Item
1.01 Entry into a Material Definitive Agreement.
On
November 17, 2022, SurgePays, Inc. (the “Company”), two wholly-owned subsidiaries of the Company (SurgePhone Wireless LLC
and Torch Wireless, collectively, the “Purchaser”) and Affordable Connectivity Financing V Limited Liability Company (the
“Seller”) (an entity affiliated with Horizon Capital LLC) entered into an Installment Sale Agreement (the “Agreement”).
The Company is acting as the guarantor of the Purchaser’s obligations pursuant to the Agreement.
Pursuant
to the Agreement, the Seller has agreed to purchase and then sell to Purchaser new and refurbished cellular devices (the “Devices”)
for distribution through the Purchaser’s distribution network to Affordable Connectivity Program (the “ACP”) (run by
the Federal Communications Commission (the “FCC”)) and California Lifeline eligible consumers. The ACP is an FCC benefit
program that helps ensure that households can afford the broadband they need. Similarly, California Lifeline is a state program that
provides discounted home phone and cell phone services to eligible households.
Under
the terms of the Agreement, the Purchaser will issue purchase orders for Devices to suppliers mutually approved by the Purchaser and
the Seller. The Seller will purchase the Devices and bill the Purchaser the cost of the purchase order plus a 9.85% fee (the “Profit
Margin”) with the total amount to be paid in nine (9) equal monthly installments. Starting on April 1, 2023, to the extent the
secured overnight financing rate as administered by the Federal Reserve Bank of New York (the “SOFR”) is greater than 3.0%,
then the Profit Margin will adjust for each 0.50% increase in SOFR above 3%, resulting in an increase to the Profit Margin of 0.2%. For
example, if on April 1, 2023, the published 1-month average SOFR is 3.5%, the Profit Margin will be reset from 9.85% to 10.05% for such
quarter.
The
Seller shall make available to Purchaser up to twenty-five million dollars ($25,000,000) in credit through November 17, 2024 (the “Maturity
Date”). Purchaser will owe a cancellation fee to the Seller if the Purchaser cancels the Agreement and prepays the entire amount
owed prior to the Maturity Date.
The
initial amount of credit extended by Seller at closing was fifteen million dollars ($15,000,000). The initial credit fee owed by Purchaser
to Seller is three hundred thousand dollars ($300,000) which is to be paid in in twelve (12) equal monthly installments.
The
amounts owed by Purchaser to Seller are secured by a first priority security interest in Purchaser’s assets.
The
Agreement contains customary representations, warranties and indemnification provisions. The Agreement also contains negative and affirmative
covenants with respect to the Company and affirmative financials covenants with respect to the Purchaser. These affirmative financials
covenants are with respect to the number of Purchaser’s monthly ACP and California Lifeline subscribers, Purchaser’s minimum
liquidity, the ratio of the Purchaser Adjusted EBITDA (as defined in the Agreement) to the Purchaser’s monthly payments to Seller,
and the ratio of the Purchaser’s liabilities (including amounts owed to Seller) to the Purchaser Adjusted EBITDA.
In
connection with the entrance into the Agreement, on November 17, 2022, the Seller, the Purchaser, and Ivy Dallas Funding, LLC (the “Paying
Agent”) entered into the Paying Agent Agreement (the “Agent Agreement”). Pursuant to the Agent Agreement, the Paying
Agent will control and administer a cash deposit account established in the name of the Purchaser for the benefit of Seller and the Paying
Agent (the “Depository Account”). The Depository Account is to be established for the purpose of Purchaser receiving cash
related to the ACP and California Lifeline programs as well for the purpose of Purchaser making all payments owed to Seller pursuant
to the Agreement. Once all monthly payments are made to Seller, the Paying Agent will pay remaining amounts in the Depository Account
to the Purchaser.
The
foregoing description of the Agreement and the Agent Agreement is not complete and is qualified in its entirety by reference to the full
text of the Agreement and the Agent Agreement which are filed as, respectively, Exhibits 10.1 and 10.2 to this Current Report on Form
8-K and are incorporated by reference herein.
