1
BASIS OF PRESENTATION AND BUSINESS
Basis
of presentation and consolidation
The
accompanying unaudited consolidated financial statements include the accounts of Surge Holdings, Inc. (“Holdings”),
incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, Ksix Media, Inc. (“Media”), incorporated
in Nevada on November 5, 2014, Ksix, LLC (“KSIX”), a Nevada limited liability company that was formed on September
14, 2011, Surge Payment Systems, LLC (Formerly known as Blvd. Media Group, LLC) (“BMG”), a Nevada limited
liability company that was formed on January 29, 2009, DigitizeIQ, LLC (“DIQ”) an Illinois limited liability company
that was formed on July 23, 2014 and Surge Crypto Currency Mining, Inc. (Formerly known as North American Exploration,
Inc.) (“NAE”), a Nevada corporation that was incorporated on August 18, 2006 (collectively the “Company”).
All significant intercompany balances and transactions have been eliminated in consolidation.
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 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 June 30, 2017 and the results of operations and cash flows for the periods presented. The results of operations
for the three and six months ended June 30, 2017 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, 2016 filed
with the SEC on December 11, 2017.
Business
description
The
Company has two operating subsidiaries, KSIX and DIQ.
KSIX
is an Internet marketing company. KSIX is an advertising network designed to create revenue streams for its affiliates and to
provide advertisers with increased measurable audience. KSIX provides performance based marketing solutions to drive traffic and
conversions within a Cost-Per-Lead (“CPL”) business model. KSIX has an online advertising network that works directly
with advertisers and other networks to promote advertiser campaigns and manages offer tracking, reporting and distribution.
DIQ
is a full service digital advertising agency specializing in survey generation and landing page optimization specifically designed
for mass tort action lawsuits.
2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fair
value measurements
The
Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value
as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair
value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature
of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective
yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances
of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
|
●
|
Level
1 — quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
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|
●
|
Level
3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
|
The
derivative liability in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, is
the only financial liability measure at fair value on a recurring basis.
The
change in the Level 3 financial instrument is as follows:
Balance,
December 31, 2016
|
|
$
|
584,168
|
|
Issued
during the six months ended June 30, 2017
|
|
|
69,920
|
|
Converted
|
|
|
(473,029
|
)
|
Change
in fair value recognized in operations
|
|
|
587,548
|
|
Balance,
June 30, 2017
|
|
$
|
768,607
|
|
The
estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following
assumptions as of June 30, 2017:
Estimated
dividends
|
|
None
|
|
Expected
volatility
|
|
|
210.49
|
%
|
Risk
free interest rate
|
|
|
2.67
|
%
|
Expected
term
|
|
|
.01-36
months
|
|
Recent
accounting pronouncements
We
have evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”)
through the date these financial statements were available to be issued and find no recent accounting pronouncements that would
have a material impact on the financial statements of the Company.
3
GOING CONCERN
The
Company has not established sources of revenues sufficient to fund the development of its business, or to pay projected operating
expenses and commitments for the next year. The Company has a working capital deficit of $3,271,963, an accumulated deficit of
$8,015,507 at June 30, 2017, and incurred losses for the past two years. These factors, among others, create an uncertainty about
our ability to continue as a going concern.
The Company projects that it should be cash
flow positive after the end of the 2nd quarter ended June 30, 2018 from ongoing operations by the combination of increased cash
flow from its current subsidiaries, as well as restructuring our current debt burden. The Company has executed an agreement with
a FINRA licensed broker, as well as several institutional investors, to bring in equity investments to pay down existing debt
obligations, cover short term shortfalls, and complete proposed acquisitions. Additionally, the Company is negotiating the closing
of the acquisition of True Wireless, LLC, (“TW”) an Oklahoma Limited Liability Company. Upon the completion of the
potential acquisition of TW as a wholly owned subsidiary, the Company will become cash flow positive.
The Company’s
ability to continue as a going concern is dependent on the success of this plan.
The
Company’s financial statements have been presented on the basis that it continues as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
4
CREDIT CARD LIABILITY
The
Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. At June 30, 2017
and December 31, 2016, the Company’s credit card liability was $336,726 and $336,726, respectively.
5
NOTES PAYABLE AND LONG-TERM DEBT – RELATED PARTY
As
of June 30, 2017 and December 31, 2016, notes payable and long-term debt due to a related party consists of:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Note
payable to director due in four equal annual installments of $26,875 on April 28 of each year
|
|
|
107,500
|
|
|
|
107,500
|
|
Less
debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
|
107,500
|
|
|
|
107,500
|
|
Less
current portion - related party
|
|
|
80,625
|
|
|
|
53,750
|
|
Long-term
debt - related party
|
|
$
|
26,875
|
|
|
$
|
53,750
|
|
The
payment due April 28, 2016 has not been made. Pursuant to the terms of the note, the note begins to accrue interest at 6% per
annum and the past due portion is convertible into the Company’s common stock at a conversion price equal to 70% of the
current price of the common stock. The Company has determined that the conversion feature for the past due portion of the note
constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding
discount recorded to the note. Accrued interest was $1,088 at December 31, 2016 and $2,166 at June 30, 2017.
6
NOTES PAYABLE AND LONG-TERM DEBT
As
of June 30, 2017, notes payable and long-term debt consists of:
|
|
|
|
Note
Balance
|
|
|
Debt
Discount
|
|
|
Carrying
Value
|
|
On
October 26, 2011, the Company entered into a note payable in the amount of $362,257, relating to a Unit redemption agreement
bearing interest at 6% per annum and is payable in equal monthly installments of $7,003, inclusive of interest, past due
|
|
$
|
68,973
|
|
|
$
|
-
|
|
|
$
|
68,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note - Non-interest bearing; on January 19, 2016, the Company modified the terms of a secured note payable in the
original amount of $950,000 and made the $700,000 balance convertible
1
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to former officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016; accruing
interest at 6% per annum since April 28, 2016
|
|
|
101,250
|
|
|
|
-
|
|
|
|
101,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to seller of DigitizeIQ, LLC due as noted below
2
|
|
|
485,000
|
|
|
|
-
|
|
|
|
485,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Credit Facility dated February 24, 2016; interest at 18% per annum; interest only for two months then 16 payments
of $28,306 monthly
3
|
|
|
261,043
|
|
|
|
-
|
|
|
|
261,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Calvary Fund I. LP, formerly Pinz Capital International, LP dated May 25, 2016 with interest at 18%
4
|
|
|
115,488
|
|
|
|
-
|
|
|
|
115,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
note payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible
into common stock
5
|
|
|
27,500
|
|
|
|
-
|
|
|
|
27,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory notes payable to Salksanna, LLC dated October 7, 2016 and December 21, 2016 with interest at 10% per annum; due
March 13, 2018; convertible into common stock
6
|
|
|
95,405
|
|
|
|
51,492
|
|
|
|
43,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
of convertible promissory notes payable to an individual dated from May 4, 2017 through May 23, 2017 with interest at 10%
per annum; due in seven months; convertible into common stock at $0.10 per share
|
|
|
60,000
|
|
|
|
34,249
|
|
|
|
25,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital notes
7
|
|
|
58,494
|
|
|
|
-
|
|
|
|
58,494
|
|
|
|
|
1,573,153
|
|
|
|
85,741
|
|
|
|
1,487,412
|
|
Less
current portion notes payable and long-term debt
|
|
|
1,547,840
|
|
|
|
85,741
|
|
|
|
1,462,099
|
|
Long-term
debt
|
|
$
|
25,313
|
|
|
$
|
-
|
|
|
$
|
25,313
|
|
As
of December 31, 2016, notes payable and long-term debt consists of:
|
|
|
|
Note
Balance
|
|
|
Debt
Discount
|
|
|
Carrying
Value
|
|
On
October 26, 2011, the Company entered into a note payable in the amount of $362,257, relating to a Unit redemption agreement
bearing interest at 6% per annum and is payable in equal monthly installments of $7,003, inclusive of interest, past due
|
|
$
|
68,973
|
|
|
$
|
-
|
|
|
$
|
68,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Promissory Note - Non-interest bearing; on January 19, 2016, the Company modified the terms of a secured note payable in the
original amount of $950,000 and made the $700,000 balance convertible
1
|
|
|
590,000
|
|
|
|
-
|
|
|
|
590,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to former officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016; accruing
interest at 6% per annum since April 28, 2016
|
|
|
101,250
|
|
|
|
-
|
|
|
|
101,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to seller of DigitizeIQ, LLC due as noted below
2
|
|
|
485,000
|
|
|
|
-
|
|
|
|
485,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Credit Facility dated February 24, 2016; interest at 18% per annum; interest only for two months then 16 payments
of $28,306 monthly
3
|
|
|
261,043
|
|
|
|
-
|
|
|
|
261,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to Calvary Fund I. LP, formerly Pinz Capital International, LP dated May 25, 2016 with interest at 18%
4
|
|
|
130,000
|
|
|
|
-
|
|
|
|
130,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
note payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible
into common stock
5
|
|
|
27,500
|
|
|
|
8,774
|
|
|
|
18,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory notes payable to Salksanna, LLC dated October 7, 2016 and December 21, 2016 with interest at 10% per annum; due
March 13, 2018; convertible into common stock
6
|
|
|
95,405
|
|
|
|
87,379
|
|
|
|
8,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital notes
7
|
|
|
183,757
|
|
|
|
-
|
|
|
|
183,757
|
|
|
|
|
1,942,928
|
|
|
|
96,153
|
|
|
|
1,846,775
|
|
Less
current portion
|
|
|
1,796,898
|
|
|
|
8,774
|
|
|
|
1,788,124
|
|
Long-term
debt
|
|
$
|
146,030
|
|
|
$
|
87,379
|
|
|
$
|
58,651
|
|
1
The
Convertible Promissory Note
was modified on January 19, 2016 to release the pledge of the holder’s former
membership units in Ksix and BMG, to make the note convertible into the Company’s common stock and to require an extra payment
of $100,000 due within 90 days. The terms of the Convertible Note provided in the event the Note was not paid prior to the Maturity
Date (January 1, 2017) or that payments are not made to the holder by the due date ($10,000 on the 1
st
and 15
th
of each month), the holder shall have the right thereafter, exercisable in whole or in part, to convert the outstanding
principal or payment then due into shares of the common stock of the Company. The Convertible Promissory Note provided the note
conversion price was determined by taking the lowest closing price of the Company’s common stock in the previous ten trading
days and then applying a 45% discount. On March 23, 2016, the parties entered into an Addendum to the Convertible Promissory Note
to allow an immediate conversion of the $20,000 payments due in April 2016 at the 45% discount rate; to modify the conversion
discount rate from 45% of the lowest price of the previous ten trading days prior to conversion to 35% of the average price of
the previous ten trading days prior to conversion for any future conversions; and to require an additional payment of $30,000
within sixty days. The Company evaluated the embedded conversion feature for derivative treatment and the debt discount is fully
amortized at December 31, 2016.
The
original note and the convertible promissory note provided for semi-monthly payments of $10,000 due on the 1
st
and
15
th
of the month, with any unpaid balance due on January 1, 2017. If the Company paid the unpaid balance on December
31, 2016, they were allowed a discount of $200,000 from the remaining balance. In addition, the modification and addendum, provided
for two additional payments during 2016. Within 90 days of January 19, 2016, the Company was required to make an additional payment
of $100,000 and within 60 days of March 23, 2016, the Company was required to make an additional payment of $30,000. As of June
30, 2017 the total balance is past due. During the three months ended June 30, 2017, $290,000 of the principal balance together
with $21,929 in accrued interest was converted into common stock.
2
Notes due seller of DigitizeIQ, LLC includes a series of notes as follows
:
|
●
|
A
non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on November 12, 2015;
(Paid February 26, 2016).
|
|
●
|
A
second non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on January
12, 2016; (Balance at March 31, 2017 - $235,000)
|
|
●
|
A
third non-interest bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on March 12,
2016 (Unpaid).
|
The
Company is renegotiating the terms of the notes. The notes bear interest at 5% per annum when in default (after the due date).
The notes were non-interest bearing until due. Accordingly, a debt discount at 5% per annum was calculated for the notes and was
amortized to interest expense until the due date of the notes.
3
Senior Secured Credit Facility Agreement -
On February 24, 2016, the Company executed a Senior Secured Credit Facility
Agreement (“Senior Credit Facility”) in the maximum amount of $5,000,000 together with a Convertible Promissory Note
(“Convertible Note”) in the amount of $750,000 with TCA Global Credit Master Fund, LP (“TCA”). The initial
loan advance was $400,000 and requires monthly interest only payments for two months and then sixteen monthly payments of $28,306,
including interest at 18% per annum. The obligation is secured by substantially all assets of the Company and its subsidiaries.
The payment due August 29, 2016 was acquired by Salksanna LLC on September 13, 2016 (See ⁶ below). The payment due September
29, 2016 was acquired by Salksanna, LLC on October 7, 2016 and the payment due October 29, 2016 was acquired by Salksanna, LLC
on December 21, 2016. (See ⁶ below).
The
Senior Credit Facility includes a provision for advisory fees in the amount of $300,000 which was paid when the Company issued
1,782,000 shares of its common stock to TCA (the “Advisory Shares”) on or about March 24, 2016. If TCA is unable to
collect the $300,000 from sales of the Advisory Shares within twelve months, the Company is obligated to issue additional shares
to TCA until TCA is able to collect the full $300,000. Should TCA still be unable to collect the full $300,000, and after at least
one year, TCA can require the Company to redeem any remaining shares for an amount equal to $300,000 less the sales proceeds that
TCA has collected. In the event TCA sells the Advisory Shares for more than $300,000, the excess proceeds, together with unsold
common shares will be returned to the Company. As long as there is no default under the terms of the Senior Credit Facility, TCA
is limited to weekly sales of the Advisory Shares equal to no more than 20% of the average weekly volume of the Company’s
common stock on its principal trading market. The stock was valued at the trading price on the date of the agreement and the resulting
$300,000 was included as a direct reduction from the carrying amount of the debt liability and was fully amortized at December
31, 2016.
The
Convertible Note is convertible into the Common Stock of the Company upon the event of: (1) a default under any of the loan documents
between the Company and TCA; or (2) mutual agreement between the Company and TCA, at which time TCA may convert all or a portion
of the outstanding principal, accrued and unpaid interest into shares of the Common Stock of the Company calculated by the conversion
amount divided by 85% of the lowest of the daily weighted average price of the Company’s Common Stock during five business
days immediately prior to the date of the request of conversion (the “Conversion”). Pursuant to the terms of the Convertible
Note, TCA is limited to beneficial ownership of not more than 4.99% of the issued and outstanding Common Stock of the Company
after taking into effect the Common Stock to be issued pursuant to the Conversion.
The
TCA note was restructured effective August 29, 2016, September 29, 2016 and October 29, 2016 to accommodate the payment of the
amounts due on those dates by Salksanna, LLC and the issue by the Company of convertible notes payable to Salksanna for the amounts
of those payments. (See ⁶ below.) The restructured note to TCA added $25,146 to each payment for the loan fee originally
paid with common stock. When the fee is paid in full, the 1,782,000 shares will be returned to the Company. The payments due TCA
on November 29, 2016 and December 29, 2016 are currently unpaid and this default resulted in the note becoming convertible into
common stock of the Company.
The
Company evaluated the resulting embedded conversion feature for derivative treatment and recorded an initial derivative liability
and debt discount of $198,524. The debt discount was fully amortized at December 31, 2016.
The
Company is also responsible for other transaction, due diligence and legal fees of $42,500 if it draws the remaining $350,000
initially committed.
The
proceeds from the loan were used to pay a $250,000 note to the seller of DIQ and for working capital.
4
Calvary Fund I, LP (formerly Pinz Capital International, L.P.) Note –
The Calvary note payable was due in installments
of $25,000 plus accrued interest on November 25, 2016; $18,750 plus accrued interest on December 25, 2016; $14,063 plus accrued
interest on January 25, 2017 and a final payment of the unpaid balance plus accrued interest on May 25, 2017. The agreement provides
for limitations on additional indebtedness. If an event of default, as defined in the agreement, occurs and if not cured within
ten days, the note becomes convertible into the Company’s common stock at a rate equal to 65% of the average VWAP over the
previous 5 trading days. If the event of default is for non-payment of any installment due, the amount convertible is limited
to the amount of the unpaid installment. Pinz Capital is controlled by a director of the Company. Calvary Fund I, LP acquired
the note from Pinz Capital in December 2016.
The
payments due November 25, 2016 and December 25, 2016 were not made. As a result, the Company was penalized $30,000, which was
added to the note balance and due to other past due obligations, it was determined the total balance was in default and due, making
the note convertible. Accordingly, a debt discount was recorded on November 25, 2016 for $52,889. The debt discount was fully
amortized at December 31, 2016.
5
Convertible note payable to River North Equity, LLC (“RNE”)-
The Company evaluated the embedded conversion
for derivative treatment and recorded an initial derivative liability and debt discount of $23,190. The debt discount is fully
amortized at June 30, 2017.
The
Company has entered into a number of agreements with RNE wherein RNE has agreed to invest up to $3,000,000 in the common stock
of the Company. These agreements require an effective Registration Statement to be on file by the Company and would allow the
Company to require RNE to purchase the Company’s common stock at 90% of the lowest trading price of the Company’s
common stock during the previous five trading days. The Company has not yet filed a Registration Statement with the SEC.
6
The Company issued three convertible notes to Salksanna, LLC in exchange for payments made by Salksanna to TCA. The first
note in the amount of $53,452 was converted into 1,953,399 shares of the Company’s common stock. The second note in the
original amount of $53,452 was partially converted with $11,500 in principal and $44 in accrued interest converted into 383,525
shares of the Company’s common stock. The conversion of the notes resulted in a loss on debt extinguishment of $107,104
in 2016.
At
June 30, 2017, the remaining notes with a principal balance of $95,405 have a debt discount of $51,572.
7
In November 2016, the Company entered into four working capital notes in the original amount of $245,000 which require daily
payments aggregating $2,956. The Company entered into two additional notes in the total amount of $140,000 during the six months
ended June 30, 2017 and made total repayment of $265,262 during the six months ended June 30, 2017 on these notes.
Derivative
liability
The
Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion
amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding
discount recorded to the associated debt. The excess of the derivative value over the face amount of the note, if any, is recorded
immediately to interest expense at inception.
The
estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following
assumptions:
Estimated
dividends
|
|
|
None
|
|
Expected
volatility
|
|
|
207.20%
to 238.94
|
%
|
Risk
free interest rate
|
|
|
2.61%
to 2.89
|
%
|
Expected
term
|
|
|
.01
to 36 months
|
|
7
Stockholder’s equity
COMMON
STOCK
2017
Transactions
Effective
January 1, 2017, the Company issued 160,000 shares of its common stock pursuant to a public relations agreement. The common stock
was valued at $44,784 based on the closing price of the common stock at that time, which is being amortized over the service period
of nine months.
In
the three months ended March 31, 2017, the Company issued 410,675 shares of its common stock in exchange for $14,513 in principal
and $7,987 in accrued interest on a convertible note obligation.
In
the three months ended March 31, 2017, the Company issued 550,000 shares of its common stock and 275,000 3-year $0.50 warrants
in exchange for $55,000 in cash.
In
the three months ended March 31, 2017, the Company issued 1,850,000 shares for legal and consulting fees of $248,605 which were
included in accrued expenses at December 31, 2016.
On
March 24, 2017, the Company issued 600,000 shares of its common stock pursuant to a modified consulting agreement related to the
acquisition of TW, with Anthony P. Nuzzo, a director of the Company. The shares were valued at $252,000 and this amount was included
in selling, general and administrative expense during the three months ended March 31, 2017.
On
March 24, 2017, the Company issued 600,000 shares of its common stock pursuant to a modification of a consulting agreement related
to the acquisition of TW. The shares were valued at $252,000 and this amount was included in selling, general and administrative
expense during the three months ended March 31, 2017.
On
March 24, 2017, the Company issued 12,000,000 shares of its common stock to Brian Cox pursuant to a Master Agreement for the Exchange
of Common Stock, Management and Control as a part of the planned acquisition of True Wireless, LLC. These shares were valued at
the fair market value of $1,200,000.
In
May 2017, the Company accepted a notice to convert $290,000 in principal of a convertible note payable into 6,257,459 shares of
its common stock and recorded a gain from debt settlement of $7,151.
On
May 15, 2017, the Company issued 160,000 shares of its common stock pursuant to a public relations agreement. The common stock
was valued at $44,784 based on the closing price of the common stock at the time of the initial contract, which is being amortized
over the service period of nine months.
During
the three months ended June 30, 2017, the Company entered into five Unit subscription agreements for total consideration of $185,000.
Units representing 1,850,000 common shares and 925,000 3-year $0.50 warrants were issued.
UNIT
SUBSCRIPTION AGREEMENT – WARRANTS
During
the six months ended June 30, 2017, the Company entered into Unit subscription agreements with seven unrelated companies
and individuals. Each Unit was priced at $0.10 and contained: (a) one share of common stock restricted in accordance with Rule
144; and (b) one-half Warrant to purchase an additional share of common stock restricted in accordance with Rule 144 for $0.50
for a period of three years after the close of the offering. For total consideration of $240,000, Units representing 2,400,000
common shares and 1,200,000 3-year $0.50 warrants were issued. The warrants were classified as equity since they have
a fixed exercise price and do not have a provision for modification.
8
RELATED PARTY TRANSACTIONS
The
Company’s chief executive officer has advanced the Company various amounts on a non-interest bearing basis, which is being
used for working capital. The advance has no fixed maturity. The activity is summarized as follows:
|
|
Six
Months Ended
|
|
|
Year
ended
|
|
|
|
June
30, 2016
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
356,502
|
|
|
$
|
318,002
|
|
New
advances, net of repayment
|
|
|
33,000
|
|
|
|
38,500
|
|
Balance
at end of period
|
|
$
|
389,502
|
|
|
$
|
356,502
|
|
See
Note 5 for long-term debt due to a director.
See
Note 7 for common stock issued to related parties.
During
the six months ended June 30, 2017, the Company had sales to TW in the amount of $23,539 and the Company had a receivable from
TW of $37,758.
9
COMMITMENTS AND CONTINGENCIES
True
Wireless, LLC
Master
Agreement for the Exchange of Common Stock, Management, and Control
On
or about December 7, 2016, the Company, entered into a Master Agreement for the Exchange of Common Stock, Management, and Control
(the “Exchange Agreement”) with True Wireless, LLC, an Oklahoma Limited Liability Company (“TW”) and the
members of TW (the “Members”). Hereinafter, the Company, TW, and its Members may be referred to as a “Party”
individually or collectively as the “Parties”.
TW’s
primary business operation is a full-service telecommunications company specializing in the Lifeline program as set forth by the
Telecommunications Act of 1996, and regulated by the FCC which provides subsidized mobile phone services for low income individuals
(“Lifeline Services”). TW currently has an FCC license to offer Lifeline Services in the following states: Oklahoma,
Rhode Island, Maryland, Texas, and Arkansas.
Kevin
Brian Cox (“Cox”), is the sole owner of all of TW’s issued and outstanding membership interests, either directly
or indirectly through EWP Communications, LLC, a Tennessee limited liability company, the beneficial owner of which is Cox.
Pursuant
to the agreement, the Company will issued 12 million shares of restricted common stock and make cash payment of $6 million and
a one-year promissory note for $6 million upon closing. The acquisition has not closed as of the date of the consolidated financial
statements issued.
On
December 7, 2016, the company made cash payment of $500,000 to Brian Cox, the owner of TW, as a deposit on acquisition. On March
24, 2017, the Company issued 12 million restricted shares of common stock to Brian Cox and recorded $1,200,000 as a deposit on
acquisition.
First
Addendum to Master Agreement for the Exchange of Equity, Management, and Control
On
March 30, 2017, the Parties executed a First Addendum to the Exchange Agreement extending the time for all material deadlines
contemplated for the transactions related to the acquisition of TW to May 1, 2017.
Additionally,
pursuant to the terms of the Exchange Agreement, the Company executed and entered into a “Management and Marketing Agreement”
(“Management Agreement”) with TW.
Pursuant
to the Management Agreement, the Company would act as the manager of TW until such time as the Exchange Agreement and the transactions
contemplated thereunder are approved by the FCC. Following such approval (which has not occurred as of the date of this Report),
the Parties will hold a final closing of the Exchange Agreement will occur and TW would become a wholly-owned subsidiary of the
Company. Notwithstanding the agreement, the Company has provided no services to Cox and neither Cox nor TW has made any payments
to the Company on account of the Management Agreement. Accordingly, on December 27, 2017, the parties agreed to terminate the
Management Agreement, treating it as a nullity as if it was never entered into by the parties.
Company
Investment in TW
At
the date of this filing, the Company’s investment in TW consists of the following:
|
|
Shares
|
|
|
Amount
|
|
Cash
paid
|
|
|
|
|
|
$
|
500,000
|
|
Common
stock issued
|
|
$
|
12,000,000
|
|
|
|
1,200,000
|
|
|
|
$
|
12,000,000
|
|
|
$
|
1,700,000
|
|
Consideration
to be paid:
|
|
|
|
|
|
|
|
|
Cash
at closing
|
|
|
|
|
|
$
|
1,500,000
|
|
Common
stock to be issued at closing
|
|
|
102,000,000
|
|
|
|
51,000,000
|
|
Note
payable due December 31, 2018
|
|
|
|
|
|
$
|
1,500,000
|
|
Total
contingent consideration
|
|
$
|
102,000,000
|
|
|
$
|
54,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
consideration
|
|
|
|
|
|
$
|
55,700,000
|
|
10
SUBSEQUENT EVENTS
The
Company has evaluated events occurring subsequent to June 30, 2017 and through the date these financial statements were available
to be issued.
Common
stock
On
October 10, 2017, the Company effectuated an increase in its authorized shares to a total of 600,000,000 shares comprising 500,000,000
shares of Common Stock par value $0.001 and 100,000,000 shares of Preferred Stock par value $0.001.
During
the three months ended September 30, 2017, the Company entered into two Unit subscription agreements as described in Note 7 for
total consideration of $130,000. Units representing 800,000 common shares and 400,000 3-year $0.50 warrants were issued.
During
the month ended October 31, 2017, the Company entered into eight Unit subscription agreements as described in Note 7 for
total consideration of $495,000. Units representing 2,475,000 common shares and 1,237,500 3-year $0.50 warrants were issued.
Acquisition
of TW
Amended
Master Agreement for the Exchange of Common Stock, Management, and Control
On
July 18, 2017, the Parties entered into an Amended Master Agreement for the Exchange of Common Stock, Management, and Control
(the “Amended Exchange Agreement”) which amended and restated the Exchange Agreement and First Amendment thereto.
The Amended Exchange Agreement reset certain of the milestones and timetables detailed in the Exchange Agreement. The material
terms of the Amended Exchange Agreement are as follows:
TERMS
|
●
|
The
Management Agreement would commence on July 18, 2017, concurrent with the execution of the Amended Exchange Agreement (the
“Management Closing”);
|
|
|
|
|
●
|
All
other terms and conditions with respect to the Transaction set forth in this Amended Exchange Agreement required to be completed
by the Parties would occur only after all required governmental and regulatory approvals of the Transaction have been delivered.
At that time, the Parties agreed to complete the Company’s acquisition of TW (the “Equity Closing”). The
Parties agreed to expedite preparation of all financial information and audits to be completed at the earliest feasible time.
|
|
|
|
|
●
|
The
Equity Closing is subject to the completion of due diligence by all Parties to the Amended Exchange Agreement;
|
|
|
|
|
●
|
The
Transaction (including the Equity Closing) is subject to delivery by the Parties of all documents required under the Amended
Exchange Agreement;
|
|
|
|
|
●
|
The
Company and TW agreed to take all necessary corporate actions to authorize the Management and Equity Closings; and
|
|
|
|
|
●
|
It
was intended that the transaction underlying the Amended Exchange Agreement would qualify for United States federal income
tax purposes as a re-organization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended. However,
both Parties recognized that in the event the transaction underlying this Agreement does not qualify for United States federal
income tax purposes as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended,
each party is separately responsible for any tax consequences and indemnifies and holds harmless the other party from and
against any and all claims, demands, actions, suits, proceedings, assessments, judgments, damages, costs, losses and expenses,
resulting from the that Parties failure to pay their tax liability for this transaction.
|
CLOSINGS
THE
MANAGEMENT CLOSING
The
Management Closing occurred on July 18, 2017 pursuant to the following material terms or actions which were approved by the Parties:
|
●
|
The Company agreed,
upon execution of the Amended Exchange Agreement, to deliver (a) $1.5 Million Promissory Note issued by the Company in favor
of Cox
(this Note was later cancelled by the mutual agreement of the parties);
and (b) undertake to authorize a
n additional number of shares
of common stock as required to fulfill the terms and conditions of the transactions between the parties;
|
|
|
|
|
●
|
Upon the Equity
Closing (which has not yet occurred), the Company agreed to issue to Cox and/or his assigns, approximately 114 million shares
of Company Common Stock and Warrants to purchase 45 million Company Common Shares for a period of five years at a purchase
price of $0.50 per share (subject to adjustment) which can be exercised on a “cashless” basis. As of the date
of this Report, 12 million shares of Company Common Stock have been issued to Cox and assigns and an additional 102 Million
shares of Company Common Stock will be delivered (as directed by Cox) at the Equity Closing;
|
|
|
|
|
●
|
It was agreed that
75% of Carter Matzinger’s (“Matzinger”) Series “A” Preferred Stock (“Series A Preferred
Stock”) containing specified majority common stock voting rights of the Company would be transferred by Matzinger to
Cox upon execution of the Amended Exchange Agreement. This agreement was subsequently amended to provide for the transfer
of 100% of the Series A Preferred Stock by Matzinger to Cox;
|
|
|
|
|
●
|
It was agreed that,
at the Post Equity Closing, Matzinger would submit for cancellation and retirement all of his (or his assigns) shares of Company
Common Stock in excess of 14 million shares. As a result thereof, Matzinger would hold no more than 14 million shares of Company
Common Stock following the Equity Closing.
|
EQUITY
CLOSING.
Conditioned
upon the Parties, having completed all material requirements of the Amended Exchange Agreement, including all delivery of all
Exhibits and Collateral Agreements contemplated thereby, and the receipt of any required third party approvals, the Parties agreed
to proceed with the Equity Closing, as follows:
At
the Equity Closing, the Company agreed to Issue to the Members:
|
●
|
$1,500,000
cash
|
|
|
|
|
●
|
$1,500,000
Promissory Note due December 31, 2018
|
|
|
|
|
●
|
Any
additional Cox Stock required to be issued pursuant to the Anti-Dilution Provision.
|
TW
and the Members agreed to issue to the Company:
|
●
|
All
outstanding Membership Interests in TW together with all documentation to reflect the
intent of the Parties such that TW would become a wholly owned subsidiary of the Company.
|
Management
and Marketing Agreement
On
or about July 18, 2017, the Company executed and entered into a “Management and Marketing Agreement” (“Management
Agreement”) with Cox. Pursuant to the Management Agreement, the Company is obligated to provide certain management services
to Cox as detailed in the Management Agreement. Notwithstanding the agreement, the Company has provided no services to Cox and
neither Cox nor TW has made any payments to the Company on account of the Management Agreement. Accordingly, on December 27, 2017,
the parties agreed to terminate the Management Agreement, treating it as a nullity as if it was never entered into by the parties.
Salksanna,
LLC Settlement
On
December 5, 2017, the Company and certain of its subsidiaries entered into a Settlement Agreement with Salksanna, LLC relating
to two separate promissory notes dated September 29, 2016 and October 29, 2016 (the “Salksanna Notes”), each in the
original principal amount of $53,542.33 and a counterclaim filed by the Company with respect to the enforcement of the obligations
evidenced by the Salksanna Notes. Under the terms of the Settlement Agreement, the Company paid Salksanna $110,000 cash in full
satisfaction of all amounts due pursuant to the Salksanna Notes and all amounts claimed by the Company under its counterclaim.
The parties also agreed to file a joint stipulation with prejudice of all litigation related to the Salksanna Notes and executed
a mutual general release with respect to the matter.
TCA
Global Credit Master Fund, L.P. Settlement
On
December 7, 2017, the Company and certain corporate and individual guarantors entered into a Settlement Agreement with TCA Global
Credit Master Fund, L.P. (“TCA”) with respect to a convertible promissory note in the original face amount of $750,000
(the TCA Note”). This matter was also the subject of litigation filed in Broward County, Florida. Under the terms of the
Settlement Agreement, the Company paid TCA $375,000 cash to settle all obligations between the parties. In addition, TCA agreed
to the cancellation of 1,782,000 shares of Company Common Stock which it had held, dismissal with prejudice of the pending litigation
and release of all security interests and guarantees it held related to the TCA Note. The parties also entered into a mutual general
release with respect to the matter.
Change
of Name
On
December 20, 2017, the Company filed a Certificate of Amendment with the Nevada Secretary of State whereby the Company’s
name was changed to “Surge Holdings, Inc.” effective as of that date.