SurgePays, Inc.

Well, ladies and gentlemen, thank you for holding. Please stay on the line. The conference will begin in just a couple minutes. Once again, thank you for holding. Please stay on the line. The conference will begin in just a couple minutes. Thank you. © transcript Emily Beynon We'll be right back. Thank you. Thank you. Thank you. Thank you. Thank you. Greetings and welcome to the Surge Pays Inc. 4th Quarter and 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you Brian Prenevel with Investor Relations. Thank you, Brian. You may begin.

Thank you, operator. Good afternoon, everyone. Welcome to the Surge Pays fourth quarter 2022 earnings webcast and conference call. Today's date is March 30th, 2023. And on the call today from Surge Pays are Brian Cox, President, Chief Executive Officer, and Tony Evers, Chief Financial Officer. Before we begin, we'd like to let everybody know that the press release is in queue. The wire service is a bit backed up, a bit of a log jam, but we have been notified that it should be out momentarily. So you should see anything necessary in the next few minutes. 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 Surge Pay's 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 in Form 10-K. Copies of today's press release will be accessible on SurgePay's investor relations website at ir.surgepays.com. In addition, SurgePay's Form 10-K for the year ended December 31st, 2022 is also available on 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. The fourth quarter of 2022 feels like a lifetime ago, so I want to remind our listeners of some important items announced in our last quarter. We announced that we had eclipsed 200,000 subscribers in our wireless business through the Affordable Connectivity Program, or ACP. We announced the addition of Jeremy Gies as president of SurgePace FinTech. Adding Jeremy has ignited our efforts to grow our convenience store network, which will take on an increased importance in 2023, as I will discuss. Jeremy is playing the lead role in expanding store count as we build our business for sustained growth and expansion. We announced the closing of a senior credit facility on November 18th. This dedicated financing allows us to move away from ordering tablets on the high cost secondary market and order direct from the manufacturer. Going direct reduces our per device cost over 20% and allows us to utilize our financing facility more cost efficiently. I think it's important to state that switching from real time spot buying devices on the secondary market to purchasing, manufacturing, and the shipping logistics of buying direct from the factory overseas did force us momentarily to take our foot off the gas, no different than shifting gears in order to accelerate at a higher velocity. For example, we were faced with the decision of air versus ocean freight. The timing for ocean was an additional 35 days difference, but the cost savings averaged over $35,000 per staged shipment, of which there were 13 shipments. When forced to choose between optimizing the appearance of growth or maximizing the present value of current and future cash flows, we'll always choose the cash flows. I'm happy to say these shipments started arriving in March and are now in a rhythm. A dedicated staff of 40 people are now managing the activation, distribution, and fulfillment of our inventory. During this transition, we did grow our wireless base, but at a controlled and disciplined pace to minimize overpaying for devices simply to attain subscriber numbers we believe we will ultimately achieve either way. In December, we announced the resignation of Jay Jones from our board of directors and the election of Laurie Weisberg and Rich Sherfield. This announcement will be a boon to SurgePays as we continue to scale the company. Jay resigned as an independent board member only to move into a closer advisory role where he will work with us in the company's senior management. Laurie and Rich are either current or former CEOs with extensive executive experience in the tech and telecom industries. In addition to operational expertise in their respective fields, Laurie and Rich bring invaluable next level familiarity with the critical legal and governance issues we expect as SurgePace continues to grow. Subsequent to year end, In February 2023, we announced a new distribution agreement with Capital Candy, a family-owned wholesale distributor to convenience stores in New England. The agreement with Capital Candy will allow Surge Place to sell our prepaid telecom and financial products for the underbanked, including ACP signups, into over 3,000 convenience stores. It's deals like these where we start to see the impact of adding someone like Jeremy Gies to our team. As a matter of fact, we recently added another 20-year veteran to the team as VP of Sales, directly reporting to Jeremy to assist in working through a funnel of over 35 more partnerships, integrations, and similar agreements, with several of those being 10 times the number of convenience stores. In the fourth quarter, revenue exceeded $36 million, a one and a half times increase compared to last year, And we exited 2022 with 144.8 million revenue run rate. 2022 revenue increased by 138% compared to 2021. And it's important to note that this was during the timeframe where sales were intentionally throttled by management to grow without dilution. The disciplined growth plan we laid out earlier this year will be rewarded with continued revenue growth, profitability, and increased shareholder value. As previously discussed, due to us taking the foot off the gas to shift to buying devices direct, the fourth quarter clarifies that SurgePays generates a lot of cash when it doesn't have to expense customer acquisitions fully upfront, and much more of our revenue reached the bottom line with a net gain of $3 million. Looking forward, we're excited about the earnings potential of SurgePays. I've been providing prepaid telecom products to the underbank community through convenience stores for 20 years, and I've never seen the response like what we're seeing in our beta testing for in-store ACP sign-ups. Not just from the customer's response inside of a store that sees a poster or sticker, but from the store owner's willingness to sign on with us, which gives us access to offer all of our FinTech and prepaid wireless products for the underbank through his store. If a customer is on SNAP, EBT, they qualify for ACP. In many cases, the SNAP benefits are used at the store closest to the residence, which is usually the convenience store. Our store owners already have a good idea of their subsidized customer base and immediately are realizing the potential. Also, by enrolling a customer from a brick and mortar store versus a pop-up tent, we anticipate retention will be higher if the customer knows where he can go to get help if needed. and the store owner is making a residual commission, so he has a vested interest to make sure these subscribers remain active and happy. Ultimately, it is our goal to utilize the ACP program to gain access to tens of thousands of convenience stores nationwide and maximize those relationships by deploying our entire suite of prepaid and fintech products for the underbanked. The early data is really encouraging, and we anticipate this being a major revenue growth driver across several verticals. To further prepare for this growth, we've more than doubled our bilingual sales, support, and back office team at our operations center in El Salvador, where we now have over 200 people strong. As I sit back and visualize how I see the model unfolding, being able to watch both main revenue channels grow in synergy, spearheaded by experienced sales leaders, This is really electric for me. Now is the time where we work aggressively to build the foundation for a multi-billion dollar revenue company serving millions of subscribers and tens of thousands of convenience stores with operational excellence and value-minded efficiency. We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to add convenience stores to our network, and leverage those stores as points of distribution into the underbank community. The larger our national network of stores, the more powerful our economic model and more viable platform for an M&A strategy in the near future. We believe increasing our network of stores can translate directly to higher revenue, higher profitability, and correspondingly stronger returns on invested capital. We continue to focus on managing our cash flow, and deploying that cash best. I generally look at current assets as a gauge of where we've been, where we are, and where we want to be. Accounts receivable have increased throughout the year from $3.2 million at the end of 2021 to $9.2 million at the end of 2022 with $7 million of cash. Turning to guidance for 2023, we believe leveraging new alignments with distributors and additional in-store ACP signups will allow SurgePays to generate revenues of at least $190 million. We expect first quarter revenues to be relatively in line with fourth quarter 2022, given that our devices started arriving in March. We anticipate growth accelerating quickly the remainder of the year. We expect 13,000 stores to be operating on the SurgePays network and expect to see positive operating cash flow during the year. I'll turn the call over to Tony to briefly review our financial results before summarizing today's call. Tony?

Thank you, Brian, and good afternoon, everyone. I'll begin my overview of the fourth quarter and full year's financial results. For the quarter, we reported revenues of $36.2 million compared to $23.3 million in the fourth quarter of 2021, representing an increase of 155%. During 2022, we reported revenues of $121.5 million, an increase of 138% over the prior 12-month period. The increased sales for the year were primarily attributable to subscriber growth and our mobile broadband business. Gross profit increased 272% in the fourth quarter to 6.7 million compared to 2.5 million in the same period a year ago. Gross profit for the year increased 118% to 13.5 million compared to 11.4 million the prior year. SG&A expenses increased by 4.4% during the year. The increase was primarily driven by one-time bonuses paid to various management personnel and increased insurance expense related to the NASDAQ uplisting. Income from operations were positive for the year at 0.6 million compared to a loss of 6 million in the prior year. Net loss for the year was 0.7 million dollars or a loss of 5 cents per share. compared to a net loss of $13.5 million or a loss of $3.09 per share last year. Of the $7 million loss, 2022 included much lower interest expenses than the prior year and certain non-recurring items, including $89,000 loss on the investment in CenterCom, a $336,000 gain on the PPP loan, and $115,000 loss from amortization of debt discount. EBITDA for the year was $2.5 million compared to a negative $5.1 million in 2021. In the fourth quarter, EBITDA was positive $4.1 million compared to $3.5 million in the fourth quarter of 2021. Turning to the balance sheet, liquidity, and cash flow, our cash balance as of December 31 was $7 million compared to $6.3 million at the end of 21. Counts receivable have increased by over $7 million from year-end 21 to $2.92 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. Given our strength in financial position, higher cash balance, and capital structure, our cash allocation priorities focus on increasing the business, 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.

We couldn't be more excited about the opportunities ahead. It's encouraging to know we have a value-differentiating business model that has only begun to show its true potential. The foundation we are building today could set the company on a trajectory that is limited only by our imagination. The past year's successes And I believe our future successes are the product of a talented, smart, and hardworking group of folks. And I take a lot of pride and I'm thankful for being a part of this great SurgePace team who are all working to build something important. Lastly, I greatly appreciate the support and interest of our shareholders as we continue this growth journey. We will now open the call for questions.

Operator?

Thank you, sir. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two 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 star one. One moment, please, while we poll for questions. And the first question comes from the line of Michael Diana with Maxon Group. Please proceed with your question.

Okay, thank you. Hey, Brian. So I heard you about how late the new tablets arrived. You have been talking about surpassing the 500,000 ACP customer mark. Is that still a 2023 event, or does that get pushed out some?

Hey, Michael. No, I appreciate the question. No, absolutely, that's still a 2023 event. And, you know, if there was not, as Brian P. mentioned, the log jam and the press release, you'd see that in the press release as well. But, no, that's absolutely a part of where we see the growth trajectory going this year. As a matter of fact, I think we've put it out there a couple of times that, you know, this initial PO round of tablets that are coming in 15, 20,000 at a time was over 300,000 devices. So we're definitely prepped and ready to get that, get that rolling up. What's interesting is this, I don't want to call it a pause. It was strategic. We looked at attrition and we wanted to make sure and add every month, you know, we're very careful about it. And just, as I said before, I didn't want to overspend on tablets when I knew we could get them a couple of months later at a much better rate. So what we did was, in doing so, we were able to spend a little bit more time developing, looking internally, negotiating with carriers, looking at our software. So it did give us a couple of moments to spend to plan and prepare. retrain, cross-train our folks down in our operations center. So we didn't just sit idly by and twiddle our thumbs. You know, I want to make sure everybody knows that. We're working our tails off in preparation so that we could still go beyond the numbers that we expect to hit this year without hitting any plateaus.

Okay, great. And I know it's probably impossible to answer this, but given the growth of the stores as a sales point for ACP? Like in the fourth quarter, what percentage would you say of your new customers in the fourth quarter could come through the stores?

I mean, that's going to be a good guess, Michael. My hope, let me replace the word you used. Let me replace hope. I hope we maintain... our field sales level now that's a more expensive customer acquisition but it's a good baseline of incoming sales force so we want to maintain that not necessarily just exploding the outdoor field sales that's where a lot of competition is and that's where we feel like a lot of the attrition is when a tent moves into town is there for two weeks and then goes on and is out of town and then somebody else comes in four weeks uh four months from now so we do feel like that that contributes to a little bit of the attrition but it definitely was one of the drivers to get us here. So we want to keep that baseline. The store acquisition cost is about 80% less than the field sale acquisition. So from a cash flow standpoint, we would hope you would start seeing a significant skew of our sales coming from the store. because we're paying such a lower upfront cost for acquiring that customer because that store owner doesn't need the money to travel, pay hotels, pop-up tents, and their livelihood is depending on that one commission, their store. This is an add-on product for them. So it's a different dynamic, and I feel it's a far better model for us to sustain long-term. And we're the only company – excuse me, we're the only ACP company – That's able to do this through the stores because we're the only ACP company that owns a software platform that does FinTech transactions and convenience stores. So we want to get out there very quickly. We want to leverage. It's not even a competitive advantage because we really don't have competitors specifically in this channel. Uh, we want to, you know, land rush this thing as hard as we can. That's why I've basically given Jeremy the green light to bring on as many sales folks as he needs to manage. The sales funnel, get all of these deals on board. everything from California to New England, all the way down to Florida. We've got various integrations going all over the country. So we definitely expect to see those numbers continue to skew. And it's my hope that you're looking at 70%, 80% plus by the fourth quarter of our sales coming from the stores.

And as part of your guidance, I think you said you expect to have More than 13,000 stores by the end of the year. Is that the right number?

That's the number we're going to go with right now. My hope is that it's beyond that number, but we want to put out a good number that we feel we can attain. Yes.

Okay, great. Thanks, Brian. Thank you, Michael.

And the next question comes from the line of Ed Wu with Ascendian Capital.

Please proceed with your question.

Your career duration is on a tremendous growth this year. You know, I think I've asked in the past about how, you know, your business is a little bit counter-cyclical. It's obviously, you know, the consumers that you guys are targeting will have to look for, you know, increased opportunity to save money. Have you seen any significant changes in your customer base in the past three months, whether people are, you know, moving down in the economic ladder at all?

You know, that's an interesting question, Ed. That's one of those that's going to take us a little while to see. I don't know that it's such an instant impact. Now, I will say this. The federal government, when it comes to ACP, has definitely made it, I don't want to say made it easier, that's not the right phrase, but they're putting an emphasis on the program. They put a lot of grants out for companies to promote it into areas where there's not an awareness or not companies making an effort to sign folks up. So, We know that the program's been a success, but as far as the kind of call it the macroeconomic global impact of everything that's going on in the world, people falling into our category, I don't know that we'd be able to directly see that. And the reason is we're at such a hyper growth type arena. We basically are pushing out all of the devices we have. So I think you almost have to get to that edge of slowing down your growth. to see, oh, hey, there's a new group that came in, so now we've got a blip. We're able to grow so fast right now. I don't know that we would see or can see that the market has expanded. No, we definitely know that there's millions of potential customers out there. Without getting way off in the weeds, one of the things that I'm passionate about is using the ACP to get in the stores as we've talked about. But also, keep in mind, every one of these subscribers that we sign up is using talk, text, and data. Well, that's building a relationship with the carriers. That's ultimately giving us more leverage to better negotiate with the carriers on pricing. So that's going to give us the opportunity to now come back to the market, use these same convenience stores, use the same equipment that's on the counter, use the same relationship, to offer the ability for them to upsell prepaid wireless at a lower cost than the other folks out there. A lot of us watched what Mint Mobile just sold to Verizon for, and they had pretty slim margins. We're very familiar with most of the MVNOs out there. We take payments for most of the MVNOs out there. To have an ability to be an MVNO that has your own brand that's paid for by the customer with family plans and very aggressive rates to help folks out and then be able to do the transaction over our own platform. So we're not paying a third party eight, nine, 10, 15% to do the transaction there. Again, that's another significant competitive advantage that we want to take, uh, you know, really maximize by getting in the door through ACP. It's the, Oh, by the way, upsell. And then, Oh, by the way, we also have a reloadable debit card. Oh, by the way, we have these other products here to help your customers the same way we help them with the Internet. So that's really our philosophy of this rollout. So I think without driving it home too hard, I think you're going to start seeing by Q4, you're going to start seeing also not only customers skewing over the ACP customers coming in through the convenience stores. I think you're going to start to see the number of prepaid customers who are paying their own bills. Remember, ACP is limited to one per household, and there's an average, as with the survey we did, average of four to five smartphones per underbanked household. We want to go after those other devices, those other phones, that other service, both in urban and rural areas, and then be able to allow and enable those people to go pay at the convenience store that they're already going to, save them money, save them travel, and be more, I guess, more and more of a partner with the convenience store owner serving his community.

Great. Thanks for answering my question, and I wish you guys good luck. Thank you. Thank you.

Thank you.

This reaches the end of the question and answer session, and this also concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a great rest of your day.