UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from ________________ to ________________
Commission
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
The
(Nasdaq Capital Market) | ||||
The
(Nasdaq Capital Market) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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| Large accelerated filer ☐ | Accelerated filer ☐ |
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| Emerging
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SurgePays, Inc. and Subsidiaries
| 1 |
SurgePays, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable - net | ||||||||
| Inventory | ||||||||
| Prepaids | ||||||||
| Total Current Assets | ||||||||
| Property and equipment - net | ||||||||
| Other Assets | ||||||||
| Note receivable | ||||||||
| Intangibles - net | ||||||||
| Internal use software development costs - net | ||||||||
| Goodwill | ||||||||
| Investment in CenterCom | ||||||||
| Operating lease - right of use asset - net | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accounts payable and accrued expenses - related party | ||||||||
| Installment sale liability | ||||||||
| Deferred revenue | ||||||||
| Operating lease liability | ||||||||
| Notes payable - related parties | ||||||||
| Notes payable | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Note payable | ||||||||
| Notes payable - related parties | ||||||||
| Notes payable - SBA government | ||||||||
| Operating lease liability | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 8) | ||||||||
| Stockholders’ Equity | ||||||||
Common stock, $ par value, shares authorized and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Stockholders’ equity | ||||||||
| Non-controlling interest | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 2 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | $ | ||||||
| Costs and expenses | ||||||||
| Cost of revenue | ||||||||
| General and administrative expenses | ||||||||
| Total costs and expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Other income (expense) | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Gain (loss) on investment in CenterCom | ( | ) | ||||||
| Total other income (expense) - net | ( | ) | ( | ) | ||||
| Net income (loss) including non-controlling interest | ( | ) | ||||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Net income (loss) available to common stockholders | $ | $ | ( | ) | ||||
| Earnings (loss) per share - attributable to common stockholders | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| Weighted average number of shares outstanding - attributable to common stockholders | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 3 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Year Ended December 31, 2022
| Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Stock issued for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Recognition of stock based compensation - stock options | - | - | - | |||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||
| March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2022
(Unaudited)
| Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Recognition of stock based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Warrants issued as debt issue costs | - | - | - | |||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating activities | ||||||||
| Net income (loss) - including non-controlling interest | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operations | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Amortization of internal use software development costs | ||||||||
| Recognition of share based compensation | ||||||||
| (Gain) loss on equity method investment - CenterCom | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| (Increase) decrease in | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepaids | ( | ) | ( | ) | ||||
| Increase (decrease) in | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accounts payable and accrued expenses - related party | ( | ) | ( | ) | ||||
| Installment sale liability - net | ||||||||
| Deferred revenue | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Capitalized internal use software development costs | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Repayments of notes payable - related party | ( | ) | ||||||
| Proceeds from notes payable | ||||||||
| Repayments on notes payable | ( | ) | ||||||
| Repayments on notes payable - SBA government | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Debt issue costs recorded in connection with notes payable | $ | $ | ||||||
| 6 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(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:
| Company Name | Incorporation Date | State of Incorporation | ||
| * |
| * |
| 7 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.
In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2023 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2023 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, 2022 filed with the SEC on March 30, 2023.
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 and Management’s Plans
As reflected in the accompanying consolidated financial statements, for the three months ended March 31, 2023, the Company had:
| ● | Net
income available to common stockholders of $ |
| ● | Net
cash provided by operations was $ |
Additionally, at March 31, 2023, the Company had:
| ● | Accumulated
deficit of $ |
| ● | Stockholders’
equity of $ |
| ● | Working
capital of $ |
| 8 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
We
manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand
of $
The Company has historically incurred significant losses and has not, prior to 2023, previously 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 continue to be achieved, or if achieved, could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months ended March 31, 2024, and our current capital structure including equity-based instruments and our obligations and debts.
The Company believes it has sufficient cash resources on hand along with access to additional debt and/or equity-based capital from third parties and related parties as needed to meet its current obligations for a period that is one year from the issuance date of these financial statements.
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, |
| ● | 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. |
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.
| 9 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Business Combinations
The Company accounts for business acquisitions using the acquisition method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date.
The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents 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.
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 with up to a $
| 10 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
With the purchase of Torch, the Company has approval to offer subsidized mobile broadband in all fifty states.
It
was determined that the Company had acquired
At
the time of acquisition, Torch had no significant assets or liabilities. The Company paid $
At the time of acquisition, Torch had nominal revenues and losses. As a result, and given the immaterial nature of this acquisition, the Company elected not to present any pro-forma financial information during the year ended December 31, 2022.
In
addition, the Company was required to pay the Sellers monthly residual payments for customers enrolled by the Company through December
31, 2022 of either $
For
the three months ended March 31, 2023 and 2022, the Company incurred expenses of $
This transaction did 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 did not require the presentation of any additional historical audits.
For financial reporting purposes, Torch has been consolidated into the Company’s consolidated statements of financial position, results of operations, and cash flows.
At
March 31, 2023 and December 31, 2022 goodwill was $
There
were
| 11 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Note Receivable (Sale of Former Subsidiary)
On May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc.
In
connection with the sale, the Company received an unsecured note receivable for $
Payments are scheduled as follows:
| For the Year Ended December 31, | ||||
| 2023 (9 months) | $ | |||
| 2024 | ||||
| 2025 | ||||
| Less: amount representing interest | ( | ) | ||
| Total | $ | |||
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. See Note 10 regarding segment disclosure.
The
SurgePhone and Torch Wireless business segment made up approximately
Revenues
related to this business segment are
Accounts
receivable related to these programs made up
Customers
in the United States accounted for
| 12 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Use of Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant estimates during the three months ended March 31, 2023 and 2022, 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, capitalized internal-use software development costs, 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 may 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.
| 13 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
| ● | Level 1 – Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; | |
| ● | Level 2 – Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and | |
| ● | Level 3 – Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate. Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
The Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, and accounts payable and accrued expenses – related party, are carried at historical cost. At March 31, 2023 and December 31, 2022, 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.
| 14 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Cash and Cash Equivalents and Concentration of Credit Risk
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.
At March 31, 2023 and December 31, 2022, 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 $
At March 31, 2023 and December 31, 2022, respectively, 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 $
There
was
Bad debt expense (recovery) is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.
| 15 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Inventory
Inventory primarily consists of tablets, cell phones and sim cards. Inventories are stated at the lower of cost or net realizable value using the average cost valuation method.
There
were
At
March 31, 2023 and December 31, 2022, the Company had inventory of $
Of the total inventory balance at March 31, 2023, $
Impairment of Long-lived Assets including Internal Use Capitalized Software Costs
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
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.
| 16 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
There were no impairment losses for the three months ended March 31, 2023 and 2022, respectively.
Internal Use Software Development Costs
We capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not meet the qualification for capitalization, as further discussed below, are expensed as incurred and recorded in general and administrative expenses in the consolidated results of operations.
Software development activities generally consist of three stages:
| (i) | planning stage, |
| (ii) | application and infrastructure development stage, and |
| (iii) | post implementation stage. |
Costs incurred in the planning and post implementation stages of software development, including costs associated with the post-configuration training and repairs and maintenance of the developed technologies, are expensed as incurred.
We capitalize costs associated with software developed for internal use when the planning stage is completed, management has authorized further funding for the completion of the project, and it is probable that the project will be completed and perform as intended. Costs incurred in the application and infrastructure development stages, including significant enhancements and upgrades, are capitalized. Capitalization ends once a project is substantially complete, and the software and technologies are ready for their intended purpose. There is judgment involved in estimating the stage of development as well as estimating time allocated to a particular project. A significant change in the time spent on each project could have a material impact on the amount capitalized and related amortization expense in subsequent periods.
| 17 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
We amortize internal use software development costs using a straight-line method over a three-year estimated useful life, commencing when the software is ready for its intended use. The straight-line recognition method approximates the manner in which the expected benefit will be derived. We determined the life of internal use software based on historical software upgrades and replacement.
On an ongoing basis, we assess if the estimated remaining useful lives of capitalized projects continue to be reasonable based on the remaining expected benefit and usage. If the remaining useful life of a capitalized project is revised, it is accounted for as a change in estimate and the remaining unamortized cost of the underlying asset is amortized prospectively over the updated remaining useful life.
We also evaluate internal use software for abandonment and use that as a significant indicator for impairment on a quarterly basis.
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 9.
| 18 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely with the delivery of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
| 19 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts contain a significant financing component.
Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.
The following reflects additional discussion regarding our revenue recognition policies for each of our material revenue streams. For each revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration is fixed and determinable at the initiation of the contract. Performance obligations for Torch, TW and LogicsIQ are satisfied when services are performed. Performance obligations for ECS and SB are satisfied at point of sale.
| 20 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
For each of our revenue streams we only have a single performance obligation.
Surge Phone Wireless (SPW) and Torch Wireless
SPW is licensed to provide subsidized mobile broadband services through the FCC’s Affordable Connectivity Program (ACP) to qualifying low-income customers in fourteen states. Revenues are recognized when an ACP application is completed and accepted. Each month we reconcile subscriber usage to ensure the service was utilized. A monthly file is submitted to the Universal Service Administrative Company for review and approval, at which time we have completed our performance obligation and recognize accounts receivable and revenue. Revenues are recorded in the month when services were rendered, with payment typically received on the 28th of the following month.
Surge Blockchain
Revenues are generated through the sale of various products such as energy drinks, CBD products, and other top selling products in convenience store and bodega nationwide. At the time in which our products are sold at the store our performance obligation is considered complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
LogicsIQ
LogicsIQ is an enterprise software development company providing marketing business intelligence (“BI”), plaintiff generation and case load management solutions for law firms representing plaintiffs in Mass Tort legal cases. Revenues are earned from our lead generation, retained services offerings and call center activities through CenterCom.
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.
Effective
February 1, 2023, LogicsIQ started offering call center services to existing clients. These services are similar in nature to the
services CenterCom offers LogicsIQ. The total revenue from these services for the three months ended March 31, 2023 was $
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.
Contract Liabilities (Deferred Revenue)
Contract liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer deposit is relieved and revenue is recognized.
At
March 31, 2023 and December 31, 2022, the Company had deferred revenue of $
| 21 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
The following represents the Company’s disaggregation of revenues for the three months ended March 31, 2023 and 2022:
| For the Three Months Ended | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Revenue | Revenue | % of Revenues | Revenue | % of Revenues | ||||||||||||
| Surge Phone and Torch Wireless | $ | % | $ | % | ||||||||||||
| Surge Blockchain, LLC | % | % | ||||||||||||||
| LogicsIQ, Inc. | % | % | ||||||||||||||
| Surge Fintech & ECS | % | % | ||||||||||||||
| Total Revenues | $ | % | $ | % | ||||||||||||
Cost of Revenues
Cost of revenues consists of purchased telecom services including data usage and access to wireless networks. Additionally, prepaid phone cards, commissions 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 March 31, 2023 and December 31, 2022, respectively, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
The Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the three months ended March 31, 2023 and 2022, respectively.
| 22 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
For
the three months ended March 31, 2023, the Company generated net income. The Company currently has an unapplied net operating loss carryforward
(deferred tax asset), which is currently being evaluated for applicability in offsetting the current taxable net income. The Company
believes the current net operating loss carryforward is in excess of any amounts of income tax that may be due. At March 31, 2023, the
Company has an income tax liability of $
Investment – Former Related Party
On
January 17, 2019, we announced the completion of an agreement to acquire a
Anthony N. Nuzzo, a former 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. The financial information used to account for the investment is unaudited.
At
March 31, 2023 and December 31, 2022, our investment in CenterCom was $
During
the three months ended March 31, 2023 and 2022, we recognized a gain of $
| 23 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(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 $
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 |
| 24 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(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.
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 contingently issuable shares, common stock issuable upon the conversion of stock options and warrants (using the treasury stock method), and convertible notes. 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.
| March 31, 2023 | March 31, 2022 | |||||||
| Warrants | ||||||||
| Stock options | ||||||||
| Series A, convertible preferred stock | ||||||||
| Total common stock equivalents | ||||||||
Warrants and stock options included as commons stock equivalents represent those that are vested and exercisable. See Note 9.
| 25 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Based on the potential common stock equivalents noted above at March 31, 2023 and 2022, respectively, the Company has sufficient authorized shares of common stock () to settle any potential exercises of common stock equivalents.
The Company had a net loss in 2022, as a result, basic and diluted earnings per share for the three months ended March 31, 2022 were the same.
| March 31, 2023 | ||||
| Numerator | ||||
| Net income | $ | |||
| Denominator | ||||
| Weighted average shares outstanding - basic | ||||
| Effect of dilutive securities (warrants) | ||||
| Weighted average shares outstanding - diluted | ||||
| Earnings per share - basic | $ | |||
| Earnings per share - diluted | $ | |||
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.
| 26 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
During the three months ended March 31, 2023 and 2022, the Company incurred expenses with related parties in the normal course of business totaling $ and $, respectively, as follows;
| Related Party | March 31, 2023 | March 31, 2022 | ||||||
| 321 Communications, Inc. (3) | $ | $ | ||||||
| Carddawg Investments, Inc. (1) | ||||||||
| CenterCom USA, Inc. (2) | ||||||||
| National Relief Telecom (3) | ||||||||
| Total | $ | $ | ||||||
| (1) |
| (2) |
| (3) |
The Company uses certain credit cards to pay expenses, these credit cards are in the names of certain of the Company’s officers and directors.
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 March 2022, the Financial Accounting Standards Board (the "FASB") issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings ("TDRs") for creditors in ASC 310, Receivables (Topic 310), and requires entities to provide disclosures about current period gross write-offs by year of origination. Also, ASU 2022-02 updates the requirements related to accounting for credit losses under ASC 326, Financial Instruments – Credit Losses (Topic 326), and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 was effective for the Company January 1, 2023. The adoption of ASU 2022-02 did not have a material impact 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, or cash flows.
| 27 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Note 3 – Property and Equipment
Property and equipment consisted of the following:
| Type | March 31, 2023 | December 31, 2022 | Estimated Useful Lives (Years) |
||||||||
| Computer equipment and software | $ | $ | |||||||||
| Furniture and fixtures | |||||||||||
| Less: accumulated depreciation/amortization | |||||||||||
| Property and equipment - net | $ | $ | |||||||||
In
June 2022, the Company acquired software having a fair value of $
Depreciation
and amortization expense for the three months ended March 31, 2023 and 2022 was $
These amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Note 4 – Intangibles
Intangibles consisted of the following:
| Type | March 31, 2023 | December 31, 2022 | Estimated Useful Lives (Years) | ||||||||
| Proprietary Software | $ | $ | |||||||||
| Tradenames/trademarks | |||||||||||
| ECS membership agreement | |||||||||||
| Noncompetition agreement | |||||||||||
| Customer Relationships | |||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | |||||||
| Intangibles - net | $ | $ | |||||||||
| 28 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Amortization
expense for the three months ended March 31, 2023 and 2022 was $
Estimated amortization expense for each of the five (5) succeeding years is as follows:
| For the Year Ended December 31: | ||||
| 2023 (9 Months) | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ | |||
Note 5 – Internal Use Software Development Costs
Internal Use Software Development Costs consisted of the following:
| Type | March 31, 2023 | December 31, 2022 | Estimated Useful Life (Years) |
||||||||
| Internal Use Software Development Costs | $ | $ | |||||||||
| Less: accumulated amortization | |||||||||||
| Internal Use Software Development Costs - net | $ | $ | |||||||||
Management has determined that all costs incurred in 2022 related to internal use software development costs related to the application and infrastructure development stage which were completed at December 31, 2022. Amortization of these costs began in 2023.
Additional
costs of $
For the three months ended March 31, 2023 and
2022, amortization of internal use software development costs was $
| 29 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Estimated amortization expense is as follows for the years ended December 31:
| 2023 (9 Months) | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total | $ |
Note 6 – Debt
The following represents a summary of the Company’s notes payable – SBA government, notes payable – related parties, and notes payable, key terms, and outstanding balances at March 31, 2023 and December 31, 2022, 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.
| 30 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Installment
payments, including principal and interest, are due monthly (beginning twelve (12) months from the date of the promissory note) in amounts
ranging from $
| PPP | EIDL | EIDL | PPP | |||||||||||||||||||
| Terms | SBA | SBA | SBA | SBA | Total | |||||||||||||||||
| Issuance dates of SBA loans | ||||||||||||||||||||||
| Term | ||||||||||||||||||||||
| Maturity date | ||||||||||||||||||||||
| Interest rate | % | % | % | % | ||||||||||||||||||
| Collateral | ||||||||||||||||||||||
| Conversion price | N/A | N/A | N/A | N/A | ||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||
| Forgiveness of loan | ( | ) | ( | ) | 1 | |||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Reclassification to note payable | ( | ) | ( | ) | 2 | |||||||||||||||||
| Balance - December 31, 2022 | ||||||||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||
| 1 |
| 2 |
| 31 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Notes Payable – Related Parties
| 1 | 2 | |||||||||||
| Note Payable | Note Payable | |||||||||||
| Terms | Related Party | Related Party | Total | |||||||||
| Issuance dates of notes | ||||||||||||
| Maturity date | | |||||||||||
| Interest rate | ||||||||||||
| Collateral | ||||||||||||
| Conversion price | N/A | N/A | ||||||||||
| Balance - December 31, 2021 | $ | $ | ||||||||||
| Conversion of debt into common stock | ( | ) | ( | ) | ||||||||
| Reclass of accrued interest to note payable | ||||||||||||
| Balance - December 31, 2022 | ||||||||||||
| Less: short term | ||||||||||||
| Long term | $ | $ | $ | |||||||||
| Balance - December 31, 2022 | $ | $ | $ | |||||||||
| Repayments | ( | ) | ( | ) | ||||||||
| Balance - March 31, 2023 | ||||||||||||
| Less: short term | ||||||||||||
| Long term | $ | $ | $ |
| 1 |
In
2022, the Company included $
| 2 |
| 32 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Notes Payable
| 1 | 2 | 3 | 4 | |||||||||||||||||
| Terms | Notes Payable | Notes Payable | Notes Payable | Note Payable | Total | |||||||||||||||
Issuance dates of notes
| ||||||||||||||||||||
| Maturity date | ||||||||||||||||||||
| Interest rate | ||||||||||||||||||||
| Default interest rate | N/A | |||||||||||||||||||
| Collateral | ||||||||||||||||||||
| Warrants issued as debt discount/issue costs | N/A | N/A | ||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| Gross proceeds | ||||||||||||||||||||
| Reclassification from SBA - PPP note payable | ||||||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Debt issue costs | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Amortization of debt issue costs | ||||||||||||||||||||
| Balance - December 31, 2022 | ||||||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | $ | $ |
| 1 |
| 2 |
| 3 |
| 4 |
| 33 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Secured Revolving Debt
In
April 2022, a maximum of $
The
notes accrued interest at a monthly rate of
The
maximum amount outstanding under the loan was the lesser of $
In
2022, the Company repaid the $
Debt Maturities
The following represents the maturities of the Company’s various debt arrangements for each of the five (5) succeeding years and thereafter as follows:
| For the Year Ended December 31, | Notes Payable - Related Parties | Notes Payable - SBA Government | Note Payable | Total | ||||||||||||
| 2023 (9 Months) | $ | $ | $ | $ | ||||||||||||
| 2024 | ||||||||||||||||
| 2025 | ||||||||||||||||
| 2026 | ||||||||||||||||
| 2027 | ||||||||||||||||
| Thereafter | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 34 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(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 March 31, 2023 and December 31, 2022, respectively.
Note 8 – Commitments and Contingencies
Operating Leases
We have entered into various operating lease agreements, including our corporate headquarters. We account for leases in accordance with ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. In addition, a lessor is required to classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating. We determine if an arrangement is a lease, or contains a lease, at inception and record the lease in our financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at commencement to determine the present value of lease payments except when an implicit interest rate is readily determinable. We determine our incremental borrowing rate based on market sources including relevant industry data.
We have lease agreements with lease and non-lease components and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective with the exception of direct sales-type leases and production equipment classes embedded in supply agreements. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.
| 35 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
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. For purposes of calculating lease liabilities, lease term would include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, included as a component of general and administrative expenses, in the accompanying consolidated statements of operations.
Certain operating leases provide for annual increases to lease payments based on an index or rate, our lease has no stated increase, payments were fixed at lease inception. We calculate the present value of future lease payments based on the index or rate at the lease commencement date. Differences between the calculated lease payment and actual payment are expensed as incurred.
At March 31, 2023 and December 31, 2022, respectively, the Company had no financing leases as defined in ASC 842, “Leases.”
The tables below present information regarding the Company’s operating lease assets and liabilities at March 31, 2023 and 2022, respectively:
| For the Three Months Ended | For the Three Months Ended | |||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Operating Leases | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total net lease cost | $ | $ | ||||||
| 36 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Supplemental balance sheet information related to leases was as follows:
| March 31, 2023 | December 31, 2022 | |||||||
| Operating leases | ||||||||
| Operating lease ROU assets - net | $ | $ | ||||||
| Operating lease liabilities - current | ||||||||
| Operating lease liabilities - non-current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
Supplemental cash flow and other information related to leases was as follows:
| For the Three Months Ended | For the Three Months Ended | |||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Cash paid for amounts included in measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| ROU assets obtained in exchange for lease liabilities | ||||||||
| Operating leases | $ | $ | ||||||
| Weighted average remaining lease term (in years) | ||||||||
| Operating leases | ||||||||
| Weighted average discount rate | ||||||||
| Operating leases | % | % | ||||||
Future minimum lease payments for the years ended December 31:
| 2023 (9 Months) | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: amount representing interest | ( | ) | ||
| Total lease obligations | $ |
| 37 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Employment Agreements (Chief Executive Officer and Chief Financial Officer)
The Company is currently finalizing amendments to the terms of its executive employment agreements with its Chief Executive Officer and Chief Financial Officer. These agreements are expected to be completed during the second quarter of 2023.
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. The case was dismissed without prejudice by the Court on December 15, 2022.
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.
| 38 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(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 $
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. Written discovery is winding down and depositions are anticipated in the 2nd and 3rd Q of 2023.
Aliotta and Vasquesz v SurgePays – Litigation
Robert
Aliotta and Steve Vasquesz, on behalf of themselves and others similarly situated v. SurgePays, Inc. d/b/a Surge Logics, filed January
4, 2023, in the U.S. District Court for the Northern District of Illinois, Case No. 1:23-cv-00042. Plaintiffs allege violations
of the Telephone Consumer Protection Act (TCPA) and the Florida Telephone Solicitations Act (FTSA) based on telephone solicitations allegedly
made by or on behalf of SurgePays, Inc. Plaintiffs seek damages for themselves and seek certification of a class action on behalf
of others similarly situated. Defendants intend to vigorously defend the action however most similar cases are eventually resolved by
an out-of-court settlement. At this time, it is impossible to estimate the amount or range of potential loss, but similar matters are
usually settled for $
| 39 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Demiray v. SurgePays, Inc.
Meral
Demiray v Surge Holdings, Inc. a/k/a SurgePays, Inc.: In the United States District Court for the Northern District of Illinois, Case
# 22-cv-6591, filed November 23, 2022. Plaintiff filed a claim against SurgePays following her dismissal from her position as an employee
of the company. Following negotiations among and between SurgePays, SurgePays’ insurance carrier and the Plaintiff, a settlement
has been reached and documentation is currently being drafted for full settlement, release, and dismissal of the claim. The case was
settled and dismissed in 2023 for $
Note 9 – Stockholders’ Equity
At March 31, 2023, the Company had one (1) class of stock:
Common Stock
| - | shares authorized | |
| - | Par value - $ | |
| - |
In
2022, all Series A Preferred stockholders, representing shares issued and outstanding, agreed to convert their holdings into
shares of common stock. The transaction had a net effect of $
| 40 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Securities and Incentive Plan
In March 2023, the Company’s shareholders approved the 2022 Plan (the “Plan”) initially approved, authorized and adopted by the Board of Directors in August 2022.
The Plan provides for the following:
| 1. | shares of common stock |
| 2. | An annual increase on the first day of each calendar year beginning January 1, 2023 and ending on January 31, 2031 equal to the lesser of: |
| a. | ||
| b. | Such smaller amount of common stock as determined by the Board of Directors. |
| 3. | The shares may be issued as follows to directors, officers, employees and consultants: |
| a. | Distribution equivalent rights | |
| b. | Incentive share options | |
| c. | Non-qualified share options | |
| d. | Performance unit awards | |
| e. | Restricted share awards | |
| f. | Restricted share unit awards | |
| g. | Share appreciation rights | |
| h. | Tandem share appreciation rights | |
| i. | Unrestricted share awards |
See Schedule 14A Information filed with the US Securities and Exchange Commission on January 19, 2023 for a complete detail of the Plan.
| 41 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Equity Transactions for the Three Months Ended March 31, 2023
Stock Issued for Services
The
Company issued shares of common stock for services rendered, having a fair value of
Equity Transactions for the Year Ended December 31, 2022
Stock Issued as Direct Offering Costs
The
Company issued 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 $
Stock Issued for Acquisition of Software
The
Company acquired software having a fair value of $
Exercise of Warrants (Cashless)
The
Company issued
Exercise of Warrants
The
Company issued
| 42 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Stock Options
| Weighted | ||||||||||||||||||||
| Average | Weighted | |||||||||||||||||||
| Weighted | Remaining | Average | ||||||||||||||||||
| Number of | Average | Contractual | Aggregate | Grant | ||||||||||||||||
| Stock Options | Options | Exercise Price | Term (Years) | Intrinsic Value | Date Fair Value | |||||||||||||||
| Outstanding - December 31, 2021 | $ | $ | ||||||||||||||||||
| Vested and Exercisable - December 31, 2021 | $ | $ | - | |||||||||||||||||
| Unvested and non-exercisable - December 31, 2021 | $ | $ | - | |||||||||||||||||
| Granted | $ | - | ||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Cancelled/Forfeited | ||||||||||||||||||||
| Outstanding - December 31, 2022 | $ | $ | ||||||||||||||||||
| Vested and Exercisable - December 31, 2022 | $ | $ | - | |||||||||||||||||
| Unvested and non-exercisable - December 31, 2022 | $ | $ | - | |||||||||||||||||
| Granted | $ | - | ||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Cancelled/Forfeited | ||||||||||||||||||||
| Outstanding - March 31, 2023 | $ | $ | ||||||||||||||||||
| Vested and Exercisable - March 31, 2023 | $ | $ | - | |||||||||||||||||
| Unvested and non-exercisable - March 31, 2023 | $ | $ | - | |||||||||||||||||
During 2023 and 2022, and stock options vested each year, respectively, were held by the Company’s Chief Financial Officer.
Stock-based
compensation expense for the three months ended March 31, 2023 and 2022 was $
As of March 31, 2023, compensation cost related to the unvested options not yet recognized was $.
Weighted average period in which compensation will vest (years) years. The unvested stock option expense is expected to be recognized through March 2024.
| 43 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Warrants
Warrant activity for the three months ended March 31, 2023 and the year ended December 31, 2022 are summarized as follows:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Number of | Average | Remaining | Aggregate | |||||||||||||
| Warrants | Warrants | Exercise Price | Contractual Term (Years) | Intrinsic Value | ||||||||||||
| Outstanding - December 31, 2021 | $ | $ | ||||||||||||||
| Vested and Exercisable - December 31, 2021 | $ | $ | ||||||||||||||
| Unvested - December 31, 2021 | $ | $ | - | |||||||||||||
| Granted | $ | - | ||||||||||||||
| Exercised | ( | ) | $ | - | ||||||||||||
| Cancelled/Forfeited | ( | ) | $ | - | ||||||||||||
| Outstanding - December 31, 2022 | $ | $ | ||||||||||||||
| Vested and Exercisable - December 31, 2022 | $ | $ | ||||||||||||||
| Unvested - December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | - | ||||||||||||||
| Exercised | $ | - | ||||||||||||||
| Cancelled/Forfeited | ( | ) | $ | - | ||||||||||||
| Outstanding - March 31, 2023 | $ | $ | ||||||||||||||
| Vested and Exercisable - March 31, 2023 | $ | $ | ||||||||||||||
| Unvested and non-exercisable - March 31, 2023 | $ | $ | ||||||||||||||
Warrant Transactions for the Year Ended December 31, 2022
Warrants Issued as Debt Issue Costs
In
connection with $ in
notes payable to non-related parties (see Note 6), the Company issued
| 44 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % | |||
Warrants Issued as Interest Expense
A
vendor increased the amount of credit the Company had for making purchases. In consideration for the increase, the Company issued
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % | |||
In
2022, the Company extended the due dates of certain notes payable totaling $
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % |
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.
| 45 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Segment information for the Company’s operations for the three months ended March 31, 2023 and 2022, are as follows:
For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | ||||||||
| Surge Phone and Torch Wireless | $ | $ | ||||||
| Surge Blockchain, LLC | ||||||||
| LogicsIQ, Inc. | ||||||||
| Surge Fintech & ECS | ||||||||
| Total | $ | $ | ||||||
| Cost of revenues | ||||||||
| Surge Phone and Torch Wireless | $ | $ | ||||||
| Surge Blockchain, LLC | ||||||||
| LogicsIQ, Inc. | ||||||||
| Surge Fintech & ECS | ||||||||
| Total | $ | $ | ||||||
| Operating expenses | ||||||||
| Surge Phone and Torch Wireless | $ | $ | ||||||
| Surge Blockchain, LLC | ||||||||
| LogicsIQ, Inc. | ||||||||
| Surge Fintech & ECS | ||||||||
| Surge Pays, Inc. | ||||||||
| Total | $ | $ | ||||||
| Income (loss) from operations | ||||||||
| Surge Phone and Torch Wireless | $ | $ | ||||||
| Surge Blockchain, LLC | ||||||||
| LogicsIQ, Inc. | ( | ) | ||||||
| Surge Fintech & ECS | ( | ) | ( | ) | ||||
| Surge Pays, Inc. | ( | ) | ( | ) | ||||
| Total | $ | $ | ( | ) | ||||
| 46 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Segment information for the Company’s assets and liabilities at March 31, 2023 and December 31, 2022, are as follows:
| March 31, 2023 | December 31, 2022 | |||||||
| Total Assets | ||||||||
| Surge Phone and Torch Wireless | $ | $ | ||||||
| Surge Blockchain, LLC | ( | ) | ( | ) | ||||
| LogicsIQ, Inc. | ||||||||
| Surge Fintech & ECS | ||||||||
| Surge Pays, Inc. | ( | ) | ||||||
| Total | $ | $ | ||||||
| Total Liabilities | ||||||||
| Surge Phone and Torch Wireless | $ | $ | ||||||
| Surge Blockchain, LLC | ||||||||
| LogicsIQ, Inc. | ||||||||
| Surge Fintech & ECS | ||||||||
| Surge Pays, Inc. | ||||||||
| Total | $ | $ | ||||||
Note 11 – Installment Sale Liability
Agreement
In
2022, the Company executed a two-year (2) financing arrangement with Affordable Connectivity Financing (“ACF”, “Seller”)
to receive up to $
This
agreement is based upon the Company submitting a purchase order and ACF approving the request. The Company may cancel the purchase order
prior to ACF paying for the devices.
Under
the terms of the agreement, ACF is directly purchasing products and reselling to the Company at a markup. At December 31, 2022, the markup
was
| 47 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(UNAUDITED)
Repayment Period
Each installment sale contract shall be repaid over a period of nine (9) months.
Security
This arrangement is fully secured by all assets of the Company.
Minimum Outstanding Balance
Prepayment Penalty
Administrative Fee
The
Company is required to pay $
Default Rate
Commitment Fee
ACF
charged a
Covenants
At March 31, 2023 and December 31, 2022, respectively, the Company was in compliance with all of the following ratios:
| 1. | Company adjusted EBITDA, | |
| 2. | Total Leverage Ratio, | |
| 3. | Fixed Charge Coverage Ratio, | |
| 4. | Minimum Subscriber Base; and | |
| 5. | Minimum Liquidity |
Additionally, the Company is required to provide various data to the vendor on a periodic basis. The Company has not received notice from the vendor regarding any instances of non-compliance.
Lockbox
The Company will maintain a lockbox for the benefit of the Seller.
Installment Sale Liability
At
March 31, 2023 and December 31, 2022, the Company recorded an installment sale liability of $
During
the three months ended March 31, 2023 and 2022, the Company paid fees of $
| 48 |
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This statement contains forward-looking statements within the meaning of the Securities Act of 1933, as amended (the ‘Securities Act’). Discussions containing such forward-looking statements may be found throughout this statement. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the matters set forth in this statement. The accompanying consolidated financial statements as of March 31, 2023 and 2022 and for the three months then ended includes the accounts of SurgePays, Inc. and its wholly owned subsidiaries during the period owned by SurgePays, Inc.
SurgePays, Inc (“SurgePays,” “we” the “Company”) was incorporated in Nevada on August 18, 2006, is a technology and telecom company focused on the underbanked and underserved communities. SurgePhone and Torch Wireless provide subsidized mobile broadband to over 250,000 low-income subscribers nationwide. SurgePays fintech platform empowers clerks at thousands of convenience stores to provide a suite of prepaid wireless and financial products to underbanked customers.
About SurgePays, Inc.
SurgePays, Inc. is a financial technology and telecom company focused on providing these essential services to the underbanked community. The Company’s wireless subsidiaries provide mobile broadband, voice and SMS text messaging to both subsidized and direct retail prepaid customers. The Company’s blockchain fintech platform utilizes a suite of financial and prepaid products to convert corner stores into tech-hubs for underbanked neighborhoods.
SurgePhone Wireless and Torch Wireless
SurgePhone and Torch, wholly owned subsidiaries of SurgePays, are mobile virtual network operators (MVNO) licensed by the Federal Communications Commission (the “FCC”) to provide subsidized access to quality internet through mobile broadband services to consumers qualifying under the federal guidelines of the Affordable Connectivity Program (the “ACP”). The ACP (the successor program, as of March 1, 2022 to the Emergency Broadband Benefit program) provides SurgePhone and Torch 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. SurgePhone and Torch combined are licensed to offer subsidized mobile broadband to all fifty states.
| 49 |
Surge Fintech (ECS Business)
We refer to the collective operations of ECS Prepaid, LLC, a Missouri limited liability company, Electronic Check Services, Inc., a Missouri corporation, and Central States Legal Services, Inc., a Missouri corporation, as “Surge Fintech.” This was previously referred to as the “ECS Business.”
Surge Fintech has been a financial technology tech and wireless top-up platform for over 15 years. Through a series of transactions between October 2019 and January 2020, we acquired the ECS Business primarily for the favorable ACH banking relationship and a fintech transactions platform processing over 20,000 transactions a day at approximately 8,000 independently owned convenience stores. The platform serves as the proven backbone for wireless top-up transactions and wireless product aggregation for the SurgePays nationwide network.
ShockWave CRM™
SurgePays acquired the Software as a Service (SaaS) Customer Relationship Management (CRM) and Billing System software platform “MVNO Cloud Services” on June 7, 2022. SurgePays is rebranding the software as ShockWave CRM. 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.
ShockWave is an end-to-end cloud-based SaaS offering an Omnichannel CRM, billing system and carrier integrations specific to the telecommunication and broadband industry. Some of these services include sales agent management, device and SIM inventory management, order processing and provisioning, retail Point of Service (POS) activations and payments, customer service management, retention tools, billing, and payments.
Surge Blockchain
Surge Blockchain Software is a back-office marketplace (accessed through the SurgePays fintech portal for convenience stores) offering wholesale consumable goods direct to convenience stores who are transacting on the SurgePays Fintech platform. The wholesale e-commerce platform is easily accessed through the secure app interface – similar to a website. We believe what makes this sales platform unique is that it also offers the merchant the ability to order wholesale consumable goods at a significant discount from traditional distributors with one touch ease. We are able to sell products at a significant discount by using on demand Direct Store Delivery (DSD). Our platform is connected directly to manufacturers, who ship products direct to the store while cutting out the middleman. The goal of the SurgePays Portal is to leverage the competitive advantage and efficiencies of e-commerce to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas, and supermarkets while increasing profit margins for these stores.
LogicsIQ, Inc.
LogicsIQ, Inc. is a lead generation and case management solutions company primarily serving law firms in the mass tort industry. The company’s CRM “Intake Logics” facilitates the entire life cycle of converting a lead into a signed retainer client integrated into the law firms case management software. Our proven strategy of delivering cost-effective retained cases to our attorney and law firm clients means those clients are better able to manage their media and advertising budgets and reach targeted audiences more quickly and effectively when utilizing our proprietary data driven analytics dashboards. Our ability to deliver transparent results through our integrated Business Intelligence (B.I.) dashboards has bolstered our reputation as an industry leader in the mass tort client acquisition field.
| 50 |
Centercom
Since 2019, we have owned a 40% equity interest in Centercom Global, S.A. de C.V. (“Centercom”). Centercom is a bilingual operations center providing the Company with sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational back-office services. Centercom is based in El Salvador.
COMPARISON OF THREE MONTHS ENDED March 31, 2023 AND 2022
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations, stockholders’ deficit, or cash flows.
Revenues during the three months ended March 31, 2023 and 2022 consisted of the following:
| 2023 | 2022 | |||||||
| Revenue | $ | 34,776,443 | $ | 21,141,372 | ||||
| Cost of revenue (exclusive of depreciation and amortization) | (27,081,960 | ) | (18,507,741 | ) | ||||
| General and administrative | (2,989,421 | ) | (3,683,782 | ) | ||||
| Income (Loss) from operations | $ | 4,705,062 | $ | (1,050,151 | ) | |||
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Revenue increased overall by $13,635,071 (65%) from the three months ended March 31, 2022 to the three months ended March 31, 2023. The breakout was as follows:
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | ||||||||
| Surge Phone and Torch Wireless | $ | 28,659,384 | $ | 14,048,031 | ||||
| Surge Blockchain, LLC | 11,068 | 29,829 | ||||||
| LogicsIQ, Inc. | 3,170,845 | 2,293,072 | ||||||
| Surge Fintech & ECS | 2,934,346 | 4,770,440 | ||||||
| Total | $ | 34,776,.443 | $ | 21,141,372 | ||||
SurgePhone and Torch Wireless revenues (as detailed in Notes 2 and 11 of the financial statements) increased by $14,611,353 related to the additional revenue stream generated by the increase in subscribers to over 250,000 at the end of March 31, 2023 from over 75,000 at the end of March 31, 2022 for the Emergency Broadband Benefit and Affordable Connectivity programs (the “ACP”) started in August of 2021. LogicsIQ revenues increased by $877,773 related to the Camp Lejeune litigation we are delivering retained cases on. The overall case count went from 1,115 in the three months ended March 31, 2022 to 1,793 in the three months ended March 31, 2023. Surge Fintech (ECS) revenues decreased by $1,836,094 due to the shifting of customers to the ACP program from wireless prepaid services at our stores.
We expect revenues to grow for each segment of the Company in future periods, specifically our subscriber base and active store count.
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Income (loss) from operations | ||||||||
| Surge Phone and Torch Wireless | $ | 7,298,049 | $ | 2,106,633 | ||||
| Surge Blockchain, LLC | 11,068 | 29,460 | ||||||
| LogicsIQ, Inc. | 4,464 | (367,242 | ) | |||||
| Surge Fintech & ECS | (282,943 | ) | (199,933 | ) | ||||
| Surge Pays, Inc. | (2,325,576 | ) | (2,619,069 | ) | ||||
| Total | $ | 4,705,062 | $ | (1,051,151 | ) | |||
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Operations income improved overall by $5,756,213 from the three months ended March 31, 2022 to the three months ended March 31, 2023, primarily as a result of an increase in operating profit of $5,194,902 in SurgePhone and Torch Wireless, an increase in operating profit of $371,706 in LogicsIQ, and a decrease in operating profit of $83,010 in Surge Fintech. Most of these changes are related to the change in revenue for each stream. Overall margins remained consistent for both three-month periods ended March 31, 2022 and 2023.
Cost of Revenue, Gross Profit and Gross Margin
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cost of Revenue | ||||||||
| Surge Phone and Torch Wireless | $ | 21,311,859 | $ | 11,879,072 | ||||
| Surge Blockchain, LLC | 500 | - | ||||||
| LogicsIQ, Inc. | 2,877,988 | 2,000,420 | ||||||
| Surge Fintech & ECS | 2,891,613 | 4,628,249 | ||||||
| Total | $ | 27,081,960 | $ | 18,507,741 | ||||
Cost of revenue for services primarily consists of tablet, phone and SIM cards and associated freight, shipping and handling costs, marketing services, data plan expenses, royalties, and out-sourced call center expenses.
We expect that our cost of revenue will increase or decrease to the extent that our revenue increases and decreases and depending on our subscriber base and store count.
Gross profit is calculated as revenue less cost of revenue. Gross profit margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods will depend on a variety of factors, including market conditions that may impact our pricing, sales mix among devices, sales mix changes among consumables, excess and obsolete inventories, and our cost structure for manufacturing operations relative to volume. Our gross profit in future periods will vary based upon our revenue stream mix and may increase based upon our distribution channels.
We expect that our gross profit margin for product and service will increase over the long term as our sales and production volumes increase and our cost per unit decreases due to efficiencies of scale. We intend to use our design, information systems, and sales force capabilities to further advance and improve the efficiency of our revenue streams, which we believe will reduce costs and increase our gross margin.
General and administrative during the three months ended March 31, 2023 and 2022 consisted of the following:
| 2023 | 2022 | |||||||
| Depreciation and amortization | $ | 266,023 | $ | 171,068 | ||||
| Selling, general and administration | 2,723,398 | 3,512,714 | ||||||
| Total | $ | 2,989,421 | $ | 3,683,782 | ||||
The increase in depreciation and amortization costs for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 is the result of amortizing internal-use software development costs capitalized in 2022 associated with software enhancements to our various software platforms continuing in 2023. There were no such costs incurred in the first quarter of 2022.
Selling, general and administrative expenses during the three months ended March 31, 2023 and 2022 consisted of the following:
| 2023 | 2022 | |||||||
| Contractors and consultants | $ | 549,634 | $ | 552,089 | ||||
| Professional services | 301,058 | 163,791 | ||||||
| Compensation | 854,018 | 1,728,482 | ||||||
| Computer and internet | 158,561 | 93,999 | ||||||
| Advertising and marketing | 32,336 | 86,637 | ||||||
| Insurance | 321,266 | 436,739 | ||||||
| Other | 506,525 | 450,977 | ||||||
| Total | $ | 2,723,398 | $ | 3,512,714 | ||||
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Selling, general and administrative costs (S, G & A) decreased by $789,318 (22%). The changes are discussed below:
| ● | Contractors and consultants expense decreased by $2,455 or less than 1% from $552,089 in the three months ended March 31, 2022 to $549,634 in the three months ended March 31, 2023. |
| ● | Professional services increased $137,267 in the three months ended March 31, 2023 primarily due to an increase in legal fees of $163,054. Legal proceedings are the main reason for the higher spending on professional services in 2023. |
| ● | Compensation decreased from $1,728,482 in the three months ended March 31, 2022 to $854,018 in the three months ended March 31, 2023 primarily as a result of one-time bonuses paid to various management personnel in 2022. |
| ● | Computer and internet costs increased by 69% to $158,561 in the three months March 31, 2023 from $93,999 in the three months ended March 31, 2022. The increase is primarily due to the acquisition of ShockWave CRM™. |
| ● | Advertising and marketing costs decreased to $32,336 in the three months ended March 31, 2023 from $86,637 in the three months ended March 31, 2022 primarily due to one-time investor relation expenses in 2022 (these expenses included a one-time issuance of shares of common stock to an affiliate of MZ Group, an investor relations firm with whom we have worked since January 2022). |
| ● | Insurance expense decreased to $321,266 in the three months ended March 31, 2023 from $436,739 in the three months ended March 31, 2022 primarily as a result of lower premiums related to Directors and Officers coverage. |
| ● | Other costs increased to $506,523 in the three months ended March 31, 2023 from $450,977 in the three months ended March 31, 2022. |
Other (expense) income during the three months ended March 31, 2023 and 2022 consisted of the following:
| 2023 | 2022 | |||||||
| Interest, net | $ | (192,326 | ) | $ | (169,645 | ) | ||
| Gain (loss) on equity investment in Centercom | 33,029 | (25,183 | ) | |||||
| Total other (expense) income | $ | (159,297 | ) | $ | (194,828 | ) | ||
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Interest expense increased to $192,326 in the three months ended March 31, 2023 from $169,645 in the three months ended March 31, 2022.
The equity investment in Centercom increased by $33,029 in the three months ended March 31, 2023 compared to a decrease of $25,183 in the three months ended March 31, 2022.
Equity Transactions for the Three Months Ended March 31, 2023
Stock Issued for Services
The Company issued 60,082 shares of common stock for services rendered, having a fair value of 307,458 ($4.49 - $5.96/share), based upon the quoted closing trading price.
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.
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The Company evaluated the performance of its operating segments based on revenues and operating income (loss). Segment information for the three months ended March 31, 2023 and 2022, are as follows:
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| (unaudited) | (unaudited) | |||||||
| Revenues | ||||||||
| SurgePhone & Torch Wireless | $ | 28,659,384 | $ | 14,048,031 | ||||
| Surge Blockchain | 11,868 | 29,829 | ||||||
| LogicsIQ | 3,170,845 | 2,293,072 | ||||||
| Surge Fintech & ECS | 2,934,346 | 4,770,440 | ||||||
| Total | $ | 34,776,443 | $ | 21,141,372 | ||||
| Cost of revenues (exclusive of depreciation and amortization) | ||||||||
| SurgePhone & Torch Wireless | $ | 21,311,859 | $ | 11,879,072 | ||||
| Surge Blockchain | 500 | - | ||||||
| LogicsIQ | 2,877,988 | 2,000,420 | ||||||
| Surge Fintech & ECS | 2,891,613 | 4,628,249 | ||||||
| Total | $ | 27,081,960 | $ | 18,507,741 | ||||
| Operating expenses | ||||||||
| SurgePhone & Torch Wireless | $ | 49,476 | $ | 62,326 | ||||
| Surge Blockchain | 300 | 369 | ||||||
| LogicsIQ | 288,393 | 659,894 | ||||||
| Surge Fintech & ECS | 325,677 | 342,124 | ||||||
| SurgePays | 2,325,575 | 2,619,069 | ||||||
| Total | $ | 2,989,421 | $ | 3,683,782 | ||||
| Operating income (loss) | ||||||||
| SurgePhone & Torch Wireless | $ | 7,298,049 | $ | 2,106,633 | ||||
| Surge Blockchain | 11,463 | 29,460 | ||||||
| LogicsIQ | 4,464 | (367,242 | ) | |||||
| Surge Fintech & ECS | (282,943 | ) | (199,933 | ) | ||||
| SurgePays | (2,325,575 | ) | (2,619,069 | ) | ||||
| Total | $ | 4,705,062 | $ | (1,050,151 | ) | |||
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Segment information for the Company’s assets and liabilities at March 31, 2023 and December 31, 2022, are as follows:
| Total Assets | March 31, 2023 | December 31, 2022 | ||||||
| (unaudited) | (audited) | |||||||
| SurgePhone & Torch Wireless | $ | 37,423,959 | $ | 27,239,365 | ||||
| Surge Blockchain | (539,319 | ) | (550,782 | ) | ||||
| LogicsIQ | 2,405,735 | 2,500,499 | ||||||
| Surge Fintech & ECS | 1,610,273 | 1,906,212 | ||||||
| SurgePays | (334,006 | ) | 2,908,212 | |||||
| Total | $ | 40,566,642 | $ | 34,003,506 | ||||
| Total Liabilities | ||||||||
| SurgePhone & Torch Wireless | $ | 18,370,938 | $ | 15,484,392 | ||||
| Surge Blockchain | 198,197 | 198,197 | ||||||
| LogicsIQ | 2,528,427 | 2,619,521 | ||||||
| Surge Fintech & ECS | 45,927 | 58,919 | ||||||
| SurgePays | 9,442,383 | 10,524,224 | ||||||
| Total | $ | 30,585,872 | $ | 28,885,253 | ||||
SurgePhone Wireless and Torch Wireless
The Affordable Connectivity Program (ACP) revenue for the three months ended March 31,2023 increased by $14,611,353 as compared to the three months ended March 31, 2022. The increase was a result of being newly licensed to provide the Emergency Broadband Benefit (“EBB”) program and Affordable Connectivity Program (“ACP”). Cost of revenues for the three months ended March 31,2023, increased by $9,432,787 from the same period ended March 31, 2022, as a result of the purchases of devices ($6,225,402), data usage expenses ($7,725,095) and marketing services paid of ($5,518,680) for the ACP program. The operating income increased from an operating income of $2,106,633 as of the three months ended March 31,2022, to operating income of $7,298,049 as of three months ended March 31,2023.
Surge Blockchain
The revenue for the three months ended March 31, 2023 decreased by $17,961 compared to the three months March 31, 2022. The operating income for the three months ended March 31, 2023 decreased by $17,997 compared to the same period in 2022.
LogicsIQ
The revenue for the three months ended March 31, 2023 increased by $877,773 compared to the three months ended March 31, 2022. The revenue changed due to the maturity curve of the various litigation cases as older litigation (Roundup) slowed down and newer litigation (Camp Lejeune) is sourced. Operating income increased by $371,706 for comparable periods of 2023 to 2022. LogicsIQ ended with an operating income of $4,464 for the three months ended March 31, 2023 compared to an operating loss of $367,242 for the same period in 2022.
Surge Fintech and ECS
The revenue for the three months ended March 31, 2023 was $2,934,346 compared to $4,770,440 for the same period in 2022. The decrease of 39% was a continuing result of the residual impact of COVID-19 and the shifting of customers to the ACP program from wireless prepaid services at our stores.
Overall
The overall increase in revenue of $13,635,071 from 2022 to 2023 for the three months ended March 31, can be attributable to opening of some new markets and the continued growth of subscribers with the Affordable Connectivity Program (ACP) program. The net operating loss improved by $5,755,213 from three months ended March 31, 2022 to the three months ended March 31, 2023.
LIQUIDITY and CAPITAL RESOURCES
At March 31, 2023 and December 31, 2022, our current assets were $34,213,558 and $27,563,785, respectively, and our current liabilities were $25,646,975 and $23,464,062, respectively, which resulted in a working capital surplus of $8,556,583 and of $4,099,723, respectively. The increase in current assets is a result of expansion of the Affordable Connectivity Program, whereby inventory increased by $4,335,727 for tablets and phones and accounts receivable increased by $429,187.
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Total assets at March 31, 2023 and December 31, 2022 amounted to $40,566,642 and $34,003,506, respectively. The increase in total assets is a result of the expansion of the Affordable Connectivity Program, whereby inventory increased by $4,335,727 for tablets and phones and accounts receivable increased by $429,187. Total assets increased by $6,563,136 from December 31, 2022 to March 31, 2023. At March 31, 2023, assets consisted of current assets of $34,213,558, net property and equipment of $572,991, net intangible assets of $2,616,601, goodwill of $1,666,782, equity investment in Centercom of $387,235, note receivable of $176,851, internal use software of $511,959, and operating lease right of use asset of $420,665 compared to current assets of $27,563,785, net property and equipment of $643,373, net intangible assets of $2,779,977, goodwill of $1,666,782, equity investment in Centercom of $354,206, note receivable of $176,851, internal use software of $387,180, and operating lease right of use asset of $431,352 at December 31, 2022.
At March 31, 2023, our total liabilities were $30,585,872. This $1,700,619 increase from $28,885,253 at December 31, 2022 was related to the installment sales liability increase of $2,026,713 related to inventory purchases for the Affordable Connectivity Program.
At March 31, 2023, our total stockholders’ surplus was $9,980,770 as compared to $5,118,253 at December 31, 2022.
We expect the positive operating income results for the three months ended March 31, 2023 will continue to be positive for each reporting period of 2023. The gross margin for the three months ended March 31, 2023 was approximately 22% compared to the three months ended March 31, 2022 of approximately 12%. Revenue streams are expected to increase quarter over quarter in 2023.
The following table sets forth the major sources and uses of cash for the three months ended March 31, 2023 and 2022.
| 2023 | 2022 | |||||||
| Net cash provided by or (used in) operating activities | $ | 2,865,796 | $ | (3,323,556 | ) | |||
| Net cash used in investing activities | (157,044 | ) | (11,401 | ) | ||||
| Net cash provided by financing activities | (882,321 | ) | 494,387 | |||||
| Net change in cash and cash equivalents | $ | 1,826,431 | $ | (2,840,570 | ) | |||
As a result of net positive cash provided by operating activities at March 31, 2023, the cash increased in the period ended March 31, 2023 by $2,865,796, compared to cash used in operations of $3,323,556 in the period ended March 31, 2022.
At March 31, 2023, the Company had the following material commitments and contingencies.
Notes payable – related party - See Note 6 to the Consolidated Financial Statements.
Notes payable and long-term debt - See Note 6 to the Consolidated Financial Statements.
Related party transactions - See Note 2 to the Consolidated Financial Statements for additional discussion.
Cash requirements and capital expenditures –At the current level of operations, the Company does not anticipate borrowing funds to meet basic operating costs. The Company may need to borrow funds to meet the hyper-growth expected to occur in the ACP in 2023.
Known trends and uncertainties – The Company is planning to acquire other businesses with similar business operations. The uncertainty of the economy may increase the difficulty of raising funds to support the planned business expansion.
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Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which were prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue and expenses. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.
While our significant accounting policies are more fully described in Note 2—Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and which require our most difficult, subjective and complex judgments.
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 years ended December 31, 2022 and 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, capitalized internal-use software development costs, and property and equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred tax assets.
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
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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.
Impairment of Long-lived Assets including Internal Use Capitalized Software Costs
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.
Inventory Valuation
Inventory is stated at the lower of cost or net realizable value (average cost). For items manufactured by third parties, cost is determined using the weighted average cost method (WAC). We write-down inventory when it has been determined that conditions exist that may not allow the inventory to be sold for at the intended price or the inventory is determined to be obsolete based on assumption about future demand and market conditions. The charge related to inventory write-downs is recorded as cost of goods sold. We evaluate inventory at least annually and at other times during the year. We have incurred and may in the future incur charges to write-down inventory.
Internal Use Software Development Costs
We capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not meet the qualification for capitalization, as further discussed below, are expensed as incurred and recorded in general and administrative expenses in the consolidated results of operations.
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Revenue from Contracts with Customers
We account for revenue earned from contracts with customers under ASC 606, Revenue from Contracts with Customers (“ASC 606”), and ASC 842, Leases (“ASC 842”). The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify the contract with the customer.
● Step 2: Identify the performance obligations in the contract.
● Step 3: Determine the transaction price.
● Step 4: Allocate the transaction price to the performance obligations in the contract.
● Step 5: Recognize revenue when, or as, the company satisfies a performance obligation.
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 its 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.
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.
Recent Accounting Pronouncements
In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Our management has determined that, as of March 31, 2023, the Company’s disclosure controls are effective, but the Company lacks segregation of duties similar to other companies our size.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
From time to time, we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. Except as described below, we are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or results of operations.
The following is a summary of threatened, pending, asserted or un-asserted claims against us or any of our wholly owned subsidiaries for which there have been material developments since December 31, 2021.
| (1) | 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. | |
| (2) | On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleged breach of contract and prayed for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion practice and discovery process. The case was settled and a settlement agreement entered into on January 30, 2023. The following payments were made pursuant to the settlement agreement: February 3, 2023 for $5,000, February 15, 2023 for $25,000 and March 15, 2023 for $30,000. The payments under the settlement agreement have been completed. Entry of a dismissal order is pending on the Court’s docket. |
| (3) | 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. Written discovery is winding down and depositions are anticipated in the second and third quarters of 2023. |
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| (4) | Robert Aliotta and Steve Vasquesz, on behalf of themselves and others similarly situated v. SurgePays, Inc. d/b/a Surge Logics, filed January 4, 2023, in the U.S. District Court for the Northern District of Illinois, Case No. 1:23-cv-00042. Plaintiffs allege violations of the Telephone Consumer Protection Act (TCPA) and the Florida Telephone Solicitations Act (FTSA) based on telephone solicitations allegedly made by or on behalf of SurgePays, Inc. Plaintiffs seek damages for themselves and seek certification of a class action on behalf of others similarly situated. Defendants intend to vigorously defend the action however most similar cases are eventually resolved by an out-of-court settlement. At this time, it is impossible to estimate the amount or range of potential loss, but similar matters are usually settled for $100,000.00 or less. SurgePays, Inc has been removed from the case following a Motion to Dismiss and LogicsIQ, Inc. has been named as the defendant. The case remains in the pleadings stage. | |
| (5) | Meral Demiray v Surge Holdings, Inc. a/k/a SurgePays, Inc.: In the United States District Court for the Northern District of Illinois, Case # 22-cv-6591, filed November 23, 2022. Plaintiff filed a claim against SurgePays following her dismissal from her position as an employee of the company. Following negotiations among and between SurgePays, SurgePays’ insurance carrier and the Plaintiff, a settlement has been reached and has been completed and the case was dismissed by Stipulation of the Parties. | |
| (6) | SurgePays, Inc. et al. v. Fina et al., Case No. CJ-2022-2782, District Court of Oklahoma County, Oklahoma. Plaintiffs SurgePays, Inc. and Kevin Brian Cox initiated this case against its former officer Mike Fina, his companies Blue Skies Connections, LLC, True Wireless, Inc., Government Consulting Solutions, Inc., Mussell Communications LLC and others. This case also arises from the June 2021 transaction by which SurgePays sold True Wireless to Blue Skies. During the litigation of CJ-2021-5327 described above, SurgePays learned information that showed Mike Fina breached his duties owed to True Wireless during his employment and consulting work for True Wireless prior to SurgePays’ sale of True Wireless to Blue Skies. SurgePays alleges that Mike Fina conspired with the other defendants to damage True Wireless thereby harming the value of the company and causing its eventual sale at a greatly reduced price. SurgePays asserts claims for (i) breach of contract; (ii) breach of fiduciary duty; (iii) fraud; (iv) tortious interference; and (v) unjust enrichment. At this stage, no defendant has asserted a counter-claim against SurgePays. | |
| The case is still at the early pleadings stage. SurgePays filed a Second Amended Petition on January 27, 2023. Defendants Fina, Blue Skies, True Wireless, and Government Consulting Solutions filed a Motion to Dismiss on March 10, 2023. It is SurgePays’ present intent to vigorously prosecute this case. At this early stage, no attempts at settlement have been made. |
ITEM 1A: RISK FACTORS
Not applicable.
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ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three-month period ended March 31, 2023, the Company issued 60,082 shares of common stock for services rendered, having a fair value of 307,458 ($4.49 - $5.96/share), based upon the quoted closing trading price. The shares were issued in reliance on the exemption from registration pursuant to Section 4(a)(2) of the Securities Act.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4: MINE SAFETY DISCLOSURES.
Not applicable
ITEM 5: OTHER INFORMATION.
We are reporting the following information in lieu of reporting on a Current Report on Form 8-K under Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
ITEM 6: EXHIBITS
| Exhibit | ||
| Number | Exhibit Description | |
| 31.1* | Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer | |
| 31.2* | Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer | |
| 32.1** | Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer | |
| 32.2** | Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
*Filed herewith.
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SURGEPAYS, INC. | ||
| Date: May 11, 2023 | ||
| By: | /s/ Kevin Brian Cox | |
| Kevin Brian Cox | ||
Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 11, 2023 | /s/ Anthony Evers |
| Anthony Evers | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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