Business context and reporting period
SurgePays, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company operates technology-enabled wholesale, payments and wireless platforms serving independent retailers and underbanked customers, alongside LogicsIQ’s legal-marketing services. True Wireless was sold and deconsolidated on May 7, 2021, so its results are included only through that date.
Financial performance and position
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $11.38 million | $14.51 million | $22.37 million | $30.30 million |
| Gross profit | $1.33 million | $0.13 million | $2.46 million | $0.47 million |
| Gross margin | 11.7% | 0.9% | 11.0% | 1.5% |
| Operating loss | $1.41 million | $4.03 million | $3.52 million | $6.71 million |
| Net loss | $0.21 million | $2.43 million | $5.03 million | $5.48 million |
For the six months, net cash used in operating activities was $4.86 million, compared with $2.23 million in 2020. Investing activities used $0.37 million; financing activities provided $5.13 million. Cash declined by $99,171 to $574,824.
At June 30, current assets were $1.35 million and current liabilities were $13.63 million, producing a $12.28 million working-capital deficit. Total liabilities were $16.72 million, versus $18.05 million at year-end 2020; stockholders’ deficit was $9.33 million. Current liabilities included $4.42 million of related-party loans, $5.80 million of accounts payable and accrued expenses, and $0.84 million of convertible notes, net. Long-term SBA notes were $1.50 million. The line of credit was zero after the True Wireless sale.
Changes versus prior comparable periods
Revenue fell 22% in the quarter and 26% in the first half. Management attributed much of the decline to COVID-related limits on retailer visits and store growth, with lower ECS sales the largest segment contributor. LogicsIQ’s quarterly revenue was roughly flat, as lower lead-generation revenue was offset by growth in retained services. First-half LogicsIQ revenue declined 21%.
Gross margin improved in both comparisons, and operating losses narrowed. The quarterly net loss improved substantially, but results included a $1.90 million gain on deconsolidating True Wireless and gains related to liability settlements and derivative fair-value changes. First-half results also included $3.40 million of interest expense and $1.78 million of derivative expense. These items make net loss a less direct measure of underlying operating performance.
Common shares issued and outstanding increased from 127.1 million at December 31, 2020 to 161.5 million at June 30, 2021; 163.3 million were outstanding on August 13. Potential common-stock equivalents totaled 228.7 million at June 30, including convertible notes, warrants and preferred stock.
Outlook, risks and unusual items
Management stated it expected continued operating losses and negative operating cash flow in the near term, and did not expect positive operating cash flow until the fourth quarter of 2021. It planned to fund operations through additional debt or equity, pursue partnerships and distribution opportunities, and seek market opportunities with potential near-term cash flow. No quantified revenue or earnings guidance was provided.
The filing states that substantial doubt exists about the company’s ability to continue as a going concern over the following twelve months. Management said that without additional capital it may need to reduce business-development activities or cease operations. The company also noted that it must borrow to meet basic operating costs.
True Wireless was transferred for the buyer’s assumption of specified liabilities totaling approximately $2.41 million. SurgePays retained $1.10 million of liabilities and received an unsecured $176,851 note receivable bearing 0.6% interest, with payments scheduled to begin in June 2023. The transaction generated a $1.90 million accounting gain.
Other risks include variable demand and intense competition, COVID-related supply and sales disruption, dependence on raising capital, related-party borrowing, and substantial potential dilution from convertible securities and warrants. A lawsuit by Glen Eagles Acquisition LP includes counterclaims against the company and its CEO and is tentatively set for trial in June 2022. The company also disclosed an FCC proposed forfeiture of $5.50 million relating to alleged ineligible subscriber lines from 2012–2013; management disputes the claim and believes any outcome would not materially affect its financial position. Management reported disclosure controls were effective, while noting a lack of segregation of duties.
Important facts for investors to verify
- Whether the company obtained adequate new financing and achieved the anticipated cash-flow improvement; the filing identifies substantial going-concern doubt.
- Whether revenue and store activity recovered after COVID-related constraints, particularly in ECS and the wholesale platform.
- The terms, conversion prices and dilution potential of convertible notes, warrants and preferred shares, and the resulting share count.
- The True Wireless sale terms, retained liabilities, note receivable collection schedule and any buyer repurchase rights.
- The status and potential financial exposure of the Glen Eagles litigation and the FCC forfeiture matter.
- Reconcile narrative disclosures against the financial statements: portions of MD&A contain inconsistent segment and settlement descriptions, so the underlying statement and note figures warrant confirmation.