Description

“It's a mess, aint it Sheriff?”

“If it aint it'll do till the mess gets here.”

―  'No Country For Old Men'

Charge Enterprises, Inc. (“CRGE”) is a company that I think is overvalued. The bear thesis is simple at its heart – about $80 million of fairly ordinary looking acquisitions over 2 years, now valued at $1 billion+. 

So here’s why you may want to wait to short it: Borrow cost is high (about 30%), but it recently uplisted to Nasdaq (April) so perhaps liquidity will follow and borrow will improve. Also the company recently raised money at a higher valuation ($7/share) from a well-regarded investor. This stock has been volatile but has actually trended up over the last year when EV and unprofitable growth names have been killed. A former senior Ford exec came aboard as President. 

Maybe I’m missing something here, and if so I’d love to hear the bull case. Also, apologies for the formatting.

Overview From the 10-K: 

Charge Enterprises, Inc. (the “Company” or “Charge”) consists of a portfolio of global businesses with a vision to build the electrification and telecommunications infrastructure that will address and service requirements for EVC and WNI which includes 5G, tower, distributed antennae systems (“DAS”), small cell, and electrical infrastructure.  We operate in two segments: Telecommunications which provides connection of voice calls and data to global carriers and Infrastructure which builds physical wireless network elements, provides electrical construction services and designs and installs EV charging stations and infrastructure.  

·         Telecommunications has provided connection of both voice and data to Carriers and MNO’s globally for over two decades and we will selectively add profitable products and services, such as SMS text, to this long-established business.

·         Infrastructure focuses on building physical elements of wireless networks, installation of EV charging ecosystems and electrical installation.

An infrastructure play on Telecoms and Electric Vehicles - sounds pretty good? Plus there’s substantial revenue growth. (from their latest presentation): https://uploads-ssl.webflow.com/616580575fdfb84e39aa1165/6228ce004606a3ba514151b2_20220303%20Charge%20Enterprises%20Q1%20Investor%20Summit%20Presentation.pdf

Unfortunately, when you dig in things look a lot less glamorous. The growth is almost all from M&A, Pro Forma revenues are shrinking, and there are no profits

Most of the revenues are from the acquisition of a declining low-margin telecom business with a lot of revenues but almost no gross profits stapled to a couple of electrical contractors, an electric scooter charging station business that has yet to see meaningful rollout that I have found and another charging station business they recently acquired. The CEO has talked up the EV charging angle but the "over $500 million of revenues" they point to are primarily from the low margin Telecom business. 

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How did we get here?

The 10-K gives us the brief history of a shell company that has tried on a few business models for size:

We were incorporated in the state of Nevada on May 8, 2003 under the name “E-Education Network, Inc.” On August 10, 2005 we changed our name to “GoIP Global, Inc.” On December 27, 2017, we redomiciled from Nevada to Colorado. On October 1, 2020, we converted from a Colorado corporation to a Delaware corporation and in connection with such conversion changed our name to “Transworld Holdings, Inc.” As of January 26, 2021, our name has been further changed to “Charge Enterprises, Inc.”

This omits a couple of further detours through investment fads du jour described in the S-1, typos and run-on sentences included to give you a flavor:

We were incorporated in the State of Colorado on December 27, 2017. In early 2018 we had sought to engage in ventures related to the Internet of Value, or IoV, and then in late 2018 had abandoned the IoV business model and decided to pursue a business opportunity in the CBD market. Thereafter, in early 2019 management determined that the CBD opportunity postpone the CBD opportunity and turned its attention to an opportunity in the emerging cannabis sector. Since the completion of the acquisitions of TransWorld, PTGi and GetCharged, described below, we have determined not to pursue any of these proposed earlier opportunities or businesses.  

Buildup through M&A:

• April 30, 2020, TransWorld Enterprises Inc. (“TW”) a holding company with no assets. 1,000,000 shares of Series D Preferred Stock and 1,000,000 shares of Series F Preferred Stock valued at $3,057,907. TW was “focused on acquiring controlling interests in profitable basic businesses, primarily transportation companies, manufacturing, and consumer products businesses”.

• September 25, 2020, GetCharged in exchange for 60,000,000 shares of common stock valued at $17,500,000. Closed October 12, 2020. This deal brought the current CEO Andrew Fox on board. GetCharged had a charging station design and had tried to raise funds earlier that year on a crowdfunding platform, at a $4mm valuation: https://www.startengine.com/getcharged-inc. The CRGE S-1 described Charge “deploying docks and charging stations in Paris in June 2020 and intends to expand that presence, with the goal of deploying GetCharged's unique docking and charging stations in more than 100 locations over the next 18 months.” “Charge Infrastructure has a very simple business model – every time an e-scooter is plugged into one of our charging and docking stations we get paid. We run at a global of 50% gross profit margin and can recoup the full investment cost including installation after twelve months at 80% utilization. Recurring revenue streams will include charging, parking, sponsorship, diagnostics and data.” In the 2021 10-K the assets and goodwill related to GetCharged have been written off completely and the above text is gone. GetCharged had revs of $60,483 for the first 9 months of 2020. Former CRGE Chairman Kenneth Orr was paid a finder's fee for the GetCharged deal ”In connection with the closing, the Company will owe a success fee of 3%, or $525,000, to TransWorld’s CEO”

•  PTGi in consideration for $892,000 cash. Closed October 31, 2020. If that name sounds familiar it’s because it was bought from publicly traded HCHC (now Innovate Corp). Revenues have been falling, and I present the pro forma 20/21 financials from CRGE and the segment data from HCHC. There may be some differences in reporting between the two companies, but the declines are obvious

CRGE’s 10-K shows a reduction in overhead costs but note that “Salaries and benefits decreased $3.0 million to $1.8 million due to certain changes in classification between salaries and benefits and general and administrative and allocations to Non-operating Corporate in 2021”. Given the shrinking Gross Profit levels and margins, it seems like future cashflow might get squeezed. Q1 (just reported) actually showed an increase in revenues Y/Y but a continued decrease in gross profit noting that:

Revenues increased $32.2 million to $143.6 million driven by changes in our customer mix and overall increase in wholesale traffic volumes compared to 2021 driven by higher voice demand as a result of geo-political unrest in Eastern Europe. The rapid development of new technologies, services and products has eliminated many of the traditional distinctions among wireless, cable, internet, local and long distance communication services. While revenues increased in the first quarter, the company continues to expect downward pressure on revenues over time due to the pace of technology development, emergence of new products, and intense competition… Gross margin percentage in this business decreased year over year due to customer mix.

•  Nextridge, Inc., Closed on May 21, 2021 for an aggregate purchase price of $19,798,324 - $6,850,000 paid through the issuance of 2,395,105 shares of Series B preferred stock. Nextridge operates through its wholly owned subsidiary, ANS Advanced Network Services LLC, a New York, limited liability company (“ANS”). Per CRGE “ANS is highly experienced in the installation of physical wireless network elements including 5G, tower, DAS, small cells”. Revenue appears to have been around $37 million per Dun & Bradstreet.

• B W Electrical Services LLC (“BW”), Closed December 27, 2021. Paid an aggregate cash amount of $13,500,000 plus 1,285,714 shares of our common stock (about $18 million total value). A portion of the cash consideration was placed in escrow. BW, founded in 2006 and headquartered in New Jersey, is an electrical contracting services firm specializing in commercial projects with a focus on ground-up construction. D&B estimated revenues at $12.1 million, though that seems low.

• On January 14, 2022, EV Group Holdings LLC, a New Jersey limited liability company (“EV Depot”) for $18.7 million (cash of $1,250,000 plus 5,201,863 shares of common stock). EV Depot, headquartered in New Jersey, is a group of companies focused on real estate solutions for commercial and fleet operators requiring parking, maintenance and EV charging depot resources. I couldn’t find revenue estimates but the 8-K notes a portion of the stock is held back against a gross margin target of $4.4 million for 2022.

Valuation:

CRGE has done several financings, and has several warrants and convertible preferred shares and convertible notes. Using the numbers from the 10-Q as of 3/31 and adding the Island shares:

I estimate the Convertible Notes add another 26.5 million shares using the Treasury method and a share price of $4.30.

Options and warrants:

Call it 250 million shares fully diluted using the treasury method. At $4.60/share, that’s over $1.1 billion of market cap.

Cash and Investments are about $50 million, offseting interest bearing liabilities of about $29 million and a working capital deficit of over $20 million. The company has raised about another $10 million since, but I’ll use the billion for EV.

Interestingly, the marketable securities are “predominately in shares of large publicly traded securities which are being invested until such time the funds are needed for operations” and the company recognized a loss during Q1.

Leadership

The CEO and Chairman is Andrew Fox, formerly of GetCharged. Mr. Fox is a serial entrepreneur with a history in the nightlife &entertainment business among other things: https://www.forbes.com/forbes/2005/1212/078.html?sh=6ab2c533697c

Mr. Fox has an interesting way of pitching the company (from April 2021):

https://medium.com/authority-magazine/meet-the-disruptors-andrew-fox-of-charge-enterprises-on-the-three-things-you-need-to-shake-up-your-25cf07a58562

“I saw the Achilles’ heel for their entire electric vehicle business model lacking infrastructure. I called my partner and said I had a crazy idea for an infrastructure company for electric micro-mobility vehicles. Quick charging stations are going to be everywhere in a short time. Starting this type of business was very hard and required around-the-clock work. That work paid off last year, when we went public. Today, we have operations in 19 countries and generate over $500 million dollars annually.”

So, while the claim is true per se (including Telecoms), it surely is not true of CRGE’s charging infrastructure businesses.

Here is a video of him making similar statements https://www.pscp.tv/w/1BdxYYMYWqlxX

The former Chairman (until September 2021) Kenneth Orr was barred from association with any broker or dealer. https://www.sec.gov/litigation/admin/34-50941.htm

Summary:

So we have a business that was assembled for about $80 million, less than $30 million of that in cash. $3 million of that was for an entity with no assets and as far as I can tell no revenues. $17.5 million has been written off. So let’s say $60 million for the rest. That $60 million investment is currently valued at over $1 billion (down from a peak of over $1.5 billion). That's phenomenal IRR on that capital allocation if it holds up. 

If we say that the declining Telecoms profits will offset Corporate overhead (they didn’t in Q1, but let’s keep it simple) then all the value should be in the Infrastructure business. To be fair, it does appear to be growing:

It may well be that CRGE will build a decent business in EV charging at the second time of asking but bear in mind that a lot of the infrastructure revenue above is from the acquired construction and electrical contracting businesses – not usually high multiple businesses. Compared to IESC at 8x EBITDA for example the purchase price of around $60 million seems about fair for ~$7.5 million of run rate EBITDA. Even if growth is sustained this year, $1 billion seems a lot to pay.

And Yet… 

• CRGE has raised investment from reputed investors including Arena (Dan Zwirn) and Island Capital’s Andrew Farkas recently

• Insiders are not running for the exits yet. 

• They recruited the credible Mark LaNeve, Ford’s former U.S. sales and marketing chief who is now President of CRGE. 

• I could have made the same bear case a year ago and the stock is actually up over that time period. 

Conclusion:

Perhaps I just don’t get it. Perhaps the uplisting to the Nasdaq will provide liquidity and insiders will begin to cash in. Perhaps this is just a name to watch for now. 

As Sheriff Ed Tom Bell might say, “it’s a mess, ain’t it”

Risks

• A high multiple growth business in EV charging stations emerges from the acquistions.

• The company recently managed to sell shares to Island Capital Group LLC at $7/share with warrants at $8.50. So far the company has not had problems raising capital.

• No apparent liquidity issues – cash and investments of about $60mm pro forma the most recent raise. A lot of the debt is held by investors with an interest in the stock.

• Future M&A / contract wins

Catalyst

Insider sales / Increased Liquidity

Telecom business resumes its decline, hurting the "high revenue" appearance