New Acquisition & National CBD Distribution Drive Growth

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FINTECH AND RETAIL SUPPLY CHAIN INNOVATOR

Surge Focuses on Small While Building Big

When investors think of fintech and retail supply chains, they think big. Big networks, big functionality, big banks, big retail and wholesale markets.  When they think of fintech and supply chain management in the independent retail and C-store level they think old-style PoS, EDI, and feature-poor functionality. Surge, an innovator, is changing this sentiment in the industry and certainly on behalf of the retailers and regional/small product manufacturers and service providers. Moreover, its approach to deploying and scaling its offering and capabilities could lead to unprecedented growth in this segment for the Company, stores, and its product/service provider partners. After all, as a result of its latest acquisition and its key partnerships, Surge is in the early innings of offering multiple products, services, and fintech capabilities to nearly 50,000 stores and their customers, nationwide, with a path to service over 110,000.

The Acquisition

Earlier this month, the Company entered into an agreement with GBT Technologies Inc. (OTC -  GTCH) to acquire the assets of their ECS Prepaid Business, Electronic Check Services business and the Central State Legal Services segment. Based on 2018 results, these businesses represent over $48.7M in annualized revenue, bringing Surge’s expected annualized revenue run rate to over $60M million. 

This transaction adds over 9,800 retail customer locations (and over 160 salesforce) to which the Company can now cross market its SurgePays Network products, SurgePays™ Reloadable Debit Card, SurgePhone Wireless and SIM Starter Kits. Over the coming months, management will integrate operations and infrastructure which will likely generate significant operating synergies, including the elimination of potentially redundant expenses, thus enhancing overall profitability.

The transaction enhances Surge’s shareholders’ equity, which is key as the Company moves toward is goal of listing on a national exchange.  Surge Holdings paid $5 million in consideration - 3,333,333 shares of Surge Holdings common stock and a $4 million note. Given that the deal is closing this quarter, we estimate that $10M+ in revenue will be recorded from the ECS deal this quarter, and that on a preliminary basis, ECS could account for $70-75M in revenue next year.  

The Multiplier Model

In our view, the best way to describe the core of Surge’s approach to growth and wide-scale implementation in both a vertical and horizontal fashion, is what we term the “Multiplier Model.” The basis of the Company’s capabilities is inherent in its exponential, top-line growth model. Top-line (horizontal) growth rises exponentially as new locations are on-boarded, and when new products/services are introduced (vertical) and then penetrated into existing or introduced in new stores through the Surge platform.

Targeting large, underserved markets, Surge’s offerings improve and enhance operations and profits for retailers, provides previously inaccessible broad-scale distribution for manufacturers, and improves the quality of life directly and indirectly for its low income, underbanked consumers. SurgePays™ Retail Blockchain Network is a first-in-kind fintech network connecting independent retailers, manufacturers and consumers. As the first company to truly tie these three specific components of the food chain together, we view Surge as a unique fintech and retail supply chain provider.

On the front-end, retailers can offer in-demand products and services and financial capabilities to its customers while on the back end, can enhance their payments turnaround times along with the key blockchain and management platform functionality. Organizations like AATAC also serve as a purchasing group to improve pricing and order flow from the manufacturers. The manufacturers, particularly regional producers, can now broadly offer their wares through Surge’s network which dramatically enhance their reach. Surge and its role as distributor can “cherry-pick” the top product and service providers in the greatest in-demand categories.

One great example is a recent agreement to distribute BRIM’S snack foods through the SurgePays™ Retail Blockchain Network. Established in 1979, Brimhall Foods is a leading manufacturer and distributor of quality snack food items throughout the Southeast under the BRIM’S brand. As Surge CEO Brian Cox noted, “BRIM’S has been one of the most recognized brands in the Southeast over the past 30 years and we are honored to launch our first 15 BRIM’S products in the Bagged Snacks Category on the SurgePays network. Helping an established regional manufacturer expand into new markets nationwide is a significant component of our business model and overall strategy. “ Thus, AATAC and ECS locations benefit greatly from leveraging the opportunities laid before them in “joining the network.”

Clearly, Surge is on its way to installing its flagship blockchain offering in 40,000 stores affiliated with the aforementioned and highly regarded trade association, AATAC. We believe at least $1500/mo. in revenue per store can be generated, once fully deployed. As a technology company Surge is well-positioned to scale easily and rapidly. Moreover, we believe that expansion into this segment will accelerate, beginning in the coming weeks.

The Best CBD Channel; Creative, Lower-Risk Play on CBD Market

Surge also signed an agreement with  Weekend Warrior Wellness, a brand of Contigo Products, LLC, to distribute its ‘5-Hour Hemp Energy Shots,’ ‘Energy Mints with CBD’ and ‘Mint Strips with CBD’ through the SurgePays™ Retail Blockchain Network. The impact of the agreement is already being realized, as the products have been shipping over the past few months and are in high demand.  Most CBD products are sold online and those that are sold in stores are typically available on a regional or local basis only and it does not appear that the large-scale, national availability has yet occurred.

Hemp-infused CBD products are very popular in C-stores, leveraging tobacco, energy, and other similarly categorized products. Thus, we believe that by broadening the CBD product manufacturers and adding multiple product types and SKUs, there is a real opportunity for Surge to offer a true, national platform that could potentially reach more than 110,000 locations nationwide.  As with other products, the Multiplier Model targeting the introduction of the top CBD products will drive industry sales and add major revenue/profit growth to Surge. And this model enables Surge to onboard the hottest products in the top-selling categories very quickly. From an investing perspective, clearly a channel with such a broad reach offers much lower risk and unique upside as a play on the growth of the CBD market, already one off the nation’s fastest-growing consumer product segments.

LOOKING AHEAD

At present, we are suspending our financial forecasts, pending a closer review of ECS and the CBD opportunities over the net few weeks. With an estimated addition of $70-75M from ECS alone, it is clear our next pro forma projections would be upward top-line and profit revisions to those found in our July 2019 report. Still, the core of our investment thesis has only been bolstered even higher by the ECS transaction along with management’s strategy and traction with AATAC. Thus, we reiterate our sentiment and $3.25 price target on these shares.

RECENT TRADING HISTORY FOR SURGE HOLDINGS, INC.

(Source: www.StockCharts.com)