreement. It provides for a $450,000 annual base salary, a $225,000 signing bonus, 500,000 restricted shares plus 100,000 signing shares subject to stated plan/approval terms, and additional potential cash and equity incentives.
- Management reported disclosure controls effective as of June 30, 2022, but noted a lack of segregation of duties consistent with the company’s size.
Important facts for investors to verify
- Whether ACP subscriber growth, reimbursement approvals and device/service economics can sustain revenue growth while improving gross margins and cash generation.
- Receivable aging, collection timing and eligibility under the secured revolver’s 80%-of-receivables borrowing base, including the impact of its 24% rate and repayment triggers.
- Funding needs and the company’s ability to address the stated going-concern doubt, despite reported cash and positive working capital.
- Resolution and potential financial exposure from the Blue Skies/True Wireless, Terracom and Ambess litigation.
- Actual dilution and compensation expense from warrants, the CFO agreement’s equity awards, and any future incentive-plan approvals.
- The impact of Torch acquisition residual payments and whether the acquired ShockWave software generates revenue or operating efficiencies.