Notes
to Condensed Consolidated Financial Statements
March
31, 2021
The
accompanying consolidated financial statements include the accounts of SurgePays Inc., (“Surge” or the “Company”),
formerly Ksix Media Holdings, Inc. and Surge Holdings, Inc. The Company was incorporated in Nevada on August 18, 2006, and
its wholly owned subsidiaries, Ksix Media, Inc. (“Media”), incorporated in Nevada on November 5, 2014; Ksix, LLC (“KSIX”),
a Nevada limited liability company that was formed on September 14, 2011; Surge Blockchain, LLC (“Blockchain”), formerly
Blvd. Media Group, LLC (“BLVD”), a Nevada limited liability company that was formed on January 29, 2009; DigitizeIQ, LLC
(“DIQ”) an Illinois limited liability company that was formed on July 23, 2014; Surge Cryptocurrency Mining, Inc. (“Crypto”),
formerly North American Exploration, Inc. (“NAE”), a Nevada corporation that was incorporated on August 18, 2006 (since January
1, 2019, this has been a dormant entity that does not own any assets); LogicsIQ Inc. (“Logics”), an Nevada corporation that
was formed on October 2, 2018; SurgePays Fintech Inc (“Tech”), an Nevada corporation that was formed on August 22, 2019;
Surge Payments LLC (“Payments”), an Nevada corporation that was formed on December 17, 2018; SurgePhone Wireless LLC (“Surge
Phone”), an Nevada corporation that was formed on August 29, 2019 and True Wireless, Inc., an Oklahoma corporation (formerly True
Wireless, LLC) (“TW”), (collectively the “Company” or “we”). On October 29, 2020, the Company filed
a Certificate of Amendment to the Company’s Articles of Incorporation to change its name to SurgePays, Inc.
All
significant intercompany balances and transactions have been eliminated in consolidation.
Recent
Developments
Stock
Purchase Agreements
On
January 22, 2021, the Company entered into a stock purchase agreement (the “Digitize IQ Agreement”), by and between the Company
and LogicsIQ, Inc. Pursuant to the Digitize IQ Agreement, the Company sold one hundred percent (100%) of its ownership interests in Digitize
IQ, LLC to LogicsIQ, Inc. for a purchase price of $10.
On
January 22, 2021, the Company entered into a stock purchase agreement (the “KSIX Agreement”), by and between the Company
and LogicsIQ, Inc. Pursuant to the KSIX Agreement, the Company sold one hundred percent (100%) of its ownership interests in KSIX, LLC
to LogicsIQ, Inc. for a purchase price of $10.
Evergreen
Capital Management Note
On
March 8, 2021 (the “Effective Date”), SurgePays, Inc. (the “Company”), entered into a Securities Purchase Agreement
(the “SPA”) with Evergreen Capital Management LLC (the “Investor”), pursuant to which the Company sold to the
Investor a 15% OID convertible promissory note with a principal amount of $2,300,000 (the “Note”) and a warrant (the “Warrant”)
to purchase up to 13,437,500 shares of Common Stock for proceeds of $2,000,000.
The
Note matures on March 8, 2022, bears interest at the rate of 5% per annum and is convertible at any time upon the option of the Investor
into shares of Common Stock at a conversion price equal to $0.16 per share or, upon the occurrence and during the continuance of an Event
of Default (as defined in the Note), if lower, at a conversion price equal to 75% of the lowest daily VWAP of the Common Stock during
the 20 consecutive trading days immediately preceding the applicable conversion date.
The
Warrant is exercisable at a purchase price of $0.16 per share at any time on or prior to March 8, 2026, and may be exercised on a cashless
basis, beginning on the six-month anniversary of the Effective Date, if the shares of Common Stock underlying the Warrant are not then
registered under the Securities Act of 1933.
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions to Form
10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do
not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual
financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements
contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company
as of March 31, 2021 and the results of operations and cash flows for the periods presented. The results of operations for the three
months ended March 31, 2021 are not necessarily indicative of the operating results for the full fiscal year or any future period. These
unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on April 2, 2021.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations
are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business
failure.
The
Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions in
the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility
of prices in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project
the Company’s operating results on a consistent basis.
Concentration
of Credit Risk
Financial
instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable. The Company
is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account
balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject the Company to concentrations
of credit risk. Company closely monitors extensions of credit. Estimated credit losses have been recorded in the consolidated financial
statements. Recent credit losses have been within management’s expectations. One customer accounted for more than 11% of revenues
in for the period ending March 31, 2020. No customer accounted for more than 10% of revenues in for the period ending March 31, 2021.
Method
of Accounting
Investments
held in stock of entities other than subsidiaries, namely corporate joint ventures and other non-controlled entities usually are accounted
for by one of three methods: (i) the fair value method (addressed in Topic 320), (ii) the equity method (addressed in Topic 323), or
(iii) the cost method (addressed in Subtopic 325-20). Pursuant to Paragraph 323-10-05-5, the equity method tends to be most appropriate
if an investment enables the investor to influence the operating or financial policies of the investee.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company
held no cash equivalents at March 31, 2021 and December 31, 2020.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution.
The balance at times may exceed federally insured limits.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral
to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts
receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based
on days outstanding, and amounts are written off when determined to be uncollectible by management. As of March 31, 2021 and December
31, 2020, the Company had reserves of $116,664.
Inventories
Inventories
are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method. As of March 31, 2021 and
December 31, 2020, the Company had inventory of $233,809 and $178,309, respectively.
Leases
In
February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842) which amended guidance for lease arrangements to increase
transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing
activities. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection
of lease guidance is referred to as ASC 842. The revised guidance seeks to achieve this objective by requiring reporting entities to
recognize lease assets and lease liabilities on the balance sheets for substantially all lease arrangements.
As
part of the adoption the Company elected the practical expedients permitted under the transition guidance within the new standard, which
among other things, allowed the Company to:
|
1.
|
Not
separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components
associated with that lease component as a single lease component.
|
|
|
|
|
2.
|
Not
to apply the recognition requirements in ASC 842 to short-term leases.
|
|
|
|
|
3.
|
Not
record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered immaterial.
|
Refer
to Note 12. Leases for additional disclosures required by ASC 842.
Fair
value measurements
The
Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value
as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value
measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these
instruments. The carrying amounts of our short- and long-term credit obligations approximate fair value because the effective
yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances
of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
|
●
|
Level
1 — quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
|
|
●
|
Level
3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
|
Derivative
Liabilities
The
Company evaluates its options, warrants, convertible notes, or other contracts, if any, to determine if those contracts or embedded components
of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25
of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative
is marked-to-market each balance sheet date and recorded as either an asset or a liability. The change in fair value is recorded in the
consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument,
the instrument is marked to fair value at the date of conversion, exercise, or cancellation and then the related fair value is
reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other
embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments
are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed
at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification
are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will
be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
is expected within 12 months of the balance sheet date.
The
Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine
whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity
should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument’s contingent exercise and settlement provisions.
The
Company utilizes a binomial option pricing model to compute the fair value of the derivative liability and to mark to market the fair
value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income
or expense in the consolidated statements of operations.
The
Company had derivative liabilities of $2,729,151 and $1,357,528 as of March 31, 2021 and December 31, 2020 , respectively.
Revenue
recognition
The
Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely with the delivery of the Company’s
services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when
a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects
to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
1)
|
Identify
the contract with a customer
|
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s
rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial
substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable
based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s
ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or,
in the case of a new customer, published credit and financial information pertaining to the customer.
2)
|
Identify
the performance obligations in the contract
|
Performance
obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable
of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily
available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services
is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company
must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract.
If these criteria are not met the promised services are accounted for as a combined performance obligation.
3)
|
Determine
the transaction price
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services
to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration
that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending
on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment,
it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s
contracts as of March 31, 2021 and December 31, 2020 contained a significant financing component.
4)
|
Allocate
the transaction price to performance obligations in the contract
|
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract
with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a
specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised
in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations
require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless
the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service
that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance
obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the
standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines
related to the performance obligations.
5)
|
Recognize
revenue when or as the Company satisfies a performance obligation
|
The
Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance
obligation is satisfied by transferring a promised service to a customer.
Disaggregation
of Revenue from Contracts with Customers. The following table disaggregates gross revenue by entity for the three months ended March
31, 2021 and 2020:
|
|
For
the Three Months Ended
|
|
|
|
March
31, 2021
|
|
|
March
31, 2020
|
|
True Wireless, Inc.
|
|
$
|
628,325
|
|
|
$
|
290,705
|
|
Surge Blockchain, LLC
|
|
|
-
|
|
|
|
229,802
|
|
LogicsIQ, Inc.
|
|
|
3,408,403
|
|
|
|
5,451,919
|
|
ECS
|
|
|
6,914,486
|
|
|
|
9,746,773
|
|
Other
|
|
|
37,734
|
|
|
|
68,600
|
|
Total revenue
|
|
$
|
10,988,948
|
|
|
$
|
15,787,799
|
|
True
Wireless is licensed to provide wireless services to qualifying low-income customers in five states. Revenues are recognized when the
services have been provided and the government subsidy has been earned.
Surge
Blockchain revenues are generated through the SurgePaysPortal multi-purpose software are recognized when the goods and services have
been delivered and earned.
LogicsIQ
is a full-service digital advertising agency and revenues are recognized at a period in time once performance obligations are met and
services are provided as customer deposits are received in advance. The majority of the revenue is recognized within the month the obligation
was created and recognized, after the lead is identified and sent to the customer.
ECS
is a leading provider of prepaid wireless load and top-ups, check cashing and wireless SIM activation to convenience stores and bodegas
nationwide. Revenues are generated and recognized at time of sale.
Earnings
per Share
Earnings
per share (“EPS”) is the amount of earnings attributable to each share of Common Stock. For convenience, the term
is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards
Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available
to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period.
Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether
or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing
operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the
computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur
from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
The
following table shows the outstanding dilutive common shares excluded from the diluted net income (loss) per share calculation as they
were anti-dilutive:
|
|
Contingent
shares issuance
arrangement, stock options
or warrants
|
|
|
|
For
the Three Months Ended March 31, 2021
|
|
|
For
the Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Convertible note
|
|
|
15,738,269
|
|
|
|
12,461,539
|
|
Common stock options
|
|
|
850,176
|
|
|
|
850,176
|
|
Common stock warrants
|
|
|
15,410,500
|
|
|
|
7,063,919
|
|
Total contingent shares
issuance arrangement, stock options or warrants
|
|
|
31,998,945
|
|
|
|
20,375,634
|
|
Income
taxes
We
use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”)
Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for the amount of: (i) taxes payable
or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been
recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that
includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the
available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
Through
December 23, 2014, KSIX and BLVD operated as limited liability companies and all income and losses were passed through to the owners.
Through October 12, 2015, DIQ operated as a limited liability company and all income and losses were passed through to its owner. Subsequent
to the acquisition dates, these limited liability companies were owned by Surge and became subject to income tax.
Through
April 1, 2018, TW operated as a limited liability company and all income and losses were passed through to the owners. In order to facilitate
the merger discussed above, TW converted from a limited liability company to a Subchapter C Corporation.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting
periods presented.
The
Company is no longer subject to tax examinations by tax authorities for years prior to 2018.
In
response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed
into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017
Tax Act”). Corporate taxpayers may carryback net operating losses (NOLs) originating between 2018 and 2020 for up to five years,
which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing
corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct
interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for 2019 and
2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits
instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.
In
addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property
generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material
adjustments to our income tax provision for the three months ended March 31, 2021.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current year’s presentation.
Recent
adopted accounting pronouncements
In
August 2020, the FASB issued ASU 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity. The amendments in Update No. 2020-06 simplify the complexity associated with applying U.S. GAAP for certain
financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible
instruments and derivative scope exception for contracts in an entity’s own equity. Update No. 2020-06 is effective for fiscal
years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier
than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted the new
standard during the quarter ended March 31, 2021 and the adoption did not have a material effect on the condensed consolidated financial
statements and related disclosures.
In
December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general
approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This
guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company
adopted the new standard during the quarter ended March 31, 2021 and the adoption did not have a material effect on the condensed consolidated
financial statements and related disclosures.
Recent
issued accounting pronouncements
In
March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions to account for contracts, hedging relationships
and other transactions that reference LIBOR or another reference rate if certain criteria are met. The amendments of ASU No. 2020-04
are effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications made and hedging relationships
entered into on or before December 31, 2022. The Company is evaluating the impact that the amendments of this standard would have on
the Company’s consolidated financial statements.
Management
has evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”)
through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not
yet effective accounting pronouncements, when adopted, will have a material impact on the financial statements of the Company.
At
March 31, 2021 and December 31, 2020, our current assets were $2,553,931 and $1,251,029, respectively, and our current liabilities were
$14,974,306 and $15,303,661, respectively, which resulted in a working capital deficit of $12,420,375 and $14,052,632, respectively.
Total
assets at March 31, 2021 and December 31, 2020 amounted to $8,789,851 and $7,325,071, respectively. At March 31, 2021, assets consisted
of current assets of $2,553,931, net property and equipment of $223,594, net intangible assets of $3,923,615, goodwill of $866,782, equity
investment in Centercom of $340,839, and operating lease right of use asset of 819,632, as compared to current assets of $1,251,029,
net property and equipment of $236,810, net intangible assets of $4,125,742, goodwill of $866,782, equity investment in Centercom of
$414,612 and operating lease right of use asset of $368,638 at December 31, 2020.
At
March 31, 2021, our total liabilities of $19,180,939 increased $1,129,902 from $18,051,037 at December 31, 2020.
At
March 31, 2021, our total stockholders’ deficit was $10,391,088 as compared to $10,725,966 at December 31, 2020. The principal
reason for the increase in stockholders’ deficit was the impact of the net loss of $4,815,431 offset by equity issuances during
2021.
The
following table sets forth the major sources and uses of cash for the three months ended March 31, 2021 and 2020.
|
|
March
31,
2021
|
|
|
March
31,
2020
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net cash used in operating activities
|
|
$
|
(3,435,354
|
)
|
|
$
|
(1,043,922
|
)
|
Net cash used in investing activities
|
|
|
(2,615
|
)
|
|
|
(3,072
|
)
|
Net cash provided
by financing activities
|
|
|
4,366,448
|
|
|
|
1,139,500
|
|
Net change in cash
and cash equivalents
|
|
$
|
928,479
|
|
|
$
|
92,506
|
|
At
December 31, 2020, the Company had the following material commitments and contingencies.
Notes
payable – related party - See Note 7 to the Condensed Consolidated Financial Statements.
Notes
payable and long-term debt - See Note 8 to the Condensed Consolidated Financial Statements.
Convertible
promissory notes - See Note 9 to the Condensed Consolidated Financial Statements.
Related
party transactions - See Note 14 to the Condensed Consolidated Financial Statements.
Cash
requirements and capital expenditures – At the current level of operations, the Company has to borrow funds to meet basic operating
costs.
Known
trends and uncertainties – The Company is planning to acquire other businesses with similar business operations. The uncertainty
of the economy may increase the difficulty of raising funds to support the planned business expansion.
We
believe we will continue to incur net losses and do not expect positive cash flows from operations until the 4th quarter of
2021. At that time, we believe the impact of COVID-19 will have rescinded enough to allow us to fully implement our sales strategy, resulting
in increased revenue in all segments of our business. The Company will continue to fund operations until cash flow positive through the
use of promissory notes, both related and non-related party. These notes made up the majority of the $4,366,448 generated by financing
activities during the three months ended March 31, 2021.
On
March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and included a provision
for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”). The PPP provides
small businesses with funds to pay up to eight (8) weeks of payroll costs, including benefits. Funds received under the PPP may also
be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or a portion of the loans may be
forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from the date of issuance, and all payments
are deferred for the first six (6) months of the loan. Any unforgiven balance of loan principal and accrued interest at the end of the
six (6) month loan deferral period is amortized in equal monthly installments over the remaining 18-months of the loan term. On April
17, 2020, the Company closed a $498,082 SBA guaranteed PPP loan with Bank3. On March 2, 2021, the Company closed a $518,167 SBA guaranteed
PPP loan with Bank3. The Company expects to use the loan proceeds as permitted and apply for and receive forgiveness for the entire loan
amount. In addition, the Company received $636,600 in several Economic Injury Disaster Loans with the Small Business Administration.
These loans all carry a 3.75% interest rate payable over 30 years. First payment due 12 months from date of note.
Property
and equipment stated at cost, less accumulated depreciation, consisted of the following:
|
|
March
31,
2021
|
|
|
December
31, 2020
|
|
|
|
(unaudited)
|
|
|
|
|
Computer Equipment and Software
|
|
$
|
315,411
|
|
|
$
|
312,796
|
|
Furniture and Fixtures
|
|
|
9,774
|
|
|
|
9,774
|
|
Leasehold Improvements
|
|
|
19,724
|
|
|
|
19,724
|
|
|
|
|
344,909
|
|
|
|
342,294
|
|
Less: Accumulated Depreciation
|
|
|
(121,315
|
)
|
|
|
(105,484
|
)
|
|
|
$
|
223,594
|
|
|
$
|
236,810
|
|
Depreciation
expense was $15,831 and $15,524 for the three months ended March 31, 2021 and 2020, respectively.
Property
and equipment stated at cost, less accumulated depreciation, consisted of the following:
|
|
March
31,
2021
|
|
|
December
31, 2020
|
|
|
|
(unaudited)
|
|
|
|
|
ECS Membership agreement
|
|
$
|
465,000
|
|
|
$
|
465,000
|
|
Customer relationships
|
|
|
183,255
|
|
|
|
183,255
|
|
Noncompetition agreement
|
|
|
201,389
|
|
|
|
201,389
|
|
Trade names
|
|
|
617,474
|
|
|
|
617,474
|
|
Proprietary software
|
|
|
4,286,403
|
|
|
|
4,286,403
|
|
|
|
|
5,753,521
|
|
|
|
5,753,521
|
|
Less: Accumulated Depreciation
|
|
|
(1,829,906
|
)
|
|
|
(1,627,779
|
)
|
|
|
$
|
3,923,615
|
|
|
$
|
4,125,742
|
|
Amortization
expense of intangible assets for the three months ended March 31, 2021 and 2020 total $202,127 and $200,028, respectively. As of December
31, 2020, the weighted average remaining useful lives of these assets were 6.55 years.
The
carrying amount of goodwill was $866,782 at March 31, 2021 and December 31, 2020. There were no changes in the carrying amount of goodwill
during the period.
No
impairment in the carrying amount of goodwill was recognized during the three months ended March 31, 2021 and 2020.
The
Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. During the three months
ended March 31, 2021 and 2020, the Company utilized a credit card issued in the name of Surge Holdings, Inc. to pay certain trade obligations
totaling $102,941 and $87,382, respectively. At March 31, 2021 and December 31, 2020, the Company’s total credit card liability
was $382,191 and $383,073, respectively.
7
|
NOTES
PAYABLE – RELATED PARTY
|
In
December 2018, the Company executed a promissory note payable agreement with SMDMM Funding, LLC (“SMDMM”), an entity that
is owned by the Company’s Chief Executive Officer. The promissory note was for a principal sum up to $1.1 million at an annual
interest rate of 6%, due on December 27, 2021. During the three months ended March 31, 2021, the Company did not withdraw any net advances
on the note.
In
August 2019, the Company executed a promissory note payable agreement with SMDMM. The promissory note was for a principal sum up to $217,000
at an annual interest rate of 6%, due on August 15, 2022. During the three months ended March 31, 2021, the Company did not withdraw
any net advances on the note.
During
the fourth quarter 2019, the Company executed a promissory note payable agreement with SMDMM. The promissory note was for a principal
sum up to $883,440 at an annual interest rate of 15%, due on November 21, 2022. During the three months ended March 31, 2021, the Company
did not withdraw any net advances on the note.
During
the year ended December 31, 2020 and the three months ended March 31, 2021, the Company executed a series of promissory notes payable
agreement with SMDMM. The promissory notes were for a principal sum up to $2,371,500 at an annual interest rate of 10%, due on demand.
During the three months ended March 31, 2021, the Company drew advances on the note totaling $1.26 million.
During
the three months ended March 31, 2021, the Company made accrued interest payments of $0. The outstanding principal balance under the
promissory notes due to SMDMM was $4,596,940 and $3,341,940 at March 31, 2021 and December 31, 2020, respectively. Accrued interest owed
to SMDMM was $369,391 and $272,127 at March 31, 2021 and December 31, 2020, respectively.
During
the three months ended March 31, 2021, the Company executed a series of promissory notes with AN Holdings, LLC, an entity owned by the
Company’s President. The promissory notes were for an aggregate principal sum of $63,000 at an annual interest rate of 15%, due
on demand. The Company repaid $63,000 during the three months ended March 31, 2021. As of March 31, 2021 and December 31, 2020, the outstanding
balance on the notes was $147,500. Accrued interest owed to was $11,343 and $5,888 at March 31, 2021 and December 31, 2020, respectively.
8
|
NOTES
PAYABLE AND LONG-TERM DEBT
|
As
of March 31, 2021 and December 31, 2020, notes payable and long-term debt, net of debt discount, consists of:
|
|
March
31,
2021
|
|
|
December
31,
2020
|
|
|
|
(unaudited)
|
|
|
|
|
Promissory note
payable to a lender dated November 4, 2019; accruing interest at 18% per annum; due November 3, 2020; 100,000 shares of restricted
Common Stock granted on execution recorded as a debt discount1
|
|
$
|
-
|
|
|
$
|
250,000
|
|
Promissory note payable to Bank3 dated April
17, 2020; accruing interest at 1% per annum, due October 17, 2021.
|
|
|
498,082
|
|
|
|
498,082
|
|
Note payable to US Small Business Administration
dated May 25, 2020; accruing interest at 3.75% per annum; due May 25, 2050.
|
|
|
150,000
|
|
|
|
150,000
|
|
Note payable to US Small Business Administration
dated July 5, 2020; accruing interest at 3.75% per annum; due July 5, 2050.
|
|
|
150,000
|
|
|
|
150,000
|
|
Note payable to US Small Business Administration
dated July 5, 2020; accruing interest at 3.75% per annum; due July 5, 2050.
|
|
|
15,100
|
|
|
|
15,100
|
|
Note payable to US Small Business Administration
dated July 7, 2020; accruing interest at 3.75% per annum; due July 7, 2050.
|
|
|
150,000
|
|
|
|
150,000
|
|
Note payable to US Small Business Administration
dated July 21, 2020; accruing interest at 3.75% per annum; due July 21, 2050.
|
|
|
150,000
|
|
|
|
150,000
|
|
Note payable to US Small Business Administration
dated July 21, 2020; accruing interest at 3.75% per annum; due July 21, 2050.
|
|
|
21,500
|
|
|
|
21,500
|
|
Promissory note payable to
BHP Capital NY dated January 30, 2020 with interest at 14% per annum; due February 5, 2021; convertible into shares of Common Stock
upon default2
|
|
|
-
|
|
|
|
100,343
|
|
Promissory note payable to
Armada Capital Partners LLC dated January 30, 2020 with interest at 14% per annum; due February 5, 2021; convertible into shares
of Common Stock upon default2
|
|
|
28,499
|
|
|
|
118,394
|
|
Promissory note payable to
Jefferson Street Capital LLC dated January 30, 2020 with interest at 14% per annum; due February 5, 2021; convertible into shares
of Common Stock upon default2
|
|
|
79,203
|
|
|
|
148,500
|
|
Promissory note payable to
GS Capital Partners dated February 7, 2020 with interest at 14% per annum; due February 6, 2021; convertible into shares of Common
Stock upon default3
|
|
|
-
|
|
|
|
216,000
|
|
Promissory note payable to
Fourth Man LLC dated February 7, 2020 with interest at 14% per annum; due April 5, 2021; convertible into shares of Common Stock
upon default3
|
|
|
-
|
|
|
|
187,018
|
|
Promissory note payable to
GS Capital Partners dated March 5, 2020 with interest at 14% per annum; due February 6, 2021; convertible into shares of Common Stock
upon default4
|
|
|
-
|
|
|
|
378,000
|
|
Promissory note payable to
Tangiers Global LLC dated March 15, 2020 with interest at 14% per annum; due March 15, 2021; convertible into shares of Common Stock
upon default5
|
|
|
-
|
|
|
|
50,695
|
|
Promissory note payable to
LGH Investments LLC dated May 29, 2020 with interest at 10% per annum; due March 29, 2021; convertible into shares of Common Stock
upon default6
|
|
|
-
|
|
|
|
400,000
|
|
Promissory note payable to
Vista Capital LLC dated July 21, 2020 with interest at 10% per annum; due March 29, 2021; convertible into shares of Common Stock
upon default7
|
|
|
-
|
|
|
|
270,000
|
|
Promissory note payable to
Lucas Ventures dated December 14, 2020 with interest at 10% per annum; due September 10, 2021; convertible into shares of Common
Stock upon default8
|
|
|
165,000
|
|
|
|
165,000
|
|
Promissory note payable
to Bank3 dated March 1, 2021; accruing interest at 1% per annum, due March 2, 2026.
|
|
|
518,167
|
|
|
|
-
|
|
|
|
|
1,925,551
|
|
|
|
3,418,632
|
|
Less: Debt discount
|
|
|
(119,319
|
)
|
|
|
(517,781
|
)
|
|
|
$
|
1,806,232
|
|
|
$
|
2,900,851
|
|
1Promissory
note – The Company evaluated the 100,000 restricted shares of the Company’s Common Stock granted with the note and recorded
a debt discount of $31,200. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt,
using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated
statements of operations. There was unamortized debt discount of $0 as of March 31, 2021 and December 31, 2020, respectively. During
the three months ended March 31, 2021, the Company recorded amortization of debt discount totaling $0. During the three months ended
March 31, 2021, the Company issued shares of the Company’s Common Stock to settle the outstanding balances of the promissory note.
2
On January 30, 2020, the Company entered into Securities Purchase Agreements (the “January 2020 SPAs”), with severally
and not jointly, with BHP, Armada, Jefferson (the “January 2020 Investors”), pursuant to which the January 2020 Investors
purchased from the Company, for an aggregate purchase price of $500,000 (the “January 2020 Purchase Price”), Promissory Notes
in the aggregate principal amount of $540,000 (the “January 2020 Notes”). The January 2020 Notes will be repaid according
to a schedule of fixed interest and principal payments beginning in August 2020. As additional consideration for the January 2020 Investors
loaning the January 2020 Purchase Price to the Company, the Company issued to each of the January 2020 Investors 250,000 shares of Common
Stock for a total of 750,000 shares (the “January 2020 Share Issuance”). In connection with the January 2020 SPAs, the Company
paid issuance costs of $40,000 which is accounted for as a debt discount on the consolidated balance sheets and is being amortized over
the life of the notes.
The
January 2020 Notes shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on February 5, 2021. No payments
of principal or interest are due through July 2020 (five (5) months following issuance) and then there are seven (7) fixed payments of
principal and interest due on a monthly basis until maturity. On August 7, 2020, the Company executed agreements with the January 2020
investors to postpone the first and second principal and interest payment due date to maturity date and extend the maturity date until
April 5, 2021 in exchange for 195,000 shares of Common Stock. The shares were valued on day of grant with a fair value of $30,225 and
is included as a component of interest expense in the consolidated statements of operations.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion
price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”)
for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and
(ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior
to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable.
The Company recorded a $260,001 debt discount relating to the conversion feature of the notes. The debt discount is being accreted over
the life of these notes to accretion of debt discount and issuance cost.
The
Company valued the 750,000 shares upon day of grant with a fair value of $240,000 and accounted for it as debt discount on the consolidated
balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the
effective interest method. The amortization of debt discount is included as a component of interest expense in the statements of operations.
There
was total unamortized debt discount related to the January 2020 SPAs of $0 as of March 31, 2021. During the three months ended March
31, 2021, the Company recorded amortization of debt discount totaling $52,257.
During
the three months ended March 31, 2021, the Company issued 1,100,555 shares of the Company’s Common Stock to settle the outstanding
balances of $177,908 under the January 2020 SPAs.
3
On February 3 and February 6, 2020, the Company entered into Securities Purchase Agreements (the “February 2020 SPAs”),
with severally and not jointly, with GS Capital Partners (“GSC”) and Fourth Man LLC (“Fourth”), (the “February
2020 Investors”), pursuant to which the February 2020 Investors purchased from the Company, for an aggregate purchase price of
$400,000 (the “February 2020 Purchase Price”), Promissory Notes in the principal amount of $432,000 (the “February
2020 Notes”). The February 2020 Notes will be repaid according to a schedule of fixed interest and principal payments beginning
in August 2020. As additional consideration for the February 2020 Investors loaning the February 2020 Purchase Price to the Company,
the Company issued to each of the February 2020 Investors 300,000 shares of Common Stock for a total of 600,000 shares (the “February
Share Issuance”). In connection with the February 2020 SPAs, the Company paid issuance costs of $32,000 which is accounted for
as a debt discount on the consolidated balance sheets and is being amortized over the life of the notes. On August 5, 2020 and September
24, 2020, the Company executed agreements with the February 2020 Investors to postpone the first principal and interest payment due date
to October 5, 2020 and extend the maturity date until April 5, 2021 in exchange for 225,000 shares of Common Stock. The shares were valued
on day of grant with a fair value of $28,965 and is included as a component of interest expense in the consolidated statements of operations.
The
terms of the February 2020 Notes are substantially the same as the terms of the January 2020 Notes. The Company recorded a debt discount
of $214,000 relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion
of debt discount and issuance cost.
The
Company valued the 600,000 shares upon day of grant with a fair value of $186,000 and accounted for it as debt discount on the consolidated
balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the
effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements
of operations.
There
was total unamortized debt discount related to the February 2020 SPAs of $0 as of March 31, 2021. During the three months ended March
31, 2021, the Company recorded amortization of debt discount totaling $42,658. As of March 31, 2021, the outstanding balance under the
February 2020 SPAs was $0.
4
On March 5, 2020, the Company entered into a Securities Purchase Agreement (the “March 2020 SPA”), with GSC (the
“March 2020 Investor”), pursuant to which the March 2020 Investor purchased from the Company, for an aggregate purchase price
of $350,000 (the “March 2020 Purchase Price”), a Promissory Note in the principal amount of $378,000 (the “March 2020
Note”). The March 2020 Note will be repaid according to a schedule of fixed interest and principal payments beginning in September
2020. As additional consideration for the March 2020 Investor loaning the March 2020 Purchase Price to the Company, the Company issued
to the March 2020 Investor 400,000 shares of Common Stock of the Company. In connection with the March 2020 SPAs, the Company paid issuance
costs of $28,000 which is accounted for as a debt discount on the consolidated balance sheets and is being amortized over the life of
the notes.
The
March 2020 Note shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on March 5, 2021. No payments of
principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments of
principal and interest due on a monthly basis until maturity.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion
price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”)
for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and
(ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior
to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable.
The Company recorded a debt discount of $241,200 relating to the conversion feature of the notes. The debt discount is being accreted
over the life of these notes to accretion of debt discount and issuance cost.
The
Company valued the 400,000 shares upon day of grant with a fair value of $108,800 and accounted for it as debt discount on the consolidated
balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the
effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements
of operations.
There
was total unamortized debt discount related to the March 2020 SPAs of $0 as of March 31, 2021. During the three months ended March 31,
2021, the Company recorded amortization of debt discount totaling $47,018. As of March 31, 2021, the outstanding balance under the March
2020 SPAs was $0.
5
On April 1, 2020, the Company entered into a Securities Purchase Agreement (the “April 2020 SPA”), with Tangiers
Global (“Tangiers”) (the “April 2020 Investor”), pursuant to which the April 2020 Investor purchased from the
Company, for an aggregate purchase price of $150,000 (the “April 2020 Purchase Price”), a Promissory Note in the principal
amount of $162,000 (the “April 2020 Note”). The April 2020 Note will be repaid according to a schedule of fixed interest
and principal payments beginning in September 2020. As additional consideration for the April 2020 Investor loaning the April 2020 Purchase
Price to the Company, the Company issued to the April 2020 Investor 172,000 shares of Common Stock of the Company.
The
April 2020 Note shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on March 15, 2021. No payments of
principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments of
principal and interest due on a monthly basis until maturity.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion
price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”)
for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and
(ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior
to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable.
The Company recorded a debt discount of $103,560 relating to the conversion feature of the notes. The debt discount is being accreted
over the life of these notes to accretion of debt discount and issuance cost.
The
Company valued the 172,000 shares upon day of grant with a fair value of $46,400 and accounted for it as debt discount on the consolidated
balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the
effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements
of operations.
There
was total unamortized debt discount related to the April 2020 SPA of $0 as of March 31, 2021. During the three months ended March 31,
2021, the Company recorded amortization of debt discount totaling $32,843. As of March 31, 2021, the outstanding balance under the April
2020 SPAs was $0.
6
On May 29, 2020, the Company entered into a Securities Purchase Agreement (the “May 2020 SPA”), with LGH Investments
LLC (“LGH”) (the “May 2020 Investor”), pursuant to which the May 2020 Investor purchased from the Company, for
an aggregate purchase price of $370,000 (the “May 2020 Purchase Price”), a Promissory Note in the principal amount of $400,000
(the “May 2020 Note”). The May 2020 Note will be repaid according to a schedule of fixed interest and principal payments
beginning in September 2020. As additional consideration for the May 2020 Investor loaning the May 2020 Purchase Price to the Company,
the Company issued to the May 2020 Investor 400,000 shares of Common Stock of the Company in addition to three-year warrants to purchase
500,000 shares of Common Stock.
The
May 2020 Note shall accrue interest at a rate of fourteen percent (10%) per annum and will mature on March 29, 2021. No payments of principal
or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments of principal
and interest due on a monthly basis until maturity.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion
price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”)
for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and
(ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior
to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable.
The Company recorded a debt discount of $149,604 relating to the conversion feature of the notes. The debt discount is being accreted
over the life of these notes to accretion of debt discount and issuance cost.
The
Company valued the 400,000 shares upon day of grant with a fair value of $124,000 and accounted for it as debt discount on the consolidated
balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the
effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements
of operations.
The
warrants were issued to the Buyers by the Company on May 29, 2020 in connection with the SPA. The warrants entitle the Buyers, respectively,
to exercise purchase rights represented by the warrants up to 500,000 shares per warrant. The warrants permit the Buyers to exercise
the purchase rights at any time on or after May 29, 2020 through May 29, 2023. Each warrant contains an exercise price per share of $0.40,
subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise rights as defined therein. The
Company has maintained the right to redeem each warrant in full at any time following payment in full of the amounts owing under each
respective note. The Company valued the warrants upon day of grant with a fair value of $96,396 and accounted for it as debt discount
on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of
the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the
consolidated statements of operations.
There
was total unamortized debt discount related to the May 2020 SPA of $0 as of March 31, 2021. During the year ended December 31, 2020,
the Company recorded amortization of debt discount totaling $80,000. As of March 31, 2021, the outstanding balance under the February
2020 SPAs was $0.
7
On July 20, 2020, the Company entered into a Securities Purchase Agreement (the “July 2020 SPA”), with Vista Capital
Investments LLC (“Vista”) (the “July 2020 Investor”), pursuant to which the July 2020 Investor purchased from
the Company, for an aggregate purchase price of $250,000 (the “July 2020 Purchase Price”), a Promissory Note in the principal
amount of $270,000 (the “July 2020 Note”). The July 2020 Note will be repaid according to a schedule of fixed interest and
principal payments beginning in September 2020. As additional consideration for the July 2020 Investor loaning the July 2020 Purchase
Price to the Company, the Company issued to the July 2020 Investor 270,000 shares of Common Stock of the Company in addition to three-year
warrants to purchase 338,000 shares of Common Stock.
The
July 2020 Note shall accrue interest at a rate of fourteen percent (10%) per annum and will mature on April 20, 2021. No payments of
principal or interest are due through January 2020 (six (6) months following issuance) and then there are three (3) fixed payments of
principal and interest due on a monthly basis until maturity.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion
price equal to 0.70 (representing a 30% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”)
for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and
(ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior
to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable.
The Company recorded a debt discount of $145,538 relating to the conversion feature of the notes. The debt discount is being accreted
over the life of these notes to accretion of debt discount and issuance cost.
The
Company valued the 270,000 shares upon day of grant with a fair value of $62,100 and accounted for it as debt discount on the consolidated
balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the
effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements
of operations.
The
warrants were issued to the Buyers by the Company on July 20, 2020 in connection with the SPA. The warrants entitle the Buyers, respectively,
to exercise purchase rights represented by the warrants up to 338,000 shares per warrant. The warrants permit the Buyers to exercise
the purchase rights at any time on or after July 20, 2020 through July 19, 2023. Each warrant contains an exercise price per share of
$0.40, subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise rights as defined therein.
The Company has maintained the right to redeem each warrant in full at any time following payment in full of the amounts owing under
each respective note. The Company valued the warrants upon day of grant with a fair value of $42,362 and accounted for it as debt discount
on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of
the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the
consolidated statements of operations.
There
was total unamortized debt discount related to the July 2020 SPA of $19,708 as of March 31, 2021. During the three months ended March
31, 2021, the Company recorded amortization of debt discount totaling $88,686.
8
On December 14, 2020, the Company entered into a Securities Purchase Agreement (the “December 2020 SPA”), with
Lucas Ventures LLC (“Lucas”) (the “December 2020 Investor”), pursuant to which the December 2020 Investor purchased
from the Company, for an aggregate purchase price of $153,000 (the “December 2020 Purchase Price”), a Promissory Note in
the principal amount of $165,000 (the “December 2020 Note”). The December 2020 Note will be repaid according to a schedule
of fixed interest and principal payments beginning in September 2020. As additional consideration for the December 2020 Investor loaning
the December 2020 Purchase Price to the Company, the Company issued to the December 2020 Investor 300,000 shares of Common Stock of the
Company in addition to three-year warrants to purchase 150,000 shares of Common Stock.
The
December 2020 Note shall accrue interest at a rate of ten percent (10%) per annum and will mature on September 14, 2021. No payments
of principal or interest are due through January 2021 (six (6) months following issuance) and then there are three (3) fixed payments
of principal and interest due on a monthly basis until maturity.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion
price equal to 0.70 (representing a 30% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”)
for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and
(ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior
to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable.
The Company recorded a debt discount of $77,318 relating to the conversion feature of the notes. The debt discount is being accreted
over the life of these notes to accretion of debt discount and issuance cost.
The
Company valued the 300,000 shares upon day of grant with a fair value of $48,600 and accounted for it as debt discount on the consolidated
balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the
effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements
of operations.
The
warrants were issued to the Buyers by the Company on December 14, 2020 in connection with the SPA. The warrants entitle the Buyers, respectively,
to exercise purchase rights represented by the warrants up to 150,000 shares per warrant. The warrants permit the Buyers to exercise
the purchase rights at any time on or after December 14, 2020 through December 14, 2023. Each warrant contains an exercise price per
share of $0.40, subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise rights as defined
therein. The Company has maintained the right to redeem each warrant in full at any time following payment in full of the amounts owing
under each respective note. The Company valued the warrants upon day of grant with a fair value of $39,082 and accounted for it as debt
discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion
of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in
the consolidated statements of operations.
There
was total unamortized debt discount related to the December 2020 SPA of $99,611 as of March 31, 2021. During the three months ended March
31, 2021, the Company recorded amortization of debt discount totaling $55,000.
9
On January 5, 2021, the Company entered into a Securities Purchase Agreement (the “January 2021 SPA”), with Labrys
Fund LP (“Labrys”) (the “January 2021 Investor”), pursuant to which the January 2021 Investor purchased from
the Company, for an aggregate purchase price of $230,000 (the “January 2021 Purchase Price”), a Promissory Note in the principal
amount of $250,000 (the “January 2021 Note”). The January 2021 Note will be repaid according to a schedule of fixed interest
and principal payments in its entirety on or prior to May 5, 2021. As additional consideration for the January 2021 Investor loaning
the January 2021 Purchase Price to the Company, the Company issued to the January 2021 Investor 900,000 shares of Common Stock of the
Company in addition to three-year warrants to purchase 460,000 shares of Common Stock.
The
January 2021 Note shall accrue interest at a rate of ten percent (12%) per annum and will mature on May 5, 2021.
In
the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion
price equal to 0.70 (representing a 30% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”)
for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and
(ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior
to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable.
The Company recorded a debt discount of $77,318 relating to the conversion feature of the notes. The debt discount is being accreted
over the life of these notes to accretion of debt discount and issuance cost.
The
Company valued the 900,000 shares upon day of grant with a fair value of $97,200 and accounted for it as debt discount on the consolidated
balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the
effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements
of operations.
The
warrants were issued to the Buyers by the Company on January 5, 2021 in connection with the SPA. The warrants entitle the Buyers, respectively,
to exercise purchase rights represented by the warrants up to 460,000 shares per warrant. The warrants permit the Buyers to exercise
the purchase rights at any time on or after January 5, 2021 through January 4, 2025. Each warrant contains an exercise price per share
of $0.25, subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise rights as defined therein.
The Company has maintained the right to redeem each warrant in full at any time following payment in full of the amounts owing under
each respective note. The Company valued the warrants upon day of grant with a fair value of $43,629 and accounted for it as debt discount
on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of
the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the
consolidated statements of operations.
There
was total unamortized debt discount related to the January 2021 Investor SPA of $0 as of March 31, 2021. During the three months ended
March 31, 2021, the Company recorded amortization of debt discount totaling $160,829. As of March 31, 2021, the outstanding balance under
the January 2921 SPA was $0.
9
|
CONVERTIBLE
PROMISSORY NOTES
|
As
of March 31, 2021 and December 31, 2020, convertible promissory notes payable consists of:
|
|
March
31,
2021
(unaudited)
|
|
|
December
31,
2020
|
|
Convertible
note payable to Evergreen Capital Management dated March 8, 2021 with interest at 15% per annum; due March 8, 2022; convertible into
shares of Common Stock 1
|
|
|
2,300,000
|
|
|
|
-
|
|
|
|
|
2,300,000
|
|
|
|
0
|
|
Less: Debt discount
|
|
|
(2,155,068
|
)
|
|
|
-
|
|
|
|
$
|
144,932
|
|
|
$
|
0
|
|
1
On March 8, 2021, the Company entered into a Securities Purchase
Agreement (the “SPA”), with Evergreen Capital Management (“Buyer”). In connection with the SPA, the Company issued
a note to the Buyer, and warrants to purchase the Company’s Common Stock. The aggregate purchase price of the notes is $2,000,000
and the aggregate principal amount of the notes is $2,300,000.
Pursuant
to the SPA, the Buyer purchased from the Company, for a purchase price of $2,000,000, a convertible promissory note, in the principal
amount of $2,300,000. The purchase of each note was accompanied by the Company’s issuance of a warrant to purchase 13,437,500 shares
of the Company’s Common Stock.
The
note became effective as of March 8, 2021 and is due and payable on March 8, 2022. The notes entitle the Buyer to 15% interest per annum.
Upon an Event of Default (as defined in the notes), the notes entitle the Buyers to interest at the rate of 18% per annum. The notes
may be converted into shares of the Company’s Common Stock at a conversion price equal to 0.75 (representing a 25% discount) multiplied
by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the Common Stock during the ten (10) trading
day period ending on the latest complete trading day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock
during the ten (10) trading day period ending on the latest complete trading day prior to the issue date. In the event of a default,
without demand, presentment or notice, the note shall become immediately due and payable. The Company recorded a $1,877,251 debt discount
relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt
discount and issuance cost.
The
warrants were issued to the Buyer by the Company on March 8, 2021 in connection with the SPA. The warrants entitle the Buyer to exercise
purchase rights represented by the warrants up to 13,437,500 shares per warrant. The warrants permit the Buyer to exercise the purchase
rights at any time on or after March 8, 2021 through March 7, 2022. Each warrant contains an exercise price per share of $0.16, subject
to adjustment, and also contains a provision permitting the cashless exercise of such exercise rights as defined therein. The Company
has maintained the right to redeem each warrant in full at any time following payment in full of the amounts owing under each respective
note.
The
Company valued the warrants using the Black-Scholes Option Pricing model and accounted for it as debt discount on the consolidated balance
sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective
interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
There was unamortized debt discount of $1,778,218 as of March 31, respectively, related to the warrants issued. During the three months
ended March 31, 2021, the Company recorded amortization of debt discount related to these warrants totaling $119,588. During the year
ended December 31, 2020, the Company paid $95,000 for the cancellation of 250,000 warrants.
Future
maturities of all debt (excluding debt discount discussed above in Notes 8 and 9) are as follows:
For the Years
Ending December 31,
|
|
|
|
2021 (remainder of year)
|
|
$
|
7,582,861
|
|
2022
|
|
|
2,300,000
|
|
|
|
$
|
9,882,861
|
|
10
|
DERIVATIVE
LIABILITIES
|
As
discussed above in Note 9, during the three months ended March 31, 2021, the Company executed a convertible note with a lender
and received gross proceeds of $2,000,000. The Company identified certain features embedded in the note requiring the Company to classify
the features as derivative liabilities. The conversion price of the note is subject to adjustment for issuances of the Company’s
Common Stock, or any equity linked instruments or securities convertible into the Company’s Common Stock at a purchase price
of less than the prevailing conversion price or exercise price. Such adjustment shall result in the conversion price and exercise price
being reduced to such lower purchase price.
The
table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2021:
|
|
Fair
Value
Measurement
Using Level 3
Inputs
|
|
|
|
Total
|
|
Balance, December 31, 2020
|
|
$
|
1,357,528
|
|
Change in fair value of derivative liabilities
|
|
|
303,043
|
|
Derivative liabilities recorded on issuance
of convertible notes
|
|
|
1,612,053
|
|
Write-off of derivative
liabilities upon settlement of debt
|
|
|
(543,473
|
)
|
Balance, March 31, 2021
|
|
$
|
2,729,151
|
|
During
the three months ended March 31, 2021, the fair value of the derivative feature was calculated using the following weighted average assumptions:
|
|
March
31,
2021
(unaudited)
|
|
Risk-free
interest rate
|
|
|
0.03
– 0.08
|
%
|
Expected
life of grants
|
|
|
0.75
year
|
|
Expected
volatility of underlying stock
|
|
|
169
- 291
|
%
|
Dividends
|
|
|
0
|
%
|
As
of March 31, 2021 and December 31, 2020, the derivative liability was $2,729,151 and $1,357,528, respectively. In addition, for the three
months ended March 31, 2021 and 2020, the Company recorded $303,850 and $(31,816) as the change in fair value of the derivative on the
condensed consolidated statement of operations. The Company determined that upon measuring the fair value of the derivative features,
the total amount recorded as a debt discount exceed the face value of the notes issued and the Company therefore recorded derivative
expense of $1,775,057 and $348,334 on the condensed consolidated income statements for the three months ended March 31, 2021 and 2020.
On
January 25, 2018, the Company obtained a $500,000 line of credit (LOC) with a Bank. The LOC bears interest at 5% per annum and
is secured by essentially all of the Company’s assets. The note is personally guaranteed by the owner of the majority of the Company’s
voting shares. On December 21, 2018, the Company and the bank agreed to increase the LOC to $1,000,000 at an interest rate of 6% per
annum. As of March 31, 2021 and December 31, 2020, the outstanding balance on the LOC was $912,870. The LOC matures on April 24, 2021.
The
Company determines if an arrangement contains a lease at inception. Right of use (“ROU”) assets represent the right to use
an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease.
ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over
the lease term.
The
Company leases office space in Memphis, TN, office space in Schaumburg, IL, and a call center space in El Salvador. The term of
the Memphis office is for 2 years beginning on November 1, 2019 commencing with monthly payments of $1,600. The term of the Schaumburg
offices ranges from 7 to 10 years beginning on October 1, 2020 commencing with monthly payments of $2,765 and $1,985. The term of the
call center lease is for 3 years beginning on March 1, 2019 commencing with monthly payments of $6,680. As part of the ECS transaction
discussed above, the Company acquired office space in Springfield, MO. The term of the lease is for 3 years commencing on January 1,
2020 with monthly payments of $12,000.
During
the three months ended March 31, 2021 and 2020, the Company paid lease obligations of $81,177 and $80,570, respectively, under
the leases.
The
Company utilized a portfolio approach in determining the discount rate. The portfolio approach takes into consideration the range of
the term, the range of the lease payments, the category of the underlying asset and the Company’s estimated incremental borrowing
rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments.
The Company also considered its recent debt issuances as well as publicly available data for instruments with similar characteristics
when calculating the incremental borrowing rates.
The
lease terms include options to extend the leases when it is reasonably certain that the Company will exercise that option. These operating
leases contain renewal options for periods ranging from three to five years that expire at various dates with no residual value guarantees.
Future obligations relating to the exercise of renewal options is included in the measurement if, based on the judgment of management,
the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise
include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the
presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably
plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating
lease liabilities.
Leases
with a term of 12 months or less are not recorded on the balance sheets, per the election of the practical expedient noted above.
The
Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company recognizes variable lease
payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate
are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period
incurred.
The
components of lease expense, including short term leases, were as follows:
|
|
For
the Three Months
Ended
|
|
|
For
the Three Months
Ended
|
|
|
|
March
31,
2021
(unaudited)
|
|
|
March
31,
2020
(unaudited)
|
|
Operating lease
|
|
$
|
73,618
|
|
|
$
|
70,070
|
|
Interest on lease liabilities
|
|
|
6,542
|
|
|
|
14,306
|
|
Total net lease cost
|
|
$
|
80,160
|
|
|
$
|
84,376
|
|
Supplemental
balance sheet information related to leases was as follows:
|
|
March
31,
2021
(unaudited)
|
|
|
December
31,
2020
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
Operating lease ROU assets - net
|
|
$
|
819,632
|
|
|
$
|
368,638
|
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities, included
in current liabilities
|
|
|
235,379
|
|
|
|
210,556
|
|
Noncurrent operating
lease liabilities, included in long-term liabilities
|
|
|
578,476
|
|
|
|
155,167
|
|
Total operating lease
liabilities
|
|
$
|
813,855
|
|
|
$
|
365,723
|
|
Supplemental
cash flow and other information related to leases was as follows:
|
|
For
the Three Months
Ended
|
|
|
For
the Three Months
Ended
|
|
|
|
March
31,
2021
(unaudited)
|
|
|
March
31,
2020
(unaudited)
|
|
Cash paid for amounts included in the measurement
of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating
leases
|
|
$
|
67,716
|
|
|
$
|
46,534
|
|
|
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease liabilities:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
518,848
|
|
|
$
|
355,203
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
6.09
|
|
|
|
2.12
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
7.68
|
%
|
|
|
5.5
|
%
|
Total
future minimum payments required under the lease obligations as of December 31, 2020 are as follows:
Twelve Months
Ending December 31,
|
|
|
|
2021 (remainder of year)
|
|
$
|
283,136
|
|
2022
|
|
|
222,751
|
|
2023
|
|
|
60,293
|
|
2024
|
|
|
61,877
|
|
2025
|
|
|
63,460
|
|
Thereafter
|
|
|
300,030
|
|
Total lease payments
|
|
$
|
991,547
|
|
Less: amounts representing
interest
|
|
|
(175,227
|
)
|
Total lease obligations
|
|
$
|
816,320
|
|
Preferred
Stock
Series
“A” Preferred Stock
As
of March 31, 2021 and December 31, 2020, there were 13,000,000 shares of Series A issued and outstanding.
Series
“C” Convertible Preferred Stock
As
of March 31, 2021 and December 31, 2020, there were 721,598 shares of Series C issued and outstanding.
Common
Stock
On
January 30, 2020, the Company entered into a Membership Interest Purchase
Agreement and Stock Purchase Agreement with ECS Prepaid, ECS, CSLS and the Winfreys. Pursuant to the agreements, the Company acquired
all of the membership interests of ECS Prepaid and all of the issued and outstanding stock of each ECS and CSLS. The agreements provide
that the consideration is to be paid by the Company through the issuance of 500,000 shares of the Company’s Common Stock. In addition,
the agreements called for 25,000 shares of Common Stock to be issued to the Winfreys on a monthly basis over a 12-month period. During
the three months ended March 31, 2021, the Company issued 100,000 shares of Common Stock in full settlement of the agreements.
As
discussed above, during the three months ended March 31, 2021, the Company granted 900,000 shares of Common Stock pursuant to debt agreements
executed with various lenders. The shares were valued on execution date and recorded as a debt discount on the condensed consolidated
balance sheets.
As
discussed in Note 10 above, during the three months ended March 31, 2021, the Company issued 6,614,537 shares of Common Stock for the
conversion of debt totaling $858,159 in principal and interest.
During
the three months ended March 31, 2021, the Company sold an aggregate of 13,000,000 shares of Common Stock in gross proceeds to the Company
of $1,510,000.
As
of March 31, 2021 and December 31, 2020, there were 152,848,760 and 127,131,210 shares of Common Stock issued and outstanding, respectively.
Stock
Warrants
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding – December 31,
2020
|
|
|
9,715,865
|
|
|
$
|
0.65
|
|
Exercisable – December 31, 2019
|
|
|
9,715,865
|
|
|
$
|
0.6
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding –
March 31, 2021
|
|
|
9,715,865
|
|
|
$
|
0.65
|
|
Exercisable –
March 31, 2021
|
|
|
9,715,865
|
|
|
$
|
0.6
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in
years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.40
– 3.00
|
|
|
|
9,715,865
|
|
|
|
1.27
years
|
|
|
$
|
0.65
|
|
|
|
9,715,865
|
|
|
$
|
0.
65
|
|
At
March 31, 2021 the total intrinsic value of warrants outstanding and exercisable was $0.
14
|
RELATED
PARTY TRANSACTIONS
|
The
Company’s former Chief Executive Officer has advanced the Company various amounts on a non-interest-bearing basis, which is being
used for working capital. The advance had no fixed maturity. As noted, Mr. Matzinger elected to exchange outstanding non-interest-bearing
debt totaling $389,502 owed by the Company into 6,232 shares of Preferred C stock. As of March 31, 2021 and December 31, 2020, the outstanding
balance due was $0.
For
the three months ended March 31, 2021 and 2020, outsourced management services fees of $18,457 and $255,000, respectively, were paid
to Axia Management, LLC (“Axia”) as compensation for services provided. These costs are included in Selling, general and
administrative expenses in the consolidated statements of operations. Axia is owned by the Company’s Chief Executive Officer.
At
March 31, 2021 and December 31, 2020, the Company had trade payables to Axia of $373,012 and $666,112, respectively.
For
the three months ended March 31, 2021 and 2020, the Company purchased telecom services and access to wireless networks from 321 Communications
in the amount of $218,334 and $88,974, respectively. These costs are included in Cost of revenue in the condensed consolidated statements
of operations. The Company’s Chief Executive Officer is a minority owner of 321 Communications.
At
March 31, 2021 and December 31, 2020, the Company had trade payables to 321 Communications of $25,336 and $25,336, respectively.
The
Company contracted with CenterCom Global, S.A. de C.V. (“CenterCom Global”)
to provide customer service call center services, manage the sales process to include handling incoming orders, the collection and verification
of all documents to comply with FCC regulations, monthly audit of all subscribers to file the USAC 497 form, yearly audit of all subscribers
that have been active over one year to file the USAC 555 form (Recertification), information technology professionals to maintain company
websites, sales portals and server maintenance. Billings for these services in the year ended December 31, 2020 and 2019 were $2,821,925
and $2,384,780, respectively, and are included in Cost of revenue in the consolidated statements of operations. The Company’s President
has a 50% interest in CenterCom Global.
At
March 31, 2021 and December 31, 2020, the Company had trade payables to CenterCom Global of $1,252,331 and $1,252,331, respectively.
See
Note 7 long-term debt due to related parties.
15
|
COMMITMENTS
AND CONTINGENCIES
|
On
November 1, 2013, The Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability for Forfeiture to the
Company for requesting and/or receiving support for ineligible subscriber lines between the months of October 2012 and May 2013 and proposed
a monetary forfeiture of $5,501,285. The Company has annual compliance audits with FCC approved audit firms that have found no compliance
deficiencies. Management believes the proposed monetary forfeiture is without merit and if anything should result from this notice, the
amount would not materially affect the financial position of the Company.
On
January 15, 2020, the Company and Carter Matzinger (a member of the Company’s Board of Directors) (collectively, the “Surge
Party”), and the former owners of the Company’s wholly owned subsidiary, DigitizeIQ, LLC (collectively, the “DigitizeIQ
Party” and, together with the Surge Party, the “Parties”), entered into a settlement agreement (the “DigitizeIQ
Settlement Agreement”) to settle any claims the Parties may have had against each other. The parties made claims against each other
with regard to alleged breaches of an Exchange Agreement, a Non-Compete Agreement, and promissory notes issued by the Company to the
DigitzeIQ Party (the “DigitzeIQ Promissory Notes”). Pursuant to the DigitizeIQ Settlement Agreement, the Parties, in addition
to releasing all claims against each other, agreed to cooperate to ensure the complete transfer and assignment of the domain “digitizeiq.com”
to the Company and agreed that the DigitizeIQ Promissory Notes are deemed terminated. As a result of the DigitizeIQ Promissory Notes
being terminated, the Company reduced its liabilities by approximately $580,000.
On
March 1, 2020, in connection with Mr. Evers’ appointment as Chief Financial Officer of the Company, the Company and Mr. Evers entered
into an employment agreement (the “Evers Employment Agreement”), whereby as compensation for his services, the Company shall
pay Mr. Evers a salary of $270,000 per year. Pursuant to the terms of the Evers Employment Agreement, the Company will pay the full cost
of Mr. Evers’ health insurance premiums. In the event Mr. Evers’ employment with the Company shall terminate, Mr. Evers shall
be entitled to a severance payment of a full year of salary and benefits. In addition, Mr. Evers is eligible for equity awards as approved
by the Board as defined in the agreement.
On
July 9, 2020, the Company entered into a settlement and release agreement with Unimax Communications, LLC (“Unimax”). The
settlement is related to a complaint filed by Unimax alleging the Company is indebted pursuant to a purchase order and additional financing
terms. The Company agreed to pay Unimax the total sum of $785,000 over a 24-month period. The settlement amount is included accounts
payable and accrued expenses – other on the consolidated balance sheets. During the three months ended March 31, 2021, the Company
has agreed to pay off the balance by April 30, 2021 .
Operating
segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by
the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision maker is its Chief Executive Officer.
The
Company evaluated performance of its operating segments based on revenue and operating loss. Segment information for the three months
ended March 31, 2021 and 2020, are as follows:
|
|
Surge Blockchain
& Other
|
|
|
LogicsIQ
|
|
|
TW
|
|
|
ECS
|
|
|
Total
|
|
Three Months ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
37,734
|
|
|
$
|
3,408,403
|
|
|
$
|
628,325
|
|
|
$
|
6,914,486
|
|
|
$
|
10,988,948
|
|
Cost of revenue (exclusive of depreciation and amortization)
|
|
|
(4,434
|
)
|
|
|
(2,966,753
|
)
|
|
|
(185,537
|
)
|
|
|
(6,700,585
|
)
|
|
|
(9,857,309
|
)
|
Gross margin
|
|
|
33,300
|
|
|
|
441,650
|
|
|
|
442,788
|
|
|
|
213,901
|
|
|
|
1,131,639
|
|
Costs and expenses
|
|
|
(2,144,500
|
)
|
|
|
(455,398
|
)
|
|
|
(242,401
|
)
|
|
|
(397,510
|
)
|
|
|
(3,239,809
|
)
|
Operating profit (loss)
|
|
$
|
(2,111,200
|
)
|
|
$
|
(13,748
|
)
|
|
$
|
200,387
|
|
|
$
|
(183,609
|
)
|
|
$
|
(2,108,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
298,402
|
|
|
$
|
5,451,919
|
|
|
$
|
290,705
|
|
|
$
|
9,746,773
|
|
|
$
|
15,787,799
|
|
Cost of revenue (exclusive of depreciation and amortization)
|
|
|
(303,503
|
)
|
|
|
(4,738,537
|
)
|
|
|
(491,557
|
)
|
|
|
(9,525,317
|
)
|
|
|
(15,058,914
|
)
|
Gross margin
|
|
|
(5,101
|
)
|
|
|
713,382
|
|
|
|
(200,852
|
)
|
|
|
221,456
|
|
|
|
728,885
|
|
Costs and expenses
|
|
|
(1,716,882
|
)
|
|
|
(343,138
|
)
|
|
|
(1,049,910
|
)
|
|
|
(384,194
|
)
|
|
|
(3,494,124
|
)
|
Operating income (loss)
|
|
$
|
(1,721,983
|
)
|
|
$
|
370,244
|
|
|
$
|
(1,250,762
|
)
|
|
$
|
(162,738
|
)
|
|
$
|
(2,765,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,874,911
|
|
|
$
|
1,866,783
|
|
|
$
|
616,221
|
|
|
$
|
4,431,936
|
|
|
$
|
8,789,851
|
|
Total liabilities
|
|
|
12,274,317
|
|
|
|
3,181,477
|
|
|
|
3,477,262
|
|
|
|
247,883
|
|
|
|
19,180,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
911,316
|
|
|
$
|
1,079,806
|
|
|
$
|
515,592
|
|
|
$
|
4,818,357
|
|
|
$
|
7,325,071
|
|
Total liabilities
|
|
|
10,922,335
|
|
|
|
2,440,758
|
|
|
|
4,301,249
|
|
|
|
386,695
|
|
|
|
18,051,037
|
|
On April 29, 2021, SurgePays, Inc., a Nevada
corporation (the “Company”) obtained a filed an Acknowledgement of Satisfaction of Judgment in the United States District
Court, Central District of California, Southern Division, in connection with its obligations owed to Unimax Communications, LLC
(“Unimax”) pursuant to the settlement of the judgment amount owed to Unimax. The arrangement made with Unimax resulted
in the satisfaction of the total amount of $793,146.62.