By: Richard Silverman, Plans For Growth LLC
Plans For Growth is a financial consulting firm for small and medium sized businesses. We specialize in strategy development, business planning and strategy, forecasting, and investor relations.
• All the pieces for a fast growth, high profit business are in place. It now comes down to execution.
• Successful implementation will virtually assure Surge Holdings of a lock on convenience store purchasing systems for many years. The network effect will make Surge more valuable to non-system participants as usage grows. This assures further system growth and yielding continuation of the virtuous cycle.
• Financial services, especially the Surge prepaid VISA card, should be the largest profit drivers in the near term. The Surge pre-paid VISA can virtually replace a bank account for people without access to bank services.
This article presents this analyst’s estimates for the near-term outlook for Surge Holdings (OTC QB:SURG). If the story works out as planned, Surge Holdings will transform from a $15 million per year business to one approaching an annual sales rate of $700 million per year in just 36 months, give or take a few months.
Bright outlook notwithstanding, it is unreasonable to assume that the anticipated growth will be easy, uneventful, and without problems. Surge management has built companies before, though never to this size. They are an experienced group. One can feel comfortable that they have the talent and the experience to solve most problems. But investors should not expect a nice steady upward sloping revenue and profit curve as the company on-boards tens of thousands of convenience stores. If the company is fortunate, it will solve problems in weeks and for hundreds of thousands of dollars. When one is dealing with nearly 40,000 stores after 24 months, even small adjustments can run in the millions of dollars.
Plans For Growth believes that Surge Holdings warrants investor consideration. This is a company that can dominate an industry’s purchasing mechanism and translate that dominance into profits. Unless the underlying story changes, use any problem times to accumulate. If it takes 48 months to achieve what might have been accomplished in 36, it is still a great story.
Surge Holdings is a convenience store supplier employing a strategy used with great success by companies including Sysco and Amazon. Brilliant in its simplicity, it is a strategy that time has shown to be highly effective. Dominate a client’s purchasing mechanism and offer a wide range of products. The strategy is one of depth (market penetration and ingrained customer buying behavior) and breadth (utility through product variety). Surge, Amazon, and Sysco all employ this subscription business model. Depth reflects elements of customer acquisition and lifetime value while breadth provides for increased average order value. When executed well, the combination yields a successful venture.
In the case of Amazon, its Prime service dominates purchasing behavior. For non-Prime members, Amazon still dominates purchasing decisions via a huge presence on every major search engine. Many consumers, even those who do not have Prime, search Amazon first because they know Amazon probably offers whatever they seek at a competitive price. The decision to shop Amazon first is a measure of depth. The massive number of products they offer is breadth.
Hundreds of thousands of Sysco buyers know that almost anything they need is available through the company. Sysco offers one stop shopping and delivery. There is no need to spend time searching alternatives. Sysco is the biggest in its business. Its extensive customer base reflects depth. Sysco carries a huge number of products. They have it or they will get it for you – breadth.
SurgePays functions as the purchasing system for convenience stores. It allows a store operator to simplify purchasing through a single system. SurgePays allows a store operator to reduce the number of vendors he/she has to contact when restocking from 150 to 200 to less than half as many. As the company rolls out the SurgePays system to tens of thousands of convenience stores, it will create depth. Additional companies selling goods through the system generate breadth. The combination leads to dominance in the way convenience stores buy and sell products and services.
The current line-up of Surge Holdings products and services includes three key items:
• Surge Pre-Paid VISA Card
• Cell Phone Services
All three products target convenience stores and the lower income people they serve. A convenience store working with Surge can transform from a local seller of Lottery tickets and snack foods, to a neighborhood financial services center for the unbanked who sells Lottery tickets, snack foods, phones, and much more.
The Pastime/AATAC Agreement – A Giant Step in Depth
In mid-November 2018, Plans For Growth presented a report on Surge Holdings entitled ‘Surge Holdings: Poised for Massive Revenue Growth’. The report identified the Surge Holdings business model. Much of the company’s near-term future hinged on a Memorandum of Understanding (MOU) with Pastime Foods for access to their network of convenience stores. Surge Holdings closed the deal on the last day of February 2019.
AATAC, Pastime Foods’ distribution partner, was the signatory on the agreement. AATAC is a national organization comprised of small or regional buying groups and other trade organizations. The organization services approximately 80,000 of the nearly 155,000 convenience stores in the USA, including Puerto Rico. AATAC services the convenience stores of many well-known gas station chains including BP, Chevron, and Gulf. AATAC also services Circle K stores.
Under the terms of the agreement, AATAC will introduce SurgePays to 40,000 of the network’s 80,000 stores. The initial 40,000 store group has a contractual obligation to AATAC to utilize AATAC vendors, including system providers. This obligation should result in 90+% acceptance of the SurgePays system within the first 40,000 store cohort.
AATAC’s representatives will assist with the sale and servicing of the SurgePays system. The company will offer SurgePays to convenience stores on a SaaS basis. SurgePays is a blockchain based system used to control multiple aspects of running a convenience store. The system serves as the purchasing and store management control for a wide variety of AATAC affiliated vendors and Surge Holdings products and services.
SurgePays offers a convenience store operator two major features. The system serves as an ordering platform for restocking store merchandise. Participating suppliers will be able to take electronic orders directly from the SurgePays platform. A SurgePays app allows a store manager to order products via a cell phone or tablet while reviewing inventory on the shelves. By simplifying and computerizing the process, stores and distributors can expect more frequent orders, economies of scale in delivery, and more secure accounting and collections. Sales reps can make less frequent visits to stores allowing distributors to reduce their expenses.
A recently announced agreement with UPS will allow the SurgePays system to generate UPS shipping labels and pick and pack instructions directly from the SurgePays system. This capability will simplify fulfillment for many smaller vendors currently using brokers or manually input orders.
The SurgePays platform should provide Surge a modest percentage of all convenience store items ordered through the system. We estimate the initial payable rate to be 2% based on information provided by other authors on the same subject. The list of initial participating companies includes Pastime Foods and other AATAC member suppliers. Over time, Surge will source other companies and products to supply these stores through the platform. These companies will pay more than the 2% fee. Surge Holdings has announced multiple deals with companies looking to enter the convenience store marketplace through SurgePays. Expectations call for many more companies to participate in future quarters with fees on some products ranging as high as 10+%.
SurgePays also consolidates and simplifies the wide range of financial services that convenience stores offer. A sizeable portion of the population do not have access to bank accounts. Local convenience stores and check cashing stores have become de facto ‘banks’ for millions of people lacking credit and bank access. The SurgePays platform allows convenience store operators to offer near-bank products to this population.
SurgePays permits a convenience store operator to offer the following services:
• Collect cell phone payments.
• Collect utility bill payments
• Purchase or restock a pre-paid ‘credit’ card
• Pay property tax bills
• Transfer money to a third party
• Money orders
Surge Holdings is the primary beneficiary of this system feature as the company offers financial services products that target those without bank access.
Surge Pre-Paid VISA Card
Surge Holdings offers a pre-paid VISA card that serves as an e-wallet. Convenience store customers lacking checking accounts can deposit their paychecks directly on their Surge VISA card. The card allows card holders access to their money via any ATM. An accompanying app allows a card holder to check the card balance and transactions much as one would access a checking account.
A SurgePays VISA card holder can deposit money on the card at any convenience store with a SurgePays system. The app also supports deposits via a cell phone picture of a check. Any participating convenience store will exchange money on the VISA card for a money order. Surge Holdings also offers the money order. Of course, it functions as any other VISA card to purchase goods and services.
In 1985, the US Government signed into law a program that provided lifeline communications to lower income people. The program began as a land line program, later evolving into a cell phone program. Administered by the Universal Service Administration Corporation (USAC), the program taxed phone users to pay for the program. As the program transitioned to cell phones, Congress added broadband services to voice services. Lifeline phones offer limited minutes and data capabilities.
The FCC has announced that the voice portion of the lifeline program will be ending. As of December 2021, the voice program will be fully defunded, leaving millions of lower income people to find other alternatives. The program starts defunding in 2019 with full phase out by December 2021.
Surge Holdings, through its founding firms, has a history in the lifeline phone market. The most recent quarterly report identifies an account receivable due from USAC as proof of this product line. Surge Holdings sees the phase out of lifelines as an opportunity to capture market share in the low-income cell phone market. The company offers three plans to attract this market. To enhance program adoption, it works with the customer’s GSM phone or customers can purchase an inexpensive phone supplied by Surge to convenience stores for resale.
Signing up customers is a matter of installing a SIM card. To sell the company’s cell phone, a store must have the SurgePays system to complete the sign-up process. The store also requires a supply Surge Wireless SIM cards. All SurgePays new installs require an initial purchase of a package of 6 phones and 10 SIM cards as a starter set. The set sells for roughly $440. Individual phones and SIM cards are available for restocking through the SurgePays system. Each 10,000 new SurgePays convenience stores represents approx. $4.4 million in stocking order phones and SIM card revenues, before restocking.
The phone included with the package is the Surge Volt 5XL Android Smartphone. It retails for roughly $79. The phone offers a 5” LCD screen, 8GB capacity, and 4LTE capability. Alternatively, most unlocked GSM phones will function with the Surge phone network. The SIM card to activate the system, whether used with a Volt 5XL or privately obtained phone, is free to consumers.
Surge offers three nationwide plans, including a free, advertiser supported plan. The free phone plan is the closest to the lifeline program. Those enrolled in this plan will receive advertisements through Moolah, an advertiser based phone payment reduction program (https://www.otcmarkets.com/stock/SURG/news/Surge-and-Moolah-Mobile-Partner-To-Launch-First-Free-Wireless-Service-For-Low-Income-Communities?id=222848). For a monthly price of $0/month (that is, free), a phone user can receive unlimited text, 10 hours of talk, and 1 GB of data. Not only is this a very attractive deal, unlike other ‘free’ competitor programs, the SurgePays Wireless program is truly free. There is no credit check, no contract, no credit card necessary to obtain a phone and no activation charge.
The two other SurgePays Wireless programs are as follows:
– Unlimited Text
– 20 Hours of Talk
– 2 GB of Data
– Unlimited Text
– Unlimited Talk
– Unlimited Data
Surge Holdings sees the three plans as having wide appeal, with the free service as best in class. While free to the consumer, the Moolah program pays SurgePays Wireless $10/phone/month. Surge Holdings anticipates a gross profit of $3.50 to $4.00/phone/month after paying for network fees, convenience store revenue sharing, and other costs. Surge Holdings anticipates that most of its customers will gravitate to the free phone with a sizeable percent upgrading to the $10/month alternative over time for greater service flexibility. The $35/month service will likely attract a less sizeable clientele given its target market.
Surge Holdings has all the necessary ingredients to become a huge fish in the convenience store pond. While not the largest marketplace in the USA, there are 155,000 convenience stores. The AATAC agreement offers a major entrée into the convenience store marketplace. Surge Holdings has long been involved in selling products, including cell phone services, through convenience stores. The current combination of the SurgePays system and AATAC’s industry arrangements takes Surge to an entirely higher level.
The near-term challenge for Surge is one of execution. It needs to install, train, and support the SurgePays system in the roughly 40,000 stores. The company must execute the integration of the SurgePays VISA card, its Wireless offerings, and its product ordering capability. The company needs to show the initial round of users that the system works, competent store support, and that dealing with Surge means greater profitability.
Surge Holdings believes it can install nearly 40,000 systems in the 9 months between April and December 2019. Plans For Growth believes this is optimistic. We believe it will take twice as long to complete the 40,000 installations. As the company moves forward, we see this time period from Q3/2019 to Q4/2020 as Phase 1 – the AATAC agreement fulfillment. We also question whether Surge Holdings can develop complete system usage from its participating convenience stores without periodic visits to each convenience store. Our expectation that Surge will require more labor. Our forecasted increase in Sales, General, and Administrative (SG&A) costs reflects this expectation.
Phase 2 involves SurgePays installations beyond the 40,000 AATAC locations and a broadening of the products and vendors offered through the system. Assuming a successful Phase 1, Surge Holdings will have the data and testimonials to promote the system with store owners, consumers, and vendors. Each group stands to benefit from using Surge products and services. The success of Phase 1 activities will play a major role in how Phase 2 fares, especially in its early years.
Some aspects of Phase 2 will likely start before Phase 1 completes. Specifically, the cost savings for convenience store vendors can be sufficiently significant as to make direct restocking through the system an industry standard. Even before the company completes its initial ‘depth’ effort (Phase 1), it will expand the roster of vendors working through the system. As the number of vendors increases, so does the monthly spend put through the system.
Modeling 2019 and 2020
The true test of understanding a business is building a forecast model. Models work on the basis of assumptions. So, Step 1 is to lay out the assumptions. Some may be accurate. Many will be wrong and require adjustment. Predictive models can take years to fine tune. Our goal is to offer a quarterly update and adjust the model as the company announces new developments. Let’s see how close we come to the company results.
1) The timing of the adoption of the 40,000 AATAC convenience stores sets the stage for the adoption rate of phones, VISA cards, and other services. Surge Holdings anticipates completing the 40,000 stores (or as many as eventually sign up) in 9 calendar months. This model assumes 18 calendar months.
2) The SurgePays system become profitable on a stand-alone basis when many convenience store suppliers sign up to allow purchasing through the SurgePays system. Some smaller vendors will pay more than the larger vendors on a percentage basis. Even if SurgePays is never profitable, which is not our expectation, it enables the company to sell everything else. It is strategically vital even if never profitable on a stand-alone basis.
3) For the next several years, the prepaid VISA cards should become the single most revenue generating and profitable product the company sells. The unknown is how effective the company will be in promoting the card at participating stores. There is no credit involved. Surge is not a bank meaning it can establish its own hold periods on checks. If customers adopt and use the cards as anticipated, they will become a major source of revenues and profits.
4) The phones are an excellent source of revenues but less so profits when compared to financial services. As phones require inventory, maintenance, and customer service, the overhead to offer phones requires scale to yield above average margins.
5) The existing line of lifelines phones will phase out, especially in 2020 and 2021 as consumers need to pay more each year out of pocket.
6) The model assumptions are based on public company information, Industry research, articles written by others on the same subject, and the author’s general knowledge of business. If history is a guide, every one will likely prove wrong. But such is the nature of forecasts. The author and Plans For Growth will update model assumptions as new information becomes available. Future Surge Holdings updates will identify the revised assumptions.
The following page identifies the income statement as projected in early June 2019, prior to the completion of the 2nd Quarter 2019. We will review the model as financial statements and press releases become available and as specific product data becomes available.
The information presented is sourced from public company information, industry research, articles written by others on the same subject, and the
author’s general knowledge of business.