After experiencing two years of record growth during the COVID-19 pandemic, Jacksonville, Florida-based Surge Transportation, a digital freight brokerage, sought to find a buyer and slashed its rates and workforce nearly a year before it filed for Chapter 11 bankruptcy protection on Monday.
“In the first half of 2022, demand for excess motor carrier capacity dramatically contracted. In an effort to maintain volume, [Surge] cut its rates,” according to court filings. “While lower rates resulted in more brokered jobs, they also reduced [Surge’s] profit margins and its previous robust financial situation quickly began to erode.”
In a statement to FreightWaves, Omar Singh, founder and president of Surge Transportation, said U.S. Bankruptcy Judge Jacob A. Brown approved the brokerage’s restructuring plan in its preliminary hearing Thursday.
“The U.S. Bankruptcy Court (MDFL) has approved Triumph as the debtor in possession (DIP) factor for Surge on an interim basis,” Singh wrote. “Triumph and Surge are committed to working together with customers, carriers and factors to make prompt payment of all post-petition accounts. To accomplish that goal on terms most favorable to carriers hauling freight, payments on accounts purchased by Triumph will be paid to carriers or their factor within three days of purchase by Triumph at no charge to the carrier or factor.”
A day before Surge Transportation filed for bankruptcy, the freight brokerage and Dallas-based Triumph amended their factoring and security agreement, which was subject to the bankruptcy court’s approval, to allow Surge to take advances of up to $15 million based on its receivables. According to court filings, Surge factors nearly $5 million in receivables through Triumph every month.
In its petition, Surge stated as a result of the company’s failure to pivot to the changing market conditions, “it became increasingly delinquent in the payment of carrier claims” and owes about $12 million to 5,000 trucking companies, which are typically last in line to be paid as unsecured creditors.
What happened?
Before filing for Chapter 11, Surge Transportation had scaled up to 200 employees working in Jacksonville, with satellite offices in Chicago and Ashburn, Virginia. The digital freight brokerage was slated to open an office in Dallas before experiencing an abrupt decline in online ordering in April 2022 as consumers returned to brick-and-mortar stores once COVID-19 restrictions were lifted.
Prior to the rise in inflation and the war in Ukraine, Surge had experienced record year-over-year sales growth of 260% in 2021 and 240% in 2020, court filings state.
According to the freight brokerage’s financial statements, which are based on a trailing 12-month basis as of March for the past two years, Surge posted gross revenues of around $135 million in 2023, a substantial drop of approximately $65 million from $200 million in 2022.
By the time Surge determined that its strategy of cutting rates to maintain volume was a mistake, “it lacked the financial resources to pivot to a different business model focusing on higher rates, higher profit margins and lower overall overhead,” according to court filings.
Around this time, Surge said it hired Chicago-based Logisyn Advisors, a mergers and acquisitions advisory firm that specializes in transportation and logistics companies. However, the M&A firm failed to find a buyer.
Read related article here: Surge Transportation blames bankruptcy filing on sales drop after e-commerce boom
While Surge had hoped to avoid bankruptcy, the company said it had no choice but to file its Chapter 11 petition to obtain “breathing room” to allow the new business model — which seeks to raise its rates, reduce its overhead expenses with fewer employees both in the U.S. and staffers overseas — and “become established without the threat of creditor collection actions or being cut off by motor carrier factors,” the brokerage stated in its bankruptcy filings.
Two weeks before filing its bankruptcy petition, which seeks to reorganize the business, Surge said it terminated 20 employees and is eliminating the use of one of its two overseas staffing companies, Hubtek, headquartered in Medellin, Columbia.
Broker bond reform
After Surge filed for bankruptcy, but before its preliminary hearing was convened to approve its debtor-in-possession factoring plan with Triumph, some trucking companies sent screenshots to FreightWaves of nearly 30 loads posted by Surge on Oregon-based DAT Freight & Analytics, one of the trucking industry’s largest load boards in North America, on Tuesday.
The truckers vying for spot market freight told FreightWaves they were concerned about the brokerage’s ability to pay if they agreed to haul the loads after finding out the company had filed for bankruptcy and after reading reviews posted by other carriers that moved freight for Surge, claiming their factoring companies had rejected their invoices.
Todd Spencer, president of the Owner-Operator Independent Drivers Association, a trade group headquartered in Grain Valley, Missouri, that represents nearly 140,000 small-business truckers, said the accepted practice of looking on the Federal Motor Carrier Safety Administration’s SAFER site to see if a “broker is paying carriers or stiffing them should mean something, but it doesn’t.”
A check on SAFER shows that Surge Transportation’s broker authority is active and has the required minimum of $75,000 in its trust fund on file with the regulatory agency. There’s no warning for unsuspecting motor carriers that the company currently owes $12 million to 5,000 truckers, Spencer said.
Spencer said FMCSA’s current oversight of handling broker bonds and trusts “simply doesn’t work, and it has never worked.”
“This was an issue that OOIDA raised 20 years ago,” Spencer told FreightWaves. “We were able to get a partial fix in MAP-21 in 2012 when FMCSA increased the $10,000 bond to $75,000. However, besides increasing the bond, FMCSA was supposed to add a mechanism for how their bonding proposal would work by adding provisions that would put requirements in place for bond and surety companies that the bond amount would be appropriate to cover any shortfalls or defaults. They never did it.”
More than 10 years after MAP-21 was signed into law, Spencer said FMCSA is proposing stricter rules for bond and surety companies that finance brokers.
“We proposed some performance requirements to FMCSA back in 2018 on bonding and surety companies that would address what’s going on now,” he said. “One example we have proposed to FMCSA is that when a broker files for bankruptcy, it becomes a disqualifying offense for having a bond.”
DAT spokesperson Annabel Reeves said the company is aware that Surge Transportation, which has been posting freight on its load board, has filed for bankruptcy protection.
“Surge has promised DAT that it will pay all amounts owed for loads moved on, or after, July 24,” Reeves told FreightWaves. “We are working with Surge and our own bankruptcy counsel to better understand Surge’s plan to compensate all those carriers affected both pre- and post-petition.”
Grace Sharkey and John Gallagher contributed to this report.
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