Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of
Surge
Holdings, Inc. & Subsidiaries
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of Surge Holdings, Inc. & Subsidiaries (the “Company”)
as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ deficit and cash
flows for each of the years in the two-year period ended December 31, 2019 and the related notes. In our opinion, the consolidated
financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December
31, 2019 and 2018, and the results of its consolidated operations and its consolidated cash flows for each of the years in the
two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis
of Matter - Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 3 to the financial statements, the Company incurred losses for 2019 and 2018, and at December 31, 2019 had
an accumulated deficit and negative working capital. Further, in March of 2020 the World Health Organization declared COVID-19
a pandemic. COVID-19 could disrupt the economy, the Company’s supply chain, and access to capital sources thus adversely
affecting the Company’s ability to continue its operations. Management’s evaluation of the events and conditions and
management’s plans regarding those matters are described in Note 3. The consolidated financial statements do not include
any adjustments that might result should management be unable to successfully implement its plan. Our opinion is unmodified with
respect to this matter.
/s/
Rodefer Moss & Co, PLLC
We
have served as the Company’s auditor since 2017
Nashville,
Tennessee
May
11, 2020
SURGE
HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
346,040
|
|
|
$
|
444,612
|
|
Accounts receivable,
less allowance for doubtful accounts of $774,841 and $17,000, respectively
|
|
|
3,056,213
|
|
|
|
206,679
|
|
Notes receivable
|
|
|
14,959
|
|
|
|
190,000
|
|
Lifeline revenue
due from USAC
|
|
|
60,790
|
|
|
|
850,966
|
|
Customer phone
supply
|
|
|
-
|
|
|
|
1,356,701
|
|
Prepaid
expenses
|
|
|
96,883
|
|
|
|
10,862
|
|
Total
current assets
|
|
|
3,574,885
|
|
|
|
3,059,820
|
|
Property and Equipment, less accumulated
depreciation of $38,656 and $13,782, respectively
|
|
|
294,616
|
|
|
|
30,990
|
|
Intangible assets less accumulated
amortization of $519,404 and $319,375, respectively
|
|
|
4,769,117
|
|
|
|
65,269
|
|
Goodwill
|
|
|
866,782
|
|
|
|
866,782
|
|
Investment in Centercom
|
|
|
203,700
|
|
|
|
-
|
|
Operating least right of use asset,
net
|
|
|
210,816
|
|
|
|
-
|
|
Other long-term
assets
|
|
|
66,457
|
|
|
|
61,457
|
|
Total
assets
|
|
$
|
9,986,373
|
|
|
$
|
4,084,318
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued expenses - others
|
|
$
|
3,637,577
|
|
|
$
|
3,104,234
|
|
Accounts payable
and accrued expenses - related party
|
|
|
998,517
|
|
|
|
149,901
|
|
Credit card liability
|
|
|
449,158
|
|
|
|
394,840
|
|
Loss contingency
|
|
|
38,040
|
|
|
|
70,000
|
|
Deferred revenue
|
|
|
-
|
|
|
|
50,000
|
|
Derivative liability
|
|
|
190,846
|
|
|
|
51,058
|
|
Operating lease
liability
|
|
|
90,944
|
|
|
|
-
|
|
Line of credit
|
|
|
912,870
|
|
|
|
-
|
|
Advance from
related party
|
|
|
-
|
|
|
|
389,502
|
|
Notes
payable and current portion of long-term debt, net
|
|
|
736,172
|
|
|
|
582,500
|
|
Total
current liabilities
|
|
|
7,054,124
|
|
|
|
4,792,035
|
|
Long-term debt less current portion
– related party
|
|
|
2,205,440
|
|
|
|
680,000
|
|
Operating lease liability –
net
|
|
|
119,872
|
|
|
|
-
|
|
Trade payables - long term
|
|
|
869,868
|
|
|
|
600,516
|
|
Convertible
promissory notes payable - net
|
|
|
4,436,684
|
|
|
|
-
|
|
Total
liabilities
|
|
|
14,685,988
|
|
|
|
6,072,551
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred
stock: $0.001 par value; 100,000,000 shares authorized; 13,000,000 and 13,000,000 shares issued and outstanding at December
31, 2019 and 2018, respectively
|
|
|
13,000
|
|
|
|
13,000
|
|
Series C convertible
preferred stock; $0.001 par value; 1,000,000 shares authorized; 721,598 and 643,366 shares issued and outstanding at December
31, 2019 and 2018, respectively
|
|
|
722
|
|
|
|
643
|
|
Common stock:
$0.001 par value; 500,000,000 shares authorized; 102,193,579 shares and 88,046,391 shares issued and outstanding at December
31, 2019 and 2018, respectively
|
|
|
102,193
|
|
|
|
88,047
|
|
Additional paid
in capital
|
|
|
6,055,042
|
|
|
|
333,623
|
|
Accumulated
deficit
|
|
|
(10,870,572
|
)
|
|
|
(2,423,546
|
)
|
Total
stockholders’ deficit
|
|
|
(4,699,615
|
)
|
|
|
(1,988,233
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
9,986,373
|
|
|
$
|
4,084,318
|
|
See
accompanying notes to consolidated financial statements
SURGE
HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
Years
ended December 31, 2019 and 2018
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
25,742,941
|
|
|
$
|
15,244,155
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
20,305,453
|
|
|
|
8,570,240
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,437,488
|
|
|
|
6,673,915
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
227,322
|
|
|
|
149,642
|
|
Selling,
general and administrative
|
|
|
12,978,194
|
|
|
|
8,059,742
|
|
Total
costs and expenses
|
|
|
13,205,516
|
|
|
|
8,209,384
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(7,768,028
|
)
|
|
|
(1,535,469
|
)
|
|
|
|
|
|
|
|
|
|
Other expense
(income):
|
|
|
|
|
|
|
|
|
Interest expense,
net
|
|
|
(227,016
|
)
|
|
|
(140,457
|
)
|
Change in fair
value of derivative liability
|
|
|
4,013
|
|
|
|
(4,105
|
)
|
Change in fair
value of LTC cryptocurrency
|
|
|
-
|
|
|
|
(95,387
|
)
|
Gain on sale
of assets
|
|
|
-
|
|
|
|
273,453
|
|
Gain on investment
in Centercom
|
|
|
25,192
|
|
|
|
-
|
|
(Gain)/loss
on settlement of liabilities
|
|
|
(481,187
|
)
|
|
|
43,117
|
|
Total
other expense (income)
|
|
|
(678,998
|
)
|
|
|
76,621
|
|
|
|
|
|
|
|
|
|
|
Net loss before
provision for income taxes
|
|
|
(8,447,026
|
)
|
|
|
(1,458,848
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
82,230
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(8,447,026
|
)
|
|
$
|
(1,541,078
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic and diluted
|
|
|
96,186,742
|
|
|
|
81,566,892
|
|
See
accompanying notes to consolidated financial statements.
SURGE
HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statement of Stockholders’ Deficit
|
|
Series
A
Preferred
|
|
|
Series
C Preferred
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2018
|
|
|
3,000,000
|
|
|
$
|
3,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
152,555,416
|
|
|
$
|
152,555
|
|
|
$
|
(155,555
|
)
|
|
$
|
(617,240
|
)
|
|
$
|
(617,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
in reverse merger
|
|
|
10,000,000
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79,888,784
|
|
|
|
79,889
|
|
|
|
(3,687,835
|
)
|
|
|
(265,228
|
)
|
|
|
(3,863,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common
Stock and options for services rendered
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
528,000
|
|
|
|
528
|
|
|
|
157,380
|
|
|
|
|
|
|
|
157,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common
Stock for settlement of accounts payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,206,741
|
|
|
|
1,207
|
|
|
|
249,328
|
|
|
|
|
|
|
|
250,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common
Stock for settlement of debt and accrued interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,608,981
|
|
|
|
2,609
|
|
|
|
597,303
|
|
|
|
|
|
|
|
599,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series
C Preferred Stock for conversion of promissory note and accrued interest
|
|
|
-
|
|
|
|
-
|
|
|
|
48,400
|
|
|
|
48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,024,856
|
|
|
|
-
|
|
|
|
3,024,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series
C Preferred Stock in exchange for Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
594,966
|
|
|
|
595
|
|
|
|
(148,741,531
|
)
|
|
|
(148,741
|
)
|
|
|
148,146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,541,078
|
)
|
|
|
(1,541,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2018
|
|
|
13,000,000
|
|
|
|
13,000
|
|
|
|
643,366
|
|
|
|
643
|
|
|
|
88,046,391
|
|
|
|
88,047
|
|
|
|
(333,623
|
)
|
|
|
(2,423,546
|
)
|
|
|
(1,988,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common
Stock and warrants for services rendered
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
666,000
|
|
|
|
666
|
|
|
|
328,908
|
|
|
|
-
|
|
|
|
329,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common
Stock for settlement of accounts payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
875,000
|
|
|
|
875
|
|
|
|
506,625
|
|
|
|
-
|
|
|
|
507,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common
Stock and warrants with debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
119,960
|
|
|
|
-
|
|
|
|
120,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Common Stock
and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,172,855
|
|
|
|
9,172
|
|
|
|
3,201,328
|
|
|
|
-
|
|
|
|
3,210,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common
Stock for asset purchase
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,333,333
|
|
|
|
3,333
|
|
|
|
996,667
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series
C Preferred Stock for investment in Centercom
|
|
|
-
|
|
|
|
-
|
|
|
|
72,000
|
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178,436
|
|
|
|
-
|
|
|
|
178,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series
C Preferred Stock for conversion of related party advances
|
|
|
-
|
|
|
|
-
|
|
|
|
6,232
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
389,495
|
|
|
|
-
|
|
|
|
389,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,447,026
|
)
|
|
|
(8,447,026
|
)
|
Balance,
December 31, 2019
|
|
|
13,000,000
|
|
|
$
|
13,000
|
|
|
|
721,598
|
|
|
$
|
722
|
|
|
|
102,193,579
|
|
|
$
|
102,193
|
|
|
$
|
6,055,042
|
|
|
$
|
(10,870,572
|
)
|
|
$
|
(4,699,615
|
)
|
See
accompanying notes to consolidated financial statements
SURGE
HOLDINGS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For
the Years ended December 31, 2019 and 2018
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,447,026
|
)
|
|
$
|
(1,541,078
|
)
|
Adjustments to reconcile net income
loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
227,322
|
|
|
|
149,642
|
|
Amortization of right of use assets
|
|
|
55,608
|
|
|
|
-
|
|
Amortization of debt discount
|
|
|
68,764
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
329,574
|
|
|
|
157,907
|
|
Bad debt expense
|
|
|
977,792
|
|
|
|
-
|
|
Change in fair value of LTC cryptocurrency
coins
|
|
|
-
|
|
|
|
63,487
|
|
Change in fair value of derivative
liability
|
|
|
(4,013
|
)
|
|
|
4,105
|
|
Loss (gain) on settlement of liabilities
|
|
|
474,953
|
|
|
|
(61,709
|
)
|
Loss on settlement of debt
|
|
|
-
|
|
|
|
14,667
|
|
Gain on equity investment in Centercom
|
|
|
(25,192
|
)
|
|
|
-
|
|
Accrued interest on note receivable
|
|
|
(38,471
|
)
|
|
|
-
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,599,534
|
)
|
|
|
(102,815
|
)
|
Lifeline revenue
due from USAC
|
|
|
790,176
|
|
|
|
319,603
|
|
Customer phone
supply
|
|
|
1,356,701
|
|
|
|
(836,536
|
)
|
LTC Cryptocurrency
coins
|
|
|
-
|
|
|
|
(96,992
|
)
|
Prepaid expenses
|
|
|
(86,021
|
)
|
|
|
40,465
|
|
Other assets
|
|
|
(4,999
|
)
|
|
|
-
|
|
Credit card liability
|
|
|
54,317
|
|
|
|
-
|
|
Deferred revenue
|
|
|
(50,000
|
)
|
|
|
(171,500
|
)
|
Loss contingency
|
|
|
(31,960
|
)
|
|
|
120,000
|
|
Current portion
of operating lease liability
|
|
|
(55,608
|
)
|
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
1,474,476
|
|
|
|
925,140
|
|
Net
cash used in operating activities
|
|
|
(6,533,141
|
)
|
|
|
(1,015,614
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(227,630
|
)
|
|
|
(331,803
|
)
|
Advances under notes receivable
|
|
|
(14,959
|
)
|
|
|
(190,000
|
)
|
Net cash received
in business combination
|
|
|
210,348
|
|
|
|
243,768
|
|
Net
cash used in investing activities
|
|
|
(32,241
|
)
|
|
|
(278,035
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Issuance of Common Stock and warrants
|
|
|
3,210,500
|
|
|
|
-
|
|
Due from related party - net
|
|
|
-
|
|
|
|
17,554
|
|
Note payable - borrowings
|
|
|
250,000
|
|
|
|
(31,250
|
)
|
Note payable - repayments
|
|
|
(70,000
|
)
|
|
|
-
|
|
Convertible promissory notes - borrowings
|
|
|
638,000
|
|
|
|
-
|
|
Line of credit - advances
|
|
|
1,130,000
|
|
|
|
1,441,029
|
|
Line of credit - repayments
|
|
|
(217,130
|
)
|
|
|
(1,441,029
|
)
|
Loan proceeds under related party
financing arrangement
|
|
|
2,199,440
|
|
|
|
1,653,500
|
|
Loan repayments
under related party financing arrangement
|
|
|
(674,000
|
)
|
|
|
(1,175,703
|
)
|
Net
cash provided by financing activities
|
|
|
6,466,810
|
|
|
|
464,101
|
|
|
|
|
|
|
|
|
|
|
Net decrease in
cash and cash equivalents
|
|
|
(98,572
|
)
|
|
|
(829,548
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
444,612
|
|
|
|
1,274,160
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
346,040
|
|
|
$
|
444,612
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash
flow information
|
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
77,825
|
|
|
$
|
10,580
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
82,230
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
|
|
|
|
|
|
Exchange of related party advances
for Series C Preferred Stock
|
|
$
|
389,502
|
|
|
$
|
-
|
|
Exchange of investment in Centercom
for Series C Preferred Stock
|
|
$
|
178,508
|
|
|
$
|
-
|
|
Operating lease liability
|
|
$
|
266,424
|
|
|
$
|
-
|
|
Common Stock issued in asset purchase
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
Debt acquired in asset purchase
|
|
$
|
4,000,000
|
|
|
$
|
-
|
|
Common Stock and warrants issued
with debt recorded as debt discount
|
|
$
|
120,060
|
|
|
$
|
-
|
|
Derivative liability on convertible
notes recorded as debt discount
|
|
$
|
176,348
|
|
|
$
|
-
|
|
Debt acquired in business combination
|
|
$
|
-
|
|
|
$
|
3,000,000
|
|
Exchange of Common Stock for Series
C Preferred Stock
|
|
$
|
-
|
|
|
$
|
148,741
|
|
Liabilities settled in Common Stock
|
|
$
|
-
|
|
|
$
|
3,875,352
|
|
See
accompanying notes to consolidated financial statements
SURGE
HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2019
The
accompanying consolidated financial statements include the accounts of Surge Holdings, Inc. (“Surge”), formerly KSIX
Media Holdings, Inc., incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, KSIX Media, Inc. (“Media”),
incorporated in Nevada on November 5, 2014; KSIX, LLC (“KSIX”), a Nevada limited liability company that was formed
on September 14, 2011; Surge Blockchain, LLC (“Blockchain”), formerly Blvd. Media Group, LLC (“BLVD”),
a Nevada limited liability company that was formed on January 29, 2009; DigitizeIQ, LLC (“DIQ”) an Illinois limited
liability company that was formed on July 23, 2014; Surge Cryptocurrency Mining, Inc. (“Crypto”), formerly North American
Exploration, Inc. (“NAE”), a Nevada corporation that was incorporated on August 18, 2006 (since January 1, 2019, this
has been a dormant entity that does not own any assets); Surge Logics Inc (“Logics”), an Nevada corporation that was
formed on October 2, 2018; SurgePays Fintech Inc (“Tech”), an Nevada corporation that was formed on August 22, 2019;
Surge Payments LLC (“Payments”), an Nevada corporation that was formed on December 17, 2018; SurgePhone Wireless LLC
(“Surge Phone”), an Nevada corporation that was formed on August 29, 2019 and True Wireless, Inc., an Oklahoma corporation
(formerly True Wireless, LLC) (“TW”), (collectively the “Company” or “we”). All significant
intercompany balances and transactions have been eliminated in consolidation.
Recent
Developments
As
reported on Form 8-K filed with the SEC on April 16, 2018, on April 11, 2018, the Company closed the merger transaction (the “Merger”)
that was the subject of that certain Agreement and Plan of Reorganization (the “Merger Agreement”) with True Wireless,
Inc., an Oklahoma corporation (“TW”) dated as of April 11, 2018. At closing, in accordance with the Merger Agreement,
TW merged with and into TW Acquisition Corporation, a Nevada corporation (“Merger Sub”), a wholly-owned subsidiary
of Surge Holdings, Inc., with TW being the surviving corporation. As a result of the Merger, TW became a wholly-owned subsidiary
of the Company.
As
a result of the controlling financial interest of the former members of TW, for financial statement reporting purposes, the merger
between the Company and TW has been treated as a reverse acquisition with TW deemed the accounting acquirer and the Company deemed
the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting
Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of TW (the accounting acquirer)
are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition.
The acquisition process utilizes the capital structure of the Company and the assets and liabilities of TW which are recorded
at their historical cost. The equity of the Company is the historical equity of TW retroactively restated to reflect the number
of shares issued by the Company in the transaction. See Note 4.
On
January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global,
S.A. de C.V (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer
service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation,
and other various operational support services. Anthony N. Nuzzo, a director and officer and a 10% shareholder of the Company’s
voting equity has a controlling interest in Centercom Global. Centercom also provides call center support for various third-party
clients. Centercom is involved with:
|
●
|
On-boarding
the SurgePays Portal into over 40,000 retail locations and subsequent ongoing support;
|
|
●
|
Aggressively
marketing the Company’s new “Free Wireless Service” program to substantially grow customer base while enhancing
customer service;
|
|
●
|
Supporting
the Company’s IT infrastructure including database management; and
|
|
●
|
Upselling-related
FinTech products to our existing customer base to increase revenue.
|
On
September 30, 2019, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with GBT Technologies
Inc., a Nevada corporation (“GBT”).
Under
the Purchase Agreement, the Company has purchased substantially all of the assets, and specified liabilities, of GBT’s ECS
Prepaid business, Electronic Check Services business, and the Central State Legal Services business (collectively the “ECS
Business”). The Purchase Agreement provides that the Company assumed GBT’s liabilities incurred after the effective
date of the Purchase Agreement, but only to the extent such obligations and liabilities were not caused by or related to any action
or inaction by GBT prior to the effective date of the Purchase Agreement. The Purchase Agreement provides, among other things,
that on the terms and subject to the conditions set forth therein, the Company acquired substantially all of the assets related
to the ECS Business for total consideration of five million dollars ($5,000,000). The Purchase Agreement provides that the consideration
is to be paid by the Company through the issuance of a convertible promissory note in the amount of four million dollars ($4,000,000)
to GBT (the “Note”), and through the issuance of three million three hundred thirty-three thousand three hundred thirty-three
(3,333,333) restricted shares of the Company’s Common Stock to GBT (the “Shares”). GBT may not convert the Note
to the extent that such conversion would result in beneficial ownership by GBT and/or its affiliates of more than 4.99% of the
issued and outstanding Common Stock of the Company.
Business
Overview
Surge
Holdings, Inc. (“Surge Holdings” or “the Company”), incorporated in Nevada on August 18, 2006, is a company
focused on Telecom, Media, and FinTech applications serving customers worldwide online and across social media, gaming and mobile
platforms.
The
Company’s current focus is the provision of financial and telecommunications services to the financially underserved (i.e.
persons who have little or no access to credit) within the population. The Company provides a suite of services which are primarily
marketed through small retail establishments which are utilized by members of its target market.
Commencing
in 2018, the Company has significantly expanded its suite of services to include the pursuit of the following business models:
Surge
Telecom
SurgePhone
Wireless offers discounted talk, text, and 4G LTE data wireless plans at prices that average 30% – 50% lower than competitors.
Available nationwide, SurgePhone Wireless utilizes ad impression revenue to help offset and, in many cases, eliminate the monthly
wireless plans for low income customers (free service for the customer is paid for by ad revenue). Additionally, SurgePhone also
offers strategic discounts such as the Surge Heroes campaign that rewards teachers, first responders, active military and veterans
with a free Android smartphone.
Additionally,
through the use of the SurgeRewardsApp, the Company is able to more aggressively rollout the SurgePhoneWireless service. Customers
earn rewards from the ad impressions while unlocking their phone and also by opening the SurgeRewardsApp to watch videos and ads,
as well as participate in short surveys in order to receive reward points that can be converted into statement credits for free
cell phone service or cash.
True
Wireless is licensed to provide subsidized wireless service to qualifying low income customers in 5 states. Utilizing all
4 major USA wireless backbones, True Wireless provides discounted and free wireless service to over 25,000 veterans and other
customers who qualify for certain federal programs such as SNAP (EBT) and Medicaid.
The
SurgePhone Android Volt 5XL provides a large screen smartphone option to those unable to afford a more expensive phone.
Surge
Fintech
SurgePays
Visa was launched late in the third quarter of 2019. We believe this card could be life enhancing by serving as a virtual
checking account for the unbanked, underbanked, credit challenged or those unable to access traditional financial services. The
SurgePays card will offer safety, security and convenience of using the card anywhere that accepts Visa and customers will be
able to load their card via direct deposit or loading cash directly at 110,000 locations nationwide. Customers will be able to
access and manage their accounts from the connected app. In addition, customers will also be able to take a picture of their paycheck
and load the cash to their cards (eliminating costly check cashing fees).
Surge
Software
SurgePays
Portal is a multi-purpose software interface for convenience stores, bodegas and other corner merchants providing goods and
services to the underbanked community. The merchant or clerk is able to use the portal interface – similar to a website
– with image driven navigation to add wireless minutes to any prepaid wireless carrier’s phone and access to other
services such as bill payment and loading debit cards. We believe what makes SurgePays unique is that it also offers the merchant
the ability to order wholesale goods through the portal with one touch ease. SurgePays is essentially a wholesale e-commerce storefront
that allows manufactures and distribution companies to have access to merchants while cutting out the middleman. The goal of the
SurgePays Portal is to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas,
and supermarkets. These products include energy drinks, dry foods, frozen foods, bagged snacks, processed meats, automotive parts
and many more goods, all in one convenient e-commerce storefront.
Surge
Digital Media
Surge
Logics is a full-service digital advertising agency, specializing in lead generation, Pay Per Call, landing page optimization
and managed ad spending. Our primary media buying platforms are Google AdWords, Facebook, Instagram and Bing. We have a call center
that can handle Live Call Transfers, Customer Service Support, Lead Verification and Attorney Case Support.
Through
the launch of Surge Intake Logistics (“InTake”), a proprietary CRM software solution that delivers signed retainer
services to clients, InTake is proving to be a direct benefit to clients that do not have the staff and infrastructure to handle
the volume of leads Surge Logics generates. Surge Logics has taken this a step further to provide qualified leads utilizing a
strategic partnership with Centercom to be first in class for online lead generation This partnership and new software have significantly
contributed to Surge Logic’s revenue which has grown to approximately $7.2 million for the year ended December 31, 2019.
Lead
generation describes the marketing process of stimulating and capturing interest in a product or service for the purpose of
developing sales pipeline.
Pay-per-call
(PPCall, also called cost-per-call) is an advertising model in which the rate paid by the advertiser is determined by the
number of telephone calls made by viewers of an ad. Pay Per Call providers charge per call, per impression or per conversion.
Media
buying is the process of buying media placements for advertising (on TV, in publications, on the radio, digital signage, apps
or on websites).
A
call center - centralized office used for receiving or transmitting a large volume of requests by telephone.
Centercom
Global, S.A. de C.V.
On
January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global,
S.A. de C.V (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer
service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation,
and other various operational support services. Anthony N. Nuzzo, a director and officer and a 10% shareholder of the Company’s
voting equity has a controlling interest in Centercom Global. Centercom also provides call center support for various third-party
clients. Centercom is involved with:
|
●
|
On-boarding
the SurgePays Portal into over 40,000 retail locations and subsequent ongoing support;
|
|
●
|
Aggressively
marketing the Company’s new “Free Wireless Service” program to substantially grow customer base while enhancing
customer service;
|
|
●
|
Supporting
the Company’s IT infrastructure including database management; and
|
|
●
|
Upselling-related
FinTech products to our existing customer base to increase revenue.
|
Due
to the fact that a director, officer, and minority owner of the Company has a controlling interest in Centercom Global, the Company
recorded its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s net book value
upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on the accompanying
consolidated balance sheets. The Company recorded its equity interest in Centercom’s results of operations as “Gain
on investment in Centercom” in other income (expense) on the accompanying consolidated statements of operations. The Company
periodically reviews its investment in Centercom for impairment. Management has determined that no impairment was required as
of December 31, 2019.
ECS
Business
On
September 30, 2019, the Company entered into the Purchase Agreement with GBT Technologies Inc. (“GBT”) of the ECS
Prepaid business, Electronic Check Services business and the Central States Legal Services business (collectively, “ECS”).
Through its proprietary Fintech software platform, ECS is a leading provider of prepaid wireless load and top-ups, check cashing
and wireless SIM activation to convenience stores and bodegas nationwide. Since 2008, ECS has grown to a network of over 9,800
retail locations and 160 independent sales organizations (“ISO”) processing over 18,000 transactions per day. Surge
will integrate the ECS software with its SurgePays Network in order to offer both wholesale products from third-party manufacturers,
as well as Surge products, including the SurgePays Reloadable Debit Card, SurgePhone Wireless and SIM Starter Kits. See Note 5.
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries.
All material intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations
are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business
failure.
The
Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions
in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the
volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it
difficult to project the Company’s operating results on a consistent basis.
Concentration
of Credit Risk
Financial
instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable.
The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to
the extent account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject
the Company to concentrations of credit risk. Company closely monitors extensions of credit. Estimated credit losses have been
recorded in the consolidated financial statements. Recent credit losses have been within management’s expectations. One
customer accounted for more than 16% of revenues in 2019. No customer accounted for more than 10% of revenues in 2018.
Method
of Accounting
Investments
held in stock of entities other than subsidiaries, namely corporate joint ventures and other non-controlled entities usually are
accounted for by one of three methods: (i) the fair value method (addressed in Topic 320), (ii) the equity method (addressed in
Topic 323), or (iii) the cost method (addressed in Subtopic 325-20). Pursuant to Paragraph 323-10-05-5, the equity method tends
to be most appropriate if an investment enables the investor to influence the operating or financial policies of the investee.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The
Company held no cash equivalents at December 31, 2019 and 2018.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require
collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the
outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if
receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.
As of December 31, 2019 and 2018, the Company had reserves of $774,841 and 17,000, respectively.
Concentrations
As
of December 31, 2019 and 2018, one customer represented approximately 80% and 22% of total gross outstanding receivables, respectively.
Fair
value measurements
The
Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair
value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of
fair value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature
of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective
yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances
of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
|
●
|
Level
1 — quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
|
|
●
|
Level
3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
|
Derivative
Liabilities
The
Company evaluates its options, warrants, convertible notes, or other contracts, if any, to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and
Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value
of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. The change
in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or
cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation
and then the related fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative
instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument is expected within 12 months of the balance sheet date.
The
Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine
whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an
entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.
The
Company utilizes a binomial option pricing model to compute the fair value of the derivative liability and to mark to market the
fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as
other income or expense in the consolidated statements of operations.
The
Company had derivative liabilities of $190,846 and $51,058 as of December 31, 2019 and 2018, respectively.
Revenue
recognition
The
Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect
adjustment for initially applying the new revenue standard as an adjustment to the opening balance of retained earnings and the
comparative information would not require to be restated and continue to be reported under the accounting standards in effect
for those periods.
Based
on the Company’s analysis the Company did not identify a cumulative effect adjustment for initially applying the new revenue
standards. The Company principally generates revenue through providing product, services and licensing revenue.
The
adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery
of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC
606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the
consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle,
the Company applies the following five steps:
1)
|
Identify
the contract with a customer
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s
rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract
has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that
are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies
judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the
customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining
to the customer.
2)
|
Identify
the performance obligations in the contract
|
Performance
obligations promised in a contract are identified based on the services that will be transferred to the customer that are both
capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources
that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the
transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple
promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct
in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance
obligation.
3)
|
Determine
the transaction price
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount
of variable consideration that should be included in the transaction price utilizing either the expected value method or the most
likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction
price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract
will not occur. None of the Company’s contracts as of December 31, 2019 contained a significant financing component.
4)
|
Allocate
the transaction price to performance obligations in the contract
|
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract
with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or
to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct
services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain
multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative
standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance
obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling
price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable
through past transactions, the Company estimates the standalone selling price taking into account available information such as
market conditions and internally approved pricing guidelines related to the performance obligations.
5)
|
Recognize
revenue when or as the Company satisfies a performance obligation
|
The
Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related
performance obligation is satisfied by transferring a promised service to a customer.
Disaggregation
of Revenue from Contracts with Customers. The following table disaggregates gross revenue by entity for the year ended December
31, 2019 and 2018:
|
|
For
the Year Ended
|
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
True Wireless, Inc.
|
|
$
|
3,446,003
|
|
|
$
|
12,798,687
|
|
Surge Blockchain, LLC
|
|
|
4,233,263
|
|
|
|
1,036,650
|
|
Surge Logics, Inc.
|
|
|
7,234,366
|
|
|
|
374,679
|
|
ECS
|
|
|
10,767,138
|
|
|
|
-
|
|
Other
|
|
|
62,171
|
|
|
|
1,034,139
|
|
Total revenue
|
|
$
|
25,742,941
|
|
|
$
|
15,244,155
|
|
True
Wireless is licensed to provide wireless services to qualifying low income customers in five states. Revenues are recognized when
the services have been provided and the government subsidy has been earned.
Surge
Blockchain revenues are generated through the SurgePays Portal multi-purpose software are recognized when the goods and
services have been delivered and earned.
Surge
Logics is a full-service digital advertising agency and revenues are recognized at a period in time once performance obligations
are met and services are provided as customer deposits are received in advance.
ECS
is a leading provider of prepaid wireless load and top-ups, check cashing and wireless SIM activation to convenience stores and
bodegas nationwide.
Income
taxes
We
use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”)
Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for the amount of: (i) taxes
payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters
that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results
of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets
reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all
of the deferred tax assets will not be realized.
Through
December 23, 2014, KSIX and BLVD operated as limited liability companies and all income and losses were passed through to the
owners. Through October 12, 2015, DIQ operated as a limited liability company and all income and losses were passed through to
its owner. Subsequent to the acquisition dates, these limited liability companies were owned by Surge and became subject to income
tax.
Through
April 1, 2018, TW operated as a limited liability company and all income and losses were passed through to the owners. In order
to facilitate the merger discussed above, TW converted from a limited liability company to a Subchapter C Corporation.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions
for any of the reporting periods presented.
The
Company is no longer subject to tax examinations by tax authorities for years prior to 2016.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current year’s presentation.
Recent
adopted accounting pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases”
(Topic 842). The FASB issued this update to increase transparency and comparability among organizations by recognizing
lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated
guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption of the update is permitted, and entities may also elect the optional transition method provided under ASU 2018-11,
Leases, Topic 842: Targeted Improvement, issued in July 2018, allowing for application of the standard at the adoption
date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
The Company adopted the new standard during the year ended December 31, 2019 and the adoption did not have a material effect on
the consolidated financial statements and related disclosures.
In
May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter of 2018. The Company
adopted the standard during the year ended December 31, 2018 and the adoption did not have a material effect on its consolidated
financial statements and disclosures.
In
July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company adopted
the new standard during the year ended December 31, 2019 and the adoption did not have a material effect on the consolidated financial
statements and related disclosures.
Recent
announced accounting pronouncements
In
June 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation (Topic718):
Improvements to Nonemployee Share-Based Payment Accounting. Under the new standard, companies will no longer be required to
value non-employee awards differently from employee awards. Companies will value all equity classified awards at their grant-date
under ASC 718 and forgo revaluing the award after the grant date. ASU 2018-07 is effective for annual reporting periods beginning
after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted, but no
earlier than the Company’s adoption date of Topic 606, Revenue from Contracts with Customers (as described above
under “Revenue Recognition”). The Company adopted the new standard during the year ended December 31, 2019
and the adoption did not have a material effect on the consolidated financial statements and related disclosures.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures
in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is
most important to users of each entity’s financial statements. The amendments in this update apply to all entities that
are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments
in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. The Company is currently evaluating this guidance and the impact of this update on its consolidated financial statements.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying consolidated financial statements.
The
Company had a net loss of approximately $8.4 million for the year ended December 31, 2019. As of December 31, 2019, the Company
had cash and working capital deficit of approximately $346,000 and $3.5 million, respectively.
Management’s
2019 strategic decision to invest and allocate millions of dollars into software development, product development and its infrastructure
has enabled the company to be position for immediate rapid growth. The Company continues to add stores to the ECS and Wholesale
Marketplace platforms while aggressively exploring new distribution channels and acquisitions. This is enabling the addition of
products from manufacturers in market specific categories in conjunction with national rollouts of proprietary brands such as
LocoRabbit Wireless, Max CBD and Essential products needed in today’s world.
The
3rd quarter asset purchase agreement of the ECS Business gives the Company access to a network of over 9,800 retail locations
and 160 independent salespeople processing over 18,000 transactions per day (see Note 1). ECS generates approximately $46,500,000
in annualized revenue through third party wireless services.
During
the year ended December 31, 2019, the Surge software development team has successfully implemented the merging of the SurgePays
and ECS software to more efficiently and cost effectively increase synergized revenue and profitability moving forward. In addition,
management made the decision to expedite programming, software development and integration to enable the successful launch of
the SurgePays Prepaid Visa card.
The
development of the Surge Logistics Intake software and the infrastructure at Centercom BPO have enabled rapid scaling growth and
evidenced in Surge Logics revenue trajectory.
To
support the significant growth inflection, the Company has reorganized its human resources department, including building the
administrative, legal and finance office in Bartlett, TN and the operations center in El Salvador which will be able to now host
300 employees. Management believes the Company now has the ability to scale to support its expected growth in 2020, which was
a major goal for fiscal year 2019. During the year ended December 31, 2019, the Company was able to continue the utilization of
the internal controls and operating procedures and techniques employed by the Company’s management in order to enhance the
business by creating operating efficiencies and controlling costs. Lastly, the Company has significantly restructured its balance
sheet to be an effective platform for growth as the Company continues to work towards listing on the Nasdaq Capital Market in
the near term.
In
March of 2020, the World Health Organization declared COVID-19 a pandemic. COVID-19 could disrupt the economy, the Company’s
supply chain, and access to capital sources thus adversely affecting the Company’s ability to continue its operations. Management’s
evaluation of the events and conditions and management’s plans regarding those matters are described in Note 3 to the consolidated
financial statements.
These
factors, among others, were addressed by management in determining whether the Company could continue as a going concern. The
Company projects that it should be cash flow positive by the end of Quarter 3 2020 through increased cash flow from ongoing operations
the collection of outstanding receivables and the restructuring of the current debt burden. While management believes it is more
likely than not the Company has the ability to continue as a going concern, this is dependent upon the ability to further implement
the business plan, generate sufficient revenues and to control operating expenses.
Additionally,
if necessary, based on the Company’s history of being able to raise capital from both internal and external sources coupled
with current favorable market conditions, management believes that debt and/or equity financing can be obtained from both related
parties (management and members of the Board of Directors of the Company) and external sources to pay down existing debt obligations,
cover short term shortfalls, meet the shareholders equity requirements for Nasdaq, and complete proposed acquisitions. Although
the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability
to raise additional funds if necessary, there can be no assurances to that effect. Therefore, the accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern.
As
discussed in Note 1, the Company closed the merger transaction that was the subject of the Merger Agreement with True Wireless,
Inc., dated as of April 11, 2018. At closing, in accordance with the Merger Agreement, TW merged with and into TW Acquisition
Corporation, with TW being the surviving corporation. As a result of the Merger, TW became a wholly-owned subsidiary of the Company.
Pursuant
to the terms of the Merger Agreement, TW merged into Acquisition Sub in a transaction where TW was the surviving company and became
a wholly-owned subsidiary of the Company. The transaction was structured as a tax-free reverse triangular merger. In addition
to the 12,000,000 shares of Company Common Stock and $500,000 cash which has been previously paid to the shareholders of TW, at
the closing of the merger transaction, the shareholders of TW received the following as additional merger consideration:
●
152,555,416 shares of newly-issued Company Common Stock, which gave the shareholders of TW, on a proforma basis, a 69.5% interest
in the Company’s total Common Shares.
●
An additional number of shares of Company Common Stock, if any, which were necessary to vest 69.5% of the aggregate issued and
outstanding Common Stock in the shareholders of TW at the Closing.
●
A promissory note in the original face amount of $3,000,000, bearing interest at 3% per annum maturing on December 31, 2018.
●
3,000,000 shares of newly-issued Company Series A Preferred Stock
Following
the closing of the merger transaction the Company’s investment in TW consisted of the following:
|
|
Shares
|
|
|
Amount
|
|
Consideration
paid prior to Closing:
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
|
|
|
$
|
500,000
|
|
Common stock
issued
|
|
|
12,000,000
|
|
|
|
1,200,000
|
|
Total
consideration paid
|
|
|
12,000,000
|
|
|
$
|
1,700,000
|
|
Consideration
paid at Closing:
|
|
|
|
|
|
|
|
|
Common
stock to be issued at closing (1)
|
|
|
152,555,416
|
|
|
$
|
60,683,006
|
|
Series A Preferred
Stock to be issued at closing
|
|
|
3,000,000
|
|
|
|
120,000
|
|
Note payable
due December 31, 2018
|
|
|
|
|
|
|
3,000,000
|
|
Total
consideration to be paid
|
|
|
|
|
|
$
|
63,803,006
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
|
|
|
|
$
|
65,503,006
|
|
|
(1)
|
The
common shares issued at closing of the merger transaction had a closing price of approximately $0.40 per share on the date
of the transaction.
|
Following
the closing of the merger transaction, TW’s financial statements as of the closing were consolidated with the consolidated
financial statements of the Company.
The
following presents the unaudited pro-forma combined results of operations of the Company with the TW Business as if the entities
were combined on January 1, 2018.
|
|
Year
Ended
|
|
|
|
December
31, 2018
|
|
Revenues, net
|
|
$
|
15,684,032
|
|
Net loss
|
|
$
|
(1,541,078
|
)
|
Net loss per share
|
|
$
|
(0.02
|
)
|
Weighted average number of shares outstanding
|
|
|
81,566,892
|
|
The
unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations
are not intended to present actual results that would have been attained had the acquisitions been completed as of January 1,
2018 or to project potential operating results as of any future date or for any future periods.
The
Company consolidated TW as of the closing date of the agreement, and the results of operations of the Company include that of
TW.
5
|
ASSET
PURCHASE AGREEMENT
|
On
September 30, 2019, the Company entered into the Purchase Agreement with GBT.
Under
the Purchase Agreement, the Company has purchased substantially all of the assets, and specified liabilities, of GBT’s ECS
Prepaid business, Electronic Check Services business, and the Central State Legal Services business. The Purchase Agreement provides
that the Company assumed GBT’s liabilities incurred after the effective date of the Purchase Agreement, but only to the
extent such obligations and liabilities were not caused by or related to any action or inaction by GBT prior to the effective
date of the Purchase Agreement. The Purchase Agreement provides, among other things, that on the terms and subject to the conditions
set forth therein, the Company acquired substantially all of the assets related to the ECS Business for total consideration of
five million dollars ($5,000,000). The Purchase Agreement provides that the consideration is to be paid by the Company through
the issuance of a convertible promissory note in the amount of four million dollars ($4,000,000) to GBT, and through the issuance
of three million three hundred thirty-three thousand three hundred thirty-three (3,333,333) restricted shares of the Company’s
Common Stock to GBT. As of the date of this report, the purchase price allocation has yet to be valued. GBT may not convert the
Note to the extent that such conversion would result in beneficial ownership by GBT and/or its affiliates of more than 4.99% of
the issued and outstanding Common Stock of the Company.
The
Note has an effective date of September 27, 2019 and has a term of eighteen (18) months until the maturity date. The Note shall
not bear interest and shall be convertible at the option of GBT starting from the sixth month anniversary of the effective date.
The conversion price of the Note shall equal the volume weighted average price of the Company’s Common Stock on the trading
market which the Common Stock is then trading over the previous twenty (20) days prior to the conversion date, provided that the
conversion price shall never be lower than $0.10 or higher than $0.70. The Note provides that the Company retains the right to
prepay all or any portion of the principal without any prepayment penalty. In addition, in connection with the issuance of the
Note, GBT agreed that, for the eighteen (18) months following the effective date, GBT will not dispose of the Shares or shares
issued as a result of the conversion of the Note, in an amount greater than seven and one-half percent (7.5%) of the trading volume
of the Company’s shares of Common Stock during the previous month.
Following
the closing of the merger transaction, the Company’s investment in ECS consisted of the following:
Purchase Price
|
|
|
|
Convertible note
|
|
$
|
4,000,000
|
|
Common stock
|
|
|
1,000,000
|
|
Total purchase
price
|
|
$
|
5,000,000
|
|
|
|
|
|
|
Allocation of purchase price
|
|
|
|
|
Cash
|
|
$
|
210,348
|
|
Equipment
|
|
|
63,289
|
|
Intangibles
|
|
|
4,903,876
|
|
Accounts payable
and accrued expenses
|
|
|
(177,513
|
)
|
Total allocation
of purchase price
|
|
$
|
5,000,000
|
|
|
(1)
|
The
3,333,333 restricted shares of the Company’s Common Stock issued at closing of the merger transaction had a closing
price of approximately $0.30 per share on the date of the transaction.
|
Following
the closing of the merger transaction, TW’s financial statements as of the closing were consolidated with the consolidated
financial statements of the Company.
The
following presents the unaudited pro-forma combined results of operations of the Company with the ECS Business as if the entities
were combined on January 1, 2018.
|
|
Year
Ended
|
|
|
|
December
31, 2019
|
|
Revenues, net
|
|
$
|
59,064,637
|
|
Net loss
|
|
$
|
(8,902,134
|
)
|
Net loss per share
|
|
$
|
(0.09
|
)
|
Weighted average number of shares outstanding
|
|
|
96,186,742
|
|
|
|
Year
Ended
|
|
|
|
December
31, 2018
|
|
Revenues, net
|
|
$
|
64,260,116
|
|
Net loss
|
|
$
|
(1,069,810
|
)
|
Net loss per share
|
|
$
|
(0.01
|
)
|
Weighted average number of shares outstanding
|
|
|
81,566,892
|
|
Property
and equipment stated at cost, less accumulated depreciation, consisted of the following:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Computer Equipment and
Software
|
|
$
|
309,080
|
|
|
$
|
15,263
|
|
Furniture and Fixtures
|
|
|
1,416
|
|
|
|
7,996
|
|
Leasehold
Improvements
|
|
|
25,193
|
|
|
|
25,513
|
|
|
|
|
335,689
|
|
|
|
48,771
|
|
Less: Accumulated
Depreciation
|
|
|
(41,073
|
)
|
|
|
(13,782
|
)
|
|
|
$
|
294,616
|
|
|
$
|
30,990
|
|
Depreciation
expense was $27,293 and $112,990 for the year ended December 31, 2019 and 2018, respectively.
7
|
CRYPTOCURRENCY
ASSET SALE
|
In
December 2018, the Company executed an agreement with a related party for the sale of Cryptocurrency assets for proceeds of $891,192.
In exchange for the purchased assets with a net book value of $523,743, the related party would assume the liabilities of the
entity consisting of accounts payable of $40,235 and outstanding debt and accrued interest of $808,600. The Company recognized
a gain on sale totaling $273,453.
The
Company is no longer engaged in any line of business involving cryptocurrencies or digital assets. The Company previously announced
an intention to issue Surge Utility Tokens in the future. The Company still plans on utilizing tokens as a reward program; however,
these tokens will have no monetary value and will not involve cryptocurrency or blockchain technology. These tokens will not be
able to be bought, sold, invested, or traded. Rather, these tokens will only be awarded by the Company to existing users of the
Company’s products and will then only be able to be redeemed for rewards using a Surge Rewards website set up by the Company.
The Company has not issued any Surge Utility Tokens to date and this name will not be utilized for any rewards tokens used as
part of a future Surge Rewards program.
The
Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. During the year
ended December 31, 2019 and 2018, the Company utilized a credit card issued in the name of Surge Holdings, Inc. to pay certain
trade obligations totaling $1,191,424 and $55,185, respectively. At December 31, 2019 and 2018, the Company’s total credit
card liability was $449,157 and $394,840, respectively.
9
|
NOTES
PAYABLE – RELATED PARTY
|
In
December 2018, the Company executed a promissory note payable agreement with SMDMM Funding, LLC (“SMDMM”), an entity
that is owned by the Company’s chief executive officer. The promissory note was for a principal sum up to $1.0 million at
an annual interest rate of 6%, due on December 27, 2021. During the year ended December 31, 2019, the Company drew net advances
on the note totaling $425,000. As part of the Cryptocurrency transaction discussed in Note 6 above, $80,000 of the outstanding
balance under the promissory note was assumed by the purchaser.
In
August 2019, the Company executed a promissory note payable agreement with SMDMM. The promissory note was for a principal sum
up to $217,000 at an annual interest rate of 6%, due on August 15, 2022. As of December 31, 2019, the Company drew advances on
the note totaling $217,000.
During
the fourth quarter 2019, the Company executed a promissory note payable agreement with SMDMM. The promissory note was for a principal
sum up to $883,000 at an annual interest rate of 15%, due on November 21, 2022. As of December 31, 2019, the Company drew advances
on the note totaling $883,000.
During
the year ended December 31, 2019, the Company made principal and accrued interest payments of $674,000 and $25,955, respectively.
The outstanding principal balance under the promissory notes due to SMDMM was $2,205,440 and $680,000 at December 31, 2019 and
2018, respectively. Accrued interest owed to SMDMM was $64,741 and $10,718 at December 31, 2019 and 2018, respectively.
10
|
NOTES
PAYABLE AND LONG-TERM DEBT
|
As
of December 31, 2019 and 2018, notes payable and long-term debt consists of:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Note payable to former
officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016 and 2017; accruing interest
at 6% per annum since April 28, 2016 on the past due portion
|
|
$
|
-
|
|
|
$
|
70,000
|
|
Notes payable to
seller of DigitizeIQ, LLC due as noted below 1
|
|
|
485,000
|
|
|
|
485,000
|
|
Convertible note
payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible into
Common Stock 2
|
|
|
27,500
|
|
|
|
27,500
|
|
Promissory
note payable to a lender dated November 4, 2019; accruing interest at 18% per annum; due November 3, 2020; 100,000 shares
of restricted Common Stock granted on execution recorded as a debt discount – net of debt discount of $26,328 3
|
|
|
223,672
|
|
|
|
-
|
|
|
|
$
|
736,172
|
|
|
$
|
582,500
|
|
|
1
|
Notes
due seller of DigitizeIQ, LLC includes a series of notes as follows:
|
|
●
|
A
second non-interest-bearing promissory note made payable to the seller in the amount of $250,000, which was due on January
12, 2016; (Balance at December 31, 2019 and 2018 - $235,000).
|
|
|
|
|
●
|
A
third non-interest-bearing promissory note made payable to the seller in the amount of $250,000, which was due on March 12,
2016 and remains unpaid as of December 31, 2019.
|
The
Company is renegotiating the terms of the notes. The notes bear interest at 5% per annum when in default (after the due date).
The notes were non-interest bearing until due. Accordingly, a debt discount at 5% per annum was calculated for the notes and was
amortized to interest expense until the due date of the notes.
2
Convertible note payable to River North Equity, LLC (“RNE”) - The Company evaluated the embedded conversion
for derivative treatment and recorded an initial derivative liability and debt discount of $23,190. The debt discount is fully
amortized. In February 2020, the Company and RNE settled the outstanding debt.
The
Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion
amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding
discount recorded to the associated debt. The excess of the derivative value over the face amount of the note, if any, is recorded
immediately to interest expense at inception. As noted above, the Company reached an agreement with a debt holder to convert outstanding
debt and interest into shares of Common Stock. As a result, the Company wrote-off the existing derivative liability of $34,556.
In addition, the Company wrote-off outstanding principal balance on the note totaling $32,547.
3
Promissory note – The Company evaluated the 100,000 restricted shares of the Company’s Common Stock granted
with the note and recorded a debt discount of $31,200. The debt discount is amortized over the earlier of (i) the term of the
debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component
of interest expense in the consolidated statements of operations. There was unamortized debt discount of $26,328 as of December
31, 2019. During the year ended December 31, 2019, the Company recorded amortization of debt discount totaling $4,872.
11
|
CONVERTIBLE
PROMISSORY NOTES
|
As
of December 31, 2019 and 2018, convertible promissory notes payable consists of:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Convertible
note payable to GBT Technologies Inc. dated September 27, 2019 with no interest; due March 27, 2021; convertible into Common
Stock 1
|
|
$
|
4,000,000
|
|
|
$
|
-
|
|
Convertible note
payable to Power Up Lending Group Ltd. dated September 18, 2019 with at 12% per annum; due September 18, 2020; convertible
into Common Stock 2
|
|
|
233,000
|
|
|
|
-
|
|
Convertible note
payable to BHP Capital NY dated October 7, 2019 with interest at 18% per annum; due April 7, 2021; convertible into shares
of Common Stock 3
|
|
|
135,000
|
|
|
|
-
|
|
Convertible note
payable to Armada Capital Partners LLC dated October 7, 2019 with interest at 18% per annum; due April 7, 2021; convertible
into shares of Common Stock 3
|
|
|
135,000
|
|
|
|
-
|
|
Convertible
note payable to Jefferson Street Capital LLC dated October 7, 2019 with interest at 18% per annum; due April 7, 2021; convertible
into shares of Common Stock 3
|
|
|
135,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Less: Debt
discount
|
|
|
(201,316
|
)
|
|
|
|
|
|
|
$
|
4,436,684
|
|
|
$
|
-
|
|
1
As discussed above in Note 5, the Purchase Agreement provides that the consideration is to be paid by the Company through
the issuance of a convertible promissory note in the amount of $4,000,000 to GBT, and through the issuance of three million three
hundred thirty-three thousand three hundred thirty-three restricted shares of the Company’s Common Stock. The conversion
price of the note shall equal the volume weighted average price of the Company’s Common Stock on the trading market which
the Common Stock is then trading over the previous twenty (20) days prior to the conversion date, provided that the conversion
price shall never be lower than $0.10 or higher than $0.70. The note provides that the Company retains the right to prepay all
or any portion of the principal without any prepayment penalty.
2
The Company executed a convertible note with Power Up Lending Group (“PowerUp”) on September 18, 2019 and
identified certain features embedded in the conversion feature of the note requiring the Company to classify it as a derivative
liability. The conversion price of the note shall equal 65% the average price of the two lowest trading prices of the Company’s
Common Stock on the trading market which the Common Stock is then trading over the previous twenty (20) days prior to the conversion
date (See Note 12 below). On March 6, 2020, Surge Holdings, Inc. the Company prepaid $332,027 in cash to fully satisfy the note
which would have matured on September 18, 2020. No shares of the Company’s Common Stock were issued or conveyed to PowerUp
as a result of the prepayment.
3
On October 7, 2019, the Company entered into a Securities Purchase Agreement (the “SPA”), severally and
not jointly, with BHP Capital NY Inc., a New York Corporation (“BHP”), Armada Capital Partners LLC, a Delaware limited
liability company (“Armada”), and Jefferson Street Capital LLC, a New Jersey limited liability company (“Jefferson”),
(“Buyer” or collectively the “Buyers”). In connection with the SPA, the Company issued three (3) notes,
one to each Buyer, and three (3) warrants to purchase the Company’s Common Stock, one to each Buyer. The aggregate purchase
price of the notes is $375,000 and the aggregate principal amount of the notes is $405,000.
Pursuant
to the SPA, each of the Buyers purchased from the Company, for a purchase price of $125,000, a convertible promissory note, in
the principal amount of $135,000. The purchase of each note was accompanied by the Company’s issuance of a warrant to purchase
125,000 shares of the Company’s Common Stock to each Buyer. On October 7, 2019, each Buyer delivered the purchase price
to the Company as payment for each note.
Each
note became effective as of October 7, 2019 and is due and payable on April 7, 2021. The notes entitle the Buyers to 8% interest
per annum. Upon an Event of Default (as defined in the notes), the notes entitle the Buyers to interest at the rate of 18% per
annum. The notes may be converted into shares of the Company’s Common Stock at a conversion price equal to 0.75 (representing
a 25% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the
Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and
(ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading
day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately
due and payable.
The
warrants were issued to the Buyers by the Company on October 7, 2019 in connection with the SPA. The warrants entitle the Buyers,
respectively, to exercise purchase rights represented by the warrants up to 125,000 shares per warrant. The warrants permit the
Buyers to exercise the purchase rights at any time on or after October 7, 2019 through October 7, 2022. Each warrant contains
an exercise price per share of $0.80, subject to adjustment, and also contains a provision permitting the cashless exercise of
such exercise rights as defined therein. The Company has maintained the right to redeem each warrant in full at any time following
payment in full of the amounts owing under each respective note.
The
Company valued the warrants using the Black-Scholes Option Pricing model and accounted for it as debt discount on the consolidated
balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using
the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated
statements of operations. There was unamortized debt discount of $201,316 as of December 31, 2019. During the year ended December
31, 2019, the Company recorded amortization of debt discount related to these warrants totaling $13,782.
Future
maturities of all debt (excluding debt discount discussed above in Notes 10 and 11) are as follows:
For
the Years Ending December 31,
|
|
|
|
2020
|
|
$
|
1,908,370
|
|
2021
|
|
|
5,510,000
|
|
2022
|
|
|
1,100,440
|
|
|
|
$
|
8,518,810
|
|
As
discussed above in Note 11, The Company executed a convertible note with Power Up Lending Group on September 18, 2019 and received
gross proceeds of $233,000. The Company identified certain features embedded in the note requiring the Company to classify the
feature as a derivative liability. The conversion price of the note are subject to adjustment for issuances of the Company’s
Common Stock or any equity linked instruments or securities convertible into the Company’s Common Stock at a purchase price
of less than the prevailing conversion price or exercise price. Such adjustment shall result in the conversion price and exercise
price being reduced to such lower purchase price.
During
the year ended December 31, 2019, the fair value of the derivative feature was calculated using the following weighted average
assumptions:
|
|
December
31, 2019
|
|
Risk-free
interest rate
|
|
|
1.59
– 1.87
|
%
|
Expected
life of grants
|
|
|
1
year
|
|
Expected
volatility of underlying stock
|
|
|
88
- 100
|
%
|
Dividends
|
|
|
0
|
%
|
As
of December 31, 2019, the derivative liability of the warrants was $190,846. In addition, for the year ended December 31, 2019,
the Company recorded $4,013 as a gain on the change in fair value of the derivative on the statement of operations.
On
January 25, 2018 the Company obtained a $500,000 line of credit (LOC) with a Bank. The LOC bears interest at 5% per annum and
is secured by essentially all of the Company’s assets. The note is personally guaranteed by the owner of the majority of
the Company’s voting shares. On December 21, 2018, the Company and the bank agreed to increase the LOC to $1,000,000 at
an interest rate of 6% per annum. During the year ended December 31, 2019, total advances and repayments under the LOC were $1,130,000
and $217,130, respectively. As of December 31, 2019 and 2018, the outstanding balance on the LOC was $912,870 and $0, respectively.
The
Company determines if an arrangement contains a lease at inception. Right of use (“ROU”) assets represent the right
to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from
the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease
payments over the lease term.
The
Company leases office space in Memphis, TN and a call center space in El Salvador. The term of the office is for 2 years beginning
on November 1, 2019 commencing with monthly payments of $1,600. The term of the call center lease is for 3 years beginning on
March 1, 2019 commencing with monthly payments of $6,680. During the years ended December 31, 2019 and 2018, the Company paid
lease obligations of $87,762 and $30,480, respectively, under the leases.
The
Company utilized a portfolio approach in determining the discount rate. The portfolio approach takes into consideration the range
of the term, the range of the lease payments, the category of the underlying asset and the Company’s estimated incremental
borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of
lease payments. The Company also considered its recent debt issuances as well as publicly available data for instruments with
similar characteristics when calculating the incremental borrowing rates.
The
lease terms include options to extend the leases when it is reasonably certain that the Company will exercise that option. These
operating leases contain renewal options for periods ranging from three to five years that expire at various dates with no residual
value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the
judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is
reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal
rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the
option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in
the measurement of the right-of-use assets and operating lease liabilities.
Leases
with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above.
The
Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company recognizes variable
lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an
index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are
recognized in the period incurred.
The
components of lease expense were as follows:
|
|
Year
Ended
December
31, 2019
|
|
|
|
|
|
Operating
leases
|
|
$
|
80,760
|
|
Interest
on lease liabilities
|
|
|
7,002
|
|
Total
net lease cost
|
|
$
|
87,762
|
|
Supplemental
balance sheet information related to leases was as follows:
|
|
December
31, 2019
|
|
Operating
leases:
|
|
|
|
|
Operating
lease ROU assets - net
|
|
$
|
210,816
|
|
|
|
|
|
|
Current
operating lease liabilities, included in current liabilities
|
|
$
|
90,944
|
|
Noncurrent
operating lease liabilities, included in long-term liabilities
|
|
|
119,872
|
|
Total
operating lease liabilities
|
|
$
|
210,816
|
|
Supplemental
cash flow and other information related to leases was as follows:
|
|
Year
Ended December 31, 2019
|
|
Cash
paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
55,608
|
|
ROU
assets obtained in exchange for lease liabilities:
|
|
|
|
|
Operating
leases
|
|
$
|
266,424
|
|
Weighted
average remaining lease term (in years):
|
|
|
|
|
Operating
leases
|
|
|
2.12
|
|
Weighted
average discount rate:
|
|
|
|
|
Operating
leases
|
|
|
5.5
|
%
|
Total
future minimum payments required under the lease obligations as of December 31, 2019 are as follows:
Twelve
Months Ending December 31,
|
|
|
|
2020
(thereafter)
|
|
$
|
99,360
|
|
2021
|
|
|
99,160
|
|
2022
|
|
|
27,040
|
|
Total
lease payments
|
|
$
|
222,560
|
|
Less:
amounts representing interest
|
|
|
(11,744
|
)
|
Total
lease obligations
|
|
$
|
210,816
|
|
Preferred
Stock
Series
“A” Preferred Stock
The
Company, pursuant to the consent of the Board of Directors filed a Certificate of Designation with the Nevada Secretary of State
which designated 10,000,000 shares of the Company’s authorized preferred stock as Series “A” Preferred Stock,
par value $0.001. The Series “A” Preferred Stock has the following attributes:
|
●
|
Ranks
senior only to any other class or series of designated and outstanding preferred shares of the Company;
|
|
|
|
|
●
|
Bears
no dividend;
|
|
|
|
|
●
|
Has
no liquidation preference, other than the ability to convert to Common Stock of the Company;
|
|
|
|
|
●
|
The
Company does not have any rights of redemption;
|
|
|
|
|
●
|
Voting
rights equal to ten shares of Common Stock for each share of Series “A” Preferred Stock;
|
|
|
|
|
●
|
Entitled
to same notice of meeting provisions as Common Stock holders;
|
|
|
|
|
●
|
Protective
provisions require approval of 75% of the Series “A” Preferred Shares outstanding to modify the provisions or
increase the authorized Series “A” Preferred Shares; and
|
|
|
|
|
●
|
Each
one Series “A” Preferred Shares can be converted into ten common shares at the option of the holder.
|
On
April 11, 2018, the Company issued 3,000,000 shares of Series A Preferred Stock as consideration for the True Wireless, Inc. merger.
As discussed in Note 1, the equity of the Company is the historical equity of TW retroactively restated to reflect the number
of shares issued by the Company in the transaction. These preferred shares were recorded as a retroactive 2017 transaction as
incentive to complete the merger.
Upon
close of the merger, the Company recorded 10,000,000 shares of Series A Preferred Stock as a part of the recapitalization transaction
for services previously rendered by the Company’s former Chief Executive Officer and Chairman of the Board of Directors.
As
of December 31, 2019 and 2018, there were 13,000,000 shares of Series A issued and outstanding.
Series
“C” Convertible Preferred Stock
On
June 22, 2018, the Board of Directors approved a Certificate of Designation for Company Series C Convertible Preferred stock,
which was filed with the Secretary of State of the State of Nevada on that date. The Certificate of Designations approved the
creation of a new series of preferred stock consisting of 1,000,000 shares of Series C Convertible Preferred Stock par value $0.001
(“Series C Preferred Stock”) with an original issue price of $100.00 per share.
The
Series “C” Preferred Stock has the following attributes:
|
●
|
Ranks
junior only to any other class or series of designated and outstanding preferred shares of the Company;
|
|
|
|
|
●
|
Bears
a dividend per share of Series C Preferred Stock equal to the per share amount (as converted), and in the same form as, the
dividend payable to the holders of the Common Stock;
|
|
|
|
|
●
|
With
respect to such liquidation, dissolution or winding up, the holders of Series C Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Junior
Securities but after distribution of such assets among, or payment thereof to holders of any Senior Preferred Stock, an amount
equal to the Series C Original Issue Price for each share of Series C Preferred Stock plus an amount equal to all declared
but unpaid dividends on Series C Preferred Stock;
|
|
|
|
|
●
|
The
Company does not have any rights of redemption;
|
|
|
|
|
●
|
Voting
rights equal to 250 shares of Common Stock for each share of Series “C” Preferred Stock;
|
|
|
|
|
●
|
Entitled
to same notice of meeting provisions as Common Stock holders;
|
|
|
|
|
●
|
Protective
provisions require approval of 75% of the Series “C” Preferred Shares outstanding to modify the provisions or
increase the authorized Series “C” Preferred Shares; and
|
|
|
|
|
●
|
Each
one Series “C” Preferred Shares can be converted into ten common shares at the option of the holder.
|
As
noted above, each share of Series C Preferred Stock is convertible into 250 shares of Company Common Stock (the same conversion
rate utilized in the exchange transaction), but is only convertible on the first to occur of the following events:
|
(i)
|
The
Volume Weighted Average Price (“VWAP”) of the Company’s Common Stock during any then consecutive trading
days is at least $2.00 per share; or
|
|
|
|
|
(ii)
|
June
30, 2019.
|
On
June 29, 2018, each of Kevin Brian Cox (“Cox”), the Company’s Chief Executive Officer, and Thirteen Nevada LLC
(“13”) entered into separate Exchange Agreements with the Company whereby the Shareholders agreed to exchange an aggregate
of 148,741,531 shares of previously issued Company Common Stock for an aggregate of 594,966 shares of newly-issued Company Series
C Convertible Preferred Stock. The calculation of weighted average shares was retroactively restated in order to properly account
for the above noted share exchange.
During
the year ended December 31, 2018, the Company issued 48,400 shares of Series C Preferred in exchange for the conversion of a note
payable of $3,000,000 and accrued interest of $24,952.
As
discussed above in Note 1, on January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership
of Centercom. Upon execution of the agreement, the Company issued 72,000 shares of Preferred C stock (convertible into 18,000,000
shares of Common Stock) to a director, officer and minority owner of the Company who has a controlling interest in Centercom.
The Company recorded its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s
net book value upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on
the accompanying consolidated balance sheets.
On
February 15, 2019, Carter Matzinger elected to exchange outstanding non-interest-bearing debt totaling $389,502 owed by the Company
into 6,232 shares of Preferred C stock.
As
of December 31, 2019 and 2018, there were 721,598 and 643,366 shares of Series C issued and outstanding, respectively.
Common
Stock
On
March 8, 2018, the Company granted a consultant 48,000 restricted shares for services rendered.
On
April 11, 2018, the Company issued 152,555,416 shares of Common Stock as consideration for the True Wireless, Inc. merger. As
discussed in Note 1, the equity of the Company is the historical equity of TW retroactively restated to reflect the number of
shares issued by the Company in the transaction. These common shares were recorded as a retroactive 2017 transaction as incentive
to complete the merger.
On
April 25, 2018, the Company issued an aggregate of 480,000 shares of Common Stock to two consultants valued at $0.27 per share.
In
July 2018, the Company issued an aggregate of 1,156,587 shares of Common Stock valued at $0.20 per share to nine parties in settlement
of certain disputes between TW and Benson Communications, S.A. de C.V. The settlement had been previously reached on September
29, 2017.
In
August 2018, the Company reached a settlement with the debt holder and issued 2,175,000 in full settlement of the outstanding
debt totaling $435,000.
During
the year ended December 31, 2019, the Company granted consultants 96,000 restricted shares for services pursuant to consulting
agreements.
On
March 27, 2019, the Company reached a settlement with a consultant to issue 875,000 shares for services rendered. Upon execution
of the settlement, the Company recorded a loss on settlement of $507,500.
As
discussed above in Note 5, on September 30, 2019, the Company entered into a Purchase Agreement with GBT Technologies Inc. Pursuant
to the agreement, the Company acquired substantially all of the assets related to the ECS Business for total consideration of
five million dollars ($5,000,000). The Purchase Agreement provides that the consideration is to be paid by the Company through
the issuance of a convertible promissory note in the amount of $4,000,000 and through the issuance of 3,333,333 restricted shares
of the Company’s Common Stock.
In
October 2019, the Company issued 70,000 shares of Common Stock to a consultant valued at $0.31 per share.
On
November 4, 2019, the Company granted 100,000 shares of Common Stock pursuant to a debt agreement executed with a lender. The
shares were valued at $0.31 per share and was recorded as a debt discount.
During
the year ended December 31, 2019, the Company sold an aggregate of 9,172,855 shares of Common Stock and 4,462,135 warrants, with
each warrant exercisable for one share of Common Stock at an exercise price of $0.75, resulting in gross proceeds to the Company
of $3,210,500.
During
the year ended December 31, 2019 and 2018, the Company recorded total stock-based compensation expense of $295,900 and $146,000,
respectively, in relation to shares issued for services.
As
of December 31, 2019 and 2018, there were 102,193,579 and 88,046,391 shares of Common Stock issued and outstanding, respectively.
Stock
Warrants
On
March 8, 2018, the Company granted its former Chief Financial Officer 50,000 warrants to purchase the Company’s Common Stock
with an exercise price of $0.41 per share, a term of 5 years, and a vesting period of 1 year. The warrants have an aggregated
fair value of approximately $14,700 that was calculated using the Black-Scholes option-pricing model.
On
February 15, 2019, the Company executed a consulting agreement with a third party for professional services. Upon execution of
the agreement, the Company agreed to issue 100,000 warrants to purchase the Company’s Common Stock with an exercise price
of $3.00 per share, a term of 3 years, and immediate vesting. In addition, the consultant is eligible to receive 150,000 warrants
upon achievement of certain milestones as discussed in the agreement. The 250,000 warrants have an aggregated fair value of approximately
$30,782 that was calculated using the Black-Scholes.
For
the year ended December 31, 2019 and 2018, when computing fair value of share-based payments, the Company has considered the following
variables:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Risk-free
interest rate
|
|
|
2.50
|
%
|
|
|
2.03
|
%
|
Expected
life of grants
|
|
|
3
years
|
|
|
|
1.5
years
|
|
Expected
volatility of underlying stock
|
|
|
168.71
|
%
|
|
|
173.02
|
%
|
Dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
The
estimated warrant life was determined based on the “simplified method,” giving consideration to the overall vesting
period and the contractual terms of the award.
During
the year ended December 31, 2019 and 2018, the Company recorded total stock-based compensation expense related to the warrants
of approximately $33,700 and $11,800, respectively. The unrecognized compensation expense at December 31, 2019 was approximately
$0.
16
|
RELATED
PARTY TRANSACTIONS
|
The
Company’s former chief executive officer has advanced the Company various amounts on a non-interest-bearing basis, which
is being used for working capital. The advance has no fixed maturity. As noted, Mr. Matzinger elected to exchange outstanding
non-interest-bearing debt totaling $389,502 owed by the Company into 6,232 shares of Preferred C stock. As of December 31, 2019
and 2018, the outstanding balance due was $0 and $389,502, respectively.
For
the year ended December 31, 2019 and 2018, outsourced management services fees of $1,020,000 was paid to Axia Management, LLC
(“Axia”) as compensation for services provided. These costs are included in Selling, general and administrative expenses
in the Consolidated Statements of Operations. Axia is owned by the majority owner of the Company.
At
December 31, 2019 and 2018, the Company had trade payables to Axia of $666,112 and $66,535, respectively.
For
the year ended December 31, 2019 and 2018, the Company purchased telecom services and access to wireless networks from 321 Communications
in the amount of $704,683 and $1,016,393, respectively. These costs are included in Cost of revenue in the Statements of Operations.
The owner of the majority of the Company’s voting shares is a minority owner of 321 Communications.
At
December 31, 2019 and 2018, the Company had trade payables to 321 Communications of $140,923 and $52,161, respectively.
The
Company contracted with Centercom Global, S.A. de C.V. (“Centercom Global”) to provide customer service call
center services, manage the sales process to include handling incoming orders, the collection and verification of all documents
to comply with FCC regulations, monthly audit of all subscribers to file the USAC 497 form, yearly audit of all subscribers that
have been active over one year to file the USAC 555 form (Recertification), information technology professionals to maintain company
websites, sales portals and server maintenance. Billings for these services in the year ended December 31, 2019 and 2018 were
$2,384,780 and $2,129,546, respectively, and are included in Cost of revenue in Consolidated Statements of Operations. A director,
officer, and minority owner of the Company has a controlling interest in Centercom Global. As discussed in Note 1, on January
17, 2019 the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom for $178,508, the
Company’s ownership percentage of the net book value of Centercom upon completion of the transaction.
At
December 31, 2019 and 2018, the Company had trade payables to Centercom Global of $282,159 and $175,000, respectively.
See
Note 5 for long-term debt due to related parties.
17
|
COMMITMENTS
AND CONTINGENCIES
|
On
November 1, 2013, The Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability for Forfeiture
to the Company for requesting and/or receiving support for ineligible subscriber lines between the months of October 2012 and
May 2013 and proposed a monetary forfeiture of $5,501,285. The Company has annual compliance audits with FCC approved audit firms
that have found no compliance deficiencies. Management believes the proposed monetary forfeiture is without merit and if anything
should result from this notice, the amount would not materially affect the financial position of the Company.
In
October 2018, the Company signed an agreement with Pastime Foods (“Pastime”) in order to expand the Company’s
distribution network for its SurgePays portal. The agreement will initiate distribution and sales to over 15,000 convenience and
retail locations with a long-term target of greater than 40,000 locations. According to the agreement, Pastime commits to selling
more than an average required minimum of $1,500 of monthly sales revenue per location. The Company will fund the initial placement
costs and expenses with a total initial advance of $190,000 as well as fees of $10,000. Any advances will be offset by the sharing
of distribution revenues for shipments paid by retailers directly to Pastime and the Company. The sharing percentage will be 100%
of the net distribution profit until the advances have been covered. As of December 31, 2018, the outstanding receivable due to
the Company pursuant to the agreement is $190,000 and is shown as Note Receivable on the consolidated balance sheet.
In
November 2018, the Company entered into a settlement agreement with West Publishing Corporation (“West”) to remedy
an outstanding civil action filed by West. Pursuant to the agreement, the Company will pay West the principal amount of $125,000
plus interest accruing at the annual rate of 7%. As of December 31, 2019, all payments were made as required in the settlement
agreement.
Deferred
Tax Assets
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Bill”) was signed into law. Prior to the enactment of
the Tax Reform Bill, the Company measured its deferred tax assets at the federal rate of 34%. The Tax Reform Bill reduced the
federal tax rate to 21% resulting in the re-measurement of the deferred tax asset as of December 31, 2017. Beginning January 1,
2018, the lower tax rate of 21% will be used to calculate the amount of any federal income tax due on taxable income earned during
2018.
For
the periods from inception through the date of conversion to a C corporation in April 2018, the Company reported its income under
True Wireless LLC, a limited liability company. As a result, the Company’s income for federal and state income tax purposes
were reportable on the tax returns of the individual partners. Accordingly, no recognition has been made for federal or state
income taxes in the accompanying financial statements of the Company through the date of conversion.
At
December 31, 2019, the Company has available for U.S. federal income tax purposes a net operating loss (“NOL”) carry-forwards
of approximately $8.3 million that may be used to offset future taxable income through the fiscal year ending December 31, 2039.
If not used, these NOLs may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50%
ownership change as determined under the regulations. The Company plans on undertaking a detailed analysis of any historical and/or
current Section 382 ownership changes that may limit the utilization of the net operating loss carryovers. No tax benefit has
been reported with respect to these net operating loss carry-forwards in the accompanying consolidated financial statements since
the Company believes that the realization of its net deferred tax asset of approximately $1,749,000 was not considered more likely
than not and accordingly, the potential tax benefits of the net loss carry-forwards are fully offset by a valuation allowance
of $1,749,000.
Deferred
tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the
deferred tax assets because of the uncertainty regarding its realizability. In assessing the realization of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon future generation for taxable income during the periods in which
temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration
of all the information available, Management believes that significant uncertainty exists with respect to future realization of
the deferred tax assets and has therefore established a full valuation allowance. The valuation allowance increased by approximately
$1,711,000 and $290,000 for the year ended December 31, 2019 and 2018, respectively.
The
Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain
positions that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or
expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to
as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of
tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation
to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If
applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other
expenses – Interest expense” in the statement of operations. Penalties would be recognized as a component of “General
and administrative.”
No
material interest or penalties on unpaid tax were recorded during the year ended December 31, 2019 and 2018. As of December 31,
2019 and 2018, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant
changes in its unrecognized tax benefits in the next year.
Components
of deferred tax assets are as follows:
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
Net
deferred tax assets – Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
income tax benefit from NOL carry-forwards
|
|
$
|
2,002,427
|
|
|
$
|
291,359
|
|
Less
valuation allowance
|
|
|
(2,002,427
|
)
|
|
|
(291,359
|
)
|
Deferred
tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
Tax Provision in the Consolidated Statements of Operations
A
reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows:
|
|
For
the Year
Ended
December 31,
2019
|
|
|
For
the Year
Ended
December 31,
2018
|
|
|
|
|
|
|
|
|
Federal
statutory income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance on net operating loss carry-forwards
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Operating
segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly
by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision maker is its Chief Executive Officer.
The
Company evaluated performance of its operating segments based on revenue and operating profit (loss). Segment information for
the year ended December 31, 2019 and 2018 and as of December 31, 2019 and 2018, are as follows:
|
|
Surge
|
|
|
TW
|
|
|
ECS
|
|
|
Total
|
|
Year
ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
9,558,415
|
|
|
$
|
5,417,388
|
|
|
$
|
10,767,138
|
|
|
$
|
25,742,941
|
|
Cost of revenue
|
|
|
(5,916,947
|
)
|
|
|
(3,998,410
|
)
|
|
|
(10,390,096
|
)
|
|
|
(20,305,453
|
)
|
Gross
margin
|
|
|
3,641,468
|
|
|
|
1,418,978
|
|
|
|
377,042
|
|
|
|
5,437,488
|
|
Costs
and expenses
|
|
|
(9,199,277
|
)
|
|
|
(3,597,229
|
)
|
|
|
(409,010
|
)
|
|
|
(13,205,516
|
)
|
Operating
loss
|
|
|
(5,557,809
|
)
|
|
|
(2,178,251
|
)
|
|
|
(31,968
|
)
|
|
|
(7,768,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,445,468
|
|
|
$
|
12,798,687
|
|
|
$
|
-
|
|
|
$
|
15,244,155
|
|
Cost of revenue
|
|
|
(1,864,727
|
)
|
|
|
(6,705,513
|
)
|
|
|
-
|
|
|
|
(8,570,240
|
)
|
Gross
margin
|
|
|
580,741
|
|
|
|
6,093,174
|
|
|
|
-
|
|
|
|
6,673,915
|
|
Costs
and expenses
|
|
|
(2,558,156
|
)
|
|
|
(5,651,228
|
)
|
|
|
-
|
|
|
|
(8,209,384
|
)
|
Operating
loss
|
|
|
(1,977,415
|
)
|
|
|
441,946
|
|
|
|
-
|
|
|
|
(1,535,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
3,636,624
|
|
|
$
|
1,339,577
|
|
|
$
|
5,010,172
|
|
|
$
|
9,986,373
|
|
Total
liabilities
|
|
|
10,850,674
|
|
|
|
3,815,175
|
|
|
|
20,139
|
|
|
|
14,685,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
947,550
|
|
|
$
|
3,136,768
|
|
|
$
|
-
|
|
|
$
|
4,084,318
|
|
Total
liabilities
|
|
|
2,694,258
|
|
|
|
3,378,293
|
|
|
|
-
|
|
|
|
6,072,551
|
|
Membership
Interest Purchase Agreement
On
January 30, 2020, the Company entered into a Membership Interest Purchase Agreement (the “MIPA”) by and among the
Company, ECS Prepaid, LLC, a Missouri limited liability company (“ECS Prepaid”), Dennis R. Winfrey, an individual,
and Peggy S. Winfrey, an individual (together, the “Winfreys”), whereby the Company purchased from the Winfreys all
of the Membership Interests of ECS Prepaid owned by the Winfreys (the “ECS Prepaid Membership Interests”). In consideration
for the ECS Prepaid Membership Interests, the Company issued to Suray Holdings LLC, an entity jointly controlled by the Winfreys,
450,000 shares of Common Stock of the Company.
ECS
and CSLS Stock Purchase Agreement
On
January 30, 2020, the Company entered into a Stock Purchase Agreement (the “ECS and CSLS SPA”) by and among the Company,
Electronic Check Services, Inc., a Missouri corporation (“ECS”), Central States Legal Services, Inc., a Missouri corporation
(“CSLS”), and the Winfreys, whereby the Company purchased from the Winfreys all of the issued and outstanding stock
of each of ECS and CSLS (the “ECS and CSLS Stock”). In consideration for the ECS and CSLS Stock, the Company issued
50,000 shares of Common Stock to Suray (the “ECS and CLS Purchase Share Issuance”).
January
SPAs and Notes
On
January 30, 2020, the Company entered into Securities Purchase Agreements (the “January 2020 SPAs”), with three (3)
accredited investors (the “January 2020 Investors”), pursuant to which the January 2020 Investors purchased from the
Company, for an aggregate purchase price of $500,000 (the “January 2020 Purchase Price”), Promissory Notes in the
aggregate principal amount of $540,000 (the “January 2020 Notes”). The January 2020 Notes will be repaid according
to a schedule of fixed interest and principal payments beginning in August 2020. As additional consideration for the January 2020
Investors loaning the January 2020 Purchase Price to the Company, the Company issued to each of the January 2020 Investors 250,000
shares of Common Stock for a total of 750,000 shares (the “January 2020 Share Issuance”).
The
January 2020 Notes shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on February 5, 2021. No
payments of principal or interest are due through July 2020 (five (5) months following issuance) and then there are seven (7)
fixed payments of principal and interest due on a monthly basis until maturity.
Settlement
Agreement
On
January 15, 2020, the Company and Carter Matzinger (a member of the Company’s Board of Directors) (collectively, the “Surge
Party”), and the former owners of the Company’s wholly-owned subsidiary, DigitizeIQ, LLC (collectively, the “DigitizeIQ
Party” and, together with the Surge Party, the “Parties”), entered into a settlement agreement (the “DigitizeIQ
Settlement Agreement”) to settle any claims the Parties may have had against each other. The parties made claims against
each other with regard to alleged breaches of an Exchange Agreement, a Non-Compete Agreement, and promissory notes issued by the
Company to the DigitzeIQ Party (the “DigitzeIQ Promissory Notes”).
Pursuant
to the DigitizeIQ Settlement Agreement, the Parties, in addition to releasing all claims against each other, agreed to cooperate
to ensure the complete transfer and assignment of the domain “digitizeiq.com” to the Company and agreed that the DigitizeIQ
Promissory Notes are deemed terminated. As a result of the DigitizeIQ Promissory Notes being terminated, on an unaudited basis,
the Company reduced its liabilities by approximately $580,000.
February
SPAs and Note
On
February 3 and February 6, 2020, the Company entered into Securities Purchase Agreements (the “February 2020 SPAs”),
with two (2) accredited investor (the “February 2020 Investors”), pursuant to which the February 2020 Investors purchased
from the Company, for an aggregate purchase price of $400,000 (the “February 2020 Purchase Price”), Promissory Notes
in the principal amount of $432,000 (the “February 2020 Notes”). The February 2020 Notes will be repaid according
to a schedule of fixed interest and principal payments beginning in August 2020. As additional consideration for the February
2020 Investors loaning the February 2020 Purchase Price to the Company, the Company issued to each of the February 2020 Investors
300,000 shares of Common Stock for a total of 600,000 shares (the “February Share Issuance”).
The
terms of the February 2020 Notes are substantially the same as the terms of the January 2020 Notes.
Anthony
Evers Employment Agreement
On
March 1, 2020, in connection with Mr. Evers’ appointment as Chief Financial Officer of the Company, the Company and Mr.
Evers entered into an employment agreement (the “Evers Employment Agreement”), whereby as compensation for his services,
the Company shall pay Mr. Evers a salary of $270,000 per year. Pursuant to the terms of the Evers Employment Agreement, the Company
will pay the full cost of Mr. Evers’ health insurance premiums. In the event Mr. Evers’ employment with the Company
shall terminate, Mr. Evers shall be entitled to a severance payment of a full year of salary and benefits.
March
SPA and Note
On
March 5, 2020, the Company entered into a Securities Purchase Agreement (the “March 2020 SPA”), with an accredited
investor (the “March 2020 Investor”), pursuant to which the March 2020 Investor purchased from the Company, for an
aggregate purchase price of $350,000 (the “March 2020 Purchase Price”), a Promissory Note in the principal amount
of $378,000 (the “March 2020 Note”). The March 2020 Note will be repaid according to a schedule of fixed interest
and principal payments beginning in September 2020. As additional consideration for the March 2020 Investor loaning the March
2020 Purchase Price to the Company, the Company issued to the March 2020 Investor 400,000 shares of Common Stock of the Company.
The
March 2020 Note shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on March 5, 2021. No payments
of principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments
of principal and interest due on a monthly basis until maturity.
April
SPA and Note
On
April 1, 2020, the Company entered into a Securities Purchase Agreement (the “April 2020 SPA”), with an accredited
investor (the “April 2020 Investor”), pursuant to which the April 2020 Investor purchased from the Company, for an
aggregate purchase price of $150,000 (the “April 2020 Purchase Price”), a Promissory Note in the principal amount
of $162,000 (the “April 2020 Note”). The April 2020 Note will be repaid according to a schedule of fixed interest
and principal payments beginning in September 2020. As additional consideration for the April 2020 Investor loaning the April
2020 Purchase Price to the Company, the Company issued to the April 2020 Investor 172,000 shares of Common Stock of the Company.
The
April 2020 Note shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on March 15, 2021. No payments
of principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments
of principal and interest due on a monthly basis until maturity.
SURGEPAYS,
INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
421,315
|
|
|
$
|
346,040
|
|
Accounts receivable,
less allowance for doubtful accounts of $0 and $774,841, respectively
|
|
|
337,017
|
|
|
|
3,056,213
|
|
Note receivable
|
|
|
—
|
|
|
|
14,959
|
|
Lifeline revenue
due from USAC
|
|
|
222,833
|
|
|
|
60,790
|
|
Inventory
|
|
|
177,184
|
|
|
|
—
|
|
Prepaid
expenses
|
|
|
38,772
|
|
|
|
96,883
|
|
Total
current assets
|
|
|
1,197,121
|
|
|
|
3,574,885
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, less accumulated
depreciation of $89,965 and $38,656, respectively
|
|
|
249,871
|
|
|
|
294,616
|
|
Intangible assets less accumulated
amortization of $1,347,024 and $519,404, respectively
|
|
|
4,406,497
|
|
|
|
4,769,117
|
|
Goodwill
|
|
|
866,782
|
|
|
|
866,782
|
|
Investment in Centercom
|
|
|
456,685
|
|
|
|
203,700
|
|
Operating lease right of use asset,
net
|
|
|
419,372
|
|
|
|
210,816
|
|
Other long-term
assets
|
|
|
61,458
|
|
|
|
66,457
|
|
Total
assets
|
|
$
|
7,657,786
|
|
|
$
|
9,986,373
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued expenses - others
|
|
$
|
5,479,508
|
|
|
$
|
3,637,577
|
|
Accounts payable
and accrued expenses - related party
|
|
|
1,699,914
|
|
|
|
998,517
|
|
Credit card liability
|
|
|
378,260
|
|
|
|
449,158
|
|
Loss contingency
|
|
|
—
|
|
|
|
38,040
|
|
Derivative liability
|
|
|
1,415,238
|
|
|
|
190,846
|
|
Operating lease
liability
|
|
|
50,151
|
|
|
|
90,944
|
|
Line of credit
|
|
|
912,870
|
|
|
|
912,870
|
|
Convertible notes
payable and current portion of long-term debt, net
|
|
|
1,324,629
|
|
|
|
—
|
|
Debt –
related party
|
|
|
463,000
|
|
|
|
—
|
|
Notes
payable and current portion of long-term debt, net
|
|
|
247,094
|
|
|
|
736,172
|
|
Total
current liabilities
|
|
|
11,970,664
|
|
|
|
7,054,124
|
|
|
|
|
|
|
|
|
|
|
Long-term debt less current portion
– related party
|
|
|
2,225,440
|
|
|
|
2,205,440
|
|
Operating lease liability –
net
|
|
|
365,723
|
|
|
|
119,872
|
|
Trade payables - long term
|
|
|
869,868
|
|
|
|
869,868
|
|
Notes payable and long term portion
of debt - net
|
|
|
1,134,582
|
|
|
|
—
|
|
Convertible
promissory notes payable - net
|
|
|
—
|
|
|
|
4,436,684
|
|
Total
liabilities
|
|
|
16,566,277
|
|
|
|
14,685,988
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred
stock: $0.001 par value; 100,000,000 shares authorized; 13,000,000 and 13,000,000 shares issued and outstanding at September
30, 2020 and December 31, 2019, respectively
|
|
|
13,000
|
|
|
|
13,000
|
|
Series C convertible
preferred stock; $0.001 par value; 1,000,000 shares authorized; 721,598 and 721,598 shares issued and outstanding at September
30, 2020 and December 31, 2019, respectively
|
|
|
722
|
|
|
|
722
|
|
Common stock:
$0.001 par value; 500,000,000 shares authorized; 116,236,031 shares and 102,193,579 shares issued and outstanding at September
30, 2020 and December 31, 2019, respectively
|
|
|
116,235
|
|
|
|
102,193
|
|
Additional paid
in capital
|
|
|
9,816,841
|
|
|
|
6,055,042
|
|
Accumulated
deficit
|
|
|
(18,855,289
|
)
|
|
|
(10,870,572
|
)
|
Total
stockholders’ deficit
|
|
|
(8,908,491
|
)
|
|
|
(4,699,615
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
7,657,786
|
|
|
$
|
9,986,373
|
|
See
accompanying notes to condensed consolidated financial statements
SURGEPAYS,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
For
the Three Months Ended
September 30,
|
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
12,802,172
|
|
|
$
|
4,901,864
|
|
|
$
|
43,104,767
|
|
|
$
|
12,295,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
11,216,186
|
|
|
|
3,023,292
|
|
|
|
39,422,776
|
|
|
|
7,814,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,585,986
|
|
|
|
1,878,572
|
|
|
|
3,681,991
|
|
|
|
4,480,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
306,341
|
|
|
|
17,926
|
|
|
|
876,152
|
|
|
|
39,050
|
|
Selling,
general and administrative
|
|
|
2,904,569
|
|
|
|
2,998,359
|
|
|
|
11,138,464
|
|
|
|
9,222,923
|
|
Total
costs and expenses
|
|
|
3,210,910
|
|
|
|
3,016,285
|
|
|
|
12,014,616
|
|
|
|
9,261,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
(1,624,924
|
)
|
|
|
(1,137,713
|
)
|
|
|
(8,332,625
|
)
|
|
|
(4,781,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,164,409
|
)
|
|
|
(20,767
|
)
|
|
|
(2,348,175
|
)
|
|
|
(93,157
|
)
|
Derivative expense
|
|
|
(33,239
|
)
|
|
|
—
|
|
|
|
(529,294
|
)
|
|
|
—
|
|
Change in fair
value of derivative liability
|
|
|
212,851
|
|
|
|
—
|
|
|
|
405,413
|
|
|
|
—
|
|
Gain on investment
in Centercom
|
|
|
107,649
|
|
|
|
6,134
|
|
|
|
252,985
|
|
|
|
70,909
|
|
Gain/(loss) on
settlement of liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,556,979
|
|
|
|
(466,187
|
)
|
Other
income
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
Total
other income (expense)
|
|
|
(877,148
|
)
|
|
|
(14,633
|
)
|
|
|
347,908
|
|
|
|
(488,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before
provision for income taxes
|
|
|
(2,502,072
|
)
|
|
|
(1,152,346
|
)
|
|
|
(7,984,717
|
)
|
|
|
(5,269,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,502,072
|
)
|
|
$
|
(1,152,346
|
)
|
|
$
|
(7,984,717
|
)
|
|
$
|
(5,269,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic and diluted
|
|
|
114,683,442
|
|
|
|
98,452,560
|
|
|
|
108,246,505
|
|
|
|
94,225,836
|
|
See
accompanying notes to condensed consolidated financial statements.
SURGEPAYS,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statement of Stockholders’ Deficit
(Unaudited)
Three
Months ended September 30, 2020
|
|
Series
A
|
|
|
Series
C
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance, July 1, 2020
|
|
|
13,000,000
|
|
|
$
|
13,000
|
|
|
|
721,598
|
|
|
$
|
722
|
|
|
|
112,923,912
|
|
|
$
|
112,923
|
|
|
$
|
9,263,973
|
|
|
$
|
(16,353,217
|
)
|
|
$
|
(6,962,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock and options
for services rendered
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,000
|
|
|
|
65
|
|
|
|
59,758
|
|
|
|
-
|
|
|
|
59,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock and warrants
with debt recorded as debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
270,000
|
|
|
|
270
|
|
|
|
104,192
|
|
|
|
-
|
|
|
|
104,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued for conversion
of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,259,040
|
|
|
|
1,259
|
|
|
|
131,827
|
|
|
|
-
|
|
|
|
133,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Make whole Common Stock issued pursuant
to SPA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,283,079
|
|
|
|
1,283
|
|
|
|
195,058
|
|
|
|
-
|
|
|
|
196,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock for modification
of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
360,000
|
|
|
|
360
|
|
|
|
49,530
|
|
|
|
-
|
|
|
|
49,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock for an acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
75
|
|
|
|
12,503
|
|
|
|
-
|
|
|
|
12,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,502,072
|
)
|
|
|
(2,502,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2020
|
|
|
13,000,000
|
|
|
|
13,000
|
|
|
|
721,598
|
|
|
|
722
|
|
|
$
|
116,236,031
|
|
|
$
|
116,235
|
|
|
$
|
9,816,841
|
|
|
$
|
(18,855,289
|
)
|
|
$
|
(8,908,491
|
)
|
Three
Months ended September 30, 2019
|
|
Preferred
Stock
|
|
|
Series
C Preferred
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 1, 2019
|
|
|
13,000,000
|
|
|
$
|
13,000
|
|
|
|
721,598
|
|
|
$
|
722
|
|
|
|
97,988,818
|
|
|
$
|
97,989
|
|
|
$
|
4,604,735
|
|
|
$
|
(6,541,164
|
)
|
|
$
|
(1,824,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and warrants
for services rendered
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
84,700
|
|
|
|
-
|
|
|
|
84,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
594,285
|
|
|
|
594
|
|
|
|
207,406
|
|
|
|
-
|
|
|
|
208,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares for asset
purchase
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,333,333
|
|
|
|
3,333
|
|
|
|
996,667
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,152,346
|
)
|
|
|
(1,152,346
|
)
|
Balance,
September 30, 2019
|
|
|
13,000,000
|
|
|
$
|
13,000
|
|
|
|
721,598
|
|
|
$
|
722
|
|
|
|
101,966,436
|
|
|
$
|
101,966
|
|
|
$
|
5,893,508
|
|
|
$
|
(7,693,510
|
)
|
|
$
|
(1,684,314
|
)
|
See
accompanying notes to condensed consolidated financial statements
SURGEPAYS,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statement of Stockholders’ Deficit
(Unaudited)
Nine
Months ended September 30, 2020
|
|
Series
A
|
|
|
Series
C
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1,
2020
|
|
|
13,000,000
|
|
|
$
|
13,000
|
|
|
|
721,598
|
|
|
$
|
722
|
|
|
|
102,193,579
|
|
|
$
|
102,193
|
|
|
$
|
6,055,042
|
|
|
$
|
(10,870,572
|
)
|
|
$
|
(4,699,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock and options
for services rendered
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,000
|
|
|
|
65
|
|
|
|
127,927
|
|
|
|
-
|
|
|
|
127,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Common Stock and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,014,285
|
|
|
|
2,014
|
|
|
|
702,986
|
|
|
|
-
|
|
|
|
705,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock and warrants
with debt recorded as debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,592,000
|
|
|
|
2,592
|
|
|
|
903,506
|
|
|
|
-
|
|
|
|
906,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for conversion of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,409,040
|
|
|
|
9,409
|
|
|
|
2,070,317
|
|
|
|
-
|
|
|
|
2,079,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Make whole Common Stock issued pursuant
to SPA
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,283,079
|
|
|
|
1,283
|
|
|
|
195,058
|
|
|
|
-
|
|
|
|
196,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock for modification
of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
360,000
|
|
|
|
360
|
|
|
|
49,530
|
|
|
|
-
|
|
|
|
49,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock for an acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700,000
|
|
|
|
700
|
|
|
|
210,094
|
|
|
|
-
|
|
|
|
210,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of shares for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,380,952
|
)
|
|
|
(2,381
|
)
|
|
|
(497,619
|
)
|
|
|
-
|
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,984,717
|
)
|
|
|
(7,984,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2020
|
|
|
13,000,000
|
|
|
$
|
13,000
|
|
|
|
721,598
|
|
|
$
|
722
|
|
|
|
116,236,031
|
|
|
$
|
116,235
|
|
|
$
|
9,816,841
|
|
|
$
|
(18,855,289
|
)
|
|
$
|
(8,908,491
|
)
|
Nine
Months ended September 30, 2019
|
|
Preferred
Stock
|
|
|
Series
C Preferred
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1,
2019
|
|
|
13,000,000
|
|
|
$
|
3,000
|
|
|
|
643,366
|
|
|
$
|
643
|
|
|
|
88,046,391
|
|
|
$
|
88,047
|
|
|
$
|
333,623
|
|
|
$
|
(2,423,546
|
)
|
|
$
|
(1,988,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and warrants
for services rendered
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
596,000
|
|
|
|
596
|
|
|
|
307,277
|
|
|
|
-
|
|
|
|
307,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for settlement
of accounts payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
875,000
|
|
|
|
875
|
|
|
|
506,625
|
|
|
|
-
|
|
|
|
507,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,115,712
|
|
|
|
9,115
|
|
|
|
3,181,385
|
|
|
|
-
|
|
|
|
3,190,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares for asset
purchase
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,333,333
|
|
|
|
3,333
|
|
|
|
996,667
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series C Preferred Stock
for investment in Centercom
|
|
|
-
|
|
|
|
-
|
|
|
|
72,000
|
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178,436
|
|
|
|
-
|
|
|
|
178,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series C Preferred Stock
for conversion of related party advances
|
|
|
-
|
|
|
|
-
|
|
|
|
6,232
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
389,495
|
|
|
|
-
|
|
|
|
389,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,269,964
|
)
|
|
|
(5,269,964
|
)
|
Balance,
September 30, 2019
|
|
|
13,000,000
|
|
|
$
|
13,000
|
|
|
|
721,598
|
|
|
$
|
722
|
|
|
|
101,966,436
|
|
|
$
|
101,966
|
|
|
$
|
5,893,508
|
|
|
$
|
(7,693,510
|
)
|
|
$
|
(1,684,314
|
)
|
See
accompanying notes to condensed consolidated financial statements
SURGEPAYS,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine
Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,984,717
|
)
|
|
$
|
(5,269,964
|
)
|
Adjustments to reconcile net income
loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
876,512
|
|
|
|
39,051
|
|
Amortization of right of use assets
|
|
|
146,647
|
|
|
|
35,015
|
|
Amortization of debt discount
|
|
|
1,417,524
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
127,992
|
|
|
|
307,873
|
|
Change in fair value of derivative
liability
|
|
|
(405,413
|
)
|
|
|
-
|
|
Derivative expense
|
|
|
529,294
|
|
|
|
-
|
|
(Gain) loss on settlement of liabilities
|
|
|
(2,556,979
|
)
|
|
|
474,953
|
|
Gain on equity investment in Centercom
|
|
|
(252,985
|
)
|
|
|
(70,909
|
)
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,719,196
|
|
|
|
(5,163,347
|
)
|
Lifeline revenue
due from USAC
|
|
|
(162,043
|
)
|
|
|
619,162
|
|
Customer phone
supply
|
|
|
-
|
|
|
|
1,355,201
|
|
Inventory
|
|
|
(177,184
|
)
|
|
|
-
|
|
Prepaid expenses
|
|
|
58,111
|
|
|
|
(100,600
|
)
|
Other assets
|
|
|
4,999
|
|
|
|
-
|
|
Credit card liability
|
|
|
(70,898
|
)
|
|
|
165,914
|
|
Deferred revenue
|
|
|
-
|
|
|
|
(50,000
|
)
|
Loss contingency
|
|
|
(38,040
|
)
|
|
|
(30,000
|
)
|
Current portion
of operating lease liability
|
|
|
(150,145
|
)
|
|
|
(35,015
|
)
|
Accounts
payable and accrued expenses
|
|
|
2,540,510
|
|
|
|
2,767,632
|
|
Net
cash used in operating activities
|
|
|
(3,377,619
|
)
|
|
|
(4,955,034
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Repayments of notes receivable
|
|
|
14,959
|
|
|
|
-
|
|
Purchase of equipment
|
|
|
(4,147
|
)
|
|
|
(222,000
|
)
|
Net
cash provided by (used) in investing activities
|
|
|
10,812
|
|
|
|
(222,000
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Issuance of Common Stock and warrants
|
|
|
705,000
|
|
|
|
3,190,500
|
|
Repurchase of Common Stock
|
|
|
(500,000
|
)
|
|
|
-
|
|
Note payable, related party - borrowings
|
|
|
723,196
|
|
|
|
-
|
|
Note payable, related party - repayments
|
|
|
(240,196
|
)
|
|
|
-
|
|
Note payable - borrowings
|
|
|
1,134,582
|
|
|
|
-
|
|
Note payable - repayments
|
|
|
(27,500
|
)
|
|
|
(70,000
|
)
|
Convertible promissory notes - borrowings
|
|
|
2,182,000
|
|
|
|
233,000
|
|
Convertible promissory notes - repayments
|
|
|
(373,000
|
)
|
|
|
-
|
|
Cash paid for debt issuance costs
|
|
|
(162,000
|
)
|
|
|
-
|
|
Line of credit - advances
|
|
|
-
|
|
|
|
1,130,000
|
|
Line of credit - repayments
|
|
|
-
|
|
|
|
(217,130
|
)
|
Loan proceeds under related party
financing arrangement
|
|
|
-
|
|
|
|
1,316,000
|
|
Loan repayments
under related party financing arrangement
|
|
|
-
|
|
|
|
(674,000
|
)
|
Net
cash provided by financing activities
|
|
|
3,442,082
|
|
|
|
4,908,370
|
|
|
|
|
|
|
|
|
|
|
Net change in
cash and cash equivalents
|
|
|
75,275
|
|
|
|
(300,709
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
346,040
|
|
|
|
444,612
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
421,315
|
|
|
$
|
143,903
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash
flow information
|
|
|
|
|
|
|
|
|
Cash
paid for interest and income taxes:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
98,113
|
|
|
$
|
65,600
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
|
|
|
|
|
|
Exchange of related party advances
for Series C Preferred Stock
|
|
$
|
-
|
|
|
$
|
389,502
|
|
Exchange of investment in Centercom
for Series C Preferred Stock
|
|
$
|
-
|
|
|
$
|
178,508
|
|
Common Stock issued for an acquisition
|
|
$
|
210,794
|
|
|
$
|
1,000,000
|
|
Debt acquired in acquisition
|
|
$
|
-
|
|
|
$
|
4,000,000
|
|
Common Stock and warrants issued
with debt recorded as debt discount
|
|
$
|
906,098
|
|
|
$
|
-
|
|
Derivative liability on convertible
notes recorded as debt discount
|
|
$
|
1,366,636
|
|
|
$
|
-
|
|
Operating lease liability
|
|
$
|
355,203
|
|
|
$
|
230,812
|
|
Make whole Common Stock issued pursuant
to SPA
|
|
$
|
196,341
|
|
|
$
|
-
|
|
Issuance of Common Stock for modification
of debt
|
|
$
|
49,890
|
|
|
$
|
-
|
|
See
accompanying notes to condensed consolidated financial statements
SURGE
HOLDINGS, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
September
30, 2020
The
accompanying consolidated financial statements include the accounts of SurgePays Inc., (“Surge”), formerly KSIX Media
Holdings, Inc. and Surge Holdings, Inc., incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, KSIX Media,
Inc. (“Media”), incorporated in Nevada on November 5, 2014; KSIX, LLC (“KSIX”), a Nevada limited liability
company that was formed on September 14, 2011; Surge Blockchain, LLC (“Blockchain”), formerly Blvd. Media Group, LLC
(“BLVD”), a Nevada limited liability company that was formed on January 29, 2009; DigitizeIQ, LLC (“DIQ”)
an Illinois limited liability company that was formed on July 23, 2014; Surge Cryptocurrency Mining, Inc. (“Crypto”),
formerly North American Exploration, Inc. (“NAE”), a Nevada corporation that was incorporated on August 18, 2006 (since
January 1, 2019, this has been a dormant entity that does not own any assets); Surge Logics Inc. (“Logics”), an Nevada
corporation that was formed on October 2, 2018; SurgePays Fintech Inc (“Tech”), an Nevada corporation that was formed
on August 22, 2019; Surge Payments LLC (“Payments”), an Nevada corporation that was formed on December 17, 2018; SurgePhone
Wireless LLC (“Surge Phone”), an Nevada corporation that was formed on August 29, 2019 and True Wireless, Inc., an
Oklahoma corporation (formerly True Wireless, LLC) (“TW”), (collectively the “Company” or “we”).
On October 29, 2020, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation to change its
name to SurgePays, Inc.
All
significant intercompany balances and transactions have been eliminated in consolidation.
Recent
Developments
On
September 30, 2019, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with GBT Technologies
Inc., a Nevada corporation (“GBT”).
Under
the Purchase Agreement, the Company has purchased substantially all of the assets, and specified liabilities, of GBT’s ECS
Prepaid business, Electronic Check Services business, and the Central State Legal Services business (collectively the “ECS
Business”). The Purchase Agreement provides that the Company assumed GBT’s liabilities incurred after the effective
date of the Purchase Agreement, but only to the extent such obligations and liabilities were not caused by or related to any action
or inaction by GBT prior to the effective date of the Purchase Agreement. The Purchase Agreement provides, among other things,
that on the terms and subject to the conditions set forth therein, the Company acquired substantially all of the assets related
to the ECS Business for total consideration of five million dollars ($5,000,000). The Purchase Agreement provides that the consideration
is to be paid by the Company through the issuance of a convertible promissory note in the amount of four million dollars ($4,000,000)
to GBT (the “Note”), and through the issuance of three million three hundred thirty-three thousand three hundred thirty-three
(3,333,333) restricted shares of the Company’s Common Stock to GBT (the “Shares”). GBT may not convert the Note
to the extent that such conversion would result in beneficial ownership by GBT and/or its affiliates of more than 4.99% of the
issued and outstanding Common Stock of the Company.
Membership
Interest Purchase Agreement
On
January 30, 2020, the Company entered into a Membership Interest Purchase Agreement (the “MIPA”) by and among the
Company, ECS Prepaid, LLC, a Missouri limited liability company (“ECS Prepaid”), Dennis R. Winfrey, an individual,
and Peggy S. Winfrey, an individual (together, the “Winfreys”), whereby the Company purchased from the Winfreys all
of the Membership Interests of ECS Prepaid owned by the Winfreys (the “ECS Prepaid Membership Interests”). In consideration
for the ECS Prepaid Membership Interests, the Company issued to Suray Holdings LLC, an entity jointly controlled by the Winfreys,
450,000 shares of Common Stock of the Company.
ECS
and CSLS Stock Purchase Agreement
On
January 30, 2020, the Company entered into a Stock Purchase Agreement (the “ECS and CSLS SPA”) by and among the Company,
Electronic Check Services, Inc., a Missouri corporation (“ECS”), Central States Legal Services, Inc., a Missouri corporation
(“CSLS”), and the Winfreys, whereby the Company purchased from the Winfreys all of the issued and outstanding stock
of each of ECS and CSLS (the “ECS and CSLS Stock”). In consideration for the ECS and CSLS Stock, the Company issued
50,000 shares of Common Stock to Suray (the “ECS and CLS Purchase Share Issuance”).
Business
Overview
Surge
Holdings, Inc. (“Surge Holdings” or “the Company” or “we”), incorporated in Nevada on August
18, 2006, is a company focused on Telecom, Media, and FinTech applications serving customers worldwide online and across social
media, gaming and mobile platforms.
The
Company’s current focus is the provision of financial and telecommunications services to the financially underserved (i.e.
persons who have little or no access to credit) within the population. The Company provides a suite of services which are primarily
marketed through small retail establishments which are utilized by members of its target market.
Commencing
in 2018, the Company has significantly expanded its suite of services to include the pursuit of the following business models:
True
Wireless
True
Wireless Inc. is licensed to provide subsidized wireless service to qualifying low income customers in 5 states. Utilizing all
4 major USA wireless backbones, True Wireless provides discounted and free wireless service to over 25,000 veterans and other
customers who qualify for certain federal programs such as SNAP (EBT) and Medicaid.
LocoRabbit
Wireless
LocoRabbit
is an MVNO with wireless services (voice, text and data) being provided via the T-Mobile nationwide LTE networks. The value driven
service is sold primarily through the SurgePays software, enabling retailers to do activations on site, but can also be purchased
directly from www.locorabbit.com. LocoRabbit Wireless SIM Kits (bring your own device) and smartphones are being featured on the
Prepaid Center racks being installed in convenience stores. The payments for the service can be made in cash, monthly at retailers
on the SurgePays network.
SurgePays,
Inc.
SurgePays,
Inc. is meeting the needs of underserved markets in financial technology, telecommunications, and digital media. It offers prepaid
wireless and underbanked financial products and services, along with popular consumer goods, to retail merchants (such as operators
of convenience stores, bodegas, and gas stations) that address the needs of many store customers nationwide.
The
SurgePays system is a fintech software platform that processes third-party prepaid wireless activations and top-ups, gift card
activation and loads, and wireless SIM activation. It enables retailers to instantly add credit to any prepaid wireless customer’s
account for any carrier, providing the merchant commissioned transactions, increased foot traffic, and customer loyalty. Additionally,
SurgePays offers an innovative supply-chain marketplace for convenience store, bodega and tienda owners. Retailers can order many
top selling products for their store, at a deeper wholesale discount than traditional distribution due to utilizing the Direct
Store Delivery (DSD) model. (www.SurgePays.com)
Surge
Software
SurgePays
Portal is a multi-purpose software interface for convenience stores, bodegas and other corner merchants providing goods and services
to the underbanked community. The merchant or clerk is able to use the portal interface – similar to a website – with
image driven navigation to add wireless minutes to any prepaid wireless carrier’s phone and access to other services such
as bill payment and loading debit cards. We believe what makes SurgePays unique is that it also offers the merchant the ability
to order wholesale goods through the portal with one touch ease. SurgePays is essentially a wholesale e-commerce storefront that
allows manufactures and distribution companies to have access to merchants while cutting out the middleman. The goal of the SurgePays
Portal is to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas, and
supermarkets. These products include energy drinks, dry foods, frozen foods, bagged snacks, processed meats, automotive parts
and many more goods, all in one convenient e-commerce storefront.
Surge
Logics
Is
a performance-driven marketing agency focused on the Mass Tort industry for attorneys. We utilize our in-house media buying team
as well as our marketing partners. Our dedication to performance-driven marketing reflects in our strategy and media spend. Our
proven strategy means our clients’ media budget delivers one of the most cost-effective lead acquisitions and retained cases
systems available. Surge Logics commitment and tracking mean our clients’ campaigns are optimized by data-informed decisions.
Our responsive, in-house creative team rapidly executes new ads when data shows the need.
Surge
Logics efficiency, follow-up, and feedback allows for a smooth interface with attorney’s office and case management systems.
Key features:
●
Straightforward Onboarding Process
●
Intake Center for case acquisition
●
Case Management and CRM Integration
●
Appointment scheduling
●
Lead Callbacks on:
–
Webforms
–
Live Chats
–
Lead Lists
●
After-Hours Call Transfers
Intake
Logics
Intake
Logics is our proprietary, powerhouse CRM and intake management software built based on our years of experience. Built with marketing
and tracking in mind, it allows Surge Logics and the attorneys to break down media spend per marketing channel and break it down
to case cost.
Since
we built this from the ground up with strong API functionality, we can integrate into any attorneys Case Management System. Some
of the benefits of Intake Logics are auto email / SMS, integrated dialer, real-time reporting, and SMS bot follow up. Our unique
SMS bot and email system communicate with leads to make sure we communicate with potential clients from multiple channels. With
our real-time reporting and strict control of marketing and intake services mean that our clients have a 360° view of the
client acquisition process. Intake Logics tracks inbound calls and multiple internet ad campaigns to optimize for the best cost
per case conversion. In addition, our around the clock statistics keep our clients well-versed in results, outcomes, and conversions.
Centercom
Global, S.A. de C.V.
Centercom
is a dynamic operations center currently providing all SurgePays subsidiaries with a cost effective solution for sales support,
customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead
generation, and other critical operational support services. Anthony N. Nuzzo, a director and officer and a 10% shareholder of
the Company’s voting equity has a controlling interest in Centercom Global.
Due
to the fact that a director, officer, and minority owner of the Company has a controlling interest in Centercom Global, the Company
recorded its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s net book value
upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on the accompanying
consolidated balance sheets. The Company recorded its equity interest in Centercom’s results of operations as “Gain
on investment in Centercom” in other income (expense) on the accompanying consolidated statements of operations. The Company
periodically reviews its investment in Centercom for impairment. Management has determined that no impairment was required as
of September 30, 2020.
ECS
Business
On
September 30, 2019, the Company entered into the Purchase Agreement with GBT Technologies Inc. (“GBT”) of the ECS
Prepaid LLC business, Electronic Check Services business and the Central States Legal Services business (collectively, “ECS”).
Through its proprietary Fintech software platform, ECS is a leading provider of prepaid wireless load and top-ups, check cashing
and wireless SIM activation to convenience stores and bodegas nationwide. Since 2008, ECS has grown to a network of over 9,800
retail locations and 160 independent sales organizations (“ISO”) processing over 18,000 transactions per day. Surge
has integrated the ECS software with its SurgePays Network to offer both wholesale products from third-party manufacturers, Gift
Cards, LocoRabbit Wireless and SIM Starter Kits. See Note 4.
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions
to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly,
they do not contain all information and footnotes required by accounting principles generally accepted in the United States of
America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed
consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present
the financial position of the Company as of September 30, 2020 and the results of operations and cash flows for the periods presented.
The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the operating
results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read
in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2019 filed with the SEC on May 12, 2020.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations
are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business
failure.
The
Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions
in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the
volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it
difficult to project the Company’s operating results on a consistent basis.
Concentration
of Credit Risk
Financial
instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable.
The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to
the extent account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject
the Company to concentrations of credit risk. Company closely monitors extensions of credit. Estimated credit losses have been
recorded in the consolidated financial statements. Recent credit losses have been within management’s expectations. One
customer accounted for more than 12% of revenues in 2020. One customer accounted for more than 16% of revenues in 2019.
Method
of Accounting
Investments
held in stock of entities other than subsidiaries, namely corporate joint ventures and other non-controlled entities usually are
accounted for by one of three methods: (i) the fair value method (addressed in Topic 320), (ii) the equity method (addressed in
Topic 323), or (iii) the cost method (addressed in Subtopic 325-20). Pursuant to Paragraph 323-10-05-5, the equity method tends
to be most appropriate if an investment enables the investor to influence the operating or financial policies of the investee.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The
Company held no cash equivalents at September 30, 2020 and December 31, 2019.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require
collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the
outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if
receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.
As of September 30, 2020 and December 31, 2019, the Company had reserves of $0 and $774,841, respectively.
Concentrations
As
of September 30, 2020 and December 31, 2019, one customer represented approximately 47% and 80% of total gross outstanding receivables,
respectively.
Inventories
Inventories
are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method. As of September
30, 2020 and December 31, 2019, the Company had inventory of $177,184 and $0, respectively.
Leases
In
February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842) which amended guidance for lease arrangements
to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s
leasing activities. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter
the collection of lease guidance is referred to as ASC 842. The revised guidance seeks to achieve this objective by requiring
reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements.
On
January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and recognized a right of use (“ROU”)
asset and liability in the condensed consolidated balance sheet related to the operating lease for office space. Results for the
nine months ended September 30, 2020 and 2019 are presented under ASC 842.
As
part of the adoption the Company elected the practical expedients permitted under the transition guidance within the new standard,
which among other things, allowed the Company to:
|
1.
|
Not
separate non-lease components from lease components and instead to account for each separate lease component and the non-lease
components associated with that lease component as a single lease component.
|
|
|
|
|
2.
|
Not
to apply the recognition requirements in ASC 842 to short-term leases.
|
|
|
|
|
3.
|
Not
record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered
immaterial.
|
Refer
to Note 12. Leases for additional disclosures required by ASC 842.
Fair
value measurements
The
Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair
value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of
fair value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature
of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective
yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances
of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
|
●
|
Level
1 — quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
|
|
●
|
Level
3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
|
Derivative
Liabilities
The
Company evaluates its options, warrants, convertible notes, or other contracts, if any, to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and
Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value
of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. The change
in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or
cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation
and then the related fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative
instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument is expected within 12 months of the balance sheet date.
The
Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine
whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an
entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.
The
Company utilizes a binomial option pricing model to compute the fair value of the derivative liability and to mark to market the
fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as
other income or expense in the consolidated statements of operations.
The
Company had derivative liabilities of $1,415,238 and $190,846 as of September 30, 2020 and December 31, 2019, respectively.
Revenue
recognition
The
Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect
adjustment for initially applying the new revenue standard as an adjustment to the opening balance of retained earnings and the
comparative information would not require to be restated and continue to be reported under the accounting standards in effect
for those periods.
Based
on the Company’s analysis the Company did not identify a cumulative effect adjustment for initially applying the new revenue
standards. The Company principally generates revenue through providing product, services and licensing revenue.
The
adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery
of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC
606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the
consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle,
the Company applies the following five steps:
1)
|
Identify
the contract with a customer
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s
rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract
has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that
are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies
judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the
customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining
to the customer.
2)
|
Identify
the performance obligations in the contract
|
Performance
obligations promised in a contract are identified based on the services that will be transferred to the customer that are both
capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources
that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the
transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple
promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct
in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance
obligation.
3)
|
Determine
the transaction price
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount
of variable consideration that should be included in the transaction price utilizing either the expected value method or the most
likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction
price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract
will not occur. None of the Company’s contracts as of September 30, 2020 and December 31, 2019 contained a significant financing
component.
4)
|
Allocate
the transaction price to performance obligations in the contract
|
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract
with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or
to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct
services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain
multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative
standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance
obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling
price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable
through past transactions, the Company estimates the standalone selling price taking into account available information such as
market conditions and internally approved pricing guidelines related to the performance obligations.
5)
|
Recognize
revenue when or as the Company satisfies a performance obligation
|
The
Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related
performance obligation is satisfied by transferring a promised service to a customer.
Disaggregation
of Revenue from Contracts with Customers. The following table disaggregates gross revenue by entity for the three and nine
months ended September 30, 2020 and 2019:
|
|
For
the Three Months Ended
|
|
|
|
September
30, 2020
|
|
|
September
30, 2019
|
|
True Wireless, Inc.
|
|
$
|
680,205
|
|
|
$
|
135,537
|
|
Surge Blockchain, LLC
|
|
|
67,870
|
|
|
|
2,783,348
|
|
Surge Logics, Inc.
|
|
|
3,718,592
|
|
|
|
1,980,166
|
|
ECS
|
|
|
8,278,546
|
|
|
|
-
|
|
Other
|
|
|
56,959
|
|
|
|
2,813
|
|
Total revenue
|
|
$
|
12,802,172
|
|
|
$
|
4,901,864
|
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2020
|
|
|
September
30, 2019
|
|
True Wireless, Inc.
|
|
$
|
1,725,053
|
|
|
$
|
3,583,806
|
|
Surge Blockchain, LLC
|
|
|
491,349
|
|
|
|
4,351,123
|
|
Surge Logics, Inc.
|
|
|
13,626,638
|
|
|
|
4,355,370
|
|
ECS
|
|
|
27,081,145
|
|
|
|
-
|
|
Other
|
|
|
180,582
|
|
|
|
4,759
|
|
Total revenue
|
|
$
|
43,104,767
|
|
|
$
|
12,295,058
|
|
True
Wireless is licensed to provide wireless services to qualifying low income customers in five states. Revenues are recognized when
the services have been provided and the government subsidy has been earned.
Surge
Blockchain revenues are generated through the SurgePays Portal multi-purpose software are recognized when the goods and
services have been delivered and earned.
Surge
Logics is a full-service digital advertising agency and revenues are recognized at a period in time once performance obligations
are met and services are provided as customer deposits are received in advance.
ECS
is a leading provider of prepaid wireless load and top-ups, check cashing and wireless SIM activation to convenience stores and
bodegas nationwide.
Earnings
per Share
Earnings
per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term
is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards
Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available
to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the
period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred
stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned)
from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation
of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect
the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options
or warrants.
The
following table shows the outstanding dilutive common shares excluded from the diluted net income (loss) per share calculation
as they were anti-dilutive:
|
|
Contingent
shares issuance
arrangement, stock options
or warrants
|
|
|
|
For
the Nine
Months
Ended
September 30, 2020
|
|
|
For
the Nine
Months
Ended
September 30, 2019
|
|
|
|
|
|
|
|
|
Convertible note
|
|
|
36,812,989
|
|
|
|
-
|
|
Common stock options
|
|
|
850,176
|
|
|
|
-
|
|
Common stock
warrants
|
|
|
7,708,919
|
|
|
|
6,446,064
|
|
|
|
|
|
|
|
|
|
|
Total contingent
shares issuance arrangement, stock options or warrants
|
|
|
45,372,084
|
|
|
|
6,148,922
|
|
Income
taxes
We
use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”)
Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for the amount of: (i) taxes
payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters
that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results
of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets
reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all
of the deferred tax assets will not be realized.
Through
December 23, 2014, KSIX and BLVD operated as limited liability companies and all income and losses were passed through to the
owners. Through October 12, 2015, DIQ operated as a limited liability company and all income and losses were passed through to
its owner. Subsequent to the acquisition dates, these limited liability companies were owned by Surge and became subject to income
tax.
Through
April 1, 2018, TW operated as a limited liability company and all income and losses were passed through to the owners. In order
to facilitate the merger discussed above, TW converted from a limited liability company to a Subchapter C Corporation.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions
for any of the reporting periods presented.
The
Company is no longer subject to tax examinations by tax authorities for years prior to 2017.
In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was
signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act
of 2017 (“2017 Tax Act”). Corporate taxpayers may carryback net operating losses (NOLs) originating between
2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the
80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in
2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest
income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits
to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period
of years, as originally enacted by the 2017 Tax Act.
In
addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement
property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result
in any material adjustments to our income tax provision for the nine months ended September 30, 2020.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current year’s presentation.
Recent
adopted accounting pronouncements
In
January 2017, the FASB issued ASU 2017-04 Intangibles-Goodwill and Other (“ASC 350”): Simplifying the Accounting
for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating
Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform
procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets
and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities
assumed in a business combination. Instead, under ASU 2017-04, an entity should perform its annual or interim goodwill impairment
test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge
for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects
from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if
applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests for fiscal years beginning after December
15, 2019 and an entity should apply the amendments of ASU 2017-04 on a prospective basis. The adoption of ASU 2017-04 did not
have a material impact on its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures
in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is
most important to users of each entity’s financial statements. The amendments in this update apply to all entities that
are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments
in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. The Company adopted the new standard during the quarter ended March 31, 2020 and the adoption did not have a material
effect on the consolidated financial statements and related disclosures.
Recent
issued accounting pronouncements
In
August 2020, the FASB issued ASU 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity. The amendments in Update No. 2020-06 simplify the complexity associated with applying U.S.
GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus
on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Update
No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within
those fiscal years. The Company is currently in the process of determining the effect that the adoption will have on its financial
position and results of operations.
In
March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions to account for contracts,
hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The amendments
of ASU No. 2020-04 are effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications
made and hedging relationships entered into on or before December 31, 2022. The Company is evaluating the impact that the amendments
of this standard would have on the Company’s consolidated financial statements
In
December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the
general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income
taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods.
The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.
Management
has evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”)
through the date these financial statements were available to be issued and found no recent accounting pronouncements issued,
but not yet effective accounting pronouncements, when adopted, will have a material impact on the financial statements of the
Company.
The
Company had a net loss of approximately $7.9 million for the nine months ended September 30, 2020. As of September 30, 2020, the
Company had cash and working capital deficit of approximately $421,000 and $10.8 million, respectively.
Management’s
ability to pivot in 2020 due to the Coronavirus allowed the Company to finalize enhancements to both the SurgePays and Logics
Intake platforms, resulting in improved end user control on product logistics. The company also overhauled its entire customer
service platform and standard operating procedures to ensure rapid growth success. Management continued efforts to source products
for our client base, including an exclusivity to provide gift card distribution at all locations.
During
the year ended December 31, 2019, the Surge software development team has successfully implemented the merging of the SurgePays
and ECS software to more efficiently and cost effectively increase synergized revenue and profitability moving forward.
The
development of the Surge Logistics Intake software and the infrastructure at Centercom BPO have enabled rapid scaling growth and
evidenced in Surge Logics revenue trajectory.
To
support the significant growth inflection, the Company has reorganized its human resources department, including building the
administrative, legal and finance office in Bartlett, TN and the operations center in El Salvador which will be able to now host
300 employees. Management believes the Company now has the ability to scale to support its expected growth in 2020, which was
a major goal for fiscal year 2019. During the year ended December 31, 2019 and the nine months ended September 30, 2020, the Company
was able to continue the utilization of the internal controls and operating procedures and techniques employed by the Company’s
management in order to enhance the business by creating operating efficiencies and controlling costs. Lastly, the Company has
significantly restructured its balance sheet to be an effective platform for growth as the Company continues to work towards listing
on the Nasdaq Capital Market in the near term. There can be no assurances the Company will be successful in achieving a listing
on the Nasdaq Capital Market in the near term.
In
March 2020, the World Health Organization declared COVID-19 a pandemic. COVID-19 could disrupt the economy, the Company’s
supply chain, and access to capital sources thus adversely affecting the Company’s ability to continue its operations.
These
factors, among others, were addressed by management in determining whether the Company could continue as a going concern. The
Company projects that it should be cash flow positive by the end of Quarter 1 2021 through increased cash flow from ongoing operations
the collection of outstanding receivables and the restructuring of the current debt burden. While management believes it is more
likely than not the Company has the ability to continue as a going concern, this is dependent upon the ability to further implement
the business plan, generate sufficient revenues and to control operating expenses.
Additionally,
if necessary, based on the Company’s history of being able to raise capital from both internal and external sources coupled
with current favorable market conditions, management believes that debt and/or equity financing can be obtained from both related
parties (management and members of the Board of Directors of the Company) and external sources to pay down existing debt obligations,
cover short term shortfalls, meet the shareholders equity requirements for Nasdaq, and complete proposed acquisitions. Although
the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability
to raise additional funds if necessary, there can be no assurances to that effect. Therefore, the accompanying condensed consolidated
financial statements have been prepared assuming that the Company will continue as a going concern.
On
March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and included a
provision for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”).
The PPP provides small businesses with funds to pay up to eight (8) weeks of payroll costs, including benefits. Funds received
under the PPP may also be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or
a portion of the loans may be forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from
the date of issuance, and all payments are deferred for the first six (6) months of the loan. Any unforgiven balance of loan principal
and accrued interest at the end of the six (6) month loan deferral period is amortized in equal monthly installments over the
remaining 18-months of the loan term. On April 17, 2020, the Company closed a $498,082 SBA guaranteed PPP loan with Bank3. The
Company expects to use the loan proceeds as permitted and apply for and receive forgiveness for the entire loan amount. In addition,
the Company received $636,000 in several Economic Injury Disaster Loans with the Small Business Administration. These loans all
carry a 3.75% interest rate payable over 30 years. First payment due 12 months from date of note.
4
|
ASSET
PURCHASE AGREEMENT
|
On
September 30, 2019, the Company entered into the Purchase Agreement with GBT.
Under
the Purchase Agreement, the Company has purchased substantially all of the assets, and specified liabilities, of GBT’s ECS
Prepaid business, Electronic Check Services business, and the Central State Legal Services business. The Purchase Agreement provides
that the Company assumed GBT’s liabilities incurred after the effective date of the Purchase Agreement, but only to the
extent such obligations and liabilities were not caused by or related to any action or inaction by GBT prior to the effective
date of the Purchase Agreement. The Purchase Agreement provides, among other things, that on the terms and subject to the conditions
set forth therein, the Company acquired substantially all of the assets related to the ECS Business for total consideration of
five million dollars ($5,000,000). The Purchase Agreement provides that the consideration is to be paid by the Company through
the issuance of a convertible promissory note in the amount of four million dollars ($4,000,000) to GBT, and through the issuance
of three million three hundred thirty-three thousand three hundred thirty-three (3,333,333) restricted shares of the Company’s
Common Stock to GBT. As of the date of this report, the purchase price allocation has yet to be valued. GBT may not convert the
Note to the extent that such conversion would result in beneficial ownership by GBT and/or its affiliates of more than 4.99% of
the issued and outstanding Common Stock of the Company.
The
Note has an effective date of September 27, 2019 and has a term of eighteen (18) months until the maturity date. The Note shall
not bear interest and shall be convertible at the option of GBT starting from the sixth month anniversary of the effective date.
The conversion price of the Note shall equal the volume weighted average price of the Company’s Common Stock on the trading
market which the common stock is then trading over the previous twenty (20) days prior to the conversion date, provided that the
conversion price shall never be lower than $0.10 or higher than $0.70. The Note provides that the Company retains the right to
prepay all or any portion of the principal without any prepayment penalty. In addition, in connection with the issuance of the
Note, GBT agreed that, for the eighteen (18) months following the effective date, GBT will not dispose of the Shares or shares
issued as a result of the conversion of the Note, in an amount greater than seven and one-half percent (7.5%) of the trading volume
of the Company’s shares of Common Stock during the previous month.
Following
the closing of the merger transaction, the Company’s investment in ECS consisted of the following:
Purchase Price
|
|
|
|
|
Convertible note
|
|
$
|
4,000,000
|
|
Common stock
|
|
|
1,000,000
|
|
Total purchase
price
|
|
$
|
5,000,000
|
|
|
|
|
|
|
Allocation of purchase price
|
|
|
|
|
Cash
|
|
$
|
210,348
|
|
Equipment
|
|
|
63,289
|
|
Intangibles
|
|
|
4,903,876
|
|
Accounts payable
and accrued expenses
|
|
|
(177,513
|
)
|
Total allocation
of purchase price
|
|
$
|
5,000,000
|
|
|
(1)
|
The
3,333,333 restricted shares of the Company’s Common Stock issued at closing of the merger transaction had a closing
price of approximately $0.30 per share on the date of the transaction.
|
Following
the closing of the merger transaction, ECS’s financial statements as of the closing were consolidated with the consolidated
financial statements of the Company.
The
following presents the unaudited pro-forma combined results of operations of the Company with the ECS Business as if the entities
were combined on January 1, 2019.
|
|
Nine
Months Ended
|
|
|
|
September
30, 2019
|
|
Revenues
|
|
$
|
45,503,800
|
|
Net loss
|
|
$
|
(5,381,401
|
)
|
Net loss per share
|
|
$
|
(0.06
|
)
|
Weighted average number of shares
outstanding
|
|
|
94,225,836
|
|
Property
and equipment stated at cost, less accumulated depreciation, consisted of the following:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Computer Equipment and
Software
|
|
$
|
310,338
|
|
|
$
|
312,760
|
|
Furniture and Fixtures
|
|
|
9,774
|
|
|
|
1,416
|
|
Leasehold
Improvements
|
|
|
19,724
|
|
|
|
21,513
|
|
|
|
|
339,836
|
|
|
|
335,689
|
|
Less: Accumulated
Depreciation
|
|
|
(89,965
|
)
|
|
|
(41,073
|
)
|
|
|
$
|
249,871
|
|
|
$
|
294,616
|
|
Depreciation
expense was $48,892 and $39,050 for the nine months ended September 30, 2020 and 2019, respectively.
The
Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. During the nine
months ended September 30, 2020 and 2019, the Company utilized a credit card issued in the name of Surge Holdings, Inc. to pay
certain trade obligations totaling $102,941 and $1,106,280, respectively. At September 30, 2020 and December 31, 2019, the Company’s
total credit card liability was $378,260 and $449,158, respectively.
7
|
NOTES
PAYABLE – RELATED PARTY
|
In
December 2018, the Company executed a promissory note payable agreement with SMDMM Funding, LLC (“SMDMM”), an entity
that is owned by the Company’s Chief Executive Officer. The promissory note was for a principal sum up to $1.0 million at
an annual interest rate of 6%, due on December 27, 2021. During the nine months ended September 30, 2020, the Company did not
withdraw any net advances on the note.
In
August 2019, the Company executed a promissory note payable agreement with SMDMM. The promissory note was for a principal sum
up to $217,000 at an annual interest rate of 6%, due on August 15, 2022. During the nine months ended September 30, 2020, the
Company did not withdraw any net advances on the note.
During
the fourth quarter 2019, the Company executed a promissory note payable agreement with SMDMM. The promissory note was for a principal
sum up to $883,000 at an annual interest rate of 15%, due on November 21, 2022. During the nine months ended September 30, 2020,
the Company did not withdraw any net advances on the note.
During
the third quarter 2020, the Company executed a series of promissory notes payable agreement with SMDMM. The promissory notes were
for a principal sum up to $458,000 at an annual interest rate of 10%, due on demand. During the nine months ended September 30,
2020, the Company drew advances on the note totaling $458,000.
During
the nine months ended September 30, 2020, the Company made accrued interest payments of $30,000. The outstanding principal balance
under the promissory notes due to SMDMM was $2,663,440 and $2,205,440 at September 30, 2020 and December 31, 2019, respectively.
Accrued interest owed to SMDMM was $190,420 and $64,741 at September 30, 2020 and December 31, 2019, respectively.
During
the nine months ended September 30, 2020, the Company executed a series of promissory notes with AN Holdings, LLC, an entity owned
by the Company’s President. The promissory notes were for an aggregate principal sum of $265,196 at an annual interest rate
of 15%, due on demand. During the nine months ended September 30, 2020, the Company made accrued interest payments of $15,164.
The Company repaid $240,196. As of September 30, 2020, the outstanding balance on the notes was $25,000. Accrued interest owed
to was $3,631 at September 30, 2020.
8
|
NOTES
PAYABLE AND LONG-TERM DEBT
|
As
of September 30, 2020 and December 31, 2019, notes payable and long-term debt, net of debt discount, consists of:
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Notes
payable to seller of DigitizeIQ, LLC due as noted below 1
|
|
|
-
|
|
|
|
485,000
|
|
Convertible note
payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible into
Common Stock 2
|
|
|
-
|
|
|
|
27,500
|
|
Promissory note
payable to a lender dated November 4, 2019; accruing interest at 18% per annum; due November 3, 2020; 100,000 shares of restricted
Common Stock granted on execution recorded as a debt discount – net of debt discount of $2,906 3
|
|
|
247,094
|
|
|
|
223,672
|
|
Promissory note payable to Bank3
dated April 17, 2020; accruing interest at 1% per annum, due October 17, 2021.
|
|
|
498,082
|
|
|
|
-
|
|
Note payable to US Small Business
Administration dated May 25, 2020; accruing interest at 3.75% per annum; due May 25, 2050.
|
|
|
150,000
|
|
|
|
-
|
|
Note payable to US Small Business
Administration dated July 5, 2020; accruing interest at 3.75% per annum; due July 5, 2050.
|
|
|
150,000
|
|
|
|
-
|
|
Note payable to US Small Business
Administration dated July 5, 2020; accruing interest at 3.75% per annum; due July 5, 2050.
|
|
|
15,100
|
|
|
|
-
|
|
Note payable to US Small Business
Administration dated July 7, 2020; accruing interest at 3.75% per annum; due July 7, 2050.
|
|
|
150,000
|
|
|
|
-
|
|
Note payable to US Small Business
Administration dated July 21, 2020; accruing interest at 3.75% per annum; due July 21, 2050.
|
|
|
149,900
|
|
|
|
-
|
|
Note payable
to US Small Business Administration dated July 21, 2020; accruing interest at 3.75% per annum; due July 21, 2050.
|
|
|
21,500
|
|
|
|
-
|
|
|
|
$
|
1,381,676
|
|
|
$
|
736,172
|
|
|
1
|
Notes
due seller of DigitizeIQ, LLC includes a series of notes as follows:
|
|
●
|
A
second non-interest-bearing promissory note made payable to the seller in the amount of $250,000, which was due on January
12, 2016; (Balance at September 30, 2020 and December 31, 2019 - $0 and $235,000).
|
|
|
|
|
●
|
A
third non-interest-bearing promissory note made payable to the seller in the amount of $250,000, which was due on March 12,
2016 and was repaid as of September 30, 2020.
|
In
January 2020, the Company and the sellers settled the outstanding promissory notes and a gain on settlement for the outstanding
principal balance $485,000 and related accrued interest of $97,806, was recorded on the condensed consolidated statements of operations.
2
Convertible note payable to River North Equity, LLC (“RNE”) - The Company evaluated the embedded conversion
for derivative treatment and recorded an initial derivative liability and debt discount of $23,190. The debt discount is fully
amortized. In February 2020, the Company and RNE settled the outstanding debt.
3
Promissory note – The Company evaluated the 100,000 restricted shares of the Company’s Common Stock granted
with the note and recorded a debt discount of $31,200. The debt discount is amortized over the earlier of (i) the term of the
debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component
of interest expense in the consolidated statements of operations. There was unamortized debt discount of $2,906 and $26,328 as
of September 30, 2020 and December 31, 2019, respectively. During the nine months ended September 30, 2020, the Company recorded
amortization of debt discount totaling $28,294.
9
|
CONVERTIBLE
PROMISSORY NOTES
|
As
of September 30, 2020 and December 31, 2019, convertible promissory notes payable consists of:
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Convertible
note payable to GBT Technologies Inc. dated September 27, 2019 with no interest; due March 27, 2021; convertible into Common
Stock 1
|
|
$
|
-
|
|
|
$
|
4,000,000
|
|
Convertible note
payable to Power Up Lending Group Ltd. dated September 18, 2019 with at 12% per annum; due September 18, 2020; convertible
into Common Stock 2
|
|
|
-
|
|
|
|
233,000
|
|
Convertible note
payable to BHP Capital NY dated October 7, 2019 with interest at 8% per annum; due April 7, 2021; convertible into shares
of Common Stock 3
|
|
|
30,000
|
|
|
|
135,000
|
|
Convertible note
payable to Armada Capital Partners LLC dated October 7, 2019 with interest at 8% per annum; due April 7, 2021; convertible
into shares of Common Stock 3
|
|
|
-
|
|
|
|
135,000
|
|
Convertible note
payable to Jefferson Street Capital LLC dated October 7, 2019 with interest at 8% per annum; due April 7, 2021; convertible
into shares of Common Stock 3
|
|
|
78,860
|
|
|
|
135,000
|
|
Convertible note
payable to BHP Capital NY dated January 30, 2020 with interest at 14% per annum; due February 5, 2021; convertible into shares
of Common Stock 4
|
|
|
180,000
|
|
|
|
-
|
|
Convertible note
payable to Armada Capital Partners LLC dated January 30, 2020 with interest at 14% per annum; due February 5, 2021; convertible
into shares of Common Stock 4
|
|
|
180,000
|
|
|
|
-
|
|
Convertible note
payable to Jefferson Street Capital LLC dated January 30, 2020 with interest at 14% per annum; due February 5, 2021; convertible
into shares of Common Stock 4
|
|
|
180,000
|
|
|
|
-
|
|
Convertible note
payable to GS Capital Partners dated February 7, 2020 with interest at 14% per annum; due February 6, 2021; convertible into
shares of Common Stock 5
|
|
|
216,000
|
|
|
|
-
|
|
Convertible note
payable to Fourth Man LLC dated February 7, 2020 with interest at 14% per annum; due April 5, 2021; convertible into shares
of Common Stock 5
|
|
|
216,000
|
|
|
|
-
|
|
Convertible note
payable to GS Capital Partners dated March 5, 2020 with interest at 14% per annum; due February 6, 2021; convertible into
shares of Common Stock 6
|
|
|
378,000
|
|
|
|
-
|
|
Convertible note
payable to Tangiers Global LLC dated March 15, 2020 with interest at 14% per annum; due March 15, 2021; convertible into shares
of Common Stock 7
|
|
|
162,000
|
|
|
|
-
|
|
Convertible note
payable to LGH Investments LLC dated May 29, 2020 with interest at 10% per annum; due March 29, 2021; convertible into shares
of Common Stock 8
|
|
|
400,000
|
|
|
|
-
|
|
Convertible
note payable to Vista Capital LLC dated July 21, 2020 with interest at 10% per annum; due March 29, 2021; convertible into
shares of Common Stock 9
|
|
|
270,000
|
|
|
|
-
|
|
|
|
|
2,290,860
|
|
|
|
4,638,000
|
|
Less: Debt
discount
|
|
|
(966,231
|
)
|
|
|
(201,316
|
)
|
|
|
$
|
1,324,629
|
|
|
$
|
4,436,684
|
|
1
As discussed above in Note 4, the Purchase Agreement provides that the consideration is to be paid by the Company through
the issuance of a convertible promissory note in the amount of $4,000,000 to GBT, and through the issuance of three million three
hundred thirty-three thousand three hundred thirty-three restricted shares of the Company’s Common Stock. The conversion
price of the note shall equal the volume weighted average price of the Company’s Common Stock on the trading market which
the Common Stock is then trading over the previous twenty (20) days prior to the conversion date, provided that the conversion
price shall never be lower than $0.10 or higher than $0.70. The note provides that the Company retains the right to prepay all
or any portion of the principal without any prepayment penalty. On June 23, 2020, the debt was converted into 8,000,000 shares
of the Company’s Common Stock with a per share fair value of $0.24 per share. Upon issuance of the shares, the Company recorded
a gain on settlement of $2,080,000 on the condensed consolidated statements of operations.
2
The Company executed a convertible note with Power Up Lending Group (“PowerUp”) on September 18, 2019 and
identified certain features embedded in the conversion feature of the note requiring the Company to classify it as a derivative
liability. The conversion price of the note shall equal 65% the average price of the two lowest trading prices of the Company’s
Common Stock on the trading market which the Common Stock is then trading over the previous twenty (20) days prior to the conversion
date. On March 6, 2020, Surge Holdings, Inc. the Company prepaid $233,000 in cash to fully satisfy the note which would have matured
on September 18, 2020. No shares of the Company’s Common Stock were issued or conveyed to PowerUp as a result of the prepayment.
3
On October 7, 2019, the Company entered into a Securities Purchase Agreement (the “SPA”), severally and
not jointly, with BHP Capital NY Inc., a New York Corporation (“BHP”), Armada Capital Partners LLC, a Delaware limited
liability company (“Armada”), and Jefferson Street Capital LLC, a New Jersey limited liability company (“Jefferson”),
(“Buyer” or collectively the “Buyers”). In connection with the SPA, the Company issued three (3) notes,
one to each Buyer, and three (3) warrants to purchase the Company’s Common Stock, one to each Buyer. The aggregate purchase
price of the notes is $375,000 and the aggregate principal amount of the notes is $405,000.
Pursuant
to the SPA, each of the Buyers purchased from the Company, for a purchase price of $125,000, a convertible promissory note, in
the principal amount of $135,000. The purchase of each note was accompanied by the Company’s issuance of a warrant to purchase
125,000 shares of the Company’s Common Stock to each Buyer. On October 7, 2019, each Buyer delivered the purchase price
to the Company as payment for each note.
Each
note became effective as of October 7, 2019 and is due and payable on April 7, 2021. The notes entitle the Buyers to 8% interest
per annum. Upon an Event of Default (as defined in the notes), the notes entitle the Buyers to interest at the rate of 18% per
annum. The notes may be converted into shares of the Company’s Common Stock at a conversion price equal to 0.75 (representing
a 25% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the
Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and
(ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading
day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately
due and payable. The Company recorded a $266,181 debt discount relating to the conversion feature of the notes. The debt discount
is being accreted over the life of these notes to accretion of debt discount and issuance cost.
The
warrants were issued to the Buyers by the Company on October 7, 2019 in connection with the SPA. The warrants entitle the Buyers,
respectively, to exercise purchase rights represented by the warrants up to 125,000 shares per warrant. The warrants permit the
Buyers to exercise the purchase rights at any time on or after October 7, 2019 through October 7, 2022. Each warrant contains
an exercise price per share of $0.80, subject to adjustment, and also contains a provision permitting the cashless exercise of
such exercise rights as defined therein. The Company has maintained the right to redeem each warrant in full at any time following
payment in full of the amounts owing under each respective note.
The
Company valued the warrants using the Black-Scholes Option Pricing model and accounted for it as debt discount on the consolidated
balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using
the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated
statements of operations. There was unamortized debt discount of $0 and $75,078 as of September 30, 2020 and December 31, 2019,
respectively, related to the warrants issued. During the nine months ended September 30, 2020, the Company recorded amortization
of debt discount related to these warrants totaling $88,860. During the nine months ended September 30, 2020, the Company paid
$95,000 for the cancellation of 250,000 warrants. During the nine months ended September 30, 2020, the Company paid $140,000 of
the outstanding balance in addition to converting $156,140 of outstanding balance to 1,409,040 shares of Company Common Stock.
The aggregate outstanding balance on the notes was $108,860 and $405,000 as of September 30, 2020 and December 31, 2019, respectively.
4
On January 30, 2020, the Company entered into Securities Purchase Agreements (the “January 2020 SPAs”),
with severally and not jointly, with BHP, Armada, Jefferson (the “January 2020 Investors”), pursuant to which the
January 2020 Investors purchased from the Company, for an aggregate purchase price of $500,000 (the “January 2020 Purchase
Price”), Promissory Notes in the aggregate principal amount of $540,000 (the “January 2020 Notes”). The January
2020 Notes will be repaid according to a schedule of fixed interest and principal payments beginning in August 2020. As additional
consideration for the January 2020 Investors loaning the January 2020 Purchase Price to the Company, the Company issued to each
of the January 2020 Investors 250,000 shares of Common Stock for a total of 750,000 shares (the “January 2020 Share Issuance”).
In connection with the January 2020 SPAs, the Company paid issuance costs of $40,000 which is accounted for as a debt discount
on the condensed consolidated balance sheet and is being amortized over the life of the notes.
The
January 2020 Notes shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on February 5, 2021. No
payments of principal or interest are due through July 2020 (five (5) months following issuance) and then there are seven (7)
fixed payments of principal and interest due on a monthly basis until maturity. On August 7, 2020, the Company executed agreements
with the January 2020 investors to postpone the first and second principal and interest payment due date to maturity date and
extend the maturity date until April 5, 2021 in exchange for 195,000 shares of Common Stock. The shares were valued on day of
grant with a fair value of $30,225 and is included as a component of interest expense in the condensed consolidated statements
of operations.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock
at a conversion price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted
average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading
day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period
ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice,
the note shall become immediately due and payable. The Company recorded a $260,001 debt discount relating to the conversion feature
of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost.
The
Company valued the 750,000 shares upon day of grant with a fair value of $240,000 and accounted for it as debt discount on the
condensed consolidated balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion
of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense
in the condensed consolidated statements of operations.
There
was total unamortized debt discount related to the January 2020 SPAs of $185,805 as of September 30, 2020. During the nine months
ended September 30, 2020, the Company recorded amortization of debt discount totaling $354,195.
5
On February 3 and February 6, 2020, the Company entered into Securities Purchase Agreements (the “February 2020
SPAs”), with severally and not jointly, with GS Capital Partners (“GSC”) and Fourth Man LLC (“Fourth”),
(the “February 2020 Investors”), pursuant to which the February 2020 Investors purchased from the Company, for an
aggregate purchase price of $400,000 (the “February 2020 Purchase Price”), Promissory Notes in the principal amount
of $432,000 (the “February 2020 Notes”). The February 2020 Notes will be repaid according to a schedule of fixed interest
and principal payments beginning in August 2020. As additional consideration for the February 2020 Investors loaning the February
2020 Purchase Price to the Company, the Company issued to each of the February 2020 Investors 300,000 shares of Common Stock for
a total of 600,000 shares (the “February Share Issuance”). In connection with the February 2020 SPAs, the Company
paid issuance costs of $32,000 which is accounted for as a debt discount on the condensed consolidated balance sheet and is being
amortized over the life of the notes. On August 5, 2020 and September 24, 2020, the Company executed agreements with the February
2020 Investors to postpone the first principal and interest payment due date to October 5, 2020 and extend the maturity date until
April 5, 2021 in exchange for 225,000 shares of Common Stock. The shares were valued on day of grant with a fair value of $28,965
and is included as a component of interest expense in the condensed consolidated statements of operations.
The
terms of the February 2020 Notes are substantially the same as the terms of the January 2020 Notes. The Company recorded a debt
discount of $214,000 relating to the conversion feature of the notes. The debt discount is being accreted over the life of these
notes to accretion of debt discount and issuance cost.
The
Company valued the 600,000 shares upon day of grant with a fair value of $186,000 and accounted for it as debt discount on the
condensed consolidated balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion
of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense
in the condensed consolidated statements of operations.
There
was total unamortized debt discount related to the February 2020 SPAs of $150,157 as of September 30, 2020. During the nine months
ended September 30, 2020, the Company recorded amortization of debt discount totaling $281,843.
6
On March 5, 2020, the Company entered into a Securities Purchase Agreement (the “March 2020 SPA”), with
GSC (the “March 2020 Investor”), pursuant to which the March 2020 Investor purchased from the Company, for an aggregate
purchase price of $350,000 (the “March 2020 Purchase Price”), a Promissory Note in the principal amount of $378,000
(the “March 2020 Note”). The March 2020 Note will be repaid according to a schedule of fixed interest and principal
payments beginning in September 2020. As additional consideration for the March 2020 Investor loaning the March 2020 Purchase
Price to the Company, the Company issued to the March 2020 Investor 400,000 shares of Common Stock of the Company. In connection
with the March 2020 SPAs, the Company paid issuance costs of $28,000 which is accounted for as a debt discount on the condensed
consolidated balance sheet and is being amortized over the life of the notes.
The
March 2020 Note shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on March 5, 2021. No payments
of principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments
of principal and interest due on a monthly basis until maturity.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock
at a conversion price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted
average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading
day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period
ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice,
the note shall become immediately due and payable. The Company recorded a debt discount of $241,200 relating to the conversion
feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance
cost.
The
Company valued the 400,000 shares upon day of grant with a fair value of $108,800 and accounted for it as debt discount on the
condensed consolidated balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion
of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense
in the condensed consolidated statements of operations.
There
was total unamortized debt discount related to the March 2020 SPAs of $141,246 as of September 30, 2020. During the nine months
ended September 30, 2020, the Company recorded amortization of debt discount totaling $236,754.
7
On April 1, 2020, the Company entered into a Securities Purchase Agreement (the “April 2020 SPA”), with
Tangiers Global (“Tangiers”) (the “April 2020 Investor”), pursuant to which the April 2020 Investor purchased
from the Company, for an aggregate purchase price of $150,000 (the “April 2020 Purchase Price”), a Promissory Note
in the principal amount of $162,000 (the “April 2020 Note”). The April 2020 Note will be repaid according to a schedule
of fixed interest and principal payments beginning in September 2020. As additional consideration for the April 2020 Investor
loaning the April 2020 Purchase Price to the Company, the Company issued to the April 2020 Investor 172,000 shares of Common Stock
of the Company.
The
April 2020 Note shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on March 15, 2021. No payments
of principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments
of principal and interest due on a monthly basis until maturity.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock
at a conversion price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted
average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading
day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period
ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice,
the note shall become immediately due and payable. The Company recorded a debt discount of $103,560 relating to the conversion
feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance
cost.
The
Company valued the 172,000 shares upon day of grant with a fair value of $46,400 and accounted for it as debt discount on the
condensed consolidated balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion
of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense
in the condensed consolidated statements of operations.
There
was total unamortized debt discount related to the April 2020 SPA of $73,676 as of September 30, 2020. During the nine months
ended September 30, 2020, the Company recorded amortization of debt discount totaling $88,324.
8
On May 29, 2020, the Company entered into a Securities Purchase Agreement (the “May 2020 SPA”), with LGH
Investments LLC (“LGH”) (the “May 2020 Investor”), pursuant to which the May 2020 Investor purchased from
the Company, for an aggregate purchase price of $370,000 (the “May 2020 Purchase Price”), a Promissory Note in the
principal amount of $400,000 (the “May 2020 Note”). The May 2020 Note will be repaid according to a schedule of fixed
interest and principal payments beginning in September 2020. As additional consideration for the May 2020 Investor loaning the
May 2020 Purchase Price to the Company, the Company issued to the May 2020 Investor 400,000 shares of Common Stock of the Company
in addition to three year warrants to purchase 500,000 shares of Common Stock.
The
May 2020 Note shall accrue interest at a rate of fourteen percent (10%) per annum and will mature on March 29, 2021. No payments
of principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments
of principal and interest due on a monthly basis until maturity.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock
at a conversion price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted
average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading
day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period
ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice,
the note shall become immediately due and payable. The Company recorded a debt discount of $149,604 relating to the conversion
feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance
cost.
The
Company valued the 400,000 shares upon day of grant with a fair value of $124,000 and accounted for it as debt discount on the
condensed consolidated balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion
of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense
in the condensed consolidated statements of operations.
The
warrants were issued to the Buyers by the Company on May 29, 2020 in connection with the SPA. The warrants entitle the Buyers,
respectively, to exercise purchase rights represented by the warrants up to 500,000 shares per warrant. The warrants permit the
Buyers to exercise the purchase rights at any time on or after May 29, 2020 through May 29, 2023. Each warrant contains an exercise
price per share of $0.40, subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise
rights as defined therein. The Company has maintained the right to redeem each warrant in full at any time following payment in
full of the amounts owing under each respective note. The Company valued the warrants upon day of grant with a fair value of $96,396
and accounted for it as debt discount on the condensed consolidated balance sheet. The debt discount is amortized over the earlier
of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount
is included as a component of interest expense in the condensed consolidated statements of operations.
There
was total unamortized debt discount related to the May 2020 SPA of $216,296 as of September 30, 2020. During the nine months ended
September 30, 2020, the Company recorded amortization of debt discount totaling $183,704.
9
On July 20, 2020, the Company entered into a Securities Purchase Agreement (the “July 2020 SPA”), with Vista
Capital Investments LLC (“Vista”) (the “July 2020 Investor”), pursuant to which the July 2020 Investor
purchased from the Company, for an aggregate purchase price of $250,000 (the “July 2020 Purchase Price”), a Promissory
Note in the principal amount of $270,000 (the “July 2020 Note”). The July 2020 Note will be repaid according to a
schedule of fixed interest and principal payments beginning in September 2020. As additional consideration for the July 2020 Investor
loaning the July 2020 Purchase Price to the Company, the Company issued to the July 2020 Investor 270,000 shares of Common Stock
of the Company in addition to three year warrants to purchase 338,000 shares of Common Stock.
The
July 2020 Note shall accrue interest at a rate of fourteen percent (10%) per annum and will mature on April 20, 2021. No payments
of principal or interest are due through January 2020 (six (6) months following issuance) and then there are three (3) fixed payments
of principal and interest due on a monthly basis until maturity.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock
at a conversion price equal to 0.70 (representing a 30% discount) multiplied by the lesser of (i) the lowest one day volume weighted
average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading
day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period
ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice,
the note shall become immediately due and payable. The Company recorded a debt discount of $145,538 relating to the conversion
feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance
cost.
The
Company valued the 270,000 shares upon day of grant with a fair value of $62,100 and accounted for it as debt discount on the
condensed consolidated balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion
of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense
in the condensed consolidated statements of operations.
The
warrants were issued to the Buyers by the Company on July 20, 2020 in connection with the SPA. The warrants entitle the Buyers,
respectively, to exercise purchase rights represented by the warrants up to 338,000 shares per warrant. The warrants permit the
Buyers to exercise the purchase rights at any time on or after July 20, 2020 through July 19, 2023. Each warrant contains an exercise
price per share of $0.40, subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise
rights as defined therein. The Company has maintained the right to redeem each warrant in full at any time following payment in
full of the amounts owing under each respective note. The Company valued the warrants upon day of grant with a fair value of $42,362
and accounted for it as debt discount on the condensed consolidated balance sheet. The debt discount is amortized over the earlier
of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount
is included as a component of interest expense in the condensed consolidated statements of operations.
There
was total unamortized debt discount related to the May 2020 SPA of $199,051 as of September 30, 2020. During the nine months ended
September 30, 2020, the Company recorded amortization of debt discount totaling $70,949.
Future
maturities of all debt (excluding debt discount discussed above in Notes 8 and 9) are as follows:
For
the Years Ending December 31,
|
|
|
|
2020 (remainder of year)
|
|
$
|
1,365,870
|
|
2021
|
|
|
3,395,860
|
|
2022
|
|
|
1,100,440
|
|
Thereafter
|
|
|
1,414,582
|
|
|
|
$
|
7,276,752
|
|
10
|
DERIVATIVE
LIABILITIES
|
As
discussed above in Note 9, during the nine months ended September 30, 2020, the Company executed convertible notes with lenders
and received gross proceeds of $2,182,000. The Company identified certain features embedded in the notes requiring the Company
to classify the features as derivative liabilities. The conversion price of the notes are subject to adjustment for issuances
of the Company’s Common Stock or any equity linked instruments or securities convertible into the Company’s Common
Stock at a purchase price of less than the prevailing conversion price or exercise price. Such adjustment shall result in the
conversion price and exercise price being reduced to such lower purchase price.
The
table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and
liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months
ended September 30, 2020:
|
|
Fair
Value
Measurement
Using Level 3
Inputs
|
|
|
|
Total
|
|
Balance, December 31, 2019
|
|
$
|
190,846
|
|
Change in fair value of derivative
liabilities
|
|
|
(405,413
|
)
|
Derivative liabilities recorded on
issuance of convertible notes
|
|
|
1,909,378
|
|
Write-off
of derivative liabilities upon settlement of debt
|
|
|
(279,573
|
)
|
Balance, September 30, 2020
|
|
$
|
1,415,238
|
|
During
the nine months ended September 30, 2020, the fair value of the derivative feature was calculated using the following weighted
average assumptions:
|
|
September
30, 2020
|
|
Risk-free
interest rate
|
|
|
0.11
– 1.51
|
%
|
Expected
life of grants
|
|
|
0.75
year
|
|
Expected
volatility of underlying stock
|
|
|
96
- 115
|
%
|
Dividends
|
|
|
0
|
%
|
As
of September 30, 2020 and December 31, 2019, the derivative liability was $1,414,431 and $190,846, respectively. In addition,
for the nine months ended September 30, 2020, the Company recorded $406,220 as a gain on the change in fair value of the derivative
on the condensed consolidated statement of operations. The Company determined that upon measuring the fair value of the derivative
features, the total amount recorded as a debt discount exceed the face value of the notes issued and the Company therefore recorded
derivative expense of $529,294 on the condensed consolidated income statements.
On
January 25, 2018 the Company obtained a $500,000 line of credit (LOC) with a Bank. The LOC bears interest at 5% per annum and
is secured by essentially all of the Company’s assets. The note is personally guaranteed by the owner of the majority of
the Company’s voting shares. On December 21, 2018, the Company and the bank agreed to increase the LOC to $1,000,000 at
an interest rate of 6% per annum. As of September 30, 2020 and December 31, 2019, the outstanding balance on the LOC was $912,870.
The
Company determines if an arrangement contains a lease at inception. Right of use (“ROU”) assets represent the right
to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from
the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease
payments over the lease term.
The
Company leases office space in Memphis, TN and a call center space in El Salvador. The term of the office is for 2 years beginning
on November 1, 2019 commencing with monthly payments of $1,600. The term of the call center lease is for 3 years beginning on
March 1, 2019 commencing with monthly payments of $6,680. As part of the ECS transaction discussed above, the Company acquired
office space in Springfield, MO. The term of the lease is for 3 years commencing on January 1, 2020 with monthly payments of $12,000.
During
the nine months ended September 30, 2020 and 2019, the Company paid lease obligations of $292,914 and $53,085, respectively, under
the leases.
The
Company utilized a portfolio approach in determining the discount rate. The portfolio approach takes into consideration the range
of the term, the range of the lease payments, the category of the underlying asset and the Company’s estimated incremental
borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of
lease payments. The Company also considered its recent debt issuances as well as publicly available data for instruments with
similar characteristics when calculating the incremental borrowing rates.
The
lease terms include options to extend the leases when it is reasonably certain that the Company will exercise that option. These
operating leases contain renewal options for periods ranging from three to five years that expire at various dates with no residual
value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the
judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is
reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal
rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the
option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in
the measurement of the right-of-use assets and operating lease liabilities.
Leases
with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above.
The
Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company recognizes variable
lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an
index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are
recognized in the period incurred.
The
components of lease expense, including short term leases, were as follows:
|
|
For
the Nine
Months
Ended
|
|
|
For
the Nine
Months
Ended
|
|
|
|
September
30, 2020
|
|
|
September
30, 2019
|
|
Operating lease
|
|
$
|
248,677
|
|
|
$
|
48,020
|
|
Interest on
lease liabilities
|
|
|
44,237
|
|
|
|
5,065
|
|
Total net
lease cost
|
|
$
|
292,914
|
|
|
$
|
53,085
|
|
Supplemental
balance sheet information related to leases was as follows:
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
Operating lease ROU assets
- net
|
|
$
|
419,372
|
|
|
$
|
210,816
|
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities,
included in current liabilities
|
|
$
|
50,151
|
|
|
$
|
90,944
|
|
Noncurrent
operating lease liabilities, included in long-term liabilities
|
|
|
365,723
|
|
|
|
119,872
|
|
Total operating
lease liabilities
|
|
$
|
415,874
|
|
|
$
|
210,816
|
|
Supplemental
cash flow and other information related to leases was as follows:
|
|
For
the Nine
Months
Ended
|
|
|
For
the Nine
Months
Ended
|
|
|
|
September
30, 2020
|
|
|
September
30, 2019
|
|
Cash paid for amounts included in
the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows
from operating leases
|
|
$
|
150,145
|
|
|
$
|
35,015
|
|
|
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for
lease liabilities:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
355,203
|
|
|
$
|
230,812
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease
term (in years):
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
2.03
|
|
|
|
2.42
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
11
|
%
|
|
|
5
|
%
|
Total
future minimum payments required under the lease obligations as of September 30, 2020 are as follows:
Twelve
Months Ending December 31,
|
|
|
|
2020 (remainder of year)
|
|
$
|
60,840
|
|
2021
|
|
|
240,161
|
|
2022
|
|
|
165,561
|
|
Total lease payments
|
|
$
|
466,562
|
|
Less: amounts
representing interest
|
|
|
(50,688
|
)
|
Total lease
obligations
|
|
$
|
415,874
|
|
Preferred
Stock
Series
“A” Preferred Stock
As
of September 30, 2020 and December 31, 2019, there were 13,000,000 shares of Series A issued and outstanding.
Series
“C” Convertible Preferred Stock
As
of September 30, 2020 and December 31, 2019, there were 721,598 shares of Series C issued and outstanding.
Common
Stock
As
discussed above in Note 1, on January 30, 2020, the Company entered into a Membership Interest Purchase Agreement and Stock Purchase
Agreement with ECS Prepaid, ECS, CSLS and the Winfreys. Pursuant to the agreements, the Company acquired all of the membership
interests of ECS Prepaid and all of the issued and outstanding stock of each ECS and CSLS. The agreements provide that the consideration
is to be paid by the Company through the issuance of 500,000 shares of the Company’s Common Stock. In addition, the agreements
called for 25,000 shares of Common Stock to be issued to the Winfreys on a monthly basis over a 12-month period. During the nine
months ended September 30, 2020, the Company issued 200,000 shares of Common Stock pursuant to the agreements.
As
discussed in Note 9 above, during the nine months ended September 30, 2020, the Company granted 2,592,000 shares of Common Stock
pursuant to debt agreements executed with various lenders. The shares were valued on execution date and recorded as a debt discount
on the condensed consolidated balance sheets.
As
discussed in Note 9 above, during the nine months ended September 30, 2020, the Company issued 9,409,040 shares of Common Stock
for the conversion of debt totaling $2,079,726 in principal and interest.
During
the nine months ended September 30, 2020, the Company sold an aggregate of 2,014,285 shares of Common Stock and 214,284 warrants,
with each warrant exercisable for one share of Common Stock at an exercise price of $0.75, resulting in gross proceeds to the
Company of $705,000.
On
September 15, 2020, the Company executed a consulting agreement with a third party for professional services. Upon execution of
the agreement, the Company agreed to issue 65,000 shares of the Company’s Common Stock. The 65,000 shares have an aggregated
fair value of approximately $7,995 which was expensed immediately upon execution of the agreement.
As
of September 30, 2020 and December 31, 2019, there were 116,236,031 and 102,193,579 shares of Common Stock issued and outstanding,
respectively.
Stock
Warrants
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding –
December 31, 2019
|
|
|
6,849,635
|
|
|
$
|
0.71
|
|
Exercisable – December 31,
2019
|
|
|
6,849,635
|
|
|
$
|
0.71
|
|
Granted
|
|
|
984,284
|
|
|
$
|
0.48
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
(250,000
|
)
|
|
$
|
-
|
|
Outstanding
– September 30, 2020
|
|
|
7,583,919
|
|
|
$
|
0.68
|
|
Exercisable
– September 30, 2020
|
|
|
7,583,919
|
|
|
$
|
0.68
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.40
– 3.00
|
|
|
|
7,583,919
|
|
|
1.39 years
|
|
$
|
0.68
|
|
|
|
7,583,919
|
|
|
$
|
0.
68
|
|
At
September 30, 2020 the total intrinsic value of warrants outstanding and exercisable was $0.
As
discussed in Note 9, during the nine months ended September 30, 2020, the Company paid $95,000 for the cancellation of 250,000
warrants.
On
February 15, 2019, the Company executed a consulting agreement with a third party for professional services. Upon execution of
the agreement, the Company agreed to issue 100,000 warrants to purchase the Company’s Common Stock with an exercise price
of $3.00 per share, a term of 3 years, and immediate vesting. In addition, the consultant is eligible to receive 150,000 warrants
upon achievement of certain milestones as discussed in the agreement. The 250,000 warrants have an aggregated fair value of approximately
$30,782 that was calculated using the Black-Scholes.
For
the nine months ended September 30, 2019, when computing fair value of share-based payments, the Company has considered the following
variables:
|
|
September
30, 2019
|
|
Risk-free interest rate
|
|
|
2.50
|
%
|
Expected life of grants
|
|
|
3
years
|
|
Expected volatility of underlying
stock
|
|
|
168.71
|
%
|
Dividends
|
|
|
0
|
%
|
The
estimated warrant life was determined based on the “simplified method,” giving consideration to the overall vesting
period and the contractual terms of the award.
The
Company did not issue any warrants as compensation for services during the nine months ended September 30, 2020.
During
the nine months ended September 30, 2020 and 2019, the Company recorded total stock-based compensation expense related to the
warrants of $0 and $33,673, respectively. The unrecognized compensation expense at September 30, 2020 was approximately $0.
14
|
RELATED
PARTY TRANSACTIONS
|
The
Company’s former Chief Executive Officer has advanced the Company various amounts on a non-interest-bearing basis, which
is being used for working capital. The advance had no fixed maturity. As noted, Mr. Matzinger elected to exchange outstanding
non-interest-bearing debt totaling $389,502 owed by the Company into 6,232 shares of Preferred C stock. As of September 30, 2020
and December 31, 2019, the outstanding balance due was $0.
For
the nine months ended September 30, 2020 and 2019, outsourced management services fees of $0 and $765,000, respectively, were
paid to Axia Management, LLC (“Axia”) as compensation for services provided. These costs are included in Selling,
general and administrative expenses in the condensed consolidated statements of operations. Axia is owned by the Company’s
Chief Executive Officer.
At
September 30, 2020 and December 31, 2019, the Company had trade payables to Axia of $438,027 and $666,112, respectively.
For
the nine months ended September 30, 2020 and 2019, the Company purchased telecom services and access to wireless networks from
321 Communications in the amount of $168,714 and $499,356, respectively. These costs are included in Cost of revenue in the condensed
consolidated statements of operations. The Company’s Chief Executive Officer is a minority owner of 321 Communications.
At
September 30, 2020 and December 31, 2019, the Company had trade payables to 321 Communications of $4,269 and $140,923, respectively.
The
Company contracted with Centercom Global, S.A. de C.V. (“Centercom Global”) to provide customer service call
center services, manage the sales process to include handling incoming orders, the collection and verification of all documents
to comply with FCC regulations, monthly audit of all subscribers to file the USAC 497 form, yearly audit of all subscribers that
have been active over one year to file the USAC 555 form (Recertification), information technology professionals to maintain company
websites, sales portals and server maintenance. Billings for these services in the nine months ended September 30, 2020 and 2019
were $2,202,191 and $1,594,068, respectively, and are included in Cost of revenue in the condensed consolidated statements of
operations. The Company’s President has a controlling interest in Centercom Global.
At
September 30, 2020 and December 31, 2019, the Company had trade payables to Centercom Global of $1,108,599 and $282,159, respectively.
See
Note 7 long-term debt due to related parties.
15
|
COMMITMENTS
AND CONTINGENCIES
|
On
November 1, 2013, The Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability for Forfeiture
to the Company for requesting and/or receiving support for ineligible subscriber lines between the months of October 2012 and
May 2013 and proposed a monetary forfeiture of $5,501,285. The Company has annual compliance audits with FCC approved audit firms
that have found no compliance deficiencies. Management believes the proposed monetary forfeiture is without merit and if anything
should result from this notice, the amount would not materially affect the financial position of the Company.
On
January 15, 2020, the Company and Carter Matzinger (a member of the Company’s Board of Directors) (collectively, the “Surge
Party”), and the former owners of the Company’s wholly-owned subsidiary, DigitizeIQ, LLC (collectively, the “DigitizeIQ
Party” and, together with the Surge Party, the “Parties”), entered into a settlement agreement (the “DigitizeIQ
Settlement Agreement”) to settle any claims the Parties may have had against each other. The parties made claims against
each other with regard to alleged breaches of an Exchange Agreement, a Non-Compete Agreement, and promissory notes issued by the
Company to the DigitzeIQ Party (the “DigitzeIQ Promissory Notes”). Pursuant to the DigitizeIQ Settlement Agreement,
the Parties, in addition to releasing all claims against each other, agreed to cooperate to ensure the complete transfer and assignment
of the domain “digitizeiq.com” to the Company and agreed that the DigitizeIQ Promissory Notes are deemed terminated.
As a result of the DigitizeIQ Promissory Notes being terminated, on an unaudited basis, the Company reduced its liabilities by
approximately $580,000.
On
March 1, 2020, in connection with Mr. Evers’ appointment as Chief Financial Officer of the Company, the Company and Mr.
Evers entered into an employment agreement (the “Evers Employment Agreement”), whereby as compensation for his services,
the Company shall pay Mr. Evers a salary of $270,000 per year. Pursuant to the terms of the Evers Employment Agreement, the Company
will pay the full cost of Mr. Evers’ health insurance premiums. In the event Mr. Evers’ employment with the Company
shall terminate, Mr. Evers shall be entitled to a severance payment of a full year of salary and benefits. In addition, Mr. Evers
is eligible for equity awards as approved by the Board as defined in the agreement.
On
July 9, 2020, the Company entered into a settlement and release agreement with Unimax Communications, LLC (“Unimax”).
The settlement is related to a complaint filed by Unimax alleging the Company is indebted pursuant to a purchase order and additional
financing terms. The Company agreed to pay Unimax the total sum of $785,000 over a 24-month period. The settlement amount is included
accounts payable and accrued expenses – other on the condensed consolidated balance sheets.
Operating
segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly
by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision maker is its Chief Executive Officer.
Segment
information for the three and nine months ended September 30, 2020 and 2019 and as of September 30, 2020 and December 31, 2019,
are as follows:
|
|
Surge
|
|
|
TW
|
|
|
ECS
|
|
|
Total
|
|
Three Months ended September 30,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,843,418
|
|
|
$
|
680,205
|
|
|
$
|
8,278,549
|
|
|
$
|
12,802,172
|
|
Cost of revenue
|
|
|
(2,918,983
|
)
|
|
|
(269,989
|
)
|
|
|
(8,027,214
|
)
|
|
|
(11,216,186
|
)
|
Gross margin
|
|
|
924,435
|
|
|
|
410,216
|
|
|
|
251,335
|
|
|
|
1,585,986
|
|
Costs and
expenses
|
|
|
(2,423,424
|
)
|
|
|
(437,480
|
)
|
|
|
(350,006
|
)
|
|
|
(3,210,910
|
)
|
Operating
loss
|
|
$
|
(1,498,989
|
)
|
|
$
|
(27,264
|
)
|
|
$
|
(98,671
|
)
|
|
$
|
(1,624,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended September 30,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,428,766
|
|
|
$
|
1,473,098
|
|
|
$
|
-
|
|
|
$
|
4,901,864
|
|
Cost of revenue
|
|
|
(1,991,139
|
)
|
|
|
(1,032,153
|
)
|
|
|
-
|
|
|
|
(3,023,292
|
)
|
Gross margin
|
|
|
1,437,627
|
|
|
|
440,945
|
|
|
|
-
|
|
|
|
1,878,572
|
|
Costs and
expenses
|
|
|
(2,154,161
|
)
|
|
|
(862,124
|
)
|
|
|
-
|
|
|
|
(3,016,285
|
)
|
Operating
loss
|
|
$
|
(716,534
|
)
|
|
$
|
(421,179
|
)
|
|
$
|
-
|
|
|
$
|
(1,137,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
14,298,569
|
|
|
$
|
1,725,053
|
|
|
$
|
27,081,145
|
|
|
$
|
43,104,767
|
|
Cost of revenue
|
|
|
(11,915,653
|
)
|
|
|
(1,071,266
|
)
|
|
|
(26,435,857
|
)
|
|
|
(39,422,776
|
)
|
Gross margin
|
|
|
2,382,916
|
|
|
|
653,787
|
|
|
|
645,288
|
|
|
|
3,681,991
|
|
Costs and
expenses
|
|
|
(8,851,172
|
)
|
|
|
(2,050,875
|
)
|
|
|
(1,112,569
|
)
|
|
|
12,014,616
|
)
|
Operating
loss
|
|
$
|
(6,468,256
|
)
|
|
$
|
(1,397,088
|
)
|
|
$
|
(467,281
|
)
|
|
$
|
(8,332,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,739,867
|
|
|
$
|
5,555,191
|
|
|
$
|
-
|
|
|
$
|
12,295,058
|
|
Cost of revenue
|
|
|
(4,282,620
|
)
|
|
|
(3,531,994
|
)
|
|
|
-
|
|
|
|
(7,814,614
|
)
|
Gross margin
|
|
|
2,457,247
|
|
|
|
2,023,197
|
|
|
|
-
|
|
|
|
4,480,444
|
|
Costs and
expenses
|
|
|
(6,389,314
|
)
|
|
|
(2,872,659
|
)
|
|
|
-
|
|
|
|
(9,261,973
|
)
|
Operating
loss
|
|
$
|
(3,932,067
|
)
|
|
$
|
(849,462
|
)
|
|
$
|
-
|
|
|
$
|
(4,781,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,609,212
|
|
|
$
|
220,837
|
|
|
$
|
4,805,737
|
|
|
$
|
7,635,786
|
|
Total liabilities
|
|
|
12,142,517
|
|
|
|
4,120,623
|
|
|
|
303,137
|
|
|
|
16,566,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,636,624
|
|
|
$
|
1,339,577
|
|
|
$
|
5,010,172
|
|
|
$
|
9,986,373
|
|
Total liabilities
|
|
|
10,850,674
|
|
|
|
3,815,175
|
|
|
|
20,139
|
|
|
|
14,685,988
|
|
17
|
SUBSEQUENT
EVENTS
On
October 29, 2020, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation to change
its name to SurgePays, Inc.
|
Shares
of Common Stock
The
date of this prospectus is _______, 2021