SurgePays: High-Risk, High-Return Play With Surging Subscriber Numbers (NASDAQ:SURG)

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SurgePays, Inc. (NASDAQ:SURG) is a company focused on the underbanked and underserved communities, offering telecom, mobile broadband and fintech services. All the action at the moment is in their mobile broadband service, which is taking off in a dramatic fashion, but first a quick introduction of their fintech business.


The company leverages a network of local community shops for offering mainly financial services for the underbanked, using their own software platform.

This is a low-margin (4-6%) business, as they are selling services for third parties. Here are some of the Fintech products on offer:

FinTech solutions

SURG IR Presentation

The idea is to increase the network of participating shops and then use their position as a kind of Trojan Horse, then start selling their own product and services as well, generating much higher margins.

One idea that management has ventilated was telehealth services, which would also produce societal benefits as it could unburden emergency services which many underserved Americans use as the first line of healthcare services.

This seems a nice concept, and having a network of local shops hooked up to their own software seems a pretty leverageable asset to us, but the action at the moment is elsewhere, in their mobile broadband services.

Mobile Broadband Services

Last year, the company started to leverage the network of partner stores to offer telecom services:

Touch Wireless acquisition

SURG IR presentation

It’s here where the action is

The company serves as an MVNO (mobile virtual network operator), using AT&T (T) and T-Mobile’s (TMUS) wireless backbones which costs them $15 (depending on data usage of the customer and they have hedged against heavy users so the costs are more like $12 on average).

So gross margins are 50%+, perhaps closer to 60% after the cap of $15 cost per user for heavy data users they negotiated with carriers.

They go out Obamacare open season-like, with tents in the vicinity of their community shops with banners saying “Free Internet.” Indeed, they do offer free internet and an $11 tablet to boot, which is why they are signing up so many subscribers.

How does this work? This works via the ACP, the Affordable Connectivity Plan, part of the recent large infrastructure bill aimed at solving the digital divide.

ACP provides a $30/M subsidy and up to $100 per tablet, so SurgePays is getting paid by the Government. The market for this is huge, some 30M to 48M U.S. households, and this could be more if one counts the immigrants that qualify for the WIC program (they’ll automatically qualify for ACP as well).

With the acquisition of Torch Wireless in April, they can now operate in all 50 U.S. states, also producing economies in customer acquisition (through national campaigns like unleashing bots on social media). Subscriber growth moved from:

Indeed, from the SurgePays CEO Brian Cox (linked PR):

It’s been my experience that scaling to the next 150,000 subscriber milestone should be much quicker based on economies of scale, software efficiencies and factoring most of the last year we only had 14 states. Now, we have all 50 states, are hitting on all cylinders and reinvesting the gross positive cash to accelerate sales growth.

Acquisition costs are $45 in the field and $20-$25 online and the process is helped by their acquisition of a CRM platform called Shockwave, which they also license out to six other companies (providing some additional revenues).

Most people still come from field signups (1200-1500 a day), but some 300 online, which has the advantage not only of being cheaper, it also gives them additional data which can be used for selling additional products.

A pending receivables credit would enable the company to buy even more tablets in advance, which is the real limiting factor to the company’s growth at the moment (Q2CC):

we don’t run out of tablets because of supply chain. We run out of tablets because we’ve hit our max allocation of tablets we’re willing to purchase for that month.

At the same time as enabling to buy more tablets in advance, this will improve the timing and the margins on the tablets, which cost them $80-$85 today (Q2CC):

I can wait because I don’t have to do just in time because I’m not using the money we made yesterday to buy tablets for tomorrow, then I can look and see a price that’s closer to $72 to $75, which is huge. It doesn’t sound like much saving $10 to $15 a tablet, but when you’re looking at 30,000, 40,000, 50,000 a month, that’s a significant difference.

But the credit line hasn’t been established yet but with $8.7M in cash and $8.3M in government receivables, that shouldn’t really be a problem.

While the market is huge and just taking off, most of the competition consists of either bigger well-capitalized companies that mostly go for fixed-line home broadband services or less well-capitalized companies that go the mobile route but with a sim card-only approach as they lack the capital to buy the tablets.


Revenue ($28M) growth was pretty spectacular in Q2 at 146.1% and it was also $7M up from Q1. This chimes with subscriber growth, which was roughly 50K in the quarter:

  • 50K tablets at $100 = $5M
  • 50K subscribers at $30/M = $4.5M, but not all of these subscribed right at the start of the quarter so this is more like half of that, $2.25M.

One also has to realize that:

  • Revenue is recognized when an ACP application is completed and accepted, this can take 3-60 days.
  • Probably not everybody that signs up is accepted
  • There is also likely to be some churn

But grosso modo reported subscriber growth and revenue growth chime, which removes one worry as the stock is shorted and we’re looking at what could motivate that. It’s not revenue or subscriber growth.

Here is the H1/22 disaggregated revenue from the Q2/22 10-Q:

Disaggregated revenue

SURG Q2/22 10-Q

And the previous quarter disaggregated view, from the Q1/22 10-Q:

Disaggregated revenue

SURG Q1/22 10Q

At first sight, it is curious that Torch Wireless produced $3M in revenues in Q1 while its acquisition was only announced in April, but apparently, the closing date for the acquisition was January 1, 2022, per the Q2/22 10-Q as they were already managing their affairs and payments.

So all the growth is produced by Torch, as Surge Phone Wireless produced $11M both in Q1 and Q2. Not bad for an $800K acquisition, although they pay a royalty of $2-$3 per subscriber, but that’s a one-off and basically a rounding error.


Gross margins are still low, which is no surprise:

  • Their fintech business generates a 4%-6% margin.
  • The tablets generate roughly 10% margin.
  • The broadband subscriptions generate 50%+ gross margin but initially have to absorb $45 customer acquisition cost.

This will all gradually improve though:

  • Financing on government receivables enables better timing with the acquisition of tablets, improving the margin (as well as enabling faster subscriber growth). This could reduce tablet costs by $10+
  • The installed base of subscribers grows and becomes much bigger than the number of new subscribers (which initially bring low margin as a result of the one-off acquisition cost).
  • Management mentioned hedging against heavy data users, driving down average subscriber cost to $12 which would increase the margin on subscribers further.

So margins are set to improve especially with the growing base of subscribers, and this will also improve cash flow.

OpEx isn’t increasing nearly as much, it only grew by 11% in Q2 and this was mostly related to Nasdaq listing cost, so we can expect a good deal of operational leverage to kick in.

What is a bit concerning is the interest (24%) they pay on the $5M notes they took out in April this year, from the 10-Q:

In April 2022, a maximum of $3,000,000 was made available to the Company, issued pursuant to a series of 270-day (9 months) revolving notes for purposes of purchasing inventory. In June 2022, this amount was increased to $5,000,000. The notes will accrue interest a monthly rate of 2% (24% annualized). The Company may take drawdowns based upon eligible accounts receivable. In the event that eligible accounts receivable is less than 80% of the loan amount, within four (4) business days, the Company will be required to make a payment to the lender so that the loan amount is no greater than 80% of the then current eligible accounts receivable. The maximum amount outstanding under the loan is the lesser of $5,000,000 or 80% of eligible accounts receivable. Additionally, any related accrued interest associated with this mandatory payment will also be due. These advances are secured by all assets of the Company.

Receivables rose to $8.3M at the end of Q2 so there are no worries on that part, but the interest rate is very steep. Management argued on the Q2CC that they were close to opening a receivables financing line so it looks like this problem might be diminished or even eliminated fairly soon.


Readers might have spotted a line in the disaggregated revenue tables above saying LogicsIQ. They produce is enterprise software for law firms representing plaintiffs in Mass Tort legal cases.

There is going to be a dividend tax-free spin-off to existing shareholders somewhere in H2 after the company has worked with the management of LogicsIQ to smooth out the revenue stream more evenly throughout the year (which is driven by sudden bursts in Tort Law cases), and achieve cash flow breakeven. It’s in discussion with the SEC (Q1CC):

We’re really looking forward as well, to the market understanding that if you’re a shareholder of SurgePays, you’re going to get a dividend of stock from this Spinoff IPO.


Fully diluted (including the 5.7M warrants), there are 17.8M shares outstanding for a market cap of $89M (at $5 share price). Cash holdings at $8.6M even exceed debt at $6.7M so EV is a fraction smaller. Here is management guidance for FY22 (earnings PR):

  • Total revenues of at least $130 million.
  • EBITDA is expected to be at least $15 million.
  • Greater than 200,000 subscribers in the mobile broadband business.

That is, the shares sell below 0.7x EV/S and on the $15M+ FY22 EBITDA the shares would sell at an EV/EBITDA multiple below 6x.

Here is another perspective, end-of-year run rates. On present subscriber growth, the company could easily have 250K+ subscribers by the end of the year and 400K by the end of next year.

This would produce the following end-of-year run rates for their mobile broadband business (based on a 50% gross margin and $15M in OpEx):




Revenue run rate



Gross profit



Net profit






Keep in mind that these are end-of-year run rates (albeit for their mobile broadband business only), actual FY22 and FY23 revenues from the mobile broadband business will be lower as subscribers rise during the year only reaching these figures by year-end.

The CEO argued that the growth is likely to continue for 2.5-3 years as they have hardly begun to scratch the surface of the 48M households qualifying for ACP. This could very well be a 1M+ subscriber business in a couple of years.


There is likely some attrition, but unlikely to be above the typical 8%-10% industry rates and it could very well be less as the service is essentially free for users (but they have to keep using it in order to remain qualified for ACP).

Then there is the ACP itself, which depends on politics, but it had broad bipartisan support as part of the infrastructure bill. Not really a vote winner trying to curtail that, the internet is a crucial channel for access to jobs, education and services like healthcare these days.

Recession and inflation aren’t likely to dent the growth much either, if at all. While attrition might go up a bit in case of a recession, there would be more families qualifying for the ACP subsidies.

Then there are the shorts:

SURG short

Given what we’ve seen on recent trading, it’s probably over 1M by now. The float isn’t huge, there are only 12.1M shares outstanding and insiders hold some 3.7M of these although the stock has little institutional ownership (4.6%).

Management has to be blatantly lying about something for the short thesis to pan out. The subscriber growth is backed by revenue growth. The company is bleeding little cash and its operating metrics are set to improve markedly if the growth continues. It seems to add up for us, but perhaps they’re betting on the demise of the ACP budget.


The company has a lot going for it. It has hardly begun to scratch a huge total addressable market (“TAM”), providing an unbeatable proposition (free internet) to ACP-qualified subscribers. Fast growth can continue for years.

The subscriber growth is limited by the number of tablets they can pre-finance, but a pending finance deal on the government ACP receivables should lessen this limit (and improve the margins on the tablets).

While margins are still low, with an increasing base of subscribers for their mobile broadband business these will set to improve and the company will start to produce cash.

The shares are pretty cheap, held down by a seemingly increasing short position, management owns well over a third of the company and they aren’t selling shares.

The risk is in the continuation of the ACP but given the digital divide and the importance of the Internet for access to jobs, education, and services like healthcare, we’re not overly worried about that.

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