NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Note
1 - Organization and Nature of Operations
Organization
and Nature of Operations
SurgePays,
Inc. (“SurgePays,” “SP,” “we,” “our” or “the Company”), and its operating
subsidiaries, is a technology-driven company building a next generation supply chain software platform that can offer wholesale goods
and services more cost efficiently than traditional and existing wholesale distribution models.
The
parent (SurgePays, Inc.) and subsidiaries are organized as follows:
Schedule of Subsidiaries
| Company
Name |
|
|
Incorporation
Date |
|
State
of Incorporation |
| SurgePays,
Inc. |
|
|
August
18, 2006 |
|
Tennessee |
| KSIX
Media, Inc. |
|
|
November
5, 2014 |
|
Nevada |
| KSIX,
LLC |
|
|
September
14, 2011 |
|
Nevada |
| Surge
Blockchain, LLC |
|
|
January
29, 2009 |
|
Nevada |
| Injury
Survey, LLC |
|
|
July
28, 2020 |
|
Nevada |
| DigitizeIQ,
LLC |
|
|
July
23, 2014 |
|
Illinois |
| 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 |
| ECS
Prepaid, LLC |
|
|
June
9, 2009 |
|
Missouri |
| Central
States Legal Services, Inc. |
|
|
August
1, 2003 |
|
Missouri |
| Electronic
Check Services, Inc. |
|
|
May
19, 1999 |
|
Missouri |
| Torch
Wireless |
** |
|
January
29, 2019 |
|
Wyoming |
| * | | Entity was disposed
of on May 7, 2021. |
| ** | | Effective January
1, 2022, the Company acquired Torch Wireless |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Impact
of COVID-19
The
ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies
and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19
has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and
financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The COVID-19
pandemic has the potential to significantly impact the Company’s supply chain, distribution centers, or logistics and other service
providers.
In
addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand for products
and services and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues
to evolve, the Company will continue to closely monitor market conditions and respond accordingly.
We
have implemented adjustments to our operations designed to keep employees safe and comply with international, federal, state, and local
guidelines, including those regarding social distancing. The extent to which COVID-19 may further impact the Company’s business,
results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be
predicted with confidence. In response to COVID-19, the United States government has passed legislation and taken other actions to provide
financial relief to companies and other organizations affected by the pandemic.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may
emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or
the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced
operations.
Any
resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business,
financial condition, and results of operations.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions to
Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly,
they do not contain all information and footnotes required by accounting principles generally accepted in the United States of
America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated
financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the
financial position of the Company as of September 30, 2022 and the results of operations and cash flows for the periods presented.
The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the operating results for
the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the
financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2021 filed with the SEC on March 24, 2022.
Management
acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all
adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated
financial position and the consolidated results of its operations for the periods presented.
Liquidity,
Going Concern and Management’s Plans
These
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.
As
reflected in the accompanying consolidated financial statements, for the nine months ended September 30, 2022, the Company had:
| ● | Net
loss available to common stockholders of $3,725,569; and |
| ● | Net
cash used in operations was $3,951,043 |
Additionally,
at September 30, 2022, the Company had:
| ● | Accumulated
deficit of $38,848,912 |
| ● | Stockholders’
equity of $464,086; and |
| ● | Working
capital of $53,234 |
We
manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand
of $7,892,050 at September 30, 2022.
The
Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from
the sales of its products and services to achieve profitable operations. There can be no assurance that profitable operations will ever
be achieved, or if achieved, could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis
of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months that will end on September
30, 2023, and our current capital structure including equity-based instruments and our obligations and debts.
These
factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve-month period subsequent
to the date that these consolidated financial statements are issued. The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern. Accordingly, the consolidated financial statements have
been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and
satisfaction of liabilities and commitments in the ordinary course of business.
Management’s
strategic plans include the following:
| ● | Continue
the hyper growth of the Affordable Connectivity Program revenue stream; |
| ● | Execution
of business plan and significant revenue growth from prior period; |
| ● | Pursuing
a line of credit to achieve the hyper growth of the Affordable Connectivity Program,; |
| ● | Expand
product and services offerings to a larger surrounding geographic area; |
| ● | Continuing
to explore and execute prospective partnering or distribution opportunities; and |
| ● | Identifying
unique market opportunities that represent potential positive short-term cash flow. |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Note
2 - Summary of Significant Accounting Policies
Principles
of Consolidation and Non-Controlling Interest
These
consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly
owned subsidiaries. All intercompany transactions and balances have been eliminated.
For
entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other
than the Company. The aggregate of the income or loss and corresponding equity that is not owned by us is included in Non-controlling
Interests in the consolidated financial statements.
Business
Combinations
The
Company accounts for business acquisitions using the acquisition method of accounting, in accordance with which assets acquired and liabilities
assumed are recorded at their respective fair values at the acquisition date.
The
fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed
based on their respective fair values. Goodwill represents the 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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Effective
January 1, 2022, the Company executed a management agreement with Torch Wireless (“Torch”). Generally, the Company was engaged
to handle the following services:
| |
● | Oversee
management of the business being conducted by Torch; |
| |
● | Involved
in the performance of Torch’s obligations under contracts regarding its business operations
and maintenance of Torch’s customer relationships; |
| |
● | Assist
Torch with regulatory compliance; |
| |
● | Manage
all billing and collection functions, including the right to collect revenues related to
Torch’s business operations, as part of the agreement, Torch may not participate in
this function; and |
| |
● | Manage
all payment functions related to the business, including the right to disburse funds, as
part of the agreement, Torch may not participate in this function. |
Torch
is a provider of subsidized mobile broadband services to consumers qualifying under the federal guidelines of the U.S. Federal Communication
Commission’s Affordable Connectivity Program (“ACP”). The ACP provides the Company up to a $100 reimbursement for the
cost of each tablet device distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services.
With the purchase of Torch, the Company now has approval to offer subsidized mobile broadband in all fifty states.
During
June 2022, it was determined that the Company had acquired 100% of Torch, effective January 1, 2022, resulting in Torch becoming a wholly-owned
subsidiary, in a transaction accounted for as a business combination. Pursuant to ASC 805-10-25-7, the Company determined that the acquisition
date preceded the closing date as it was managing Torch and in full control of all operational decision making. At this time, the Company
had obtained control of Torch through its management contract.
At
the time of acquisition, Torch had no significant assets or liabilities. The Company paid $800,000.
As a result of the acquisition, the Company recorded goodwill of $800,000.
With the purchase of Torch, the Company now has approval to offer subsidized mobile broadband in all fifty states.
At
the time of acquisition, Torch had nominal revenues and losses. As a result, and given the immaterial nature of this acquisition, the
Company has elected not to present any pro-forma financial information.
In
addition, the Company will pay the Sellers monthly residual payments for customers enrolled by the Company through December 31, 2022
of either $2 or $3 per customer (depending on the category of customer).
For
the three and nine months ended September 30, 2022, the Company incurred expenses of $584,038 and $905,281, respectively, related to the residual
payments. All expenses are included as a component of cost of goods sold.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
This
transaction does not involve the purchase of a “significant amount of assets” as defined in the Instructions to Item 2.01
of Form 8-K. Additionally, the acquisition of Torch was not deemed to be significant at any level under SEC Regulation S-X 3.05 and does
not require the presentation of any additional historical audits.
At
September 30, 2022, Torch has been consolidated with the Company’s consolidated statements of financial position, results of operations,
and cash flows.
At
September 30, 2022 and December 31, 2021 goodwill was $1,666,782 and $866,782, respectively. There were no impairment losses for the
three and nine months ended September 30, 2022 or 2021, 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. During 2021, the $20,000
was forgiven. In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%,
with a default interest rate of 10%. The Company will receive twenty-five (25) payments of principal and accrued interest totaling $7,461
commencing in June 2023. Payments are scheduled as follows:
Scheduled of Receivables
| For
the Year Ended December 31, 2022: | |
| |
| | |
| |
| 2023 | |
$ | 52,227 | |
| 2024 | |
| 89,532 | |
| 2025 | |
| 44,766 | |
| | |
| 186,525 | |
| Less:
amount representing interest | |
| (9,674 | ) |
| Total | |
$ | 176,851 | |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
As
a result of the sale, we deconsolidated our entire ownership interest in TW from our consolidated financial statements on May 7, 2021,
the effective date of the sale agreement, and recognized a gain on deconsolidation of $1,895,871 as follows:
Scheduled of Deconsolidated Ownership
| Consideration | |
| |
| Note
receivable | |
$ | 176,851 | |
| | |
| | |
| Fair
value of consideration received | |
| 176,851 | |
| | |
| | |
| Recognized
amounts of identifiable assets sold and liabilities assumed by buyer: | |
| | |
| | |
| | |
| Cash | |
| 325,316 | |
| Lifeline
revenue due from USAC | |
| 74,650 | |
| Inventory | |
| 107,089 | |
| Property
and equipment - net | |
| 20,645 | |
| Operating
lease - right of use asset - net | |
| 10,981 | |
| Total
assets sold | |
| 538,681 | |
| | |
| | |
| Accounts
payable and accrued expenses | |
| 1,183,850 | |
| Line
of credit | |
| 912,870 | |
| Note
payable - SBA government | |
| 150,000 | |
| Operating
lease liability | |
| 10,981 | |
| Total
liabilities assumed by buyer | |
| 2,257,701 | |
| | |
| | |
| Total
net liabilities assumed by buyer | |
| 1,719,020 | |
| | |
| | |
| Gain
on deconsolidation of True Wireless | |
| 1,895,871 | |
Business
Segments and Concentrations
The
Company uses the “management approach” to identify its reportable segments. The management approach requires companies to
report segment financial information consistent with information used by management for making operating decisions and assessing performance
as the basis for identifying the Company’s reportable segments. The Company manages its business as multiple reportable segments.
Customers
in the United States accounted for 100% of our revenues. We do not have any property or equipment outside of the United States.
See
Note 10 regarding segment disclosure.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Use
of Estimates
Preparing
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues
and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant
estimates during the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively, include, allowance for
doubtful accounts and other receivables, inventory reserves and classifications, valuation of loss contingencies, valuation of
derivative liabilities, valuation of stock-based compensation, estimated useful lives related to intangible assets and property and
equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred
tax assets.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations
are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business
failure.
The
Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions in
the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility
of prices in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project
the Company’s operating results on a consistent basis.
Fair
Value of Financial Instruments
The
Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements.
ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific
asset or liability.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
The
Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring
basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement.
The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining
fair value.
The
three tiers are defined as follows:
| |
● | Level
1 —Observable inputs that reflect quoted market prices (unadjusted) for identical assets
or liabilities in active markets; |
| |
● | Level
2—Observable inputs other than quoted prices in active markets that are observable
either directly or indirectly in the marketplace for identical or similar assets and liabilities;
and |
| |
● | Level
3—Unobservable inputs that are supported by little or no market data, which require
the Company to develop its own assumptions. |
The
determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations
often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation
methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the
asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions
of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors
to assist us in determining fair value, as appropriate.
Although
the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative
of net realizable value or reflective of future fair values.
The
Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, and accounts
payable and accrued expenses – related party, are carried at historical cost. At September 30, 2022 and December 31, 2021,
respectively, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these
instruments.
ASC
825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities
at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable
unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument
should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding
financial instruments.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Cash
and Cash Equivalents and Concentration of Credit Risk
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months
or less at the purchase date and money market accounts to be cash equivalents.
At
September 30, 2022 and December 31, 2021, respectively, the Company did not have any cash equivalents.
The
Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent
account balances exceed the amount insured by the FDIC, which is $250,000. At September 30, 2022 and December 31, 2021, the Company did
not experience any losses on cash balances in excess of FDIC insured limits.
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from outstanding customer balances. Credit is extended to customers
based on an evaluation of their financial condition and other factors. Interest is not accrued on overdue accounts receivable. The Company
does not require collateral.
Management
periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible
amounts. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical
collection information and existing economic conditions. Accounts determined to be uncollectible are charged to operations when that
determination is made.
Allowance
for doubtful accounts was $137,218 for the periods ended September 30, 2022 and December 31, 2021, respectively.
There
was no bad debt expense for the three and nine months ended September 30, 2022 and 2021, respectively.
Bad
debt expense (recovery) is recorded as a component of general and administrative expenses in the accompanying consolidated statements
of operations.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Inventory
Inventory
primarily consists of tablets and sim cards. Inventories are stated at the lower of cost or net realizable value using the
first-in, first-out (FIFO) valuation method.
During
the three and nine months ended September 30, 2022, the Company recorded a provision for inventory obsolescence of $51,718, respectively.
During
the three and nine months ended September 30, 2021, the Company recorded a provision for inventory obsolescence of $0, respectively.
At
September 30, 2022 and December 31, 2021, the Company had inventory of $9,492,385 and $4,359,296, respectively.
Impairment
of Long-lived Assets
Management
evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances
indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived
Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible
assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative
to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes
in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be
generated from the use and ultimate disposition of these assets.
If
impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to
be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
There
were no impairment losses for the three and nine months ended September 30, 2022 and 2021, respectively.
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated
useful lives of the assets.
Expenditures
for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When
property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective
accounts with the resulting gain or loss reflected in operations.
Management
reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount
of the asset may not be recoverable. Management has revised the capitalization policy to capitalize any property and equipment over $7,500. This impact
was immaterial to the periods presented.
There
were no impairment losses for the three and nine months ended September 30, 2022 and 2021, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Right
of Use Assets and Lease Obligations
The
Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments over
the lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental
borrowing rate.
Typically,
renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements
exceed that of the initial lease term, and the performance of the business remains strong. Therefore, the Right of Use Asset and Lease
Liability may include an assumption on renewal options that have not yet been exercised by the Company. The Company’s operating
leases contained renewal options 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.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Upon
conversion of a note for shares of common stock where the embedded conversion option has been bifurcated and accounted for as a derivative
liability, the Company records the shares at fair value, relieves all related notes, derivatives, and debt discounts, and recognizes
a net gain or loss on debt extinguishment. Equity instruments that are initially classified as equity that become subject to reclassification
under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
Debt
Issue Cost
Debt
issuance cost paid to lenders, or third parties are amortized to interest expense in the consolidated statements of operations, over
the life of the underlying debt instrument.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely with the delivery of the Company’s
services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when
a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects
to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
Identify
the contract with a customer
A
contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s
rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial
substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable
based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s
ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or,
in the case of a new customer, published credit and financial information pertaining to the customer.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
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.
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, 2022 and December 31, 2021, respectively, contained a significant financing component.
Allocate
the transaction price to performance obligations in the contract
If
the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract
with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a
specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised
in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations
require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless
the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service
that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance
obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the
standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines
related to the performance obligations.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Recognize
revenue when or as the Company satisfies a performance obligation
The
Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance
obligation is satisfied by transferring a promised service to a customer.
The
following reflects additional discussion regarding our revenue recognition policies for each of our material revenue streams. For each
revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration
is fixed and determinable at the initiation of the contract. Performance obligations for Torch, TW and LogicsIQ are satisfied when services
are performed. Performance obligations for ECS and SB are satisfied at point of sale.
For
each revenue stream we only have a single performance obligation.
Surge
Phone Wireless (SPW) and Torch Wireless
SPW
and Torch Wireless are separately licensed to provide subsidized mobile broadband services through the FCC’s Affordable
Connectivity Program (ACP) to qualifying low-income customers, covering all fifty states. Revenues are recognized when an ACP
application is completed and accepted. Each month we reconcile subscriber usage to ensure the service was utilized. A monthly file
is submitted to the Universal Service Administrative Company for review and approval, at which time we have completed our
performance obligation and recognize accounts receivable and revenue. Revenues are recorded in the month when services were
rendered, with payment typically received on the 28th of the following month.
Surge
Blockchain
Revenues
are generated through the sale of various products such as energy drinks, CBD products, and other top selling products in convenience
store and bodega nationwide. At the time in which our products are sold at the store our performance obligation is considered complete.
At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
LogicsIQ
LogicsIQ
is an enterprise software development company providing marketing business intelligence (“BI”), plaintiff generation and
case load management solutions for law firms representing plaintiffs in Mass Tort legal cases. Revenues are earned from our lead generation
and retained services offerings.
Lead
generation consist of sourcing leads, which requires us to drive traffic to our landing pages for a specific marketing campaign. We also
achieve this in certain marketing campaigns by using third-party preferred vendors to meet the needs of our clients. Revenues are recognized
at the time the lead is delivered to the client. If payment is received in advance of the delivery of services, it is included in deferred
revenue, and subsequently recognized once the performance obligation has been completed.
Retained
service offerings consist of turning leads into a retained legal case. To provide this service to our customers, we qualify leads through
verification of information collected during the lead generation process. Additionally, we further qualify these leads using a client
questionnaire which assists in determining the services to be provided. The qualification process is completed using our call center
operations.
If
payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the
performance obligation has been completed. At the time of delivery of leads and the creation of retained cases (customers are qualified
at this point), our performance obligation has been completed and revenues are recognized. Arrangements with customers do not provide
the customer with the right to take possession of our software or platform at any time. Once the advertising is delivered, it is non-refundable.
Surge
Fintech and ECS
Revenues
are generated through the sale of telecommunication products such as mobile phones, wireless top-up refills, and other mobile related
products. At the time in which our products are sold through our online web portal (point of sale), our performance obligation is considered
complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording
revenue.
True
Wireless (TW) (Former Subsidiary)
TW
was licensed to provide wireless services to qualifying low-income customers in five states. Revenues were recognized when a lifeline
application was completed and accepted. Each month we reconciled subscriber usage to ensure the service was utilized. A monthly file
was submitted to the Universal Service Administrative Company for review and approval, at which time we completed our performance obligation
and recognized accounts receivable and revenue. Revenues were recorded in the month when services were rendered, with payment typically
received on the 15th of the following month. If the subscriber did not utilize the Lifeline service during the month, we had
15-days to cure usage. If not cured, the subscriber was de-enrolled from the lifeline program at day 45. This process to verify usage
and de-enrollment had been temporarily suspended due to the COVID-19 pandemic. Historically, we had had an insignificant amount of subscribers
de-enrolled.
TW
was sold in May 2021 and has been deconsolidated as of the disposal date.
Contract
Liabilities (Deferred Revenue)
Contract
liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion
of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer
deposit is relieved and revenue is recognized.
At
September 30, 2022 and December 31, 2021, the Company had deferred revenue of $1,896,510 and $276,250, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
The
following represents the Company’s disaggregation of revenues for the nine months ended September 30, 2022 and 2021:
Schedule of Disaggregation of Revenue from Contracts with Customers
| | |
Nine
Months Ended September 30, | |
| | |
2022 | | |
2021 | |
| Revenue | |
Revenue | | |
%
of Revenues | | |
Revenue | | |
%
of Revenues | |
| | |
| | |
| | |
| | |
| |
| Surge
Phone and Torch Wireless | |
$ | 61,462,327 | | |
| 72.04 | % | |
$ | 1,253,035 | | |
| 3.40 | % |
| Surge
Blockchain, LLC | |
| 102,378 | | |
| 0.12 | % | |
| 110,547 | | |
| 0.30 | % |
| LogicsIQ, Inc. | |
| 10,689,006 | | |
| 12.53 | % | |
| 15,449,941 | | |
| 41.86 | % |
| Surge Fintech & ECS | |
| 13,064,149 | | |
| 15.31 | % | |
| 18,933,869 | | |
| 51.30 | % |
| True Wireless | |
| - | | |
| 0.00 | % | |
| 1,157,981 | | |
| 3.14 | % |
| Total Revenues | |
$ | 85,317,860 | | |
| 100 | % | |
$ | 36,905,373 | | |
| 100 | % |
Cost
of Revenues
Cost
of revenues consists of the cost of purchased tablets and SIM cards, commissions, and purchased telecom services including data
usage and access to wireless networks. Additionally, prepaid phone cards and advertising costs.
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, 2022 and December 31, 2021, respectively, the Company
had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
The
Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related
to uncertain income tax positions were recorded for the nine months ended September 30, 2022 and 2021, respectively.
Investment
– Former Related Party
On
January 17, 2019, we announced the completion of an agreement to acquire a 40% equity ownership of CenterCom Global, S.A. de C.V. (“CenterCom”).
CenterCom is a dynamic operations center currently providing sales support, customer service, IT infrastructure design, graphic media,
database programming, software development, revenue assurance, lead generation, and other various operational support services. Our CenterCom
team is based in El Salvador. CenterCom also provides call center support for various third-party clients.
Anthony
N. Nuzzo, a director and officer and the holder of approximately 10% of our voting equity had a controlling interest in CenterCom Global.
During 2022, Mr. Nuzzo passed away. See Form 8-K filed on March 24, 2022.
The
strategic partnership with CenterCom as a bilingual operations hub has powered our growth and revenue. CenterCom has been built to support
the infrastructure required to rapidly scale in synergy and efficiency to support our sales growth, customer service and development.
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, 2022 and December 31, 2021, our investment in CenterCom was $401,190 and $443,288, respectively.
During
the three months ended September 30, 2022 and 2021, we recognized a loss of $52,435 and gain of $21,072, respectively.
During
the nine months ended September 30, 2022 and 2021, we recognized a loss of $42,099 and a loss of $3,556, respectively.
During
2021, CenterCom forgave $429,010 of accounts payable owed by SurgePays to CenterCom. As this debt forgiveness occurred
with a related party there was no gain recorded and the Company increased additional paid in capital.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
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 $34,708 and $76,413 in marketing and advertising costs during the three months ended September 30, 2022 and 2021,
respectively.
The
Company recognized $170,714 and $638,706 in marketing and advertising costs during the nine months ended September 30, 2022 and 2021,
respectively.
Stock-Based
Compensation
The
Company accounts for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the
fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions
in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by
the issuance of those equity instruments.
The
Company uses the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the
fair value of options.
The
fair value of stock-based compensation is determined as of the date of the grant or the date at which the performance of the services
is completed (measurement date) and is recognized over the vesting periods.
When
determining fair value of stock-based compensation, the Company considers the following assumptions in the Black-Scholes model:
| ● | Exercise
price, |
| ● | Expected
dividends, |
| ● | Expected
volatility, |
| ● | Risk-free
interest rate; and |
| ● | Expected
life of option |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Stock
Warrants
In
connection with certain financing (debt or equity), 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 warrants issued for compensation using the Black-Scholes
option pricing model as of the measurement date. However, for warrants issued that meet the definition of a derivative liability, fair
value is determined based upon the use of a binomial pricing model.
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 (for services) are recorded at fair value and expensed over the requisite service period
or at the date of issuance if there is not a service period.
Basic
and Diluted Earnings (Loss) per Share and Reverse Stock Split
Pursuant
to ASC 260-10-45, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the periods presented.
Diluted
earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents
and potentially dilutive securities outstanding during the period. Potentially dilutive common shares may consist of common stock issuable
for stock options and warrants (using the treasury stock method), convertible notes and common stock issuable. These common stock equivalents
may be dilutive in the future. In the event of a net loss, diluted loss per share is the same as basic loss per share since the effect
of the potential common stock equivalents upon conversion would be anti-dilutive.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
The
following potentially dilutive equity securities outstanding as of September 30, 2022 and 2021 were as follows:
Schedule of Diluted Net Income (Loss) Per Share
| | |
September
30, 2022 | | |
September
30, 2021 | |
| Convertible
notes payable and related accrued interest (1) | |
| - | | |
| 540,206 | |
| Warrants
(2) | |
| 5,648,563 | | |
| 473,609 | |
| Stock
options (3) | |
| 6,801 | | |
| 3,401 | |
| Series
A, convertible preferred stock (4) | |
| 26,000 | | |
| 26,000 | |
| Series
C, convertible preferred stock (5) | |
| - | | |
| 3,607,990 | |
| Total
common stock equivalents | |
| 5,681,364 | | |
| 4,651,206 | |
| 1 | - conversion prices
variable |
| 2 | - exercise prices
variable |
| 3 | - weighted average
exercise price - $16/share and $16/share, respectively |
| 4 | - each share converts
to 1/10 of a share of common stock |
| 5 | | - each share converts
to 250 shares of common stock |
The
convertible notes contained exercise prices that had a discount to market ranging from 70% - 75% of the 10 or 20 days (See Note 5). As
a result, the amount computed for common stock equivalents could have changed given the quoted closing trading price at each reporting
period.
Warrants
and stock options included as commons stock equivalents represent those that are vested and exercisable. See Note 9.
Based
on the potential common stock equivalents noted above at September 30, 2022 and December 31, 2021, respectively, the Company has sufficient
authorized shares of common stock (500,000,000) to settle any potential exercises of common stock equivalents.
Related
Parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of the Company and its management and other parties with which the Company may
deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one
of the transacting parties might be prevented from fully pursuing its own separate interests.
The
Company uses certain credit cards to pay expenses, these credit cards are in the names of certain officers and
directors of the Company
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
During
the three and nine months ended September 30, 2022, the Company incurred expenses with related parties in the normal course of business
totaling $6,914,425 and $14,320,854, respectively.
Schedule
of Related Party Expenses
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
For the Three Months Ended
September 30, | | |
For the Nine Months Ended
September 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
| | |
| | |
| | |
| |
| Related party expenses | |
| | | |
| | | |
| | | |
| | |
| 321 Communications, Inc | |
$ | 5,685,359 | | |
$ | 362 | | |
$ | 11,554,803 | | |
$ | 362 | |
| Axia Management, LLC | |
| - | | |
| 1,300 | | |
| - | | |
| 95,415 | |
| Carddawg Investments, Inc. | |
| 94,023 | | |
| 15,732 | | |
| 124,767 | | |
| 41,116 | |
| CenterCom USA, Inc | |
| 393,990 | | |
| 338,595 | | |
| 1,713,920 | | |
| 908,550 | |
| Galaxy | |
| - | | |
| 67,950 | | |
| - | | |
| 67,950 | |
| National Relief Telecom | |
| 741,053 | | |
| - | | |
| 927,364 | | |
| - | |
| Total | |
$ | 6,914,425 | | |
$ | 423,940 | | |
$ | 14,320,854 | | |
$ | 1,113,393 | |
| Total related party expenses | |
$ | 6,914,425 | | |
$ | 423,940 | | |
$ | 14,320,854 | | |
$ | 1,113,393 | |
The increase in the expense is directly related to
the Company’s expansion into the Affordable Connectivity program. The vendors supplying data plans for the program are 321 Communications
and National Relief Telecom.
Recent
Accounting Standards
Changes
to accounting principles are established by the FASB in the form of Accounting Standards Updates (“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’ equity, cash flows, or presentation thereof. Management has evaluated all recent accounting pronouncements issued
through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not
yet effective accounting pronouncements, when adopted, will have a material impact on the consolidated financial statements of the Company.
In
June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments. Codification
Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019
(2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. This guidance replaces the
current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information to inform credit loss estimates. For SEC filers meeting certain criteria, the
amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
For
SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies
and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019.
We
adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s
consolidated financial statements.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions,
eliminates certain exceptions to existing guidance related to the approach for intra period tax allocation, the methodology for calculating
income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires
an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period
that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes
on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes
the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax
law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.
We
adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s
consolidation financial statements.
In
August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity; Own Equity (“ASU 2020-06”),
as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or
improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes
from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component,
unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium.
As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and
will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method
when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current
accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the
fiscal year.
We
adopted this pronouncement on January 1, 2022; however, the adoption of this standard did not have a material effect on the Company’s
consolidated financial statements.
Reclassifications
Certain
prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no material
effect on the consolidated results of operations, stockholders’ equity (deficit), or cash flows.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Note
3 – Property and Equipment
Management has revised the capitalization policy to
capitalize any property and equipment over $7,500. This impact was immaterial to the periods presented.
Property
and equipment consisted of the following:
Schedule of Property and Equipment
| | |
| | |
| | |
Estimated
Useful |
| Type | |
September
30, 2022 | | |
December
31, 2021 | | |
Lives
(Years) |
| | |
| | |
| | |
|
| Computer
equipment and software | |
$ | 1,005,946 | | |
$ | 283,484 | | |
3
- 5 |
| Furniture
and fixtures | |
| 83,092 | | |
| 82,752 | | |
5
- 7 |
| | |
| 1,089,038 | | |
| 366,236 | | |
|
| Less:
accumulated depreciation | |
| (341,982 | ) | |
| (165,788 | ) | |
|
| Property
and equipment - net | |
$ | 747,056 | | |
$ | 200,448 | | |
|
In
June 2022, the Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash, of
which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued 85,000 shares of common
stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.
Depreciation
and amortization expense for the three months ended September 30, 2022 and 2021 was $140,318 and $17,756, respectively.
Depreciation
and amortization expense for the nine months ended September 30, 2022 and 2021 was $174,403 and $50,491, respectively.
These
amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Note
4 – Intangibles
Intangibles
consisted of the following:
Schedule of Intangible Assets
| | |
| | |
| | |
Estimated
Useful |
| Type | |
September
30, 2022 | | |
December
31, 2021 | | |
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 | |
| (2,810,167 | ) | |
| (2,320,036 | ) | |
|
| Intangibles
- net | |
$ | 2,943,353 | | |
$ | 3,433,484 | | |
|
ECS
has been a financial technology and wireless top-up platform for over 15 years. On October 1, 2019, we acquired ECS primarily for the
favorable ACH banking relationships and a fintech transactions platform (proprietary software) processing over 20,000 transactions a
day at approximately 8,000 independently owned retail stores. The platform serves as a 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 on a straight-line basis over seven years.
Amortization
expense for the three months ended September 30, 2022 and 2021 was $163,377 and $163,377, respectively.
Amortization
expense for the nine months ended September 30, 2022 and 2021 was $490,131 and $528,881, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Estimated
amortization expense for each of the five (5) succeeding years is as follows:
Schedule of Estimated
Amortization Expenses
| For
the Year Ended December 31, 2022: | |
| |
| | |
| |
| 2022
(3 months) | |
$ |
163,377 | |
| 2023 | |
|
653,508 | |
| 2024 | |
|
653,508 | |
| 2025 | |
|
653,508 | |
| 2026 | |
|
653,508 | |
| 2027 | |
|
165,944 | |
| Total | |
$ |
2,943,353 | |
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, 2022 and December 31, 2021, respectively:
Notes
Payable – SBA government
(1)
Paycheck Protection Program - PPP Loan
Pertaining
to the Company’s eighteen (18) month loan and in accordance with the Paycheck Protection Program (“PPP”) and Conditional
Loan Forgiveness, the promissory note evidencing the loan contains customary events of default relating to, among other things, payment
defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result
in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment
against the Company.
Under
the terms of the PPP loan program, all or a portion of this Loan may be forgiven upon request from Borrower to Lender, provided the Loan
proceeds are used in accordance with the terms of the Coronavirus Aid, Relief and Economic Security Act (the “Act” or “CARES”),
Borrower is not in default under the Loan or any of the Loan Documents, and Borrower has provided documentation to Lender supporting
such request for forgiveness that includes verifiable information on Borrower’s use of the Loan proceeds, to Lender’s satisfaction,
in its sole and absolute discretion.
(2)
Economic Injury Disaster Loan (“EIDL”)
This
program was made available to eligible borrowers in light of the impact of the COVID-19 pandemic and the negative economic impact on
the Company’s business. Proceeds from the EIDL are to be used for working capital purposes.
Installment
payments, including principal and interest, are due monthly (beginning twelve (12) months from the date of the promissory note) in amounts
ranging from $109 - $751/month. The balance of principal and interest is payable over the next thirty (30) years from the date of the
promissory note. There are no penalties for prepayment. Based upon guidance issued by the SBA on June19, 2020, the EIDL Loan is not required
to be refinanced by the PPP loan.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Schedule of Notes Payable
| | |
| | |
| | |
| | |
| | |
| |
| | |
PPP | | |
EIDL | | |
EIDL | | |
PPP | | |
| |
| Terms | |
SBA | | |
SBA | | |
SBA | | |
SBA | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| |
| 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 | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Principal | |
$ | 498,082 | | |
$ | 150,000 | | |
$ | 486,600 | | |
$ | 518,167 | | |
$ | 1,652,849 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance - December 31, 2020 | |
$ | 498,082 | | |
$ | 150,000 | | |
$ | 486,600 | | |
$ | - | | |
$ | 1,134,682 | |
| Gross proceeds | |
| - | | |
| - | | |
| - | | |
| 518,167 | | |
| 518,167 | |
| Forgiveness of loan | |
| (371,664 | ) | |
| - | | |
| - | | |
| - | | |
| (371,664 | )1 |
| Deconsolidation of subsidiary (“TW”) | |
| - | | |
| - | | |
| (150,000 | ) | |
| - | | |
| (150,000 | )2 |
| Balance - December 31, 2021 | |
| 126,418 | | |
| 150,000 | | |
| 336,600 | | |
| 518,167 | | |
| 1,131,185 | |
| Forgiveness of loan | |
| - | | |
| - | | |
| - | | |
| (518,167 | ) | |
| (518,167 | )3 |
| Repayments | |
| (20,807 | ) | |
| (3,530 | ) | |
| (6,455 | ) | |
| - | | |
| (30,792 | ) |
| Balance - September 30, 2022 | |
$ | 105,611 | | |
$ | 146,470 | | |
$ | 330,145 | | |
$ | - | | |
$ | 582,226 | |
| 1 | During 2021, the
Company received a partial forgiveness on a PPP loan totaling $377,743, of which $371,664 was for principal and $6,079 for accrued interest.
The Company recorded this forgiveness as other income in the accompanying consolidated statements of operations. |
| 2 | In
connection with the deconsolidation of TW in 2021, $150,000
of debt was assumed by the TW’s buyer. |
| 3 | During 2022, the
Company received forgiveness on a PPP loan totaling $524,143, of which $518,167 was for principal and $5,976 for accrued interest. The
Company recorded this forgiveness as other income in the accompanying consolidated statements of operations. |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Notes
Payable – Related Parties
Schedule of Notes Payable
| | |
1 | | |
2 | | |
3 | | |
| |
| | |
Loan
Payable | | |
Loan
Payable | | |
Loan
Payable | | |
| |
| Terms | |
Related
Party | | |
Related
Party | | |
Related
Party | | |
Total | |
| | |
| | |
| | |
| | |
| |
| Issuance
dates of notes | |
Various | | |
May
2020/January 2021 | | |
August
2021 | | |
| |
| Maturity
date | |
January
1, 2023/January 1, 2024 | | |
March
2021 | | |
August
2031 | | |
| |
| Interest
rate | |
| 10% | | |
| 15% | | |
| 10% | | |
| | |
| Collateral | |
| Unsecured | | |
| Unsecured | | |
| Unsecured | | |
| | |
| Conversion
price | |
| N/A | | |
| N/A | | |
| N/A | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance
- December 31, 2020 | |
$ | 3,341,940 | | |
$ | 147,500 | | |
$ | - | | |
$ | 3,489,440 | |
| Gross
proceeds | |
| 3,825,000 | | |
| 63,000 | | |
| 467,385 | | |
| 4,355,385 | |
| Accrued
interest included in note balance | |
| 692,458 | | |
| - | | |
| - | | |
| 692,458 | |
| Conversion
of debt into common stock | |
| (2,265,967 | ) | |
| - | | |
| - | | |
| (2,265,967 | ) |
| Repayments | |
| - | | |
| (210,500 | ) | |
| - | | |
| (210,500 | ) |
| Balance
- December 31, 2021 | |
| 5,593,431 | | |
| - | | |
| 467,385 | | |
| 6,060,816 | |
| No
activity - 2022 | |
| - | | |
| - | | |
| - | | |
| - | |
| Balance
- September 30, 2022 | |
$ | 5,593,431 | | |
$ | - | | |
$ | 467,385 | | |
$ | 6,060,816 | |
| 1 | Activity is with
the Company’s Chief Executive Officer and Board Member (Kevin Brian Cox). Prior to September 30, 2021, these notes were either
due on demand or had a specific due date. Additionally, these advances had interest rates from 6% - 15%. On September 30, 2021, all notes
and related accrued interest were combined into two (2) new notes. |
| The new notes had due
dates of June 30, 2022 or January 1, 2023. In April 2022, the notes were extended to January 1, 2023 and January 1, 2024,
respectively. All notes bear interest at 10%. At September 30, 2021, the Company included $692,458 of accrued interest in the new
note balance. In 2021, the Company issued 561,758 shares of common stock at $4.30/share to settle $2,415,560 of debt including
principal of $2,265,967 and accrued interest of $149,593. As a result of the debt conversion with a related party,
gains/losses were recognized, however, the Company increased additional paid-in capital for $2,415,560. |
| 2 | Activity is with
the Company’s former President, Chief Operating Officer and Board Member (Anthony Nuzzo). Mr. Nuzzo passed away in March 2022. |
| 3 | Activity is with
David May, who is a Board Member. |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Notes
Payable
Schedule of Notes
Payable
| | |
| 1 | | |
| 2 | | |
| 3 | | |
| | | |
| 4 | | |
| | | |
| | |
| Terms | |
| Notes
Payable | | |
| Notes
Payable | | |
| Notes
Payable | | |
| Note
Payable | | |
| Notes
Payable | | |
| Total | | |
| In-Default | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Issuance
dates of notes | |
| April/May
2022 | | |
| April/June
2022 | | |
| March
2022 | | |
| 2019 | | |
| 2021 | | |
| | | |
| | |
| Maturity
date | |
| October/November
2022 | | |
| January/February
2023 | | |
| March
2023 | | |
| 2020 | | |
| 2022 | | |
| | | |
| | |
| Interest
rate | |
| 19% | | |
| 24% | | |
| 19% | | |
| 18% | | |
| 10% | | |
| | | |
| | |
| Default
interest rate | |
| 26% | | |
| N/A | | |
| 26% | | |
| 0% | | |
| 0% | | |
| | | |
| | |
| Collateral | |
| Unsecured | | |
| All
assets | | |
| Unsecured | | |
| Unsecured | | |
| Unsecured | | |
| | | |
| | |
| Warrants
issued as discount/issue costs | |
| 36,000 | | |
| N/A | | |
| 15,000 | | |
| N/A | | |
| 2,406,250 | | |
| | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Principal | |
$ | 1,200,000 | | |
$ | 5,000,000 | | |
$ | 500,000 | | |
$ | 250,000 | | |
$ | 1,101,000 | | |
$ | 8,051,000 | | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance
- December 31, 2020 | |
| - | | |
| - | | |
| - | | |
| 250,000 | | |
| - | | |
| 250,000 | | |
$ | 250,000 | |
| Gross
proceeds | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,101,000 | | |
| 1,101,000 | | |
| | |
| Debt
discount | |
| - | | |
| - | | |
| - | | |
| - | | |
| (672,254 | ) | |
| (672,254 | ) | |
| | |
| Amortization
of debt discount | |
| - | | |
| - | | |
| - | | |
| - | | |
| 698,511 | | |
| 698,511 | | |
| | |
| Repayments | |
| - | | |
| - | | |
| - | | |
| (250,000 | ) | |
| (1,127,257 | ) | |
| (1,377,257 | ) | |
| | |
| Balance
- December 31, 2021 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Gross
proceeds | |
| 1,200,000 | | |
| 5,000,000 | | |
| 500,000 | | |
| - | | |
| - | | |
| 6,700,000 | | |
| | |
| Debt
issue costs | |
| (76,451 | ) | |
| - | | |
| (38,953 | ) | |
| - | | |
| - | | |
| (115,404 | ) | |
| | |
| Amortization
of debt issue costs | |
| 56,048 | | |
| - | | |
| 38,953 | | |
| - | | |
| - | | |
| 95,001 | | |
| | |
| Balance
- September 30, 2022 | |
$ | 1,179,597 | | |
$ | 5,000,000 | | |
$ | 500,000 | | |
$ | - | | |
$ | - | | |
$ | 6,679,597 | | |
$ | - | |
| 1 | - | These notes were
issued with 36,000, three (3) year warrants, which have been reflected as debt issue costs and are amortized over the life of the debt. |
| 2 | - | The Company executed
a $5,000,000, secured, revolving promissory note with a third party. The Company may draw down on the note at 80% of eligible accounts
receivable. See below. |
| 3 | - | These notes were
issued with 15,000, three (3) year warrants, which have been reflected as debt issue costs and were amortized over the life of the debt.
Additionally, in September 2022, the Company issued an additional 12,000, three (3) year warrants, which have been treated as interest
expense in connection with extending the maturity date for notes totaling $400,000 to March 2023. In October 2022, the Company repaid
$100,000. |
| 4 | - | In the event
of default, these notes were convertible at 75% of the market price based upon the VWAP in preceding 10 days. There were defaults. Debt
discount on notes totaling $1,101,000 in principal included original issue discounts of $101,000 and debt discounts associated with warrants
totaling $229,268. Additionally, the Company computed a beneficial conversion feature of $341,986. |
Secured
Revolving Debt
In
April 2022, a maximum of $3,000,000 was made available to the Company, issued pursuant to a series of 270-day (9 months) revolving notes
for purposes of purchasing inventory. In June 2022, this amount was increased to $5,000,000.
The
notes will accrue interest a monthly rate of 2% (24% annualized). The Company may take drawdowns based upon eligible accounts receivable.
In the event that eligible accounts receivable is less than 80% of the loan amount, within four (4) business days, the Company will be
required to make a payment to the lender so that the loan amount is no greater than 80% of the then current eligible accounts receivable.
The maximum amount outstanding under the loan is the lesser of $5,000,000 or 80% of eligible accounts receivable. Additionally, any related
accrued interest associated with this mandatory payment will also be due. These advances are secured by all assets of the Company.
At
September 30, 2022 and December 31, 2021, the Company had a balance due of $5,000,000 and $0, respectively. See table above.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Convertible
Notes Payable – Net
Schedule of Notes
Payable
| | |
Convertible | | |
Convertible | | |
Convertible | | |
| |
| Terms | |
Notes
Payable | | |
Notes
Payable | | |
Notes
Payable | | |
Total | |
| | |
| | |
| | |
| | |
| |
| 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 | | |
| | |
| | |
| | | |
| | | |
| | | |
| | |
| Principal | |
$ | - | | |
$ | 2,347,000 | | |
$ | 2,550,000 | | |
$ | 4,897,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance
- December 31, 2020 | |
$ | - | | |
$ | 1,516,170 | | |
$ | - | | |
$ | 1,516,170 | |
| Gross
proceeds | |
| - | | |
| - | | |
| 2,550,000 | | |
| 2,550,000 | |
| Debt
discount | |
| - | | |
| - | | |
| (2,460,829 | ) | |
| (2,460,829 | ) |
| Amortization
of debt discount | |
| - | | |
| 517,781 | | |
| 2,460,829 | | |
| 2,978,610 | |
| Repayments
- cash | |
| - | | |
| - | | |
| (2,550,000 | )D | |
| (2,550,000 | ) |
| Conversion
to equity/debt modification | |
| - | | |
| (2,110,898 | ) | |
| - | | |
| (2,110,898 | ) |
| Reclassified
to receivable | |
| - | | |
| 76,947 | C | |
| - | | |
| 76,947 | |
| Balance
- December 31, 2021 | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| A | – | Convertible
at 65% multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock during
the ten (10) trading days prior to conversion. |
| B | – | Convertible
at 70% - 75% multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock
during the ten (10) trading days prior to conversion. |
| C | - | During 2021,
the Company 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. |
| D | - | During 2021,
the Company repaid the $2,550,000 of convertible notes in full, however, one of the notes, having a principal of $2,300,000 was prepaid
early. As a result, the Company paid an additional prepayment penalty equal to 120% of the outstanding amount due at the time of prepayment,
resulting in additional interest expense of $465,239. Also, at the time of repayment, the embedded derivative liability ceased to exist. |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Line
of Credit
The
Company had a $1,000,000 line of credit with a bank, bearing interest at 6%, which was due in April 2021. The line of credit was secured
by all of the Company’s assets and was personally guaranteed by the owner of the majority of the Company’s voting shares.
The balance at December 31, 2021 was $0. In connection with the deconsolidation of TW in May 2021, the buyer assumed the line of credit.
Note
6 – Derivative Liabilities
During
2021, the above convertible notes contained embedded conversion options with a conversion price that could result in issuing an undeterminable
amount of future common stock to settle the host contract. Accordingly, the embedded conversion option is required to be bifurcated from
the host instrument (convertible note) and treated as a liability, which is calculated at fair value, and marked to market at each reporting
period.
The
Company used the binomial pricing model to estimate the fair value of its embedded conversion option liabilities with the following inputs:
Schedule of Weighted
Average Assumptions
| | |
December
31, 2021 |
| Expected
term (years) | |
|
0.20
- 1 year |
| Expected
volatility | |
|
143%
- 291% |
| Expected
dividends | |
|
0% |
| Risk
free interest rate | |
|
0.03%
- 0.09% |
A
reconciliation of the beginning and ending balances for the derivative liability measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) is as follows at December 31, 2021:
Summary of Changes in
Fair Value
| Derivative
liability - December 31, 2020 | |
$ | 1,357,528 | |
| Fair
value at commitment date | |
| 1,877,250 | |
| Fair
value mark to market adjustment | |
| (1,806,763 | ) |
| Gain
on derivative liability upon related debt settled | |
| (1,428,015 | ) |
| Derivative
liability - December 31, 2021 | |
$ | - | |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
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, 2022 and 2021, the Company recorded a change in fair of derivative liabilities of $0 and $202,784,
respectively. These amounts reflect a mark to market adjustment recorded to the accompanying consolidated statements of operations.
During
the nine months ended September 30, 2022 and 2021, the Company recorded a change in fair of derivative liabilities of $0 and $746,896,
respectively. These amounts reflect a mark to market adjustment recorded to the accompanying consolidated statements of operations.
In
connection with bifurcating the embedded conversion option and accounting for this instrument at fair value, the Company computed a fair
value on the commitment date, and upon the initial valuation of this instrument, determined that the fair value of the liability exceeded
the proceeds of the debt host instrument. As a result, the Company recorded a debt discount at the maximum amount allowed (the face amount
of the debt), which required the overage to be recorded as a derivative expense.
For
the three months years ended September 30, 2022 and 2021, the Company recorded a derivative expense of $0 and $0, respectively.
For
the nine months years ended September 30, 2022 and 2021, the Company recorded a derivative expense of $0 and $1,775,057, respectively.
During
the year ended December 31, 2021, in connection with the repayment of convertible notes which contained embedded conversion features,
the related derivative liabilities ceased to exist.
During
the three months ended September 30, 2022 and 2021, the Company recorded a gain of $0 and $136,487, respectively, related to the settlement
of convertible debt which contained an embedded conversion feature and was separately bifurcated and classified as a derivative liability.
The Company has recorded these gains in the accompanying consolidated statements of operations as a component of gain on settlement of
liabilities.
During
the nine months ended September 30, 2022 and 2021, the Company recorded a gain of $0 and $979,469, respectively.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Note
7 – Fair Value of Financial Instruments
The
Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate
level in which to classify them for each reporting period. This determination requires significant judgments to be made.
The
Company did not have any assets or liabilities measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021,
respectively
Note
8 – Commitments and Contingencies
Operating
Lease
We
have entered into various operating lease agreements, including our corporate headquarters. We account for leases in accordance with
ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease
liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating,
with classification affecting the pattern of expense recognition in the statement of operations. In addition, a lessor is required to
classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all of the risks and
rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control,
the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating. We determine
if an arrangement is a lease, or contains a lease, at inception and record the lease in our financial statements upon lease commencement,
which is the date when the underlying asset is made available for use by the lessor.
Right-of-use
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of
lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at commencement
to determine the present value of lease payments except when an implicit interest rate is readily determinable. We determine our incremental
borrowing rate based on market sources including relevant industry data.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
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.
At
September 30, 2022 and December 31, 2021, respectively, the Company has no financing leases as defined in ASC 842, “Leases.”
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
The
tables below present information regarding the Company’s operating lease assets and liabilities at September 30, 2022 and December
31, 2021, respectively:
Schedule of Lease Expense
| | |
For
the Nine Months Ended | | |
For
the Nine Months Ended | |
| | |
September
30, 2022 | | |
September
30, 2021 | |
| Operating
Leases | |
$ | 44,747 | | |
$ | 140,464 | |
| Interest
on lease liabilities | |
| 17,216 | | |
| 31,898 | |
| Total
net lease cost | |
$ | 61,963 | | |
$ | 172,362 | |
Supplemental
balance sheet information related to leases was as follows:
Schedule of Supplemental Information
Related to Leases
| | |
September
30, 2022 | | |
December
31, 2021 | |
| | |
| | |
| |
| Operating
leases | |
| | | |
| | |
| | |
| | | |
| | |
| Operating
lease ROU assets - net | |
$ | 441,921 | | |
$ | 486,668 | |
| | |
| | | |
| | |
| Operating
lease liabilities - current | |
| 38,606 | | |
| 49,352 | |
| Operating
lease liabilities - non-current | |
| 409,672 | | |
| 438,903 | |
| Total
operating lease liabilities | |
$ | 448,278 | | |
$ | 488,255 | |
Supplemental
cash flow and other information related to leases was as follows:
Schedule of
Supplemental Cash Flow and Other Information Related to Leases
| | |
For
the Nine Months Ended | | |
For
the Nine Months Ended | |
| | |
September
30, 2022 | | |
September
30, 2021 | |
| Cash
paid for amounts included in measurement of lease liabilities |
|
|
|
|
|
|
|
|
| Operating
cash flows from operating leases | |
$ | 39,977 | | |
$ | 117,357 | |
| Cash
paid for amounts included in measurement of lease liabilities Operating cash flows from operating leases | |
$ | 39,977 | | |
$ | 117,357 | |
| | |
| | | |
| | |
| ROU
assets obtained in exchange for lease liabilities | |
| | | |
| | |
| Operating
leases | |
$ | - | | |
$ | 515,848 | |
| ROU
assets obtained in exchange for lease liabilities Operating leases | |
$ | - | | |
$ | 515,848 | |
| | |
| | | |
| | |
| Weighted
average remaining lease term (in years) | |
| | | |
| | |
| Operating
leases | |
| 7.74 | | |
| 8.19 | |
| | |
| | | |
| | |
| Weighted
average discount rate | |
| | | |
| | |
| Operating
leases | |
| 5 | % | |
| 5 | % |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Future
minimum lease payments at September 30, 2022
Schedule of Future Minimum Payments
| | |
| | |
| 2022
(3 months) | |
$ | 14,878 | |
| 2023 | |
| 60,294 | |
| 2024 | |
| 61,876 | |
| 2025 | |
| 63,460 | |
| Thereafter | |
| 351,356 | |
| Total
lease payments | |
| 551,864 | |
| Less:
amount representing interest | |
| (103,586 | ) |
| Total
lease obligations | |
$ | 448,278 | |
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
– Legal Matters
True
Wireless and Surge Holdings - Terracom Litigation
Global
Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton
County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom
believes Mr. Coffman and Mr. Carroll are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma
and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as
such we believe True Wireless has a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and
Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc.,
but not in wireless sales. The complaint requests general damages plus fees and costs for tortious interference with a business relationship
in their prayer for relief. They have made no written demand for damages at this point in time. The Company believes this matter is simply
an anti-competitive attempt by Terracom to cause distress to True Wireless.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Surge
Holdings – Juno Litigation
Juno
Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712
DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint
against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following
analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary.
Unimax
- Litigation
On
July 9, 2020, the Company entered into a settlement and release agreement with Unimax Communications, LLC (“Unimax”). The
settlement is related to a complaint filed by Unimax alleging the Company is indebted pursuant to a purchase order and additional financing
terms. The Company agreed to pay Unimax the total sum of $785,000 over a 24-month period. The settlement amount is included accounts
payable and accrued expenses on the consolidated balance sheets. The balance was repaid in April 2021.
Glen
Eagles Litigation
SurgePays,
Inc., formerly named as Surge Holdings, Inc., a Nevada corporation, Plaintiff, vs. Glen Eagles Acquisition LP, a Delaware limited partnership,
Defendant; District Court Clark County, Nevada; Case No.: A-21-831204-B
ALTCORP
TRADING, LLC, a Costa Rica limited liability company; et al, Plaintiffs, vs. Surge Holdings, Inc., a Nevada corporation; VSTOCK Transfer,
LLC, a California limited liability company, et al; District Court Clark County, Nevada; Case No.: A-20-823039-B
These
two lawsuits involved AltCorp Trading, LLC, Stanley Hills, LLC, and Glen Eagles Acquisition LP (the “AltCorp Parties.”).
Each of these lawsuits were ultimately disputes relating to the total consideration the Company paid to GBT Technologies, Inc. (“GBT”)
to acquire all of the assets of the entities that comprise the ECS Business (prior to the Company’s January 2020 acquisition of
the entities themselves).
On
October 18, 2021, the AltCorp Parties, GBT, and the Company entered into a non-binding Memorandum of Understanding (the “MOU”)
to set up a framework for an attempt to settle the two lawsuits.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
On
December 22, 2021 (the “Effective Date”), pursuant to the framework in the MOU, the AltCorp Parties, Igor 1 Corp. (an entity
related to the AltCorp Parties), the Company, ECS Prepaid LLC (“ECS LLC), and, in his individual capacity, Kevin Brian Cox (the
Company’s Chief Executive Officer), entered into a Resolution of Purchase, Mutual Release, and Settlement Agreement (the “Settlement
Agreement”) to settle the two lawsuits and resolve all disputes related to the consideration paid by the Company to GBT.
This
Settlement Agreement was entered into pursuant to a resolution of the Board authorizing the negotiation of and entry into of such agreement.
As
part of this agreement, the Company has acquired GBT’s rights to a certain Master Distribution and Service Agreement between Interactive
Communications International, Inc. and W.L. Petrey Wholesale Company, Inc., d/b/a UGO-HUB dated August 29, 2016 (the “MDA”),
as amended. The MDA contains sales channel access to a variety of unique wholesale prepaid products with approximately $1,500,000 to
$2,500,000 in monthly revenue. The MDA is the subject of a lawsuit between GBT and Robert Warren Jackson, RWJ Advanced Marketing LLC,
and Gregory Bauer int federal district court in Nevada (the “GBT Lawsuit”).
If
the result of the GBT Lawsuit is an assignment of the MDA to GBT or that GBT or an affiliate of GBT is the legal owner of the MDA, GBT
or such affiliate will assign the MDA to Surge and GBT shall be entitled to receive the Escrow Amount. If the result of the GBT Lawsuit
is a monetary judgment without the assignment or legal decree of ownership of the MDA, GBT shall be entitled to receive the Escrow Amount
and shall assign and timely pay to the Company the first one million dollars ($1,000,000) GBT recovers from the defendants in the GBT
Lawsuit. In the event that GBT does not prevail in the GBT Lawsuit then it shall be entitled to release of the Escrow Amount but shall
be responsible for any fees and costs obligation sought by the defendants in the GBT Lawsuit.
The
Company agreed to make total payments of four million two hundred thousand dollars ($4,200,000) to Stanley Hills, LLC on or prior to
January 7, 2022. This $4.2 million amount consists of a total of four hundred fifty thousand dollars ($450,000) paid by the Company in
November and December 2021, one hundred thousand dollars ($100,000) to be paid on or about January 4, 2022, and three million six hundred
fifty thousand dollars ($3,650,000) to be paid on or prior to January 7, 2022 of which three hundred seventy-five thousand dollars ($375,000)
will be held in escrow (the “Escrow Amount”). At December 31, 2021, the Company had accrued $3,750,000 as a settlement expense,
which was paid on January 7, 2022.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
In
addition, Igor 1 Corp. as of the Effective Date, held one hundred ten thousand (110,000) shares of the Company’s common stock that
has a restrictive legend (the “Igor Shares”). The owner of Igor 1 Corp. will be responsible for and shall pay for attempting
to have the restrictive legend from the Igor Shares removed (with the Company agreeing to pay seven hundred fifty dollars ($750) to help
pay for the legal opinion required). If Igor 1 Corp. is unable to have the legend removed prior to January 30, 2022, the Company will
pay Igor 1 Corp. five hundred thousand dollars ($500,000) within five (5) trading days to purchase the Igor Shares back and then cancel
them. As of February 4, 2022 (five trading days after January 30th), the Company was not asked to pay Igor 1 Corp. any funds
related to this possible share cancellation.
Glen
Eagles and a related entity as of the Effective Date, held three thousand (3,000) shares of the Company’s common stock (the “Glen
Eagles Shares”). The Glen Eagles shares shall be sold on the open market within thirty (30) days following the Effective Date.
If for any reason the consideration for the Glen Eagles shares is less than fifteen thousand dollars ($15,000), the Company will have
the obligation to compensate Glen Eagles for the difference between the actual amount received and $15,000. Such difference shall be
paid within five (5) days of Glen Eagles providing written proof of the proceeds of the sale of the Glen Eagles Shares. Glen Eagles was
paid $8,552.25 on February 16, 2022 for full settlement.
The
Settlement Agreement replaces all prior agreements between the parties. In addition, within three (3) trading days of the last payment
related to the $4.2 million payment to Stanley Hills being made, the parties shall make filings with the state District Court in Clark
County, Nevada to dismiss both lawsuits, including, regarding the lawsuit filed by AltCorp Trading, LLC, the dismissal of the lawsuit
as to VStock Transfer, LLC, to which the Company owed certain indemnification obligations. The parties agreed to a full mutual release
of any disputes or claims between the parties. All matters were dismissed by stipulation of the parties on January 12, 2022.
Crystal
Chapman, on behalf of herself and others similarly situated, Plaintiff versus SurgePays, Inc., Defendant; U.S. District Court for the
Northern District of Illinois, Case No.: 1:21-cv-04272. On August 11, 2021, the plaintiffs filed a lawsuit alleging violations of the
Telephone Consumer Protection Act as a putative class action. The plaintiffs are seeking unspecified damages and an order enjoining the
Company or their agents from making autodialed calls. The case alleges contact to consumer(s) whose telephone numbers are on the Federal
Do Not Call list, without their consent. There are no other counts under the TCPA or any other statute or tort. The Company vigorously
disputes the allegations in this complaint as the Company only contacts consumers who have provided express written consent to be contacted.
The Company believes it uses the leading software in the industry for lead verification and believes it can prove consent for all called
parties. This matter was settled in the quarter ended December 31, 2021.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
SurgePays
– Ambess Litigation
On
December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of
contract and prays for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion
practice and discovery process.
True
Wireless and SurgePays - Litigation
Blue
Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327,
filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless,
LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless
employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the
sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation
agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims
asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless.
An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive
damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs
have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive
attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox.
Note
9 – Stockholders’ Equity
Reverse
Stock Split
On
November 2, 2021, the Company effected a 1 for 50 reverse stock split of all classes of its stock. All share and per share amounts have
been retroactively restated to the earliest period presented.
At
September 30, 2022, the Company had three (3) classes of stock:
Common
Stock
| |
- | 500,000,000
shares authorized |
| |
- | Par
value - $0.001 |
| |
- | Voting
at 1 vote per share |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Series
A, Convertible Preferred Stock
| |
- | 13,000,000
shares authorized |
| |
- | 260,000
issued and outstanding |
| |
- | Par
value - $0.001 |
| |
- | Voting
at 10 votes per share (2,600,000 votes) |
| |
- | Ranks
senior to any other class of preferred stock |
| |
- | Dividends
- none |
| |
- | Liquidation
preference – none |
| |
- | Rights
of redemption - none |
| |
- | Conversion
into 1/10 of a share of common stock for each share held (26,000 common stock equivalents) |
Series
C, Convertible Preferred Stock
| |
- | 1,000,000
shares authorized |
| |
- | None
issued and outstanding |
| |
- | Par
value - $0.001 |
| |
- | Voting
at 250 votes per share |
| |
- | Ranks
junior to any other class of preferred stock |
| |
- | Dividends
– equal to the per share amount (as converted basis) as the common stockholders should
the Board of Directors declare a dividend |
| |
- | Liquidation
preference – original issue price plus any declared yet unpaid accrued dividends |
| |
- | Rights
of redemption - none |
| |
- | Conversion
into 250 shares of common stock for each share held |
In
October 2021, all Series C, Preferred stockholders, representing 721,598 shares issued and outstanding, agreed to convert their holdings
into 3,607,980 shares of common stock. The transaction had a net effect of $0 on stockholders’ equity.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Equity
Transactions for the Nine Months Ended September 30, 2022
Stock
Issued as Direct Offering Costs
In
April 2022, the Company issued 200,000 shares of common stock for services rendered in connection with the Company’s NASDAQ uplisting
in 2021. As a result, the Company recorded the par value of the common stock issued with a corresponding charge to additional paid-in
capital, resulting in a net effect of $0 to stockholders’ equity.
Stock
Issued for Acquisition of Software
In
June 2022, the Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash, of
which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued 85,000 shares of common
stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.
Exercise
of Warrants
The
Company issued 147,153 shares of common stock in connection with a cashless exercise of 498,750 warrants. The transaction had a net effect
of $0 on stockholders’ equity.
Equity
Transactions for the Year Ended December 31, 2021
NASDAQ
Listing
On
November 2, 2021, the Company was approved to be uplisted to NASDAQ. The common stock and warrants are traded on the Nasdaq Capital Market
under the symbols SURG and SURGW, respectively.
Stock
Issued for Services
The
Company issued 13,411 shares of common stock for services rendered, having a fair value of $99,436 ($5 - $14.05/share), based upon the
quoted closing trading price.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Stock
and Warrants Issued for Cash and Related Direct Offering Costs
The
Company issued an aggregate 4,862,247 shares of common stock for $21,294,800 ($4.30 -$8/share). In connection with raising these funds,
the Company paid $2,222,952 in direct offering costs, resulting in net proceeds of $19,076,710.
Of
the 4,862,247 shares issued in 2021, 4,600,000 shares and 690,000 were sold in connection with the Company’s uplist to NASDAQ as
follows:
On
November 4, 2021, the Company issued 4,600,000 units consisting of one share of common stock and one warrant and 690,000 over-allotment
warrants. The units were sold at $4.30 per unit for gross proceeds of $19,786,900 ($19,780,000 from the sale of 4,600,000 units at $4.30
and $6,900 from the sale of 690,000 over-allotment warrants at $0.01). The warrants are exercisable immediately at $4.73/share and expire
three (3) years from the issuance date.
In
connection with the Company’s sale of common stock, the Company incurred direct offering costs of $2,222,952 which were charged
to additional paid-in capital. Net proceeds were $19,076,710.
On
November 4, 2021, the Company issued 230,000 five (5) year warrants to the underwriters. These warrants are exercisable beginning May
1, 2022 until November 1, 2026. The exercise price is $4.73/share. The fair value of these warrants was $647,897 based upon the following
assumptions:
Schedule of Fair Value of Warrants
| Expected
term (years) | |
5 |
| Expected
volatility | |
118% |
| Expected
dividends | |
0% |
| Risk
free interest rate | |
0.53% |
Since
these warrants were issued as direct offering costs associated with the offering, the Company has accounted for these warrants as both
a charge and increase to additional paid-in capital, resulting in a net effect on stockholders’ equity of $0.
These
230,000 warrants were exchanged for 68,161 shares of common stock in July 2022 in a cashless exchange. The net effect on stockholders’
equity was $0.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Exercise
of Warrants
The
Company issued 2,133 shares of common stock in connection with a cashless exercise of warrants. The transaction had a net effect of $0
on stockholders’ equity.
Stock
and Warrants Issued as Debt Discount
During
2021, the Company issued stock and warrants in connection with the issuance of debt and derivative liabilities totaling $3,562,829, which
were recorded as debt discounts to be amortized over the life of the debt. The Company issued 18,000 shares of common stock along with
137,500 three (3) year warrants, having an exercise price of $8/share. The aggregate discount recorded was $2,645,890 for the stock and
warrants which are reflected in the accompanying consolidated statements of stockholders’ equity. An additional discount of $102,194
was recorded in connection with the commitment date fair value of derivative liabilities for an aggregate discount of $2,748,084.
Fair
value of the warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected term (years) |
| 3 |
| Expected volatility |
| 118% |
| Expected dividends |
| 0% |
| Risk free interest rate |
| 0.53% |
Conversion
of Debt
The
Company issued 709,674 shares of common stock in connection with the conversion of convertible debt, having a fair value of $3,363,561
($0.05 - $10.38/share), based upon the quoted closing trading price.
Make-whole
Arrangement
The
Company issued 15,147 shares of common stock to debt holders that were entitled to shares upon the settlement of debt and related accrued
interest. The shares had a fair value of $90,401 ($5.60 - $6/share), based upon the quoted closing trading price.
Stock
Issued for Debt Modification
The
Company issued 13,916 shares of common stock in connection with the modification of debt arrangements. The shares had a fair value of
$108,931 ($5.60 - $8/share), based upon the quoted closing trading price.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Stock
Issued in Settlement of Liabilities
The
Company issued 276,702 shares of common stock to various vendors and debt holders to settle accounts payable, debt and derivative liabilities.
The shares had a fair value of $1,997,977 ($4.50 - $15.99/share), based upon the quoted closing trading price. In connection with these
debt settlements, the Company recorded a gain of $1,469,641.
Stock
Issued in Acquisition of Membership Interest in ECS
On
January 30, 2020, the Company entered into a Membership Interest Purchase Agreement and Stock Purchase Agreement with ECS Prepaid, ECS,
CSLS and the Winfrey’s. Pursuant to the agreements, the Company acquired all of the membership interests of ECS Prepaid and all
of the issued and outstanding stock of each ECS and CSLS. The agreements provide that the consideration is to be paid by the Company
through the issuance of 10,000 shares of the Company’s Common Stock. In addition, the agreements called for 500 shares of Common
Stock to be issued to the Winfrey’s on a monthly basis over a 12-month period. During 2021, the Company issued 2,000 shares of
common stock in full settlement of the agreements. The shares had a fair value of $17,900 ($8.95/share), based upon the quoted closing
trading price. During 2020, the Company issued 5,500 shares.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Stock
Options
Stock
option transactions under the Company’s Plan for the nine months ended September 30, 2022 and the year ended December 31, 2021
are summarized as follows:
Schedule of Stock Option Transactions
| Stock
Options | |
Number of
Options | | |
Weighted
Average
Exercise Price | | |
Weighted
Average
Remaining
Contractual
Term (Years) | | |
Aggregate
Intrinsic
Value | | |
Weighted
Average
Grant
Date
Fair Value | |
| Outstanding
- December 31, 2020 | |
| 17,004 | | |
$ | 16.00 | | |
| 6.16 | | |
$ | - | | |
$ | - | |
| Vested
and Exercisable - December 31, 2020 | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
$ | - | |
| Unvested
and non-exercisable - December 31, 2020 | |
| 17,004 | | |
$ | 16.00 | | |
| 6.16 | | |
$ | - | | |
$ | - | |
| Granted | |
| - | | |
| - | | |
| | | |
| | | |
$ | - | |
| Exercised | |
| - | | |
| - | | |
| | | |
| | | |
| | |
| Cancelled/Forfeited | |
| - | | |
| - | | |
| | | |
| | | |
| | |
| Outstanding
- December 31, 2021 | |
| 17,004 | | |
$ | 16.00 | | |
| 5.16 | | |
$ | - | | |
$ | - | |
| Vested
and Exercisable - December 31, 2021 | |
| 3,401 | | |
$ | 16.00 | | |
| 5.16 | | |
$ | - | | |
$ | - | |
| Unvested
and non-exercisable - December 31, 2021 | |
| 13,603 | | |
$ | 16.00 | | |
| 5.16 | | |
$ | - | | |
$ | - | |
| Granted | |
| - | | |
| - | | |
| | | |
| | | |
$ | - | |
| Exercised | |
| - | | |
| - | | |
| | | |
| | | |
| | |
| Cancelled/Forfeited | |
| - | | |
| - | | |
| | | |
| | | |
| | |
| Outstanding
- September 30, 2022 | |
| 17,004 | | |
$ | 16.00 | | |
| 4.42 | | |
$ | - | | |
$ | - | |
| Vested
and Exercisable - September 30, 2022 | |
| 6,801 | | |
$ | 16.00 | | |
| 4.42 | | |
$ | - | | |
$ | - | |
| Unvested
and non-exercisable - September 30, 2022 | |
| 10,202 | | |
$ | 16.00 | | |
| 4.42 | | |
$ | - | | |
$ | - | |
During
2022 and 2021, 3,400 stock options vested (6,801 in total), which were held by the Company’s Chief Financial Officer.
Compensation
expense recorded for stock-based compensation is as follows for the three months ended September 30, 2022 and 2021, was $9,294 and $9,294,
respectively.
Compensation
expense recorded for stock-based compensation is as follows for the nine months ended September 30, 2022 and 2021, was $27,882 and
$27,882, respectively.
As
of September 30, 2022, compensation cost related to the unvested options not yet recognized was $52,663.
Weighted
average period in which compensation will vest (years) 1.42 years. The unvested stock option expense is expected to be recognized through
March 2024.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Warrants
Warrant
activity for the nine months ended September 30, 2022 and the year ended December 31, 2021 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
- December 31, 2020 | | |
| 194,317 | | |
$ | 32.50 | | |
| 1.52 | | |
$ | - | |
| Vested
and Exercisable - December 31, 2020 | | |
| 194,317 | | |
$ | 32.50 | | |
| 1.52 | | |
$ | - | |
| Granted | | |
| 5,935,450 | | |
$ | 8.01 | | |
| - | | |
| - | |
| Exercised | | |
| (2,133 | ) | |
$ | 12.50 | | |
| - | | |
| - | |
| Cancelled/Forfeited | | |
| (44,650 | ) | |
$ | 23.49 | | |
| - | | |
| - | |
| Outstanding
- December 31, 2021 | | |
| 6,082,984 | | |
$ | 8.68 | | |
| 2.93 | | |
$ | - | |
| Vested
and Exercisable - December 31, 2021 | | |
| 5,852,984 | | |
$ | 8.70 | | |
| 2.85 | | |
$ | - | |
| Unvested
- December 31, 2021 | | |
| 230,000 | | |
$ | 8.00 | | |
| 4.85 | | |
$ | - | |
| Granted | | |
| 153,000 | | |
$ | 4.73 | | |
| - | | |
| | |
| Exercised | | |
| (498,750 | ) | |
$ | 8.00 | | |
| - | | |
| | |
| Cancelled/Forfeited | | |
| (88,671 | ) | |
$ | 40.04 | | |
| - | | |
| | |
| Outstanding
- September 30, 2022 | | |
| 5,648,563 | | |
$ | 8.14 | | |
| 2.10 | | |
$ | - | |
| Vested
and Exercisable - September 30, 2022 | | |
| 5,648,563 | | |
$ | 8.14 | | |
| 2.10 | | |
$ | - | |
| Unvested
and non-exercisable - September 30, 2022 | | |
| - | | |
$ | - | | |
| 0.00 | | |
$ | - | |
Warrant
Transactions for the Nine Months Ended September 30, 2022
Debt
Issue Costs
In
connection with $1,700,000 in notes issued in March, April and May 2022 (See Note 5), the Company issued 51,000 warrants, which are accounted
for as debt issue costs, having a fair value of $115,404.
The
fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected term (years) | |
| 3 years | |
| Expected volatility | |
| 119% - 120 | % |
| Expected dividends | |
| 0 | % |
| Risk free interest rate | |
| 2.45%
- 2.80 | % |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Interest
Expense
In
May 2022, a vendor increased the amount of credit the Company had for making purchases. In consideration for the increase, the Company
issued 90,000 warrants, which are accounted for as interest expense, having a fair value of $212,608.
The
fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected
term (years) | |
| 3
years | |
| Expected
volatility | |
| 120 | % |
| Expected
dividends | |
| 0 | % |
| Risk
free interest rate | |
| 2.71 | % |
In
September 2022, the Company extended the due dates of certain notes payable totaling $400,000 for an additional 6 months. In consideration
for the extension of the maturity date, the Company issued 12,000 warrants, which are accounted for as interest expense, having a fair
value of $38,754.
The
fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected
term (years) | |
| 3
years | |
| Expected
volatility | |
| 119 | % |
| Expected
dividends | |
| 0 | % |
| Risk
free interest rate | |
| 4.25 | % |
Warrant
Exercise
In
July 2022, the Company issued 78,992 shares of common stock in connection with a cashless exercise of 268,750 warrants.
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Warrant
Transactions for the Year Ended December 31, 2021
During
2021, the Company granted 277,950 warrants to convertible note holders and additional 137,500 warrants to note holders. These warrants
were exercisable upon the grant date, had expiration dates ranging from 3 – 5 years, and exercise prices of $8 - $12/share.
Additionally,
in connection with the NASDAQ uplisting, 5,290,000 warrants were sold for cash and an additional 230,000 warrants were issued as an underwriters’
discount. The 230,000 warrants are exercisable six (6) months from the grant date in May 2022. See above for additional discussion, including
the cashless exercise of these warrants for 68,161 shares of common stock.
In
connection with the Company’s NASDAQ uplisting, 433,017 warrants were repriced at a lower exercise price to better reflect the
current market offering. No other terms had been modified. As a result, for the year ended December 31, 2021, the Company recorded a
warrant modification expense of $74,476 in the accompanying consolidated statements of operations with an offsetting increase to additional
paid in capital.
The
fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected
term (years) |
| 3
- 5 |
| Expected
volatility |
| 119%
- 146% |
| Expected
dividends |
| 0% |
| Risk
free interest rate |
| 0.07%
- 1.15% |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Note
10 – Segment Information
Operating
segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by
the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision maker is its Chief Executive Officer.
The
Company evaluated performance of its operating segments based on revenue and operating loss. All data below is prior to intercompany
eliminations.
Segment
information for the three and nine months ended September 30, 2022 and 2021, are as follows:
Schedule of Operating Segments
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
Three Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2022 | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
| | |
| | |
| | |
| |
| Revenues | |
| | | |
| | | |
| | | |
| | |
| Surge Phone and Torch Wireless | |
$ | 27,345,641 | | |
$ | 1,250,804 | | |
$ | 61,462,327 | | |
$ | 1,253,035 | |
| Surge Blockchain, LLC | |
| 54,707 | | |
| 32,629 | | |
| 102,378 | | |
| 110,547 | |
| LogicsIQ, Inc. | |
| 4,763,990 | | |
| 7,453,036 | | |
| 10,689,006 | | |
| 15,449,941 | |
| Surge Fintech & ECS | |
| 4,007,007 | | |
| 5,801,884 | | |
| 13,064,149 | | |
| 18,933,869 | |
| True Wireless | |
| - | | |
| - | | |
| - | | |
| 1,157,981 | |
| SurgePays, Inc. | |
| - | | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 36,171,345 | | |
$ | 14,538,353 | | |
$ | 85,317,860 | | |
$ | 36,905,373 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cost of revenues | |
| | | |
| | | |
| | | |
| | |
| Surge Phone and Torch Wireless | |
$ | 24,298,074 | | |
$ | 1,179,212 | | |
$ | 54,836,122 | | |
$ | 1,186,881 | |
| Surge Blockchain, LLC | |
| 957 | | |
| (588 | ) | |
| 2,457 | | |
| 1,377 | |
| LogicsIQ, Inc. | |
| 5,693,500 | | |
| 5,851,931 | | |
| 10,457,462 | | |
| 12,628,769 | |
| Surge Fintech & ECS | |
| 4,258,010 | | |
| 5,604,316 | | |
| 13,276,380 | | |
| 18,421,530 | |
| True Wireless | |
| - | | |
| - | | |
| - | | |
| 306,062 | |
| SurgePays, Inc. | |
| - | | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 34,250,541 | | |
$ | 12,634,871 | | |
$ | 78,572,421 | | |
$ | 32,544,619 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses | |
| | | |
| | | |
| | | |
| | |
| Surge Phone and Torch Wireless | |
$ | 84,775 | | |
$ | 11,496 | | |
$ | 215,664 | | |
$ | 35,409 | |
| Surge Blockchain, LLC | |
| 300 | | |
| (918 | ) | |
| 53,271 | | |
| 11,725 | |
| LogicsIQ, Inc. | |
| 446,292 | | |
| 646,128 | | |
| 1,454,111 | | |
| 1,604,261 | |
| Surge Fintech & ECS | |
| 370,599 | | |
| 288,966 | | |
| 1,013,518 | | |
| 1,062,315 | |
| True Wireless | |
| - | | |
| 61,458 | | |
| - | | |
| 615,013 | |
| SurgePays, Inc. | |
| 2,031,238 | | |
| 1,902,824 | | |
| 6,918,965 | | |
| 6,933,756 | |
| Total | |
$ | 2,933,204 | | |
$ | 2,909,954 | | |
$ | 9,655,529 | | |
$ | 10,262,479 | |
| | |
| | | |
| | | |
| | | |
| | |
| Income (loss) from operations | |
| | | |
| | | |
| | | |
| | |
| Surge Phone and Torch Wireless | |
$ | 2,962,792 | | |
$ | 60,096 | | |
$ | 6,410,541 | | |
$ | 30,745 | |
| Surge Blockchain, LLC | |
| 53,450 | | |
| 34,135 | | |
| 46,650 | | |
| 97,445 | |
| LogicsIQ, Inc. | |
| (1,375,802 | ) | |
| 954,977 | | |
| (1,222,567 | ) | |
| 1,216,911 | |
| Surge Fintech & ECS | |
| (621,602 | ) | |
| (91,398 | ) | |
| (1,225,749 | ) | |
| (549,976 | ) |
| True Wireless | |
| - | | |
| (61,458 | ) | |
| - | | |
| 236,906 | |
| SurgePays, Inc. | |
| (2,031,238 | ) | |
| (1,902,824 | ) | |
| (6,918,965 | ) | |
| (6,933,756 | ) |
| Total | |
$ | (1,012,400 | ) | |
$ | (1,006,472 | ) | |
$ | (2,910,090 | ) | |
$ | (5,901,725 | ) |
SURGEPAYS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2022
(UNAUDITED)
Segment
information for the Company’s assets and liabilities at September 30, 2022 and December 31, 2021, are as follows:
| | |
September
30, 2022 | | |
December
31, 2021 | |
| | |
| | |
| |
| Total
Assets | |
| | | |
| | |
| Surge
Phone and Torch Wireless | |
$ | 17,772,528 | | |
$ | (161,110 | ) |
| Surge
Blockchain, LLC | |
| (560,954 | ) | |
| (608,188 | ) |
| LogicsIQ,
Inc. | |
| 2,392,232 | | |
| 1,284,562 | |
| Surge
Fintech & ECS | |
| 2,656,342 | | |
| 3,870,409 | |
| True
Wireless | |
| - | | |
| - | |
| SurgePays, Inc. | |
| 11,100,715 | | |
| 15,114,529 | |
| Total | |
$ | 33,360,863 | | |
$ | 19,500,202 | |
| | |
| | | |
| | |
| Total
Liabilities | |
| | | |
| | |
| Surge
Phone and Torch Wireless | |
$ | 11,527,879 | | |
$ | 5,773 | |
| Surge
Blockchain, LLC | |
| 198,197 | | |
| 197,614 | |
| LogicsIQ,
Inc. | |
| 4,392,510 | | |
| 2,056,886 | |
| Surge
Fintech & ECS | |
| 60,029 | | |
| 48,346 | |
| True
Wireless | |
| - | | |
| - | |
| SurgePays, Inc. | |
| 16,718,162 | | |
| 13,640,262 | |
| Total | |
$ | 32,896,777 | | |
$ | 15,948,881 | |
