SurgePays, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 24, 2022. This is an annual report, not a standalone fourth-quarter report, so the filing text does not provide clear Q4-only financial results. SurgePays operates fintech and prepaid-product platforms for underserved communities, wireless services through SurgePhone, and marketing and case-management services through LogicsIQ.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $51.06 million | $54.41 million |
| Cost of revenue | $44.89 million | $51.94 million |
| Gross profit and margin | $6.17 million; 12.1% | $2.47 million; 4.5% |
| Operating loss and margin | $(5.99) million; (11.7)% | $(10.15) million; (18.6)% |
| Net loss and margin | $(13.53) million; (26.5)% | $(10.72) million; (19.7)% |
| Net cash used in operating activities | $(15.29) million | $(4.33) million |
Revenue declined 6% year over year, while gross margin improved as cost of revenue fell faster than sales. Operating loss narrowed 41%, but net loss increased, reflecting higher non-operating expenses. Interest expense was $3.84 million, versus $4.80 million in 2020; 2021 also included $3.68 million of debt-discount amortization and a $3.75 million settlement expense. Basic and diluted loss per share was $3.09, compared with $5.02 in 2020; per-share data reflect the 1-for-50 reverse split.
Year-end cash was $6.28 million. Current assets were $13.89 million and current liabilities $10.00 million, yielding working capital of $3.89 million, versus a $14.41 million deficit in 2020. Total assets were $19.50 million; total liabilities were $15.95 million; stockholders’ equity was $3.55 million, compared with a $10.73 million deficit a year earlier. Cash provided by financing was $21.27 million, principally reflecting equity proceeds; cash increased by $5.61 million for the year.
At year-end, related-party loans totaled $6.06 million, SBA notes $1.13 million, and operating lease liabilities $0.49 million. The balance sheet showed no line of credit, convertible notes, or derivative liabilities at year-end. The November Nasdaq offering generated approximately $19.79 million gross and $19.08 million net proceeds after direct offering costs; the company said proceeds helped repay debt and derivative liabilities.
Changes versus 2020
- SurgePhone Wireless and related revenue increased by $6.69 million, principally due to Emergency Broadband Benefit/Affordable Connectivity Program activity beginning in 2021. LogicsIQ revenue rose $1.42 million.
- ECS/SurgePays Fintech revenue fell $10.23 million, attributed to COVID-era limits on sales representatives’ store visits and a shift from prepaid wireless payments at stores to subsidized wireless services. True Wireless revenue fell $1.21 million following its May 2021 sale.
- SurgePhone Wireless and Other reported $7.43 million of revenue, LogicsIQ $17.85 million, ECS $24.63 million, and True Wireless $1.16 million. ECS remained the largest reported revenue source.
- Operating cash use increased substantially, while year-end working capital moved from deficit to surplus after the equity offering. Net loss nonetheless widened.
Outlook, risks, contingencies, and unusual items
- Management outlook: Management expected ACP revenue to grow quarter over quarter in 2022 and forecast positive operating cash flow and net income beginning in early 2022. These are expectations, not formal quantified guidance; the filing cautions actual results may differ. Management also said it might seek a line of credit to fund anticipated ACP growth and planned to pursue acquisitions and expansion.
- Going concern: The independent auditor included a substantial-doubt explanatory paragraph. The company had a $13.53 million net loss, $15.29 million operating cash outflow, and $35.12 million accumulated deficit in 2021. Management’s plan depends in part on growth in ACP-related revenue; there is no assurance profitability or positive cash flow will be achieved or sustained.
- Settlement and litigation: The company recorded a $3.75 million settlement expense in 2021 as part of a $4.2 million settlement relating to disputes over the ECS business acquisition; the final payment was made January 7, 2022, and the related lawsuits were dismissed. Other disclosed matters included an approximately $73,000 contract claim and a dispute involving the sale of True Wireless; the company described defenses but outcomes remained uncertain. It reported no reserve for the Juno Financial matter based on counsel’s assessment.
- Other unusual items: The sale of True Wireless generated a $1.90 million accounting gain on deconsolidation and a $176,851 unsecured note receivable. The company also reported a $1.47 million gain on settlement of liabilities and $1.81 million of derivative fair-value gains, alongside derivative expense and debt-discount amortization. These items make reported net loss less indicative of recurring operations.
- Execution and external risks: Key risks include dependence on government broadband subsidy programs and regulatory approvals, competitive pressure, technology and customer-demand changes, COVID-related disruption, access to capital, and the company’s ability to scale sales and operations. The filing estimates its share of convenience-store sales is below 1%.
- Governance and subsequent events: CEO Kevin Cox held significant voting influence, and related-party transactions included services and payables involving entities connected to executives or directors. LogicsIQ CEO and SurgePays President and director Anthony Nuzzo died on March 18, 2022. The filing also disclosed one-time executive and director cash bonuses approved after year-end, including $375,000 for the CEO.
Important facts for investors to verify
- Whether ACP customer growth, reimbursement collections, and program rules support management’s 2022 profitability and cash-flow expectations.
- How quickly the company can convert receivables and the sharp increase in inventory ($4.36 million at year-end) into cash, given 2021 operating cash use.
- The terms, repayment schedule, and related-party nature of the $6.06 million in related-party loans, as well as other debt and cash requirements after the January 2022 settlement payment.
- The potential dilution from outstanding warrants, including offering warrants exercisable at $4.73 per share, and other equity-linked securities; common shares outstanding were 12,048,775 as of March 22, 2022.
- The status and potential financial exposure of remaining litigation, regulatory matters, and the acquired distribution agreement whose rights were subject to separate litigation.
- How Nuzzo’s death affects LogicsIQ leadership, related-party arrangements, and the company’s operating plans.