SURG - NASDAQ

Good day, and welcome to the SurgePays, Inc. Second Quarter 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brian Prenoveau. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to the SurgePays Second Quarter 2022 Earnings Webcast and Conference Call. Today's date is August 11, 2022, and on the call today from SurgePays are Brian Cox, President and Chief Executive Officer; and Tony Evers, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see SurgePays' most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure are included in the press release we issued this afternoon. Copies of today's press release are accessible on SurgePays' Investor Relations website, ir.surgepays.com. In addition, SurgePays' Form 10-Q for the quarter ended June 30, 2022, will also be available on SurgePays' Investor Relations website. And now I'd like to turn the call over to President and Chief Executive Officer, Brian Cox.

Thanks, Brian. We were tremendously busy in the second quarter of this year, and the hard work of the team is translating to not just growth, but growth with a strategic direction. Revenue exceeded $28 million for the second quarter, which is a 146% increase compared to last year. The revenue trajectory is in line with the growth path that we laid out earlier this year. So we're thrilled with the progress we've been making, but even more excited about where the company can go in the future. Last month, we announced that we had eclipsed 150,000 subscribers in our mobile broadband business through the Affordable Connectivity Program. Our target by the end of the year was 200,000 customers, which I believe we'll exceed. But I want to take time to speak more of the big picture about growing our business and the long-term opportunity that's available to us. The ACP program continues to provide affordable broadband Internet access to low-income households. Estimates vary, but we believe anywhere from 30 million to 50 million households are eligible for this program. This is all to say that while 200,000 subscribers is a nice goal for 2022, we believe there's significant room for growth beyond that, and we need to be strategic and long-term minded in our decision-making and how we operate the business. Growth and progress are never linear, and we're working tirelessly to fine-tune our operations, analyze performance and tighten the screws where necessary. As an example, in some of our recent analysis, we noticed that our higher data users were driving up average usage costs. So we went back to our carriers. We negotiated a new wholesale plan, which would ensure that no user could use beyond the cost of $15 per month to us. By pushing heavy users to this plan, we can now hedge costs, which should allow us to drive our average cost back down to around $12 per month. Our estimates show this would be an immediate impact of roughly $100,000 in savings per month. We're not simply looking to get the highest subscriber level as quickly as possible. We're looking to build a successful business to maximize the opportunity that's been presented to us. One area where that's paramount is managing our cash and cash flow, deploying that cash in the best manner possible. I'd like to look at current assets as a gauge for where we've been, where we are and if we're on target. Accounts receivable has steadily increased throughout the year from $3.2 million at the end of 2021 to $5.6 million at the end of the first quarter to $8.3 million at the end of the second quarter. At the end of the second quarter, we had $8.7 million of cash compared to $3.4 million at the end of the first quarter. The June 30, 2022, cash total includes the final cash payments made for the acquisition of Torch Wireless. Where this available cash could have been used to buy tablets and add subscribers, we believe, and still believe, that the acquisition of Torch provides us with a much better long-term growth opportunity. Recall that with SurgePhone Wireless, we were only licensed to offer this program in 14 states. With the acquisition of Torch Wireless, we can now offer the program in all 50 states and can significantly ramp up wireless subscribers online. Torch has the additional benefit of also being a licensed lifeline carrier in certain states as well. In addition to Torch Wireless, in the second quarter, we purchased a client relationship management, or CRM, software platform that we had been using as a central nervous system for managing our wireless business. The CRM houses customer information, is integrated with underlying wireless carriers, manages the plans and metering, the customer service, compliance, billing and is connected to the FCC's database clearing house. We were expensed for this service on a per subscriber basis. And as subscribers increased, our costs also increased. Looking at the growth opportunity and our internal goals for subscribers over the next few years, we made the strategic decision to buy the system outright and believe it will be cheaper to buy now than what the annual expense would be at 500,000 to 600,000 up to 1 million subscribers. The CRM platform has been rebranded as ShockWave, and interested parties can check it out by visiting shockwavecrm.com. That's shockwavecrm.com. We're doubly excited about the ShockWave CRM because it can be licensed out to other companies as well and be another source of revenue for the company. The CRM currently has 6 other ACP and lifeline companies using the system and provides high-margin Software-as-a-Service revenue to our business. This isn't the main focus of SurgePays, but it does provide nice ancillary revenue stream to the company. I wanted to highlight these opportunities to demonstrate how our team is thinking about the overall potential of this business. The cash used for Torch Wireless and to purchase the CRM could have easily been used to buy more tablets, sign up subscribers and pump our numbers for the second quarter. However, we believe that's short-term thinking. In our analysis, the cash used to buy Torch and the CRM provide a far greater payoff down the road. We have the ability to offer ACP in all 50 states. We can manage our customer base more efficiently. We believe we can lower costs, all while continue to grow our subscriber base at a really impressive rate. Going forward, we continue to balance the need for growth with the cash flow provided and the cash opportunities. We've discussed various financing opportunities in the past, and we are close to obtaining a receivables financing line. We believe a more significant line of credit, backed by the U.S. government receivable, will allow us to ramp our wireless subscriber growth over a longer period of time with less dilution. Yes, this was probably not the easiest route and has created more strain on the management team than a simple equity raise. However, we think the hard work and longer time frame is worth it as we can raise money to fund growth while not diluting shareholders and keeping float essentially the same as where it was when we listed on the Nasdaq. I honestly couldn't be more excited about all of the progress we've made as a company, but also how much more we can achieve. I'm extremely proud of how much we've been able to accomplish in a short amount of time and that the results are starting to be demonstrated in our financial results. Revenue growth is accelerating. We're learning more and more about our subscriber base each month. We have more cash to fund the growth and more tools at our disposal today than we did 3 or 6 months ago to drive growth even further. As I've said before, we believe we are uniquely positioned to best offer these products and services to the underbanked and underserved because for so long, these communities have been overlooked by larger corporations. The ACP program is a great government initiative that provides invaluable Internet access to households that previously could not afford it. We want to gauge success by growing revenue and profit, obviously, but also believe we can do this by providing valuable services that most of us on this call take for granted. Being a licensed provider of mobile broadband is a perfect complement to our existing business of providing financial services to underbanked and underserved communities. We still have a goal to reach $1 billion in annual sales with profitable growth and in communities that haven't been adequately addressed. We are now operating a business that has the ability to grow organically or through accretive acquisitions and better serve our customers. I'll turn the call over to Tony to provide a brief review of the financial results before summarizing today's call. Tony?

Thank you, Brian, and good afternoon, everyone. I will begin by overview of the second quarter's financial results. For the quarter, we reported revenues of $28 million compared to $11.4 million in the second quarter of 2021, representing an increase of 146%. This was primarily attributable to the subscriber growth in our mobile broadband business, as Brian has discussed. Gross profit increased 65% in the second quarter to $2.2 million compared to $1.3 million in the year ago period. SG&A expenses increased 11% in the second quarter compared to the second quarter of last year. The increase in the quarter was primarily driven by the professional fees and other costs associated with the company's move to Nasdaq in November largely insurance -- largely made up of insurance premiums. Loss from operations narrowed to a loss of $847,000 from a $1.4 million loss in last year's second quarter. Net loss for the second quarter was $973,000 or a loss of $0.07 per share compared to a net loss of $214,000 or a loss of $0.07 per share in the second quarter of 2022 -- or second quarter of 2021. The second quarter of 2021 benefited from several nonrecurring items, including a $646,000 benefit from a change in the fair value of liabilities. We also had a $701,000 gain on settlement of liabilities and a $1.9 million benefit from amortization of debt discount, all in the second quarter of 2021. For quarter 2 2022, EBITDA was a loss of $85,973 close to breakeven. Turning to the balance sheet, liquidity and cash flow. Our cash balance, as Brian has mentioned, as of June 30 was $8.7 million compared to $6.3 million at the end of 2021. Accounts receivable has increased by over $5 million as wireless subscriber growth increased to $8.3 million. The receivable is from the U.S. government for the mobile broadband subsidy. Payment usually occurs approximately 30 to 60 days after a new customer is verified and signed up. As Brian briefly mentioned in his remarks, we made cash payments of $800,000 to complete the Torch Wireless acquisition and $300,000 payment for the CRM system. Given our strengthened financial position, higher cash balance and capital structure, our cash allocation priorities are focused on investing in the business and maintaining ample liquidity for future growth. I will now pass the call back to Brian for some closing remarks Brian?

Thanks, Tony. As a company, our North Star is building a successful organization that provides access to mobile broadband and essential financial services to households and communities where they aren't readily accessible. We believe we are cornering the underbank market both at home, around their local communities and in the local stores where they shop. If we do this successfully, we will tap into a huge market with tremendous growth potential. The hard work our team has done is starting to really show in our financial results. We've demonstrated how the growth in revenue is trending towards profitability and how the company is generating more cash. With more cash, we can reinvest in the business to gain wireless subscribers, increase our geographic reach and improve the overall performance of the company. We aren't focused on making each quarter look as rosy as possible. We are thinking longer term about where this company can be 2, 3, 5 years down the road with a significantly larger customer base and the ability to expand our revenue streams within this market. We couldn't be more excited about the opportunities ahead of us, and we are looking forward to sharing our progress with shareholders, employees and partners. I want to thank all the employees at SurgePays. Lastly, I greatly appreciate the support and interest of our shareholders as we continue this journey of growth. We will now open up the call to questions. Operator?

[Operator Instructions] And our first question will come from Michael Diana with Maxim Group.

So you mentioned 30 million to 50 million households potentially eligible for ACP. And I know at previous investor conferences and all you've talked about certainly growing not just this year but continuing to grow next year. So what gives you confidence that these potential subscribers are still going to be there next year or 2 years from now?

Thanks, Michael. I appreciate the question. What I think what gives me the most confidence is the demand that we see when we go into these areas that -- and I don't want to have the cliche underserved and to where we just kind of wash over that word. When we go into these communities and we -- our salespeople set up these tents and the line wraps around the corner until the folks there at the tent run out of devices, that lets me know, obviously, there's a need. And I think there's an intersect of the fact that it's a product that people want and need. So I think that's how we've hit a little bit of a synergistic home run. There's different markets that I think you're going to see online when it comes to what more of the White House and other people are referring to. And I think a lot of these companies are going to be targeting existing customers, like, say, for example, the elderly who are already paying for services that now would just get a discount to their service. I don't know that necessarily there's a large group of folks, millions of folks in low-income neighborhoods who are going to be surfing on White House web pages to find access to mobile broadband. So I think the fact that we actually roll up our sleeves and go into these communities, where we already are, by the way, and that's our home, and we go in there and we set that up, that's how I believe it's cornering using our -- a little bit -- I don't want to call it a competitive advantage, but it's more home to us. And that's where we -- and we're also not a big cable company just trying to get, again, pass on discounts to existing customers. We believe that our market is transient. Most of our customer base doesn't have broadband fixed wired Internet. So that's why I believe that there's such a significant uptick. And as I referenced in my -- some of my points there. The second quarter was an introspective quarter of, okay, hey, this is -- we've proved out this model. This is going to work. If we're at 0.5 million subscribers, what would I do today, what would I look back on and see what are the incremental costs that we can avoid such as -- like we talked about buying ShockWave. What are some of the things we can do now to not look back. I mean, we could have saved a couple of million dollars had we done it this way. So that's really what -- we finally got a large enough sample once we equipped 100,000 subscribers to really start diving in and also geographically coast-to-coast because customer usage patterns are not the same in different parts of the country. So that's what gives me the belief that we can -- definitely, which we've talked about this far exceeds some of the numbers that we've put out there, but do so in a way to maximize the profit that we can make from each subscriber.

Okay. And asked a little different ways and based on what you just said. So I think you're saying there aren't that many, if any, other companies out there doing exactly what you're doing?

I think there's always going to be companies that -- I mean, anytime you're successful, there's going to be people mimicking what you do. I think what's really interesting, the companies who are capitalized like us are going to be your larger companies that do more of a fixed line or fixed, I call it, fixed wire broadband, the traditional go in the side of the house of the apartment and have a modem in the house. Those are going to be the larger capitalized companies. The wireless companies who are attempting to do it the same way we are not able to do it at the scale that we are because they're not capitalized like we are. So we very rarely, if ever, this is the reports we get back from our frontline folks, very rarely do we ever see or, let's say, we get boxed out or bump into competitors out there on the street. And then you have quite a few of the other wireless companies that are doing SIM only, which -- and just -- I don't want to glaze over that. These are devices, which is a tablet, which is the way that we -- that we put the service out. We have an 8-inch tablet, 8- to 10-inch tablet and it can also be used as a hotspot. Some of the other larger wireless companies are not going to tablet route. They're simply doing the SIM only, and then hoping that folks already have a tablet that they could put that SIM card in and use that to get their access to the Internet. I believe this market is an instant gratification market. Anytime somebody could see a tablet that's valued at $150 or so, and if you walk away with that tablet in hand, I think we'll always get that customer.

And the next question will come from Ed Woo with Ascendiant Capital.

Yes. Congratulations on the quarter and on the growth. My question is, as we head into some uncertain economic environment, do you think that, that actually helps your business or hurts your business with the weakening macro environment?

Thanks, Ed, for the question. That's an interesting one. I get asked that a lot. And I always want to navigate that carefully because I obviously never want to wish hard times on anyone. That's definitely not how we have built our company. It's to provide essential services and things that people need to help people. But what it does is, I believe it increases our potential customer pool because it adds -- the way that the economy, inflation, gas prices and what have you, it's obviously, as we've seen some of the -- from the national numbers here, it's increasing the people who are dropping down into our, let's just call it, the socioeconomic status of qualifying for our service. So I always want to be careful on how I say tough times for folks. I don't want to sound it's a beneficiary, but rather, it gives us the opportunity to help those folks. So I don't see -- it definitely doesn't create a hindrance. I mean, it increases our potential customer pool. Likewise, the -- one of the -- one of my challenges in looking at some of the government numbers for potential of this program, it's very difficult to pinpoint the immigrants. I don't know that there's a perfect dialed in number of how many immigrants there are out there that are undocumented. And this is one of the few government programs. It's the only communication program that -- where you can qualify as an undocumented immigrant, under the WIC program, which we've talked about that before. It's a program that people can qualify for to make sure that their children have baby formula, diapers and what have you. It's the WIC, W-I-C. So if you're on WIC, you qualify for this program. So that's one reason why I think my personal opinion is I think that the potential for the market is greater than what we even discussed on the call. But -- so the more immigrants that come into the country and the more folks that may be having a little bit of difficulty, yes, I think it increases our customer pull. But again, I don't want to celebrate that, but it is an opportunity for us to help more folks.

Well, I definitely know that your customers are appreciative of the product that you guys give. And then my last question is on supply -- longer-term supply chain and then inflation. Any impact on your business longer term, especially possibly getting more tablets?

Ed, I'm actually glad you asked that question. I wasn't going to get into this today because there's -- there's obviously things that we're looking at as we talked about tightening the screws is kind of the way I always tell my guys. Find ways to keep the screws tight. Find ways to make more money on the same drops of sweat that we're already dropping so that we can attain more tomorrow. One of those -- one of the big reasons why I couldn't be more excited about obtaining this -- the line of credit based on receivables is it's going to allow us to buy tablets in advance. And for those of you guys in this market of products and global sourcing, just-in-time purchasing is always going to be the most expensive type of purchasing because you're basically getting what's available right then at the price it's available for, and that's why we're seeing anywhere from $80 to $88 a tablet. If we have the capital -- and the reason we're doing that is because we're cash flowing and we're being very careful what I call redline growth. We're hitting our numbers internally, and then we're running out of tablets that month. We hit our numbers and sometimes, we hit them too fast and we run out too soon. But I was never willing to do a capital raise and dilute the company and just to achieve more sales. So with us having access to capital, no, it won't -- the supply chain doesn't affect us at all. It actually will enhance our ability to get those tablets for less because if I can put in an order with a deposit today, and I can get -- I can wait because I don't have to do just in time because I'm not using the money we made yesterday to buy tablets for tomorrow, then I can look and see a price that's closer to $72 to $75, which is huge. It doesn't sound like much saving $10 to $15 a tablet, but when you're looking at 30,000, 40,000, 50,000 a month, that's a significant difference. So again, we're a beneficiary as long. As we can pay that money upfront and as long as we don't need that money tomorrow and I can wait and get those tablets next month, the supply chain is actually helping us out. And I think that we've leveraged our relationships with the distributors. We are the first call that these guys make. Michael asked a call about some of the other companies. A lot of the companies who do the model we do are smaller. Well, if I'm buying 30,000 tablets from you a month and a smaller company is buying 2,000 tablets from you, you call me first. So that's 1 reason that we've -- we don't run out of tablets because of supply chain. We run out of tablets because we've hit our max allocation of tablets we're willing to purchase for that month.

Sounds great, and I wish you guys good luck.

Thanks, Ed.

Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.