SurgePays, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are with FY2019. The company, then known as Surge Holdings during much of the year, filed as SurgePays, Inc. on April 1, 2021. Its businesses span prepaid wireless and payment transactions, wholesale retail distribution software, Lifeline service, and digital marketing.
Financial performance and position
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Revenue | $54.41 million | $25.74 million |
| Gross profit (gross margin) | $2.47 million (4.5%) | $3.12 million (12.1%) |
| Operating loss | $(10.15) million | $(7.77) million |
| Net loss | $(10.72) million; $(0.10) per share | $(8.45) million; $(0.09) per share |
| Cash from operating activities | $(4.33) million in the audited cash-flow statement | $(6.53) million |
| Cash and cash equivalents | $674,000 | $346,000 |
| Current assets / current liabilities | $1.25 million / $15.31 million | $3.57 million / $7.05 million |
| Total liabilities / stockholders’ deficit | $18.05 million / $(10.73) million | $14.69 million / $(4.70) million |
Revenue rose 111%, led by ECS, whose revenue increased to $34.86 million from $10.77 million, and Surge Logics, up to $16.43 million from $7.23 million. True Wireless and Surge Blockchain revenue declined. Despite the revenue growth, gross profit fell 21%; the filing attributes this mainly to weaker gross profit at True Wireless and Surge Blockchain. Selling, general and administrative expense rose 7% to $11.44 million, while depreciation and amortization increased to $1.17 million, primarily reflecting ECS-related assets.
Interest expense increased to $3.38 million from $227,000, primarily due to additional borrowing. FY2020 other items included a $2.58 million gain on settlement of liabilities, a $578,000 gain from derivative fair-value changes, and $567,000 of derivative expense. The company reported $4.65 million of financing cash inflows, principally from borrowing, and $8,000 of investing cash inflows.
Liquidity, debt, and capital
- Working-capital deficit widened to $14.06 million from $3.48 million. The company said it had to borrow to meet basic operating costs.
- Year-end current debt and related-party debt were substantial; total liabilities were $18.05 million. Disclosed scheduled debt maturities, before debt discounts, totaled $7.82 million: $5.57 million in 2021 and $2.26 million in 2022.
- The company relied on equity issuance and promissory notes for funding. Common shares outstanding rose from 102.2 million at year-end 2019 to 127.1 million at year-end 2020; 147.9 million were outstanding as of March 31, 2021. Warrants, convertible instruments, and preferred shares create further potential dilution.
- The audit report includes an emphasis-of-matter paragraph on going concern. The company reported recurring losses and negative working capital; the auditor’s opinion on the financial statements was not modified.
Outlook, risks, and unusual items
Management expected continued net losses and did not expect positive operating cash flow until the fourth quarter of 2021, anticipating that easing COVID-19 effects would allow fuller execution of its sales strategy. This is management’s expectation, not a guarantee. The company also planned further acquisitions and said economic uncertainty could make financing expansion more difficult.
- Material risks include financing needs and potential shareholder dilution; intense competition; dependence on regulation and FCC licenses, including the Lifeline program; execution and integration risks; COVID-19 and economic disruption; customer-credit and collection exposure; and risks from operations in El Salvador.
- Reported litigation and regulatory matters include an Oklahoma Corporation Commission action seeking a fine exceeding $100,000 and possible license revocation; a Unimax judgment of $767,291 plus fees and costs; and a Juno Financial claim exceeding $1.7 million. The filing also describes a separate noncompetition dispute. Outcomes and potential financial effects are uncertain.
- Related-party dealings include borrowings from entities owned by the CEO and President, payments to a company in which the President has an ownership interest, and office space owned by an entity of the CEO. Verify terms, balances, and governance oversight.
- Management stated disclosure controls were effective while noting a lack of segregation of duties. The auditor was not engaged to audit internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the cash-flow figures: the audited cash-flow statement reports operating cash use of $4.326 million, while MD&A reports $4.348 million (and another liquidity disclosure gives $4.348 million or $4.349 million); reported cash change also varies between sections. The filing text does not provide a clear reconciliation.
- Review the detailed financial-statement notes for debt balances, near-term maturities, default and conversion provisions, derivative liabilities, and the subsequent March 2021 financing.
- Assess whether gross margins can recover as revenue scales, and whether the 2021 positive-operating-cash-flow target was achieved.
- Evaluate collectability and customer concentration: one customer represented more than 11% of FY2020 revenue, and one customer accounted for about 47% of gross receivables at year-end.
- Track the Oklahoma regulatory matter, Unimax and Juno claims, related-party arrangements, and potential dilution from common-stock equivalents.