SURG - NASDAQ

Welcome to the SurgePays First Quarter 2023 Earnings Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to, Brian Prenoveau. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Welcome to the SurgePays first quarter 2023 earnings webcast and conference call. Today's date is May 11, 2023. 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 a 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 measures are included in the press release we issued this afternoon. Copies of today's press release are accessible on SurgePays' Investor Relations website at ir.surgepays.com. In addition, SurgePays' Form 10-Q for the quarter ended March 31, 2023 will also 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. First of all, I'd like to thank our shareholders and those interested in SurgePays for joining the call. As we have expanded and are continuing to expand our audience, I'd like to give a brief overview of who we are, what we do and our target market. SurgePays brings financial and telecom products to the underbanked and underserved populations of the United States where they live and where they shop. Our goal is to build the largest direct distribution network of underbanked products and services in the country. The underbanked do the majority of their financial transactions at their trusted local convenience store that closest to their home. SurgePays utilizes these stores as the points of distribution into these communities. As we onboard stores to fintech software platform, we enable the Clerk at that store to perform transactions such as prepaid wireless activation and payments, along with reloading debit cards and other financially enabling services to improve the daily lives of those without traditional access to banks, credit, and checking accounts. One of the really great things is that our revenue is directly tied to how many essential services we provide to those who need it most. The Affordable Connectivity Program or ACP has been the revenue driver for SurgePays growth over the last two years, taking us from a Company with $50 million in revenue in 2021, to $121 million in 2022 with roughly breakeven profitability. In 2023, we are guiding to $190 million of sales with positive cash flow. The ACP offers a federal subsidy for a tablet device and a monthly cellular broadband Internet service to the recipients of any other income-based government benefit such as Medicaid, veterans pension, Section 8, and most notably, the program historically called food stamps or EBT, but now goes by the name SNAP. There are several wireless companies out there with licenses to offer the ACP program to the public. However, we are uniquely positioned as the only ACP Company that owns its own customer relationship management software platform, that's integrated with the FCC's database and also AT&T and T-Mobile. Further, we're the only ACP Company that owns one of the few prepaid transaction platforms that has a nationwide network of convenience stores. This trifecta competitive advantage paves the way for us to be the only ACT Company able to do brick and mortar sign-ups inside convenience stores, which means store owners can earn revenue by helping those and their underserved community get connected. We are utilizing this great ACP program as the enticing catalyst to build what is now over 25,000 stores to be on-boarded with a staging target of less than 12 months. In some areas, more than 30% of the transactions at convenience stores and supermarkets are using a SNAP card, which is the government benefit. Every customer who pulls out that card in the store is eligible for ACP. What's even more exciting is that, ACP is limited to one per household, and through our surveys, we know that each household has three to four smartphones on another prepaid wireless Company. With our presence in these stores where these customers shop, and the ability for these customers to pay their monthly prepaid wireless bills at the same store, it's a fantastic launching pad for our non-ACP prepaid wireless subscriber push later this year. Another exciting facet of our business is now the store owner is making money directly in partnership with helping his community, and we're the Company enabling this. Directly because of this, I've never seen a warmer reception to upselling and distributing other products to a store. Not only does our software platform have a navigation interface similar to a website for doing these transactions, it also has a wholesale marketplace back-office where store owners can order high margin products that are in-demand directly from the manufacturer. These products are the impulse consumables by the register that maybe store owners in rural areas especially have difficulty obtaining or the minimum orders from their local distributors are just too high. Using ACP to add stores to our network by the tens of thousands grows our ACP subscriber base, our prepaid top-up and payment revenue, and gives us points of distribution for selling other third party products into these communities nationwide. This is the mindset or the driving force for parlaying the success of the ACP program into exponential revenue growth in our other verticals. We are piggybacking this hot reception by store owners to have access to this offering. Even with the majority of our team's energy focused on this longer term growth model, I'm pleased to announce that the first quarter of 2023 continues the profitability trend we began to see at the end of 2022, delivering net income of $4.5 million and EBITDA over $5 million. With our funding in-place, we've secured a consistent supply of tablets at a significantly lower cost and in the meantime, we've built out the infrastructure to distribute them in the most efficient means possible. We should no longer see periods of throttling growth due to running out of devices. We expect revenue to ramp higher in future quarters. As I mentioned in the last quarter's call, the key metric is new stores on our platform going forward. More stores on our platform means more ACP sign-ups, more prepaid wireless subscribers, more products on the shelf, more transactions over our fintech platform and more sales per individual store. As always, we're focused on managing our cash, and our cash flow while deploying that cash to maximize growth. We expected first quarter revenues to align with fourth quarter 2022 revenues, and has precisely what happened, but with strong positive cash flow. We anticipate the full benefit of our lending facility to be realized toward the end of the second quarter with growth accelerating quickly, and continuing into the second half of the year. We still expect 13,000 stores to operate on the SurgePays network by the end of the year, and see positive operating cash flow during the year and only looking to raise capital for a defined opportunistic purpose. I don't normally enjoy preparing for these calls but stopping for a minute to see the fruits of your labor has changed my mind a bit, considering how the fruit looks now. I think our next couple of calls will continue elevating my smile, as we're able to continue shifting gears upward. Until then, thanks go out to the SurgePays team for pushing forward and delivering on a daily basis. I'll turn the call over to Tony, to review our financial results briefly before summarizing today's call. Tony?

Thank you, Brian, and good afternoon, everyone. I will begin my overview of the first quarter's financial results. For the quarter, we reported revenues $34.8 million compared to $21.1 million in the first quarter of 2022, representing an increase of 64%. The increased sales for the quarter were primarily attributable to subscriber growth in our mobile broadband business. Gross profit increased 192% in the first quarter, to $7.7 million compared to $2.6 million in the year ago period. First quarter gross margin also showed significant improvement up to 22.1% versus the 12.5% in the first quarter last year. SG&A expenses decreased by 22% year-over-year, this was primarily driven by a decrease in compensation expense of $875,000 from Q1 2022 to Q1 2023. Income from operations was positive for the quarter at $4.7 million compared to a loss of $1 million for the year ago period. Net income for the quarter was $4.5 million or a gain of $0.32 per basic share, compared to a net loss of $1.2 million or a loss of $0.10 per basic share in 2022 Q1. Of the $4.5 million gain in the first quarter 2022, 2023 showed an increase of gross margin of 13% over Q1 of 2022. Other income included a 33% gain on our investment in Centrecom. Turning to the balance sheet liquidity and cash flow. Our cash balance as of March 31 was $8.9 million compared to $7 million at the end of -- year-end 2022. Accounts receivable have increased by $400,000 from year-end 2022 to $9.7 million. The receivable is from the U.S. government for the mobile broadband subsidy. Payment usually occurs in the last day of the month, following the verification of a new customer with USAC. Given our strengthen in financial position, higher cash balance and capital structure, our cash allocation priorities focus on investing in the business, and maintaining ample liquidity for future growth. I'll now pass the call back to Brian, for some closing remarks. Brian?

Thanks, Tony. Hopefully, it's clear what we are building here at SurgePays. We've succeeded and continue to succeed in making significant advances in the financial profile of the Company while doing our best to protect shareholder interest. We are poised to create one of the largest direct distribution networks of underbanked products and services in the country, and a vast market with tremendous growth potential awaits. These results have proven we can do that while delivering positive cash flow. Thank you so much for your time today. We will now open up the call to questions. Operator?

Thank you. [Operator Instructions]. And our first question today will come from Ed Woo with Ascendiant Capital.

Yes. Congratulations on the quarter. My question as the economic environment continues to get weaker. Have you noticed any change with your convenience store partners either with your customer base?

Yes, good question Ed. Thanks for the -- thanks for dialing in. We've seen -- I've been involved with convenience stores and delivering underbanked products for 20 years now. One of the things that I've noticed, and it is proportionate to the macro environment, is there's two components there. The stores are looking for ways to be more efficient with their capital. And then consumers are looking for ways to obviously get more from their capital, rather their income. So, this always presents a really unique opportunity for us, because considering that -- like we talked about, we have the competitive advantage where we're normally the value-based deliverable the product and we're delivering the best value, at the best cost directly to them. When you have moments in time like this where people are aware, and they take a step back and they evaluate things instead of just staying in that same rut in the road financially, it's always good for the value-based companies like us, delivering a better cost product. So, it's not so much that all of a sudden you see more people moving into an underbanked, underserved neighborhood because there's typically not a whole lot of houses for rent. Those neighborhoods are usually pretty packed already. So I don't think that all of a sudden there's this explosion of customers. It's the customer's awareness that changes. And it's the store's awareness, if we have a way for that store owner to make more money without having to put out capital for inventory, because most of our products are just transaction. So for example, he takes down the number, helps us enroll someone for ACP. That store owner just made $12. He didn't put out any money to earn that money. So that's why it's such a hot product for him. And our other transaction products, he doesn't have to lay out money products sit on the shelf and then wait 30, 60 days to upsell that product with the risk of the inventory going bad. So it's a really strategic time for us. And I think it's one of those windows of time that we really want to take advantage of and because when times get better, these products are still going to be there and we're still going to have these relationships. So, I think that's the opportunity and that's the window of time for us related to the macroeconomic situation.

Great. That's a very good answer to my question. I wish you guys good luck. Thank you.

Thanks, Ed.

Your next question will come from Adam Waldo with Lismore Partners.

Hi. Good day, gents. Thanks very much for taking my questions. I hope you can hear me okay.

Yeah. Hey, Adam. We hear you.

Great. Thanks, Brian. So I wanted to just get a little bit to see to what extent you guys could provide a little bit of guidance on the balancing of continued hyper growth of the business through the ACP on the one hand and improving profitability by EBITDA margins and free cash flow on the other. So obviously, you had a very nice quarter here in the first quarter in that regard. Some of that was due to timing around the device delivery cadence. You've given guidance for the full-year for operating cash flow to be positive and haven’t given margin guidance in your press release, but can you talk a little bit to what you would see the progression of margin structures and cash flow looking like over the year as you try to continue to balance both scaling up subscribers and improving profitability and cash flow?

Sure. No. That's really astute question by the way. I appreciate that. Because that right there is probably I'd say on average of 30 minutes to an hour a day, the debate back and forth that Tony and I, our CFO, have when we're laying this out, so it's not just kind of what I call a jailbreak strategy of just get it done and go get sales. It's methodical and making sure we're making money because, well, obviously, we are a public Company. We're on the call right now. The core executives in our Company come from the entrepreneurial, hey, we need to make money mindset where it is our goal to make money and expand those margins as much as possible. So the thing that we look at -- and getting off into margins and the press release and what have you is a little bit challenging. But to add – I want to add a little bit more color to why of all the things that I talked about in the press release and the script, of why the stores are so advantageous for us as a distribution point for ACP, for our own MVNO subscribers and all of the other products we sell and then using ACP as that golden ticket to really just pave that way and open the door for us. It's not just the model, it's the cost. When we're paying folks out there in tents that that go out and set up the pop up tents, that's their only source of income. They're traveling hotels, gas, and their only source of income is doing the ACP program. So at the end of the day, those people require a much higher, you know, let's call it a spiff, a bounty, the payment for that. The store, this is a simple quick transaction at the store where we're simply using them to get the telephone number where our software can then engage that customer by way of chat through SMS so that the heavy lifting of that subscriber activation is done by our people. So that store owner is quick. Now we're paying the store $10 to $12 as opposed to paying someone in the field $50. So when you look at utilizing a borrowing base and our access to capital and really looking at it globally and staring at a year and saying, okay, what's more important here? Are we trying to put up numbers every 90 days? Just to make certain people out there happy or at the end of that year, at the end of that two years, do we want to squeeze in? And, again, simple math our devices used to be $93, now they're $65 ballpark. Our field sales cost us $50. At a store that costs us $12. If you run the math, I can get four store customers for every three field sales. So, you know, that's when you talk about that, that's why our bandwidth and our energy and our focus has been pushed not only on that from a standpoint of the margins, but also think about this. You kind of -- you didn't ask this, but it's kind of in line with that, customer retention and attrition. If that tent rolls through town and gets rid of all of its devices and gone, it's gone. It doesn't come back. That salesperson goes to the next town. If that customer ever has an issue, nobody to go to except the next tent that comes to town. If there's, you know, the tablet breaks or there's an issue, that most of these people don't know their Company. If it's the store that they go to three to five times a week, and they can go back in there, and that store owner has a very small residual payment just for that customer staying on the product. Well, that store owner has a vested interest to say, you know, hey, Adam. Hey, man. I tell you what, text your problem to SURG, Hey, man, the customer service, they'll help you out. They got you. They'll take care of me, man. If you need anything else, let me know. They got an email address and telephone number. We can help you. We got your back. So, it's a completely different mindset of that customer engagement being in that community permanently for retention, for lower cost, and keep in mind too, you asked specifically about margins. We're realizing the $25 to $27 lower cost for device right now as we speak. So that's why you're seeing some of these margins and we're realizing this cash flow.

Right. And the unit -- obviously the unit economics drivers are all improving and that's really nice to see on the – does that mean that as we sort of exit 2023 and you scale up to towards your target of 0.5 million subscribers as you exit the year. That we could be posting EBITDA margins into double digits in the fourth quarter even with that rate of growth, you did a mid-teens EBITDA margin here in the first.

Are you talking about per quarter or for the year?

Oh, I'm sorry. I should have been clear about that, Brian. Fourth quarter, could you exit the year with an EBITDA? Where could you exit the year for fourth quarter EBITDA margin given that you did mid-teens here in the first?

You know, I don't want to necessarily give EBITDA guidance. It's not -- and the reason I laugh at that is I know what I think it's going to be and, I would hesitate to put that out there because you guys would think I'm crazy. But at the same time, conservatively, I think you could basically take what we did in the first quarter and extrapolate that upward as a skew. I think the skew of customer growth and store growth will be more heavily skewed in the third quarter and fourth quarter. Right now, as all of these the components of bringing on a chain of stores or stores are, you've got to get your point of sale materials out, the poster, the door sticker, the gas pump starburst, the little rack card that sits up by the cash register that creates awareness for people that, hey, are you on government benefits? Well, you're entitled to this one as well. Ask at the register. That's very, very important. Simple training of the store, we've had our development team create videos, because we've quickly found out we do not have the manpower to train all of these stores that are in the pipeline. So we created if you want to call it modules of training, very simple one or two minute videos where people, store owners and Clerks can watch and basically get certified and understand our platform. So there's those components as well that have all been built that will start seeing the fruition of that. And look, we're doing the best we can to grow as fast as we can, but the right way. So you're going to see each quarter have an increase of stores because now we're more efficient and those stores are obviously compounding on what we did last quarter, and we're learning what types of stores need, what types of training. A supermarket with multiple Clerks has a different training mindset than where a store that's a bodega where the owner who has a vested interest in every transaction at that store is at the store. We've got some other integrations that are going to be really interesting where we're working with eight independently owned ATM Company software where every time somebody swipes that reloadable debit card, kind of a given that customer doesn't have a checking account, most likely they're on some type of government benefit. Being able to ask them on the screen of the ATM, if anyone in their household is on government benefits and then being able to secure their mobile number through the ATM. There's some pretty powerful things that we're going to be able to see that you -- I think let's call it the ground, the traction that’s starting to turn. They hold 18 wheeler wheels right now, but they're going pick up steam in the third and fourth quarter.

That's very helpful. I appreciate, Brian. That's helpful color. Will you permit me one more quick one? And if you will, can you give us a little bit of an update on what you've been seeing in terms of average monthly customer attrition in recent months? Is that improving, is that pretty stable around your historical levels?

It's stable, but you make -- it almost make me want to scratch my skin on that because I still itch thinking about that because it's definitely I'm kind of a maniac about that. I'm always looking for ways to keep a customer once we've earned it. All of my income that I've ever done as a business model that I ever wanted to do was always reoccurring revenue to subscriber base. And so there are definitely all types of things that we're deploying even our reward systems that we're deploying to entice customers to stay on and simply use the product. We're testing right now. Obviously, the program we talked about reimburses the device, a tablet device, but we also have access to smartphones. We don't get reimbursed for the smartphone. But is that a longer term customer if we can offer them a smartphone? If it's the SIM card only, well, then they can put that in their phone. And they can use it. Well that customer be a longer term customer? Because at the end of the day, especially as we all watched net mobile being purchased for over $1 billion with just over 2 million subscribers. They've definitely elevated what you'd consider the valuation for subscriber for prepaid wireless. So that was kind of encouraging, kind of, juiced, and jazz to all of us. But that's definitely something that we're going to continue to look at and I think the stores are going to really help us reduce attrition because like I said, that customer does business with that store. That's their guy. That's the guy that they buy their cigarettes from, their coffee from, their Doritos. They go in there three to five times a week. And it's almost a perception that I'm buying. I got my service through him or her. It's not some random Company that I got from a tent. It's them. And I need to do business with them because I see them all the time. So we really do feel like that's going really help reduce that and continue to help us grow. But it's right at where it is historically. But we're – it’s something that I have a whole team of people that constantly work on the data analysts and business intelligence of that component to definitely try to keep it at one of the better in the industry. But again, that's definitely a focus of mine personally.

Okay. Thanks very much. Best wishes for the rest of the year.

Thanks, Adam.

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

Hey, Michael.

So you've focused on stores as being extremely important here. And I've heard you mention a few numbers. I think you said 13,000 by the end of the year and then the release it says over 25,000 within 12 months. Could you tell us, like, how many active stores do you have now? And is that the program, 13,000 by the end of the year, and 25,000 by, like mid-year next year?

Yeah -- no. It's exactly what and that's allowing us time to definitely want to set -- I do not want to use the word slow roll. But like I talked with Jeremy, who's the president of our fintech subsidiary, talked to him every night. We always talk about growing the right way. And the right way is making sure that the stores have the material. You could have 20,000 transactions going through a store a week, but if your material is not up in the store, there's zero awareness that the customers need to ask at the register about our products. And for that matter, even the other products, being able to pay their prepaid Boost, Track on, MetroPCS, Cricket, the ability that now they can just pay their bill up at the register. So the point of sale material is of utmost importance at the store, making sure not only that it's shipped out to the store that it's put up in the store. We have some relationships with distributor companies like H.T. Hackney that have hundreds of salespeople that operate out of 26 distribution warehouses and regions across the southeast and Midwest, and incentivizing those salespeople to get the store set up and send us a picture of the point of sale materials set up in the store, and they get an extra little spiff per picture per store. Little things like that, we're trying, we're testing, we're comparing that to signing up, for example, a 200 store chain, where we don't have a sales guy and the store ownership is responsible and saying, hey, what's working? What's yielding the best results? So those are all the things that we're doing right now, learning from it and then implementing what's best. So to answer your question, by the end of the year, I definitely feel like we'll be over 13,000 stores that was our conservative estimate we wanted to put out there. Right now, you've got with 8,000 stores, I believe, on the network. But that can change very, very quickly. You know, we're testing and I am a testing animal. There's certain networks out there that we may look at taking over, acquiring that are just simply networks where people are doing one-off products to convenience stores where we can basically buy their pre-existing relationship of 100, 500 to 1000 stores, 2000 stores, then deploy our entire suite of products on that store, meaning that network has a much higher value to us as a Company than it did to that one-off product Company. Those are the ways that we're looking to grow that as well. So 25,000 staged over the next 12 months and, 13,000 by the end of the year. I do believe we'll exceed that, but that's what we'll go with right now.

Okay. That's great. Thank you very much.

Sure. Thanks. Good talking to you Mike.