Notes
to Condensed Consolidated Financial Statements
June
30, 2019
The
accompanying 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 (since January 1, 2019, this
has been a dormant entity that does not own any assets); Surge Logics Inc (“Logics”), an Nevada corporation that was
formed on October 2, 2018; 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.
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.
On
January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global,
S.A. de C.V (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer
service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation,
and other various operational support services. Anthony N. Nuzzo, a director and officer and a 10% shareholder of the Company’s
voting equity has a controlling interest in CenterCom Global. Centercom also provides call center support for various third-party
clients. Centercom is involved with:
|
●
|
On-boarding
the SurgePays Portal into over 40,000 retail locations and subsequent ongoing white glove support;
|
|
●
|
Aggressively
marketing the Company’s new “Free Wireless Service” program to substantially grow customer base while enhancing
customer service;
|
|
●
|
Supporting
the Company’s IT infrastructure including database management; and
|
|
●
|
Upselling-related
FinTech products to our existing customer base to increase revenue.
|
Business
Overview
Surge
Holdings, Inc. (“Surge Holdings” or “the Company”), incorporated in Nevada on August 18, 2006, is a company
focused on Telecom, Media, and FinTech applications serving customers worldwide online and across social media, gaming and mobile
platforms.
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 to 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.
Commencing
in 2018, the Company’s focus has significantly expanded to include the pursuit of the following business models:
Surge
Telecom
SurgePhone
Wireless offers discounted talk, text, and 4G LTE data wireless plans at prices that average 30% – 50% lower than competitors.
Available nationwide, SurgePhone Wireless utilizes ad impression revenue to help offset and, in many cases, eliminate the monthly
wireless plans for low income customers (free service for the customer is paid for by ad revenue). Additionally, 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.
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 25,000 veterans and other
customers who qualify for certain federal programs such as SNAP (EBT) and Medicaid.
The
SurgePhone Android Volt 5XL provides a large screen smartphone option to those unable to afford a more expensive phone.
Surge
Fintech
SurgePays
Visa is targeted for launch later in the third quarter of 2019. We believe this card could be life enhancing by serving as
a virtual checking account for the unbanked, underbanked, credit challenged or those unable to access traditional financial services.
The SurgePays card will offer safety, security and convenience of using the card anywhere that accepts Visa and customers will
be able to load their card via direct deposit or loading cash directly at 110,000 locations nationwide. Customers will be able
to access and manage their accounts from the connected app. 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
Software
SurgePays
Portal is a multi-purpose software interface for convenience stores, bodegas and other corner merchants providing goods and
services to the underbanked community. The merchant or clerk is able to use the portal interface – similar to a website
– with image driven navigation to add wireless minutes to any prepaid wireless carrier’s phone and access to other
services such as bill payment and loading debit cards. We believe what makes SurgePays unique is that it also offers the merchant
the ability to order wholesale goods through the portal with one touch ease. SurgePays is essentially a wholesale e-commerce storefront
that allows manufactures and distribution companies to have access to merchants while cutting out the middleman. The goal of the
SurgePays Portal is to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas,
and supermarkets. These products include energy drinks, dry foods, frozen foods, bagged snacks, processed meats, automotive parts
and many more goods, all in one convenient e-commerce storefront.
The
Company is no longer engaged in any line of business involving cryptocurrencies or digital assets. The Company previously announced
an intention to issue Surge Utility Tokens in the future. . The Company still plans on utilizing tokens as a reward program; however,
these tokens will have no monetary value and will not involve cryptocurrency or blockchain technology. These tokens will not be
able to be bought, sold, invested, or traded. Rather, these tokens will only be awarded by the Company to existing users of the
Company’s products and will then only be able to be redeemed for rewards using a Surge Rewards website set up by the Company.
The Company has not issued any Surge Utility Tokens to date and this name will not be utilized for any rewards tokens used as
part of a future Surge Rewards program.
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 - centralized office used for receiving or transmitting a large volume of requests by telephone.
Centercom
Global, S.A. de C.V.
On
January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global,
S.A. de C.V (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer
service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation,
and other various operational support services. Anthony N. Nuzzo, a director and officer and a 10% shareholder of the Company’s
voting equity has a controlling interest in CenterCom Global. Centercom also provides call center support for various third-party
clients. Centercom is involved with:
|
●
|
On-boarding
the SurgePays Portal into over 40,000 retail locations and subsequent ongoing white glove support;
|
|
●
|
Aggressively
marketing the Company’s new “Free Wireless Service” program to substantially grow customer base while enhancing
customer service;
|
|
●
|
Supporting
the Company’s IT infrastructure including database management; and
|
|
●
|
Upselling-related
FinTech products to our existing customer base to increase revenue.
|
Due
to the fact that a director, officer, and minority owner of the Company has a controlling interest in CenterCom Global, the Company
recorded its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s net book value
upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on the accompanying
condensed consolidated balance sheets. The Company recorded its equity interest in Centercom’s results of operations as
“Gain on investment in Centercom” in other income (expense) on the accompanying condensed consolidated statements
of income. The Company periodically reviews its investment in Centercom for impairment. Management has determined that no impairment
was required as of June 30, 2019.
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
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 June 30, 2019 and the results of operations and cash flows for the periods presented. The results
of operations for the six months ended June 30, 2019 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, 2018 filed with the SEC on April 1, 2019.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of 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 disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Risks
and Uncertainties
The
Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations
are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business
failure.
The
Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected
to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions
in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the
volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it
difficult to project the Company’s operating results on a consistent basis.
Concentration
of Credit Risk
Financial
instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable.
The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to
the extent account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject
the Company to concentrations of credit risk. Company closely monitors extensions of credit. Estimated credit losses have been
recorded in the consolidated financial statements. Recent credit losses have been within management’s expectations. No customer
accounted for more than 10% of revenues in 2019 or 2018.
Method
of Accounting
Investments
held in stock of entities other than subsidiaries, namely corporate joint ventures and other non-controlled entities usually are
accounted for by one of three methods: (i) the fair value method (addressed in Topic 320), (ii) the equity method (addressed in
Topic 323), or (iii) the cost method (addressed in Subtopic 325-20). Pursuant to Paragraph 323-10-05-5, the equity method tends
to be most appropriate if an investment enables the investor to influence the operating or financial policies of the investee.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The
Company held no cash equivalents at June 30, 2019 and December 31, 2018.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
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).
|
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 June 30, 2019 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.
Income
taxes
We
use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”)
Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for the amount of: (i) taxes
payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters
that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results
of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets
reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all
of the deferred tax assets will not be realized.
Through
December 23, 2014, KSIX and BLVD operated as limited liability companies and all income and losses were passed through to the
owners. Through October 12, 2015, DIQ operated as a limited liability company and all income and losses were passed through to
its owner. Subsequent to the acquisition dates, these limited liability companies were owned by Surge and became subject to income
tax.
Through
April 1, 2018, TW operated as a limited liability company and all income and losses were passed through to the owners. In order
to facilitate the merger discussed above, TW converted from a limited liability company to a Subchapter C Corporation.
ASC
Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions
for any of the reporting periods presented.
The
Company is no longer subject to tax examinations by tax authorities for years prior to 2016.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current year’s 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 a loss from operations of approximately $4.1 million for the six months ended June 30, 2019. As of June 30, 2019,
we had cash and working capital deficit of approximately $1.4 million and $1.5 million, respectively.
Management
made a decision to expedite product rollouts in order to ramp up revenue in 2019 and beyond. As part of this strategy, the Company
rolled out the SurgePays software platform to the AATAC network of 40,000 retail locations. This includes placement orders
of 250,000 Androids and 500,000 Sim Starter kits over the course of the multi-phase rollout. The Company is in the first phase of the rollout, during which it expects to initially fulfil $2,800,000 in
purchase orders of Androids and Sim Starter kits during Quarter 3.
In
addition, management made the decision to expedite programming, software development and integration to enable to launch of the
SurgePays Prepaid Visa card in Quarter 3.
To
support the significant growth inflection, we have reorganized our human resources department, including building the administrative,
legal and finance office in Bartlett, and the operations center in El Salvador (which will be able to host 300 employees). We
believe the Company now has the ability to support this exponential growth, which was a major goal for fiscal year 2019. Lastly,
we have significantly restructured our balance sheet to be an effective platform for growth as we continue to work towards listing
on the Nasdaq Capital Market.
These
factors, among others, were addressed by management in determining whether the Company could continue as a going concern. The
Company projects that it should be cash flow positive by the end of fiscal year 2019 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, meet the shareholders equity requirements for Nasdaq, and complete
proposed acquisitions. While the Company believes in the viability of management’s strategy to generate sufficient revenue,
control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. While management
believes it is more likely than not the Company has the ability to continue as a going concern, this is dependent upon the ability
to further implement the business plan, generate sufficient revenues and to control operating expenses.
Additionally, if necessary,
based on the Company’s history of being able to raise capital from both internal and external sources coupled with current
favorable market conditions, management believes that debt and/or equity financing can be obtained from both related parties (management
and members of the Board of Directors of the Company) and external sources. Therefore, the accompanying consolidated financial
statements have been prepared assuming that the Company will 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 gave 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, which were 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 had a closing price of approximately $0.40 per share on the date
of the transaction.
|
Following
the closing of the transaction, TW’s financial statements as of the Closing were 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, 2018.
|
|
Six Months Ended
|
|
|
|
June 30, 2018
|
|
Revenues, net
|
|
$
|
7,927,317
|
|
Net loss
|
|
$
|
(237,332
|
)
|
Net loss per share
|
|
$
|
(0.00
|
)
|
Weighted average number of shares outstanding
|
|
|
76,206,307
|
|
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,
2018 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.
Property
and equipment stated at cost, less accumulated depreciation, consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Computer Equipment
|
|
$
|
11,263
|
|
|
$
|
11,263
|
|
Furniture and Fixtures
|
|
|
7,996
|
|
|
|
7,996
|
|
Leasehold Improvements
|
|
|
25,513
|
|
|
|
25,513
|
|
|
|
|
44,771
|
|
|
|
44,771
|
|
Less: Accumulated Depreciation
|
|
|
(16,580
|
)
|
|
|
(13,782
|
)
|
|
|
$
|
28,191
|
|
|
$
|
30,990
|
|
Depreciation
expense was $2,798 and $2,281 for the six months ended June 30, 2019 and 2018, respectively.
6
|
CRYPTOCURRENCY
ASSET SALE
|
In
December 2018, the Company executed an agreement with a related party for the sale of Cryptocurrency assets for proceeds of $891,192.
In exchange for the purchased assets with a net book value of $523,743, the related party would assume the liabilities of the
entity consisting of accounts payable of $40,235 and outstanding debt and accrued interest of $808,600. The Company recognized
a gain on sale totaling $273,453.
The
Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. During the six
months ended June 30, 2019, the Company utilized a credit card issued in the name of Surge Holdings, Inc. to pay certain trade
obligations totaling $854,685. At June 30, 2019 and December 31, 2018, the Company’s total credit card liability was $516,956
and $394,840, respectively.
8
|
NOTES
PAYABLE – RELATED PARTY
|
In
December 2018, the Company executed a promissory note payable agreement with SMDMM Funding, LLC, an entity that is owned by the
Company’s chief executive officer. The promissory note was for a principal sum up to $1.0 million at an annual interest
rate of 6%, due on December 27, 2021. As of June 30, 2019, the Company drew advances on the note totaling $1,859,000. As part
of the Cryptocurrency transaction discussed in Note 6 above, $80,000 of the outstanding balance under the promissory note was
assumed by the purchaser. During the six months ended June 30, 2019, the Company made principal and accrued interest payments
of $674,000 and $25,955, respectively. The outstanding principal balance under the promissory note due to SMDMM was $1,105,000
and $680,000 at June 30, 2019 and December 31, 2018, respectively. Accrued interest owed to SMDMM was $16,430 and $10,718 at June
30, 2019 and December 31, 2018, respectively.
9
|
NOTES
PAYABLE AND LONG-TERM DEBT
|
As
of June 30, 2019 and December 31, 2018, notes payable and long-term debt consists of:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
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
|
|
$
|
20,000
|
|
|
$
|
70,000
|
|
Notes payable to seller of DigitizeIQ, LLC due as noted below 1
|
|
|
485,000
|
|
|
|
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
|
|
|
|
27,500
|
|
|
|
$
|
532,500
|
|
|
$
|
582,500
|
|
|
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 June 30, 2019 and December 31, 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 June 30, 2019.
|
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.
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. As noted above, the Company reached an agreement with a debt holder to convert outstanding
debt and interest into shares of common stock. As a result, the Company wrote-off the existing derivative liability of $34,556.
In addition, the Company wrote-off outstanding principal balance on the note totaling $32,547.
The
Company determines if an arrangement contains a lease at inception. ROU assets represent the right to use an underlying asset
for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and
liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease
term.
The
Company’s leases consist of leaseholds on office and call center space. The Company utilized a portfolio approach in determining
the discount rate. The portfolio approach takes into consideration the range of the term, the range of the lease payments, the
category of the underlying asset and the Company’s estimated incremental borrowing rate, which is derived from information
available at the lease commencement date, in determining the present value of lease payments. The Company also considered its
recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating the incremental
borrowing rates.
The
lease term includes options to extend the lease when it is reasonably certain that the Company will exercise that option. These
operating leases contain renewal options for periods ranging from three to five years that expire at various dates with no residual
value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the
judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is
reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal
rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the
option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in
the measurement of the right-of-use assets and operating lease liabilities.
Leases
with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above.
The
Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company recognizes variable
lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an
index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are
recognized in the period incurred.
The
components of lease expense were as follows:
|
|
Six Months Ended
June 30, 2019
|
|
|
|
|
|
Operating leases
|
|
|
22,040
|
|
Interest on lease liabilities
|
|
|
2,642
|
|
Total net lease cost
|
|
|
22,682
|
|
Supplemental
balance sheet information related to leases was as follows:
|
|
June 30, 2019
|
|
Operating leases:
|
|
|
|
|
Operating lease ROU assets
|
|
$
|
213,414
|
|
|
|
|
|
|
Current operating lease liabilities, included in current liabilities
|
|
$
|
33,080
|
|
Noncurrent operating lease liabilities, included in long-term liabilities
|
|
|
180,334
|
|
Total operating lease liabilities
|
|
$
|
213,414
|
|
Supplemental
cash flow and other information related to leases was as follows:
|
|
Six Months Ended June 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
17,398
|
|
ROU assets obtained in exchange for lease liabilities:
|
|
|
|
|
Operating leases
|
|
$
|
230,812
|
|
Weighted average remaining lease term (in years):
|
|
|
|
|
Operating leases
|
|
|
2.3
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
|
5
|
%
|
Total
future minimum payments required under the lease obligations as of June 30, 2019 are as follows:
Twelve Months Ending December 31,
|
|
|
|
2019 (thereafter)
|
|
$
|
33,080
|
|
2020
|
|
|
80,160
|
|
2021
|
|
|
80,160
|
|
2022
|
|
|
20,014
|
|
Total lease payments
|
|
$
|
213,414
|
|
Less: amounts representing interest
|
|
|
(14,027
|
)
|
Total lease obligations
|
|
$
|
199,387
|
|
On
January 25, 2018 the Company obtained a $500,000 line of credit (LOC) with a Bank. The LOC bears interest at 5% per annum and
is secured by essentially all of the Company’s assets. The note is personally guaranteed by the owner of the majority of
the Company’s voting shares. On December 21, 2018, the Company and the bank agreed to increase the LOC to $1,000,000 at
an interest rate of 6% per annum. During the six months ended June 30, 2019, total advances and repayments under the LOC were
$1,130,973 and $203,000, respectively. As of June 30, 2019 and December 31, 2018, the outstanding balance on the LOC was $927,973
and $0, respectively.
Preferred
Stock
Series
“A” Preferred Stock
As
of June 30, 2019 and December 31, 2018, there were 13,000,000 shares of Series A issued and outstanding.
Series
“C” Convertible Preferred Stock
As
discussed above in Note 1, on January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership
of Centercom. Upon execution of the agreement, the Company issued 72,000 shares of Preferred C stock (convertible into 18,000,000
shares of common stock) to a director, officer and minority owner of the Company who has a controlling interest in Centercom.
The Company recorded its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s
net book value upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on
the accompanying condensed consolidated balance sheets.
On
February 15, 2019, Carter Matzinger elected to exchange outstanding non-interest-bearing debt totaling $389,502 owed by the Company
into 6,232 shares of Preferred C stock.
As
of June 30, 2019 and December 31, 2018, there were 721,598 and 643,366 shares of Series C issued and outstanding, respectively.
Common
Stock
On
February 14, 2019, the Company granted a consultant 21,000 restricted shares for services rendered.
On
March 27, 2019, the Company reached a settlement with a consultant to issue 875,000 shares for services rendered. Upon execution
of the settlement, the Company recorded a loss on settlement of $507,500.
During
the six months ended June 30, 2019, the Company sold an aggregate of 8,521,427 shares of common stock and 4,036,422 warrants,
with each warrant exercisable for one share of Common Stock at an exercise price of $0.75, resulting in gross proceeds to the
Company of $2,892,500.
During
the six months ended June 30, 2019, the Company recorded total stock-based compensation expense of $189,450 in relation to shares
issued for services.
As
of June 30, 2019 and December 31, 2018, there were 97,988,818 and 88,046,391 shares of Common Stock issued and outstanding, respectively.
Stock
Warrants
On
February 15, 2019, the Company executed a consulting agreement with a third party for professional services. Upon execution of
the agreement, the Company agreed to issue 100,000 warrants to purchase the Company’s common stock with an exercise price
of $3.00 per share, a term of 3 years, and immediate vesting. In addition, the consultant is eligible to receive 150,000 warrants
upon achievement of certain milestones as discussed in the agreement.
The
250,000 warrants to be issued upon execution have an aggregated fair value of approximately $30,782 that was calculated using
the Black-Scholes option-pricing model based on the assumptions below.
|
|
June 30, 2019
|
|
Risk-free interest rate
|
|
|
2.50
|
%
|
Expected life of grants
|
|
|
3 years
|
|
Expected volatility of underlying stock
|
|
|
168.71
|
%
|
Dividends
|
|
|
0
|
%
|
The
estimated warrant life was determined based on the “simplified method,” giving consideration to the overall vesting
period and the contractual terms of the award.
During
the six months ended June 30, 2019, the Company recorded total stock-based compensation expense related to the warrants of approximately
$33,673. The unrecognized compensation expense at June 30, 2019 was approximately $0.
13
|
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 noted, Mr. Matzinger elected to exchange outstanding
non-interest-bearing debt totaling $389,502 owed by the Company into 6,232 shares of Preferred C stock. As of June 30, 2019 and
December 31, 2018, the outstanding balance due was $0 and $389,502, respectively.
For
the six months ended June 30, 2019 and 2018, outsourced management services fees of $510,000 was paid to Axia Management, LLC
(“Axia”) as compensation for services provided. These costs are included in Selling, general and administrative expenses
in the Condensed Consolidated Statements of Operations. Axia is owned by the majority owner of the Company.
At
June 30, 2019 and December 31, 2018, the Company had trade payables to Axia of $181,005 and $66,535, respectively.
For
the six months ended June 30, 2019 and 2018, the Company purchased telecom services and access to wireless networks from 321 Communications
in the amount of $308,237 and $602,265, respectively. These costs are included in Cost of revenue in the Condensed Consolidated
Statements of Operations. The owner of the majority of the Company’s voting shares is a minority owner of 321 Communications.
At
June 30, 2019 and December 31, 2018, the Company had trade payables to 321 Communications of $55,725 and $52,161, 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 six months
ended June 30, 2019 and 2018 were $1,163,935 and $1,095,651, respectively, and are included in Cost of revenue in the Condensed
Consolidated Statements of Operations. A director, officer, and minority owner of the Company has a controlling interest in CenterCom
Global. As discussed in Note 1, on January 17, 2019 the Company announced the completion of an agreement to acquire a 40% equity
ownership of Centercom for $178,508, the Company’s ownership percentage of the net book value of Centercom upon completion
of the transaction.
At
June 30, 2019 and December 31, 2018, the Company had trade payables to CenterCom Global of $203,096 and $175,000, respectively.
See
Note 5 for long-term debt due to related parties.
14
|
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.
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 be 100%
of the net distribution profit until the advances have been covered. As of December 31, 2018, the outstanding receivable due to
the Company pursuant to the agreement is $190,000 and is shown as Note Receivable on the consolidated balance sheet.
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%.
As
of June 30, 2019, all payments were made as required in the settlement agreement.
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 profit (loss). Segment information for
the three and six months ended June 30, 2019 and 2018 and as of June 30, 2019 and December 31, 2018, are as follows:
|
|
Surge
|
|
|
TW
|
|
|
Total
|
|
Three Months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,169,349
|
|
|
$
|
1,285,071
|
|
|
$
|
3,454,420
|
|
Cost of revenue
|
|
|
(1,552,073
|
)
|
|
|
(759,682
|
)
|
|
|
(2,311,755
|
)
|
Gross margin
|
|
|
617,276
|
|
|
|
525,389
|
|
|
|
1,142,665
|
|
Costs and expenses
|
|
|
(2,687,959
|
)
|
|
|
(986,410
|
)
|
|
|
(3,674,369
|
)
|
Operating income (loss)
|
|
|
(2,070,683
|
)
|
|
|
(461,021
|
)
|
|
|
(2,531,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
735,214
|
|
|
$
|
3,430,898
|
|
|
$
|
3,430,898
|
|
Cost of revenue
|
|
|
(615,008
|
)
|
|
|
(1,751,067
|
)
|
|
|
(1,751,067
|
)
|
Gross margin
|
|
|
120,206
|
|
|
|
1,679,831
|
|
|
|
1,679,831
|
|
Costs and expenses
|
|
|
(770,267
|
)
|
|
|
(1,271,311
|
)
|
|
|
(1,271,311
|
)
|
Operating income
|
|
|
(650,061
|
)
|
|
|
408,520
|
|
|
|
408,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,311,101
|
|
|
$
|
4,082,093
|
|
|
$
|
7,393,194
|
|
Cost of revenue
|
|
|
(2,291,481
|
)
|
|
|
(2,499,841
|
)
|
|
|
(4,791,322
|
)
|
Gross margin
|
|
|
1,019,620
|
|
|
|
1,582,252
|
|
|
|
2,601,872
|
|
Costs and expenses
|
|
|
(4,235,154
|
)
|
|
|
(2,010,534
|
)
|
|
|
(6,245,688
|
)
|
Operating income (loss)
|
|
|
(3,215,534
|
)
|
|
|
(428,282
|
)
|
|
|
(3,643,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
735,214
|
|
|
$
|
6,750,349
|
|
|
$
|
7,485,563
|
|
Cost of revenue
|
|
|
(615,008
|
)
|
|
|
(3,305,262
|
)
|
|
|
(3,920,270
|
)
|
Gross margin
|
|
|
120,206
|
|
|
|
3,445,087
|
|
|
|
3,565,293
|
|
Costs and expenses
|
|
|
(770,267
|
)
|
|
|
(2,578,697
|
)
|
|
|
(3,348,964
|
)
|
Operating income
|
|
|
(650,061
|
)
|
|
|
866,390
|
|
|
|
216,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,363,611
|
|
|
$
|
2,884,690
|
|
|
$
|
5,248,301
|
|
Total liabilities
|
|
|
3,492,424
|
|
|
|
3,580,595
|
|
|
|
7,073,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
947,550
|
|
|
$
|
3,136,768
|
|
|
$
|
4,084,318
|
|
Total liabilities
|
|
|
2,694,258
|
|
|
|
3,378,293
|
|
|
|
6,072,551
|
|
There
have been no subsequent events through August 14, 2019, the date these financial statements were available to be issued, that
require recognition or disclosure in such financial statements.