SurgePays, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited. SurgePays describes itself as a technology-driven wholesale and fintech platform serving independent convenience stores and underbanked customers, with businesses including wireless services, retail transaction processing, and LogicsIQ marketing and legal-intake services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $14.54 million | $12.80 million | $36.91 million | $43.10 million |
| Operating loss | $0.38 million | $1.62 million | $3.89 million | $8.33 million |
| Net loss | $1.66 million | $2.50 million | $6.69 million | $7.98 million |
| Basic and diluted loss per share | $(0.51) | $(1.09) | $(2.21) | $(3.69) |
Gross margin, calculated as revenue less cost of revenue, was approximately 13.1% in Q3 2021 versus 12.4% in Q3 2020, and 11.8% for the first nine months of 2021 versus 8.5% in the comparable 2020 period. Operating-loss margins also improved: approximately 2.6% versus 12.7% in Q3, and 10.6% versus 19.3% for the nine-month periods.
Cash flow and liquidity: For the first nine months, operating cash use was $7.14 million (versus $3.38 million in 2020), investing cash use was $0.38 million, and financing provided $7.48 million. Cash declined by $38,468 to $635,527. At September 30, current assets were $2.84 million and current liabilities $11.24 million; the reported working-capital deficit was approximately $8.40 million. Total assets were $8.63 million, total liabilities $19.18 million, and stockholders’ deficit $10.55 million.
Debt: The balance sheet reported $7.01 million of related-party loans, $1.50 million of SBA notes, $1.30 million of net convertible notes, $0.59 million of other net notes, and $1.57 million of derivative liabilities, in addition to lease liabilities and operating payables. The $912,870 line of credit shown at year-end was no longer outstanding at September 30 after the True Wireless buyer assumed it. Interest expense for the first nine months rose to $4.64 million from $2.35 million.
Material changes versus the prior comparable period
- Q3 revenue rose 14%, while nine-month revenue fell 14%. LogicsIQ growth and the new Emergency Broadband Benefit (EBB) revenue stream supported Q3; lower ECS revenue was a major offset.
- Nine-month ECS revenue fell about $8.05 million, which management attributed primarily to COVID-related limits on in-person store contact and store additions. LogicsIQ revenue increased about $1.72 million; Surge Blockchain and other revenue increased about $0.69 million.
- General and administrative expense fell 28% in Q3 and 31% for the nine-month period. Management cited lower costs in several areas, including a prior-year bad-debt expense, while advertising and marketing spending increased.
- SurgePays sold True Wireless on May 7, 2021, deconsolidating the subsidiary and recording a $1.90 million gain. The buyer assumed specified liabilities, while SurgePays retained certain other liabilities and received a $176,851 unsecured note receivable.
- Despite lower operating losses, nine-month net loss includes higher interest and derivative expenses. A $1.90 million True Wireless deconsolidation gain and $0.98 million gain on liability settlements also affected the comparison.
Outlook, risks, contingencies, and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern within the twelve months after the financial statements were issued. It cited recurring losses, $7.14 million of operating cash use, a working-capital deficit, and dependence on additional capital. Management planned to raise debt or equity, pursue partnerships and distribution opportunities, and monitor cash and expenses.
- Management outlook: The filing says the company expected continued losses and negative operating cash flow near term, while also stating it did not expect positive operating cash flow until Q4 2021. Management anticipated that easing COVID-related restrictions could support revenue recovery; these are expectations, not reported results or guarantees.
- Subsequent financing: After quarter-end, SurgePays issued $19.79 million of securities in a November 4 offering and reported net proceeds of $17.74 million after direct offering costs. Also after quarter-end, it disclosed additional notes and warrants, subsequent repayment of those notes, a $2.42 million CEO note conversion into shares, and $429,010 of related-party payable forgiveness by CenterCom. The company began trading on Nasdaq Capital Market on November 2, 2021.
- Legal and regulatory matters: Disclosed matters include a proposed FCC forfeiture of $5.50 million that management disputes; Juno Financial litigation seeking more than $1.70 million; Glen Eagles litigation with a counterclaim and a tentatively scheduled 2022 trial; and a putative TCPA class action seeking unspecified damages. Outcomes and potential financial effects are uncertain.
- Other risks: The filing discusses COVID-related uncertainty, competitive and demand volatility, difficulty raising capital, and dependence on financing to meet operating costs. Management said disclosure controls were effective but noted a lack of segregation of duties comparable to larger companies.
Important facts for investors to verify
- Whether the post-quarter public offering proceeds materially improved liquidity and reduced the going-concern risk, and how much cash remained after subsequent uses.
- Actual operating cash flow and progress toward management’s stated Q4 2021 cash-flow-positive expectation.
- Collection and quality of receivables: accounts receivable rose to $1.67 million from $180,499 at year-end, while operating cash use increased.
- Debt terms, interest costs, derivative-liability valuations, related-party balances, and dilution from convertible securities, preferred stock, and warrants.
- Developments and potential exposure in the disclosed litigation and FCC matter, as well as the business impact of the True Wireless disposal and COVID-related constraints.