SurgePays, Inc. Q1 FY2024 Earnings Call

Thank you, operator, and good afternoon, everyone. Welcome to the SurgePays' First Quarter 2024 Earnings Webcast and Conference Call. Today's date is May 13, 2024. And on the call today from SurgePays are Brian Cox, President and Chief Executive Officer; and Tony Evers, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see SurgePays' most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statement to reflect the events that occur after this call. Copies of today's press release are accessible on SurgePays' Investor Relations website. In addition, SurgePays Form 10-Q for the quarter ended March 31, 2024, will also be available on SurgePays Investor Relations website. And now I'd like to turn the call over to President and Chief Executive Officer, Brian Cox.

Thanks, Quinn. First, I would like to thank our shareholders and those interested in SurgePays for joining the call. As we have expanded and continue expanding our audience, I'd like to give a brief overview of who we are, what we do and our target market. Our core mission at SurgePays is to provide financial technology and prepaid wireless services to the underbanked and underserved populations at the grassroots level, where they live and shop. Studies have shown that the underbank do most of their financial transactions at the trusted local convenience store closest to their homes. SurgePays' technology layered platform empowers clerks at these convenience stores to provide a suite of prepaid wireless and financial products to underbank customers at the register. Before we dive into Q1 results, let's address the 800-pound gorilla. We are currently in a complicated environment pending government approval of continuing the funding of ACP, the Affordable Connectivity Program. The ACP funding provision made it to the floor by being attached to the FAA Reauthorization Act. So it's likely it could come to a vote with Rip and Replace another program or be attached to another bill. We could know in a few weeks. We are hopeful ACP passes, but we aren't waiting around for approval. Three months ago, I challenged my team to make a plan to replace or duplicate all ACP revenue within 12 months. I'm thrilled to announce that I believe that they have not only met this challenge but exceeded it with the successful rollout of our prepaid wireless company, LinkUp Mobile, combined with ramping up our legacy prepaid wireless top-up business. Strategic hires, new technology and other corporate initiatives have put us in a great position. Our team has put together a comprehensive strategic plan that we are confident will enable us to grow our SurgePays' nationwide network, which is a product-agnostic delivery system to the underbanked and underserved utilizing convenience stores as the points of distribution. If the ACP is funded, we will be in a fantastic situation immediately. If the ACP is not funded, I expect us not only to just replace our current ACP revenue but exceed it in 12 months with the rollout and scaling of our prepaid wireless company, LinkUp Mobile, utilizing our own distribution platform, SurgePays. As an example of the traction we've accomplished, we now have signed over 9 master nationwide dealers for LinkUp distribution and prepaid top-up business. We believe the combination of our own MVNO prepaid wireless company and the top-up platform is a compelling, long-standing distribution business to switch to us. We will help those companies roll out our program into wireless dealers, convenience stores, and bodegas. It bears emphasizing that the timing of this rollout and expected revenue growth should happen independently of ACP and is a direct result of our team's execution. Touching on our financial results for the quarter, overall revenues were affected by our decision last year to shift focus away from LogicsIQ. This effectively eliminated the $3.2 million of revenue that LogicsIQ contributed in the first quarter of 2023. However, it allowed our team to be completely focused on verticals aligned with our profitable and scalable business model. Despite the recent quarterly loss in Lead Generation revenue, we believe our new focus will benefit the company in the long term. Our Mobile Virtual Network Operator, or MVNO wireless revenue increased from $28.7 million in the first quarter of 2023 to $28.9 million in the first quarter of 2024. Gross profit increased 6% to $8.2 million compared to $7.7 million in the year-ago period, and gross margin increased about 4% to 26%. I'm looking for big things and big revenue coming from our team's future efforts and execution. Whether or not the ACP is funded, we are confident we can continue to build the largest distribution network of underbanked products and services, utilizing convenience stores as the points of distribution with or without ACP. If the ACP is funded, we plan to expand our ACP customer base with the use of our base of stores and other mechanisms in place. I'd like to emphasize this point. Our business plan never had the word ACP in it. Our team has been relentlessly working for well over a year on the cornerstone of our business: our prepaid wireless brand, LinkUp Mobile, and our fintech platform, SurgePays, which represents our distribution. Integrations with carriers, endless APIs into partners and development highlight what the team has accomplished. Our wireless and fintech products work in synergy and when combined, represent an offering never seen in our industry. Whether or not the ACP is funded, we will look to aggressively increase revenue in LinkUp Mobile and our prepaid platform transactions through strategic distribution partnerships, organic sales, key hires, and as opportunities arise, complementary acquisitions that are synergistic and accretive to our business model. Keep in mind that if ACP is not funded, millions of current ACP customers left in the lurch will be looking for a new prepaid wireless company to replace their subsidized service. It is our plan to leverage our relationship with our existing ACP base to convert them to low-cost value plans while offering aggressive promotions to the convenience stores and wireless dealers who are frontline access to those utilizing all other ACP companies. We think this will give us the upper hand in converting many ACP customers into LinkUp Mobile customers. In any scenario, we believe we have the team, the products, and the distribution to be extremely successful regardless of how the ACP funding situation plays out. We have aggressive internal targets and anticipate this contributing to positive cash flow in 2024. In the meantime, as of March 31, 2024, we had approximately $43 million in cash in the bank and are looking for accretive acquisitions. Our focus is on positive net earnings businesses that complement our model. I'll turn the call over to Tony to review our financial results before summarizing today's call.

Thank you, Brian, and good afternoon, everyone. I will begin my overview of the first quarter's financial results. For the first quarter, we reported revenues of $31.4 million compared to $34.8 million in 2023, representing a decrease of 10%. The decrease was primarily due to the operational changes by management in late 2023 to our Lead Generation services consisting of LogicsIQ with its revenues decreasing by $3.2 million. Gross profit increased 6% during the first quarter to $8.2 million compared to $7.7 million in the year-ago period. First quarter gross margin also showed improvement to 26% versus 22.1% in the first quarter last year. SG&A expenses increased by 115% year-over-year. The increase was primarily due to noncash stock compensation for management. The stock compensation relates to employment agreements signed in late 2023. We also had additional expenses for contractor and consultant fees related to the purchase of ClearLine earlier this year. Income from operations was $1.8 million during the first quarter compared to $4.6 million in the year-ago period. Net income for the first quarter was $1.2 million or a gain of $0.07 per share compared to $4.5 million or $0.32 per share in the prior year quarter. Our reported net income and EPS were $1.2 million and $0.07 per share. Our income and earnings per share were adversely impacted by the noncash expenses in the quarter, primarily related to noncash compensation to executives based on the employment agreements. For comparative purposes regarding the first quarter of 2023, adding back to $1.5 million in stock compensation in the first quarter of 2024 would have resulted in an EPS of $0.15 per share. EPS was also diluted by a 34% increase in shares outstanding related to the capital raise and the warrant conversions occurring in the first quarter of 2024. Turning to the balance sheet, liquidity, and cash flow. Our cash balance as of March 31, 2024, was $42.9 million compared to $14.6 million at year-end 2023. The increase was attributable to both the capital raise in January of approximately $17 million and the exercise of warrants during the first quarter of 2024 of over $8 million. Accounts receivables decreased by $1.3 million from year-end 2023 to $8.3 million. The ACP stopped accepting subscribers in February of 2024. As a result, our overall receivable from the U.S. government decreased as of quarter end. Given our strengthened financial position, cash balance, and capital structure, our cash allocation priorities 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.

Thanks, Tony. I believe the four key components to a company's success are the team, the products, the distribution, and the funding. I believe we have assembled the best and most experienced team in the history of prepaid wireless. We have the most compelling offering in the market currently. We own our own distribution, and we have over $42 million cash in the bank to execute our plan. I believe SurgePays is built for success regardless of how the ACP funding situation plays out. Thank you so much for your time today. We will now open up the call to questions.

The first question we have is from Andrew Scott of OIS.

It’s an interesting situation. The quarter doesn’t seem bad, considering the $2 million nonstock compensation charge. What are your thoughts on ACP? You mentioned it as the big 800-pound gorilla. Are you noticing any changes in Washington? Many senators are discussing it. Can you share anything more about what you’re observing?

Yes, thank you for the question, Andrew. It's really a day-to-day situation. Over the past month, we've learned more about civics than we ever did in school because it's directly relevant to us now. As mentioned in our script, the FAA bill was used to advance discussions, making it more likely that a vote will occur. We managed to get it out of committee, so there’s increased possibility for a vote. You can find information on ACP funding online, and more Senators have been expressing support, even over the weekend. While I don't want to dive too deep into politics, our contacts in Washington have indicated that if funding happens, everyone will want to take credit. It seems that, especially in an election year, people prefer to make a last-minute effort to show they’re helping. Regarding body language, I tend to observe those who are more connected to Washington than we are. It's important to watch what others are doing at the table rather than just the dealers. For instance, a promotion that was originally planned by AT&T to attract ACP customers who had lost service was removed last week because they believe the ACP will receive funding. That’s the kind of indicator I would pay attention to, from those who frequently engage in Washington networking. However, it's still anyone's guess what will happen next. There are about 50 million people impacted; I've heard advocacy numbers that mention 23 million households but that translates to 50 million individuals. This includes perspectives from both extremes and everything in between, across both political parties. We remain very hopeful, but we are also actively executing our business model. The timing for our launch of LinkUp Mobile couldn’t be better. Even if the ACP situation were completely stable, we would still be launching LinkUp Mobile now because of the lengthy preparation involved. So, regardless of the outcome, we are either in a fantastic position or a very strong one.

All right. Brian, any more comments on LinkUp Mobile? I know it's a new division. You said some strategic hires. Is there any kind of any more guidance you can give us on what you're looking to accomplish there?

Yes. I'm not sure about guidance since that's a tricky term on these calls. However, let me share a bit about my background for those who may not know. I entered the wireless industry early on and sold five copper line CLECs I owned when I saw demand for Boost flip phones. I've been involved in wireless since the beginning, and my goal has always been to launch a competitive prepaid wireless brand. For a long time, I hadn't found the right opportunity until now. The distribution of prepaid wireless relies heavily on solid partnerships with dealers, such as your premier wireless resellers who are widely present, even in affluent neighborhoods, because there are over 100 million prepaid wireless customers. These resellers earn money through upfront incentives for activating customers and by receiving a percentage of monthly payments made by these customers. Until recently, we lacked the right mix of resources to provide competitive payment options and attractive rates against the competition, but now we do. We can compete directly with other companies in the market. The third-party fintech providers in the wireless space don't own their wireless operations, which gives us a competitive edge. When retailers choose whether to partner with SurgePays, we can offer more incentive points using LinkUp Mobile. Instead of negotiating small margins on prepaid options like Verizon's, we can now confidently promote our product and offer substantial margins similar to what we've seen with ACP. This is the first phase of our rollout. I am incredibly excited about this, perhaps the most I've felt since receiving my first CLEC approval in Tennessee in 2005. We have an excellent team and great technology, and we are winning in direct competition. As the year continues, you will begin to see our success reflected in our results.

Yes. And I'd love to see what you guys are going to do with that $43 million in cash. There's a lot you can do. I'll finish there, but I got a couple of other questions. I don't want to hog the line.

No, I'll give one last comment. Don't forget, I started this company with a mattress on the floor, a dorm fridge, and a dog. And a credit card with a $10,000 limit. I definitely didn't have $43 million in the bank, but I'm still the same guy that did it. And I've got a fantastic team now that can help me execute on. So I appreciate the questions, Andrew.

The next question we have is from Ed Woo of Ascendiant Capital Markets.

Yes. Congratulations on the quarter and definitely managing through the ACP process. And like I said, you and a lot of people out there are rooting for this to get funded. My question is, obviously, congratulations on having such a huge war chest. Some of your recent acquisitions have been pretty minor, relatively small for technology. Do you anticipate maybe doing a major shift that maybe buying one of your competitors to expand in the MVNO space? Or will it be kind of more of the same going forward?

That's a great question. I often discuss this with our CFO, Tony. We receive offers for potential acquisitions that, while in our vicinity, aren't directly aligned with our current focus. There are certainly competitors we consider valuable acquisitions at the right moment. Right now, with numerous NDAs and contracts in play and a clear understanding of revenue from distributors, we're tracking our targets for master dealers that could bring in substantial revenue each month. Our approach is to pursue these targets, including technology service providers, selectively. If we can present a compelling offer that stands out, there's a chance that some companies may see their value dip, especially after tough experiences. We have significant, easy revenue opportunities available through our offerings. Our strategy is to tie this to our LinkUp Mobile initiative. For instance, if a competitor is active in a specific area with many activations, we need to understand what they're paying and why that master dealer is working with them. We could enhance our attractiveness by possibly offering better incentives or additional support to draw them in. We're effectively acquiring activations in this manner, and that's a practical example of how we're maneuvering now. We're preparing to launch LinkUp aggressively, and you'll be hearing more about it soon. Our market is value-oriented, which allows us to introduce competitive pricing without additional fees. We're confident in what we have and plan to promote it vigorously, seeking out opportunities to acquire competitors when they arise.

Great. Well, thank you. And I know you guys are very well, experienced to be able to take advantage of that. And congratulations and good luck.

The next question we have is from Curtis Shauger of Water Tower Research.

Congrats on your execution and what can only be described as a challenging environment with ACP. If I could for the help of all investors out there. Can you provide maybe a little bit more on the partnerships you mentioned? You mentioned master dealers. Are these folks that are going to help you populate the convenience stores in Bodegas? Or do they have a more diverse distribution network themselves?

Thank you for the question, Curtis. It's a great question because those of us in the wireless industry can sometimes take for granted the terminology we use. Our rollout strategy begins with Phase 1, where we will collaborate with master dealers or master agents. These agents typically have a designated territory in the country. They've been in the business for a long time and are familiar with the activations they will execute monthly. They order their SIM cards from dealers and generally work with two or three prepaid carriers. It's also important to note that major carriers like T-Mobile, AT&T, and Verizon each have their own prepaid brands, which adds to the mix. This approach is exciting for Tony and me because it allows us to enter a revenue stream with more predictability than what we see in the ACP segment. Once we establish our footing and gain a clearer understanding of attrition rates related to our prepaid offerings with LinkUp, we will have significant predictability. We expect the masters to order SIM cards in large quantities, and they will be responsible for activating them within a set timeframe. They engage in business with various outlets, from convenience stores to dedicated wireless retailers, providing us with a great opportunity. For context, our team comprises individuals who have been in the wireless sector since its inception, particularly in prepaid wireless. Many connections are being rekindled, and we're extremely proud of our product. The master dealer approach marks Phase 1, with Phase 2 involving online operations and leveraging our convenience store network. Although activation volumes from convenience stores may differ, these customers often demonstrate greater loyalty over time since they visit these stores frequently. Phase 3 will focus on integrating with our competitors—technology service providers that handle prepaid top-ups. Collaborating with competitors will help us increase subscriber numbers and maximize revenue. Looking ahead, we envision a 30-day timeframe for Phase 1, followed by Phase 2, and then Phase 3. By the third quarter, we should be operating effectively across all fronts, gaining a clearer understanding of our progress and the potential for rapid growth.

If I could follow up with a quick question about LogicsIQ. I know we've discussed it previously regarding its dormant or nonoperable status. However, is there any update on the potential divestment you were considering? Can you provide any insight into the current situation?

Thank you for your question, it’s a good one. It has been challenging having Tony, our CFO, juggle multiple roles, from managing prepaid underbank transactions to fintech and wireless, and then shifting focus to Lead Generation for mass tort lawsuits. This created noticeable stress within the company and was not aligned with my expectations. Honestly, I wasn't an expert in this area, and the team I was bringing in lacked expertise as well. This approach didn’t seem logical. Recently, with LogicsIQ tightening its focus, we established a partnership linked to the outcomes of certain booked cases that are currently awaiting results in various courts across the country, including cases like Camp Lejeune and 3M earplugs. We have a vested interest in these cases, which have been evaluated, and their potential value could range significantly. We are currently contemplating whether it makes sense to divest this interest since it acts as a valuable asset for us, even though it isn't classified as a GAAP asset. We have thought about whether we would consider selling it at a discount for cash access. However, in the worst-case scenario, we can hold onto it while awaiting the outcomes over the next few years, after which we would receive our share of the legal fees. That sums up our current position.

The next question we have is from Anja Soderstrom of Sidoti & Co.

So I'm just curious with the ACP not taking any more new sign-ups in February and it's stopped funding totally in April. How are you seeing the transition sort of trending? Is it that above expectations or...

That's a good question, Anja. I appreciate it. To clarify, on February 7, the government stopped allowing new enrollments. It's similar to the Obamacare open enrollment period that has closed. While they permitted us to take customers from competitors, we couldn't bring in any new customers. It seems they viewed it as a way to manage their spending without caring whether the funds went to us or another ACP company; they just wanted to limit the outflow. The drawback for us is that when transferring a customer from a competitor, the $100 credit for a tablet has likely already been used. This negatively impacted our top line revenue since that credit is unavailable for customers who haven't used it. Regarding expectations, although this is not my main focus—95% of my time is spent without mentioning ACP—I have been spending some time analyzing competitors. Interestingly, our competitors are also part of advocacy groups; even though we compete, we're currently united in ensuring the program remains funded so we can return to competing. Most companies I speak with remain optimistic. They believe, especially in an election year with bipartisan support, that there isn't much opposition to it. This is a new program that operates efficiently, funded by the government but not classified as a government program. It doesn't enrich anyone in Washington; it's truly a program for the people. This lack of dedicated advocacy has somewhat hindered its progress. However, I believe in the coming weeks we will gain clarity. The funding is set to run out at the end of this month, and I have been informed that many people tend to rally at the last minute, wanting to claim victory once they see the direction the team is headed. There seems to be growing momentum. Even over the weekend, the White House has achieved its goals over the past couple of years, and with support from the SEC and the Senate, I think we are close to a resolution. Let's see what unfolds.

Okay. That was helpful. And then in terms of your gross margin, that's been improved, also helped by the tablet sign-ups, right, rather than the in-person representatives. How should we think about that going forward? How is that rolling out?

Going forward, I have to address these types of questions with an either/or perspective. If ACP is funded, I expect to see strong gross margins and that trend continuing. If it's not, I will focus aggressively on growing LinkUp Mobile subscribers. In the short term, if gross margins are affected due to upfront incentives, promotions, and branding efforts to reach hundreds of thousands, potentially millions, of subscribers, I am fine with that. One of the advantages of having cash reserves is the ability to model, track, and chart our growth trajectory to maximize it. However, I believe the worst mistake we could make is to concentrate solely on gross margins and grow very slowly. That's not why I'm here. I aim for $140 million in revenue, and I'm challenging my team to find ways to double it—first to $280 million, then to $560 million. That's my mindset. While I recognize that making money is important, my priority right now is on growing our subscriber base to profitability, no matter the status of ACP funding.

And one last one. In earlier that you expected LinkUp Mobile in case ACP does not get refunded that should replace the ACP revenue. What type of time frame do you have on that?

We currently have SIM cards being distributed. That's a great question. We are finalizing contracts and APIs. Allow me to provide some additional context to my previous answer. Imagine you have 100 wireless dealers that you supply. After signing a deal with us for exclusive partnership with LinkUp Mobile, there’s a collaboration in place. Since you’re providing them with topping-up capabilities, your IT team will work on API integration with our platform to ensure smooth processing of all transactions, including activations and payments, along with payments for competitors. Our contracts and APIs are in the hands of my development and IT teams at this moment, and I feel like I'm putting them to the test. They are certainly working late to keep pace with sales. Additionally, we plan to start reporting on these milestones. I am genuinely excited about this. We did some preliminary reporting during ACP, and while I don't want to set unrealistic expectations, I do want to share milestones as we achieve them, such as reaching 50,000 or 100,000 users. We are eager to demonstrate what we can achieve in this non-subsidized, non-ACP market. So, keep an eye out for news in the coming weeks as we officially launch this, and I believe you'll see some remarkable developments.

We have come to the end of the question-and-answer session, and I would like to turn the call back over to Brian Cox for any closing remarks.

Hi. Thanks again for everyone who joined the call. We appreciate you. I appreciate you being a shareholder and look forward to next quarter. Have a good day. Bye-bye.

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.