• Surge recently acquired a major prepaid network adding 9,800 stores to its marketplace.
  • As states reopen, Surge ISO’s (Independent Sales Teams) hit the streets hungry to earn new commission fees.
  • Surge added a new preloaded grab-n-go phone, branded Loco Rabbit. Grab-n-go phones are a proven mover and Surge maintains a competitive advantage utilizing its own distribution network and payment rails. 
  • This translates into a better priced product for consumers and higher selling commissions to retail partners in the Surge Network – a great formula for rapid recurring revenue growth.
  • These factors combine to suggest SURG may be poised for a revenue growth acceleration in the second half of 2020.

The pandemic has brought about constant discussion of supply chains and the need to rethink how business is done, as everything from grocery stores to c-stores suffers from problems in maintaining supplies of key products. The disruptions have run deep. They have also driven a lot of discussion about the need to focus more on the outcome disparity between the haves and have-nots in the western world, especially in the US.

One company working on solutions in both of these battles is Surge Holdings Inc. (OTCQB:SURG).

SURG has seen soaring revenue growth in recent months despite a difficult context for most business models. The SURG story is a complicated one, but interesting and explosive, particularly after several new catalysts have entered the equation, including the acquisition of 10,000 new stores in its network from its ECS transaction earlier this year and the addition of an extremely promising new Grab-N-Go prepaid mobile device. 

Between the two catalysts, it doesn’t take long to see a path for some truly remarkable revenue numbers coming in the back half of the year, especially because the company’s ISO’s (Independent Sales Teams) are now likely back at work as the economy reopens, hungry to earn fresh commissions.

We will get to those catalysts below. But first, it’s important to understand the company’s unique model.

The legacy business underlying Surge is as a prepaid wireless service provider model. That now functions as a trojan horse in this narrative: it presented the company with a massive and valuable network of partners. And those relationships (with c-stores, bodegas, corner stores, etc… anywhere you might pick up a prepaid phone) have been expanded significantly to drive a new disruptive regional supply chain model built on the distribution of products and services across several major regions in the US market, with an eye toward expansion driving everything every step of the way. 

As new stores enter the model, new products are lined up to wedge into the relationship, expanding on complementary vertical and horizontal axes simultaneously.

How is it working?

So far, the market doesn’t seem to understand the model, but when it does, it will stop thinking the massive topline growth numbers are a fluke, and shares may take off. But that’s exactly why we wanted to put it in front of you now, while it is still trading at rock-bottom prices.

Q1 (March quarter) performance was a pretty good indicator of the organic growth going on at SURG. The company reported a 307% y/y jump to $15.8 million, versus $3.9 million for the same period last year. 

Brian Cox, Chairman and CEO of Surge Holdings, commented, “We continue to gain traction as evidenced by our strong revenue growth. As noted previously, we have invested millions of dollars into our infrastructure, software development, new product creation and development, along with the addition of ECS, which we acquired in 2019.  We are now seeing the results of these initiatives and anticipate not only improved revenue growth, but also improved cash flow.”

Valuation and Narrative

While we would suspect Q2 may show at least some kind of a hiccup, Q3 could be off and running as the economy largely opens back up. A quick back-of-the-napkin job on the numbers suggests the stock is massively undervalued by any traditional means of valuation, with annualized revs powering along at something above $50 million and the stock trading at a market value of merely half that. 

Generally speaking anything growing at triple-digit percentage levels on a quarterly y/y basis is more likely to be trading at 50x sales rather than 0.5x sales, suggesting SURG shares could have a lot of upside potential if the market starts to get its arms around this story.

This is especially true given the recent moves by the company to shore up dilution risk.

To wit: as noted in its release dated June 29, Surge has retired the full $4 million of its Convertible Promissory Notes held by AltCorp Trading LLC (“AltCorp”) and its parent GBT Technologies, Inc. that were previously issued in connection with the acquisition of ECS in September 2019.  The Notes were exchanged for stock at $0.50 per share with a one-year lock-up or leak-out period. Additionally, the Company announced it has cancelled approximately 2.4 million shares for total consideration of $500,000 ($0.21 per share) with a one month option to cancel up to an additional 950,000 shares at the same price per share.  Further details on the respective transactions are available in the Company’s Form 8-K, which has been filed with the Securities and Exchange Commission and is available on the Company’s website.

Brian Cox commented, “In addition to the progress and fundamental improvement we have achieved in our business, I am pleased to announce these latest transactions, which significantly enhance our balance sheet and capital structure.  Specifically, we have removed $4 million of debt from our balance sheet with the Notes converting at a significant premium to the current market price—another important step towards our planned up-listing to a national exchange.  Moreover, the agreement to cancel the outstanding shares reinforces our commitment to maximizing value for shareholders.”

Expansion Ahead

Another key point to appreciate here is the company’s recent announcement of the launch of its proprietary new brand, Loco Rabbit, offering value and convenience in a “grab-n-go” phone service.

This is a next-gen preloaded grab-n-go phone capable of expanding the company’s reach in terms of its footprint of stores in its network, which has potentially exponential implications for future sales growth as it wedges in its supply chain into those new relationships.

According to the release, the Loco Rabbit preactivated phones include 30 days of service and come ready for “off the rack” sales in high volume convenience stores at a starting retail price point of $39.99. The Grab-n-Go phones consist of a basic phone, starter Android and upgraded Android. All 3 packages started distribution through SurgePays and the ECS Prepaid network of 10,000 stores in April 2020.

Cox stated, “We are particularly excited about this latest product launch already underway, which expands on our pre-paid suite of products.  Utilizing analytics from the millions of dollars of transactions over our networks, our team was able to determine the optimal plans, pricing and device costs. The packaging and branding turned out so well, that I look to see these phones in national chain stores in 2020. Importantly, the stores not only make money with the initial sale, they get additional foot traffic and profit every time the customer comes back each month to pay for their service.”