SurgePays, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2023. SurgePays provides wireless and broadband services, fintech and prepaid products, wholesale distribution services, and lead-generation and case-management services. SurgePhone and Torch Wireless provide the largest business line, including service reimbursed through the federal Affordable Connectivity Program (ACP).
Key financial results
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $35.89 million | $28.01 million | $70.66 million | $49.15 million |
| Operating income (loss) | $6.20 million | ($0.85 million) | $10.91 million | ($1.90 million) |
| Net income (loss) attributable to common stockholders | $5.97 million | ($0.97 million) | $10.51 million | ($2.19 million) |
| Basic / diluted EPS | $0.42 / $0.40 | ($0.08) / ($0.08) | $0.74 / $0.71 | ($0.18) / ($0.18) |
| Gross margin, calculated from reported revenue and cost of revenue | 27.9% | 7.8% | 25.1% | 9.8% |
Revenue increased 28.1% in Q2 and 43.8% in the first half year over year. SurgePhone and Torch Wireless revenue grew to $30.21 million in Q2 and $58.87 million in the first half; management attributed the growth principally to ACP subscriber expansion, reporting more than 275,000 subscribers at June 30. LogicsIQ revenue fell 23% in Q2, which management linked to changes in litigation-case demand, while Surge Fintech and ECS revenue declined as customers shifted from prepaid wireless services to ACP. The company reported operating profitability in 2023 compared with operating losses in the comparable 2022 periods.
Management says overall margins remained consistent year over year, but the reported consolidated revenue and cost-of-revenue figures imply a substantial increase in gross margin. Investors should verify the figures and the basis for management’s margin statement.
Cash flow, balance sheet and debt
- First-half operating cash flow was positive $224,060, compared with negative $3.15 million in 2022. Investing activities used $281,304 and financing activities used $1.79 million. Cash declined $1.85 million to $5.19 million.
- At June 30, current assets were $33.73 million and current liabilities were $18.48 million, yielding reported working capital of $15.26 million. Total assets were $39.94 million; total liabilities were $23.38 million; and total stockholders’ equity was $16.57 million.
- Inventory rose to $18.09 million from $11.19 million at year-end 2022, absorbing $6.90 million of cash in operating activities. Accounts receivable was $10.29 million; 98% related to FCC-administered programs, according to the filing.
- The debt maturity schedule reports $5.67 million of notes payable, including $5.13 million owed to related parties, and the balance sheet separately reports an $11.35 million installment-sale liability. The installment financing is secured by all company assets, carries a markup subject to increases tied to the secured overnight financing rate, and has a nine-month repayment period for each installment. The company said it was in compliance with the facility’s financial and other covenants at June 30.
Outlook, risks and unusual items
- Management expects revenue growth across segments, particularly through expansion of the subscriber base and active store count, and says it expects long-term gross-margin improvement from scale and operating efficiencies. It also identifies possible acquisitions and expansion as plans; the filing provides no quantified earnings or revenue guidance.
- The ACP is a key concentration and policy risk: SurgePhone and Torch represented 83% of first-half revenue, and that segment’s revenue is entirely derived from FCC-administered programs. Changes to program rules, funding or eligibility could affect results.
- Management says cash resources and potential access to debt or equity financing should cover obligations for one year from issuance of the statements. It also notes the company’s history of significant losses and cautions that profitability may not continue. Management says borrowing may be needed to support expected ACP growth in 2024.
- Legal matters include ongoing Blue Skies/True Wireless litigation seeking damages and other relief, a Juno Financial contract dispute for which management recorded no reserve, and a LogicsIQ-related TCPA/FTSA putative class action whose potential loss the company says cannot currently be estimated. The company reports that other identified claims were settled or dismissed.
- After quarter-end, the company declared a $176,851 note receivable from Blue Skies in default and said it would pursue legal remedies. Separately, on August 8, 2023, the board approved one-time cash bonuses totaling $937,500 for three executives and restricted-share awards totaling 80,000 shares to independent directors.
- Potential dilution includes 5.62 million outstanding warrants, all reported as vested and exercisable, with a weighted-average exercise price of $5.00. The company also issued 125,009 shares for services in the first half, valued at $618,644.
Most important facts for investors to verify
- Reconcile the filing’s statements that margins were “consistent” with the reported figures, which imply gross margins of 27.9% in Q2 2023 versus 7.8% in Q2 2022, and 25.1% versus 9.8% for the respective first-half periods.
- Confirm the reported common-share count: the balance sheet lists 14,234,655 shares at June 30, while the statement of changes in equity lists 14,285,655. The filing separately reports 14,223,202 shares outstanding on August 5.
- Reconcile the debt presentation: the balance sheet appears to list $465,633 under both “notes payable—SBA government” and “notes payable,” while the debt schedule reports total notes of $5.67 million, including $465,633 of SBA debt and $74,213 of other notes. Assess these amounts alongside the $11.35 million secured installment-sale liability.
- Track ACP subscriber growth, federal program funding and rules, subscriber-related unit economics, and whether elevated inventory converts to sales and cash.
- Assess the impact of executive cash bonuses, share-based compensation and warrants on cash needs and dilution, and monitor the unresolved legal matters and Blue Skies note recovery.