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July 25, 2023 – Surge Transportation, Inc. (“Surge” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Middle District of Florida, lead case No. 23-01712 (Judge Jacob A Brown). The Debtor, a specialist trucking/freight broker, is represented by Bradley R. Markey of Thames Markey.
The Debtor specializes in sourcing (ie, brokering) extra truckload capacity during peak season periods and on short lead times. It charges its customers (large suppliers of consumer products, including Kraft Heinz, Anheuser Busch, Dannon, Ace Hardware, and Chewy) premium prices for its ability to source freight space in a pinch.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors (these are freight companies now owed @$12.0mn); estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn.
Events Leading to the Chapter 11 Filing
In a declaration in support of first day filings (the “Singh Declaration) [Docket No. 4], the Debtor details a post-COVID boom, as consumers ordered goods on-line and a highly stretched trucking industry left the Debtor in position to sell its premium-priced services to consumer goods suppliers struggling to find a way to transport ramped up on-line purchases to their home-bound customers. COVID was good for business, very good: "The Debtor was well-positioned to leverage these supply-side stresses of the pandemic into economic success. The Debtor experienced tremendous growth and prosperity during the pandemic. In 2020, the Debtor experienced 240% year-over-year sales growth, while in 2021, it experienced 260% year-over-year sales growth."
The boom, however, abruptly ended as COVID restrictions were lifted and on-line purchases dropped. The drop in business was exacerbated by inflationary pressures and the Debtor's decision to lower its prices to remain competitive as volumes fell. A strategic decsion the Debtor now regrets.
Omar Singh, the Debtor's President commented: “When the COVID-19 pandemic first gripped the world during March 2020, many aspect of the U.S. economy came to a halt. Among other things, millions of workers stayed home, either afraid to go outside or under government mandates to practice social distancing and avoid crowds.
While shopping at brick and mortar stores during this time either dropped precipitously or ceased altogether, online shopping boomed. Buoyed by COVID-19 economic stimulus checks, and with fewer physical outlets for spending money, the public turned to on-line shopping to satisfy its consumer needs and desires.
With heightened demand and personnel shortages due to COVID-19 and other factors, consumer goods supply chains experienced major disruptions during this time. The shipping industry was stretched thin, as suppliers scrambled to get goods to distribution centers and then to the end users. Carrier space – whether by boat, train, or truck – was at a premium.
The Debtor was well-positioned to leverage these supply-side stresses of the pandemic into economic success. The Debtor experienced tremendous growth and prosperity during the pandemic. In 2020, the Debtor experienced 240% year-over-year sales growth, while in 2021, it experienced 260% year-over-year sales growth.
By the end of 2022, the Debtor had scaled to 200 employees and was scheduled to open a third office in Dallas. It was ranked by FreightWaves as one of the Top 100 FreightTech companies for 2023. At that time, the Debtor appeared poised for continued growth and success.
The Market Collapse and Events Leading to Bankruptcy
With COVID-19 concerns fading rapidly, the world started to normalize in early 2022. Workers returned to the office, dined in restaurants and shopped at brick and mortar stores. As consumers began to refocus on services versus goods, the supply chain stressors started to ease, and the shipping industry rapidly cooled.
At the same time, the Russian invasion of Ukraine caused gas prices to spike. Inflation became a major concern, as did the efforts of the Federal Reserve to curb inflation by rapidly increasing interest rates. Consumers cut back on their purchase of consumer goods, and instead spent money on services or limited their spending altogether.
The result of the foregoing was that in the first half of 2022, demand for excess motor carrier capacity dramatically contracted. In an effort to maintain volume, the Debtor cut its rates. While lower rates resulted in more brokered jobs, they also reduced the Debtor's profit margins, and the Debtor's previously robust financial situation quickly began to erode.
By the time the Debtor determined that its strategy of cutting rates to maintain volume was a mistake, the Debtor lacked the financial resources to pivot to a different business model focusing on higher rates, higher profit margins, and lower overall overhead. As a result, the Debtor became increasingly delinquent in the payment of carrier claims to the point where accounts payable now total nearly $12 million owed to approximately 5,000 carriers."
About the Debtor
The Singh Declaration provides: "The Debtor is a trucking/freight broker which specializes in sourcing extra truckload capacity during peak season periods and on short lead times. Mr. Singh has deep knowledge and experience within the trucking industry, having worked for a leading brokerage firm from 2003 to 2010, before going into business on his own and eventually forming the Debtor with the goal of being a leading national broker. The Debtor's headquarters are located in Jacksonville, Florida, with satellite offices in Chicago, Illinois and Ashburn, Virginia.
The Debtor is a 'digital' brokerage. Its business model is based on Application Programming Interface (or 'API') pricing, a software-based approach to bidding on jobs which permits real-time pricing and routing guide price optimization. API pricing allows the Debtor to bid on a high number of jobs, matching customers with carriers at competitive rates. Prepetition, on a weekly basis, the Debtor bid on approximately 50,000 jobs and was the successful bidder on approximately 1,400 of those jobs.
The Debtor's customers are typically large suppliers of consumer goods. It has approximately 150 such customers, and prepetition its top five customers by annual dollar value have been Kraft Heinz, Anheuser Busch, Dannon, Ace Hardware, and Chewy. The Debtor has carrier agreements with approximately 60,000 motor carriers of varying size and geographic coverage. Of these motor carriers, the Debtor has had active business with approximately 5,000 at any given time and does business with approximately 25,000 during a calendar year."
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