SURGEPAYS, INC. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth in "Part I - Item 1A. Risk Factors."
Business Overview
We were incorporated in
SurgePhone wireless companies provide mobile broadband (internet connectivity) to low-income consumers nationwide. SurgePays Fintech platform utilizes a suite of financial and prepaid products to convert corner stores and bodegas into tech-hubs for underbanked neighborhoods. We are aggressively cornering the underbanked market directly to the consumer and in the stores they shop.
Please see the description in Item 1 of this Annual Report for a description of
our SurgePhone,
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COMPARISON OF YEAR ENDED
Revenues during the years endedDecember 31, 2022 and 2021 consisted of the following: 2022 2021 Revenue$ 121,544,190 $ 51,060,589 Cost of revenue (exclusive of depreciation and amortization) (108,074,782 ) (44,890,610 ) General and administrative (12,835,623 ) (12,162,547 ) Income (Loss) from operations$ 633,785 $ (5,992,568 )
Revenue increased overall by
For the Years Ended December 31,
2022 2021
Revenues
Surge Phone and Torch Wireless $ 88,351,547 $ 7,289,239
Surge Blockchain, LLC 112,911 138,106
LogicsIQ, Inc. 16,760,656 17,846,698
Surge Fintech & ECS 16,319,076 24,628,566
True Wireless - 1,157,980
Surge Pays, Inc. - -
Total $ 121,544,190 $ 51,060,589 SurgePhone and
We expect revenues to grow for each segment of the Company in future periods, specifically our subscriber base and active store count.
For the Years Ended December 31,
2022 2021
Income (loss) from operations
Surge Phone and Torch Wireless $ 11,921,855 $ 1,160,124
Surge Blockchain, LLC 56,823 124,704
LogicsIQ, Inc. 324,259 705,224
Surge Fintech & ECS (1,974,773 ) (546,665 )
True Wireless - 236,905
Surge Pays, Inc. (9,694,379 ) (7,672,860 )
Total $ 633,785 $ (5,992,568 ) Operations income improved overall by
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue for services primarily consists of tablet, phone and SIM cards and associated freight, shipping and handling costs, marketing services, data plan expenses, royalties, and out-sourced call center expenses.
We expect that our cost of revenue will increase or decrease to the extent that our revenue increases and decreases and depending on our subscriber base and store count.
Gross profit is calculated as revenue less cost of revenue. Gross profit margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods will depend on a variety of factors, including: market conditions that may impact our pricing, sales mix among devices, sales mix changes among consumables, excess and obsolete inventories, and our cost structure for manufacturing operations relative to volume. Our gross profit in future periods will vary based upon our revenue stream mix and may increase based upon our distribution channels.
We expect that our gross profit margin for product and service will increase over the long term as our sales and production volumes increase and our cost per unit decreases due to efficiencies of scale. We intend to use our design, information systems, and sales force capabilities to further advance and improve the efficiency of our revenue streams, which we believe will reduce costs and increase our gross margin.
General and administrative during the years ended
2022 2021
Depreciation and amortization
$ 12,835,623 $ 12,162,547
The increase in depreciation and amortization costs for 2022 is the result of capitalizing costs associated with software enhancements to our various software platforms in 2022.
Selling, general and administrative expenses during the years ended
2022 2021
Contractors and consultants $ 1,667,016 $ 2,284,135
Professional services 1,204,133 1,758,055
Compensation 4,780,885 3,872,765
Computer and internet 403,583 552,455
Advertising and marketing 259,393 661,238
Bad debt expense (recovery) (7,767 ) 24,841
Insurance 1,535,687 791,535
Other 2,061,100 1,458,140
Total $ 11,904,030 $ 11,403,164
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Selling, general and administrative costs (S, G & A) increased by
? Contractors and consultants expense decreased by
? Professional services decreased
legal fees of
our common stock on the Nasdaq Capital Market were the main reason for the
higher spending on professional services in 2021.
? Compensation increased from
as a result of one-time bonuses paid to various management personnel in 2022.
? Computer and internet costs decreased by 26.9% to
? Advertising and marketing costs decreased to
2021 primarily due to the normalization of advertising spending in 2022.
? Bad debt expense recovery decreased to
? Insurance expense increased to
primarily as a result of a full year of additional coverage amounts related to
the listing of our common stock on the Nasdaq Capital Market.
? Other costs increased to
due to an increase various administrative expenses such as office, building,
travel and bank fees. Other (expense) income during the years endedDecember 31, 2022 and 2021 consisted of the following: 2022 2021 Interest, net$ (1,843,396 ) $ (3,840,616 ) Change in fair value of derivative liabilities` - 1,806,763 Derivative expense - (1,775,057 )
Gain (loss) on equity investment in Centercom (89,082 ) 28,676 Gain (loss) on settlement of liabilities
336,726 1,469,641
Amortization of debt discount (115,404 ) (3,677,121 )
Gain on deconsolidation of True Wireless - 1,895,871
Settlement expense - (3,750,000 )
Warrant modification expense - (74,476 )
Other income 524,143 377,743
Total other (expense) income $ (1,187,013 ) $ (7,538,576 ) Interest expense decreased to
During the years ended
A reconciliation of the beginning and ending balances for the derivative
liability measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) is as follows at
Derivative liability -December 31, 2020 1,357,528 Fair value at commitment date 1,877,250 Fair value mark to market adjustment (1,806,763 )
Gain on derivative liability upon related debt settled (1,428,015 )
Derivative liability -
Changes in fair value of derivative liabilities are included in other income (expense) in the accompanying consolidated statements of operations.
For the years ended
During the years ended
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The equity investment in Centercom decreased by
During 2022, the Company received a forgiveness on a PPP loan totaling
In 2021, in connection with the listing of our common stock on the Nasdaq
Capital Market, 433,017 warrants were repriced at a lower exercise price to
better reflect the current market offering. No other terms had been modified. As
a result, the Company recorded a warrant modification expense of
Equity Transactions for the Year Ended
Stock Issued as Direct Offering Costs
The Company issued 200,000 shares of common stock for services rendered in
connection with the listing of our common stock on the Nasdaq Capital Market
2021. As a result, the Company recorded the par value of the common stock issued
with a corresponding charge to additional paid-in capital, resulting in a net
effect of
Stock Issued for Acquisition of Software
The Company acquired software having a fair value of
Exercise of Warrants (Cashless)
The Company issued 147,153 shares of common stock in connection with the
cashless exercise of 498,750 warrants. These transactions had a net effect of
Exercise of Warrants
The Company issued 100 shares of common stock in connection with an exercise of
100 warrants at an exercise price of
Equity Transactions for the Year Ended
Stock Issued for Services
The Company issued 13,411 shares of common stock for services rendered, having a
fair value of
Stock and Warrants Issued for Cash and Related Direct Offering Costs
The Company issued an aggregate 4,862,247 shares of common stock for
LIQUIDITY and CAPITAL RESOURCES
At
Total assets at
At
At
We expect the positive operating income results of
The following table sets forth the major sources and uses of cash for the years
ended
2022 2021
Net cash provided by or (used in) operating activities
(1,498,582 ) (376,724 )
Net cash provided by financing activities 1,457,468 21,274,486
Net change in cash and cash equivalents $ 752,158 $ 5,609,501 As a result of net positive cash provided by operating activities in 2022, the
cash increased in 2022 by
At
Notes payable - related party - See Note 6 to the Consolidated Financial Statements.
Notes payable and long-term debt - See Note 8 to the Consolidated Financial Statements.
Convertible promissory notes - See Note 9 to the Consolidated Financial Statements.
Related party transactions - See page F-29 and F-30 to the Consolidated Financial Statements.
Cash requirements and capital expenditures -At the current level of operations, the Company does not anticipate borrowing funds to meet basic operating costs. The Company may need to borrow funds to meet the hyper-growth expected to occur in the ACP in 2023.
Known trends and uncertainties - The Company is planning to acquire other businesses with similar business operations. The uncertainty of the economy may increase the difficulty of raising funds to support the planned business expansion.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which were
prepared in accordance with
While our significant accounting policies are more fully described in Note 2-Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and which require our most difficult, subjective and complex judgments.
Use of Estimates
Preparing financial statements in conformity with
Significant estimates during the years ended
Fair Value of Financial Instruments
The Company accounts for financial instruments under
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
? Level 1 - Observable inputs that reflect quoted market prices (unadjusted) for
identical assets or liabilities in active markets;
? Level 2 - Observable inputs other than quoted prices in active markets that
are observable either directly or indirectly in the marketplace for identical
or similar assets and liabilities; and
? Level 3 - Unobservable inputs that are supported by little or no market data,
which require the Company to develop its own assumptions.
The determination of fair value and the assessment of a measurement's placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management's assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
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Impairment of Long-lived Assets including Internal Use Capitalized Software Costs
Management evaluates the recoverability of the Company's identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 "Impairment or Disposal of Long-Lived Assets." Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company's business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.
If impairment is indicated based on a comparison of the assets' carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Inventory Valuation
Inventory is stated at the lower of cost or net realizable value (first-in, first-out method). For items manufactured by third parties, cost is determined using the weighted average cost method (WAC). We write-down inventory when it has been determined that conditions exist that may not allow the inventory to be sold for at the intended price or the inventory is determined to be obsolete based on assumption about future demand and market conditions. The charge related to inventory write-downs is recorded as cost of goods sold. We evaluate inventory at least annually and at other times during the year. We have incurred and may in the future incur charges to write-down inventory.
Internal Use Software Development Costs
We capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not meet the qualification for capitalization, as further discussed below, are expensed as incurred and recorded in general and administrative expenses in the consolidated results of operations.
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Revenue from Contracts with Customers
We account for revenue earned from contracts with customers under ASC 606, Revenue from Contracts with Customers ("ASC 606"), and ASC 842, Leases ("ASC 842"). The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
? Step 1: Identify the contract with the customer.
? Step 2: Identify the performance obligations in the contract.
? Step 3: Determine the transaction price.
? Step 4: Allocate the transaction price to the performance obligations in the contract.
? Step 5: Recognize revenue when, or as, the company satisfies a performance obligation.
Stock-Based Compensation
The Company accounts for our stock-based compensation under ASC 718 "Compensation - Stock Compensation" using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.
The Company uses the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options.
The fair value of stock-based compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
Stock Warrants
In connection with certain financing (debt or equity), consulting and collaboration arrangements, the Company may issue warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of warrants issued for compensation using the Black-Scholes option pricing model as of the measurement date. However, for warrants issued that meet the definition of a derivative liability, fair value is determined based upon the use of a binomial pricing model.
Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants (for services) are recorded at fair value and expensed over the requisite service period or at the date of issuance if there is not a service period.
Recent Accounting Pronouncements
In the normal course of business, we evaluate all new accounting pronouncements
issued by the
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