SurgePays, Inc.

Good day, and welcome to the Surge Pays Incorporated Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I'd now like to turn the call over to Mr. Brian Prentiveau. Investor Relations, please go ahead.

Thank you, Operator, and good afternoon, everyone. Welcome to the Surge Pays third quarter 2022 earnings webcast and conference call. Today's date is November 14, 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 surge pay'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 afternoon. Copies of today's press release are accessible on the SurgePays Investor Relations website, ir.surgepays.com. In addition, SurgePays Form 10-Q for the quarter ended September 30, 2022. also be available on the Surge Pays Investor Relations website. 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 third quarter of this year, and the team's hard work is translating into not just growth, but growth with a strategic direction. Revenue exceeded $36 million in the third quarter, a two-and-a-half times increase compared to last year. In the first nine months of 2022, revenue increased by 131% compared to the first nine months of last year. And it's important to note this was during a timeframe where sales were intentionally throttled by management in order to grow without dilution. We believe continuing along this disciplined growth plan that we've laid out earlier this year will be rewarded in shareholder value. We're thrilled with our progress and even more excited about where the company can go in the future. Last month, we announced that we had eclipsed 200,000 mobile broadband subscribers, our year-end target, in our wireless business through the Affordable Connectivity Program, or ACP. We continue to grow our subscriber count in this huge long-term opportunity by providing subsidized broadband internet access to low-income households. As we discussed previously, Estimates vary, but it looks like there's 50 million households that qualify for ACP, and after almost a year and a half, only 14 million households have taken advantage of ACP, which puts the adoption of this benefit at around only 28%. We believe we've only scratched the surface of the program, and there's significant room for growth, which is why we're so excited about being able to do enrollments and activations over our SurgePays software platform, inside convenience stores. We will be strategic and long-term in our decision-making and business operations, especially when it comes to leveraging existing synergies to accelerate sales using our competitive advantages. 150,000 mobile broadband subscribers was my benchmark for analyzing our efficiency in purchasing our wireless equipment, our ongoing reoccurring margins, and customer retention. This evaluation has led to opportunities to expand gross margin in both our equipment and services. Additionally, we have implemented new protocols to enhance customer retention. One tool that will accelerate subscriber growth is the surge-based FinTech platform. While speaking with convenience store owners, they estimated 75% of their customers are actively using Snap EBT, to purchase things like energy drinks and food at their stores. Our platform enables the clerk at these stores to take prepaid wireless payments and can now initiate ACP customer enrollments at the checkout counter. As most of you know, receiving SNAP qualifies you to get ACP. We have created a way for the clerk to quickly enter the data we need at the time of purchase for our compliance team to work directly with the customer to enroll and activate them. The store owner is compensated for helping his customers gain access to this valuable benefit. This will help entice more store owners to sign on with Surge Pays as well. Currently, almost all ACP companies, our competitors, get enrollments using pop-up tents outside in low-income neighborhoods. The weather is now changing, and in most parts of the country where it's cold, things slow down. There's a huge opportunity for us here. To our knowledge, there is no other ACP company offering or even able to offer this opportunity to convenience store owners. This benefits both the consumer and the local convenience store owner while benefiting both of our surge pays core revenue channels. Until recently, The SurgePay Spintech platform has taken a backseat to the intense subscriber land grab in ACP enrollments and growing SurgePhone. Now we can synergize the growth of both channels. We've begun adding bandwidth into growing the network of stores using our platform. Our recent announcement of hiring Jeremy Gies as president for SurgePay Spintech is an example of that new emphasis and should be a kickstart for revenue growth. Jeremy has an extensive background in the telecom and fintech space and will be tasked with expanding SurgePay's fintech revenue by increasing the number of stores on our network, the sales per store, and margins per sale. We couldn't be more excited to add Jeremy to the team. In addition to adding Jeremy to the SurgePay's fintech team, we've also inked a new master service agreement with GPO Plus, Inc., GPO Plus is a distribution company focused on independent regional retailers. Under the agreement, GPO will be considered a master agent and will be compensated for setting up stores to transact on our network. We're excited to start seeing the benefits of a 40-plus salesperson team pulling doors, bringing sales, and what the impact of such a different sales pitch they have now when you can lead with enabling the store to offer ACP to their community. One area of focus that is always top of mind is managing our cash and cash flow and deploying that cash in the best manner possible. I like to look at current assets as a gauge of where we've been, where we are, and where we want to be. 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 and 8.3 million at the end of the second quarter and $9.5 million at the end of the third quarter with $7.5 million of cash. In the future, we will continue to balance the need for growth with the cash flow provided and the cash opportunities. I've walked a path of not diluting shareholders to finance growth. I am the company's largest shareholder, and let me tell you, I'm not eager to see my share cut. To address our cash flow needs, We're at the finish line finalizing a significant financing backed by U.S. government receivable. This will help us ramp our wireless subscriber growth over a more extended period. I couldn't be more excited about the process we've made as a company and how much more we can achieve. I'm incredibly proud of how much we've accomplished in a short time and the market that is going on around us that we've accomplished this in. and the results are starting to be demonstrated in our financial results. Revenue growth is accelerating, and we have several programs to improve margins. We're learning more and more about our subscriber base each month. We have more cash to fund growth and more tools at our disposal today than we did three or six months ago to drive growth even further. As I've said, we are uniquely positioned to offer these products and services to the underbanked and underserved, because giant corporations have overlooked these communities for a long time. The ACP program is a great government initiative that provides valuable internet access to households who previously couldn't afford it. We want to gauge success by growing revenue and profit, but we also believe we can do this by providing valuable services to households and communities that desperately need them. Being a licensed mobile broadband provider perfectly complements our existing business of providing products and financial services to the underbank and underserved communities. We still aim to reach one billion in annual sales with profitable growth in communities that have not been adequately addressed. We are now scaling a business that can 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 our financial results before summarizing today's call. Tony?

Thank you, Brian. Good afternoon, everyone. I'll begin my overview of the third quarter's financial results. For the quarter, we reported revenues at $36.2 million compared to $14.5 million in the third quarter of 2021, representing an increase of 149%. This was primarily attributable to the subscriber growth in our mobile broadband business. Gross profit increased 1% in the third quarter to $1.92 million, compared to 1.90 million in the year-ago period. SG&A expenses increased less than 1% in the third quarter compared to the third quarter of last year. While we saw decreases in most categories, including compensation, the overall increase was due to additional insurance expense. Loss from operations remained essentially flat at a loss of $1 million for both 21 and 22 of the third quarter. Net loss for the third quarter was $1.5 million, or a loss of 12 cents per share, compared to a net loss of 1.7 million, or a loss of 51 cents per share last year. Of the 1.5 million loss in the third quarter, approximately 1.4 million was due to accelerated expenses at Logix IQ related to the Can't Resume ad campaign. Additionally, the third quarter of 2022 included much lower interest rate interest expense than the prior year quarter and certain non-recurring items, including a $52,000 loss on investment in CenterCom and a $58,000 loss from amortization of debt discount. Turning to the balance sheet, liquidity and cash flow, our cash balance as of September 30th was $7.9 million compared to $6.3 million at the end of 2021. Accounts receivable has increased by over $6.2 million from year-end 2021 to $8.3 million. Receivable is from the U.S. government with a mobile broadband subsidy. Payment usually occurs within 30 to 60 days after a new customer is verified and signed up. Given our strength in 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 pass the call back to Brian for some closing remarks. Brian.

Thanks, Tony, and thanks for soldiering up there with the flu. I appreciate you powering through this. Thank you. 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 developing an ecosystem to serve this 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 first nine months of this year has proved that the opportunity is there. We've increased revenue 131% so far compared to the first nine months of 2021, and we think the path to accelerating revenue growth is right in front of us. 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 want to thank all of the employees at SurgePay. I do consider them truly a team. Lastly, I greatly appreciate the support and interest of our shareholders as we continue this journey of growth. We will now open the call to questions. Operator?

At this time, we will Begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from Michael Diana of Maxim Group. Please go ahead.

So, Brian, it sounds like you really ramped up the sales potential here in the quarter. Could you give us some more background on Jeremy Geese and also talk a little more about EPO Plus?

Yeah, sure.

Thanks for the question, and thanks, Michael.

Jeremy, we've been waiting for about a year. As you know, I'm very open about the 100% focus on the ACP program, number one. It wasn't just the land grab of profitability and revenue growth for us. It was also learning the customer base, the habits, and being able to analyze how to maximize and scale this growth without ever plateauing. So we do feel like we've got a great trajectory right now, a great understanding of the program, compliance. We bought Shockwave as a software platform and several other things that we've done to make sure we can put guardrails up to our growth. I guess about four or five months ago when I saw this coming, you know, I was like, okay, We want to be able to do this through our stores. That's the big picture long-term play is being able to provide products and financial services to folks where they shop in the corner, getting as many stores as we can on our network transacting, and ultimately that's the way we'll never get out-technologied, if you will. We'll just be able to add new products. The problem is there's only one me, and running two channels was just not going to work time-wise. So I... I called in all the favors with folks I've worked with now for 20 years in the financial services, prepaid, underbanked market, all the old godfathers, if you will, and came across a great candidate, highly, highly recommended. Hit it off. The guy's got some of the same DNA that I do, and he's a 2.0 version of me that wakes up every day and thinks about adding stores and sales. So he's going to be a huge boost for us. being able to grow that without taking any focus off my plate or my team's plate and being able to build, you know, leverage our existing infrastructure that we already have supporting these stores, but now building it from more of a conquering standpoint to go add more stores, adding sales per store, and really focus on those margins per sale. So Jeremy was a great, great hire for us, and we're already seeing as he's adding folks to his team, and we're already seeing the results of hiring him with these contracts coming in, one of them being the GPO. GPO is a very unique company it is a company on the OTC their primary let's call it tip of the spear growth product is really cool CBD products that they've that they've acquired and so they're already dealing with independently owned mom-and-pop community stores you know I think there's some solutions that will actually work with on these guys on both sides of the aisle so to speak because I'd like to offer some of their products as well here soon to our stores but the biggest The biggest, I think, I'd say partnership with them is the fact they already have 40 people that are out there actively pulling doors. And when you're pulling doors – and for those of you who don't know, that's one of the ways I got my start. So I've pulled thousands of convenience store doors. You have a couple of seconds to be able to grab that store clerk's attention and then work your sales pitch. And to anybody that's taken EBT or SNAP at their store, you see the sign up front – and you see the stickers around the store of what products you can buy, anybody that's on that program or platform to service that customer base, to be able to provide your customer base with internet, with this benefit, and kind of be that technology hub to your community, it changes the sales pitch completely from buying my stuff to, hey, I want to help you help your base. Well, to do that, here's what we need to engage together And, you know, now they're on our platform. Now they're able to do this. Oh, by the way, that same platform enables you to do prepaid wireless pop-ups. Oh, by the way, hey, we also have these products here. So that's what the GPO is just, I mean, the first domino to fall with Jeremy coming on board and having someone that's working 40-plus hours a week just solely intent on growing the store count.

All right. That sounds great. Also, you mentioned you were, quote, at the finish line on your financing agreement. Can you tell us a little more about that, or is it premature?

I don't want to say it's premature. I'm laughing because I had given a deadline of this call, and I just watched that deadline slip up a little bit. I think, you know, keep an eye out. I think, you know, it's all the last-minute acronyms. and the components where the attorneys are finalizing things. But one of the things I do want – I don't know that if I've explained – people have asked me, well, why did it take this long, and why did you hold out? Why did you intentionally throw out sales to get to this point? I want to make sure people know this is not a factoring deal. Factoring does – it allows you to grow at a 3% to 4% rate. It does not allow you to grow at the rate for us to accomplish the land grab that we want to go after. And so I want to be very clear. The borrowing base is using a factor of the receivable, but also using a factor of the inventory. And it's more of an installment sale financing where we pay back the money we pull down over nine months. It's not debt. So those of you out there who live in the balance sheet world can quickly ascertain that there's a great chance for us to leverage this to at some point next year, hopefully by the middle of next year, be not only profitable but debt-free. So it's a really unique tool that we've put a tremendous amount of time and energy into that we're really, really excited about. And we're not on the one-yard line anymore. I mean, Michael, the nose of the football is right at the line. I mean, we just need to sneak this thing across. And I do expect it to happen here shortly.

All right. Thanks, Brad.

Our next question comes from Ed Wu of Ascendant Capital. Please go ahead.

Yeah, congratulations on the crossing of 200,000 mobile service broadband subscribers. My question is, obviously, you guys have done very well, and there's a lot of big opportunity. Have you noticed any new entrants or any change in competition out in the field?

Not really. You know, I think the strong get stronger because we're all learning. Uh, you know, all of us, and we do talk amongst ourselves and we share vendors and consultants. Uh, that's the unique thing about there being such a low penetration, this market, we're not fighting each other right now. There's plenty of, there's plenty of yield for all of us. So, um, and also keep in mind too, you know, we, we bought the shockwave software platform, so we're able to kind of see market trends as well and pretty interesting data there. Um, but there's not necessarily new folks getting into the game at all. It's, uh, folks trying to figure out better ways to add more customers, trying to work on their margins and equipment costs. So it's very similar to what we're doing, and that's why I think that, you know, to maybe add a layer of why the in-store enrollment or in-store sales are so unique, all of the ACP companies out there are prepaid wireless companies. That's what they are. They're wireless carriers. We have a completely different perspective on servicing this base, this underserved, underbanked market. It was never my goal just to be a wireless carrier. A wireless MB&O, that's just one of the products that we use to attack the market, to penetrate the market, and then we bring in our entire suite of products. So with that said, we own the CRM Shockwave, which, again, for those of you that may not know, we're integrated into the National Verifier. and the National Accountability Database of the FCC. And it also integrates us into the AT&T and T-Mobile backbones, which is what we use to provide the wireless service and mobile broadband. So we're one of the, to my knowledge, the only company that offers ACP that owns their own CRM. Now stack onto that, Ed, that we own the SurgePays platform, which does payments at the store level. And I know for a fact that none of the other uh transaction companies out there there's not too many of them that do the convenience store payments none of those are actual carriers they all only do third-party transactions so we've got a significant competitive advantage here and i plan on maximizing it uh to really grow that base so i do think that there's you know this is going to open up a huge opportunity for us and to your point about competition i get asked that on every call uh one-on-one shareholder call We just don't see it, but that's no reason to stand around and keep looking. I want to sprint and do things that not only these other folks may not be thinking of, but they can't do.

That sounds great. I really appreciate the color. My last question is, obviously, there's been a lot of headlines about weakening macro, high inflation, and it's just completely pounding the people at the bottom of the social ladder. How does that help or hurt your business?

Yeah, that's a good question. And it always puts me in a unique spot because I always want to be very, very clear. I never hoped for affliction or demise or, you know, folks to be in situations that would benefit me or us as a company. But the fact of the matter is we are a safety net for those who have had those curveballs of life thrown at them. And right now, there's a lot of collateral damage for what's going on in the world or our country. And the majority of it falls on our market. I think most of the people on this call, whether gas is $3 or $5, it's not going to affect where we drive today. And most of us probably throw things at the store on our credit card without thinking too much about it. Well, that's not our base. So what it does, it actually motivates me. It motivates our team to figure out Not just, hey, how can we sell a wireless product and maximize margins? Do we want to make margins of profit? Absolutely. But can we do it in a way where we can cut their cost from who they're getting the service from now, whether it's TracFone, Boost, MetroPCS? Well, think about this. If our software is in that convenience store where they shop, they're getting the internet from us through the ACP program. the store owner is incentivized to talk to that customer and go ahead and bring them over to our prepaid wireless too, which we look to really roll out aggressively in Q1 of next year. That's other financial products and other prepaid products that we can offer where we can grow our revenue. Yes, absolutely, but we can do so by helping folks as much as we can. I've mentioned several times about having an add-on of telehealth. Again, I do not want to offer telehealth. but partnering with companies who do, putting those apps on our tablets or devices or phones, and all of those folks who cannot use telehealth because you need a credit card, but we could package it with talk, text, data, and now FaceTime your doctor. As a plan, they could go pay cash at the convenience store. That's something I definitely want to do and roll out, and as another service that we could provide these people who have been hit pretty hard, you know, like I said at the with inflation and food costs and gas prices.

Well, congratulations. I'm sure everybody appreciates all that you've done, especially all the people on your mobile broadband program. So thank you, and thank you for answering my questions, and I wish you guys good luck.

Thanks, Ed. Our next question comes from Jeff Cohn of the Wall Street Resource. Please go ahead.

Hello. You guys delivered some very nice top-line growth But from a headline standpoint, on the bottom line, you know, it reads that it missed considerably. Did you guys have, you know, higher expenses in something or missed internal projections? Or was it just due to rogue analyst numbers where the numbers differ so far?

Yeah, I don't think I would say rogue analyst numbers. I mean, I appreciate the guys that follow us and, you know, obviously – That's going to be a part of the ecosystem for me to accomplish the goals for this company. When a lot of this was laid out, there's two factors there that I think that it's contributable to. Keeping in mind, there's an upfront cost to every mobile broadband subscriber we add. There's the commission or the payment that's made to the salesperson, and then there's also the device cost. That's being entirely expensed upfront in month one. The way I look at this is kind of a rule of numbers. If you accelerate growth faster than what you had anticipated, then you're going to have more upfront expense considering that we're expensing more than we're making in the first two months. So if we had a more steady, slow growth pattern, I think you would see the expenses balanced out and a little bit more in line with what the analysts had put out there. But the fact that our sales, let's say our sales acceleration has been so successful from a business perspective, we're high-fiving from a reporting perspective. And this is where it gets into actual real business versus reporting or what you guys look at it quarterly. There's not a single person on my team that looks at quarterly or reporting and factors that into their decision-making. It's getting us to a half million subscribers as fast as possible. which is what I beat in their head, you know, on a weekly basis religiously. So, you know, I think that there's things that we don't really take into account in growing the business. And, you know, I definitely don't, you know, I don't. You know, again, I'm focused, laser focused on a couple of things. And, you know, obviously controlling costs. I mean, we're not burning money to do this. We're using our own cash flows to grow it. So, From a reporting perspective and how that falls, I think those things will take care of themselves in the next couple of months once our customer base has grown to a level where the profit from our existing reoccurring customers absorbs that upfront cost of our growth.

Okay, thank you. That was very helpful.

Thank you. At this time, this concludes our question and answer session. I would now like to turn the call back over to Brian Prentiva for any closing remarks.

Thank you, everyone. That concludes today's call. We may now disconnect.