SurgePays, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 30, 2023. SurgePays provides subsidized mobile broadband and prepaid/financial products through wireless subsidiaries and convenience-store fintech operations, alongside LogicsIQ legal-marketing services. The 2022 results include Torch Wireless, acquired effective January 1, 2022.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $121.5 million | $51.1 million |
| Gross profit / margin | $13.5 million / 11.1% | $6.2 million / 12.1% |
| Operating income (loss) | $0.6 million | $(6.0) million |
| Net loss available to common stockholders | $(0.7) million | $(13.5) million |
| Loss per share, basic and diluted | $(0.05) | $(3.09) |
| Cash from (used in) operating activities | Conflicting disclosure; see below | $(15.3) million |
Revenue rose $70.5 million, or 138%. SurgePhone and Torch generated $88.4 million, about 73% of consolidated revenue, versus $7.3 million in 2021. Management attributed the increase chiefly to ACP/EBB subscriber growth, to more than 200,000 at year-end from 30,000 a year earlier. LogicsIQ revenue fell 6% to $16.8 million, and Surge Fintech/ECS revenue declined 34% to $16.3 million.
Cash was $7.0 million at year-end. Current assets of $27.6 million exceeded current liabilities of $23.5 million, yielding $4.1 million of working capital. Total liabilities were $28.9 million, up from $15.9 million; the increase was principally associated with a $13.0 million installment-sale liability for ACP device purchases. Other reported debt included $5.6 million of related-party loans, $1.6 million of notes payable and $0.5 million of SBA debt. Stockholders’ equity was $5.1 million.
Cash-flow disclosure to verify: MD&A says operating activities provided $793,272, while the audited cash-flow statement and liquidity note report net cash used in operations of $793,272. The filing text does not resolve this sign discrepancy. The audited statement reports $1.5 million used in investing activities, $1.5 million provided by financing activities and a $0.8 million net increase in cash.
Material changes and unusual items
- Wireless growth reshaped the revenue mix: SurgePhone/Torch rose from about 14% to 73% of revenue. The filing states all revenue for this segment came from FCC-administered programs; these programs also accounted for 96% of year-end accounts receivable.
- Operating results improved by $6.6 million, but consolidated operating income remained modest. SurgePhone/Torch reported $11.9 million of segment operating income; SurgePays corporate reported a $9.7 million operating loss, and Fintech/ECS reported a $2.0 million operating loss.
- Interest expense declined to $1.8 million from $3.8 million. 2022 other income included $524,143 from PPP loan forgiveness. The 2021 comparison included several substantial debt, derivative, settlement and True Wireless deconsolidation items.
- 2022 financing included $6.7 million of note proceeds and $5.2 million of note repayments. The company also issued 270,745 shares to settle $1.1 million of related-party debt and 85,000 shares as part of the $711,400 ShockWave CRM software acquisition.
- The ACP device-financing arrangement provides up to $25 million, is secured by company assets, and has a 9.85% markup at year-end, subject to quarterly adjustment beginning April 2023. It also includes fees, a minimum outstanding balance and other covenants.
Outlook, risks and contingencies
Management expected revenue streams to increase quarter over quarter in 2023 and forecast positive operating income in each 2023 reporting period. It cited fourth-quarter 2022 operating income of $3.3 million and an approximately 18% gross margin; the filing text does not provide a clear supporting quarterly financial table. These statements are management expectations, not formal quantified guidance.
The company reported a 2022 net loss and accumulated deficit of $35.8 million. Although management said it expected available resources and access to additional capital to cover obligations for one year from the financial-statement issuance date, it also acknowledged a history of losses and no assurance of sustained profitability. It may need borrowing to support anticipated ACP growth; expansion plans and acquisitions could increase financing needs.
- Program and regulatory exposure: Wireless revenue and receivables are heavily concentrated in FCC programs, including ACP; changes to program rules, funding, eligibility or reimbursement could materially affect results and collections.
- Liquidity and financing: Inventory and receivables expanded with ACP growth. The device-financing liability, secured borrowing terms, capital needs and ability to raise debt or equity merit monitoring.
- Litigation: The Blue Skies/True Wireless dispute remained in discovery and sought damages and other relief; potential loss was not quantified. A TCPA/Florida telephone-solicitation class action against LogicsIQ remained at the pleadings stage; the company said loss could not be estimated. The Juno matter remained in discovery with no reserve recorded. Ambess was settled after year-end.
- Related parties and governance: 2022 related-party expenses totaled $20.1 million, including $16.0 million for telecom services from 321 Communications and $1.2 million from National Relief Telephone. CEO Kevin Cox owns about 38.6% of the common stock and has significant voting influence.
- Dilution and execution: Warrants outstanding totaled 5.68 million at year-end. Executive employment agreements and the shareholder-approved 2022 incentive plan include potentially substantial equity awards. The filing also cites competition, technology change, customer retention, acquisition integration and foreign-operation risks.
The independent auditor issued an unqualified opinion on the financial statements and identified revenue recognition as a critical audit matter. Management reported effective disclosure controls and no material weaknesses; the auditor did not express an opinion on internal control over financial reporting.
Important facts for investors to verify
- Resolve the $793,272 operating-cash-flow sign inconsistency between MD&A and the audited statements.
- Check ACP program funding, enrollment and reimbursement developments, and collection of the related receivables.
- Review the installment-sale financing’s full cost, quarterly markup adjustments, repayment requirements, covenants and collateral implications.
- Assess the status and potential exposure of the Blue Skies and TCPA litigation, and whether reserves or disclosures change.
- Track segment margins, corporate overhead, recurring profitability and cash conversion against management’s 2023 expectations.
- Review related-party transactions and potential share dilution from warrants, executive awards and the incentive plan.