1
|
BASIS
OF PRESENTATION AND BUSINESS
|
Basis
of presentation and principles of consolidation
The
accompanying unaudited condensed consolidated financial statements include the accounts of Surge Holdings, Inc. (“Surge”),
formerly Ksix Media Holdings, Inc., incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, Ksix Media,
Inc. (“Media”), incorporated in Nevada on November 5, 2014, Ksix, LLC (“KSIX”), a Nevada limited liability
company that was formed on September 14, 2011, Surge Blockchain, LLC (“Blockchain”), formerly Blvd. Media Group, LLC
(“BLVD”), a Nevada limited liability company that was formed on January 29, 2009, DigitizeIQ, LLC (“DIQ”)
an Illinois limited liability company that was formed on July 23, 2014 Surge Cryptocurrency Mining, Inc. (“Crypto”),
formerly North American Exploration, Inc. (“NAE”), a Nevada corporation that was incorporated on August 18, 2006 and
True Wireless, Inc., an Oklahoma corporation (formerly True Wireless, LLC) (“TW”), (collectively the “Company”
or “we”). All significant intercompany balances and transactions have been eliminated in consolidation.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial statements 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 condensed consolidated
financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial
position of the Company as of September 30, 2018 and the results of operations and cash flows for the periods presented. The results
of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the operating results for
the full fiscal year or any future period. These unaudited condensed 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, 2017 filed with the SEC on April 10, 2018 and Form 8-K/A filed with the SEC on June 26, 2018.
Recent
Developments
As
reported on Form 8-K filed with the SEC on April 16, 2018, on April 11, 2018, the Company closed the merger transaction (the “Merger”)
that was the subject of that certain Agreement and Plan of Reorganization (the “Merger Agreement”) with True Wireless,
Inc., an Oklahoma corporation (“TW”) dated as of April 11, 2018. At closing, in accordance with the Merger Agreement,
TW merged with and into TW Acquisition Corporation, a Nevada corporation (“Merger Sub”), a wholly-owned subsidiary
of Surge Holdings, Inc. (the “Merger”), with TW being the surviving corporation. As a result of the Merger, TW became
a wholly-owned subsidiary of the Company.
As
a result of the controlling financial interest of the former members of TW, for financial statement reporting purposes, the merger
between the Company and TW has been treated as a reverse acquisition with TW deemed the accounting acquirer and the Company deemed
the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting
Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of TW (the accounting acquirer)
are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition.
The acquisition process utilizes the capital structure of the Company and the assets and liabilities of TW which are recorded
at their historical cost. The equity of the Company is the historical equity of TW retroactively restated to reflect the number
of shares issued by the Company in the transaction. See Note 4.
Business
description
The
Company’s current focus is the provision of financial and telecommunications services to the financially underserved (i.e.
persons who have little or no access credit) within the population. The Company provides a suite of services which are primarily
marketed through small retail establishments which are utilized by members of its target market.
Historically,
the Company’s principal business has been digital advertising and lead generation through two of its wholly owned subsidiaries—DIQ,
which is a full-service digital advertising agency specializing in survey generation and landing page optimization specifically
designed for mass tort action lawsuits and KSIX, which is an Internet marketing company and has an advertising network designed
to create revenue streams for its affiliates and to provide advertisers with increased measurable audience. KSIX has an online
advertising network that works directly with advertisers and other networks to promote advertiser campaigns and manage offer tracking,
reporting and distribution.
Commencing
in 2018, the Company’s focus has significantly expanded to include the pursuit of the following business models:
Surge
Telecom
True
Wireless
is licensed to provide subsidized wireless service to qualifying low income customers in 5 states. Utilizing all
4 major USA wireless backbones, True Wireless provides discounted and free wireless service to over 60,000 veterans and other
qualifying federal programs such as SNAP (EBT) and Medicaid.
SurgePhone
offers discounted talk, text, and 4G LTE data wireless plans at prices that average 15% – 40% lower than competitors.
(Unlimited plans start at just $10/mo) Available nationwide, SurgePhone also offers strategic discounts such as the Surge Heroes
campaign that rewards teachers, first responders, active military and veterans with a free Android smartphone (surgeheroes.com).
SafeHomePhone
is a nationwide home phone alternative. This product has a modem that connects to the PCS network and allows customers to
plug in their traditional home phone without paying the local phone company or worrying about wiring. Customers can save 60% or
more and keep their same number.
The
SurgePhone Volt 5XL’s
slim, sturdy, affordable design fits comfortably in your hand and easily in your pocket. It’s
mesmerizing 5” LCD touchscreen display delivers an HD entertainment experience for your favorite videos and movies, while
dual front and back cameras allow you to capture stunning photos. Plus, with an expandable micro SD memory slot, you can add even
more storage for your best memories
SurgePays
Visa
is targeted for a Q4 2018-Q1 2019 launch. This card will perform the functions of a traditional credit card and also
a checking account for the unbanked or credit challenged. The SurgePays card will offer safety, security and convenience of using
the card anywhere that accepts Visa. Customers will be able to access their accounts from the connected app to remit money to
friends and relatives while avoiding costly fees. In addition, customers will also be able to take a picture of their paycheck
and load the cash to their cards (eliminating costly check cashing fees).
Surge
Money Order
will launch in the Midwest and southeast in Q1 2019. This is a natural add-on to our convenient store Fintech
product suite and will ensure we box out any other stand-alone product competitors. Entering the $20 Billion a year money order
business will enable unbanked customers to send secure payments.
SurgePays
Portal is a multi-purpose software interface for convenient stores, bodegas and other corner merchants providing goods and
services to the underbanked community. The merchant or clerk is able to use the portal – similar to a website – with
image driven navigation to add wireless minutes for any carrier, pay bills and also load debit cards etc. What makes SurgePays
unique is that it also offers the merchant access to order wholesale goods through the portal with one touch ease. SurgePays is
essentially an e-commerce store front that allows manufactures and distribution companies to have access to merchants while cutting
out the middle man. The goal of the SurgePays Portal is to provide every Fintech and Telecom product available to convenient stores,
corner markets, bodegas, and supermarkets while procuring other consumable products commonly sold in these same stores. From the
Telecom and Fintech products such as SurgePhone Androids, SurgePhone Wireless Service, Wireless Top-ups, Bill Payments, Pinless
LD, Money Remittance, Money Orders and Reloadable Visa debit load cards to distributing partner company’s consumables such
as energy drinks, CBD oils, dry foods, frozen foods, snacks, automotive parts and many more goods you will find next time you
are in a convenient store and look around.
Surge
Digital Assets
Surge
Cryptocurrency
strategically mines Ethereum, Litecoin and cryptocurrencies. The Company’s mining operation consists
of 136 machines pooled together with other machines in a mining pool to maximize the processing power and yields. This operation
is does not require any Surge human capital and runs 24/7. The goal for this subsidiary is to hold Bitcoin, Litecoin, Ripple and
Stellar as digital assets with the expectation of future appreciation.
The
Surge Utility Token
is part of our rewards program intended to incentivize customer loyalty while also encouraging each customer
to purchase additional Surge services. For example, a wireless customer should also become a SurgePays Visa holder and or other
products in the Surge ecosystem as we expand. The Surge Tokens are issued on the Ethereum blockchain and are ERC-20 compliant.
The tokens will be used for redeeming gifts and prizes from the Surge Rewards website. The launch target for the Surge Utility
Token is Q4 2018
TokenSpinner
is the first smartphone app that Surge Holdings Inc. has developed with a launch date target of Q4 2018. The app provides
a simple game of chance spin of the wheel to win a prize. The app has multiple Ad Network feeds that pay Surge per impression.
Players of the game have an opportunity to earn additional spins by participating in other activities (where Surge is compensated)
like watching videos or filling out surveys. The prizes will vary from gift cards, to electronics and of course Surge Tokens.
Surge
Digital Media
Surge
Logics
is a full-service digital advertising agency, specializing in lead generation, Pay Per Call, landing page optimization
and managed ad spending. Our primary media buying platforms are Google AdWords, Facebook, Instagram and Bing. We have a call center
that can handle Live Call Transfers, Customer Service Support, Lead Verification and Attorney Case Support.
Lead
generation
describes the marketing process of stimulating and capturing interest in a product or service for the purpose of
developing sales pipeline.
Pay-per-call
(PPCall, also called cost-per-call) is an advertising model in which the rate paid by the advertiser is determined by the
number of telephone calls made by viewers of an ad. Pay Per Call providers charge per call, per impression or per conversion.
Media
buying
is the process of buying media placements for advertising (on TV, in publications, on the radio, digital signage, apps
or on websites).
A
call center
or call center is a centralized office used for receiving or transmitting a large volume of requests by telephone.
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Fair
value measurements
The
Company adopted the provisions of ASC Topic 820, “
Fair Value Measurements and Disclosures
”, which defines fair
value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of
fair value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature
of these instruments. The carrying amounts of our short and long-term credit obligations approximate fair value because the effective
yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances
of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
ASC
820 describes three levels of inputs that may be used to measure fair value:
|
●
|
Level
1 — quoted prices in active markets for identical assets or liabilities.
|
|
●
|
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
|
|
●
|
Level
3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
|
The
derivative liability in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, is
the only financial liability measure at fair value on a recurring basis.
The
change in the Level 3 financial instrument is as follows:
|
|
2018
|
|
Balance, January 1, 2018
|
|
$
|
-
|
|
Additions – Merger transaction
|
|
|
59,141
|
|
Additions
|
|
|
22,368
|
|
Change in fair value recognized in operations
|
|
|
4,105
|
|
Balance, September 30, 2018
|
|
$
|
85,614
|
|
The
estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following
assumptions as of September 30, 2018:
|
|
2018
|
|
Estimated dividends
|
|
|
None
|
|
Expected volatility
|
|
|
113.72
|
%
|
Risk free interest rate
|
|
|
3.13
|
%
|
Expected term
|
|
|
.01-36 months
|
|
LTC
cryptocurrency coins are valued at current quoted rates and are therefore a Level 1 input.
Income
Taxes
In
its interim financial statements, the Company follows the guidance in ASC 270 “
Interim Reporting
” and ASC 740
“
Income Taxes
” whereby the Company utilizes the expected annual effective rate in determining its income tax
provision. The income tax expenses for the three and nine months ended September 30, 2018 was $27,480 and $82,230, respectively.
Recently
issued and adopted accounting pronouncements
Revenue
Recognition
The
Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect
adjustment for initially applying the new revenue standard as an adjustment to the opening balance of retained earnings and the
comparative information would not require to be restated and continue to be reported under the accounting standards in effect
for those periods.
Based
on the Company’s analysis the Company did not identify a cumulative effect adjustment for initially applying the new revenue
standards. The Company principally generates revenue through providing product, services and licensing revenue.
The
adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition 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:
1)
|
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.
2)
|
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.
3)
|
Determine
the transaction price
|
The
transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount
of variable consideration that should be included in the transaction price utilizing either the expected value method or the most
likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction
price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract
will not occur. None of the Company’s contracts as of September 30, 2018 contained a significant financing component.
4)
|
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.
5)
|
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.
Reclassification
Certain prior period amounts have been
reclassified to conform to current period presentation.
Recent
accounting pronouncements
We
have evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”)
through the date these financial statements were available to be issued and find no recent accounting pronouncements that would
have a material impact on the financial statements of the Company.
The
Company had loss from operations of approximately $183,486 and $115,368 for the nine months ended September 30, 2018 and 2017,
respectively. As of September 30, 2018, we had cash and working capital deficit of approximately $1.4 million and $4.9 million,
respectively. These factors, among others, create an uncertainty about our ability to continue as a going concern. The Company
projects that it should be cash flow positive by the end of fiscal year 2018 from ongoing operations by the combination of increased
cash flow from its current subsidiaries, as well as restructuring our current debt burden. The Company has executed an agreement
with a FINRA licensed broker, as well as several institutional investors, to bring in equity investments to pay down existing
debt obligations, cover short term shortfalls, and complete proposed acquisitions. The Company’s ability to continue as
a going concern is dependent on the success of this plan.
The
Company’s financial statements have been presented on the basis that it continues as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
As
discussed in Note 1, the Company closed the merger transaction (the “Merger”) that was the subject of that certain
Agreement and Plan of Reorganization (the “Merger Agreement”) with True Wireless, Inc., an Oklahoma corporation (“TW”)
dated as of April 11, 2018. At closing, in accordance with the Merger Agreement, TW merged with and into TW Acquisition Corporation,
a Nevada corporation (“Merger Sub”), a wholly-owned subsidiary of Surge Holdings, Inc. (the “Merger”),
with TW being the surviving corporation. As a result of the Merger, TW became a wholly-owned subsidiary of the Company.
Pursuant
to the terms of the Merger Agreement, TW, Inc. merged into Acquisition Sub in a transaction where TW, Inc. was the surviving company
and become a wholly-owned subsidiary of the Company. The transaction was structured as a tax-free reverse triangular merger. In
addition to the 12,000,000 shares of Company Common Stock and $500,000 cash which has been previously paid to the shareholders
of TW, at the closing of the merger transaction, the shareholders of TW received the following as additional merger consideration:
●
152,555,416 shares of newly-issued Company Common Stock, which will give the shareholders of TW, on a proforma basis, a 69.5%
interest in the Company’s total Common Shares.
●
An additional number of shares of Company Common Stock, if any, necessary to vest 69.5% of the aggregate issued and outstanding
Common Stock in the shareholders of TW at the Closing.
●
A Promissory Note in the original face amount of $3,000,000, bearing interest at 3% per annum maturing on December 31, 2018.
●
3,000,000 shares of newly-issued Company Series A Preferred Stock
Following
the closing of the merger transaction the Company’s investment in TW consisted of the following:
|
|
Shares
|
|
|
Amount
|
|
Consideration paid prior to Closing:
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
|
|
|
$
|
500,000
|
|
Common stock issued
|
|
|
12,000,000
|
|
|
|
1,200,000
|
|
Total consideration paid
|
|
|
12,000,000
|
|
|
$
|
1,700,000
|
|
Consideration paid at Closing:
|
|
|
|
|
|
|
|
|
Common stock to be issued at closing
(1)
|
|
|
152,555,416
|
|
|
$
|
60,683,006
|
|
Series A Preferred Stock to be issued at closing
|
|
|
3,000,000
|
|
|
|
120,000
|
|
Note payable due December 31, 2018
|
|
|
|
|
|
|
3,000,000
|
|
Total consideration to be paid
|
|
|
|
|
|
$
|
63,803,006
|
|
|
|
|
|
|
|
|
|
|
Total consideration
|
|
|
|
|
|
$
|
65,503,006
|
|
|
(1)
|
The
Common Shares issued at closing of the Merger Transaction were valued at approximately $0.40 per share.
|
Following
the closing of the transaction, TW’s financial statements as of the Closing will be consolidated with the Consolidated Financial
Statements of the Company.
The
following presents the unaudited pro-forma combined results of operations of the Company with the TW Business as if the entities
were combined on January 1, 2017.
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2017
|
|
|
September 30, 2018
|
|
Revenues, net
|
|
$
|
1,660,676
|
|
|
$
|
4,504,585
|
|
|
$
|
5,547,888
|
|
Net income (loss)
|
|
$
|
2,310,938
|
|
|
$
|
154,231
|
|
|
$
|
(664,837
|
)
|
Net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
Weighted average number of shares outstanding
|
|
|
71,999,426
|
|
|
|
62,940,297
|
|
|
|
86,066,723
|
|
The
unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations
are not intended to present actual results that would have been attained had the acquisitions been completed as of January 1,
2017 or to project potential operating results as of any future date or for any future periods.
The
Company consolidated TW as of the closing date of the agreement, and the results of operations of the Company include that of
TW.
The
Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. During the nine
months ended September 30, 2018, the Company utilizes a credit card issued in the name of Surge Holdings, Inc. to pay certain
trade obligations totaling $24,618. At September 30, 2018 and December 31, 2017, the Company’s total credit card liability
was $361,345 and $0, respectively.
6
|
NOTES
PAYABLE – RELATED PARTY
|
As
of September 30, 2018 and December 31, 2017, notes payable due to a related party consists of:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Note payable to SMDMM Funding LLC; interest at 8% per annum; due on demand
|
|
$
|
-
|
|
|
$
|
344,241
|
|
Note payable to SMDMM Funding LLC; interest at 8% per annum; due on demand
|
|
|
241,000
|
|
|
|
-
|
|
Note payable to SMDMM Funding LLC; interest at 8% per annum; due on demand
|
|
|
430,000
|
|
|
|
-
|
|
Note payable – to SMDMM Funding LLC; interest at 8% per annum
|
|
|
30,000
|
|
|
|
-
|
|
Promissory note issued according to Merger Agreement; interest at 3% per annum; maturing December 31, 2018
|
|
|
3,000,000
|
|
|
|
-
|
|
Notes payable—related party
|
|
$
|
3,701,000
|
|
|
$
|
344,241
|
|
SMDMM
Funding, LLC is owned by the Company’s chief executive officer. Accrued interest owed to SMDMM Funding, LLC was $35,525
and $1,711 at September 30, 2018 and December 31, 2017, respectively.
7
|
NOTES
PAYABLE AND LONG-TERM DEBT
|
As
of September 30, 2018 and December 31, 2017, notes payable and long-term debt consists of:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Note payable to former officer and director due in four equal annual installments of $26,875 beginning April 28, 2016; past due in 2016 and 2017; accruing interest at 6% per annum since April 28, 2016 on the past due portion
|
|
$
|
107,500
|
|
|
$
|
-
|
|
Note payable to former officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016 and 2017; accruing interest at 6% per annum since April 28, 2016 on the past due portion
|
|
|
101,250
|
|
|
|
-
|
|
Notes payable to seller of DigitizeIQ, LLC due as noted below
1
|
|
|
485,000
|
|
|
|
-
|
|
Convertible note payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible into common stock
2
|
|
|
27,500
|
|
|
|
-
|
|
Unsecured demand notes to an unaffiliated third-party company bearing interest at 6.49%
3
|
|
|
-
|
|
|
|
435,000
|
|
|
|
|
721,250
|
|
|
|
435,000
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
669,062
|
|
|
|
435,000
|
|
Long-term debt
|
|
$
|
52,188
|
|
|
$
|
-
|
|
1
Notes due seller of DigitizeIQ, LLC
includes a series of notes as follows:
|
●
|
A
second non-interest-bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on January
12, 2016; (Balance at September 30, 2018 - $235,000)
|
|
|
|
|
●
|
A
third non-interest-bearing Promissory Note made payable to the Seller in the amount of $250,000, which was due on March 12,
2016 and remains unpaid as of September 30, 2018.
|
The
Company is renegotiating the terms of the notes. The notes bear interest at 5% per annum when in default (after the due date).
The notes were non-interest bearing until due. Accordingly, a debt discount at 5% per annum was calculated for the notes and was
amortized to interest expense until the due date of the notes.
2
Convertible
note payable to River North Equity, LLC (“RNE”) -
The Company evaluated the embedded conversion for derivative
treatment and recorded an initial derivative liability and debt discount of $23,190. The debt discount is fully amortized.
The
Company has entered into a number of agreements with RNE wherein RNE has agreed to invest up to $3,000,000 in the common stock
of the Company. These agreements require an effective Registration Statement to be on file by the Company and would allow the
Company to require RNE to purchase the Company’s common stock at 90% of the lowest trading price of the Company’s
common stock during the previous five trading days. The Company has not yet filed a Registration Statement with the SEC.
3
Unsecured
Demand Note –
In August 2018, the Company reached a settlement with the debt holder and issued 2,175,000 common shares
in full settlement of the outstanding debt.
Derivative
liability
The
Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion
amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding
discount recorded to the associated debt. The excess of the derivative value over the face amount of the note, if any, is recorded
immediately to interest expense at inception.
The
estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following
assumptions during the nine months ended September 30, 2018:
Estimated dividends
|
|
None
|
|
Expected volatility
|
|
|
113.72
|
%
|
Risk free interest rate
|
|
|
3.13
|
%
|
Expected term
|
|
|
.01-36 months
|
|
Preferred
Stock
On
June 29, 2018, each of Kevin Brian Cox (“Cox”), the Company’s Chief Executive Officer, and Thirteen Nevada LLC
(“13”) entered into separate Exchange Agreements with the Company whereby the Shareholders agreed to exchange an aggregate
of 148,741,531 shares of previously issued Company Common Stock for an aggregate of 594,966 shares of newly-issued Company Series
C Convertible Preferred Stock.
The
calculation of weighted average shares was retroactively restated in order to properly account for the above noted share exchange.
Common
Stock
2018
Transactions
On
April 11, 2018, the Company issued 152,555,416 shares of Common Stock and 3,000,000 shares of Series A Preferred Stock as consideration
for the True Wireless, Inc. merger.
On
April 25, 2018, the Company issued an aggregate of 480,000 shares of Common Stock to two consultants valued at $0.27 per share.
In
July 2018, the Company issued an aggregate of 1,156,587 shares of Common Stock valued at $0.20 per share to nine parties in settlement
of certain disputes between TW and Benson Communications, S.A. de C.V. The settlement had been previously reached on September
29, 2017.
As
noted above in Note 7, in August 2018, Company reached a settlement with the debt holder and issued 2,175,000 in full settlement
of the outstanding debt.
During
the nine months ended September 30, 2018, the Company granted a consultant 48,000 restricted shares for services rendered. During
the nine months ended September 30, 2018 and 2017, the Company recorded total expense of approximately $16,541 and $0, respectively.
Stock
Options
During
the nine months ended September 30, 2018, the Company granted its Chief Financial Officer 50,000 options to purchase the Company’s
common stock with an exercise price of $0.41 per share, a term of 5 years, and a vesting period of 1 year. The options have an
aggregated fair value of approximately $14,700 that was calculated using the Black-Scholes option-pricing model. Variables used
in the Black-Scholes option-pricing model include: (1) discount rate of 2.03% (2) expected life of 1.5 years, (3) expected volatility
of 173.02%, and (4) zero expected dividends. The estimated option life was determined based on the “simplified method,”
giving consideration to the overall vesting period and the contractual terms of the award.
The
fair values of the options issued and outstanding are being amortized over their respective vesting periods. The unrecognized
compensation expense at September 30, 2018 was approximately $8,100. During the nine months ended September 30, 2018 and 2017,
the Company recorded total option expense of approximately $8,100 and $0, respectively.
Unit
Subscription Agreement - Warrants
During
January 2018, the Company entered into Unit subscription agreements with seven unrelated companies and individuals. Each Unit
was priced at $0.20 and contained: (a) one share of common stock restricted in accordance with Rule 144; and (b) one-half Warrant
to purchase an additional share of common stock restricted in accordance with Rule 144 for $0.50 for a period of three years after
the close of the offering. For total consideration of $460,000, Units representing 2,300,000 common shares and 1,150,000 3-year
$0.50 warrants were issued. The warrants were classified as equity since they have a fixed exercise price and do not have a provision
for modification.
9
|
RELATED
PARTY TRANSACTIONS
|
The
Company’s former chief executive officer has advanced the Company various amounts on a non-interest bearing basis, which
is being used for working capital. The advance has no fixed maturity. As of September 30, 2018, the outstanding balance due was
$389,502.
For
the nine months ended September 30, 2018 and 2017, outsourced management services fees of $765,000 was paid to Axia Management,
LLC (Axia) as compensation for services provided and were commensurate with the level of effort required to provide these services.
These costs are included in Selling, general and administrative expenses in the Statement of Operations. Axia is owned by the
majority owner of the Company.
At
September 30, 2018 and December 31, 2017, the Company had trade payables to Axia of $54,643 and $55,400, respectively.
For
the nine months ended September 30, 2018 and 2017, the Company purchased telecom services and access to wireless networks from
321 Communications in the amount of $826,401 and $1,253,002, respectively. These costs are included in Cost of revenue in the
Statement of Operations. The majority owner of the Company is a minority owner of 321 Communications.
At
September 30, 2018 and December 31, 2017, the Company had trade payables to 321 Communications of $75,606 and $132,404, respectively.
The
Company contracted with
CenterCom Global, S.A. de C.V.
(“CenterCom Global”)
to provide customer service call center services, manage the sales process to include handling incoming orders, the collection
and verification of all documents to comply with FCC regulations, monthly audit of all subscribers to file the USAC 497 form,
yearly audit of all subscribers that have been active over one year to file the USAC 555 form (Recertification), information technology
professionals to maintain company websites, sales portals and server maintenance. Billings for these services in the nine months
ended September 30, 2018 and 2017 were $1,612,126 and $976,678, respectively, and are included in Cost of revenue in the Statement
of Operations. A director, officer, and minority owner of the Company has a controlling interest in CenterCom Global.
At
September 30, 2018 and December 31, 2017, the Company had trade payables to CenterCom Global of $182,364 and $150,000, respectively.
See
Note 5 for long-term debt due to related parties.
10
|
COMMITMENTS
AND CONTINGENCIES
|
On
November 1, 2013, The Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability for Forfeiture
to the Company for requesting and/or receiving support for ineligible subscriber lines between the months of October 2012 and
May 2013 and proposed a monetary forfeiture of $5,501,285. The Company has annual compliance audits with FCC approved audit firms
that have found no compliance deficiencies. Management believes the proposed monetary forfeiture is without merit and if anything
should result from this notice, the amount would not materially affect the financial position of the Company.
The
Company evaluated performance of its operating segments based on revenue and operating profit (loss). Segment information for
the three and nine months ended September 30, 2018 and 2017 and as of September 30, 2018 and December 31, 2017, are as follows:
|
|
Surge
|
|
|
TW
|
|
|
Total
|
|
Three Months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
819,149
|
|
|
$
|
3,231,878
|
|
|
$
|
4,051,027
|
|
Cost of revenue
|
|
|
648,590
|
|
|
|
1,591,857
|
)
|
|
|
2,240,447
|
|
Gross margin
|
|
|
170,558
|
|
|
|
1,640,022
|
|
|
|
1,810,580
|
|
Costs and expenses
|
|
|
867,997
|
|
|
|
1,342,398
|
)
|
|
|
2,210,395
|
|
Operating income (loss)
|
|
|
(697,438
|
)
|
|
|
297,623
|
|
|
|
(399,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
3,356,470
|
|
|
$
|
3,356,470
|
|
Cost of revenue
|
|
|
-
|
|
|
|
1,965,305
|
|
|
|
1,965,305
|
|
Gross margin
|
|
|
-
|
|
|
|
1,391,165
|
|
|
|
1,391,165
|
|
Costs and expenses
|
|
|
-
|
|
|
|
1,342,892
|
|
|
|
1,342,892
|
|
Operating income
|
|
|
-
|
|
|
|
48,273
|
|
|
|
48,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,554,363
|
|
|
$
|
9,982,227
|
|
|
$
|
11,536,590
|
|
Cost of revenue
|
|
|
1,263,599
|
|
|
|
4,897,118
|
|
|
|
(6,160,717
|
|
Gross margin
|
|
|
290,764
|
|
|
|
5,085,109
|
|
|
|
5,375,873
|
|
Costs and expenses
|
|
|
1,638,265
|
|
|
|
3,921,094
|
|
|
|
5,559,359
|
|
Operating income (loss)
|
|
|
(1,347,501
|
)
|
|
|
1,164,015
|
|
|
|
(183,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
9,823,078
|
|
|
$
|
9,823,078
|
|
Cost of revenue
|
|
|
-
|
|
|
|
(6,103,535
|
)
|
|
|
(6,103,535
|
)
|
Gross margin
|
|
|
-
|
|
|
|
3,719,543
|
|
|
|
3,719,543
|
|
Costs and expenses
|
|
|
-
|
|
|
|
(3,834,911
|
)
|
|
|
(3,834,911
|
)
|
Operating loss
|
|
|
-
|
|
|
|
(115,368
|
)
|
|
|
(115,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,549,097
|
|
|
$
|
3,771,022
|
|
|
$
|
5,320,119
|
|
Total liabilities
|
|
|
6,092,498
|
|
|
|
3,285,941
|
|
|
|
9,378,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
1,176,094
|
|
|
$
|
1,176,094
|
|
Total liabilities
|
|
|
-
|
|
|
|
3,076,838
|
|
|
|
3,076,838
|
|
In October 2018, the Company signed an
agreement with Pastime Foods (“Pastime”) in order to expand the Company’s distribution network for its SurgePays
portal. The agreement will initiate distribution and sales to over 15,000 convenience and retail locations with a long-term target
of greater than 40,000 locations. According to the agreement, Pastime commits to selling more than an average required minimum
of $1,500 of monthly sales revenue per location. The Company will fund the initial placement costs and expenses with a total initial
advance of $190,000 as well as fees of $10,000. Any advances will be offset by the sharing of distribution revenues for shipments
paid by retailers directly to Pastime and the Company. The sharing percentage will 100% of the net distribution profit until the
advances have been covered.
In November 2018, the Company entered into
a settlement agreement with West Publishing Corporation (“West”) to remedy an outstanding civil action filed by West.
Pursuant to the agreement, the Company will pay West the principal amount of $125,000 plus interest accruing at the annual rate
of 7%. The Company will make monthly principal payments as follows:
December 7, 2018
|
|
$
|
25,000
|
|
January 7, 2019
|
|
|
25,000
|
|
February 7, 2019
|
|
|
25,000
|
|
March 7, 2019
|
|
|
20,000
|
|
|
|
$
|
95,000
|
|
On November 6, 2018, the Company made the
first payment of $30,000 as required in the settlement agreement.