|
1
|
BASIS
OF PRESENTATION AND BUSINESS
|
Basis
of presentation and consolidation
The
accompanying unaudited consolidated financial statements include the accounts of Surge Holdings, Inc. (“Surge”), formerly
Ksix Media Holdings, Inc., incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, Ksix Media, Inc. (“Media”),
incorporated in Nevada on November 5, 2014, Ksix, LLC (“KSIX”), a Nevada limited liability company that was formed
on September 14, 2011, Surge Blockchain, LLC (“Blockchain”), formerly Blvd. Media Group, LLC (“BLVD”),
a Nevada limited liability company that was formed on January 29, 2009, DigitizeIQ, LLC (“DIQ”) an Illinois limited
liability company that was formed on July 23, 2014 and Surge Cryptocurrency Mining, Inc. (“Crypto”), formerly 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 March 31, 2018 and the results of operations and cash flows for the periods presented. The results of operations
for the three months ended March 31, 2018 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, 2017 filed
with the SEC on April 10, 2018.
Business
description
The
Company has been doing business through two of its wholly owned subsidiaries. DIQ is a full service digital advertising agency
specializing in survey generation and landing page optimization specifically designed for mass tort action lawsuits. KSIX is an
Internet marketing company and has an advertizing 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
with 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 manage offer tracking, reporting and distribution.
Other
subsidiaries were inactive as of the end of December 2017 and the Company intends to pursue the following business models in 2018.
Blockchain
is focused on expanding development and licensing for a Blockchain Service as a Software (SaaS) Payments Platform in order to
deliver a real product that improves people’s lives.
Crypto
intends to strategically mine Bitcoin, Litecoin and other cryptocurrencies. The company finalized its first mining farm of 100
Antminer L3+ machines. The mining operation will work 24/7 to both generate revenues and deliver to the Company a commodity as
of March 31, 2018.
Effective
December 7, 2016, the Company executed a Master Exchange Agreement for the exchange of Common Stock, Management and Control (the
“Exchange Agreement”) with True Wireless, LLC (“TW”) and Kevin Brian Cox (“Cox”), the sole
owner of TW’s issued and outstanding membership interests. TW’s primary business operation is a full-service telecommunications
company specializing in the Lifeline program which provides subsidized mobile phone service for low income individuals. The acquisition
had not closed as of the date of these financial statements (See Notes 9 and 10 for details).
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:
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●
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Level
1 — quoted prices in active markets for identical assets or liabilities.
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●
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Level
2 — quoted prices for similar assets and liabilities in active markets or inputs
that are observable.
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●
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Level
3 — inputs that are unobservable (for example cash flow modeling inputs based on
assumptions).
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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:
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|
|
2018
|
|
|
2017
|
|
|
Balance, beginning of year
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|
$
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92,897
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|
|
$
|
584,168
|
|
|
Issued during the period
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|
|
-
|
|
|
|
22,368
|
|
|
Converted
|
|
|
-
|
|
|
|
(1,017,840
|
)
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|
Change in fair
value recognized in operations
|
|
|
(33,756
|
)
|
|
|
504,201
|
|
|
Balance, March 31, 2018 and December
31, 2017
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|
$
|
59,141
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|
|
$
|
92,897
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|
The
estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following
assumptions as of March 31, 2018:
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2018
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|
|
2017
|
|
|
Estimanted dividends
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|
None
|
|
|
None
|
|
|
Expected volatility
|
|
|
164.32
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%
|
|
|
216.37
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%
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|
Risk free interest rate
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|
|
2.85
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%
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|
|
2.76
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%
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Expected term
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.01-36
months
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.01-36
months
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LTC
cryptocurrency coins are valued at current quoted rates and are therefore a Level 1 input.
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.
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 $1,932,890, an accumulated deficit of
$8,273,276 at March 31, 2018, 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.
The
Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. At March 31,
2018 and December 31, 2017, the Company’s credit card liability was $336,726 and
$336,726,
respectively.
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5
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NOTES
PAYABLE – RELATED PARTY
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As
of March 31, 2018 and December 31, 2017, notes payable due to a related party consists of:
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March
31, 2018
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December
31, 2017
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Notes
payable to SMDMM Funding LLC; interest at 8% per annum; due on demand
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$
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241,000
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|
|
$
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285,000
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|
Notes
payable to True Wireless, LLC; non-interest bearing; due on demand
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|
-
|
|
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19,000
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|
|
Notes
payable—related party
|
|
|
241,000
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|
|
|
304,000
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SMDMM
Funding, LLC and True Wireless, LLC are owned by the Company’s chief executive officer.
Accrued
interest owed to SMDMM Funding, LLC was $183 and $1,711 at March 31, 2018 and December 31, 2017, respectively.
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6
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NOTES
PAYABLE AND LONG-TERM DEBT
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As
of March 31, 2018 and December 31, 2017, notes payable and long-term debt consists of:
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|
|
3/31/18
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|
|
12/31/17
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|
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 $7,003, inclusive of interest, past due ¹
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$
|
-
|
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|
$
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68,973
|
|
|
Note payable to former officer and director
due in four equal annual installments of $26,875 beginning April 28, 2016; past due in 2016 and 2017; accruing interest at
6% per annum since April 28, 2016 on the past due portion
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|
107,500
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|
|
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107,500
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|
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Note payable to former officer due in
four equal annual installments of $25,313 on April 28 of each year; past due in 2016 and 2017; accruing interest at 6% per
annum since April 28, 2016 on the past due portion
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101,250
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|
|
|
101,250
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|
|
Notes payable to seller of DigitizeIQ,
LLC due as noted below²
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|
|
485,000
|
|
|
|
485,000
|
|
|
Convertible
note payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum;
due April 13, 2017; convertible into common stock
5
|
|
|
27,500
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|
|
|
27,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721,250
|
|
|
|
790,223
|
|
|
Current portion
of long-term debt
|
|
|
669,062
|
|
|
|
738,035
|
|
|
Long-term
debt
|
|
$
|
52,188
|
|
|
$
|
52,188
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|
¹The
remaining balance due on the Unit redemption agreement note was settled with a payment of $10,000 in cash, which resulted in a
net gain of $66,723 including accrued interest of $7,750.
²
Notes due seller of DigitizeIQ, LLC includes
a series of notes as follows
:
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●
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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).
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|
|
|
|
|
|
●
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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)
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|
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|
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●
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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.
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.
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.
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 during the three months ended March 31, 2018:
|
Estimanted
dividends
|
|
None
|
|
Expected
volatility
|
|
164.32%
|
|
Risk
free interest rate
|
|
2.85%
|
|
Expected
term
|
|
.01-36
months
|
7 STOCKHOLDERS’
EQUITY
COMMON
STOCK
2018
Transactions
On
January 4, 2018, the former chief executive officer of the Company retired 10,778,761 shares of the Company’s common stock.
The transaction was recorded as a reduction in common stock of $10,779 and an increase in additional paid in capital of $10,779.
Simultaneously, the options outstanding at the time to the former chief executive officer expired.
On
March 13, 2018, the Company retired the 1,782,000 shares of common stock held in the treasury.
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 is 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 is 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.
UNIT
SUBSCRIPTION AGREEMENT – WARRANTS
During
the three months ended March 31, 2018, the Company entered into Unit subscription agreements with seven unrelated companies and
individuals. Each Unit was priced at $0.20 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 $460,000, Units representing 2,300,000 common
shares and 1,150,000 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.
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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:
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|
|
Three
Months End
|
|
|
Year
ended
|
|
|
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
389,502
|
|
|
$
|
356,502
|
|
|
New advances
|
|
|
1,446
|
|
|
|
34,000
|
|
|
Repayment
|
|
|
-
|
|
|
|
(1,000
|
)
|
|
Balance at end of period
|
|
$
|
390,948
|
|
|
$
|
389,502
|
|
See
Note 5 for long-term debt due to related parties.
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 issue 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.
True
Wireless Transaction
On
April 11, 2018, the Company, True Wireless, Inc., an Oklahoma corporation (“TW, Inc.”) and TW Acquisition Corporation,
a newly formed Nevada corporation (“Acquisition Sub”), completed the merger contemplated by the Exchange Agreement
by entering into an Agreement and Plan of Reorganization (the “Merger Agreement”).
Pursuant
to the terms of the Merger Agreement, TW, Inc. merged into Acquisition Sub in a transaction where TW, Inc. was the surviving company
and become a wholly-owned subsidiary of the Company. The transaction was structured as a tax-free reverse triangular merger. In
addition to the 12,000,000 shares of Company Common Stock and $500,000 cash which has been previously paid to the shareholders
of TW, at the Closing of the merger transaction, the shareholders of TW received the following as additional merger consideration:
● 152,555,416
shares of newly-issued Company Common Stock, which will give the shareholders of TW, on a proforma basis, a 69.5% interest in
the Company’s total Common Shares.
● An
additional number of shares of Company Common Stock, if any, necessary to vest 69.5% of the aggregate issued and outstanding Common
Stock in the shareholders of TW at the Closing.
● A
Promissory Note in the original face amount of $3,000,000, bearing interest at 3% per annum maturing on December 31, 2018.
● 3,000,000
shares of newly-issued Company Series A Preferred Stock
Following
the closing of the merger transaction the Company’s investment in TW consisted of the following:
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|
|
Shares
|
|
|
Amount
|
|
|
Consideration paid
prior to Closing:
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
|
|
|
$
|
500,000
|
|
|
Common stock
issued
|
|
|
12,000,000
|
|
|
|
1,200,000
|
|
|
Total
consideration paid
|
|
|
12,000,000
|
|
|
$
|
1,700,000
|
|
|
Consideration paid
at Closing:
|
|
|
|
|
|
|
|
|
|
Common stock to
be issued at closing
|
|
|
152,555,416
|
|
|
$
|
60,683,006
|
|
|
Series A Preferred
Stock to be issued at closing
|
|
|
3,000,000
|
|
|
|
120,000
|
|
|
Note payable
due December 31, 2018
|
|
|
|
|
|
|
3,000,000
|
|
|
Total
consideration to be paid
|
|
|
|
|
|
$
|
63,803,006
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
|
|
|
|
$
|
65,503,006
|
|
Following
the Closing, TW’s financial statements as of the Closing will be consolidated with the Consolidated Financial Statements
of the Company
The
foregoing summary of the transactions contemplated by the Merger Agreement does not purport to be complete and is subject to,
and qualified in its entirety by, the full text of the Merger Agreement, which is attached as Exhibit 2.1 to Form 8-K filed by
the Company with the Securities and Exchange Commission on April 16, 2018, which is incorporated herein by reference.
Issuance
of Stock
On
April 13, 2018, the Company issued 152,555,416 shares of Common Stock and 3,000,000 shares of Preferred Stock as consideration
for the True Wireless, Inc. merger.
On
April 25, 2018, the Company issued an aggregate of 525,000 shares of Common Stock to two consultants valued at $0.27 per share.
On
May 7, 2018, the Company issued an aggregate of 1,156,587 shares of Common Stock valued at $0.20 per share to nine parties in
settlement of certain disputes between True Wireless, LLC and Benson Communications, S.A. de C.V. The settlement had been previously
reached on September 29, 2017.