SurgePays, Inc., (SURG) a microcap that recently uplisted to Nasdaq, is a financial technology and telecommunications company, providing services to the underbanked community in the United States.  

SURG is on the verge of transitioning from a history of losses to profits.  In 2021 the company had negative EBITDA of $5 million.  Guidance for 2022 is for EBITDA of $15 million.  At the current EV, SURG is trading at an EBITDA multiple on 2022 guidance of 2.5X.  Seems attractive for a company growing sales at a rate of 130% and which is forecast to become EBITDA and earnings positive this year.   

I will focus on the business segment leading to the dramatic change.  SURG is a mobile virtual network operator (MVNO) that is licensed by the FCC to provide mobile broadband service under the new Affordable Connectivity Program (ACP), the successor government program to the Emergency Broadband Benefit (EBB) program.  The ACP program began in August 2021 and is funded with $14 billion to provide subsidized broadband to low-income households in the U.S. With households currently eligible for the program are in the range of 33 million and enrolled households in the range of 6 million, the growth potential is obviously enormous. 

Below are a couple of links to sites that describe the program:

https://www.educationsuperhighway.org/acpbenefit/?gclid=Cj0KCQjwvLOTBhCJARIsACVldV3BI2hhYzFFG3EOBXpMN3nrTF-nQqDf0YTfHaJHkE7w2G_c3EN17TsaAti7EALw_wcB

https://www.fcc.gov/broadbandbenefit

SURG with its purchase of Torch wireless is now licensed in all 50 states as an ACP provider through its MVDO.  SURGE started offering the service in August of 2021.  As of March it had 100,000 subs and is adding on average 1,000 subs a day.

The economics of the subsidy is that SURG receives a $100 reimbursement for every tablet sold and $30 per month for broadband service.  The tablet costs SURG $80 and the commission to the salesperson is $45.  They receive $130 within a month for the tablet and a first-month service fee from the government.  So, the payback creates very attractive balance sheet economics. 

 Regarding the service, revenue is $30 a month and the direct cost is $12, so GM is 60%.  SURG projects exiting 2022 with 200,000 subscribers.  They also think they can get to 2,000 additions a day at some point, so guidance could move north in a meaningful way and sets up 2023 to also be a year of tremendous growth in this business. 

SURG also has services that are in 8,000 C Stores and Bodegas in the eastern half of the U.S.  This business consists of providing a suite of products and services for the underbanked, including pre-paid wireless top-up, gift cards, debit card reloads, payment services, and wholesale eCommerce.  While this business is growing and moving toward break-even and could add to value now and in the future, it has had a legacy of losses.  I am assuming little improvement in this business as the investment thesis is based on the huge opportunity with the ACP program. 

Capital Structure

The company currently has 12,063,000 shares outstanding and 5,290,000 warrants outstanding at an exercise price of $4.73, with an expiration date of November 2024.   At current prices, SURG stock can appreciate 42% before the warrants have a dilutive effect.  Warrants would also bring $25 million in cash into the company or $1.45 per share after exercise. 

Owner/Manager

While not always a measure of success I think it’s a positive, especially in a micro-cap, that the CEO, Kevin Cox, owns approximately 40% of the company.  Mr. Cox has been Chief Executive Officer and a Director since July 2017.  He was the majority owner of True Wireless from January 2011 through April 2018, when True Wireless became a wholly-owned subsidiary of the Company. Mr. Cox has grown companies for nearly 20 years that have delivered telecom, broadband, and financial services to the unbanked and underserved segments of society.   

Financial Pro-Forma

Revenue in 2021 was $51 million with EBITDA of negative $4 million.   For 2022, mainly due to the hyper-growth in the ACP program sub adds, revenue is projected to increase 160% to $130 million with EBITDA of $15 million and earnings per share of $1.20.  For 2023 I am forecasting $200 million in revenue with EBITDA of $30 million, an increase of 100%, and earnings per share of $1.90. 

Valuation

The share price should start to rise once the company reports a couple of quarters of high growth and positive cash flow and earnings.  Therefore, for modeling, I am assuming a share price above the warrant exercise price of $4.75.   I add $25 million to cash and 5.3 million to the share count bringing it to 17.3 million.   With these numbers, my model shows $.75 cents earnings in 2022 and $1.38 for 2023.  8X earnings seems reasonable for a starting point, using that metric and adding $1.45 in cash for 2022 and another $1.50 in cash by end of 2023 from operations, I get a share price of $7.50 for 2022 and $14.00 for 2023.  These numbers put the EBITDA multiple to EV in the range of 6.8X to 6.5X for 2022 and 2023 respectively. 

My interest in SURG, which I consider a special situation, is based on the opportunity for high growth with the ACP program in the near term.  I do not think the story is well known and the numbers have not yet been reported showing that growth.  I would not be interested in this for the legacy SURG wireless business and C Store/Bodega services to the underbanked

Possible opportunity for a one to two-year hold and a 140% to 330% return potential.