NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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
|
|
DigitizeIQ, LLC
|
|
July 23, 2014
|
|
Illinois
|
|
LogicsIQ, 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
|
|
*
|
Entity was disposed of on May 7, 2021. See below.
|
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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 economic impact due to COVID-19.
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 September
30, 2021 and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months
ended September 30, 2021 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, 2020 filed with the SEC on April 2, 2021.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 nine months ended September 30, 2021, the Company had:
|
●
|
Net
loss of $6,687,302; and
|
|
●
|
Net
cash used in operations was $7,144,369
|
Additionally,
at September 30, 2021, the Company had:
|
●
|
Accumulated
deficit of $28,367,097
|
|
●
|
Stockholders’
deficit of $10,545,905; and
|
|
●
|
Working
capital deficit of $8,403,231
|
We
manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand
of $635,527 at September 30, 2021. Although the Company intends to raise additional debt or equity capital, the Company expects to continue
to incur significant losses from operations and have negative cash flows from operating activities for the near-term. These losses could
be significant as product and service sales ramp up along with continuing expenses related to compensation, professional fees, development
and regulatory are incurred.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 September
30, 2022, and our current capital structure including equity-based instruments and our obligations and debts.
See
Note 11 as it related to the need for additional capital. The
Company continues to 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:
|
●
|
Pursuing
additional capital raising opportunities,
|
|
●
|
Continuing
to explore and execute prospective partnering or distribution opportunities; and
|
|
●
|
Identifying
unique market opportunities that represent potential positive short-term cash flow.
|
Note
2 - Summary of Significant Accounting Policies
Principles
of Consolidation
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.
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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 September
30, 2021 and December 31, 2020, goodwill was $866,782, respectively.
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. 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
|
|
|
|
|
|
|
|
|
|
2021 (3 months)
|
|
$
|
-
|
|
|
2022
|
|
|
-
|
|
|
2023
|
|
|
52,227
|
|
|
2024
|
|
|
89,532
|
|
|
2025
|
|
|
44,766
|
|
|
Notes Receivable Gross
|
|
|
186,525
|
|
|
Less: amount representing interest
|
|
|
(9,674
|
)
|
|
Total
|
|
$
|
176,851
|
|
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 nine months ended September 30, 2021 and 2020, respectively, include, allowance for doubtful accounts and other
receivables, inventory reserves and classifications, valuation of beneficial conversion features in convertible debt, 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.
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 September 30, 2021 and December 31, 2020, 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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
September 30, 2021 and December 31, 2020, 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. There were no accounts in excess of this insured limit.
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 $116,664 and $116,664 at September 30, 2021 and December 31, 2020, respectively.
For
the three months ended September 30, 2021 and 2020, the Company recorded a bad debt expense of $0 and $0.
For
the nine months ended September 30, 2021 and 2020, the Company recorded a bad debt expense of $0 and $0.
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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Inventory
Inventory
primarily consists of tablets and sim cards, as well as masks, hand sanitizer and other miscellaneous items. Inventories are stated at
the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method. As of September 30, 2021 and December
31, 2020, the Company had inventory of $502,109 and $178,309, 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 and nine months ended September 30, 2021 and 2020, 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 and nine months ended September 30, 2021 and 2020, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 September 30, 2021, 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 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
The
Company has adopted ASU 2017-11, “Earnings per share (Topic 260)”, provided that when determining whether certain
financial instruments should be classified as liability or equity instruments, a down round feature no longer precludes equity classification
when assessing whether the instrument is indexed to an entity’s own stock.
The
guidance simplifies the accounting for certain equity-linked financial instruments and embedded features with down round features that
reduce the exercise price when the pricing of a future round of financing is lower. This allows the company to treat such instruments
or their embedded features as equity instead of considering them as a derivative liability. If such a feature is triggered the value
is measured pre-trigger and post-trigger. The difference in these two measurements is treated as a dividend, reducing income, which will
reduce the income available to common stockholders.
If
a down round feature on the conversion option embedded in the note is triggered, the Company will evaluate whether a beneficial conversion
feature exists, the Company will record the amount as a debt discount and will amortize it over the remaining term of the debt.
Convertible
Notes with Fixed Rate Conversion Options
The
Company may enter into convertible notes, some of which may contain fixed rate conversion features, whereby the outstanding principal
and accrued interest may be converted, by the holder, into common shares at a fixed discount to the price of the common stock at the
time of conversion. The Company measures the fair value of the notes at the time of issuance, which is the result of the share price
discount at the time of conversion and records the premium to interest expense on the note issuance date.
Beneficial
Conversion Features
For
instruments that are not considered liabilities under ASC 480 or ASC 815, the Company applies ASC 470-20 to convertible securities with
beneficial conversion features that must be settled in stock. ASC 470-20 requires that the beneficial conversion feature be valued at
the commitment date as the difference between the effective conversion price and the fair market value of the common stock (whereby the
conversion price is lower than the fair market value) into which the security is convertible, multiplied by the number of shares into
which the security is convertible limited to the amount of the loan. This amount is recorded as a debt discount and amortized to interest
expense in the Consolidated Statements of Operations.
Debt
Issue Cost
Debt
issuance cost paid to lenders, or third parties are recorded as debt discounts and amortized to interest expense in the consolidated
statements of operations, over the life of the underlying debt instrument.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 September 30, 2021 and 2020 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.
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 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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
True
Wireless (TW)
TW
is licensed to provide wireless services to qualifying low-income customers in five states. Revenues are recognized when a lifeline 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 15th of the following month. If the subscriber did not utilize the Lifeline service during the month, we have 15-days
to cure usage. If not cured, the subscriber is de-enrolled from the lifeline program at day 45. This process to verify usage and de-enrollment
has been temporarily suspended due to the COVID-19 pandemic. Historically, we have had an insignificant amount of subscribers de-enrolled.
TW was sold in May 2021 and has been deconsolidated.
ECS
and Surge Blockchain (SB)
Revenues
are generated through the re-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.
Surge
Phone Wireless (SPW)
SPW
is licensed to provide The Emergency Broadband Benefit (EBB) services to qualifying low-income customers in fourteen states. Revenues
are recognized when a EBB 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.
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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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.
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
September 30, 2021 and December 31, 2020, the Company had deferred revenue of $235,500 and $443,300, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
The
following represents the Company’s disaggregation of revenues for the nine months ended September 30, 2021 and 2020:
Schedule of Disaggregation of Revenue from Contracts with Customers
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Revenue
|
|
|
% of Revenues
|
|
|
Revenue
|
|
|
% of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ECS
|
|
$
|
18,968,630
|
|
|
|
51.40
|
%
|
|
$
|
26,967,015
|
|
|
|
62.56
|
%
|
|
LogicsIQ, Inc.
|
|
|
15,350,491
|
|
|
|
41.59
|
%
|
|
|
13,626,638
|
|
|
|
31.61
|
%
|
|
Surge Pays, Inc.
|
|
|
1,249,015
|
|
|
|
3.38
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
True Wireless
|
|
|
1,157,981
|
|
|
|
3.14
|
%
|
|
|
1,725,053
|
|
|
|
4.00
|
%
|
|
Surge Blockchain, LLC
|
|
|
110,547
|
|
|
|
0.30
|
%
|
|
|
491,349
|
|
|
|
1.14
|
%
|
|
Other
|
|
|
68,709
|
|
|
|
0.19
|
%
|
|
|
294,712
|
|
|
|
0.68
|
%
|
|
Total Revenues
|
|
$
|
36,905,373
|
|
|
|
100
|
%
|
|
$
|
43,104,767
|
|
|
|
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 September 30, 2021 and December 31, 2020, 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 and nine months ended September 30, 2021 and 2020, respectively.
As
of September 30, 2021, tax years 2018-2020 remain open for IRS audit.
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 and nine months ended September 30, 2021 and 2020, respectively.
Investment
– 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. Anthony N. Nuzzo, a director and officer and the holder of approximately 10% of our voting equity has a
controlling interest in CenterCom Global. CenterCom also provides call center support for various third-party clients.
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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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
September 30, 2021 and December 31, 2020, our investment in CenterCom was $411,056 and $414,612, respectively.
During
the three months ended September 30, 2021 and 2020, we recognized a gain of $21,072 and $107,649, respectively.
During
the nine months ended September 30, 2021 and 2020, we recognized a loss of $3,556 and a gain of $252,985, respectively.
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 $76,413 and $56,742 in marketing and advertising costs during the three months ended September 30, 2021 and 2021,
respectively.
The
Company recognized $638,706 and $209,699 in marketing and advertising costs during the nine months ended September 30, 2021 and 2021,
respectively.
Stock-Based
Compensation
The
Company accounts for 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 stock based fair value 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.
When
determining fair value, 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
|
In
September2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting.” ASU No 2018-07 expands the scope of Topic 718 to include share-based payment transactions
for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions
in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment
awards.
Common
Stock Awards
The
Company may grant common stock awards to non-employees in exchange for services provided. The Company measures the fair value of these
awards using the fair value of the services provided or the fair value of the awards granted, whichever is more reliably measurable.
The fair value measurement date of these awards is generally the date the performance of services is complete. The fair value of the
awards is recognized on a straight-line basis as services are rendered. The share-based payments related to common stock awards for the
settlement of services provided by non-employees is recorded in accordance with ASU 2018-07 (September2018) on the consolidated statement
of operations in the same manner and charged to the same account as if such settlements had been made in cash.
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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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.
The
following potentially dilutive equity securities outstanding as of September 30, 2021 and 2020 were as follows:
Schedule of Diluted Net Income (Loss) Per Share
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
Convertible notes payable and related accrued interest (1)
|
|
|
540,206
|
|
|
|
736,260
|
|
|
Warrants (2)
|
|
|
473,609
|
|
|
|
154,178
|
|
|
Stock options (3)
|
|
|
3,401
|
|
|
|
17,004
|
|
|
Series A, convertible preferred stock (4)
|
|
|
1,300,000
|
|
|
|
1,300,000
|
|
|
Series C, convertible preferred stock (5)
|
|
|
180,399,500
|
|
|
|
180,399,500
|
|
|
Total common stock equivalents
|
|
|
182,716,716
|
|
|
|
182,606,942
|
|
|
1
- exercise prices $4.33 - $5/share
|
|
2
- exercise prices $8 - $150/share
|
|
3
- exercise price $16/share
|
|
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 have 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 change 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 September 30, 2021, the Company has sufficient authorized shares of common stock
(500,000,000) to settle any potential exercises of common stock equivalents.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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.
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 financial statements
of the Company.
In
September 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring
recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an
allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new
standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to
receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for certain companies
until fiscal years beginning after December 15, 2022. The new standard will be effective for the Company in the first quarter of
fiscal year beginning October 1, 2023, and early adoption is permitted. The Company has not completed its review of the impact of
this standard on its 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 intraperiod 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. 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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Based
on the Company’s history of immaterial credit losses from trade receivables, management does not expect that the adoption of this
standard will have a material effect on the Company’s consolidated financial statements.
In
August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in
an Entity’s Own Equity”, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities
and equity. ASU 2020-06 is effective for interim and annual periods beginning after December 15, 2023, with early adoption permitted.
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.
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’ deficit, or cash flows.
At
September 30, 2021 and December 31, 2020, respectively, on the consolidated balance sheets, the Company separated its various types of
debt into more distinct categories. Certain accounts payable were reclassified from non-current to current.
For
the three and nine months ended September 30, 2021 and 2020, respectively, on the consolidated statements of operations, the Company
reclassified certain expenses amongst general and administrative and cost of revenues.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Note
3 – Property and Equipment
Property
and equipment consisted of the following:
Schedule of Property and Equipment
|
|
|
|
|
|
|
|
|
Estimated
|
|
Type
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Useful
Lives (Years)
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
283,485
|
|
|
$
|
273,256
|
|
|
3 - 5
|
|
Furniture and fixtures
|
|
|
82,752
|
|
|
|
47,526
|
|
|
5 - 7
|
|
Leasehold improvements
|
|
|
1,789
|
|
|
|
21,512
|
|
|
15
|
|
|
|
|
368,026
|
|
|
|
342,294
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(150,956
|
)
|
|
|
(105,484
|
)
|
|
|
|
Property and equipment - net
|
|
$
|
217,070
|
|
|
$
|
236,810
|
|
|
|
Depreciation
expense for the three months ended September 30, 2021 and 2020 was $17,756 and $17,911, respectively.
Depreciation
expense for the nine months ended September 30, 2021 and 2020 was $50,491 (including $5,019 of depreciation from TW prior to deconsolidation)
and $48,892, respectively.
These
amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
In
connection with the deconsolidation of TW, the Company disposed of property and equipment with a net carrying amount of $20,645.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Note
4 – Intangibles
Intangibles
consisted of the following:
Schedule
of Intangible Assets
|
|
|
|
|
|
|
|
|
Estimated Useful
|
|
Type
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
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
|
|
|
(2,156,659
|
)
|
|
|
(1,627,778
|
)
|
|
|
|
Intangibles - net
|
|
$
|
3,596,861
|
|
|
$
|
4,125,742
|
|
|
|
ECS
has been a financial technology tech 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 September 30, 2021 and 2020, was $163,377 and $277,094, respectively.
Amortization
expense for the nine months ended September 30, 2021 and 2020, was $528,881 and $831,281, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Estimated
amortization expense for each of the five (5) succeeding years and thereafter is as follows:
Scheduled of Estimated Amortization Expenses
For
the Year Ended December 31, 2021:
|
|
|
|
2021
|
|
|
2021 (3 months)
|
|
$
|
163,377
|
|
|
2022
|
|
$
|
653,508
|
|
|
2023
|
|
$
|
653,508
|
|
|
2024
|
|
$
|
653,508
|
|
|
2025
|
|
$
|
653,508
|
|
|
Thereafter
|
|
|
819,452
|
|
|
Total
|
|
$
|
3,596,861
|
|
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 September 30, 2021 and December 31, 2020, 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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(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.
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, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Gross proceeds
|
|
|
498,082
|
|
|
|
150,000
|
|
|
|
486,600
|
|
|
|
-
|
|
|
|
1,134,682
|
|
|
Balance - December 31, 2020
|
|
|
498,082
|
|
|
|
150,000
|
|
|
|
486,600
|
|
|
|
-
|
|
|
|
1,134,682
|
|
|
Gross proceeds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
518,167
|
|
|
|
518,167
|
|
|
Deconsolidation of subsidiary (“TW”)
|
|
|
-
|
|
|
|
-
|
|
|
|
(150,000
|
)*
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
Repayments
|
|
|
-
|
|
|
|
(1,040
|
)
|
|
|
(2,385
|
)
|
|
|
-
|
|
|
|
(3,425
|
)
|
|
Balance - September 30, 2021
|
|
$
|
498,082
|
|
|
$
|
148,960
|
|
|
$
|
334,215
|
|
|
$
|
518,167
|
|
|
$
|
1,499,424
|
|
|
*
|
In
connection with the deconsolidation of TW, $150,000 was assumed by the buyer.
|
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Notes
Payable – Related Parties
Schedule
of Notes Payable
|
|
|
1
|
|
2
|
|
|
|
Note Payable
|
|
Note Payable
|
|
Terms
|
|
Related Party
|
|
Related Party
|
|
|
|
|
|
|
|
Issuance dates of notes
|
|
Various
|
|
May 2020/January 2021
|
|
Maturity date
|
|
June 30, 2022 or January 1, 2023 due on demand
|
|
March 2021 and due on demand
|
|
Interest rate
|
|
10%
|
|
15%
|
|
Collateral
|
|
Unsecured
|
|
Unsecured
|
|
Conversion price
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
In-Default
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2019
|
|
|
2,205,440
|
|
|
|
-
|
|
|
|
2,205,440
|
|
|
$
|
-
|
|
|
Gross proceeds
|
|
|
1,136,500
|
|
|
|
147,500
|
|
|
|
1,284,000
|
|
|
|
|
|
|
Balance - December 31, 2020
|
|
|
3,341,940
|
|
|
|
147,500
|
|
|
|
3,489,440
|
|
|
|
-
|
|
|
Gross proceeds
|
|
|
3,625,000
|
|
|
|
63,000
|
|
|
|
3,688,000
|
|
|
|
|
|
|
Repayments
|
|
|
-
|
|
|
|
(163,000
|
)
|
|
|
(163,000
|
)
|
|
|
|
|
|
Balance - September 30, 2021
|
|
$
|
6,966,940
|
|
|
$
|
47,500
|
|
|
$
|
7,014,440
|
|
|
$
|
-
|
|
|
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. All notes bear interest at 10%.
|
|
2
|
Activity is with the Company’s President, Chief Operating
Officer and Board Director (Anthony Nuzzo). In 2021, the Company received advances of $63,000 in the quarter ended March 31, 2021, which
were repaid in the quarter ended March 31, 2021 (this related to the January 2021 note). The remaining outstanding amount of $47,500
is due on demand.
|
On November 4, 2021, the Company’s Chief
Executive Officer converted notes totaling $2,415,560 into 561,758 shares of common stock, having a fair value of $1,808,861 ($3.22/share),
based upon the quoted closing trading price. As a result of the debt conversion, the Company recognized a gain on debt extinguishment
of $605,699. However, since this is a related party transaction, accordingly no gain can be recognized, resulting in an increase to additional
paid-in capital.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Notes
Payable
Schedule
of Notes Payable
|
Terms
|
|
Note
|
|
Note
|
|
Note
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
Issuance dates of notes
|
|
2016
|
|
2016
|
|
November 4, 2019
|
|
August/September 2021
|
|
Maturity date
|
|
2016
|
|
2017
|
|
November 3, 2020
|
|
August/September 2022
|
|
Interest rate
|
|
5%
|
|
10%
|
|
18%
|
|
10%
|
|
Collateral
|
|
Unsecured
|
|
Unsecured
|
|
Unsecured
|
|
Unsecured
|
|
Conversion price
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Warrants issued as discount
|
|
N/A
|
|
N/A
|
|
N/A
|
|
2,406,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
In-Default
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
485,000
|
|
|
$
|
27,500
|
|
|
$
|
250,000
|
|
|
$
|
853,386
|
*
|
|
$
|
1,615,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2019
|
|
|
485,000
|
|
|
|
27,500
|
|
|
|
223,672
|
|
|
|
-
|
|
|
|
736,172
|
|
|
$
|
512,500
|
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
26,328
|
|
|
|
-
|
|
|
|
26,328
|
|
|
|
|
|
|
Repayments
|
|
|
(485,000
|
)
|
|
|
(27,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(512,500
|
)
|
|
|
|
|
|
Balance - December 31, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
Gross proceeds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
853,386
|
|
|
|
853,386
|
|
|
|
|
|
|
Debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(265,268
|
)**
|
|
|
(265,268
|
)
|
|
|
|
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,087
|
|
|
|
5,087
|
|
|
|
|
|
|
Repayments
|
|
|
-
|
|
|
|
-
|
|
|
|
(250,000
|
)
|
|
|
-
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
Balance - September 30, 2021
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
593,205
|
|
|
$
|
593,205
|
|
|
$
|
-
|
|
|
*
|
In the event of default, notes with principal totaling $386,000
are convertible at 75% of the market price based upon the VWAP in preceding 10 days.
|
|
**
|
Debt discount on notes totaling $386,000 includes original
issue discounts of $36,000 and debt discounts associated with warrants totaling $229,268.
|
Subsequent to September 30, 2021, the Company
repaid $386,000 and related accrued interest of $5,016. At this time the remaining debt discount was fully amortized to interest expense.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Convertible
Notes Payable – Net
Schedule
of Notes Payable
|
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, 2019
|
|
$
|
4,436,684
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,436,684
|
|
|
$
|
-
|
|
|
Gross proceeds
|
|
|
-
|
|
|
|
2,347,000
|
|
|
|
-
|
|
|
|
2,347,000
|
|
|
|
|
|
|
Debt discount
|
|
|
-
|
|
|
|
(2,347,000
|
)
|
|
|
-
|
|
|
|
(2,347,000
|
)
|
|
|
|
|
|
Amortization of debt discount
|
|
|
161,217
|
|
|
|
1,829,219
|
|
|
|
-
|
|
|
|
1,990,436
|
|
|
|
|
|
|
Repayments - cash
|
|
|
(438,698
|
)
|
|
|
(130,061
|
)
|
|
|
-
|
|
|
|
(568,759
|
)
|
|
|
|
|
|
Repayments - common stock
|
|
|
(4,159,203
|
)
|
|
|
(182,988
|
)
|
|
|
-
|
|
|
|
(4,342,191
|
)
|
|
|
|
|
|
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
|
|
|
|
1,458,912
|
|
|
|
1,976,693
|
|
|
|
|
|
|
Repayments - cash
|
|
|
-
|
|
|
|
(1,132,170
|
)
|
|
|
(250,000
|
)
|
|
|
(1,382,170
|
)
|
|
|
|
|
|
Repayments - common stock
|
|
|
-
|
|
|
|
(978,728
|
)
|
|
|
-
|
|
|
|
(978,728
|
)
|
|
|
|
|
|
Reclassified to receivable
|
|
|
-
|
|
|
|
76,947
|
C
|
|
|
-
|
|
|
|
76,947
|
|
|
|
|
|
|
Balance - September 30, 2021
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,298,083
|
|
|
$
|
1,298,083
|
|
|
$
|
-
|
|
|
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 overpaid 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.
|
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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 September 30, 2021 and December 31, 2020 was $0 and $912,870. In connection with the deconsolidation of TW in May 2021,
the buyer assumed the line of credit.
Note
6 – Derivative Liabilities
The
above convertible notes contained an embedded conversion option 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
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Expected term (years)
|
|
|
0.20
- 1 year
|
|
|
|
0.75
years
|
|
|
Expected volatility
|
|
|
143%
- 291
|
%
|
|
|
96%
- 132
|
%
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Risk free interest rate
|
|
|
0.03%
- 0.09
|
%
|
|
|
0.08%
- 1.51
|
%
|
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 September 30, 2021 and December 31, 2020:
Summary of Changes in Fair Value
|
Derivative liability - December 31, 2019
|
|
$
|
190,846
|
|
|
Fair value at commitment date
|
|
|
2,024,191
|
|
|
Fair value mark to market adjustment
|
|
|
(577,936
|
)
|
|
Gain on derivative liability upon related debt settled
|
|
|
(279,573
|
)
|
|
Derivative liability - December 31, 2020
|
|
|
1,357,528
|
|
|
Fair value at commitment date
|
|
|
1,877,251
|
|
|
Fair value mark to market adjustment
|
|
|
(746,896
|
)
|
|
Gain on derivative liability upon related debt settled
|
|
|
(920,375
|
)
|
|
Derivative liability - September 30, 2021
|
|
$
|
1,567,508
|
|
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 September 30, 2021 and 2020, the Company recorded a change in fair of derivative liabilities of (202,784) and
$212,851, respectively.
During
the nine months ended September 30, 2021 and 2020, the Company recorded a change in fair of derivative liabilities of $746,896 and $405,413,
respectively.
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 ended September 30, 2021 and 2020, the Company recorded a derivative expense of $0 and $33,239, respectively.
For
the nine months ended September 30, 2021 and 2020, the Company recorded a derivative expense of $1,775,057 and $529,294, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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.
Liabilities
measured at fair value on a recurring basis consisted of the following at September 30, 2021 and December 31, 2020:
Schedule of Liabilities Measured Fair Value on Recurring Basis
|
|
|
September 30, 2021
|
|
|
Quoted
Prices in
Active
Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
1,567,508
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,567,508
|
|
|
|
|
December 31, 2020
|
|
|
Quoted
Prices in Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Derivative liabilities
|
|
$
|
1,357,528
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,357,528
|
|
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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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.
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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
At
September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December
31, 2020, respectively:
Schedule of Lease Expense
|
|
|
For the
Nine Months Ended
|
|
|
For the
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
Operating Leases
|
|
$
|
140,464
|
|
|
$
|
248,677
|
|
|
Interest on lease liabilities
|
|
|
31,898
|
|
|
|
44,237
|
|
|
Total net lease cost
|
|
$
|
172,362
|
|
|
$
|
292,914
|
|
Supplemental
balance sheet information related to leases was as follows:
Schedule of Supplemental Information Related to Leases
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease ROU assets - net
|
|
$
|
522,072
|
|
|
$
|
368,638
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities - current
|
|
$
|
68,303
|
|
|
$
|
210,556
|
|
|
Operating lease liabilities - non-current
|
|
|
447,002
|
|
|
|
155,167
|
|
|
Total operating lease liabilities
|
|
$
|
515,305
|
|
|
$
|
365,723
|
|
Supplemental
cash flow and other information related to leases was as follows:
|
|
|
For the
Nine Months Ended
|
|
|
For the
Nine Months Ended
|
|
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
Cash paid for amounts included in measurement of lease liabilities
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
117,357
|
|
|
$
|
150,145
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease liabilities
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
515,848
|
|
|
$
|
355,203
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
8.19
|
|
|
|
2.03
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
5
|
%
|
|
|
11
|
%
|
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Schedule of Future Minimum Payments
Future
minimum lease payments at December 31,
|
2021 (3 months remaining)
|
|
$
|
27,841
|
|
|
2022
|
|
|
78,750
|
|
|
2023
|
|
|
60,294
|
|
|
2024
|
|
|
61,876
|
|
|
2025
|
|
|
63,460
|
|
|
Thereafter
|
|
|
350,269
|
|
|
Total lease payments
|
|
|
642,490
|
|
|
Less: amount representing interest
|
|
|
(127,185
|
)
|
|
Total lease obligations
|
|
$
|
515,305
|
|
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.
Contingencies
On
November 1, 2013, The Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability for Forfeiture to the
Company for requesting and/or receiving support for ineligible subscriber lines between the months of October 2012 and May 2013 and proposed
a monetary forfeiture of $5,501,285. The Company has annual compliance audits with FCC approved audit firms that have found no compliance
deficiencies. Management believes the proposed monetary forfeiture is without merit and if anything should result from this notice, the
amount would not materially affect the financial position of the Company.
On
January 15, 2020, the Company and Carter Matzinger (a member of the Company’s Board of Directors) (collectively, the “Surge
Party”), and the former owners of the Company’s wholly owned subsidiary, DigitizeIQ, LLC (collectively, the “DigitizeIQ
Party” and, together with the Surge Party, the “Parties”), entered into a settlement agreement (the “DigitizeIQ
Settlement Agreement”) to settle any claims the Parties may have had against each other. The parties made claims against each other
with regard to alleged breaches of an Exchange Agreement, a Non-Compete Agreement, and promissory notes issued by the Company to the
DigitizeIQ Party (the “DigitizeIQ Promissory Notes”). Pursuant to the DigitizeIQ Settlement Agreement, the
Parties, in addition to releasing all claims against each other, agreed to cooperate to ensure the complete transfer and assignment of
the domain “digitizeiq.com” to the Company and agreed that the DigitizeIQ Promissory Notes are deemed terminated. As a result
of the DigitizeIQ Promissory Notes being terminated, the Company reduced its liabilities by approximately $580,000.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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., 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:
On
March 4, 2021, Glen Eagles Acquisition LP (“Glen Eagles”) demanded payment of either $1,000,000 cash or $2,500,000 worth
of Surge’s common stock based on false allegations of impropriety. In sum, Glen Eagles contended that Surge had diluted its shares
and denied Glen Eagles the benefit of its June 2020 stock exchange transaction with Surge. At the time of Glen Eagles’ demand to
Surge, however, Surge’s stock price was comparable to and even greater than its price at the time of the June 2020 exchange transaction.
On March 16, 2021, Surge filed suit against Glen Eagles, seeking declaratory relief and alleging Glen Eagles breached the implied covenant
of good faith and fair dealing inherent in the June 2020 exchange agreement by demanding additional payment. On April 19, 2021, Glen
Eagles filed an answer and a counterclaim against Surge and its Chief Executive Officer, Brian Cox, alleging claims for declaratory relief,
breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, fraudulent concealment, and seeking
the appointment of a receiver. Chief Executive Officer Brian Cox has not yet been served with this counterclaim and Surge is preparing
its response to the counterclaim, which will incorporate a denial of these allegations. Pretrial scheduling is for June 2022. At this
time, the outcome of this litigation is not able to be determined by management due to the timing of the litigation and discovery not
having commenced. The Company is currently trying to settle this matter.
Crystal
Chapman, on behalf of herself and others similarly situated, Plaintiff versus SurgePays, Inc., Defendant; U.S. District Court for the
Northern District of Illinoi, 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. Although it is anticipated that this
case will result in an individual settlement, the Company cannot predict the outcome of this case at this time.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Note
9 – Stockholders’ Deficit
At
September 30, 2021, and prior to the conversions noted below, 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
|
Series
A, Convertible Preferred Stock
|
|
-
|
100,000,000
shares authorized
|
|
|
-
|
13,000,000
issued and outstanding
|
|
|
-
|
Par
value - $0.001
|
|
|
-
|
Voting
at 10 votes per share (130,000,000 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 (1,300,000 common stock equivalents)
|
Series
C, Convertible Preferred Stock
|
|
-
|
1,000,000
shares authorized
|
|
|
-
|
721,598
issued and outstanding
|
|
|
-
|
Par
value - $0.001
|
|
|
-
|
Voting
at 250 votes per share (180,399,500 votes)
|
|
|
-
|
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 (180,399,500 common stock equivalents)
|
|
|
|
In October 2021, prior to the reverse stock split, all
Series C stockholders representing 721,598 shares issued and outstanding agreed to convert their holdings into common stock. The
conversion was based upon the expected 1 for 50 reverse stock split which occurred on November 2, 2021. As a result of the conversion,
the Company issued 3,607,980 shares of common stock. The net effect on equity was $0.
|
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Equity
Transactions for the Nine Months Ended September 30, 2021
Reverse
Stock Split
On
November 2, 2021, the Company effected a 1 for 50 reverse stock split. All share and per share amounts have been retroactively restated
to the earliest period presented.
Stock
Issued for Cash
The
Company issued 260,000 shares of common stock for $1,510,000 ($5 -$8/share).
Stock
Issued for Services
The
Company issued 9,991 shares of common stock for services rendered, having a fair value of $79,505 ($5 - $14.05/share), based upon the
quoted closing trading price.
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’ deficit.
Stock
Issued as Debt Discount
The
Company issued 18,000 shares of common stock in connection with the issuance of debt, having a fair value of $2,038,635 ($5.35/share),
based upon the quoted closing trading price.
Warrants
Issued as a Debt Discount
The
Company issued 2,406,250 three (3) year warrants, having an exercise price of $8/share, with notes totaling $386,000, resulting in a
debt discount of $265,268. The notes had an original issue discount of $36,000 as well as warrants that were accounted for at fair value
totaling $229,268.
Fair
value of the warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of The Warrants
|
Expected term (years)
|
|
|
3
years
|
|
|
Expected volatility
|
|
|
118
|
%
|
|
Expected dividends
|
|
|
0
|
%
|
|
Risk free interest rate
|
|
|
0.53
|
%
|
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Conversion
of Debt
The
Company issued 147,916 shares of common stock in connection with the conversion of convertible debt, having a fair value of $948,002
($3.40 - $10.40/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 $1,879,785 ($4.50 - $13.50/share), based upon the quoted closing trading price. In connection with these
debt settlements, the Company recorded a gain of $979,469.
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 the three months ended March 31, 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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Stock
Options
Stock
option transactions under the Company’s Plan for the nine months ended September 30, 2021 and the year ended December 31, 2020
are summarized as follows:
Schedule of Stock Option Transactions
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Date
|
|
|
Stock Options
|
|
Options
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Fair Value
|
|
|
Outstanding - December 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
0.00
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Exercisable - December 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
0.00
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Vested
and Exercisable - December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
0.00
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Unvested
and non-exercisable - December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
17,004
|
|
|
$
|
16.00
|
|
|
|
7.00
|
|
|
$
|
-
|
|
|
$
|
8.75
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
Outstanding - December 31, 2020
|
|
|
17,004
|
|
|
$
|
16.00
|
|
|
|
6.16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Vested and Exercisable - December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
0.00
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Unvested and non-exercisable - December 31, 2020
|
|
|
17,004
|
|
|
$
|
16.00
|
|
|
|
6.16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2020
|
|
|
17,004
|
|
|
$
|
16.00
|
|
|
|
6.16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Vested and Exercisable - December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
0.00
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Unvested and non-exercisable - December 31, 2020
|
|
|
17,004
|
|
|
$
|
16.00
|
|
|
|
6.16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - September 30, 2021
|
|
|
17,004
|
|
|
$
|
16.00
|
|
|
|
5.42
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Vested and Exercisable - September 30, 2021
|
|
|
3,401
|
|
|
$
|
16.00
|
|
|
|
5.42
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Unvested and non-exercisable - September 30, 2021
|
|
|
13,603
|
|
|
$
|
16.00
|
|
|
|
5.42
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Compensation
expense recorded for stock-based compensation is as follows for the nine months ended September 30, 2021 and 2020, respectively:
Schedule of Stock-based Compensation
|
Nine Months Ended
|
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
$
|
27,880
|
|
|
$
|
21,685
|
|
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
As
of September 30, 2021, compensation cost related to the unvested options not yet recognized was as follows:
Schedule of Unvested Options Not Yet Recognized
|
Compensation expense
|
|
$
|
89,837
|
|
|
|
|
|
|
|
|
Weighted average period in which compensation will vest (years)
|
|
|
2.42
|
|
The
unvested stock option expense is expected to be recognized through March 2024.
Warrants
Warrant
activity for the Nine Months Ended September 30, 2021 and the Year Ended December 31, 2020 are summarized as follows:
Schedule of Warrants Activity
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Warrants
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Outstanding and exercisable - December 31, 2019
|
|
|
136,993
|
|
|
$
|
35.50
|
|
|
|
1.98
|
|
|
$
|
-
|
|
|
Exercisable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
62,325
|
|
|
$
|
26.50
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Forfeited
|
|
|
(5,000
|
)
|
|
$
|
40.00
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding - December 31, 2020
|
|
|
194,317
|
|
|
$
|
32.50
|
|
|
|
1.52
|
|
|
$
|
-
|
|
|
Exercisable - December 31, 2020
|
|
|
194,317
|
|
|
$
|
32.50
|
|
|
|
1.52
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2020
|
|
|
194,317
|
|
|
$
|
32.50
|
|
|
|
1.52
|
|
|
$
|
-
|
|
|
Exercisable - December 31, 2020
|
|
|
194,317
|
|
|
$
|
32.50
|
|
|
|
1.52
|
|
|
$
|
-
|
|
|
Granted
|
|
|
326,075
|
|
|
$
|
8.13
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(2,133
|
)
|
|
|
12.50
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Forfeited
|
|
|
(44,650
|
)
|
|
$
|
23.49
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding - September 30, 2021
|
|
|
473,609
|
|
|
$
|
16.68
|
|
|
|
3.21
|
|
|
$
|
-
|
|
|
Exercisable - September 30, 2021
|
|
|
473,609
|
|
|
$
|
16.68
|
|
|
|
3.21
|
|
|
$
|
-
|
|
During
2021, the Company granted 277,950 warrants to convertible note holders and additional 48,125 warrants to note holders. These warrants
were exercisable upon grant, had expiration dates ranging from 3 – 5 years, and an exercise price of $8/share.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
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. Segment information for the three and nine
months ended September 30, 2021 and 2020, are as follows:
Schedule of Operating Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surge Blockchain & Other
|
|
$
|
1,283,433
|
|
|
$
|
125,762
|
|
|
$
|
1,364,351
|
|
|
$
|
671,931
|
|
|
LogicsIQ
|
|
|
7,453,036
|
|
|
|
3,718,593
|
|
|
|
15,350,491
|
|
|
|
13,626,638
|
|
|
TW
|
|
|
-
|
|
|
|
680,205
|
|
|
|
1,157,981
|
|
|
|
1,725,053
|
|
|
ECS
|
|
|
5,801,884
|
|
|
|
8,277,612
|
|
|
|
19,032,550
|
|
|
|
27,081,145
|
|
|
Total
|
|
$
|
14,538,353
|
|
|
$
|
12,802,172
|
|
|
$
|
36,905,373
|
|
|
$
|
43,104,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surge Blockchain & Other
|
|
$
|
1,202,699
|
|
|
$
|
142,469
|
|
|
$
|
1,212,334
|
|
|
$
|
817,454
|
|
|
LogicsIQ
|
|
|
5,827,856
|
|
|
|
2,775,889
|
|
|
|
12,628,669
|
|
|
|
10,419,011
|
|
|
TW
|
|
|
-
|
|
|
|
270,613
|
|
|
|
306,062
|
|
|
|
1,750,454
|
|
|
ECS
|
|
|
5,604,316
|
|
|
|
8,027,215
|
|
|
|
18,397,554
|
|
|
|
26,435,857
|
|
|
Total
|
|
$
|
12,634,871
|
|
|
$
|
11,216,186
|
|
|
$
|
32,544,619
|
|
|
$
|
39,422,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surge Blockchain & Other
|
|
$
|
1,282,709
|
|
|
$
|
2,058,761
|
|
|
$
|
4,973,867
|
|
|
$
|
7,175,767
|
|
|
LogicsIQ
|
|
|
646,511
|
|
|
|
820,019
|
|
|
|
1,604,073
|
|
|
|
3,018,200
|
|
|
TW
|
|
|
61,458
|
|
|
|
(16,940
|
)
|
|
|
615,013
|
|
|
|
708,080
|
|
|
ECS
|
|
|
288,696
|
|
|
|
349,070
|
|
|
|
1,061,490
|
|
|
|
1,112,569
|
|
|
Total
|
|
$
|
2,279,374
|
|
|
$
|
3,210,910
|
|
|
$
|
8,254,443
|
|
|
$
|
12,014,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surge Blockchain & Other
|
|
$
|
(1,201,975
|
)
|
|
$
|
(2,075,469
|
)
|
|
$
|
(4,821,850
|
)
|
|
$
|
(7,321,290
|
)
|
|
LogicsIQ
|
|
|
978,669
|
|
|
|
122,685
|
|
|
|
1,117,749
|
|
|
|
189,427
|
|
|
TW
|
|
|
(61,458
|
)
|
|
|
426,532
|
|
|
|
236,906
|
|
|
|
(733,481
|
)
|
|
ECS
|
|
|
(91,128
|
)
|
|
|
(98,672
|
)
|
|
|
(426,494
|
)
|
|
|
(467,281
|
)
|
|
Total
|
|
$
|
(375,892
|
)
|
|
$
|
(1,624,924
|
)
|
|
$
|
(3,893,689
|
)
|
|
$
|
(8,332,625
|
)
|
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
Surge Blockchain & Other
|
|
$
|
2,763,299
|
|
|
$
|
911,316
|
|
|
LogicsIQ
|
|
|
1,779,572
|
|
|
|
1,079,806
|
|
|
TW
|
|
|
-
|
|
|
|
515,592
|
|
|
ECS
|
|
|
4,088,088
|
|
|
|
4,818,357
|
|
|
Total
|
|
$
|
8,630,959
|
|
|
$
|
7,325,071
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
|
|
|
|
|
|
|
Surge Blockchain & Other
|
|
$
|
17,122,811
|
|
|
$
|
10,922,205
|
|
|
LogicsIQ
|
|
|
2,036,130
|
|
|
|
2,440,888
|
|
|
TW
|
|
|
-
|
|
|
|
4,301,249
|
|
|
ECS
|
|
|
17,923
|
|
|
|
386,695
|
|
|
Total
|
|
$
|
19,176,864
|
|
|
$
|
18,051,037
|
|
Note
11 – Subsequent Events
Centercom Accounts Payable Forgiveness
On October 5, 2021, CenterCom, an entity that
is 40% owned by SurgePays and 50% owned by Mr. Nuzzo, a director and officer of SurgePays, 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.
Notes
Payable
Subsequent
to September 30, 2021, the Company issued three (3) notes totaling $715,000. The notes were issued with original issue discounts totaling
$65,000, resulting in net proceeds of $650,000. The notes are due one (1) year from issuance and are unsecured. The notes were issued
with 3,540,750 three (3) year warrants at an exercise price of $8/share. In the event of default, two (2) of the notes contain
a conversion right whereby the notes are convertible at 75% of the market price based upon the VWAP in preceding 10 days. All notes and
related accrued interest are required to be repaid upon an uplist to NASDAQ or another senior exchange.
Subsequent to September 30, 2021, the Company
repaid $715,000 and related accrued interest of $6,148. At this time the remaining debt discount was fully amortized to interest expense.
NASDAQ Listing
On November 2, 2021, the Company’s common
stock and warrants started trading on the Nasdaq Capital Market under the symbols SURG and SURGW, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
Stock
and Warrants Issued for Cash
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 offering, the Company incurred direct offering costs of $2,042,952 which will be charged to additional paid-in capital.
Net proceeds were $17,743,948.
In
connection with this offering, the underwriter was granted a 45-day option to purchase an additional 690,000 shares of common stock and/or
up to an additional 690,000 warrants solely to cover over-allotments, at the public offering price per share of common stock and per
warrant, less underwriting discounts. The Company received proceeds of $6,900 from the exercise of these 690,000 warrants at $0.01(see
above). The underwriter still has the option to purchase an additional 690,000 shares of common stock at $4.30.
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.
Warrant Repricing
In connection with the reverse 1 for 50 reverse
stock split, all warrants were subject to repricing.