NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Note
1 - Organization and Nature of Operations
Organization
and Nature of Operations
SurgePays,
Inc. (“SurgePays,” “SP,” “we,” “our” or “the Company”), and its operating
subsidiaries, is a technology-driven company building a next generation supply chain software platform that can offer wholesale goods
and services more cost efficiently than traditional and existing wholesale distribution models.
The
parent (SurgePays, Inc.) and subsidiaries are organized as follows:
Schedule of Subsidiaries
| Company
Name |
|
Incorporation
Date |
|
State
of Incorporation |
| SurgePays,
Inc. |
|
August
18, 2006 |
|
Tennessee |
| KSIX
Media, Inc. |
|
November
5, 2014 |
|
Nevada |
| KSIX,
LLC |
|
September
14, 2011 |
|
Nevada |
| Surge
Blockchain, LLC |
|
January
29, 2009 |
|
Nevada |
| Injury Survey, LLC |
|
July 28, 2020 |
|
Nevada |
| DigitizeIQ,
LLC |
|
July
23, 2014 |
|
Illinois |
| Surge
Logics, Inc. |
|
October
2, 2018 |
|
Nevada |
| Surge
Payments, LLC |
|
December
17, 2018 |
|
Nevada |
| Surgephone
Wireless, LLC |
|
August
29, 2019 |
|
Nevada |
| SurgePays
Fintech, Inc. |
|
August
22, 2019 |
|
Nevada |
| True
Wireless, Inc. |
* |
October
29, 2020 |
|
Oklahoma |
| ECS
Prepaid, LLC |
|
June
9, 2009 |
|
Missouri |
| Torch Wireless, LLC |
** |
January
29, 2019 |
|
Wyoming |
| Central
States Legal Services, Inc. |
|
August
1, 2003 |
|
Missouri |
| Electronic
Check Services, Inc. |
|
May
19, 1999 |
|
Missouri |
| *
|
Entity
was disposed of on May 7, 2021. |
| **
|
As
of January 1, 2022, this was accounted for as a variable interest entity |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Impact
of COVID-19
The
ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies
and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19
has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and
financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The COVID-19
pandemic has the potential to significantly impact the Company’s supply chain, distribution centers, or logistics and other service
providers.
In
addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand for products
and services and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues
to evolve, the Company will continue to closely monitor market conditions and respond accordingly.
We
have implemented adjustments to our operations designed to keep employees safe and comply with international, federal, state, and local
guidelines, including those regarding social distancing. The extent to which COVID-19 may further impact the Company’s business,
results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be
predicted with confidence. In response to COVID-19, the United States government has passed legislation and taken other actions to provide
financial relief to companies and other organizations affected by the pandemic.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may
emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or
the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced
operations.
Any
resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business,
financial condition, and results of operations.
To
date, the Company has not experienced any significant negative economic impact due to COVID-19.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions to Form 10-Q and
Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain
all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial
statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all
of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March
31, 2022 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended
March 31, 2022 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited
consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 24, 2022.
Management
acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all
adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated
financial position and the consolidated results of its operations for the periods presented.
Liquidity,
Going Concern and Management’s Plans
These
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.
As
reflected in the accompanying consolidated financial statements, for the three months ended March 31, 2022, the Company had:
| ● |
Net
loss available to common stockholders of $1,212,334;
and |
| ●
|
Net
cash used in operations was $3,323,556 |
Additionally,
at March 31, 2022, the Company had:
| ● |
Accumulated
deficit of $36,335,677 |
| ● |
Stockholders’
equity of $2,354,589,
and |
| ● |
Working
capital of $3,485,199 |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
We
manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand
of $3,442,926 at March 31, 2022.
The
Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from
the sales of its products and services to achieve profitable operations. There can be no assurance that profitable operations will ever
be achieved, or if achieved, could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis
of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months ended March
31, 2022, and our current capital structure including equity-based instruments and our obligations and debts.
Without
sufficient revenues from operations, if the Company does not obtain additional capital, the Company will be required to reduce the scope
of its business development activities or cease operations. The Company may explore obtaining additional capital financing and the Company
is closely monitoring its cash balances, cash needs, and expense levels.
These
factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve-month period subsequent
to the date that these consolidated financial statements are issued. The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern. Accordingly, the consolidated financial statements have
been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and
satisfaction of liabilities and commitments in the ordinary course of business.
Management’s
strategic plans include the following:
| ● |
Continue
the hyper growth of the Affordable Connectivity Program revenue stream, |
| ● |
Execution
of business plan and significant revenue growth from prior period, |
| ● |
Pursuing
a line of credit to achieve the hyper growth of the Affordable Connectivity Program, |
| ● |
Expand
product and services offerings to a larger surrounding geographic area. |
| ● |
Continuing
to explore and execute prospective partnering or distribution opportunities; and |
| ● |
Identifying
unique market opportunities that represent potential positive short-term cash flow. |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Note
2 - Summary of Significant Accounting Policies
Principles
of Consolidation and Non-Controlling Interest
These
consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly
owned subsidiaries. All intercompany transactions and balances have been eliminated.
For
entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other
than the Company. The aggregate of the income or loss and corresponding equity that is not owned by us is included in Non-controlling
Interests in the consolidated financial statements.
Variable
Interest Entities
A
variable interest entity (“VIE”) is an entity that does not have sufficient equity at risk to finance its activities without
additional subordinated financial support or is structured such that equity investors lack the ability to control the entity’s
activities or do not substantially participate in the gains and losses of the entity. Upon inception of a contractual agreement, and
thereafter, if a reconsideration event occurs, the Company performs an assessment to determine whether the arrangement contains a variable
interest in an entity and whether that entity is a VIE. The primary beneficiary of a VIE is the party that has both the power to direct
the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to
receive benefits from the VIE that could potentially be significant to the VIE. Under Accounting Standards Codification (“ASC”)
810 – Consolidations, where the Company concludes that it is the primary beneficiary of a VIE, the Company consolidates
the accounts of that VIE.
Effective
January 1, 2022, the Company executed a management agreement with Torch Wireless (“Torch”). Generally, the Company was engaged
to handle the following services:
| |
● |
Oversee
management of the business being conducted by Torch, |
| |
● |
Involved
in the performance of Torch’s obligations under contracts regarding its business operations and maintenance of Torch’s
customer relationships, |
| |
● |
Assist
Torch with regulatory compliance, |
| |
● |
Manage
all billing and collection functions, including the right to collect revenues related to Torch’s business operations, as part
of the agreement, Torch may not participate in this function |
| |
● |
Manage
all payment functions related to the business, including the right to disburse funds, as part of the agreement, Torch may not participate
in this function; and |
On
April 6, 2022, the Company acquired 100% of the equity of Torch in exchange for $800,000, resulting in Torch becoming a wholly-owned
subsidiary in a transaction accounted for as a business combination. Payment for Torch is expected to be completed during the second
quarter of 2022.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
In
addition, the Company will pay the Sellers monthly residual payments for customers enrolled by the Company through December 31, 2022
of either $2 or $3 per customer (depending on the category of customer). While Torch has existing operations, it has not yet generated
material revenues. This transaction does not involve the purchase of a “significant amount of assets” as defined in the Instructions
to Item 2.01 of Form 8-K.
Torch
is a provider of subsidized mobile broadband services to consumers qualifying under the federal guidelines of the U.S. Federal Communication
Commission’s Affordable Connectivity Program (“ACP”). The ACP provides the Company up to a $100 reimbursement for the
cost of each tablet device distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services.
With the purchase of Torch, the Company now has approval to offer subsidized mobile broadband in all fifty states.
At
March 31, 2022, Torch is a VIE and has been consolidated with the Company’s financial position, results of operations, and cash
flows.
The
following table summarizes the carrying amounts of Torch’s assets and liabilities (after the elimination of intercompany transactions
and balances) included in the Company’s consolidated balance sheet at March 31, 2022:
Schedule of Variable Interest Entities
| | |
| 2022 | |
| Assets | |
| | |
| Cash | |
$ | 1,017,756 | |
| Accounts receivable | |
| 1,665,906 | |
| Inventory | |
| 923,415 | |
| Total Assets | |
$ | 3,607,077 | |
| | |
| | |
| Liabilities | |
| | |
| Accounts payable | |
$ | 63,254 | |
| Total Liabilities | |
$ | 63,254 | |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Business
Combinations
The
Company accounts for business acquisitions using the acquisition method of accounting, in accordance with which assets acquired and liabilities
assumed are recorded at their respective fair values at the acquisition date.
The
fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed
based on their respective fair values. Goodwill represents excess of the purchase price over the estimated fair values of the assets
acquired and liabilities assumed.
Significant
judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles. Fair value and useful
life determinations are based on, among other factors, estimates of future expected cash flows, and appropriate discount rates used in
computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets
acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these
estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement
period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets
and liabilities made after the end of the measurement period are recorded within the Company’s operating results.
At
December 31, 2021 and 2020, goodwill was $866,782, respectively. There were no impairment losses for the years ended December 31, 2021
and 2020, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Deconsolidation
of Subsidiary
In
accordance with ASC Topic 810-10-40, a parent company must deconsolidate a subsidiary as of the date the parent ceases to have a controlling
interest in that subsidiary and recognize a gain or loss in net income at that time.
On
May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc. (“TW”), however we retained $1,097,659 in liabilities
which consisted of $1,077,659 in accounts payable and accrued expenses as well as $20,000 in related party loans. During 2021, the $20,000
was forgiven. In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%,
with a default interest rate of 10%. The Company will receive twenty-five (25) payments of principal and accrued interest totaling $7,461
commencing in June 2023. Payments are scheduled as follows:
Scheduled of Receivables
| For the Year Ended December 31, 2021 | |
| |
| | |
| |
| 2022 | |
$ | - | |
| 2023 | |
| 52,227 | |
| 2024 | |
| 89,532 | |
| 2025 | |
| 44,766 | |
| Receivables, gross | |
| 186,525 | |
| Less: amount representing interest | |
| (9,674 | ) |
| Total | |
$ | 176,851 | |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
As
a result of the sale, we deconsolidated our entire ownership interest in TW from our consolidated financial statements on May 7, 2021,
the effective date of the sale agreement, and recognized a gain on deconsolidation of $1,895,871 as follows:
Scheduled of Deconsolidated Ownership
| Consideration | |
| | |
| Note receivable | |
$ | 176,851 | |
| | |
| | |
| Fair value of consideration received | |
| 176,851 | |
| | |
| | |
| Recognized amounts of identifiable assets sold and liabilities assumed by buyer: | |
| | |
| | |
| | |
| Cash | |
| 325,316 | |
| Lifeline revenue due from USAC | |
| 74,650 | |
| Inventory | |
| 107,089 | |
| Property and equipment - net | |
| 20,645 | |
| Operating lease - right of use asset - net | |
| 10,981 | |
| Total assets sold | |
| 538,681 | |
| | |
| | |
| Accounts payable and accrued expenses | |
| 1,183,850 | |
| Line of credit | |
| 912,870 | |
| Note payable - SBA government | |
| 150,000 | |
| Operating lease liability | |
| 10,981 | |
| Total liabilities assumed by buyer | |
| 2,257,701 | |
| | |
| | |
| Total net liabilities assumed by buyer | |
| 1,719,020 | |
| | |
| | |
| Gain on deconsolidation of True Wireless | |
| 1,895,871 | |
Business
Segments and Concentrations
The
Company uses the “management approach” to identify its reportable segments. The management approach requires companies to
report segment financial information consistent with information used by management for making operating decisions and assessing performance
as the basis for identifying the Company’s reportable segments. The Company manages its business as multiple reportable segments.
Customers
in the United States accounted for 100% of our revenues. We do not have any property or equipment outside of the United States.
See
Note 10 regarding segment disclosure.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Use
of Estimates
Preparing
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues
and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant
estimates during the three months ended March 31, 2022 and the year ended December 31, 2021, respectively, include, allowance for doubtful
accounts and other receivables, inventory reserves and classifications, valuation of loss contingencies, valuation of derivative liabilities,
valuation of stock-based compensation, estimated useful lives related to intangible assets and property and equipment, implicit interest
rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred tax assets.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations
are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business
failure.
The
Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions in
the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility
of prices in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project
the Company’s operating results on a consistent basis.
Fair
Value of Financial Instruments
The
Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements.
ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific
asset or liability.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
The
Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring
basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement.
The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining
fair value.
The
three tiers are defined as follows:
| |
● |
Level
1 —Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; |
| |
● |
Level
2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace
for identical or similar assets and liabilities; and |
| |
● |
Level
3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The
determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations
often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation
methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the
asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions
of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors
to assist us in determining fair value, as appropriate.
Although
the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative
of net realizable value or reflective of future fair values.
The
Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, and accounts payable
and accrued expenses – related party, are carried at historical cost. At March 31, 2022 and December 31, 2021, respectively, the
carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.
ASC
825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities
at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable
unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument
should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding
financial instruments.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Cash
and Cash Equivalents and Concentration of Credit Risk
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months
or less at the purchase date and money market accounts to be cash equivalents.
At
March 31, 2022 and December 31, 2021, respectively, the Company did not have any cash equivalents.
The
Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent
account balances exceed the amount insured by the FDIC, which is $250,000. At March 31, 2022 and December 31, 2021, the Company did not
experience any losses on cash balances in excess of FDIC insured limits.
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from outstanding customer balances. Credit is extended to customers
based on an evaluation of their financial condition and other factors. Interest is not accrued on overdue accounts receivable. The Company
does not require collateral.
Management
periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible
amounts. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical
collection information and existing economic conditions. Accounts determined to be uncollectible are charged to operations when that
determination is made.
Allowance
for doubtful accounts was $137,218 and $137,218 at March 31, 2022 and December 31, 2021, respectively.
For
the three months ended March 31, 2022 and 2021, the Company recorded a bad debt expense of $0 and $0, respectively.
Bad
debt expense (recovery) is recorded as a component of general and administrative expenses in the accompanying consolidated statements
of operations.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Inventory
Inventory
primarily consists of primarily of tablets and sim cards. Inventories are stated at the lower of cost or net realizable value using the
first-in, first-out (FIFO) valuation method. At March 31, 2022 and December 31, 2021, the Company had inventory of $3,075,529 and $4,359,296,
respectively.
Impairment
of Long-lived Assets
Management
evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances
indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived
Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible
assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative
to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes
in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be
generated from the use and ultimate disposition of these assets.
If
impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to
be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
There
were no impairment losses for the three months ended March 31, 2022 and 2021, respectively.
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated
useful lives of the assets.
Expenditures
for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When
property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective
accounts with the resulting gain or loss reflected in operations.
Management
reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount
of the asset may not be recoverable.
There
were no impairment losses for the three months ended March 31, 2022 and 2021, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Right
of Use Assets and Lease Obligations
The
Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments over
the lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental
borrowing rate.
Typically,
renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements
exceed that of the initial lease term, and the performance of the business remains strong. Therefore, the Right of Use Asset and Lease
Liability may include an assumption on renewal options that have not yet been exercised by the Company. At March 31, 2022, the
Company’s operating leases contained 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.
As
the rate implicit in leases are not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability
that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease
within a particular currency environment. See Note 8.
Derivative
Liabilities
The
Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, (“ASC 480”),
“Distinguishing Liabilities from Equity” and FASB ASC Topic No. 815, (“ASC 815”) “Derivatives
and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in
the fair value being recorded in results of operations as adjustments to fair value of derivatives. The Company uses a binomial model
to determine fair value.
Upon
conversion of a note where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company
records the shares at fair value, relieves all related notes, derivatives, and debt discounts, and recognizes a net gain or loss on debt
extinguishment. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815
are reclassified to liabilities at the fair value of the instrument on the reclassification date.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Debt
Issue Cost
Debt
issuance cost paid to lenders, or third parties are amortized to interest expense in the consolidated statements of operations, over
the life of the underlying debt instrument.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely with the delivery of the Company’s
services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when
a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects
to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
Identify
the contract with a customer
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s
rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial
substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable
based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s
ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or,
in the case of a new customer, published credit and financial information pertaining to the customer.
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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
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, 2022 and December 31, 2021, respectively, contained a significant financing component.
Allocate
the transaction price to performance obligations in the contract
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract
with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a
specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised
in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations
require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless
the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service
that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance
obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the
standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines
related to the performance obligations.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Recognize
revenue when or as the Company satisfies a performance obligation
The
Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance
obligation is satisfied by transferring a promised service to a customer.
The
following reflects additional discussion regarding our revenue recognition policies for each of our material revenue streams. For each
revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration
is fixed and determinable at the initiation of the contract. Performance obligations for Torch, TW and LogicsIQ are satisfied when services
are performed. Performance obligations for ECS and SB are satisfied at point of sale.
For
each revenue stream we only have a single performance obligation.
Surge
Phone Wireless (SPW)
SPW
is licensed to provide subsidized mobile broadband services through the FCC’s Affordable Connectivity Program (ACP) to qualifying
low-income customers in fourteen states. Revenues are recognized when an ACP application is completed and accepted. Each month we reconcile
subscriber usage to ensure the service was utilized. A monthly file is submitted to the Universal Service Administrative Company for
review and approval, at which time we have completed our performance obligation and recognize accounts receivable and revenue. Revenues
are recorded in the month when services were rendered, with payment typically received on the 28th of the following month.
Torch
Wireless
Torch
Wireless is licensed to provide subsidized mobile broadband services through the FCC’s Affordable Connectivity Program (ACP) to
qualifying low-income customers in all fifty states. Revenues are recognized when an ACP application is completed and accepted. Each
month we reconcile subscriber usage to ensure the service was utilized. A monthly file is submitted to the Universal Service Administrative
Company for review and approval, at which time we have completed our performance obligation and recognize accounts receivable and revenue.
Revenues are recorded in the month when services were rendered, with payment typically received on the 28th of the following month.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Surge
Blockchain
Revenues
are generated through the sale of various products such as energy drinks, CBD products, and other top selling products in convenience
store and bodega nationwide. At the time in which our products are sold at the store our performance obligation is considered complete.
At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
LogicsIQ
LogicsIQ
is an enterprise software development company providing marketing business intelligence (“BI”), plaintiff generation and
case load management solutions for law firms representing plaintiffs in Mass Tort legal cases. Revenues are earned from our lead generation
and retained services offerings.
Lead
generation consist of sourcing leads, which requires us to drive traffic to our landing pages for a specific marketing campaign. We also
achieve this in certain marketing campaigns by using third-party preferred vendors to meet the needs of our clients. Revenues are recognized
at the time the lead is delivered to the client. If payment is received in advance of the delivery of services, it is included in deferred
revenue, and subsequently recognized once the performance obligation has been completed.
Retained
service offerings consist of turning leads into a retained legal case. To provide this service to our customers, we qualify leads through
verification of information collected during the lead generation process. Additionally, we further qualify these leads using a client
questionnaire which assists in determining the services to be provided. The qualification process is completed using our call center
operations.
If
payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the
performance obligation has been completed. At the time of delivery of leads and the creation of retained cases (customers are qualified
at this point), our performance obligation has been completed and revenues are recognized. Arrangements with customers do not provide
the customer with the right to take possession of our software or platform at any time. Once the advertising is delivered, it is non-refundable.
Surge
Fintech and ECS
Revenues
are generated through the sale of telecommunication products such as mobile phones, wireless top-up refills, and other mobile related
products. At the time in which our products are sold through our online web portal (point of sale), our performance obligation is considered
complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording
revenue.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
True
Wireless (TW) (Former Subsidiary)
TW
was licensed to provide wireless services to qualifying low-income customers in five states. Revenues were recognized when a lifeline
application was completed and accepted. Each month we reconciled subscriber usage to ensure the service was utilized. A monthly file
was submitted to the Universal Service Administrative Company for review and approval, at which time we completed our performance obligation
and recognized accounts receivable and revenue. Revenues were recorded in the month when services were rendered, with payment typically
received on the 15th of the following month. If the subscriber did not utilize the Lifeline service during the month, we had
15-days to cure usage. If not cured, the subscriber was de-enrolled from the lifeline program at day 45. This process to verify usage
and de-enrollment had been temporarily suspended due to the COVID-19 pandemic. Historically, we had had an insignificant amount of subscribers
de-enrolled.
TW
was sold in May 2021 and has been deconsolidated as of the disposal date.
Contract
Liabilities (Deferred Revenue)
Contract
liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion
of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer
deposit is relieved and revenue is recognized.
At
March 31, 2022 and 2021, the Company had deferred revenue of $317,700 and $276,250, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
The
following represents the Company’s disaggregation of revenues for the three months ended March 31, 2022 and 2021:
Schedule of Disaggregation of Revenue from Contracts with Customers
| | |
Three Months Ended | |
| | |
2022 | | |
2021 | |
| Revenue | |
Revenue | | |
% of Revenues | | |
Revenue | | |
% of Revenues | |
| | |
| | |
| | |
| | |
| |
| Surge Phone Wireless | |
$ | 10,985,878 | | |
| 52 | % | |
$ | 1,077 | | |
| 0 | % |
| Surge Fintech and ECS | |
| 4,770,440 | | |
| 23 | % | |
| 6,914,486 | | |
| 63 | % |
| Torch Wireless | |
| 3,062,153 | | |
| 14 | % | |
| - | | |
| 0 | % |
| LogicsIQ, Inc. | |
| 2,293,072 | | |
| 11 | % | |
| 3,408,403 | | |
| 31 | % |
| Surge Blockchain, LLC | |
| 29,829 | | |
| 0 | % | |
| 35,887 | | |
| 0 | % |
| True Wireless | |
| - | | |
| 0 | % | |
| 628,325 | | |
| 6 | % |
| Other | |
| - | | |
| 0 | % | |
| 770 | | |
| 0 | % |
| Total Revenues | |
$ | 21,141,372 | | |
| 100 | % | |
$ | 10,988,948 | | |
| 100 | % |
Cost
of Revenues
Cost
of revenues primarily consists of purchased telecom services and access to wireless networks.
Income
Taxes
The
Company accounts for income tax using the asset and liability method prescribed by ASC 740, “Income Taxes”. Under
this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse.
The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not
that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is
recognized as income or loss in the period that includes the enactment date.
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using
that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position
will be sustained upon examination by the tax authorities. As of March 31, 2022 and December 31, 2021, respectively, the Company had
no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
The
Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related
to uncertain income tax positions were recorded for the three months ended March 31, 2022 and 2021, respectively.
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, 2022 and 2021, respectively.
Investment
– Former Related Party
On
January 17, 2019, we announced the completion of an agreement to acquire a 40% equity ownership of CenterCom Global, S.A. de C.V. (“CenterCom”).
CenterCom is a dynamic operations center currently providing sales support, customer service, IT infrastructure design, graphic media,
database programming, software development, revenue assurance, lead generation, and other various operational support services. Our CenterCom
team is based in El Salvador. CenterCom also provides call center support for various third-party clients.
Anthony
N. Nuzzo, a director and officer and the holder of approximately 10% of our voting equity had a controlling interest in CenterCom Global.
During 2022, Mr. Nuzzo passed away. See Form 8-K filed on March 24, 2022.
The
strategic partnership with CenterCom as a bilingual operations hub has powered our growth and revenue. CenterCom has been built to support
the infrastructure required to rapidly scale in synergy and efficiency to support our sales growth, customer service and development.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
We
account for this investment under the equity method. Investments accounted for under the equity method are recorded based upon the amount
of our investment and adjusted each period for our share of the investee’s income or loss. All investments are reviewed for changes
in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable.
At
March 31, 2022 and December 31, 2021, our investment in CenterCom was $418,105 and $443,288, respectively.
During
the three months ended March 31, 2022 and 2021, we recognized a loss of $25,183 and $73,773, respectively.
During
2021, CenterCom forgave $429,010 of accounts payable owed by SurgePays to CenterCom. As a result of this debt forgiveness, occurring
with a related party, accordingly, there is no gain that is recorded, the Company has increased additional paid in capital.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs are included as a component of general and administrative expense in the consolidated
statements of operations.
The
Company recognized $86,637 and $446,760 in marketing and advertising costs during the three months ended March 31, 2022 and 2021, respectively.
Stock-Based
Compensation
The
Company accounts for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the
fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions
in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by
the issuance of those equity instruments.
The
Company uses the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the
fair value of options.
The
fair value of stock based compensation is determined as of the date of the grant or the date at which the performance of the services
is completed (measurement date) and is recognized over the vesting periods.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
When
determining fair value of stock based compensation, the Company considers the following assumptions in the Black-Scholes model:
| ● |
Exercise
price, |
| ● |
Expected
dividends, |
| ● |
Expected
volatility, |
| ● |
Risk-free
interest rate; and |
| ● |
Expected
life of option |
Stock
Warrants
In
connection with certain financing, consulting and collaboration arrangements, the Company may issue warrants to purchase shares of its
common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are
classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the
measurement date. Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction
in additional paid-in capital of the common stock issued. All other warrants are recorded at fair value as expense over the requisite
service period or at the date of issuance if there is not a service period.
Basic
and Diluted Earnings (Loss) per Share and Reverse Stock Split
Pursuant
to ASC 260-10-45, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the periods presented.
Diluted
earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents
and potentially dilutive securities outstanding during the period. Potentially dilutive common shares may consist of common stock issuable
for stock options and warrants (using the treasury stock method), convertible notes and common stock issuable. These common stock equivalents
may be dilutive in the future. In the event of a net loss, diluted loss per share is the same as basic loss per share since the effect
of the potential common stock equivalents upon conversion would be anti-dilutive.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
The
following potentially dilutive equity securities outstanding as of March 31, 2022 and 2021 were as follows:
Schedule of Diluted Net Income (Loss) Per Share
| | |
March 31, 2022 | | |
March 31, 2021 | |
| Convertible notes payable and related accrued interest (1) | |
| - | | |
| 314,765 | |
| Warrants (2) | |
| 5,852,127 | | |
| 308,210 | |
| Stock options (3) | |
| 6,801 | | |
| 3,401 | |
| Series A, convertible preferred stock (4) | |
| 26,000 | | |
| 26,000 | |
| Series C, convertible preferred stock (5) | |
| - | | |
| 3,607,980 | |
| Total common stock equivalents | |
| 5,884,928 | | |
| 4,260,356 | |
| 1 | - exercise prices
variable |
| 2 | - weighted average
exercise price - $8.58/share and $30/share, respectively |
| 3 | - weighted average
exercise price - $16/share and $16/share, respectively |
| 4 | -
each share converts to 1/10 of a share of common stock |
| 5 | - each share converts
to 250 shares of common stock |
The
convertible notes contain exercise prices that had a discount to market ranging from 70% - 75% of the 10 or 20 days (See Note 5). As
a result, the amount computed for common stock equivalents could have changed given the quoted closing trading price at each reporting
period.
Warrants
and stock options included as commons stock equivalents represent those that are vested and exercisable.
Based
on the potential common stock equivalents noted above at March 31, 2022 and December 31, 2021, respectively, the Company has sufficient
authorized shares of common stock (500,000,000) to settle any potential exercises of common stock equivalents.
Related
Parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of the Company and its management and other parties with which the Company may
deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one
of the transacting parties might be prevented from fully pursuing its own separate interests.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Recent
Accounting Standards
Changes
to accounting principles are established by the FASB in the form of ASU’s to the FASB’s Codification. We consider the applicability
and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ deficit, cash flows,
or presentation thereof. 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 consolidated
financial statements of the Company.
In
June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments. Codification
Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019
(2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. This guidance replaces the
current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information to inform credit loss estimates. For SEC filers meeting certain criteria, the
amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
For
SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies
and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019.
We
adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s
consolidated financial statements.
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions,
eliminates certain exceptions to existing guidance related to the approach for intra period tax allocation, the methodology for calculating
income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires
an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period
that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes
on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes
the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax
law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
We
adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s
consolidation financial statements.
In
August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity; Own Equity (“ASU 2020-06”),
as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or
improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes
from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component,
unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium.
As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and
will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method
when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current
accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the
fiscal year.
We
adopted this pronouncement on January 1, 2022; however, the adoption of this standard did not have a material effect on the Company’s
consolidated financial statements.
Reclassifications
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on
the consolidated results of operations, stockholders’ equity (deficit), or cash flows.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Note
3 – Property and Equipment
Property
and equipment consisted of the following:
Schedule of Property and Equipment
| Type | |
March 31, 2022 | | |
December 31, 2021 | | |
Estimated Useful
Lives (Years) |
| | |
| | |
| | |
|
| Computer equipment and software | |
$ | 293,130 | | |
$ | 283,484 | | |
3 - 5 |
| Furniture and fixtures | |
| 84,507 | | |
| 82,752 | | |
5 - 7 |
| Property and equipment, gross | |
| 377,637 | | |
| 366,236 | | |
|
| Less: accumulated depreciation | |
| (173,479 | ) | |
| (165,788 | ) | |
|
| Property and equipment - net | |
$ | 204,158 | | |
$ | 200,448 | | |
|
Depreciation
expense for the three months ended March 31, 2022 and 2021 was $7,691 and $15,831, respectively.
These
amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Note
4 – Intangibles
Intangibles
consisted of the following:
Schedule of Intangible Assets
| Type | |
March 31, 2022 | | |
December 31, 2021 | | |
Estimated Useful
Lives (Years) |
| | |
| | |
| | |
|
| Proprietary Software | |
$ | 4,286,402 | | |
$ | 4,286,402 | | |
7 |
| Tradenames/trademarks | |
| 617,474 | | |
| 617,474 | | |
15 |
| ECS membership agreement | |
| 465,000 | | |
| 465,000 | | |
1 |
| Noncompetition agreement | |
| 201,389 | | |
| 201,389 | | |
2 |
| Customer Relationships | |
| 183,255 | | |
| 183,255 | | |
5 |
| | |
| 5,753,520 | | |
| 5,753,520 | | |
|
| Less: accumulated amortization | |
| (2,483,413 | ) | |
| (2,320,036 | ) | |
|
| Intangibles - net | |
$ | 3,270,107 | | |
$ | 3,433,484 | | |
|
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
ECS
has been a financial technology and wireless top-up platform for over 15 years. On October 1, 2019, we acquired ECS primarily for the
favorable ACH banking relationships and a fintech transactions platform (proprietary software) processing over 20,000 transactions a
day at approximately 8,000 independently owned retail stores. The goal was to incorporate our blockchain components into the existing
ECS network (proprietary software). After a year of development and integration, we believe the ECS platform has been successfully merged
into our platform with secure ledger data backups and will continue to serve as the proven backbone for wireless top-up transactions
and wireless product aggregation. The majority of the purchase price was allocated to the “Proprietary Software” category
being amortized straight-line over seven years.
Amortization
expense for the three months ended March 31, 2022 and 2021 was $163,377 and $202,127, respectively.
Estimated
amortization expense for each of the five (5) succeeding years is as follows:
Scheduled of Estimated Amortization Expenses
| For the Year Ended December 31, 2022: | |
| |
| | |
| |
| 2022 (9 months) | |
$ | 490,131 | |
| 2023 | |
| 653,508 | |
| 2024 | |
| 653,508 | |
| 2025 | |
| 653,508 | |
| 2026 | |
| 653,508 | |
| 2027 | |
| 165,944 | |
| Total | |
$ | 3,270,107 | |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Note
5 – Debt
The
following represents a summary of the Company’s notes payable – SBA government, loans payable – related parties, notes
payable and convertible notes, key terms, and outstanding balances at March 31, 2022 and December 31, 2021, respectively:
Notes
Payable – SBA government
(1) Paycheck Protection Program - PPP Loan
Pertaining
to the Company’s eighteen (18) month loan and in accordance with the Paycheck Protection Program (“PPP”) and Conditional
Loan Forgiveness, the promissory note evidencing the loan contains customary events of default relating to, among other things, payment
defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result
in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment
against the Company.
Under
the terms of the PPP loan program, all or a portion of this Loan may be forgiven upon request from Borrower to Lender, provided the Loan
proceeds are used in accordance with the terms of the Coronavirus Aid, Relief and Economic Security Act (the “Act” or “CARES”),
Borrower is not in default under the Loan or any of the Loan Documents, and Borrower has provided documentation to Lender supporting
such request for forgiveness that includes verifiable information on Borrower’s use of the Loan proceeds, to Lender’s satisfaction,
in its sole and absolute discretion.
(2) Economic Injury Disaster Loan (“EIDL”)
This
program was made available to eligible borrowers in light of the impact of the COVID-19 pandemic and the negative economic impact on
the Company’s business. Proceeds from the EIDL are to be used for working capital purposes.
Installment
payments, including principal and interest, are due monthly (beginning twelve (12) months from the date of the promissory note) in amounts
ranging from $109 - $751/month. The balance of principal and interest is payable over the next thirty (30) years from the date of the
promissory note. There are no penalties for prepayment. Based upon guidance issued by the SBA on June19, 2020, the EIDL Loan is not required
to be refinanced by the PPP loan.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Schedule of Notes Payable
| | |
PPP | | |
EIDL | | |
EIDL | | |
PPP | | |
| |
| Terms | |
SBA | | |
SBA | | |
SBA | | |
SBA | | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| Issuance dates of SBA loans | |
| April 2020 | | |
| May 2020 | | |
| July 2020 | | |
| March 2021 | | |
| | |
| Term | |
| 18 months | | |
| 30 Years | | |
| 30 Years | | |
| 5 Years | | |
| | |
| Maturity date | |
| October 2021 | | |
| May 2050 | | |
| July 2050 | | |
| March 2026 | | |
| | |
| Interest rate | |
| 1 | % | |
| 3.75 | % | |
| 3.75 | % | |
| 1 | % | |
| | |
| Collateral | |
| Unsecured | | |
| Unsecured | | |
| Unsecured | | |
| Unsecured | | |
| | |
| Conversion price | |
| N/A | | |
| N/A | | |
| N/A | | |
| N/A | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| Total | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Principal | |
$ | 498,082 | | |
$ | 150,000 | | |
$ | 486,600 | | |
$ | 518,167 | | |
$ | 1,652,849 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance - December 31, 2020 | |
$ | 498,082 | | |
$ | 150,000 | | |
$ | 486,600 | | |
$ | - | | |
$ | 1,134,682 | |
| Gross proceeds | |
| - | | |
| - | | |
| - | | |
| 518,167 | | |
| 518,167 | |
| Forgiveness of loan | |
| (371,664 | ) | |
| - | | |
| - | | |
| - | | |
| (371,664 | )1 |
| Deconsolidation of subsidiary (“TW”) | |
| - | | |
| - | | |
| (150,000 | ) | |
| - | | |
| (150,000 | )2 |
| Balance - December 31, 2021 | |
| 126,418 | | |
| 150,000 | | |
| 336,600 | | |
| 518,167 | | |
| 1,131,185 | |
| Repayments | |
| - | | |
| (2,176 | ) | |
| (3,437 | ) | |
| - | | |
| (5,613 | ) |
| Balance - March 31, 2022 | |
$ | 126,418 | | |
$ | 147,824 | | |
$ | 333,163 | | |
$ | 518,167 | | |
$ | 1,125,572 | |
| 1 |
During
2021, the Company received a partial forgiveness on a PPP loan totaling $377,743, of which $371,664 was for principal and $6,079
for accrued interest. The Company recorded this forgiveness as other income in the accompanying consolidated statements of operations.
|
| |
|
| 2 |
In
connection with the deconsolidation of TW in 2021, $150,000 was assumed by the buyer. |
On
April 27, 2022, the Company received forgiveness on a PPP loan of $524,144, of which $518,167 was for principal and $5,977 was for accrued
interest. The Company will record the loan forgiveness as other income during the second quarter of 2022.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Notes
Payable – Related Parties
Schedule of Notes Payable
| | |
| 1 | | |
| 2 | | |
| 3 | | |
| | |
| | |
| Loan Payable | | |
| Loan Payable | | |
| Loan Payable | | |
| | |
| Terms | |
| Related Party | | |
| Related Party | | |
| Related
Party | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Issuance dates of notes | |
| Various | | |
| May 2020/January 2021 | | |
| August 2021 | | |
| | |
| Maturity date | |
| January 1, 2025 | | |
| March 2021 and | | |
| August 2031 | | |
| | |
| Interest rate | |
| 10 | % | |
| 15 | % | |
| 10 | % | |
| | |
| Collateral | |
| Unsecured | | |
| Unsecured | | |
| Unsecured | | |
| | |
| Conversion price | |
| N/A | | |
| N/A | | |
| N/A | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance - December 31, 2020 | |
$ | 3,341,940 | | |
$ | 147,500 | | |
$ | - | | |
$ | 3,489,440 | |
| Gross proceeds | |
| 3,825,000 | | |
| 63,000 | | |
| 467,385 | | |
| 4,355,385 | |
| Accrued interest included in note balance | |
| 692,458 | | |
| - | | |
| - | | |
| 692,458 | |
| Conversion of debt into common stock | |
| (2,265,967 | ) | |
| - | | |
| - | | |
| (2,265,967 | ) |
| Repayments | |
| - | | |
| (210,500 | ) | |
| - | | |
| (210,500 | ) |
| Balance - December 31, 2021 | |
| 5,593,431 | | |
| - | | |
| 467,385 | | |
| 6,060,816 | |
| No activity - 2022 | |
| - | | |
| - | | |
| - | | |
| - | |
| Balance - March 31, 2022 | |
$ | 5,593,431 | | |
$ | - | | |
$ | 467,385 | | |
$ | 6,060,816 | |
| 1 |
Activity
is with the Company’s Chief Executive Officer and Board Director (Kevin Brian Cox). Prior to September 30, 2021, these notes
were either due on demand or had a specific due date. Additionally, these advances had interest rates from 6% - 15%. On September
30, 2021, all notes and related accrued interest were combined into two (2) new notes. |
| |
|
| |
The
new notes had due dates of June 30, 2022 or January 1, 2023. In April 2022, the notes were extended to January 1, 2023 and January
1, 2024, respectively. All notes bear interest at 10%. At September 30, 2021, the Company included $692,458 of accrued interest in the new
note balance. In 2021, the Company issued 561,758 shares of common stock at $4.30/share to settle $2,415,560 of debt including principal
of $2,265,967 and accrued interest of $149,593. As a result of the debt conversion with a related party, accordingly gains/losses
are not recognized, however, the Company increased additional paid-in capital for $2,415,560. |
| |
|
| 2 |
Activity
was with the Company’s former President, Chief Operating Officer and Board Director (Anthony Nuzzo). Mr. Nuzzo passed away
in 2022. |
| |
|
| 3 |
Activity
is with David May, who is a Board Member. |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Notes
Payable
Schedule of Notes Payable
| Terms | |
Notes Payable | | |
Note Payable | | |
Notes Payable | | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| Issuance dates of notes | |
| March 2022 | | |
| November 2019 | | |
| August/September/October 2021 | | |
| | | |
| | |
| Maturity date | |
| September 2022 | | |
| November 2020 | | |
| August/September/October 2022 | | |
| | | |
| | |
| Interest rate | |
| 19 | % | |
| 18 | % | |
| 10 | % | |
| | | |
| | |
| Default interest rate | |
| 26 | % | |
| 0 | % | |
| 0 | % | |
| | | |
| | |
| Collateral | |
| Unsecured | | |
| Unsecured | | |
| Unsecured | | |
| | | |
| | |
| Conversion price | |
| N/A | | |
| N/A | | |
| N/A | | |
| | | |
| | |
| Warrants issued as discount/issue costs | |
| 15,000 | | |
| N/A | | |
| 2,406,250 | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| Total | | |
| In-Default | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Principal | |
$ | 500,000 | | |
$ | 250,000 | | |
$ | 1,101,000 | * | |
$ | 1,851,000 | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance - December 31, 2020 | |
| - | | |
| 250,000 | | |
| - | | |
| 250,000 | | |
$ | 250,000 | |
| Gross proceeds | |
| - | | |
| - | | |
| 1,101,000 | | |
| 1,101,000 | | |
| | |
| Debt discount | |
| - | | |
| - | | |
| (672,254 | ) | |
| (672,254 | ) | |
| | |
| Amortization of debt discount | |
| - | | |
| - | | |
| 698,511 | | |
| 698,511 | | |
| | |
| Repayments | |
| - | | |
| (250,000 | ) | |
| (1,127,257 | ) | |
| (1,377,257 | ) | |
| | |
| Balance - December 31, 2021 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Gross proceeds | |
| 500,000 | | |
| - | | |
| - | | |
| 500,000 | | |
| | |
| Debt issue costs | |
| (38,953 | ) | |
| - | | |
| - | | |
| (38,953 | ) | |
| | |
| Balance - March 31, 2022 | |
$ | 461,047 | | |
$ | - | | |
$ | - | | |
$ | 461,047 | | |
| - | |
| * |
In
the event of default, these notes were convertible at 75% of the market price based upon the VWAP in preceding 10 days. There were
defaults. |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Convertible
Notes Payable – Net
Schedule of Notes Payable
| | |
Convertible | | |
Convertible | | |
Convertible | | |
| | |
| |
| Terms | |
Notes Payable | | |
Notes Payable | | |
Notes Payable | | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| Issuance dates of notes | |
| 2019 and Prior | | |
| February 2020 - December 2020 | | |
| January 2021 - March 2021 | | |
| | | |
| | |
| Maturity date | |
| 2020 | | |
| February 2021 - September 2021 | | |
| May 2021 - March 2022 | | |
| | | |
| | |
| Interest rate | |
| 14 | % | |
| 10% - 14 | % | |
| 5% - 12 | % | |
| | | |
| | |
| Collateral | |
| Unsecured | | |
| Unsecured | | |
| Unsecured | | |
| | | |
| | |
| Conversion price | |
| A | | |
| A | | |
| B | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| Total | | |
| In-Default
| |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Principal | |
$ | - | | |
$ | 2,347,000 | | |
$ | 2,550,000 | | |
$ | 4,897,000 | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance - December 31, 2020 | |
$ | - | | |
$ | 1,516,170 | | |
$ | - | | |
$ | 1,516,170 | | |
| - | |
| Gross proceeds | |
| - | | |
| - | | |
| 2,550,000 | | |
| 2,550,000 | | |
| | |
| Debt discount | |
| - | | |
| - | | |
| (2,460,829 | ) | |
| (2,460,829 | ) | |
| | |
| Amortization of debt discount | |
| - | | |
| 517,781 | | |
| 2,460,829 | | |
| 2,978,610 | | |
| | |
| Repayments - cash | |
| - | | |
| - | | |
| (2,550,000 | )D | |
| (2,550,000 | ) | |
| | |
| Conversion to equity/debt modification | |
| - | | |
| (2,110,898 | ) | |
| - | | |
| (2,110,898 | ) | |
| | |
| Reclassified to receivable | |
| - | | |
| 76,947 | C | |
| - | | |
| 76,947 | | |
| | |
| Balance - December 31, 2021 | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| A | | – Convertible
at 65%
multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock during the
ten (10) trading days prior to conversion. |
| B | | – Convertible
at 70%
- 75%
multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock during the
ten (10) trading days prior to conversion. |
| C | | - During 2021,
the Company over paid a note holder by $76,947
when settling the outstanding balance. This overpayment
had been recorded as a receivable and was repaid in full in April 2021. |
| D | | - During 2021,
the Company repaid the $2,550,000 of
notes in full, however, one of the notes, having a principal of $2,300,000
was prepaid early. As a result, the Company paid
an additional prepayment penalty equal to 120%
of the amount due, resulting in additional interest expense of $465,239.
Also, at the time of repayment, the embedded derivative liability ceased to exist. |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Line
of Credit
The
Company had a $1,000,000 line of credit with a bank, bearing interest at 6%, which was due in April 2021. The line of credit was secured
by all of the Company’s assets and was personally guaranteed by the owner of the majority of the Company’s voting shares.
The balance at March 31, 2022 and December 31, 2021 was $0 and $0, respectively. In connection with the deconsolidation of TW in May
2021, the buyer assumed the line of credit.
Note
6 – Derivative Liabilities
During
2021, the above convertible notes contained embedded conversion options with a conversion price that could result in issuing an undeterminable
amount of future common stock to settle the host contract. Accordingly, the embedded conversion option is required to be bifurcated from
the host instrument (convertible note) and treated as a liability, which is calculated at fair value, and marked to market at each reporting
period.
The
Company used the binomial pricing model to estimate the fair value of its embedded conversion option liabilities with the following inputs:
Schedule of Weighted Average Assumptions
| | |
December 31, 2021 | |
| Expected term (years) | |
| 0.20 - 1 year | |
| Expected volatility | |
| 143% - 291 | % |
| Expected dividends | |
| 0 | % |
| Risk free interest rate | |
| 0.03% - 0.09 | % |
A
reconciliation of the beginning and ending balances for the derivative liability measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) is as follows at December 31, 2021:
Summary of Changes in Fair Value
| Derivative liability - December 31, 2020 | |
$ | 1,357,528 | |
| Fair value at commitment date | |
| 1,877,250 | |
| Fair value mark to market adjustment | |
| (1,806,763 | ) |
| Gain on derivative liability upon related debt settled | |
| (1,428,015 | ) |
| Derivative liability - December 31, 2021 | |
$ | - | |
Changes
in fair value of derivative liabilities are included in other income (expense) in the accompanying consolidated statements of operations.
During
the three months ended March 31, 2022 and 2021, the Company recorded a change in fair of derivative liabilities of $0 and $303,850, respectively.
These amounts reflect a mark to market adjustment recorded to the accompanying consolidated statements of operations.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
In
connection with bifurcating the embedded conversion option and accounting for this instrument at fair value, the Company computed a fair
value on the commitment date, and upon the initial valuation of this instrument, determined that the fair value of the liability exceeded
the proceeds of the debt host instrument. As a result, the Company recorded a debt discount at the maximum amount allowed (the face amount
of the debt), which required the overage to be recorded as a derivative expense.
For
the three months years ended March 31, 2022 and 2021, the Company recorded a derivative expense of $0 and $1,775,057, respectively.
During
the year ended December 31, 2021, in connection with the repayment of convertible notes which contained embedded conversion features,
the related derivative liabilities ceased to exist.
During
the three months ended March 31, 2022 and 2021, the Company recorded a gain of $0 and $141,578, respectively, related to the settlement
of convertible debt which contained an embedded conversion feature and was separately bifurcated and classified as a derivative liability.
The Company has recorded these gains in the accompanying consolidated statements of operations as a component of gain on settlement of
liabilities.
Note
7 – Fair Value of Financial Instruments
The
Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate
level in which to classify them for each reporting period. This determination requires significant judgments to be made.
The
Company did not have any assets or liabilities measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021, respectively
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Note
8 – Commitments and Contingencies
Operating
Lease
We
have entered into various operating lease agreements, including our corporate headquarters. We account for leases in accordance with
ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease
liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating,
with classification affecting the pattern of expense recognition in the statement of operations. In addition, a lessor is required to
classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all of the risks and
rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control,
the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating. We determine
if an arrangement is a lease, or contains a lease, at inception and record the lease in our financial statements upon lease commencement,
which is the date when the underlying asset is made available for use by the lessor.
Right-of-use
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of
lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at commencement
to determine the present value of lease payments except when an implicit interest rate is readily determinable. We determine our incremental
borrowing rate based on market sources including relevant industry data.
We
have lease agreements with lease and non-lease components and have elected to utilize the practical expedient to account for lease and
non-lease components together as a single combined lease component, from both a lessee and lessor perspective with the exception of direct
sales-type leases and production equipment classes embedded in supply agreements. From a lessor perspective, the timing and pattern of
transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately,
would be classified as an operating lease.
We
have elected not to present short-term leases on the balance sheet as these leases have a lease term of 12 months or less at lease inception
and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities
are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not
provide an implicit rate of return, we used our incremental borrowing rate based on the information available at lease commencement date
in determining the present value of lease payments.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Our
leases, where we are the lessee, do not include an option to extend the lease term. Our lease also includes an option to terminate the
lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease term would include options
to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Lease
expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, included as a component
of general and administrative expenses, in the accompanying consolidated statements of operations.
Certain
operating leases provide for annual increases to lease payments based on an index or rate, our lease has no stated increase, payments
were fixed at lease inception. We calculate the present value of future lease payments based on the index or rate at the lease commencement
date. Differences between the calculated lease payment and actual payment are expensed as incurred.
At
March 31, 2022 and December 31, 2021, respectively, the Company has no financing leases as defined in ASC 842, “Leases.”
The
tables below present information regarding the Company’s operating lease assets and liabilities at March 31, 2022 and December
31, 2021, respectively:
Schedule of Lease Expense
| | |
For the Three Months Ended | | |
For the Three Months Ended | |
| | |
March 31, 2022 | | |
March 31, 2021 | |
| Operating Leases | |
$ | 23,952 | | |
$ | 73,618 | |
| Interest on lease liabilities | |
| 5,868 | | |
| 6,542 | |
| Total net lease cost | |
$ | 29,820 | | |
$ | 80,160 | |
Supplemental
balance sheet information related to leases was as follows:
Schedule of Supplemental Information Related to Leases
| | |
March 31, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Operating leases | |
| | | |
| | |
| | |
| | | |
| | |
| Operating lease ROU assets - net | |
$ | 462,716 | | |
$ | 486,668 | |
| | |
| | | |
| | |
| Operating lease liabilities - current | |
| 36,871 | | |
| 49,352 | |
| Operating lease liabilities - non-current | |
| 429,354 | | |
| 438,903 | |
| Total operating lease liabilities | |
$ | 466,225 | | |
$ | 488,255 | |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Supplemental
cash flow and other information related to leases was as follows:
Schedule of Supplemental Cash Flow and Other Information Related to Leases
| | |
For the Three
Months Ended | | |
For the Three
Months Ended | |
| | |
March 31, 2022 | | |
March 31, 2021 | |
|
| Cash paid for amounts included in measurement of lease liabilities Operating cash flows
from operating leases | |
$ | 22,030 | | |
$ | 67,716 | |
| | |
| | | |
| | |
| ROU assets obtained in exchange for lease liabilities Operating leases | |
$ | - | | |
$ | 518,848 | |
| | |
| | | |
| | |
| Weighted average remaining lease term (in years) Operating leases | |
| 8.24 | | |
| 6.09 | |
| | |
| | | |
| | |
| Weighted average discount rate Operating leases | |
| 5 | % | |
| 8 | % |
Schedule of Future Minimum Payments
| | |
| |
| Future minimum lease payments at March 31, 2022 |
| | |
| |
| 2022 (9 months) | |
$ | 44,173 | |
| 2023 | |
| 60,294 | |
| 2024 | |
| 61,876 | |
| 2025 | |
| 63,460 | |
| Thereafter | |
| 349,177 | |
| Total lease payments | |
| 578,980 | |
| Less: amount representing interest | |
| (112,755 | ) |
| Total lease obligations | |
$ | 466,225 | |
In
May 2021, the Company and its landlord mutually agreed to terminate the outstanding lease for ECS. The Company had an outstanding ROU
liability of $228,752 at the date of termination. There was no gain or loss on lease termination.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Contingencies
– Legal Matters
True
Wireless and Surge Holdings - Terracom Litigation
Global
Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton
County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom
believes Mr. Coffman and Mr. Carroll are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma
and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as
such we believe True Wireless has a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and
Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc.,
but not in wireless sales. The complaint requests general damages plus fees and costs for tortious interference with a business relationship
in their prayer for relief. They have made no written demand for damages at this point in time. The Company believes this matter is simply
an anti-competitive attempt by Terracom to cause distress to True Wireless.
Surge
Holdings – Juno Litigation
Juno
Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712
DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint
against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following
analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary.
Unimax
- Litigation
On
July 9, 2020, the Company entered into a settlement and release agreement with Unimax Communications, LLC (“Unimax”). The
settlement is related to a complaint filed by Unimax alleging the Company is indebted pursuant to a purchase order and additional financing
terms. The Company agreed to pay Unimax the total sum of $785,000 over a 24-month period. The settlement amount is included accounts
payable and accrued expenses on the consolidated balance sheets. The balance was repaid in April 2021.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Glen
Eagles Litigation
SurgePays,
Inc., formerly named as Surge Holdings, Inc., a Nevada corporation, Plaintiff, vs. Glen Eagles Acquisition LP, a Delaware limited partnership,
Defendant; District Court Clark County, Nevada; Case No.: A-21-831204-B
ALTCORP
TRADING, LLC, a Costa Rica limited liability company; et al, Plaintiffs, vs. Surge Holdings, Inc., a Nevada corporation; VSTOCK Transfer,
LLC, a California limited liability company, et al; District Court Clark County, Nevada; Case No.: A-20-823039-B
These
two lawsuits involved AltCorp Trading, LLC, Stanley Hills, LLC, and Glen Eagles Acquisition LP (the “AltCorp Parties.”).
Each of these lawsuits were ultimately disputes relating to the total consideration the Company paid to GBT Technologies, Inc. (“GBT”)
to acquire all of the assets of the entities that comprise the ECS Business (prior to the Company’s January 2020 acquisition of
the entities themselves).
On
October 18, 2021, the AltCorp Parties, GBT, and the Company entered into a non-binding Memorandum of Understanding (the “MOU”)
to set up a framework for an attempt to settle the two lawsuits.
On
December 22, 2021 (the “Effective Date”), pursuant to the framework in the MOU, the AltCorp Parties, Igor 1 Corp. (an entity
related to the AltCorp Parties), the Company, ECS Prepaid LLC (“ECS LLC), and, in his individual capacity, Kevin Brian Cox (the
Company’s Chief Executive Officer), entered into a Resolution of Purchase, Mutual Release, and Settlement Agreement (the “Settlement
Agreement”) to settle the two lawsuits and resolve all disputes related to the consideration paid by the Company to GBT.
This
Settlement Agreement was entered into pursuant to a resolution of the Board authorizing the negotiation of and entry into of such agreement.
As
part of this agreement, the Company has acquired GBT’s rights to a certain Master Distribution and Service Agreement between Interactive
Communications International, Inc. and W.L. Petrey Wholesale Company, Inc., d/b/a UGO-HUB dated August 29, 2016 (the “MDA”),
as amended. The MDA contains sales channel access to a variety of unique wholesale prepaid products with approximately $1,500,000 to
$2,500,000 in monthly revenue. The MDA is the subject of a lawsuit between GBT and Robert Warren Jackson, RWJ Advanced Marketing LLC,
and Gregory Bauer int federal district court in Nevada (the “GBT Lawsuit”).
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
If
the result of the GBT Lawsuit is an assignment of the MDA to GBT or that GBT or an affiliate of GBT is the legal owner of the MDA, GBT
or such affiliate will assign the MDA to Surge and GBT shall be entitled to receive the Escrow Amount. If the result of the GBT Lawsuit
is a monetary judgment without the assignment or legal decree of ownership of the MDA, GBT shall be entitled to receive the Escrow Amount
and shall assign and timely pay to the Company the first one million dollars ($1,000,000) GBT recovers from the defendants in the GBT
Lawsuit. In the event that GBT does not prevail in the GBT Lawsuit then it shall be entitled to release of the Escrow Amount but shall
be responsible for any fees and costs obligation sought by the defendants in the GBT Lawsuit.
The
Company agreed to make total payments of four million two hundred thousand dollars ($4,200,000) to Stanley Hills, LLC on or prior to
January 7, 2022. This $4.2 million amount consists of a total of four hundred fifty thousand dollars ($450,000) paid by the Company in
November and December 2021, one hundred thousand dollars ($100,000) to be paid on or about January 4, 2022, and three million six hundred
fifty thousand dollars ($3,650,000) to be paid on or prior to January 7, 2022 of which three hundred seventy-five thousand dollars ($375,000)
will be held in escrow (the “Escrow Amount”). At December 31, 2021, the Company had accrued $3,750,000 as a settlement expense,
which was paid on January 7, 2022.
In
addition, Igor 1 Corp. as of the Effective Date, held one hundred ten thousand (110,000)
shares of the Company’s common stock that has a restrictive legend (the “Igor Shares”). The owner of Igor 1 Corp. will
be responsible for and shall pay for attempting to have the restrictive legend from the Igor Shares removed (with the Company agreeing
to pay seven hundred fifty dollars ($750)
to help pay for the legal opinion required). If Igor 1 Corp. is unable to have the legend removed prior to January 30, 2022, the Company
will pay Igor 1 Corp. five hundred thousand dollars ($500,000)
within five (5) trading days to purchase the Igor Shares back and then cancel them. As of February 4, 2022 (five trading days after
January 30th), the Company was not asked to pay Igor 1 Corp. any funds related to this possible share cancellation.
Glen
Eagles and a related entity as of the Effective Date, held three thousand (3,000) shares of the Company’s common stock (the “Glen
Eagles Shares”). The Glen Eagles shares shall be sold on the open market within thirty (30) days following the Effective Date.
If for any reason the consideration for the Glen Eagles shares is less than fifteen thousand dollars ($15,000), the Company will have
the obligation to compensate Glen Eagles for the difference between the actual amount received and $15,000. Such difference shall be
paid within five (5) days of Glen Eagles providing written proof of the proceeds of the sale of the Glen Eagles Shares. Glen Eagles was
paid $8,552.25 on February 16, 2022 for full settlement.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
The
Settlement Agreement replaces all prior agreements between the parties. In addition, within three (3) trading days of the last payment
related to the $4.2 million payment to Stanley Hills being made, the parties shall make filings with the state District Court in Clark
County, Nevada to dismiss both lawsuits, including, regarding the lawsuit filed by AltCorp Trading, LLC, the dismissal of the lawsuit
as to VStock Transfer, LLC, to which the Company owed certain indemnification obligations. The parties agreed to a full mutual release
of any disputes or claims between the parties. All matters were dismissed by stipulation of the parties on January 12, 2022.
Crystal
Chapman, on behalf of herself and others similarly situated, Plaintiff versus SurgePays, Inc., Defendant; U.S. District Court for the
Northern District of Illinois, Case No.: 1:21-cv-04272. On August 11, 2021, the plaintiffs filed a lawsuit alleging violations of the
Telephone Consumer Protection Act as a putative class action. The plaintiffs are seeking unspecified damages and an order enjoining the
Company or their agents from making autodialed calls. The case alleges contact to consumer(s) whose telephone numbers are on the Federal
Do Not Call list, without their consent. There are no other counts under the TCPA or any other statute or tort. The Company vigorously
disputes the allegations in this complaint as the Company only contacts consumers who have provided express written consent to be contacted.
The Company believes it uses the leading software in the industry for lead verification and believes it can prove consent for all called
parties. This matter was settled in the quarter ended December 31, 2021.
SurgePays
– Ambess Litigation
On
December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of
contract and prays for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion
practice and discovery process.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
True
Wireless and Surge Pays - Litigation
Blue
Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327,
filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless,
LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless
employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the
sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation
agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims
asserted by Blue Skies and True Wireless. The matter is in the early stages of the discovery process. Mr. Coffman is no longer working
for True Wireless. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach
of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the
parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage
SurgePays, SurgePhone, and Cox.
Note
9 – Stockholders’ Equity
Reverse
Stock Split
On
November 2, 2021, the Company effected a 1 for 50 reverse stock split of all classes of its stock. All share and per share amounts have
been retroactively restated to the earliest period presented.
At
March 31, 2022, the Company had three (3) classes of stock:
Common
Stock
| |
- |
500,000,000
shares authorized |
| |
- |
Par
value - $0.001 |
| |
- |
Voting
at 1 vote per share |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Series
A, Convertible Preferred Stock
| |
- |
13,000,000
shares authorized |
| |
- |
260,000
issued and outstanding |
| |
- |
Par
value - $0.001 |
| |
- |
Voting
at 10 votes per share (2,600,000 votes) |
| |
- |
Ranks
senior to any other class of preferred stock |
| |
- |
Dividends
- none |
| |
- |
Liquidation
preference – none |
| |
- |
Rights
of redemption - none |
| |
- |
Conversion
into 1/10 of a share of common stock for each share held (26,000 common stock equivalents) |
Series
C, Convertible Preferred Stock
| |
- |
1,000,000
shares authorized |
| |
- |
None
issued and outstanding |
| |
- |
Par
value - $0.001 |
| |
- |
Voting
at 250 votes per share |
| |
- |
Ranks
junior to any other class of preferred stock |
| |
- |
Dividends
– equal to the per share amount (as converted basis) as the common stockholders should the Board of Directors declare a dividend |
| |
- |
Liquidation
preference – original issue price plus any declared yet unpaid accrued dividends |
| |
- |
Rights
of redemption - none |
| |
- |
Conversion
into 250 shares of common stock for each share held |
In
October 2021, all Series C, Preferred stockholders, representing 721,598 shares issued and outstanding, agreed to convert their holdings
into 3,607,980 shares of common stock. The transaction had a net effect of $0 on stockholders’ equity.
Equity
Transactions for the Year Ended December 31, 2021
NASDAQ
Listing
On
November 2, 2021, the Company was approved to be uplisted to NASDAQ. The common stock and warrants are traded on the Nasdaq Capital Market
under the symbols SURG and SURGW, respectively.
Stock
Issued for Services
The
Company issued 13,411 shares of common stock for services rendered, having a fair value of $99,436 ($5 - $14.05/share), based upon the
quoted closing trading price.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Stock
and Warrants Issued for Cash and Related Direct Offering Costs
The
Company issued an aggregate 4,862,247 shares of common stock for $21,294,800 ($4.30 -$8/share). In connection with raising these funds,
the Company paid $2,222,952 in direct offering costs, resulting in net proceeds of $19,076,710.
Of
the 4,862,247 shares issued in 2021, 4,600,000 shares and 690,000 were sold in connection with the Company’s uplist to NASDAQ as
follows:
On
November 4, 2021, the Company issued 4,600,000 units consisting of one share of common stock and one warrant and 690,000 over-allotment
warrants. The units were sold at $4.30 per unit for gross proceeds of $19,786,900 ($19,780,000 from the sale of 4,600,000 units at $4.30
and $6,900 from the sale of 690,000 over-allotment warrants at $0.01). The warrants are exercisable immediately at $4.73/share and expire
three (3) years from the issuance date.
In
connection with the Company’s sale of common stock, the Company incurred direct offering costs of $2,222,952 which were charged
to additional paid-in capital. Net proceeds were $19,076,710.
On
November 4, 2021, the Company issued 230,000 five (5) year warrants to the underwriters. These warrants are exercisable beginning May
1, 2022 until November 1, 2026. The exercise price is $4.73/share. The fair value of these warrants was $647,897 based upon the following
assumptions:
Schedule of Fair Value of Warrants
| Expected term (years) | |
| 5 | |
| Expected volatility | |
| 118 | % |
| Expected dividends | |
| 0 | % |
| Risk free interest rate | |
| 0.53 | % |
Since
these warrants were issued as direct offering costs associated with the offering, the Company has accounted for these warrants as both
a charge and increase to additional paid-in capital, resulting in a net effect on stockholders’ equity of $0.
Exercise
of Warrants
The
Company issued 2,133 shares of common stock in connection with a cashless exercise of warrants. The transaction had a net effect of $0
on stockholders’ equity.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Stock
and Warrants Issued as Debt Discount
During
2021, the Company issued stock and warrants in connection with the issuance of debt and derivative liabilities totaling $3,562,829,
which were recorded as debt discounts to be amortized over the life of the debt. The Company issued 18,000
shares of common stock along with 137,500
three (3)
year warrants, having an exercise price of $8/share.
The aggregate discount recorded was $2,645,890
for the stock and warrants which are reflected
in the accompanying consolidated statements of stockholders’ equity. An additional discount of $102,194
was recorded in connection with the commitment
date fair value of derivative liabilities for an aggregate discount of $2,748,084.
Fair
value of the warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected term (years) | |
| 3 years | |
| Expected volatility | |
| 118 | % |
| Expected dividends | |
| 0 | % |
| Risk free interest rate | |
| 0.53 | % |
Conversion
of Debt
The
Company issued 709,674 shares of common stock in connection with the conversion of convertible debt, having a fair value of $3,363,561
($0.05 - $10.38/share), based upon the quoted closing trading price.
Make-whole
Arrangement
The
Company issued 15,147 shares of common stock to debt holders that were entitled to shares upon the settlement of debt and related accrued
interest. The shares had a fair value of $90,401 ($5.60 - $6/share), based upon the quoted closing trading price.
Stock
Issued for Debt Modification
The
Company issued 13,916 shares of common stock in connection with the modification of debt arrangements. The shares had a fair value of
$108,931 ($5.60 - $8/share), based upon the quoted closing trading price.
Stock
Issued in Settlement of Liabilities
The
Company issued 276,702 shares of common stock to various vendors and debt holders to settle accounts payable, debt and derivative liabilities.
The shares had a fair value of $1,997,977 ($4.50 - $15.99/share), based upon the quoted closing trading price. In connection with these
debt settlements, the Company recorded a gain of $1,469,641.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Stock
Issued in Acquisition of Membership Interest in ECS
On
January 30, 2020, the Company entered into a Membership Interest Purchase Agreement and Stock Purchase Agreement with ECS Prepaid, ECS,
CSLS and the Winfrey’s. Pursuant to the agreements, the Company acquired all of the membership interests of ECS Prepaid and all
of the issued and outstanding stock of each ECS and CSLS. The agreements provide that the consideration is to be paid by the Company
through the issuance of 10,000 shares of the Company’s Common Stock. In addition, the agreements called for 500 shares of Common
Stock to be issued to the Winfrey’s on a monthly basis over a 12-month period. During 2021, the Company issued 2,000 shares of
common stock in full settlement of the agreements. The shares had a fair value of $17,900 ($8.95/share), based upon the quoted closing
trading price. During 2020, the Company issued 5,500 shares.
Stock
Options
Stock
option transactions under the Company’s Plan for the three months ended March 31, 2022 and the year ended December 31, 2021 are
summarized as follows:
Schedule of Stock Option Transactions
| | |
| | |
| | |
Weighted | | |
| | |
Weighted | |
| | |
| | |
Weighted | | |
Average | | |
| | |
Average | |
| | |
| | |
Average | | |
Remaining | | |
Aggregate | | |
Grant | |
| Stock Options | |
Number of
Options | | |
Exercise Price | | |
Contractual
Term (Years) | | |
Intrinsic
Value | | |
Date
Fair Value | |
| Outstanding - December 31, 2020 | |
| 17,004 | | |
$ | 16.00 | | |
| 6.16 | | |
$ | - | | |
$ | - | |
| Vested and Exercisable - December 31, 2020 | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
$ | - | |
| Unvested and non-exercisable - December 31, 2020 | |
| 17,004 | | |
$ | 16.00 | | |
| 6.16 | | |
$ | - | | |
$ | - | |
| Granted | |
| - | | |
| - | | |
| | | |
| | | |
$ | - | |
| Exercised | |
| - | | |
| - | | |
| | | |
| | | |
| | |
| Cancelled/Forfeited | |
| - | | |
| - | | |
| | | |
| | | |
| | |
| Outstanding - December 31, 2021 | |
| 17,004 | | |
$ | 16.00 | | |
| 5.16 | | |
$ | - | | |
$ | - | |
| Vested and Exercisable - December 31, 2021 | |
| 3,401 | | |
$ | 16.00 | | |
| 5.16 | | |
$ | - | | |
$ | - | |
| Unvested and non-exercisable - December 31, 2021 | |
| 13,603 | | |
$ | 16.00 | | |
| 5.16 | | |
$ | - | | |
$ | - | |
| Granted | |
| - | | |
| - | | |
| | | |
| | | |
$ | - | |
| Exercised | |
| - | | |
| - | | |
| | | |
| | | |
| | |
| Cancelled/Forfeited | |
| - | | |
| - | | |
| | | |
| | | |
| | |
| Outstanding - March 31, 2022 | |
| 17,004 | | |
$ | 16.00 | | |
| 4.92 | | |
$ | - | | |
$ | - | |
| Vested and Exercisable - March 31, 2022 | |
| 6,801 | | |
$ | 16.00 | | |
| 4.92 | | |
$ | - | | |
$ | - | |
| Unvested and non-exercisable - March 31, 2022 | |
| 10,202 | | |
$ | 16.00 | | |
| 4.92 | | |
$ | - | | |
$ | - | |
During
2022, an additional 3,400 options vested, which were held by the Company’s Chief Financial Officer.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Compensation
expense recorded for stock-based compensation is as follows for the three months ended March 31, 2022 and 2021, was $9,294 and $9,294,
respectively.
As
of March 31, 2022, compensation cost related to the unvested options not yet recognized was $71,250.
Weighted
average period in which compensation will vest (years) 1.92 years. The unvested stock option expense is expected to be recognized through
March 2024.
Warrants
Warrant
activity for the three months ended March 31, 2022 and the year ended December 31, 2021 are summarized as follows:
Schedule of Warrants Activity
| | |
| | |
| | |
Weighted | | |
| |
| | |
| | |
| | |
Average | | |
| |
| | |
| | |
Weighted | | |
Remaining | | |
Aggregate | |
| Warrants | |
Number of
Warrants | | |
Average
Exercise Price | | |
Contractual
Term (Years) | | |
Intrinsic
Value | |
| Outstanding - December 31, 2020 | |
| 194,317 | | |
$ | 32.50 | | |
| 1.52 | | |
$ | - | |
| Exercisable - December 31, 2020 | |
| 194,317 | | |
$ | 32.50 | | |
| 1.52 | | |
$ | - | |
| Granted | |
| 5,935,450 | | |
$ | 8.01 | | |
| - | | |
| - | |
| Exercised | |
| (2,133 | ) | |
$ | 12.50 | | |
| - | | |
| - | |
| Cancelled/Forfeited | |
| (44,650 | ) | |
$ | 23.49 | | |
| - | | |
| - | |
| Outstanding - December 31, 2021 | |
| 6,082,984 | | |
$ | 8.68 | | |
| 2.93 | | |
$ | - | |
| Exercisable - December 31, 2021 | |
| 5,852,984 | | |
$ | 8.70 | | |
| 2.85 | | |
$ | - | |
| Unvested - December 31, 2021 | |
| 230,000 | | |
$ | 8.00 | | |
| 4.85 | | |
$ | - | |
| Granted | |
| 15,000 | | |
$ | 4.73 | | |
| - | | |
| | |
| Exercised | |
| - | | |
$ | - | | |
| - | | |
| | |
| Cancelled/Forfeited | |
| (15,857 | ) | |
$ | 51.69 | | |
| - | | |
| | |
| Outstanding - March 31, 2022 | |
| 6,082,127 | | |
$ | 8.55 | | |
| 2.69 | | |
$ | - | |
| Vested and Exercisable - March 31, 2022 | |
| 5,852,127 | | |
$ | 8.58 | | |
| 2.62 | | |
$ | - | |
| Unvested and non-exercisable - March 31, 2022 | |
| 230,000 | | |
$ | 8.00 | | |
| 4.60 | | |
$ | - | |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Warrant
Transactions for the Three Months Ended March 31, 2022
In
connection with $500,000 in notes issued (See Note 5), the Company issued 15,000 warrants, which are accounted for as debt issue costs,
having a fair value of $38,953.
The
fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected term (years) | |
| 3 | |
| Expected volatility | |
| 120 | % |
| Expected dividends | |
| 0 | % |
| Risk free interest rate | |
| 2.45 | % |
Warrant
Transactions for the Year Ended December 31, 2021
During
2021, the Company granted 277,950 warrants to convertible note holders and additional 137,500 warrants to note holders. These warrants
were exercisable upon the grant date, had expiration dates ranging from 3 – 5 years, and exercise prices of $8 - $12/share.
Additionally,
in connection with the NASDAQ uplisting, 5,290,000
warrants were sold for cash and an additional
230,000
warrants were issued as an underwriters’
discount. The 230,000
warrants are exercisable six (6)
months from the grant date in May 2022. See above for additional discussion.
In
connection with the Company’s NASDAQ uplisting, 433,017 warrants were repriced at a lower exercise price to better reflect the
current market offering. No other terms had been modified. As a result, for the year ended December 31, 2021, the Company recorded a
warrant modification expense of $74,476 in the accompanying consolidated statements of operations with an offsetting increase to additional
paid in capital.
The
fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected term (years) | |
3 - 5 | |
| Expected volatility | |
119% - 146 | % |
| Expected dividends | |
| 0 | % |
| Risk free interest rate | |
| 0.07% - 1.15 | % |
Note
10 – Segment Information
Operating
segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by
the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision maker is its Chief Executive Officer.
The
Company evaluated performance of its operating segments based on revenue and operating loss. All data below is prior to intercompany
eliminations.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Segment
information for the three months ended March 31, 2022 and 2021, are as follows:
Schedule of Operating Segments
| | |
2022 | | |
2021 | |
| | |
Three Months Ended March 31, | |
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| Revenues | |
| | | |
| | |
| SurgePhone Wireless | |
$ | 10,985,878 | | |
$ | 1,077 | |
| Torch Wireless | |
| 3,062,153 | | |
| - | |
| Surge Blockchain | |
| 29,829 | | |
| 35,887 | |
| LogicsIQ | |
| 2,293,072 | | |
| 3,408,403 | |
| Surge Fintech & ECS | |
| 4,770,440 | | |
| 6,915,256 | |
| True Wireless | |
| - | | |
| 628,325 | |
| SurgePays | |
| - | | |
| - | |
| Total | |
$ | 21,141,372 | | |
$ | 10,988,948 | |
| | |
| | | |
| | |
| Cost of revenues | |
| | | |
| | |
| SurgePhone Wireless | |
$ | 8,786,793 | | |
$ | 2,469 | |
| Torch Wireless | |
| 3,092,209 | | |
| - | |
| Surge Blockchain | |
| - | | |
| 1,966 | |
| LogicsIQ | |
| 2,000,420 | | |
| 2,966,953 | |
| Surge Fintech & ECS | |
| 4,628,319 | | |
| 6,700,585 | |
| True Wireless | |
| - | | |
| 187,461 | |
| SurgePays | |
| - | | |
| - | |
| Total | |
$ | 18,507,741 | | |
$ | 9,859,434 | |
| | |
| | | |
| | |
| Operating expenses | |
| | | |
| | |
| SurgePhone Wireless | |
$ | 35,195 | | |
$ | 11,762 | |
| Torch Wireless | |
| 27,131 | | |
| - | |
| Surge Blockchain | |
| 369 | | |
| 8,475 | |
| LogicsIQ | |
| 659,894 | | |
| 355,630 | |
| Surge Fintech & ECS | |
| 342,124 | | |
| 397,540 | |
| True Wireless | |
| - | | |
| 232,066 | |
| SurgePays | |
| 2,619,069 | | |
| 2,232,211 | |
| Total | |
$ | 3,683,782 | | |
$ | 3,237,684 | |
| | |
| | | |
| | |
| Income (loss) from operations | |
| | | |
| | |
| SurgePhone Wireless | |
$ | 2,163,890 | | |
$ | (13,154 | ) |
| Torch Wireless | |
| (57,187 | ) | |
| - | |
| Surge Blockchain | |
| 29,460 | | |
| 25,446 | |
| LogicsIQ | |
| (367,242 | ) | |
| 85,820 | |
| Surge Fintech & ECS | |
| (200,003 | ) | |
| (182,869 | ) |
| True Wireless | |
| - | | |
| 208,798 | |
| SurgePays | |
| (2,619,069 | ) | |
| (2,232,211 | ) |
| Total | |
$ | (1,050,151 | ) | |
$ | (2,108,170 | ) |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Segment
information for the Company’s assets and liabilities at March 31, 2022 and December 31, 2021, are as follows:
| | |
March 31, 2022 | | |
December 31, 2021 | |
| | |
| | |
| |
| Total Assets | |
| | | |
| | |
| SurgePhone Wireless | |
$ | 2,007,044 | | |
$ | (107,845 | ) |
| Torch Wireless | |
| 6,067 | | |
| - | |
| Surge Blockchain | |
| (578,728 | ) | |
| (703,014 | ) |
| LogicsIQ | |
| 1,437,247 | | |
| 1,896,130 | |
| Surge Fintech & ECS | |
| 3,694,102 | | |
| 4,461,210 | |
| True Wireless | |
| - | | |
| (988,169 | ) |
| SurgePays | |
| 11,234,962 | | |
| 14,941,890 | |
| Total | |
$ | 17,800,694 | | |
$ | 19,500,202 | |
| | |
| | | |
| | |
| Total Liabilities | |
| | | |
| | |
| SurgePhone Wireless | |
$ | 10,036 | | |
$ | 28,933 | |
| Torch Wireless | |
| 63,254 | | |
| - | |
| Surge Blockchain | |
| 197,614 | | |
| 202,045 | |
| LogicsIQ | |
| 2,577,559 | | |
| 3,181,807 | |
| Surge Fintech & ECS | |
| 72,043 | | |
| 275,351 | |
| True Wireless | |
| - | | |
| 2,430,268 | |
| SurgePays | |
| 12,525,599 | | |
| 9,830,477 | |
| Total | |
$ | 15,446,105 | | |
$ | 15,948,881 | |
Note
11 – Subsequent Events
Stock
Issued as Direct Offering Costs
In
April 2022, the Company issued 200,000
shares of common stock for services rendered
in connection with the Company’s NASDAQ uplisting in 2021. As a result, the Company recorded the par value of the common stock
issued with a corresponding charge to additional paid-in capital, resulting in a net effect of $0
to stockholders’ equity.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2022
(UNAUDITED)
Notes
Payable and Warrants
In
April 2022, the Company executed several notes for $3,500,000.
Secured
Revolving Debt
Of
the total, a maximum of $3,000,000 will be made available to the Company, issued pursuant to a series of 270-day (9 months) revolving
notes for purposes of purchasing inventory and factoring accounts receivable.
The
notes will accrue interest a monthly rate of 2% (24% annualized). The Company may take drawdowns based upon eligible accounts receivable.
In the event that eligible accounts receivable is less than 80% of the loan amount, within four (4) business days, the Company will be
required to make a payment to the lender so that the loan amount is no greater than 80% of the then current eligible accounts receivable.
The maximum amount outstanding under the loan is the lesser of $3,000,000 or 80% of eligible accounts receivable. Additionally, any related
accrued interest associated with this mandatory payment will also be due. These advances are secured by all assets of the Company.
Term
Loans
Of
the total, $500,000 of these notes are due in six (6) months, had an interest rate of 19% and a default interest rate of 26%. These notes
were issued with an aggregate of 15,000 three (3) year warrants, having an exercise price of $4.73. The warrants are considered a debt
issuance cost, which will be amortized over the life of the notes. These notes are unsecured.