SurgePays, Inc.

Greetings. Welcome to Search Pays Incorporated First Quarter 2022 Financial Results Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Brian Pennebroe, IR. Thank you. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to the Surge Pays First Quarter 2022 Earnings Webcast and Conference Call. Today's date is May 16, 2022, and on the call today from Surge Pays 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 SurgePay's 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 morning. Copies of today's press release are accessible on SurgePay's investor relations website, ir.surgepays.com. In addition, SurgePay's Form 10-Q for the quarter ended March 31, 2022, will also be available on the SurgePay's Investor Relations website. And now, I'd like to turn the call over to President and Chief Executive Officer, Brian Cox.

Thanks, Brian, and good morning, and thanks to everyone who is joining our call today. We're really excited to be able to demonstrate the success of the mobile broadband subscriber business with the financial results that are more fully reflecting the trajectory of the company. Revenue growth accelerated in a meaningful way in the first quarter of this year. As expected, net loss and EBITDA loss narrowed considerably in the quarter when compared to the first quarter of last year. The Affordable Connectivity Program, or ACP, which started off as the Temporary Emergency Broadband Benefit Program, is now a permanent part of the government budget. Just last week, as many of you noticed, the White House made formal public remarks about this program for the first time. I was excited to see this underserved market that I've worked in for almost 20 years being brought into the mainstream. For surge pays to ultimately achieve favor in the stock market, I believe we must be considered a relevant provider of important products to a large group of people who not only want our products, but need and depend on them. I've been asked several questions over the last week regarding the mention of large companies in the White House speech. I think it's important to note that these companies have always had the ability to provide subsidized telecom services to the underbanked going back to 1985. The fact is, it's not economically enticing for these companies to provide services to this market, or the literal definition of our market would not be called the underserved. The ACP program is intended to bridge the digital divide for low income households who previously did not have reasonable or affordable access to high speed mobile broadband or internet. While most of us on this call probably take quality internet service for granted, lower income households do not. In the age of COVID with closed schools or limited access to healthcare professionals, those without reliable broadband access were at a disadvantage. It was harder for school-aged children to attend Zoom or online classes. It was harder for sick people to get access to telemedicine. With inflation as high as it's been in nearly 40 years, paychecks often can't cover the rising costs of housing, food, utilities, including internet or phone service. The ACP is set up to help millions of households across the country and allow them to stay connected and maintain online access to have access to education, employment, and healthcare. In addition to the fund, to reach these individuals and families, it was reported that the FCC is prepared to spend $100 million on ACP outreach programs over the next five years. We're excited that the market of the underbanked and underserved are no longer in the shadows. Initially, Search Phone Wireless was licensed to offer this program in 14 states. As we grew our enrollment from zero customers in August of last year to over 100,000 in those 14 states, each subscriber provides $30 of monthly reoccurring revenue. This includes the cost of equipment and commissions paid to sales. Our gross margin is approximately 40% per subscriber. Last month with our announcement of the acquisition of Torch Wireless, We are now licensed to offer this program in all 50 states. We were especially excited that we're able to complete this acquisition without diluting shareholders. I believe this acquisition will also provide us the ability to initiate our online enrollment effort nationwide using a broad scope, which should drive subscriber acquisition costs lower and increase subscribers per day. We've developed a bot that communicates with people through Facebook and Instagram Messenger. After someone clicks on one of our ads, the bot communicates with them through Messenger and asks them questions while their answers are securely used to populate an ACP application. This happens automatically. We've achieved over 1,000 successful compliant enrollments online during our testing and expect to ramp this up immediately. Today, our biggest challenge is managing cash flow and growth. We are expanding our sales force into these new markets while the sales teams that started with us last year are growing just as quickly. We have ramped up the ordering of phones and tablets. The hyper growth that we're going through has two primary challenges that I want to quickly discuss. One, a new subscriber is cash flow negative for the first two months after signing up. We need to purchase the tablet and pay a sales commission all before we begin receiving the subsidy payment from the government. So we are actively managing the cash flow from the business and reinvesting in order to buy new tablets and phones while getting those in the hands of our sales team to sign up customers and subscribers. As an example, we have 35,000 tablets currently in the hands of our sales teams nationwide. Challenge number two is managing and predicting EBITDA. Faster growth today means lower EBITDA today, but higher EBITDA later, along with higher long-term shareholder value. The upfront costs depress EBITDA in the near term because of the two-month negative carry, but will level out and accelerate positive as the subscriber base continues to increase and reoccurring revenue stair-steps monthly. Our philosophy is to maximize the growth opportunity while we have it. I'm not going to shortchange the sales team's potential by limiting their ability to sign up new subscribers simply to show better EBITDA in the short term. We do believe that given our higher subscriber base reoccurring revenue and growth rates, we should show positive EBITDA in the second quarter. We believe we are uniquely positioned to take advantage of this once in a lifetime opportunity. Our company was uniquely poised to best serve this market through the grassroots approach I've utilized for over 20 years. To be successful in reaching this customer group, you must have boots on the ground in the neighborhoods and communities. And this is done by having relationships with local store owners. The true influencers for this underserved market don't originate from Silicon Valley. However, they're the people standing behind the counter at the corner store which is normally visited five to seven times a week by lower-income consumers. Being a licensed provider of mobile broadband is a perfect complement to our existing business of providing financial services to the underbanked and underserved communities. Our suite of financial and prepaid products essentially converts corner stores and bodegas into tech hubs for the underbanked neighborhoods. These corner stores Bodegas and local convenience stores are profit partners that provide prepaid debit card, wireless minutes, top-ups, and cash to digital currency conversions, as well as capture data and build a loyal customer base. You might think that the variety of these store interactions wouldn't happen at the corner store, but they do. Corner stores, convenience stores, bodegas, whatever name that you or they go by, are all integral parts of this community. They provide necessary goods to the community. They're sometimes the only option for fresh food, and as we discussed, provide financial services that people often can't access, either because they don't have a checking or savings account, or bank branches aren't located in their neighborhoods. Even the CDC has published research about the importance of bodegas to local communities. To quote from a recent CDC research report published a few years ago, and I quote, owners agreed the role of the corner store was to provide for the local community. Most store owners explained their main priority was to provide whatever goods their surrounding community needed and wanted. As one owner stated, well, it's a convenience store. It's a convenience for the neighborhood that they have everything close and accessible. They emphasize the importance of variety and of providing goods that would otherwise be difficult for this community to find. We feel this fits our model perfectly. As I've said earlier, 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. We still have a goal to reach a billion dollars 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 and through accretive acquisitions while simultaneously making money across our core revenue channels. I'll turn the call over to Tony to provide a brief review of our financial results before summarizing today's call. Tony?

Thank you, Brian, and good morning, everyone. I will begin my overview of the first quarter's financial results. For the quarter, we reported revenues of $21.1 million compared to $9.9 million in the first quarter of 2021, representing an increase of 92%. This was primarily attributable to subscriber growth and our mobile broadband business. Gross profit increased 133% in the first quarter to $2.6 million compared to $1.1 million in the year-ago period. SG&A expenses increased 14 percent in the first quarter compared to the first quarter of last year. The increase in the quarter was primarily driven by higher compensation paid to management in the first quarter, along with the higher call center costs related to the subscribers in the ACP program. Loss from operations narrowed considerably to a loss of $1.1 million from $2.1 million in last year's first quarter. Net loss for the first quarter was $1.2 million. or a loss of 10 cents per share, compared to a net loss of 4.8 million, or a loss of $1.85 per share, first quarter of 2022. As we discussed on our year-end call in March, we believe EBITDA is a useful measure of the performance of the ongoing business that excludes many non-recurring items. EBITDA improved to a loss of 873,000 in Q122, compared to an EBITDA loss of $4 million in Q1-21. As Brian mentioned earlier, while the growth in revenue and profitability from higher margin customers and products, we would anticipate becoming EBITDA positive by the second quarter of this year and generate at least $15 million in 2022 for the year. Turning to the balance sheet liquidity and cash flow, our cash balance as of March 31st was $3.4 million, compared to $6.3 million at the end of 2021. Accounts receivable has increased almost 74% as wireless subscriber growth increases. The receivable is from the US government for the mobile broadband subsidy. Payment usually occurs approximately 30 to 60 days after a new customer is verified and signed up. Inventory continues to be an area of investment as we push the hypergrowth of our mobile broadband business. We have minimal debt to unrelated parties of just over a million dollars as we spent much of 2021 cleaning up the balance sheet to position us for growth and improved performance. Given our strengthened financial position in capital structure, our cash allocation priorities now focus 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. I spent a lot of time over the past six to eight months talking with investors, analysts, and various stakeholders about the opportunity in the mobile broadband business and how the affordable connectivity program works and provides surge pays with a substantial growth avenue. As we've completed the first quarter, we started to see those results reflected in the financial statements. Whereas before we were talking mostly about cleaning up the balance sheet and what would happen in the future, we're now able to demonstrate the progress, and it shows in the financial statements. I believe everyone and every company has a plan or a goal, but I'm excited to show how our team differentiates itself by being a real company built by folks who execute daily and understand how to scale a company. I expect this double-digit growth to continue with accelerated progress and improvements in our financial statements. I want to stress again, I will not throttle our big-picture growth plans for a short-term financial report. We are laser-focused on this underbanked land rush. Our team has worked tirelessly building a foundation for this type of growth, and it's starting to bear fruit. The underbanked and the underserved have been overlooked for far too long. Our goal is to provide access to mobile broadband and essential financial services to these households and communities. We believe we are cornering the underbank market both at home and where these consumers shop, and we will continue to make moves to add to our ability to scale and increase our competitive advantages. We couldn't be more excited about the opportunities ahead, and we look forward to sharing our progress with our shareholders, employees, and partners. I would like to thank all the employees on the SurgePace team. 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?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Michael Diana with Maxim Group. Please proceed.

So based on what you said about the larger companies, I take it that you don't really regard them as competition for what you're doing, that they just aren't as focused. Is that correct?

You know, Michael, that's a good question. I think over the years I've seen and actually discussed with representatives of these companies, the challenge, it's really twofold. On one hand, if you consider that this is a third of the market out there, this lower income, then you've got to assume that This market is living in lower income housing, which is usually going to be older and have, in many cases, requirements for wiring updates. And the big companies would have to roll a truck out. They've got to update the wiring to the network interface device outside the residence. The consumer is responsible for the wiring into their residence to a jack to be able to now put a modem in. And the question is, who's going to now pay for the modem? and the other components that would be associated with the it customer support for providing wi-fi inside the customer's house in a fixed wire situation that that's one of the economical challenges for a larger company the second is that most of these companies as they've told us are not geared for the prepaid upsell and what i mean is they're geared for the combination combo products that would be set up on auto pay for consumers like us on this call and where there's always an upsell potential of other products add ons. And it's all based on just simply adding things to your credit card. They're not positioned for a prepaid transaction, which again would need to be paid in cash at a local corner store someplace of convenience to this consumer group. So again, the mere definition of underserved does qualify in this situation. And one of the reasons why the government has always put on, let's call it, awareness programs and incentivized these larger companies to create that awareness amongst people who are without access to telecommunications is simply because these companies don't push it. They don't create awareness because it's not an economically sound product for them.

Okay, great. Thanks. Let me ask you about one other thing. As you mentioned, you have a cash flow negative situation for two months. So that raises the possibility that maybe borrowing for a short term to cover this cash flow negativity makes sense. Is that something you're considering?

Yes, it is. And what's really interesting is once the receivable from the FCC or USAC, which is the division of the FCC who actually funds this program, once that receivable achieved or eclipsed, better said, $5 million a month, it's like night and day. It became now we have a $5 million receivable ongoing from the government. So that asset is what we're going to leverage and what we're in the process of leveraging now. to get lines of credit to where we can continue to kind of bust through that ceiling of, you know, there's the rule of numbers. You buy the tablet, pay the commission, receive the compensation 45 days later. We want to be able to accelerate that and kind of pop up a couple of levels by gaining access to capital through those lines of credit. So that is something we're going to do to take advantage of now being able to now being able to deploy people nationwide, but also, and maybe to use your question to expound on what I mean by lowering our cost of acquisition, the numbers that we're coming in that we're seeing online is a cost of about $20 to $25 compared to a $45 commission in the field. So we're hoping that that continues and we're able to look at more of a blended Cost per acquisition, somewhere in the $30 to $35 range, which, as you know, would significantly enhance almost a 25% drop in our cost per acquisition by being able to go direct online.

Okay, great. Thanks very much. Thank you.

Our next question is from Ed Wu with Ascendian Capital. Please proceed.

Yeah, thanks for taking my question. I was wondering, has there been any issues with churn with customers leaving this program after they sign up with you?

I'm not going to say there's an issue. There's always a component of churn or attrition when factoring, you know, when you're building your pro forma or your business model. And this goes all the way back to, I mean, you know, long distance, dial tone, the early days of wireless all the way till now. And that's, that's a component of the business. One of the unique things that I like about this specific program, the ACP is that customers are limited to one tablet per year reimbursement. So that means that if you enroll for torch wireless today, You can't just go enroll with another company and get another tablet in four months. So you are with us. So that's why when people hear me say land rush, you do want to get to that consumer first. It's very important at that grassroots level to be that place where you secured that community. The second part of that is your ability to provide service in rural areas will decrease attrition, which is why we're really excited that we've now gotten fully integrated with the AT&T network because there's not a lot of competition out there on the AT&T network. Most of the competition is in the urban areas, and it runs over the T-Mobile network. I expect attrition to be ballpark 8% to 10% ongoing, which is also why once you start hitting that rule of large numbers, once you have a large subscriber base, you have to continue to grow higher numbers per month to see your overall customer base continue to increase, which is why the access to capital using a line of credit based on our receivable is very important.

Great. And then my next question is, have you had any issues with supply chain either to get these tablets, or have you had any impact from inflation on rising costs or labor shortages to get salespeople?

You know, Ed, that's a really good question, and I get that often. And I don't have a magic – I don't have the crystal ball to know why it has not, but it really hasn't. I've got – or I should say we've got great relationships with folks that bring these devices into the country. And as it sits right now, we're one of the first-come, first-served folks to get called. And we're also looking at manufacturing our own So that, like I said earlier, we've got 35,000 devices already out in the field right now that will be activated. We expect in the next couple of weeks. Well, maintaining that supply is very important because a salesperson cannot run out of tablets or they will bounce to another competitor. So to be able to do that 30,000, 40,000, 50,000 a month, you really need an excess of 20,000 tablets. So One of the things that Tony and our sales directors are doing is actively every week modeling this out and making sure that we have plenty of devices out there and we never get throttled. So if we see something coming down the pipe in 30 days, you know, maybe a little bit, hey, these guys are only going to be able to supply us with X tablets. Then we've got, you know, somebody that we can call and get a backup and make sure and we'll fulfill that number and we'll be fine. But no, we have not seen the price increase substantially. It's like a fish market. Prices go up and down a couple of bucks, but nothing more than a couple of dollars. We're still looking in that $83 range per device, and we really haven't been throttled. The only time that we've had to throttle is when we've had a huge sales burst. I'll give you an example. Let's say that there's great weather coast to coast, and sales just explode. For example, last week, we had a day where we did over 2,000 enrollments in one day. If you have a couple of those days in a row, then it's more the cash flow challenge to get those devices than it is supply chain or inflation.

Great. Well, thanks for answering my questions, and I wish you guys good luck. Thank you. Thanks, Ed.

As a reminder, just star 1 on your telephone keypad if you would like to ask a question. Our next question is from Adam Waldo with Lismore Partners. Please proceed.

Yes, good day, Brian and Tony. Thanks very much for taking my questions. I hope you can hear me okay. Yes, hey, good morning, Adam. Good morning. Before my three topics, I just quickly want to clarify something you said, Brian, in response to the prior questioner. You talked about 8% to 10% attrition, so 90% to 92% retention, and that's an annual rate, right? You'd expect 8% to 10%. annual subscriber attrition in the ACP business, so 90% to 92% annual retention. Is that correct?

That's based off traditional, I shouldn't say traditional, but historical in this market. It's usually what we've seen is 8% to 10%. With us only having six to, was it six, seven months under our belt, it's ballpark probably what it's going to be. I normally like to have a year, a full year under our belt to see Because there's also, again, there's a couple of different factors that you've got to incorporate. Again, in rural, you see less churn. Online, and this is opposite from what most people think, an online customer normally lasts about 1.5 times longer than a customer who went to a physical location and enrolled. It's a little backwards in what you think. And you also have an increased engagement because if you signed up online and For example, using our bot, we know your Facebook profile. So we have the ability to communicate directly with you through Messenger, which as we're finding out is a lot more effective than email for this market base. So with us just launching online and just rolling out in the more rural areas, I really need at least another 90 or 120 days to give you a more accurate, in my opinion, a more accurate long-term attrition rate.

No, that's fair. So we'll check back on the second quarter call in, excuse me, in August. In terms of the three topics I'd want to cover, first is sort of financing of the negative float rate and working capital from the tablets, which you touched on in your prepared remarks and prior question, but I want to take that conversation a slightly different way. And the second is to get an update on the Logix IQ pending tax-free dividends been off to existing shareholders. So on the working capital side, Brian, at a couple of conferences you've hinted at looking at vendor financing as one option. They're obviously on the call today. Tony and you talked about looking at, I presume, some sort of either AR securitization or factoring facility as another way to address the issue. So can you talk a little bit more specifically about whether we're talking about vendor financing, AR securitization, factoring or some combination of the two for financing that call it 45 days negative working capital flow?

Sure. No, that's a good question. It's both. It's a combination. The vendors that we have are great folks. We have a personal relationship with them. We meet them in person, talk to them constantly. They're definitely profit partners who are incentivized for us to move devices, especially in a crazy time. right now. If we're calling, you pick up the phone because we're ordering by the tens of thousands. Needless to say, that's a good relationship for us. The second part of your question, which is a combination, it's not so much a factoring approach. I've never been a huge fan of factoring just by way of really the flow of the money in factoring. I like controlling our cash. I do not ever like Let me rephrase it. I have never given up the reins of our cash, ever. So I don't see me ever allowing us our money to go into someone else's lockbox and hope and pray they do the right thing and that money ends up in our account the next day. I'm just not a factoring guy. It is what it is. We are what we are. But using the receivable as an asset for more traditional bankability and also keeping in mind, too, You know, this time last year, I'm trying to, you know, we're trying to raise money on the OTC. We're completely upside down. We're burning capital. We were a different company. Now we can clearly show, you know, our cash flows, what we're doing. We've got this receivable $5 million plus from the government. So we're far more bankable, which is one of the reasons why Tony's done a great job Scouring different types of instruments, institutions, and ways for us to gain access to capital to grow without diluting ourselves by having warrants and stock and coupons and other components like that of a normal public company, you know, access to capital. We're going traditional banking to really keep the same type.

Okay. That's really helpful. So thank you. And clearly, you know, obviously with the trajectory of the business, uh, on, uh, the growth curve it's on and, and the AR, uh, being, uh, uh, top quality from, from Uncle Sam, uh, it sounds so accessing the bank, uh, market for, for, uh, for financing receivables looks, uh, looks very promising. Um, and then finally, I guess, um, with respect to Logix IQ. So, uh, On the first quarter conference call on March 24th, you all confirmed publicly, I believe, for the first time, that that business has an expected 2022 revenue of below $20 million with EBITDA margins in the mid to high teens, so-called $3 to $4 million annual EBITDA. Is that business still on track to deliver that performance? And then where do you feel you stand in terms of the timeline previously communicated as a probable timeline of being able to complete that dividend tax-free spinoff to existing shareholders sometime during the second half of this year.

Sure. No, I can elaborate on that. We do feel, you know, the – let me back up. The Logix business cycle is a unique calendar cycle based off of the mass tort lawsuits and which suits are coming to fruition and the ramp-up and amp-up prior to that. we do see where there's quite a few big hits that are coming this summer. And by hits, I mean, you know, very positives. Even since the posting of the quarter, you know, last month was a phenomenal month for Logix. So one of the things that we're working on right now with the management team at Logix, which, by the way, we have reorganized, as we talked about on the last call, Anthony Nuzzo was the you know, was running the CEO of Logix, and with his untimely passing, we've had to restructure some things, promote folks, reorganize the team. Once that was accomplished, we do feel like the trajectory of the business will end up, you know, by the end of the year, meeting the projections that we put in place. So we're pretty excited about that. We're working with the management team right now to also, how would I say this? not reduce the dependency on the, the ups and downs, but create more consistent cashflow through ancillary products, through some of their software development products they're providing. Uh, and then also not only depend on law firms for those signed retainer cases, which can be dependent on what big cases upcoming, for example, last year, roundup was a huge case that, uh, you know, really drove a tremendous amount of capital and revenue to the company. Being able to provide things on a more consistent level and achieve that cash flow break even, and then everything they do in the mass tort business would just be icing on the cake. Instead of, hey, we made some, we lost some, we made some, we lost some, hey, we made a lot, hey, we made less, hey, we made a lot. That up and down curve can happen above sea level. As far as the IPO, the spinoff that we've talked about, and we have discussed that publicly and put that out there, we've had good developments back and forth with the SEC. You know, I'm obviously kind of, those filings are, you know, not public yet, but very, very positive comment. We're very pleased with the turn of the, the most recent turn of the S-1 document. The comments that we got back were now under 10 comments. Most of those are accounting and other items in the filing that we knew we would get comments on. For example, who's going to be your CEO who's your independent board, those types of clarifications. So everything is on track. We're very excited. We're very pleased. We're really looking forward as well to the market understanding that if you are a shareholder of SurgePays, you're going to get a dividend of stock from this spin-out IPO. It's a really, you know, it's an up-and-coming company. should have a pretty tight float and ready to make a run itself. So we're looking forward to once we're able to really get that out there more publicly. And, yeah, so, Adam, that was a good question. But everything has progressed exactly as we had hoped when we talked last time.

Well, no, that's great news. Obviously that type of business in the public market typically trades at two to three times revenue given the margin profile and obviously the variability is based on that. The growth prospects, which look pretty solid here, so, I mean, obviously you have that asset being probably valued in the public market in excess of where the whole company is valued in the public market today. So we look forward to that in the second half of the year, and thanks for taking my questions as always. Thank you, Adam.

We have reached the end of the question and answer session, and this will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.