UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
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Commission
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
The
(Nasdaq Capital Market) | ||||
The
(Nasdaq Capital Market) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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| Large accelerated filer ☐ | Accelerated filer ☐ | ||
| Smaller
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| Emerging
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐
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SurgePays, Inc. and Subsidiaries
SurgePays, Inc. and Subsidiaries
Consolidated Balance Sheets
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable - net | ||||||||
| Inventory | ||||||||
| Prepaids | ||||||||
| Total Current Assets | ||||||||
| Property and equipment - net | ||||||||
| Other Assets | ||||||||
| Note receivable | ||||||||
| Intangibles - net | ||||||||
| Goodwill | ||||||||
| Investment in Centercom | ||||||||
| Operating lease - right of use asset - net | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accounts payable and accrued expenses - related party | ||||||||
| Deferred revenue | ||||||||
| Operating lease liability | ||||||||
| Loans payable - related parties | ||||||||
| Notes payable - SBA government | ||||||||
| Notes payable - net | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Loans payable - related parties | ||||||||
| Notes payable - SBA government | ||||||||
| Operating lease liability | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 8) | ||||||||
| Stockholders’ Equity | ||||||||
| Series A, Convertible Preferred stock, par value, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Series C, Convertible Preferred stock, par value, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Common stock, par value, shares authorized and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Stockholders’ equity | ||||||||
| Non-controlling interest | ( | ) | ||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
| 1 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Operations
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Derivative expense | ( | ) | ||||||||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||||||||||
| Gain (loss) on investment in Centercom | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain on settlement of liabilities | ||||||||||||||||
| Gain on deconsolidation of True Wireless | ||||||||||||||||
| Amortization of debt discount | ( | ) | ( | ) | ||||||||||||
| Gain on forgiveness of PPP loan - government | ||||||||||||||||
| Total other income (expense) - net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss including non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Net loss available to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares - basic and diluted | ||||||||||||||||
| 2 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Three and Six Months Ended September 30, 2022
(Unaudited)
| Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Recognition of stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Warrants issued as debt issue costs | - | - | - | |||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Recognition of stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock issued as direct offering costs | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock issued to purchase software | - | - | ||||||||||||||||||||||||||||||||||||||
| Warrants issued as debt issue costs | - | - | - | |||||||||||||||||||||||||||||||||||||
| Warrants issued as interest expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| June 30, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Recognition of stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Warrants issued as interest expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Exercise of warrants (cashless) | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| 3 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ (Deficit)
For the Three and Six Months Ended September 30, 2021
(Unaudited)
| Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Stock issued for services rendered and recognition of share-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Stock issued for cash | - | - | ||||||||||||||||||||||||||||||||||
| Stock and warrants issued with debt recorded as a debt discount | - | - | ||||||||||||||||||||||||||||||||||
| Conversion of debt | - | - | ||||||||||||||||||||||||||||||||||
| Stock issued under make-whole arrangement | - | - | ||||||||||||||||||||||||||||||||||
| Stock issued in connection with debt modification | - | - | ||||||||||||||||||||||||||||||||||
| Stock issued in settlement of liabilities | - | - | ||||||||||||||||||||||||||||||||||
| Stock issued for acquisition of membership interest in ECS | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Stock issued for services rendered and recognition of share-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Recognition of stock option expense and related true up adjustment | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Stock issued in settlement of liabilities | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| True up adjustment related to initial acquisition of True Wireless | - | - | - | ( | ) | |||||||||||||||||||||||||||||||
| Stock issued for services rendered and recognition of share-based compensation ($ - $/share) | - | - | ||||||||||||||||||||||||||||||||||
| Recognition of stock option expense and related true up adjustment | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Stock issued in settlement of liabilities ($ - $/share) | - | - | ||||||||||||||||||||||||||||||||||
| Exercise of warrants (cashless) | - | - | ( | ) | ||||||||||||||||||||||||||||||||
| Conversion of debt ($ | - | - | ||||||||||||||||||||||||||||||||||
| Warrants issued with debt recorded as a debt discount | - | - | - | - | - | - | 265,268 | - | 265,268 | |||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| 4 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Operating activities | ||||||||
| Net loss - including non-controlling interest | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operations | ||||||||
| Provision for inventory obsolescence | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Amortization of debt discount/debt issue costs | ||||||||
| Recognition of share-based compensation | ||||||||
| Warrants issued for interest expense | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Derivative expense | ||||||||
| Gain on settlement of liabilities | ( | ) | ||||||
| (Gain) loss on equity method investment - Centercom | ||||||||
| Gain on forgiveness of PPP loan | ( | ) | ||||||
| Gain on deconsolidation of subsidiary (True Wireless) | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| (Increase) decrease in | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Lifeline revenue - due from USAC | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaids | ( | ) | ) | |||||
| Increase (decrease) in | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Accounts payable and accrued expenses - related party | ) | |||||||
| Deferred revenue | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Purchase of software | ( | ) | ||||||
| Acquisition of Torch Wireless | ( | ) | ||||||
| Cash disposed in deconsolidation of subsidiary (True Wireless) | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Proceeds from stock and warrants issued for cash | ||||||||
| Proceeds from loans - related party | ||||||||
| Repayments of loans - related party | ( | ) | ||||||
| Proceeds from notes payable | ||||||||
| Repayments on notes payable | ( | ) | ||||||
| Proceeds from SBA notes | ||||||||
| Repayments on SBA notes | ( | ) | ( | ) | ||||
| Proceeds from convertible notes | ||||||||
| Repayments on convertible notes - net of overpayment | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ) | |||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Debt issue costs recorded in connection with notes payable | $ | $ | ||||||
| Stock issued to acquire software | $ | $ | ||||||
| Debt discount/issue costs recorded in connection with debt/derivative liabilities | $ | $ | ||||||
| Stock issued in settlement of liabilities | $ | $ | ||||||
| Conversion of debt into equity | $ | $ | ||||||
| Right-of-use asset obtained in exchange for new operating lease liability | $ | $ | ||||||
| Termination of ECS ROU lease | $ | $ | ||||||
| Stock issued in connection with debt modification | $ | $ | ||||||
| Stock issued under make-whole arrangement | $ | $ | ||||||
| Stock issued for acquisition of membership interest in ECS | $ | $ | ||||||
| Deconsolidation of subsidiary (True Wireless) | $ | $ | ||||||
| 5 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Note 1 - Organization and Nature of Operations
Organization and Nature of Operations
SurgePays, Inc. (“SurgePays,” “SP,” “we,” “our” or “the Company”), and its operating subsidiaries, is a technology-driven company building a next generation supply chain software platform that can offer wholesale goods and services more cost efficiently than traditional and existing wholesale distribution models.
The parent (SurgePays, Inc.) and subsidiaries are organized as follows:
| Company Name | Incorporation Date | State of Incorporation | |||
| * | |||||
| ** |
| * |
| ** |
| 6 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Impact of COVID-19
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The COVID-19 pandemic has the potential to significantly impact the Company’s supply chain, distribution centers, or logistics and other service providers.
In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand for products and services and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly.
We have implemented adjustments to our operations designed to keep employees safe and comply with international, federal, state, and local guidelines, including those regarding social distancing. The extent to which COVID-19 may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence. In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations.
Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition, and results of operations.
| 7 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Basis of Presentation
The accompanying unaudited 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 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, 2022 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited 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, 2021 filed with the SEC on March 24, 2022.
Management acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the consolidated results of its operations for the periods presented.
Liquidity, Going Concern and Management’s Plans
These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
As reflected in the accompanying consolidated financial statements, for the nine months ended September 30, 2022, the Company had:
| ● | Net
loss available to common stockholders of $ |
| ● | Net
cash used in operations was $ |
Additionally, at September 30, 2022, the Company had:
| ● | Accumulated
deficit of $ |
| ● | Stockholders’
equity of $ |
| ● | Working
capital of $ |
We
manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand
of $
The Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from the sales of its products and services to achieve profitable operations. There can be no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months that will end on September 30, 2023, and our current capital structure including equity-based instruments and our obligations and debts.
These factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve-month period subsequent to the date that these consolidated financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Management’s strategic plans include the following:
| ● | Continue the hyper growth of the Affordable Connectivity Program revenue stream; |
| ● | Execution of business plan and significant revenue growth from prior period; |
| ● | Pursuing a line of credit to achieve the hyper growth of the Affordable Connectivity Program,; |
| ● | Expand product and services offerings to a larger surrounding geographic area; |
| ● | Continuing to explore and execute prospective partnering or distribution opportunities; and |
| ● | Identifying unique market opportunities that represent potential positive short-term cash flow. |
| 8 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation and Non-Controlling Interest
These consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.
For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than the Company. The aggregate of the income or loss and corresponding equity that is not owned by us is included in Non-controlling Interests in the consolidated financial statements.
Business Combinations
The Company accounts for business acquisitions using the acquisition method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date.
The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
Significant judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within the Company’s operating results.
| 9 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Effective January 1, 2022, the Company executed a management agreement with Torch Wireless (“Torch”). Generally, the Company was engaged to handle the following services:
| ● | Oversee management of the business being conducted by Torch; | |
| ● | Involved in the performance of Torch’s obligations under contracts regarding its business operations and maintenance of Torch’s customer relationships; | |
| ● | Assist Torch with regulatory compliance; | |
| ● | Manage all billing and collection functions, including the right to collect revenues related to Torch’s business operations, as part of the agreement, Torch may not participate in this function; and | |
| ● | Manage all payment functions related to the business, including the right to disburse funds, as part of the agreement, Torch may not participate in this function. |
Torch
is a provider of subsidized mobile broadband services to consumers qualifying under the federal guidelines of the U.S. Federal Communication
Commission’s Affordable Connectivity Program (“ACP”). The ACP provides the Company up to a $
During
June 2022, it was determined that the Company had acquired
At
the time of acquisition, Torch had no significant assets or liabilities. The Company paid $
At the time of acquisition, Torch had nominal revenues and losses. As a result, and given the immaterial nature of this acquisition, the Company has elected not to present any pro-forma financial information.
In
addition, the Company will pay the Sellers monthly residual payments for customers enrolled by the Company through December 31, 2022
of either $
For
the three and nine months ended September 30, 2022, the Company incurred expenses of $
| 10 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
This transaction does not involve the purchase of a “significant amount of assets” as defined in the Instructions to Item 2.01 of Form 8-K. Additionally, the acquisition of Torch was not deemed to be significant at any level under SEC Regulation S-X 3.05 and does not require the presentation of any additional historical audits.
At September 30, 2022, Torch has been consolidated with the Company’s consolidated statements of financial position, results of operations, and cash flows.
At
September 30, 2022 and December 31, 2021 goodwill was $
Deconsolidation of Subsidiary
In accordance with ASC Topic 810-10-40, a parent company must deconsolidate a subsidiary as of the date the parent ceases to have a controlling interest in that subsidiary and recognize a gain or loss in net income at that time.
On
May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc. (“TW”), however we retained $
| For the Year Ended December 31, 2022: | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| Less: amount representing interest | ( | ) | ||
| Total | $ | |||
| 11 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
As
a result of the sale, we deconsolidated our entire ownership interest in TW from our consolidated financial statements on May 7, 2021,
the effective date of the sale agreement, and recognized a gain on deconsolidation of $
| Consideration | ||||
| Note receivable | $ | |||
| Fair value of consideration received | ||||
| Recognized amounts of identifiable assets sold and liabilities assumed by buyer: | ||||
| Cash | ||||
| Lifeline revenue due from USAC | ||||
| Inventory | ||||
| Property and equipment - net | ||||
| Operating lease - right of use asset - net | ||||
| Total assets sold | ||||
| Accounts payable and accrued expenses | ||||
| Line of credit | ||||
| Note payable - SBA government | ||||
| Operating lease liability | ||||
| Total liabilities assumed by buyer | ||||
| Total net liabilities assumed by buyer | ||||
| Gain on deconsolidation of True Wireless | ||||
Business Segments and Concentrations
The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. The Company manages its business as multiple reportable segments.
Customers
in the United States accounted for
See Note 10 regarding segment disclosure.
| 12 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Use of Estimates
Preparing 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 the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant estimates during the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively, include, allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of loss contingencies, valuation of derivative liabilities, valuation of stock-based compensation, estimated useful lives related to intangible assets and property and equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred tax assets.
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.
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
| 13 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
| ● | Level 1 —Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; | |
| ● | Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and | |
| ● | Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
The Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, and accounts payable and accrued expenses – related party, are carried at historical cost. At September 30, 2022 and December 31, 2021, respectively, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.
ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding financial instruments.
| 14 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Cash and Cash Equivalents and Concentration of Credit Risk
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.
At September 30, 2022 and December 31, 2021, respectively, the Company did not have any cash equivalents.
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 $
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding customer balances. Credit is extended to customers based on an evaluation of their financial condition and other factors. Interest is not accrued on overdue accounts receivable. The Company does not require collateral.
Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. Accounts determined to be uncollectible are charged to operations when that determination is made.
Allowance
for doubtful accounts was $
There
was
Bad debt expense (recovery) is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.
| 15 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Inventory
Inventory primarily consists of tablets and sim cards. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method.
During
the three and nine months ended September 30, 2022, the Company recorded a provision for inventory obsolescence of $
During the three and nine months ended September 30, 2021, the Company recorded a provision for inventory obsolescence of $, respectively.
At
September 30, 2022 and December 31, 2021, the Company had inventory of $
Impairment of Long-lived Assets
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.
If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
There
were
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets.
Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.
Management
reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount
of the asset may not be recoverable. Management has revised the capitalization policy to capitalize any property and equipment over $
There
were
| 16 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Right of Use Assets and Lease Obligations
The Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments over the lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.
Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the performance of the business remains strong. Therefore, the Right of Use Asset and Lease Liability may include an assumption on renewal options that have not yet been exercised by the Company. The Company’s operating leases contained renewal options 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.
As the rate implicit in leases are not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. See Note 8.
Derivative Liabilities
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, (“ASC 480”), “Distinguishing Liabilities from Equity” and FASB ASC Topic No. 815, (“ASC 815”) “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The Company uses a binomial model to determine fair value.
| 17 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Upon conversion of a note for shares of common stock where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at fair value, relieves all related notes, derivatives, and debt discounts, and recognizes a net gain or loss on debt extinguishment. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
Debt Issue Cost
Debt issuance cost paid to lenders, or third parties are amortized to interest expense in the consolidated statements of operations, over the life of the underlying debt instrument.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely 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:
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.
| 18 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
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.
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, 2022 and December 31, 2021, respectively, contained a significant financing component.
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.
| 19 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
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.
The following reflects additional discussion regarding our revenue recognition policies for each of our material revenue streams. For each revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration is fixed and determinable at the initiation of the contract. Performance obligations for Torch, TW and LogicsIQ are satisfied when services are performed. Performance obligations for ECS and SB are satisfied at point of sale.
For each revenue stream we only have a single performance obligation.
Surge Phone Wireless (SPW) and Torch Wireless
SPW and Torch Wireless are separately licensed to provide subsidized mobile broadband services through the FCC’s Affordable Connectivity Program (ACP) to qualifying low-income customers, covering all fifty states. Revenues are recognized when an ACP application is completed and accepted. Each month we reconcile subscriber usage to ensure the service was utilized. A monthly file is submitted to the Universal Service Administrative Company for review and approval, at which time we have completed our performance obligation and recognize accounts receivable and revenue. Revenues are recorded in the month when services were rendered, with payment typically received on the 28th of the following month.
Surge Blockchain
Revenues are generated through the sale of various products such as energy drinks, CBD products, and other top selling products in convenience store and bodega nationwide. At the time in which our products are sold at the store our performance obligation is considered complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
| 20 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
LogicsIQ
LogicsIQ is an enterprise software development company providing marketing business intelligence (“BI”), plaintiff generation and case load management solutions for law firms representing plaintiffs in Mass Tort legal cases. Revenues are earned from our lead generation and retained services offerings.
Lead generation consist of sourcing leads, which requires us to drive traffic to our landing pages for a specific marketing campaign. We also achieve this in certain marketing campaigns by using third-party preferred vendors to meet the needs of our clients. Revenues are recognized at the time the lead is delivered to the client. If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed.
Retained service offerings consist of turning leads into a retained legal case. To provide this service to our customers, we qualify leads through verification of information collected during the lead generation process. Additionally, we further qualify these leads using a client questionnaire which assists in determining the services to be provided. The qualification process is completed using our call center operations.
If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed. At the time of delivery of leads and the creation of retained cases (customers are qualified at this point), our performance obligation has been completed and revenues are recognized. Arrangements with customers do not provide the customer with the right to take possession of our software or platform at any time. Once the advertising is delivered, it is non-refundable.
Surge Fintech and ECS
Revenues are generated through the sale of telecommunication products such as mobile phones, wireless top-up refills, and other mobile related products. At the time in which our products are sold through our online web portal (point of sale), our performance obligation is considered complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
True Wireless (TW) (Former Subsidiary)
TW was licensed to provide wireless services to qualifying low-income customers in five states. Revenues were recognized when a lifeline application was completed and accepted. Each month we reconciled subscriber usage to ensure the service was utilized. A monthly file was submitted to the Universal Service Administrative Company for review and approval, at which time we completed our performance obligation and recognized accounts receivable and revenue. Revenues were recorded in the month when services were rendered, with payment typically received on the 15th of the following month. If the subscriber did not utilize the Lifeline service during the month, we had 15-days to cure usage. If not cured, the subscriber was de-enrolled from the lifeline program at day 45. This process to verify usage and de-enrollment had been temporarily suspended due to the COVID-19 pandemic. Historically, we had had an insignificant amount of subscribers de-enrolled.
TW was sold in May 2021 and has been deconsolidated as of the disposal date.
Contract Liabilities (Deferred Revenue)
Contract liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer deposit is relieved and revenue is recognized.
At
September 30, 2022 and December 31, 2021, the Company had deferred revenue of $
| 21 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
The following represents the Company’s disaggregation of revenues for the nine months ended September 30, 2022 and 2021:
| Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Revenue | Revenue | % of Revenues | Revenue | % of Revenues | ||||||||||||
| Surge Phone and Torch Wireless | $ | % | $ | % | ||||||||||||
| Surge Blockchain, LLC | % | % | ||||||||||||||
| LogicsIQ, Inc. | % | % | ||||||||||||||
| Surge Fintech & ECS | % | % | ||||||||||||||
| True Wireless | % | % | ||||||||||||||
| Total Revenues | $ | % | $ | % | ||||||||||||
Cost of Revenues
Cost of revenues consists of the cost of purchased tablets and SIM cards, commissions, and purchased telecom services including data usage and access to wireless networks. Additionally, prepaid phone cards and advertising costs.
Income Taxes
The Company accounts for income tax using the asset and liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using
that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position
will be sustained upon examination by the tax authorities. As of September 30, 2022 and December 31, 2021, respectively, the Company
had
| 22 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
The
Company recognizes interest and penalties related to uncertain income tax positions in other expense.
Investment – Former Related Party
On
January 17, 2019, we announced the completion of an agreement to acquire a
Anthony N. Nuzzo, a director and officer and the holder of approximately 10% of our voting equity had a controlling interest in CenterCom Global. During 2022, Mr. Nuzzo passed away. See Form 8-K filed on March 24, 2022.
The strategic partnership with CenterCom as a bilingual operations hub has powered our growth and revenue. CenterCom has been built to support the infrastructure required to rapidly scale in synergy and efficiency to support our sales growth, customer service and development.
We account for this investment under the equity method. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee’s income or loss. All investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable.
At
September 30, 2022 and December 31, 2021, our investment in CenterCom was $
During
the three months ended September 30, 2022 and 2021, we recognized a loss of $
During
the nine months ended September 30, 2022 and 2021, we recognized a loss of $
During
2021, CenterCom forgave $
| 23 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs are included as a component of general and administrative expense in the consolidated statements of operations.
The
Company recognized $
The
Company recognized $
The Company accounts for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
The Company uses the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options.
The fair value of stock-based compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
When determining fair value of stock-based compensation, the Company considers the following assumptions in the Black-Scholes model:
| ● | Exercise price, |
| ● | Expected dividends, |
| ● | Expected volatility, |
| ● | Risk-free interest rate; and |
| ● | Expected life of option |
| 24 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Stock Warrants
In connection with certain financing (debt or equity), consulting and collaboration arrangements, the Company may issue warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of warrants issued for compensation using the Black-Scholes option pricing model as of the measurement date. However, for warrants issued that meet the definition of a derivative liability, fair value is determined based upon the use of a binomial pricing model.
Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants (for services) are recorded at fair value and expensed over the requisite service period or at the date of issuance if there is not a service period.
Pursuant to ASC 260-10-45, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the periods presented.
Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares may consist of common stock issuable for stock options and warrants (using the treasury stock method), convertible notes and common stock issuable. These common stock equivalents may be dilutive in the future. In the event of a net loss, diluted loss per share is the same as basic loss per share since the effect of the potential common stock equivalents upon conversion would be anti-dilutive.
| 25 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
| September 30, 2022 | September 30, 2021 | |||||||
| Convertible notes payable and related accrued interest (1) | ||||||||
| Warrants (2) | ||||||||
| Stock options (3) | ||||||||
| Series A, convertible preferred stock (4) | ||||||||
| Series C, convertible preferred stock (5) | ||||||||
| Total common stock equivalents | ||||||||
| 1 |
| 2 |
| 3 |
| 4 |
| 5 |
Warrants and stock options included as commons stock equivalents represent those that are vested and exercisable. See Note 9.
Based on the potential common stock equivalents noted above at September 30, 2022 and December 31, 2021, respectively, the Company has sufficient authorized shares of common stock () to settle any potential exercises of common stock equivalents.
Related Parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
The Company uses certain credit cards to pay expenses, these credit cards are in the names of certain officers and directors of the Company
| 26 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
During
the three and nine months ended September 30, 2022, the Company incurred expenses with related parties in the normal course of business
totaling $
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Related party expenses | ||||||||||||||||
| 321 Communications, Inc | $ | $ | $ | $ | ||||||||||||
| Axia Management, LLC | ||||||||||||||||
| Carddawg Investments, Inc. | ||||||||||||||||
| CenterCom USA, Inc | ||||||||||||||||
| Galaxy | ||||||||||||||||
| National Relief Telecom | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The increase in the expense is directly related to the Company’s expansion into the Affordable Connectivity program. The vendors supplying data plans for the program are 321 Communications and National Relief Telecom.
Recent Accounting Standards
Changes to accounting principles are established by the FASB in the form of Accounting Standards Updates (“ASU’s”) to the FASB’s Codification. We consider the applicability and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ equity, cash flows, or presentation thereof. Management has evaluated all recent accounting pronouncements issued 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 consolidated financial statements of the Company.
In June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
For SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
| 27 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intra period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.
We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s consolidation financial statements.
In August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity; Own Equity (“ASU 2020-06”), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year.
We adopted this pronouncement on January 1, 2022; however, the adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no material effect on the consolidated results of operations, stockholders’ equity (deficit), or cash flows.
| 28 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Note 3 – Property and Equipment
Management has revised the capitalization policy to
capitalize any property and equipment over $
Property and equipment consisted of the following:
| Estimated Useful | ||||||||||
| Type | September 30, 2022 | December 31, 2021 | Lives (Years) | |||||||
| Computer equipment and software | $ | $ | ||||||||
| Furniture and fixtures | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment - net | $ | $ | ||||||||
In
June 2022, the Company acquired software having a fair value of $
Depreciation
and amortization expense for the three months ended September 30, 2022 and 2021 was $
Depreciation
and amortization expense for the nine months ended September 30, 2022 and 2021 was $
These amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
| 29 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Note 4 – Intangibles
Intangibles consisted of the following:
| Estimated Useful | ||||||||||
| Type | September 30, 2022 | December 31, 2021 | Lives (Years) | |||||||
| Proprietary Software | $ | $ | ||||||||
| Tradenames/trademarks | ||||||||||
| ECS membership agreement | ||||||||||
| Noncompetition agreement | ||||||||||
| Customer Relationships | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangibles - net | $ | $ | ||||||||
ECS has been a financial technology and wireless top-up platform for over 15 years. On October 1, 2019, we acquired ECS primarily for the favorable ACH banking relationships and a fintech transactions platform (proprietary software) processing over 20,000 transactions a day at approximately 8,000 independently owned retail stores. The platform serves as a proven backbone for wireless top-up transactions and wireless product aggregation. The majority of the purchase price was allocated to the “Proprietary Software” category being amortized on a straight-line basis over seven years.
Amortization
expense for the three months ended September 30, 2022 and 2021 was $
Amortization
expense for the nine months ended September 30, 2022 and 2021 was $
| 30 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Estimated amortization expense for each of the five (5) succeeding years is as follows:
| For the Year Ended December 31, 2022: | ||||
| 2022 (3 months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ | |||
Note 5 – Debt
The following represents a summary of the Company’s notes payable – SBA government, loans payable – related parties, notes payable and convertible notes, key terms, and outstanding balances at September 30, 2022 and December 31, 2021, respectively:
Notes Payable – SBA government
(1) Paycheck Protection Program - PPP Loan
Pertaining to the Company’s eighteen (18) month loan and in accordance with the Paycheck Protection Program (“PPP”) and Conditional Loan Forgiveness, the promissory note evidencing the loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company.
Under the terms of the PPP loan program, all or a portion of this Loan may be forgiven upon request from Borrower to Lender, provided the Loan proceeds are used in accordance with the terms of the Coronavirus Aid, Relief and Economic Security Act (the “Act” or “CARES”), Borrower is not in default under the Loan or any of the Loan Documents, and Borrower has provided documentation to Lender supporting such request for forgiveness that includes verifiable information on Borrower’s use of the Loan proceeds, to Lender’s satisfaction, in its sole and absolute discretion.
(2) Economic Injury Disaster Loan (“EIDL”)
This program was made available to eligible borrowers in light of the impact of the COVID-19 pandemic and the negative economic impact on the Company’s business. Proceeds from the EIDL are to be used for working capital purposes.
Installment
payments, including principal and interest, are due monthly (beginning twelve (12) months from the date of the promissory note) in amounts
ranging from $
| 31 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
| PPP | EIDL | EIDL | PPP | |||||||||||||||||
| Terms | SBA | SBA | SBA | SBA | Total | |||||||||||||||
| Issuance dates of SBA loans | ||||||||||||||||||||
| Term | ||||||||||||||||||||
| Maturity date | ||||||||||||||||||||
| Interest rate | % | % | % | % | ||||||||||||||||
| Collateral | ||||||||||||||||||||
| Conversion price | N/A | N/A | N/A | N/A | ||||||||||||||||
| Principal | $ | $ | $ | $ | $ | |||||||||||||||
| Balance - December 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||
| Gross proceeds | ||||||||||||||||||||
| Forgiveness of loan | ( | ) | ( | )1 | ||||||||||||||||
| Deconsolidation of subsidiary (“TW”) | ( | ) | ( | )2 | ||||||||||||||||
| Balance - December 31, 2021 | ||||||||||||||||||||
| Forgiveness of loan | ( | ) | ( | )3 | ||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| 1 |
| 2 |
| 3 |
| 32 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Notes Payable – Related Parties
| 1 | 2 | 3 | ||||||||||||||
| Loan Payable | Loan Payable | Loan Payable | ||||||||||||||
| Terms | Related Party | Related Party | Related Party | Total | ||||||||||||
| Issuance dates of notes | ||||||||||||||||
| Maturity date | ||||||||||||||||
| Interest rate | ||||||||||||||||
| Collateral | ||||||||||||||||
| Conversion price | N/A | N/A | N/A | |||||||||||||
| Balance - December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Gross proceeds | ||||||||||||||||
| Accrued interest included in note balance | ||||||||||||||||
| Conversion of debt into common stock | ( | ) | ( | ) | ||||||||||||
| Repayments | ( | ) | ( | ) | ||||||||||||
| Balance - December 31, 2021 | ||||||||||||||||
| No activity - 2022 | ||||||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | ||||||||||||
| 1 |
| The new notes had due
dates of June 30, 2022 or January 1, 2023. In April 2022, the notes were extended to January 1, 2023 and January 1, 2024,
respectively. All notes bear interest at |
| 2 |
| 3 |
| 33 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Notes Payable
| 1 | 2 | 3 | 4 | |||||||||||||||||||||||||
| Terms | Notes Payable | Notes Payable | Notes Payable | Note Payable | Notes Payable | Total | In-Default | |||||||||||||||||||||
| Issuance dates of notes | ||||||||||||||||||||||||||||
| Maturity date | ||||||||||||||||||||||||||||
| Interest rate | ||||||||||||||||||||||||||||
| Default interest rate | N/A | |||||||||||||||||||||||||||
| Collateral | ||||||||||||||||||||||||||||
| Warrants issued as discount/issue costs | N/A | N/A | ||||||||||||||||||||||||||
| Principal | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Balance - December 31, 2020 | $ | |||||||||||||||||||||||||||
| Gross proceeds | ||||||||||||||||||||||||||||
| Debt discount | ( | ) | ( | ) | ||||||||||||||||||||||||
| Amortization of debt discount | ||||||||||||||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance - December 31, 2021 | ||||||||||||||||||||||||||||
| Gross proceeds | ||||||||||||||||||||||||||||
| Debt issue costs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Amortization of debt issue costs | - | - | ||||||||||||||||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | $ | $ | $ |
| 1 | - |
| 2 | - |
| 3 | - |
| 4 | - |
Secured Revolving Debt
In
April 2022, a maximum of $
The
notes will accrue interest a monthly rate of
At
September 30, 2022 and December 31, 2021, the Company had a balance due of $
| 34 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Convertible Notes Payable – Net
| Convertible | Convertible | Convertible | ||||||||||||||
| Terms | Notes Payable | Notes Payable | Notes Payable | Total | ||||||||||||
| Issuance dates of notes | ||||||||||||||||
| Maturity date | ||||||||||||||||
| Interest rate | ||||||||||||||||
| Collateral | ||||||||||||||||
| Conversion price | A | A | B | |||||||||||||
| Principal | $ | $ | $ | $ | ||||||||||||
| Balance - December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Gross proceeds | ||||||||||||||||
| Debt discount | ( | ) | ( | ) | ||||||||||||
| Amortization of debt discount | ||||||||||||||||
| Repayments - cash | ( | )D | ( | ) | ||||||||||||
| Conversion to equity/debt modification | ( | ) | ( | ) | ||||||||||||
| Reclassified to receivable | C | |||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | ||||||||||||
| A | – |
| B | – |
| C | - |
| D | - |
| 35 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Line of Credit
The
Company had a $
Note 6 – Derivative Liabilities
During 2021, the above convertible notes contained embedded conversion options with a conversion price that could result in issuing an undeterminable amount of future common stock to settle the host contract. Accordingly, the embedded conversion option is required to be bifurcated from the host instrument (convertible note) and treated as a liability, which is calculated at fair value, and marked to market at each reporting period.
The Company used the binomial pricing model to estimate the fair value of its embedded conversion option liabilities with the following inputs:
| December 31, 2021 | |||
| Expected term (years) | |||
| Expected volatility | |||
| Expected dividends | |||
| Risk free interest rate | |||
A reconciliation of the beginning and ending balances for the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows at December 31, 2021:
| Derivative liability - December 31, 2020 | $ | |||
| Fair value at commitment date | ||||
| Fair value mark to market adjustment | ( | ) | ||
| Gain on derivative liability upon related debt settled | ( | ) | ||
| Derivative liability - December 31, 2021 | $ |
| 36 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Changes in fair value of derivative liabilities are included in other income (expense) in the accompanying consolidated statements of operations.
During
the three months ended September 30, 2022 and 2021, the Company recorded a change in fair of derivative liabilities of $ and $
During
the nine months ended September 30, 2022 and 2021, the Company recorded a change in fair of derivative liabilities of $ and $
In connection with bifurcating the embedded conversion option and accounting for this instrument at fair value, the Company computed a fair value on the commitment date, and upon the initial valuation of this instrument, determined that the fair value of the liability exceeded the proceeds of the debt host instrument. As a result, the Company recorded a debt discount at the maximum amount allowed (the face amount of the debt), which required the overage to be recorded as a derivative expense.
For
the three months years ended September 30, 2022 and 2021, the Company recorded a derivative expense of $
For
the nine months years ended September 30, 2022 and 2021, the Company recorded a derivative expense of $
During the year ended December 31, 2021, in connection with the repayment of convertible notes which contained embedded conversion features, the related derivative liabilities ceased to exist.
During
the three months ended September 30, 2022 and 2021, the Company recorded a gain of $
During
the nine months ended September 30, 2022 and 2021, the Company recorded a gain of $
| 37 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Note 7 – Fair Value of Financial Instruments
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made.
The Company did not have any assets or liabilities measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021, respectively
Note 8 – Commitments and Contingencies
Operating Lease
We have entered into various operating lease agreements, including our corporate headquarters. We account for leases in accordance with ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. In addition, a lessor is required to classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating. We determine if an arrangement is a lease, or contains a lease, at inception and record the lease in our financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at commencement to determine the present value of lease payments except when an implicit interest rate is readily determinable. We determine our incremental borrowing rate based on market sources including relevant industry data.
| 38 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
We have lease agreements with lease and non-lease components and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective with the exception of direct sales-type leases and production equipment classes embedded in supply agreements. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.
We have elected not to present short-term leases on the balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.
Our leases, where we are the lessee, do not include an option to extend the lease term. Our lease also includes an option to terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease term would include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, included as a component of general and administrative expenses, in the accompanying consolidated statements of operations.
Certain operating leases provide for annual increases to lease payments based on an index or rate, our lease has no stated increase, payments were fixed at lease inception. We calculate the present value of future lease payments based on the index or rate at the lease commencement date. Differences between the calculated lease payment and actual payment are expensed as incurred.
At September 30, 2022 and December 31, 2021, respectively, the Company has no financing leases as defined in ASC 842, “Leases.”
| 39 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
The tables below present information regarding the Company’s operating lease assets and liabilities at September 30, 2022 and December 31, 2021, respectively:
| For the Nine Months Ended | For the Nine Months Ended | |||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Operating Leases | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total net lease cost | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Operating leases | ||||||||
| Operating lease ROU assets - net | $ | $ | ||||||
| Operating lease liabilities - current | ||||||||
| Operating lease liabilities - non-current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
Supplemental cash flow and other information related to leases was as follows:
| For the Nine Months Ended | For the Nine Months Ended | |||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Cash paid for amounts included in measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| ROU assets obtained in exchange for lease liabilities | ||||||||
| Operating leases | $ | $ | ||||||
| Weighted average remaining lease term (in years) | ||||||||
| Operating leases | ||||||||
| Weighted average discount rate | ||||||||
| Operating leases | % | % | ||||||
| 40 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Future minimum lease payments at September 30, 2022
| 2022 (3 months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: amount representing interest | ( | ) | ||
| Total lease obligations | $ |
In
May 2021, the Company and its landlord mutually agreed to terminate the outstanding lease for ECS. The Company had an outstanding ROU
liability of $
Contingencies – Legal Matters
True Wireless and Surge Holdings - Terracom Litigation
Global Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom believes Mr. Coffman and Mr. Carroll are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as such we believe True Wireless has a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc., but not in wireless sales. The complaint requests general damages plus fees and costs for tortious interference with a business relationship in their prayer for relief. They have made no written demand for damages at this point in time. The Company believes this matter is simply an anti-competitive attempt by Terracom to cause distress to True Wireless.
| 41 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Surge Holdings – Juno Litigation
Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary.
Unimax - Litigation
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 $
Glen Eagles Litigation
SurgePays, Inc., formerly named as Surge Holdings, Inc., a Nevada corporation, Plaintiff, vs. Glen Eagles Acquisition LP, a Delaware limited partnership, Defendant; District Court Clark County, Nevada; Case No.: A-21-831204-B
ALTCORP TRADING, LLC, a Costa Rica limited liability company; et al, Plaintiffs, vs. Surge Holdings, Inc., a Nevada corporation; VSTOCK Transfer, LLC, a California limited liability company, et al; District Court Clark County, Nevada; Case No.: A-20-823039-B
These two lawsuits involved AltCorp Trading, LLC, Stanley Hills, LLC, and Glen Eagles Acquisition LP (the “AltCorp Parties.”). Each of these lawsuits were ultimately disputes relating to the total consideration the Company paid to GBT Technologies, Inc. (“GBT”) to acquire all of the assets of the entities that comprise the ECS Business (prior to the Company’s January 2020 acquisition of the entities themselves).
On October 18, 2021, the AltCorp Parties, GBT, and the Company entered into a non-binding Memorandum of Understanding (the “MOU”) to set up a framework for an attempt to settle the two lawsuits.
| 42 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
On December 22, 2021 (the “Effective Date”), pursuant to the framework in the MOU, the AltCorp Parties, Igor 1 Corp. (an entity related to the AltCorp Parties), the Company, ECS Prepaid LLC (“ECS LLC), and, in his individual capacity, Kevin Brian Cox (the Company’s Chief Executive Officer), entered into a Resolution of Purchase, Mutual Release, and Settlement Agreement (the “Settlement Agreement”) to settle the two lawsuits and resolve all disputes related to the consideration paid by the Company to GBT.
This Settlement Agreement was entered into pursuant to a resolution of the Board authorizing the negotiation of and entry into of such agreement.
As
part of this agreement, the Company has acquired GBT’s rights to a certain Master Distribution and Service Agreement between Interactive
Communications International, Inc. and W.L. Petrey Wholesale Company, Inc., d/b/a UGO-HUB dated August 29, 2016 (the “MDA”),
as amended. The MDA contains sales channel access to a variety of unique wholesale prepaid products with approximately $
If
the result of the GBT Lawsuit is an assignment of the MDA to GBT or that GBT or an affiliate of GBT is the legal owner of the MDA, GBT
or such affiliate will assign the MDA to Surge and GBT shall be entitled to receive the Escrow Amount. If the result of the GBT Lawsuit
is a monetary judgment without the assignment or legal decree of ownership of the MDA, GBT shall be entitled to receive the Escrow Amount
and shall assign and timely pay to the Company the first one million dollars ($
The
Company agreed to make total payments of four million two hundred thousand dollars ($
| 43 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
In
addition, Igor 1 Corp. as of the Effective Date, held one hundred ten thousand () shares of the Company’s common stock that
has a restrictive legend (the “Igor Shares”). The owner of Igor 1 Corp. will be responsible for and shall pay for attempting
to have the restrictive legend from the Igor Shares removed (with the Company agreeing to pay seven hundred fifty dollars ($
Glen Eagles and a related entity as of the Effective Date, held three thousand () shares of the Company’s common stock (the “Glen Eagles Shares”). The Glen Eagles shares shall be sold on the open market within thirty (30) days following the Effective Date. If for any reason the consideration for the Glen Eagles shares is less than fifteen thousand dollars ($), the Company will have the obligation to compensate Glen Eagles for the difference between the actual amount received and $. Such difference shall be paid within five (5) days of Glen Eagles providing written proof of the proceeds of the sale of the Glen Eagles Shares. Glen Eagles was paid $ on February 16, 2022 for full settlement.
The
Settlement Agreement replaces all prior agreements between the parties. In addition, within three (3) trading days of the last payment
related to the $
Crystal Chapman, on behalf of herself and others similarly situated, Plaintiff versus SurgePays, Inc., Defendant; U.S. District Court for the Northern District of Illinois, Case No.: 1:21-cv-04272. On August 11, 2021, the plaintiffs filed a lawsuit alleging violations of the Telephone Consumer Protection Act as a putative class action. The plaintiffs are seeking unspecified damages and an order enjoining the Company or their agents from making autodialed calls. The case alleges contact to consumer(s) whose telephone numbers are on the Federal Do Not Call list, without their consent. There are no other counts under the TCPA or any other statute or tort. The Company vigorously disputes the allegations in this complaint as the Company only contacts consumers who have provided express written consent to be contacted. The Company believes it uses the leading software in the industry for lead verification and believes it can prove consent for all called parties. This matter was settled in the quarter ended December 31, 2021.
| 44 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
SurgePays – Ambess Litigation
On
December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of
contract and prays for damages of approximately $
True Wireless and SurgePays - Litigation
Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox.
Note 9 – Stockholders’ Equity
Reverse Stock Split
On
November 2, 2021, the Company effected a
At September 30, 2022, the Company had three (3) classes of stock:
Common Stock
| - | shares authorized | |
| - | Par value - $ | |
| - |
| 45 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Series A, Convertible Preferred Stock
| - | shares authorized | |
| - | issued and outstanding | |
| - | Par value - $ | |
| - | ||
| - | Ranks senior to any other class of preferred stock | |
| - | Dividends - none | |
| - | Liquidation preference – none | |
| - | Rights of redemption - none | |
| - |
Series C, Convertible Preferred Stock
| - | shares authorized | |
| - | issued and outstanding | |
| - | Par value - $ | |
| - | ||
| - | Ranks junior to any other class of preferred stock | |
| - | Dividends – equal to the per share amount (as converted basis) as the common stockholders should the Board of Directors declare a dividend | |
| - | Liquidation preference – original issue price plus any declared yet unpaid accrued dividends | |
| - | Rights of redemption - none | |
| - |
In
October 2021, all Series C, Preferred stockholders, representing shares issued and outstanding, agreed to convert their holdings
into shares of common stock. The transaction had a net effect of $
| 46 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Equity Transactions for the Nine Months Ended September 30, 2022
Stock Issued as Direct Offering Costs
In
April 2022, the Company issued shares of common stock for services rendered in connection with the Company’s NASDAQ uplisting
in 2021. As a result, the Company recorded the par value of the common stock issued with a corresponding charge to additional paid-in
capital, resulting in a net effect of $
Stock Issued for Acquisition of Software
In
June 2022, the Company acquired software having a fair value of $
Exercise of Warrants
The
Company issued
Equity Transactions for the Year Ended December 31, 2021
NASDAQ Listing
On November 2, 2021, the Company was approved to be uplisted to NASDAQ. The common stock and warrants are traded on the Nasdaq Capital Market under the symbols SURG and SURGW, respectively.
Stock Issued for Services
The
Company issued shares of common stock for services rendered, having a fair value of $
| 47 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Stock and Warrants Issued for Cash and Related Direct Offering Costs
The
Company issued an aggregate shares of common stock for $
Of the shares issued in 2021, shares and were sold in connection with the Company’s uplist to NASDAQ as follows:
On
November 4, 2021, the Company issued units consisting of and over-allotment
warrants. The units were sold at $ per unit for gross proceeds of $
In
connection with the Company’s sale of common stock, the Company incurred direct offering costs of $
On
November 4, 2021, the Company issued
| Expected term (years) | ||
| Expected volatility | ||
| Expected dividends | ||
| Risk free interest rate |
Since
these warrants were issued as direct offering costs associated with the offering, the Company has accounted for these warrants as both
a charge and increase to additional paid-in capital, resulting in a net effect on stockholders’ equity of $
These
| 48 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Exercise of Warrants
The
Company issued
Stock and Warrants Issued as Debt Discount
During
2021, the Company issued stock and warrants in connection with the issuance of debt and derivative liabilities totaling $
Fair value of the warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | ||
| Expected volatility | ||
| Expected dividends | ||
| Risk free interest rate |
Conversion of Debt
The
Company issued shares of common stock in connection with the conversion of convertible debt, having a fair value of $
Make-whole Arrangement
The
Company issued shares of common stock to debt holders that were entitled to shares upon the settlement of debt and related accrued
interest. The shares had a fair value of $
Stock Issued for Debt Modification
The
Company issued shares of common stock in connection with the modification of debt arrangements. The shares had a fair value of
$
| 49 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Stock Issued in Settlement of Liabilities
The
Company issued shares of common stock to various vendors and debt holders to settle accounts payable, debt and derivative liabilities.
The shares had a fair value of $
Stock Issued in Acquisition of Membership Interest in ECS
On
January 30, 2020, the Company entered into a Membership Interest Purchase Agreement and Stock Purchase Agreement with ECS Prepaid, ECS,
CSLS and the Winfrey’s. 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 shares of the Company’s Common Stock. In addition, the agreements called for shares of Common
Stock to be issued to the Winfrey’s on a monthly basis over a 12-month period. During 2021, the Company issued shares of
common stock in full settlement of the agreements. The shares had a fair value of $
| 50 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Stock Options
| Stock Options | Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | Weighted Average Grant Date Fair Value | |||||||||||||||
| Outstanding - December 31, 2020 | $ | $ | $ | |||||||||||||||||
| Vested and Exercisable - December 31, 2020 | $ | - | $ | - | $ | - | ||||||||||||||
| Unvested and non-exercisable - December 31, 2020 | $ | $ | - | $ | - | |||||||||||||||
| Granted | $ | - | ||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Cancelled/Forfeited | ||||||||||||||||||||
| Outstanding - December 31, 2021 | $ | $ | $ | |||||||||||||||||
| Vested and Exercisable - December 31, 2021 | $ | $ | - | $ | - | |||||||||||||||
| Unvested and non-exercisable - December 31, 2021 | $ | $ | - | $ | - | |||||||||||||||
| Granted | $ | - | ||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Cancelled/Forfeited | ||||||||||||||||||||
| Outstanding - September 30, 2022 | $ | $ | $ | |||||||||||||||||
| Vested and Exercisable - September 30, 2022 | $ | $ | - | $ | - | |||||||||||||||
| Unvested and non-exercisable - September 30, 2022 | $ | $ | - | $ | - | |||||||||||||||
During 2022 and 2021, stock options vested ( in total), which were held by the Company’s Chief Financial Officer.
Compensation
expense recorded for stock-based compensation is as follows for the three months ended September 30, 2022 and 2021, was $
Compensation
expense recorded for stock-based compensation is as follows for the nine months ended September 30, 2022 and 2021, was $
As of September 30, 2022, compensation cost related to the unvested options not yet recognized was $.
Weighted average period in which compensation will vest (years) years. The unvested stock option expense is expected to be recognized through March 2024.
| 51 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Warrants
Warrant activity for the nine months ended September 30, 2022 and the year ended December 31, 2021 are summarized as follows:
| Weighted | |||||||||||||||||
| Average | |||||||||||||||||
| Weighted | Remaining | Aggregate | |||||||||||||||
| Number of | Average | Contractual | Intrinsic | ||||||||||||||
| Warrants | Warrants | Exercise Price | Term (Years) | Value | |||||||||||||
| Outstanding - December 31, 2020 | $ | $ | |||||||||||||||
| Vested and Exercisable - December 31, 2020 | $ | $ | |||||||||||||||
| Granted | $ | - | - | ||||||||||||||
| Exercised | ( | ) | $ | - | - | ||||||||||||
| Cancelled/Forfeited | ( | ) | $ | - | - | ||||||||||||
| Outstanding - December 31, 2021 | $ | $ | |||||||||||||||
| Vested and Exercisable - December 31, 2021 | $ | $ | |||||||||||||||
| Unvested - December 31, 2021 | $ | $ | |||||||||||||||
| Granted | $ | - | |||||||||||||||
| Exercised | ( | ) | $ | - | |||||||||||||
| Cancelled/Forfeited | ( | ) | $ | - | |||||||||||||
| Outstanding - September 30, 2022 | $ | $ | |||||||||||||||
| Vested and Exercisable - September 30, 2022 | $ | $ | |||||||||||||||
| Unvested and non-exercisable - September 30, 2022 | $ | $ | |||||||||||||||
Warrant Transactions for the Nine Months Ended September 30, 2022
Debt Issue Costs
In
connection with $
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % |
| 52 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Interest Expense
In
May 2022, a vendor increased the amount of credit the Company had for making purchases. In consideration for the increase, the Company
issued
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % |
In
September 2022, the Company extended the due dates of certain notes payable totaling $
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % |
Warrant Exercise
In July 2022, the Company issued shares of common stock in connection with a cashless exercise of warrants.
| 53 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Warrant Transactions for the Year Ended December 31, 2021
During
2021, the Company granted warrants to convertible note holders and additional warrants to note holders. These warrants
were exercisable upon the grant date, had expiration dates ranging from
Additionally,
in connection with the NASDAQ uplisting,
In
connection with the Company’s NASDAQ uplisting,
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | ||
| Expected volatility | ||
| Expected dividends | ||
| Risk free interest rate |
| 54 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Note 10 – Segment Information
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 loss. All data below is prior to intercompany eliminations.
Segment information for the three and nine months ended September 30, 2022 and 2021, are as follows:
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| Surge Phone and Torch Wireless | $ | $ | $ | $ | ||||||||||||
| Surge Blockchain, LLC | ||||||||||||||||
| LogicsIQ, Inc. | ||||||||||||||||
| Surge Fintech & ECS | ||||||||||||||||
| True Wireless | ||||||||||||||||
| SurgePays, Inc. | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Surge Phone and Torch Wireless | $ | $ | $ | $ | ||||||||||||
| Surge Blockchain, LLC | ( | ) | ||||||||||||||
| LogicsIQ, Inc. | ||||||||||||||||
| Surge Fintech & ECS | ||||||||||||||||
| True Wireless | ||||||||||||||||
| SurgePays, Inc. | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ||||||||||||||||
| Surge Phone and Torch Wireless | $ | $ | $ | $ | ||||||||||||
| Surge Blockchain, LLC | ( | ) | ||||||||||||||
| LogicsIQ, Inc. | ||||||||||||||||
| Surge Fintech & ECS | ||||||||||||||||
| True Wireless | ||||||||||||||||
| SurgePays, Inc. | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Income (loss) from operations | ||||||||||||||||
| Surge Phone and Torch Wireless | $ | $ | $ | $ | ||||||||||||
| Surge Blockchain, LLC | ||||||||||||||||
| LogicsIQ, Inc. | ( | ) | ( | ) | ||||||||||||
| Surge Fintech & ECS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| True Wireless | ( | ) | ||||||||||||||
| SurgePays, Inc. | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 55 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
(UNAUDITED)
Segment information for the Company’s assets and liabilities at September 30, 2022 and December 31, 2021, are as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Total Assets | ||||||||
| Surge Phone and Torch Wireless | $ | $ | ( | ) | ||||
| Surge Blockchain, LLC | ( | ) | ( | ) | ||||
| LogicsIQ, Inc. | ||||||||
| Surge Fintech & ECS | ||||||||
| True Wireless | ||||||||
| SurgePays, Inc. | ||||||||
| Total | $ | $ | ||||||
| Total Liabilities | ||||||||
| Surge Phone and Torch Wireless | $ | $ | ||||||
| Surge Blockchain, LLC | ||||||||
| LogicsIQ, Inc. | ||||||||
| Surge Fintech & ECS | ||||||||
| True Wireless | ||||||||
| SurgePays, Inc. | ||||||||
| Total | $ | $ | ||||||
| 56 |
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This statement contains forward-looking statements within the meaning of the Securities Act. Discussions containing such forward-looking statements may be found throughout this statement. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the matters set forth in this statement. The accompanying consolidated financial statements as of September 30, 2022 and 2021 and for the three months and nine months then ended includes the accounts of SurgePays, Inc. and its wholly owned subsidiaries during the period owned by SurgePays, Inc.
SurgePays, Inc (“SurgePays”, “we” the “Company”) was incorporated in Nevada on August 18, 2006, is a technology and telecommunications company focused on the underbanked and underserved communities. SurgePays blockchain fintech platform utilizes a suite of financial and prepaid products to convert corner stores and bodegas into tech-hubs for underbanked neighborhoods. SurgePays telecom subsidiaries SurgePhone Wireless and Torch Wireless provide mobile broadband to low-income consumers nationwide.
About SurgePays, Inc.
SurgePays, Inc. is a financial technology and telecommunications company focused on providing essential services to the underbanked community. The Company’s blockchain fintech platform utilizes a suite of financial and prepaid products to convert corner stores into tech-hubs for underbanked neighborhoods. The Company’s telecom subsidiaries provide mobile broadband, voice and SMS text messaging to both subsidized and direct retail prepaid customers.
SurgePhone Wireless, Torch Wireless and LocoRabbit Wireless
SurgePhone and Torch, wholly owned subsidiaries of SurgePays, are a mobile virtual network operator (MVNO) company with 2 branded channels of business. SurgePhone and Torch are licensed by the Federal Communications Commission (the “FCC”) to provide subsidized access to quality internet through mobile broadband services to consumers qualifying under the federal guidelines of the Affordable Connectivity Program (the “ACP”). The ACP (the successor program, as of March 1, 2022 to the Emergency Broadband Benefit program) provides SurgePhone and Torch up to a $100 reimbursement for the cost of each tablet device distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. SurgePhone and Torch combined are licensed to offer subsidized mobile broadband to all fifty states.
LocoRabbit is the retail pure prepaid wireless offering with talk, text, and 4G LTE data at prices that are lower than other well-known prepaid competitors. Available nationwide, LocoRabbit is sold online direct to consumers through the nationwide network of convenience stores, gas stations, mini-marts, bodegas and tiendas connected to the SurgePays software platform. The SIM kits usually hang from a peg hook on the SurgePays gift card rack. Due to owning the payment platform, SurgePays is able to exclusively offer an industry high commission to the retailer for top-ups paid monthly at the client’s store.
| 57 |
Surge Fintech (ECS Business)
We refer to the collective operations of ECS Prepaid, LLC, a Missouri limited liability company, Electronic Check Services, Inc., a Missouri corporation, and Central States Legal Services, Inc., a Missouri corporation, as “Surge Fintech.” This was previously referred to as the “ECS Business.”
Surge Fintech has been a financial technology tech and wireless top-up platform for over 15 years. Through a series of transactions between October 2019 and January 2020, we acquired the ECS Business primarily for the favorable ACH banking relationship; a fintech transactions platform processing over 20,000 transactions a day at approximately 8,000 independently owned retail stores. The platform serves as the proven backbone for wireless top-up transactions and wireless product aggregation for the SurgePays nationwide network.
ShockWave CRM™
SurgePays acquired the Software as a Service (SaaS) Customer Relationship Management (CRM) and Billing System software platform “MVNO Cloud Services” on June 7, 2022. SurgePays is rebranding the software as ShockWave CRM. Payment for the software consisted of $300,000 in cash, of which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued 85,000 shares of common stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.
ShockWave is an end-to-end cloud-based SaaS offering an Omnichannel CRM, Billing system and carrier integrations specific to the telecommunication and broadband industry. Some of these services include sales agent management, device and SIM inventory management, order processing and provisioning, retail POS activations and payments, customer service management, retention tools, billing, and payments.
Surge Blockchain
SurgePays Blockchain Software is a back-office marketplace platform offering wholesale consumable goods direct to convenience stores, bodegas, minimarts, tiendas and other corner stores who are transacting on the SurgePays Fintech platform. The wholesale e-commerce platform is easily accessed through the secure app interface – similar to a website. We believe what makes this sales platform unique is that it also offers the merchant the ability to order wholesale consumable goods at a significant discount from traditional distributors with one touch ease. We are able to sell products at a significant discount by using on demand Direct Store Delivery (DSD.) Our platform is connected directly to manufacturers, who ship products direct to the store while cutting out the middleman. The goal of the SurgePays Portal is to leverage the competitive advantage and efficiencies of e-commerce to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas, and supermarkets while increasing profit margins for these stores. These products include herbal stimulants, energy pills and shot drinks, dry foods, communication accessories, novelties, PPP products, bagged snacks, processed meats, automotive parts and many more goods, all in one convenient wholesale e-commerce platform.
LogicsIQ, Inc.
LogicsIQ, Inc. is a software development company providing marketing business intelligence (“BI”), lead generation, and case management solutions primarily to law firms in the mass tort industry. The company’s CRM “Intake Logics” facilitates the entire life cycle of converting a potential lead into a signed retainer client integrated into the law firms case management software. Our proven strategy of delivering cost-effective retained cases to our attorney and law firm clients means those clients are better able to manage their media and advertising budgets and reach targeted audiences more quickly and effectively when utilizing our proprietary data driven analytics dashboards. Our ability to deliver transparent results has bolstered our reputation as an industry leader and solidified a solid client base.
Centercom
Since 2019, we have owned a 40% equity interest in Centercom Global, S.A. de C.V. (“Centercom”). Centercom is a bilingual operations center providing the Company with sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Centercom is based in El Salvador.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations, stockholders’ deficit, or cash flows.
At September 30, 2022 and December 31, 2021, respectively, on the consolidated balance sheets, the Company separated its various types of debt into more distinct categories. Certain accounts payable were reclassified from non-current to current.
For the three months and nine months ended September 30, 2022 and 2021, respectively, on the consolidated statements of operations, the Company reclassified certain expenses amongst general and administrative and cost of revenues.
| 58 |
Revenues during the three months ended September 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Revenue | $ | 36,171,345 | $ | 14,538,353 | ||||
| Cost of revenue (exclusive of depreciation and amortization) | 34,250,541 | 12,634,871 | ||||||
| General and administrative expenses | 2,933,204 | 2,909,954 | ||||||
| Loss from operations | $ | (1,012,400 | ) | $ | (1,006,472 | ) | ||
Revenue increased $21,632,992 (149%) primarily as a result of an increase in revenue for: SurgePhone Wireless and Torch Wireless of $26,094,837 offset by a decrease in Surge Fintech/ECS of $1,794,878 and LogicsIQ of $2,689,046. Loss from operations increased by $5,928 (1%).
General and administrative expenses during the three months ended September 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Depreciation and amortization | $ | 303,695 | $ | 181,133 | ||||
| Selling, general and administration | 2,629,509 | 2,728,821 | ||||||
| Total | $ | 2,933,204 | $ | 2,909,954 | ||||
Depreciation and amortization increased $122,562 primarily as a result of purchased software during the fiscal year of 2022.
Selling, general and administrative expenses during the three months ended September 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Contractors and consultants | $ | 472,366 | $ | 492,245 | ||||
| Professional services | 281,185 | 224,907 | ||||||
| Compensation | 822,411 | 939,334 | ||||||
| Webhosting/internet | 128,958 | 80,029 | ||||||
| Advertising and marketing | 34,708 | 76,413 | ||||||
| Other | 1,193,576 | 1,097,026 | ||||||
| Total | $ | 2,933,204 | $ | 2,909,954 | ||||
| 59 |
Selling, general and administrative costs (S, G & A) increased by $23,250 (1%). The detail changes are discussed below:
| * | Contractors and consultants decreased to $472,366 in 2022 from $492,245 in 2021 primarily due to reclassing of the call center expenses to cost of goods sold in 2022. |
| * | Professional services increased from $224,907 in 2021 to $281,185 in 2022 primarily as a result of legal expenses related to various legal proceedings. |
| * | Compensation decreased from $939,334 in 2021 to $822,411 in 2022 primarily as a result of elimination of the President position after the passing of Anthony Nuzzo, Jr. |
| * | Webhosting/internet costs increased to $128,958 in 2022 from $80,029 in 2021. |
| * | Advertising and marketing costs decreased to $34,708 in 2022 from $76,413 in 2021 primarily due to a normalization of advertising costs in 2022. The Company implemented new advertising and marketing campaigns in the first three-quarters of 2021. |
| * | Other costs decreased to $1,193,576 in 2022 from $1,097,026 in 2021 primarily due to the following changes period over period: |
| ● | Building expenses increased by $126,465; | |
| ● | insurance expense increased by $219,688 as a result of additional coverages required as part of uplisting to Nasdaq in the fourth quarter of 2021; | |
| ● | Office expenses increased by $33,546; and | |
| ● | other operating expense decreased by $95,550, as a result of reclassifying amortization of debt discount in the quarter ending September 30, 2021. |
Other (expense) income during the three months ended September 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Interest, net | $ | (633,593 | ) | $ | (1,236,778 | ) | ||
| Change in fair value of derivative liability | - | (202,784 | ) | |||||
| Amortization of debt discount | (57,933 | ) | 630,580 | |||||
| Gain on equity investment in Centercom | (52,435 | ) | 21,072 | |||||
| Gain (loss) on settlement of liabilities | - | 136,487 | ||||||
| Total Other (expense) income - net | $ | (743,961 | ) | $ | (651,423 | ) | ||
Interest expense decreased due to the repayment of various notes during 2021.
The loss on equity investment in Centercom of $52,435 in 2022 compared to an equity gain of $21,072 in 2021.
COMPARISON OF NINE MONTHS ENDED September 30, 2022 AND 2021
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations, stockholders’ deficit, or cash flows.
At September 30, 2022 and December 31, 2021, respectively, on the consolidated balance sheets, the Company separated its various types of debt into more distinct categories. Certain accounts payable were reclassified from non-current to current.
For the three months and nine months ended September 30, 2022 and 2021, respectively, on the consolidated statements of operations, the Company reclassified certain expenses amongst general and administrative and cost of revenues.
| 60 |
Revenues during the nine months ended September 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Revenue | $ | 85,317,860 | $ | 36,905,373 | ||||
| Cost of revenue (exclusive of depreciation and amortization) | 78,572,421 | 32,544,619 | ||||||
| General and administrative expenses | 9,655,529 | 10,262,479 | ||||||
| Loss from operations | $ | (2,910,090 | ) | $ | (5,901,725 | ) | ||
Revenue increased $48,412,487 (131%) primarily as a result of an increases in revenue for: SurgePhone Wireless and Torch Wireless of $60,209,292 offset by a decrease in Surge Fintech/ECS of $5,869,720 and LogicsIQ of $4,760,936. Loss from operations decreased by $2,991,635 (51%) primarily as a result of an increase in operating income in SurgePhone Wireless and Torch Wireless.
General and administrative expenses during the nine months ended September 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Depreciation and amortization | $ | 664,533 | $ | 579,384 | ||||
| Selling, general and administration | 8,990,996 | 9,683,095 | ||||||
| Total | $ | 9,655,529 | $ | 10,262,479 | ||||
Depreciation and amortization increased $85,49 primarily as a result of purchased software during the fiscal year of 2022.
Selling, general and administrative expenses during the nine months ended September 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Contractors and consultants | $ | 1,443,516 | $ | 1,582,562 | ||||
| Professional services | 947,722 | 954,026 | ||||||
| Compensation | 3,404,852 | 2,866,427 | ||||||
| Webhosting/internet | 286,536 | 445,907 | ||||||
| Advertising and marketing | 170,714 | 638,706 | ||||||
| Other | 2,737,656 | 3,195,467 | ||||||
| Total | $ | 8,990,996 | $ | 9,683,095 | ||||
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Selling, general and administrative costs (S, G & A) decreased by $692,099 (7%). The detail changes are discussed below:
| * | Contractors and consultants decreased to $1,443,516 in 2022 from $1,582,562 in 2021 primarily due to reclassing of the call center expenses to cost of goods sold in 2022. |
| * | Professional services decreased from $954,026 in 2021 to $947,722 in 2022. |
| * | Compensation increased from $2,866,427 in 2021 to $3,404,852 in 2022 primarily as a result of one-time bonuses paid to various management personnel. |
| * | Webhosting/internet costs decreased to $286,536 in 2022 from $445,907 in 2021. |
| * | Advertising and marketing costs decreased to $170,714 in 2022 from $638,706 in 2021 primarily due to a normalization of advertising costs in 2022. The Company implemented new advertising and marketing campaigns in the first three-quarters of 2021. |
| * | Other costs decreased to $457,811 in 2022 from $3,195,467 in 2021 primarily due to the following changes period over period: |
| ● | Building expenses increased by $89,288; | |
| ● | insurance expense increased by $929,436 as a result of additional coverages required as part of uplisting to Nasdaq in the fourth quarter of 2021; | |
| ● | Office expenses increased by $69,401; and | |
| ● | other operating expense increased by $1,736,211 as a result of reclassifying amortization of debt discount in the quarter ending September 30, 2021. |
Other (expense) income during the six months ended September 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Interest, net | $ | (1,370,236 | ) | $ | (4,637,236 | ) | ||
| Change in fair value of derivative liability | - | 746,896 | ||||||
| PPP loan forgiveness | 524,143 | - | ||||||
| Derivative expense | - | (1,775,057 | ) | |||||
| Amortization of debt discount | (95,001 | ) | 2,008,036 | |||||
| Gain on equity investment in Centercom | (42,099 | ) | (3,556 | ) | ||||
| Gain on deconsolidation | - | 1,895,871 | ||||||
| Gain (loss) on settlement of liabilities | - | 979,469 | ||||||
| Total Other (expense) income - net | $ | (983,193 | ) | $ | (785,577 | ) | ||
Interest expense decreased due to the repayment of various notes during 2021.
The loss on equity investment in Centercom of $42,099 in 2022 compared to an equity loss of $3,556 in 2021.
Segment Information
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.
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The Company evaluated performance of its operating segments based on revenue and operating loss. Segment information for the three and nine months ended September 30, 2022 and 2021, are as follows:
| Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| Surge Phone and Torch Wireless | $ | 27,345,641 | $ | 1,250,804 | $ | 61,462,327 | $ | 1,253,035 | ||||||||
| Surge Blockchain, LLC | 54,707 | 32,629 | 102,378 | 110,547 | ||||||||||||
| LogicsIQ, Inc. | 4,763,990 | 7,453,036 | 10,689,006 | 15,449,941 | ||||||||||||
| Surge Fintech & ECS | 4,007,007 | 5,801,884 | 13,064,149 | 18,933,869 | ||||||||||||
| True Wireless | - | - | - | 1,157,981 | ||||||||||||
| SurgePays, Inc. | - | - | - | - | ||||||||||||
| Total | $ | 36,171,345 | $ | 14,538,353 | $ | 85,317,860 | $ | 36,905,373 | ||||||||
| Cost of revenues | ||||||||||||||||
| Surge Phone and Torch Wireless | $ | 24,298,074 | $ | 1,179,212 | $ | 54,836,122 | $ | 1,186,881 | ||||||||
| Surge Blockchain, LLC | 957 | (588 | ) | 2,457 | 1,377 | |||||||||||
| LogicsIQ, Inc. | 5,693,500 | 5,851,931 | 10,457,462 | 12,628,769 | ||||||||||||
| Surge Fintech & ECS | 4,258,010 | 5,604,316 | 13,276,380 | 18,421,530 | ||||||||||||
| True Wireless | - | - | - | 306,062 | ||||||||||||
| SurgePays, Inc. | - | - | - | - | ||||||||||||
| Total | $ | 34,250,541 | $ | 12,634,871 | $ | 78,572,421 | $ | 32,544,619 | ||||||||
| Operating expenses | ||||||||||||||||
| Surge Phone and Torch Wireless | $ | 84,775 | $ | 11,496 | $ | 215,664 | $ | 35,409 | ||||||||
| Surge Blockchain, LLC | 300 | (918 | ) | 53,271 | 11,725 | |||||||||||
| LogicsIQ, Inc. | 446,292 | 646,128 | 1,454,111 | 1,604,261 | ||||||||||||
| Surge Fintech & ECS | 370,599 | 288,966 | 1,013,518 | 1,062,315 | ||||||||||||
| True Wireless | - | 61,458 | - | 615,013 | ||||||||||||
| SurgePays, Inc. | 2,031,238 | 1,902,824 | 6,918,965 | 6,933,756 | ||||||||||||
| Total | $ | 2,933,204 | $ | 2,909,954 | $ | 9,655,529 | $ | 10,262,479 | ||||||||
| Income (loss) from operations | ||||||||||||||||
| Surge Phone and Torch Wireless | $ | 2,962,792 | $ | 60,096 | $ | 6,410,541 | $ | 30,745 | ||||||||
| Surge Blockchain, LLC | 53,450 | 34,135 | 46,650 | 97,445 | ||||||||||||
| LogicsIQ, Inc. | (1,375,802 | ) | 954,977 | (1,222,567 | ) | 1,216,911 | ||||||||||
| Surge Fintech & ECS | (621,602 | ) | (91,398 | ) | (1,225,749 | ) | (549,976 | ) | ||||||||
| True Wireless | - | (61,458 | ) | - | 236,906 | |||||||||||
| SurgePays, Inc. | (2,031,238 | ) | (1,902,824 | ) | (6,918,965 | ) | (6,933,756 | ) | ||||||||
| Total | $ | (1,012,400 | ) | $ | (1,006,472 | ) | $ | (2,910,090 | ) | $ | (5,901,725 | ) | ||||
Segment information for the Company’s assets and liabilities at September 30, 2022 and December 31, 2021, are as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Total Assets | ||||||||
| Surge Phone and Torch Wireless | $ | 17,772,528 | $ | (161,110 | ) | |||
| Surge Blockchain, LLC | (560,954 | ) | (608,188 | ) | ||||
| LogicsIQ, Inc. | 2,392,232 | 1,284,562 | ||||||
| Surge Fintech & ECS | 2,656,342 | 3,870,409 | ||||||
| True Wireless | - | - | ||||||
| SurgePays, Inc. | 11,100,715 | 15,114,529 | ||||||
| Total | $ | 33,360,863 | $ | 19,500,202 | ||||
| Total Liabilities | ||||||||
| Surge Phone and Torch Wireless | $ | 11,527,879 | $ | 5,773 | ||||
| Surge Blockchain, LLC | 198,197 | 197,614 | ||||||
| LogicsIQ, Inc. | 4,392,510 | 2,056,886 | ||||||
| Surge Fintech & ECS | 60,029 | 48,346 | ||||||
| True Wireless | - | - | ||||||
| SurgePays, Inc. | 16,718,162 | 13,640,262 | ||||||
| Total | $ | 32,896,777 | $ | 15,948,881 | ||||
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SurgePhone Wireless and Torch Wireless
The Affordable Connectivity Program (ACP) revenue for the three months ended September 30,2022 increased by $26,094,837 as compared to the three months ended September 30, 2021. The increase was a result of being newly licensed to provide the Emergency Broadband Benefit (“EBB”) program and Affordable Connectivity Program (“ACP”). Cost of revenues for the three months ended September 30, 2022, increased by $23,118,862 from the same period ended September 30, 2021, as a result of the purchases of devices ($9,515,474), data usage expenses ($7,014,116) and commission paid ($5,386,626) for the ACP program. The operating income increased from an operating income of $60,096 as of the three months ended September 30, 2021, to operating income of $2,902,696 as of three months ended September 30, 2022.
The Affordable Connectivity Program (ACP)revenue for the nine months ended September 30,2022 increased by $60,209,292 as compared to the nine months ended September 30, 2021. The increase was a result of being newly licensed to provide the Emergency Broadband Benefit (“EBB”) program and Affordable Connectivity Program (“ACP”). Cost of revenues for the nine months ended September 30, 2022, increased by $ 53,649,241 from the same period ended September 30, 2021, as a result of the purchases of devices ($25,590,039), data usage expenses ($13,024,793) and commission paid ($13,176,925) for the ACP program. The operating income increased from an operating income of $30,745 as of the nine months ended September 30, 2021, to operating income of $6,379,797 as of nine months ended September 30, 2022.
Surge Blockchain
The revenue for the three months ended September 30, 2022 increased by $22,079 compared to the three months ended September 30, 2021. The operating income for the three months ended September 30, 2022 increased by $19,315 compared to the same period in 2021.
The revenue for the nine months ended September 30, 2022 decreased by $8,168 compared to the nine months ended September 30, 2021. The operating income for the nine months ended September 30, 2022 decreased by $50,795 compared to the same period in 2021.
LogicsIQ
The revenue for the three months ended September 30, 2022 decreased by $2,689,046 compared to the three months ended September 30, 2021. The revenue decreased due to the maturity curve of the various litigation cases as older cases are slowed and newer cases are set up. Operating income decreased by $2,330,780 for comparable periods of 2022 to 2021. LogicsIQ ended with an operating loss of $1,375,802 for the three months ended September 30, 2022 compared to an operating income of $954,978 for the same period in 2021.
The revenue for the nine months ended September 30, 2022 decreased by $4,760,936 compared to the nine months ended September 30, 2021. The revenue decreased due to the maturity curve of the various litigation cases as older cases are slowed and newer cases are set up. Operating income decreased by $2,439,479 for comparable periods of 2022 to 2021. LogicsIQ ended with an operating loss of $1,222,568 for the nine months ended September 30, 2022 compared to an operating gain of $1,216,912 for the same period in 2021.
Surge Fintech and ECS
The revenue for the three months ended September 30, 2022 was $4,007,007 compared to $5,801,884 for the same period in 2021. The decrease of 31% was a continuing result of the impact of COVID-19 and our strategic plan to move our salesforce from independent contractors to employed salespersons.
The revenue for the nine months ended September 30, 2022 was $13,064,149 compared to $18,933,869 for the same period in 2021. The decrease of 31% was a continuing result of the impact of COVID-19 and our strategic plan to move our salesforce from independent contractors to employed salespersons.
True Wireless (TW)
On May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc. (“TW”), however we retained $1,097,659 in liabilities which consisted of $1,077,659 in accounts payable and accrued expenses as well as $20,000 in related party loans. In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%, with a default interest rate of 10%. The Company will receive 25 payments of principal and accrued interest totaling $7,461 commencing in September 2023.
Overall
Each segment was impacted by COVID-19 in varying degrees, however, the overall increase in revenue of $21,632,992 from 2021 to 2022 for the three months ended September 30, can be attributable to opening of some markets and the new revenue stream of the EBB program. The net operating loss improved by $41,532 from three months ended September 30, 2021 to the three months ended September 30, 2022.
The overall increase in revenue of $48,412,487 from 2021 to 2022 for the nine months ended September 30, can be attributable to opening of some markets and the new revenue stream of the EBB program. The net operating loss improved by $2,990,646 from nine months ended September 30, 2021 to the nine months ended September 30, 2022.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
At September 30, 2022 and December 31, 2021, our current assets were $26,983,710 and $13,892,681 respectively, and our current liabilities were $26,930,476 and $9,998,194, respectively, which resulted in a working capital surplus of $52,244 on September 30, 2022 and a working capital surplus of $3,894,487 on December 31, 2021.
Total assets at September 30, 2022 and December 31, 2021 amounted to $33,360,863 and $19,500,202, respectively. At September 30, 2022, assets consisted of current assets of $26,983,710, net property and equipment of $747,056, net intangible assets of $2,943,353, goodwill of $1,666,782, equity investment in Centercom (related party) of $401,190, note receivable of $176,851 and net operating lease right of use asset of $441,921, as compared to current assets of $13,892,681, net property and equipment of $200,448, net intangible assets of $3,433,484, goodwill of $866,782, equity investment in Centercom (related party) of $443,288, notes receivable of $176,851 and net operating lease right of use asset of $486,668 at December 31, 2021.
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At September 30, 2022, our total liabilities of $32,896,777 increased by $16,947,896 from $15,948,881 at December 31, 2021.
At September 30, 2022, our total stockholders’ equity was $464,086 as compared to $3,551,321 at December 31, 2021. The principal reason for the decrease in stockholders’ equity was the impact of the net loss for the period.
The following table sets forth the major sources and uses of cash for the nine months ended September 30, 2022 and 2021.
September 30, 2022 | September 30, 2021 | |||||||
| Net cash used in operating activities | $ | (3,951,043 | ) | $ | (7,144,369 | ) | ||
| Net cash used in investing activities | (1,109,611 | ) | (376,712 | ) | ||||
| Net cash provided by financing activities | 6,669,208 | 7,482,613 | ||||||
| Net change in cash and cash equivalents | $ | 1,608,554 | $ | (38,468 | ) | |||
The net cash used in operating activities was mostly comprised of changes in the following items:
| ● | net loss by $3,893,283; |
| ● | accounts receivable increase of $6,217,533; |
| ● | inventory increase of $5,184,807; |
| ● | accounts payable and accrued expenses and accounts payable and accrued expenses – related parties increase of $9,253,951; and |
| ● | Deferred revenue increase of $1,620,260. |
The net cash used in investing activities was mostly comprised of changes in the following items:
| ● | acquisition of Torch Wireless of $800,000; and |
| ● | Purchase of software for $300,000. |
The net cash provided by financing activities was mostly comprised of changes in the following item:
| ● | Proceeds from notes payable of $6,700,000. |
At December 31, 2021, the Company had the following material commitments and contingencies.
Debt See Note 5 to the Consolidated Financial Statements.
Related party transactions - See Notes 2, 5 and 8 to the Consolidated Financial Statements.
Cash requirements and capital expenditures – At the current level of operations, the Company has to borrow funds to meet basic operating costs.
Known trends and uncertainties – The Company is planning to acquire other businesses with similar business operations. The uncertainty of the economy may increase the difficulty of raising funds to support the planned business expansion.
We expect the ACP revenue stream to increase month over month for the remainder of 2022. Our attention will shift quickly from our hyper growth in the broadband sector to the emphasis of on-boarding merchants and stores on our fintech platform. This will allow us to fully implement our sales strategy, resulting in increased revenue in all segments of our business. At this point in time, the Company does not anticipate the need to raise capital through any equity plays. We may need from time to time a line of credit to enhance the hyper growth in the ACP programs.
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 nine (6) months of the loan. Any unforgiven balance of loan principal and accrued interest at the end of the nine (6) month loan deferral period is amortized in equal monthly installments over the remaining 18-months of the loan term. On January 25, 2022, the Company was notified of $371,665 in forgiveness of the $498,082 SBA guaranteed PPP loan with Bank3. The outstanding balance of $126,418 is a 30-year, 1% annual interest rate. In addition, the Company received $636,600 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Our management has determined that, as of September 30, 2022, the Company’s disclosure controls are effective, but the Company lacks segregation of duties similar to other companies our size.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
From time to time, we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. Except as described below, we are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or results of operations.
The following is summary of threatened, pending, asserted or un-asserted claims against us or any of our wholly owned subsidiaries for which there have been material developments since December 31, 2021.
| (1) | True Wireless and Surge Holdings - Terracom Litigation |
Global Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom believes Mr. Coffman and Mr. Carroll are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as such we believe True Wireless has a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc., but not in wireless sales. The complaint requests general damages plus fees and costs for tortious interference with a business relationship in their prayer for relief. They have made no written demand for damages at this point in time. The Company believes this matter is simply an anti-competitive attempt by Terracom to cause distress to True Wireless.
| (2) | Surge Holdings – Juno Litigation |
Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary.
| (3) | SurgePays – Ambess Litigation |
On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of contract and prays for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion practice and discovery process.
| (4) | True Wireless and Surge Pays - Litigation |
Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox.
ITEM 1A: RISK FACTORS
Not applicable.
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ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three-month period ended September 30, 2022, the Company did not issue any shares not previously reported in Current Report on Form 8-K or a quarterly report on Form 10-Q except as follows:
The Company issued 147,153 shares of common stock in connection with a cashless exercise of 498,750 warrants. These shares were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof for the sale of securities not involving a public offering.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4: MINE SAFETY DISCLOSURES.
Not applicable
ITEM 5: OTHER INFORMATION.
None.
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ITEM 6: EXHIBITS
+ Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
*Filed herewith.
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SURGEPAYS, INC. | ||
| Date: November 14, 2022 | ||
| By: | /s/ Kevin Brian Cox | |
| Kevin Brian Cox | ||
Chief Executive Officer (Principal Executive Officer) | ||
| Date: November 14, 2022 | /s/ Anthony Evers | |
| Anthony Evers | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |
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