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1
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BASIS
OF PRESENTATION AND BUSINESS
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Basis
of presentation
The
accompanying consolidated financial statements include the accounts of Surge Holdings, Inc. (“Surge”), formerly
Ksix Media Holdings, Inc., incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, Ksix Media, Inc.
(“Media”), incorporated in Nevada on November 5, 2014, Ksix, LLC (“KSIX”), a Nevada limited liability
company that was formed on September 14, 2011, Surge Blockchain, LLC (“Blockchain”), formerly Blvd. Media Group,
LLC (“BLVD”), a Nevada limited liability company that was formed on January 29, 2009, DigitizeIQ, LLC
(“DIQ”) an Illinois limited liability company that was formed on July 23, 2014 Surge Cryptocurrency Mining, Inc.
(“Crypto”), formerly North American Exploration, Inc. (“NAE”), a Nevada corporation that was
incorporated on August 18, 2006, Surge Logics Inc (“Logics”), an Nevada corporation that was formed on
October 2, 2018 and True Wireless, Inc., an Oklahoma corporation (formerly True Wireless, LLC) (“TW”),
(collectively the “Company” or “we”). All significant intercompany balances and transactions have
been eliminated in consolidation.
Recent
Developments
As
reported on Form 8-K filed with the SEC on April 16, 2018, on April 11, 2018, the Company closed the merger transaction (the “Merger”)
that was the subject of that certain Agreement and Plan of Reorganization (the “Merger Agreement”) with True Wireless,
Inc., an Oklahoma corporation (“TW”) dated as of April 11, 2018. At closing, in accordance with the Merger Agreement,
TW merged with and into TW Acquisition Corporation, a Nevada corporation (“Merger Sub”), a wholly-owned subsidiary
of Surge Holdings, Inc. (the “Merger”), with TW being the surviving corporation. As a result of the Merger, TW became
a wholly-owned subsidiary of the Company.
As
a result of the controlling financial interest of the former members of TW, for financial statement reporting purposes, the merger
between the Company and TW has been treated as a reverse acquisition with TW deemed the accounting acquirer and the Company deemed
the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting
Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of TW (the accounting acquirer)
are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition.
The acquisition process utilizes the capital structure of the Company and the assets and liabilities of TW which are recorded
at their historical cost. The equity of the Company is the historical equity of TW retroactively restated to reflect the number
of shares issued by the Company in the transaction. See Note 4.
Business
description
The
Company’s current focus is the provision of financial and telecommunications services to the financially underserved (i.e.
persons who have little or no access credit) within the population. The Company provides a suite of services which are primarily
marketed through small retail establishments which are utilized by members of its target market.
Historically,
the Company’s principal business has been digital advertising and lead generation through two of its wholly owned subsidiaries—DIQ,
which is a full-service digital advertising agency specializing in survey generation and landing page optimization specifically
designed for mass tort action lawsuits and KSIX, which is an Internet marketing company and has an advertising network designed
to create revenue streams for its affiliates and to provide advertisers with increased measurable audience. 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.
Commencing
in 2018, the Company’s focus has significantly expanded to include the pursuit of the following business models:
Surge
Telecom
True
Wireless
is licensed to provide subsidized wireless service to qualifying low income customers in 5 states. Utilizing all
4 major USA wireless backbones, True Wireless provides discounted and free wireless service to over 60,000 veterans and other
qualifying federal programs such as SNAP (EBT) and Medicaid.
SurgePhone
offers discounted talk, text, and 4G LTE data wireless plans at prices that average 15% – 40% lower than competitors.
(Unlimited plans start at just $10/month) Available nationwide, SurgePhone also offers strategic discounts such as the
Surge Heroes campaign that rewards teachers, first responders, active military and veterans with a free Android smartphone (surgeheroes.com).
SafeHomePhone
is a nationwide home phone alternative. This product has a modem that connects to the PCS network and allows customers to
plug in their traditional home phone without paying the local phone company or worrying about wiring. Customers can save 60% or
more and keep their same number.
The
SurgePhone Volt 5XL’s
slim, sturdy, affordable design fits comfortably in your hand and easily in your pocket. It’s
mesmerizing 5” LCD touchscreen display delivers an HD entertainment experience for your favorite videos and movies, while
dual front and back cameras allow you to capture stunning photos. Plus, with an expandable micro SD memory slot, you can add even
more storage for your best memories
SurgePays
Visa
is targeted for a Q4 2018-Q1 2019 launch. This card will perform the functions of a traditional credit card and also
a checking account for the unbanked or credit challenged. The SurgePays card will offer safety, security and convenience of using
the card anywhere that accepts Visa. Customers will be able to access their accounts from the connected app to remit money to
friends and relatives while avoiding costly fees. In addition, customers will also be able to take a picture of their paycheck
and load the cash to their cards (eliminating costly check cashing fees).
Surge
Money Order
will launch in the Midwest and southeast in Q1 2019. This is a natural add-on to our convenient store Fintech
product suite and will ensure we box out any other stand-alone product competitors. Entering the $20 Billion a year money order
business will enable unbanked customers to send secure payments.
SurgePays
Portal
is a multi-purpose software interface for convenient stores, bodegas and other corner merchants providing goods and
services to the underbanked community. The merchant or clerk is able to use the portal – similar to a website – with
image driven navigation to add wireless minutes for any carrier, pay bills and also load debit cards etc. What makes SurgePays
unique is that it also offers the merchant access to order wholesale goods through the portal with one touch ease. SurgePays is
essentially an e-commerce store front that allows manufactures and distribution companies to have access to merchants while cutting
out the middle man. The goal of the SurgePays Portal is to provide every Fintech and Telecom product available to convenient stores,
corner markets, bodegas, and supermarkets while procuring other consumable products commonly sold in these same stores. From the
Telecom and Fintech products such as SurgePhone Androids, SurgePhone Wireless Service, Wireless Top-ups, Bill Payments, Pinless
LD, Money Remittance, Money Orders and Reloadable Visa debit load cards to distributing partner company’s consumables such
as energy drinks, CBD oils, dry foods, frozen foods, snacks, automotive parts and many more goods you will find next time you
are in a convenient store and look around.
Surge
Digital Assets
Surge
Cryptocurrency
strategically mines Ethereum, Litecoin and cryptocurrencies. The Company’s mining operation consists
of 136 machines pooled together with other machines in a mining pool to maximize the processing power and yields. This operation
does not require any Surge human capital and runs 24/7. The goal for this subsidiary is to hold Bitcoin, Litecoin, Ripple and
Stellar as digital assets with the expectation of future appreciation. In December 2018, the Company entered into an asset purchase
agreement by which the Company transferred the assets and liabilities to a third party. See Note 6.
The
Surge Utility Token
is part of our rewards program intended to incentivize customer loyalty while also encouraging each customer
to purchase additional Surge services. For example, a wireless customer should also become a SurgePays Visa holder and or other
products in the Surge ecosystem as we expand. The Surge Tokens are issued on the Ethereum blockchain and are ERC-20 compliant.
The tokens will be used for redeeming gifts and prizes from the Surge Rewards website. The launch target for the Surge Utility
Token is Q4 2018.
TokenSpinner
is the first smartphone app that Surge Holdings Inc. has developed with a launch date target of Q4 2018. The app provides
a simple game of chance spin of the wheel to win a prize. The app has multiple Ad Network feeds that pay Surge per impression.
Players of the game have an opportunity to earn additional spins by participating in other activities (where Surge is compensated)
like watching videos or filling out surveys. The prizes will vary from gift cards, to electronics and of course Surge Tokens.
Surge
Digital Media
Surge
Logics
is a full-service digital advertising agency, specializing in lead generation, Pay Per Call, landing page optimization
and managed ad spending. Our primary media buying platforms are Google AdWords, Facebook, Instagram and Bing. We have a call center
that can handle Live Call Transfers, Customer Service Support, Lead Verification and Attorney Case Support.
Lead
generation
describes the marketing process of stimulating and capturing interest in a product or service for the purpose of
developing sales pipeline.
Pay-per-call
(PPCall, also called cost-per-call) is an advertising model in which the rate paid by the advertiser is determined by the
number of telephone calls made by viewers of an ad. Pay Per Call providers charge per call, per impression or per conversion.
Media
buying
is the process of buying media placements for advertising (on TV, in publications, on the radio, digital signage, apps
or on websites).
A
call center
or call center is a centralized office used for receiving or transmitting a large volume of requests by telephone.
Centercom
Global, S.A. de C.V.
On
January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global,
S.A. de C.V. (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer
service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation,
and other various operational support services for SURG. Centercom also provides call center support for various third-party clients.
The Company’s primary initiatives for Centercom are:
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Assisting
in on-boarding SurgePays Portal into over 40,000 retail locations and subsequent ongoing white glove support
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Aggressively
marketing new “Free Wireless Service” program to substantially grow customer base while enhancing customer service
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Launch
SurgePays Reloadable Visa Card by end of 1
st
Quarter
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Support
the Company’s IT infrastructure including database management
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Upsell-related
FinTech products to our existing customer base to increase revenue
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2
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SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
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Basis
of Presentation
The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries.
All material intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations
are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business
failure.
The
Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions
in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the
volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it
difficult to project the Company’s operating results on a consistent basis.
Concentration of Credit Risk
Financial instruments
that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable. The Company
is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent
account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject the Company
to concentrations of credit risk. Company closely monitors extensions of credit. Estimated credit losses have been recorded in
the consolidated financial statements. Recent credit losses have been within management's expectations. No customer accounted
for more than 10% of revenues in 2018 or 2017.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The
Company held no cash equivalents at December 31, 2018 and 2017.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
Accounts
receivable and allowance for doubtful accounts
Accounts
receivable are generally due thirty days from the invoice date. The Company has a policy of reserving for uncollectible accounts
based on their best estimate of the amount of profitable credit losses in its existing accounts receivable. The Company extends
credit to its customers based on an evaluation of their financial condition and other factors. The Company generally does not
require collateral or other security to support accounts receivable. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for potential bad debts if required.
The
Company determines whether an allowance for doubtful accounts is required by evaluation of specific accounts where information
indicates the customer may have an inability to meet financial obligations. In these cases, the Company uses assumptions and judgment,
based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to
reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional
information is received. The amounts calculated are analyzed to determine the total amount of the allowance. The Company may also
record a general allowance as necessary.
Direct
write-offs are taken in the period when the Company has exhausted their efforts to collect overdue and unpaid receivables or otherwise
evaluate other circumstances that indicate that the Company should abandon such efforts. For the years ended December 31, 2018
and 2017, the Company reported $0 and $0 of bad debt expense, respectively.
Customer
Phone Supply
Customer
phone supply consists of cellular telephones provided to eligible customers in accordance with Federal Communications Commission
rules outlined in the Communications Act of 1934, as amended. These telephones are amortized to Cost of Sales over a 12-month
period from the date put into service. The amount amortized into Cost of Revenues was $1,170,295 and $1,473,956 for the years
ended December 31, 2018 and 2017, respectively.
Property
and equipment
Property
and equipment and software development costs are stated at cost, less accumulated depreciation. Depreciation is recorded using
the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the
life of the lease if it is shorter than the estimated useful life. Maintenance and repairs are charged to operations when incurred.
Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and
related accumulated depreciation account are relieved, and any gain or loss is included in operations. Computer and office equipment
is generally three to five years and office furniture is generally seven years.
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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Level
1 — quoted prices in active markets for identical assets or liabilities.
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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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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
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Balance,
January 1, 2018
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$
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-
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Additions
– Merger transaction
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59,141
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Additions
& disposals - net
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(12,188
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)
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Change
in fair value recognized in operations
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4,105
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Balance,
December 31, 2018
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$
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51,058
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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 December 31, 2018:
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2018
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Estimated
dividends
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None
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Expected
volatility
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113.72
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%
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Risk
free interest rate
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3.13
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%
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Expected
term
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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.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815
“Derivatives
and Hedging Activities”
. Applicable GAAP requires companies to bifurcate conversion options from their host instruments
and account for them as freestanding derivative financial instruments according to certain criteria. The criteria include circumstances
in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related
to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative
instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings
as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative
instrument.
Business
combinations
We
allocate the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based
on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable
assets and liabilities is recorded as goodwill.
Such
valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant
estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users,
acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management’s
estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable
and, as a result, actual results may differ from estimates.
Deferred Revenues
The Company records
deferred revenues when it receives payments or issues invoices in advance of transferring control of promised goods or services
to a customer. The advance consideration received from a customer is deferred until the Company provides the customer that product
or service. At December 31, 2018, the deferred revenues totaled $50,000. There were no deferred revenues at December
31, 2017.
Revenue
recognition
The
Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect
adjustment for initially applying the new revenue standard as an adjustment to the opening balance of retained earnings and the
comparative information would not require to be restated and continue to be reported under the accounting standards in effect
for those periods.
Based
on the Company’s analysis the Company did not identify a cumulative effect adjustment for initially applying the new revenue
standards. The Company principally generates revenue through providing product, services and licensing revenue.
The
adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery
of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC
606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the
consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle,
the Company applies the following five steps:
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1)
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Identify
the contract with a customer
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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.
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2)
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Identify
the performance obligations in the contract
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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.
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3)
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Determine
the transaction price
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The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount
of variable consideration that should be included in the transaction price utilizing either the expected value method or the most
likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction
price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract
will not occur. None of the Company’s contracts as of December 31, 2018 contained a significant financing component.
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4)
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Allocate
the transaction price to performance obligations in the contract
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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.
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5)
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Recognize
revenue when or as the Company satisfies a performance obligation
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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.
Advertising
costs
Advertising
costs are expensed as incurred in accordance with ASC 720-35
“Advertising Costs”
. The Company incurred advertising
costs of $559,333 and $427,151 for the years ended December 31, 2018 and 2017, respectively, which are included in selling, general
and administrative expenses on the Company’s consolidated financial statements.
Share-based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “
Compensation
– Stock Compensation.
” Under fair value recognition provisions, the Company recognizes equity–based
compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over
the requisite service period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over a four-year period (vesting on a straight–line basis). The fair
value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The
fair value of option awards is estimated on the date of grant using the Black–Scholes option valuation model. The
Black–Scholes option valuation model requires the development of assumptions that are input into the model. These assumptions
are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the
underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the
Company’s Common stock over the expected option life and other appropriate factors. The expected option term is computed
using the “simplified” method as permitted under the provisions of ASC 718-10-S99. The Company uses the simplified
method to calculate expected term of share options and similar instruments as the Company does not have sufficient historical
exercise data to provide a reasonable basis upon which to estimate expected term. Risk–free interest rates are calculated
based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the
Company has never paid or declared any cash dividends on the Common stock of the Company and does not intend to pay dividends
on the Common stock in the foreseeable future. The expected forfeiture rate is estimated based on historical experience.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, the equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If the actual forfeiture rate is materially different from the Company’s estimate, the
equity–based compensation could be significantly different from what the Company has recorded in the current period.
Earnings
(loss) per common share
Basic net income (loss)
per common share is computed by dividing net loss attributable to stockholders by the weighted-average number of shares of common
stock outstanding during the period. Diluted net income (loss) per common share is determined using the weighted-average number
of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. At December 31,
2018 and 2017, there were 50,000 and zero potentially dilutive common stock equivalents, respectively. Basic and
diluted earnings (loss) per share are the same for each of the periods presented since there was a loss for the year ended
December 31, 2018 and the common stock equivalents are thus antidilutive.
Income
taxes
We
use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”)
Topic 740,
“Income Taxes”.
Under this method, income tax expense is recognized for the amount of: (i) taxes
payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters
that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results
of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets
reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all
of the deferred tax assets will not be realized.
Through
December 23, 2014, KSIX and BLVD operated as limited liability companies and all income and losses were passed through to the
owners. Through October 12, 2015, DIQ operated as a limited liability company and all income and losses were passed through to
its owner. Subsequent to the acquisition dates, these limited liability companies were owned by Surge and became subject to income
tax.
Through April 1, 2018,
TW operated as a limited liability company and all income and losses were passed through to the owners. In order to facilitate
the merger discussed above, TW converted from a limited liability company to a C-Corp.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions
for any of the reporting periods presented.
Contingencies
Certain conditions may
exist as of the date financial statements are issued, which may result in a loss to the Company, but which will only be resolved
when one or more future events occur or fail to occur. Company management and its legal counsel assess such contingencies related
to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings.
The Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as
the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates
that it is probable that a liability has been incurred and the amount of the liability can be estimated, then the estimated liability
would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency
is not probable but is reasonably possible, or if probable but cannot be estimated, then the nature of the contingent liability,
together with an estimate of the range of possible loss if determinable would be disclosed.
Related
Parties
The
Company follows subtopic ASC 850-10 for the identification of related parties and disclosure of related party transactions.
Pursuant
to Section 850-10-20, the related parties include: (a) affiliates of the Company (“Affiliate” means, with respect
to any specified person, any other person that, directly or indirectly through one or more intermediaries, controls, is controlled
by or is under common control with such person, as such terms are used in and construed under Rule 405 under the Securities Act);
(b) entities for which investments in their equity securities would be required, absent the election of the fair value option
under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity;
(c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship
of management; (d) principal owners of the Company; (e) management of the Company; (f) other parties with which the Company may
deal 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; and (g) other parties that can
significantly influence the management or operating policies of the transacting parties or that have an ownership interest in
one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current year’s presentation.
Recent
accounting pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “
Leases
”
(Topic 842)
. The FASB issued this update to increase transparency and comparability among organizations by recognizing
lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated
guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption of the update is permitted, and entities may also elect the optional transition method provided under ASU 2018-11,
Leases, Topic 842: Targeted Improvement,
issued in July 2018, allowing for application of the standard at the adoption
date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
The Company does not expect the new standard will have a material effect on the consolidated financial statements and related
disclosures
In
May 2017, the FASB issued ASU 2017-09, “
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter of 2018. The Company
adopted the standard during the year ended December 31, 2018 and the adoption did not have a material effect on its consolidated
financial statements and disclosures.
In
July 2017, the FASB issued ASU 2017-11, “
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception”
. Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently
evaluating this guidance and the impact of this update on its consolidated financial statements.
In
December 2017, the Securities and Exchange Commission (“
SEC
”) released Staff Accounting Bulletin No. 118 (the
“
Bulletin
”), which provides accounting guidance regarding accounting for income taxes for the reporting period
that includes the enactment of the Tax Act. The Bulletin provides guidance in those situations where the accounting for certain
income tax effects of the Tax Act will be incomplete by the time financial statements are issued for the reporting period that
includes the enactment date. For those elements of the Tax Act that cannot be reasonably estimated, no effect will be recorded.
The
SEC has provided in the Bulletin that in situations where the accounting is incomplete for certain effects of the Tax Act, a measurement
period which begins in the reporting period that includes the enactment of the Tax Act and ends when the entity has obtained,
prepared and analyzed the information is needed in order to complete the accounting requirements. The measurement period shall
not exceed one year from enactment.
In
June 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-07,
Compensation – Stock Compensation (Topic718):
Improvements to Nonemployee Share-Based Payment Accounting
. Under the new standard, companies will no longer be required to
value non-employee awards differently from employee awards. Companies will value all equity classified awards at their grant-date
under ASC 718 and forgo revaluing the award after the grant date. ASU 2018-07 is effective for annual reporting periods beginning
after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted, but no
earlier than the Company’s adoption date of Topic 606,
Revenue from Contracts with Customers
(as described above
under “Revenue Recognition”). The Company does not believe the new standard will have a significant impact on its
consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement”.
This update is to improve the effectiveness of disclosures
in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is
most important to users of each entity’s financial statements. The amendments in this update apply to all entities that
are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments
in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. The Company is currently evaluating this guidance and the impact of this update on its consolidated financial statements.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying consolidated financial statements.
The Company had a loss
from operations of approximately $1.5 million for the year ended December 31, 2018. As of December 31, 2018, we had cash and working
capital deficit of approximately $445,000 and $1,732,000, respectively. Management made a decision to achieve certain goals in
order to ramp up revenue in 2019 and beyond that negatively affected revenue in 2018. By implementing this process, six key achievements
were successfully reached in 2018. One, we have developed and rolled out our SurgePhone wireless and SurgePays Debit card. Two,
we have completed work on our second generation SurgePays Fintech software, which has now been released. Three, we have organized
our human resources to support the significant growth which is a major goal for fiscal year 2019. Four, we have put in place important
cost controls, including our relations with our Operations Center to support our growth in a cost-effective manner. Five,
we have had ongoing productive negotiations with trade organizations to support the rapid scaling and roll-out of our products
and services. Six, we have significantly restructured our balance sheet to be an effective platform for growth.
These factors, among
others, were addressed by management in determining whether the Company could continue as a going concern. The Company projects
that it should be cash flow positive by the end of fiscal year 2019 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. While the Company believes in the viability of management’s
strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no
assurances to that effect. While management believes it is more likely than not the Company has the ability to continue as a going
concern, this is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control
operating expenses.
Additionally, if necessary,
management believes that both related parties (management and members of the Board of Directors of the Company) and potential
external sources of debt and/or equity financing will be obtained based on management’s history of being able to raise capital
from both internal and external sources coupled with current favorable market conditions. Therefore, the accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern.
As
discussed in Note 1, the Company closed the merger transaction (the “Merger”) that was the subject of that certain
Agreement and Plan of Reorganization (the “Merger Agreement”) with True Wireless, Inc., an Oklahoma corporation (“TW”)
dated as of April 11, 2018. At closing, in accordance with the Merger Agreement, TW merged with and into TW Acquisition Corporation,
a Nevada corporation (“Merger Sub”), a wholly-owned subsidiary of Surge Holdings, Inc. (the “Merger”),
with TW being the surviving corporation. As a result of the Merger, TW became a wholly-owned subsidiary of the Company.
Pursuant
to the terms of the Merger Agreement, TW, 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:
|
|
|
Shares
|
|
|
Amount
|
|
|
Consideration
paid prior to Closing:
|
|
|
|
|
|
|
|
|
|
Cash
paid
|
|
|
|
|
|
$
|
500,000
|
|
|
Common
stock issued
|
|
|
12,000,000
|
|
|
|
1,200,000
|
|
|
Total
consideration paid
|
|
|
12,000,000
|
|
|
$
|
1,700,000
|
|
|
Consideration
paid at Closing:
|
|
|
|
|
|
|
|
|
|
Common
stock to be issued at closing
(1)
|
|
|
152,555,416
|
|
|
$
|
60,683,006
|
|
|
Series
A Preferred Stock to be issued at closing
|
|
|
3,000,000
|
|
|
|
120,000
|
|
|
Note
payable due December 31, 2018
|
|
|
|
|
|
|
3,000,000
|
|
|
Total
consideration to be paid
|
|
|
|
|
|
$
|
63,803,006
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consideration
|
|
|
|
|
|
$
|
65,503,006
|
|
|
|
(1)
|
The
Common Shares issued at closing of the Merger Transaction were valued at approximately $0.40 per share.
|
Following
the closing of the transaction, TW’s financial statements as of the Closing will be consolidated with the Consolidated Financial
Statements of the Company.
The
following presents the unaudited pro-forma combined results of operations of the Company with the TW Business as if the entities
were combined on January 1, 2017.
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
Revenues,
net
|
|
$
|
15,684,032
|
|
|
$
|
14,889,852
|
|
|
Net
income (loss)
|
|
$
|
(1,541,078
|
)
|
|
$
|
787,568
|
|
|
Net
income (loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
Weighted
average number of shares outstanding
|
|
|
81,566,892
|
|
|
|
76,183,385
|
|
The
unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations
are not intended to present actual results that would have been attained had the acquisitions been completed as of January 1,
2017 or to project potential operating results as of any future date or for any future periods.
The
Company consolidated TW as of the closing date of the agreement, and the results of operations of the Company include that of
TW.
Property
and equipment stated at cost, less accumulated depreciation, consisted of the following:
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Computer Equipment
|
|
$
|
15,263
|
|
|
$
|
93,865
|
|
|
Furniture and Fixtures
|
|
|
7,996
|
|
|
|
34,916
|
|
|
Leasehold Improvements
|
|
|
25,513
|
|
|
|
24,196
|
|
|
|
|
|
48,772
|
|
|
|
152,977
|
|
|
Less: Accumulated Depreciation
|
|
|
(13,782
|
)
|
|
|
(127,015
|
)
|
|
|
|
$
|
30,990
|
|
|
$
|
25,962
|
|
Depreciation
expense was $112,990 and $6,939 for the years ended December 31, 2018 and 2017, respectively.
|
6
|
CRYPTOCURRENCY
ASSET SALE
|
In
December 2018, the Company executed an agreement with a related party for the sale of Cryptocurrency assets for proceeds of $891,192.
In exchange for the purchased assets with a net book value of $523,743, the related party would assume the liabilities of the
entity consisting of accounts payable of $40,235 and outstanding debt and accrued interest of $808,600. The Company recognized
a gain on sale totaling $273,453.
The
Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. During the year
ended December 31, 2018, the Company utilized a credit card issued in the name of Surge Holdings, Inc. to pay certain trade obligations
totaling $55,185. At December 31, 2018 and 2017, the Company’s total credit card liability was $394,840 and $0, respectively.
|
8
|
NOTES
PAYABLE – RELATED PARTY
|
As
of December 31, 2018 and 2017, notes payable due to a related party consists of:
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
Note
payable to SMDMM Funding LLC; interest at 8% per annum; due on demand
1
|
|
$
|
-
|
|
|
$
|
344,241
|
|
|
Promissory
note payable – to SMDMM Funding LLC; interest at 6% per annum
2
|
|
|
680,000
|
|
|
|
-
|
|
|
|
|
|
680,000
|
|
|
|
344,241
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt – related party
|
|
|
-
|
|
|
|
344,241
|
|
|
Long-term
debt less current portion – related party
|
|
$
|
680,000
|
|
|
$
|
-
|
|
SMDMM
Funding, LLC is owned by the Company’s chief executive officer. Accrued interest owed to SMDMM Funding, LLC was $10,718
and $1,711 at December 31, 2018 and 2017, respectively.
|
|
1
|
During
the year ended December 31, 2018, an additional $133,500 was advanced to the Company.
The Company repaid the outstanding balance and accrued interest of $477,74 and $574,
respectively, prior to year-end.
|
|
|
|
|
|
|
2
|
In
December 2018, the Company executed a promissory note payable agreement with SMDMM for
a principal sum up to $1.0 million at an annual interest rate of 6%, due on December
27, 2021. The Company drew advances on the note totaling $760,000. As part of the Cryptocurrency
transaction discussed in Note 6 above, $80,000 of the outstanding balance under
the promissory note was assumed by the purchaser.
|
As
part of the Cryptocurrency transaction discussed in Note 5 above, a total of $808,600 of outstanding balance under related party
debt was assumed by the purchaser.
|
9
|
NOTES
PAYABLE AND LONG-TERM DEBT
|
As
of December 31, 2018 and 2017, notes payable and long-term debt consists of:
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
Note payable to former officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016 and 2017; accruing interest at 6% per annum since April 28, 2016 on the past due portion
|
|
$
|
70,000
|
|
|
$
|
-
|
|
|
Notes payable to seller of DigitizeIQ, LLC due as noted below
1
|
|
|
485,000
|
|
|
|
-
|
|
|
Convertible note payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible into common stock
2
|
|
|
27,500
|
|
|
|
-
|
|
|
Unsecured demand notes to an unaffiliated third-party company bearing interest at 6.49%
3
|
|
|
-
|
|
|
|
435,000
|
|
|
|
|
$
|
582,500
|
|
|
$
|
435,000
|
|
|
|
1
|
Notes
due seller of DigitizeIQ, LLC
includes a series of notes as follows:
|
|
|
●
|
A
second non-interest-bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on January
12, 2016; (Balance at December 31, 2018 - $235,000)
|
|
|
|
|
|
|
●
|
A
third non-interest-bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on March 12,
2016 and remains unpaid as of December 31, 2018.
|
The
Company is renegotiating the terms of the notes. The notes bear interest at 5% per annum when in default (after the due date).
The notes were non-interest bearing until due. Accordingly, a debt discount at 5% per annum was calculated for the notes and was
amortized to interest expense until the due date of the notes.
2
Convertible note payable to River North Equity, LLC (“RNE”) -
The Company evaluated the embedded conversion
for derivative treatment and recorded an initial derivative liability and debt discount of $23,190. The debt discount is fully
amortized.
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.
|
|
3
|
Unsecured
Demand Note –
In August 2018, the Company reached a settlement with the debt
holder and issued 2,175,000 common shares in full settlement of the outstanding debt.
|
In
December 2018, the Company issued 433,981 shares of its common stock in settlement of debt and accrued interest of $107,500 and
$8,190, respectively. In addition, the Company wrote-off the derivative liability of $34,556 related to the note. The fair value
of the shares on day of issuance was $164,913 and the Company recorded a loss on extinguishment of debt of $14,667.
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. As noted above, the Company reached an agreement with a debt holder to convert outstanding
debt and interest into shares of common stock. As a result, the Company wrote-off the existing derivative liability of $34,556.
The
estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following
assumptions during the year ended December 31, 2018:
|
Estimated
dividends
|
|
None
|
|
|
Expected
volatility
|
|
|
113.72
|
%
|
|
Risk
free interest rate
|
|
|
3.13
|
%
|
|
Expected
term
|
|
|
.01-36
months
|
|
On January 25, 2018 the Company obtained a $500,000 line of credit (LOC) with a Bank. The LOC bears interest
at 5% per annum and is secured by essentially all of the Company’s assets. The note is personally guaranteed by the majority
owner of the Company. On December 21, 2018, the Company and the bank agreed to increase the LOC to $1,000,000 at an interest rate
of 6% per annum. of December 31, 2018, the outstanding balance on the LOC was $0.
Preferred
Stock
Series
“A” Preferred Stock
The
Company, pursuant to the consent of the Board of Directors filed a Certificate of Designation with the Nevada Secretary of State
which designated 10,000,000 shares of the Company’s authorized preferred stock as Series “A” Preferred Stock,
par value $0.001. The Series “A” Preferred Stock has the following attributes:
|
|
●
|
Ranks
senior only to any other class or series of designated and outstanding preferred shares of the Company;
|
|
|
|
|
|
|
●
|
Bears
no dividend;
|
|
|
|
|
|
|
●
|
Has
no liquidation preference, other than the ability to convert to common stock of the Company;
|
|
|
|
|
|
|
●
|
The
Company does not have any rights of redemption;
|
|
|
|
|
|
|
●
|
Voting
rights equal to ten shares of common stock for each share of Series “A” Preferred Stock;
|
|
|
|
|
|
|
●
|
Entitled
to same notice of meeting provisions as common stock holders;
|
|
|
●
|
Protective
provisions require approval of 75% of the Series “A” Preferred Shares outstanding to modify the provisions or
increase the authorized Series “A” Preferred Shares; and
|
|
|
|
|
|
|
●
|
Each
one Series “A” Preferred Shares can be converted into ten common share at the option of the holder.
|
On
April 11, 2018, the Company issued 3,000,000 shares of Series A Preferred Stock as consideration for the True Wireless, Inc. merger.
As discussed in Note 1, the equity of the Company is the historical equity of TW retroactively restated to reflect the number
of shares issued by the Company in the transaction. These preferred shares were recorded as a retroactive 2017 transaction as
incentive to complete the merger.
Upon
close of the merger, the Company recorded 10,000,000 shares of Series A Preferred Stock as a part of the recapitalization transaction
for services previously rendered by the Company’s former Chief Executive Officer and Chairman of the Board of Directors.
As
of December 31, 2018 and 2017, there were 13,000,000 and 3,000,000 shares of Series A issued and outstanding, respectively.
Series
“C” Convertible Preferred Stock
On
June 22, 2018, the Board of Directors approved a Certificate of Designation for Company Series C Convertible Preferred stock,
which was filed with the Secretary of State of the State of Nevada on that date. The Certificate of Designations approved the
creation of a new series of preferred stock consisting of 1,000,000 shares of Series C Convertible Preferred Stock par value $0.001
(“Series C Preferred Stock”) with an original issue price of $100.00 per share.
The
Series “C” Preferred Stock has the following attributes:
|
|
●
|
Ranks
junior only to any other class or series of designated and outstanding preferred shares of the Company;
|
|
|
|
|
|
|
●
|
Bears
a dividend per share of Series C Preferred Stock equal to the per share amount (as converted), and in the same form as, the
dividend payable to the holders of the Common Stock;
|
|
|
|
|
|
|
●
|
With
respect to such liquidation, dissolution or winding up, the holders of Series C Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Junior
Securities but after distribution of such assets among, or payment thereof to holders of any Senior Preferred Stock, an amount
equal to the Series C Original Issue Price for each share of Series C Preferred Stock plus an amount equal to all declared
but unpaid dividends on Series C Preferred Stock;
|
|
|
|
|
|
|
●
|
The
Company does not have any rights of redemption;
|
|
|
|
|
|
|
●
|
Voting
rights equal to 250 shares of common stock for each share of Series “C” Preferred Stock;
|
|
|
|
|
|
|
●
|
Entitled
to same notice of meeting provisions as common stock holders;
|
|
|
|
|
|
|
●
|
Protective
provisions require approval of 75% of the Series “C” Preferred Shares outstanding to modify the provisions or
increase the authorized Series “C” Preferred Shares; and
|
|
|
|
|
|
|
●
|
Each
one Series “C” Preferred Shares can be converted into ten common share at the option of the
holder.
|
As
noted above, each share of Series C Preferred Stock is convertible into 250 shares of Company Common Stock (the same conversion
rate utilized in the exchange transaction), but is only convertible on the first to occur of the following events:
|
|
(i)
|
The
Volume Weighted Average Price (“VWAP”) of the Company’s Common Stock during any then consecutive trading
days is at least $2.00 per share; or
|
|
|
|
|
|
|
(ii)
|
June
30, 2019.
|
On
June 29, 2018, each of Kevin Brian Cox (“Cox”), the Company’s Chief Executive Officer, and Thirteen Nevada LLC
(“13”) entered into separate Exchange Agreements with the Company whereby the Shareholders agreed to exchange an aggregate
of 148,741,531 shares of previously issued Company Common Stock for an aggregate of 594,966 shares of newly-issued Company Series
C Convertible Preferred Stock. The calculation of weighted average shares was retroactively restated in order to properly account
for the above noted share exchange.
During
the year ended December 31, 2018, the Company issued 48,400 shares of Series C Preferred in exchange for the conversion of a note
payable of $3,000,000 and accrued interest of $24,952.
As
of December 31, 2018 and 2017, there were 643,366 and 0 shares of Series C issued and outstanding, respectively.
Common
Stock
On
March 8, 2018, the Company granted a consultant 48,000 restricted shares for services rendered.
On
April 11, 2018, the Company issued 152,555,416 shares of Common Stock as consideration for the True Wireless, Inc. merger. As
discussed in Note 1, the equity of the Company is the historical equity of TW retroactively restated to reflect the number of
shares issued by the Company in the transaction. These common shares were recorded as a retroactive 2017 transaction as incentive
to complete the merger.
On
April 25, 2018, the Company issued an aggregate of 480,000 shares of Common Stock to two consultants valued at $0.27 per share.
In
July 2018, the Company issued an aggregate of 1,156,587 shares of Common Stock valued at $0.20 per share to nine parties in settlement
of certain disputes between TW and Benson Communications, S.A. de C.V. The settlement had been previously reached on September
29, 2017.
As
noted above in Note 8, in August 2018, Company reached a settlement with the debt holder and issued 2,175,000 in full settlement
of the outstanding debt totaling $435,000.
During
the year ended December 31, 2018, the Company recorded total stock-based compensation expense of approximately $146,000 in relation
to shares issued for services.
As
of December 31, 2018 and 2017, there were 88,046,391 and 152,555,416 shares of Common Stock issued and outstanding, respectively.
Stock
Warrants
On
March 8, 2018, the Company granted its Chief Financial Officer 50,000 warrants to purchase the Company’s common stock
with an exercise price of $0.41 per share, a term of 5 years, and a vesting period of 1 year. The warrants have an aggregated
fair value of approximately $14,700 that was calculated using the Black-Scholes option-pricing model based on the assumptions
below.
|
|
|
December
31, 2018
|
|
|
Risk-free
interest rate
|
|
|
2.03
|
%
|
|
Expected
life of grants
|
|
|
1.5
years
|
|
|
Expected
volatility of underlying stock
|
|
|
173.02
|
%
|
|
Dividends
|
|
|
0
|
%
|
The
estimated warrant life was determined based on the “simplified method,” giving consideration to the overall
vesting period and the contractual terms of the award.
During the years ended
December 31, 2018, the Company recorded total stock-based compensation expense related to the warrants of approximately
$11,800. The unrecognized compensation expense at December 31, 2018 was approximately $2,900.
Unit
Subscription Agreement - Warrants
During
January 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.
|
12
|
RELATED
PARTY TRANSACTIONS
|
The
Company’s former chief executive officer has advanced the Company various amounts on a non-interest-bearing basis, which
is being used for working capital. The advance has no fixed maturity. As of December 31, 2018 and 2017, the outstanding balance
due was $389,502 and $0, respectively.
For the years ended December 31, 2018 and 2017, outsourced management services fees of $1,020,000 was paid
to Axia Management, LLC (“Axia”) as compensation for services provided. These costs are included in Selling, general
and administrative expenses in the Statement of Operations. Axia is owned by the majority owner of the Company.
At
December 31, 2018 and 2017, the Company had trade payables to Axia of $66,535 and $55,400, respectively.
For
the years ended December 31, 2018 and 2017, the Company purchased telecom services and access to wireless networks from 321 Communications
in the amount of $1,016,393 and $1,639,655, respectively. These costs are included in Cost of revenue in the Statement of Operations.
The majority owner of the Company is a minority owner of 321 Communications.
At
December 31, 2018 and 2017, the Company had trade payables to 321 Communications of $52,161 and $132,404, respectively.
The
Company contracted with
CenterCom Global, S.A. de C.V.
(“CenterCom Global”)
to provide customer service call center services, manage the sales process to include handling incoming orders, the collection
and verification of all documents to comply with FCC regulations, monthly audit of all subscribers to file the USAC 497 form,
yearly audit of all subscribers that have been active over one year to file the USAC 555 form (Recertification), information technology
professionals to maintain company websites, sales portals and server maintenance. Billings for these services in the years ended
December 31, 2018 and 2017 were $2,129,546 and $976,678, respectively, and are included in Cost of revenue in the Statement of
Operations. A director, officer, and minority owner of the Company has a controlling interest in CenterCom Global.
At
December 31, 2018 and 2017, the Company had trade payables to CenterCom Global of $175,000 and $150,000, respectively.
See
Note 5 for long-term debt due to related parties.
|
13
|
COMMITMENTS
AND CONTINGENCIES
|
On
November 1, 2013, The Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability for Forfeiture
to the Company for requesting and/or receiving support for ineligible subscriber lines between the months of October 2012 and
May 2013 and proposed a monetary forfeiture of $5,501,285. The Company has annual compliance audits with FCC approved audit firms
that have found no compliance deficiencies. Management believes the proposed monetary forfeiture is without merit and if anything
should result from this notice, the amount would not materially affect the financial position of the Company.
In October 2018, the
Company signed an agreement with Pastime Foods (“Pastime”) in order to expand the Company’s distribution network
for its SurgePays portal. The agreement will initiate distribution and sales to over 15,000 convenience and retail locations with
a long-term target of greater than 40,000 locations. According to the agreement, Pastime commits to selling more than an average
required minimum of $1,500 of monthly sales revenue per location. The Company will fund the initial placement costs and expenses
with a total initial advance of $190,000 as well as fees of $10,000. Any advances will be offset by the sharing of distribution
revenues for shipments paid by retailers directly to Pastime and the Company. The sharing percentage will be 100% of the net distribution
profit until the advances have been covered. As of December 31, 2018, the outstanding receivable due to the Company pursuant to
the agreement is $190,000 and is shown as Note Receivable on the consolidated balance sheet.
In
November 2018, the Company entered into a settlement agreement with West Publishing Corporation (“West”) to remedy
an outstanding civil action filed by West. Pursuant to the agreement, the Company will pay West the principal amount of $125,000
plus interest accruing at the annual rate of 7%. The Company will make monthly principal payments as follows:
|
January
7, 2019
|
|
$
|
20,000
|
|
|
February
7, 2019
|
|
|
25,000
|
|
|
March
7, 2019
|
|
|
25,000
|
|
|
|
|
$
|
70,000
|
|
In
November and December 2018, the Company made two payments totaling $55,000 as required in the settlement agreement.
Deferred
Tax Assets
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Bill”) was signed into law. Prior to the enactment of
the Tax Reform Bill, the Company measured its deferred tax assets at the federal rate of 34%. The Tax Reform Bill reduced the
federal tax rate to 21% resulting in the re-measurement of the deferred tax asset as of December 31, 2017. Beginning January 1,
2018, the lower tax rate of 21% will be used to calculate the amount of any federal income tax due on taxable income earned during
2018.
For
the periods from inception through the date of conversion to a C corporation in April 2018, the Company reported its income under
True Wireless LLC, a limited liability company. As a result, the Company’s income for federal and state income tax purposes
were reportable on the tax returns of the individual partners. Accordingly, no recognition has been made for federal or state
income taxes in the accompanying financial statements of the Company through the date of conversion.
At
December 31, 2018, the Company has available for U.S. federal income tax purposes a net operating loss (“NOL”) carry-forwards
of approximately $1.5 million that may be used to offset future taxable income through the fiscal year ending December 31, 2038.
If not used, these NOLs may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50%
ownership change as determined under the regulations. The Company plans on undertaking a detailed analysis of any historical and/or
current Section 382 ownership changes that may limit the utilization of the net operating loss carryovers. No tax benefit has
been reported with respect to these net operating loss carry-forwards in the accompanying consolidated financial statements since
the Company believes that the realization of its net deferred tax asset of approximately $290,000 was not considered more likely
than not and accordingly, the potential tax benefits of the net loss carry-forwards are fully offset by a valuation allowance
of $290,000.
Deferred
tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the
deferred tax assets because of the uncertainty regarding its realizability. In assessing the realization of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon future generation for taxable income during the periods in which
temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration
of all the information available, Management believes that significant uncertainty exists with respect to future realization of
the deferred tax assets and has therefore established a full valuation allowance. The valuation allowance increased by approximately
$290,000 for the year ended December 31, 2018.
The
Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain
positions that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or
expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to
as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of
tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation
to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If
applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other
expenses – Interest expense” in the statement of operations. Penalties would be recognized as a component of “General
and administrative.”
No
material interest or penalties on unpaid tax were recorded during the year ended December 31, 2018. As of December 31, 2018 and
2017, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes
in its unrecognized tax benefits in the next year.
Components
of deferred tax assets are as follows:
|
|
|
December 31, 2018
|
|
|
Net deferred tax assets – Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax benefit from NOL carry-forwards
|
|
$
|
291,359
|
|
|
Less valuation allowance
|
|
|
(291,359
|
)
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
Income
Tax Provision in the Consolidated Statements of Operations
A
reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows:
|
|
|
For the Year
Ended
December 31,
2018
|
|
|
|
|
|
|
|
Federal statutory income tax rate
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
Change in valuation allowance on net operating loss carry-forwards
|
|
|
(21.0
|
)%
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
Operating segments
are defined as components of an enterprise about which separate financial information is available and evaluated regularly by
the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision maker is its Chief Executive Officer.
The
Company evaluated performance of its operating segments based on revenue and operating profit (loss). Segment information for
the years ended December 31, 2018 and 2017 and as of December 31, 2018 and 2017, are as follows:
|
|
|
Surge
|
|
|
TW
|
|
|
Total
|
|
|
Year
ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,445,468
|
|
|
$
|
12,798,687
|
|
|
$
|
15,244,155
|
|
|
Cost
of revenue
|
|
|
(1,864,727
|
)
|
|
|
(6,705,513
|
)
|
|
|
(8,570,240
|
)
|
|
Gross
margin
|
|
|
580,741
|
|
|
|
6,093,174
|
|
|
|
6,673,915
|
|
|
Costs
and expenses
|
|
|
(2,558,156
|
)
|
|
|
(5,651,228
|
)
|
|
|
(8,209,384
|
)
|
|
Operating
income (loss)
|
|
|
(1,977,415
|
)
|
|
|
441,946
|
|
|
|
(1,535,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
13,459,980
|
|
|
$
|
13,459,980
|
|
|
Cost
of revenue
|
|
|
-
|
|
|
|
(8,096,076
|
)
|
|
|
(8,096,076
|
)
|
|
Gross
margin
|
|
|
-
|
|
|
|
5,363,904
|
|
|
|
5,363,904
|
|
|
Costs
and expenses
|
|
|
-
|
|
|
|
(5,159,619
|
)
|
|
|
(5,159,619
|
)
|
|
Operating
income
|
|
|
-
|
|
|
|
204,285
|
|
|
|
204,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
947,550
|
|
|
$
|
3,136,768
|
|
|
$
|
4,084,318
|
|
|
Total
liabilities
|
|
|
2,694,258
|
|
|
|
3,378,293
|
|
|
|
6,072,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
-
|
|
|
$
|
1,176,094
|
|
|
$
|
1,176,094
|
|
|
Total
liabilities
|
|
|
-
|
|
|
|
3,076,838
|
|
|
|
3,076,838
|
|
Effective
February 15, 2019, the Company’s Board of Directors appointed Anthony P. Nuzzo, Jr. as President of the Company replacing
Kevin Brian Cox. Mr. Cox will continue to serve the Company as its Chief Executive Officer and Chairman of the Board. Mr. Nuzzo
will continue to also serve as the Company’s Chief Operating Officer.
On
February 15, 2019, Carter Matzinger elected to exchange outstanding non-interest bearing debt totaling $389,502 owed by the Company
into 6,232 shares of Preferred Stock.