UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:ended December 31, 20162020
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________ to _____________Commission File Number 000-52522
KSIX MEDIA HOLDINGS,SURGEPAYS, INC.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Its Charter)
Nevada | 98-0550352 | |||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||
3124 Brother Blvd, Suite 104, Bartlett, TN | 38133 | |||
(Address of Principal Executive Offices) | ( | |||
10624 S. Eastern Ave., Suite A-910, Henderson, NV 89052(901) 302-9587 (Address of Principal Executive Offices) (Zip Code)
(800) 760-9689
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class – None
Name of each exchange on which registered – N/A
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
Securities registered pursuant tounder Section 12(g) of the Exchange Act:
Title of each class – Common Stock, par value $0.001 Par Value
Name of each exchange on which registered – N/Aper share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer [ ] | Accelerated filer [ ] | |
Non-accelerated filer | Smaller reporting company [ ] | |
Emerging growth company [X] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrantRegistrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
StateAs of March 31, 2021, the aggregate marketCompany had 147,917,608 shares of its common stock, par value $0.001 per share, outstanding.
As of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as ofJune 30, 2020, the last business day of the registrant’s most recently completed second fiscal quarter. June 30, 2016 - $1,772,915.
Note:If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense,quarter, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in the Form.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of October 30, 2017, the registrant had outstanding 80,907,035 shares of its common stock, par value $0.001 per share held by non-affiliates of $0.001.the registrant was approximately $27,157,139 based on $0.24 (on a post-reverse stock split basis), the closing price of the registrant’s common stock, par value $0.001 per share on that date.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Annual Report on Form 10-K may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “outlook,” “estimate,” “potential,” “continues,” “may,” “will,” “seek,” “approximately,” “predict,” “anticipate,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Known material factors that could cause our actual results to differ from those in the forward-looking statements are described in “Risk Factors” herein.
Readers are cautioned not to place undue reliance on forward-looking statements, which are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Annual Report, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, potential growth or growth prospects, future research and development, sales and marketing and general and administrative expenses, and our objectives for future operations, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” in this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Annual Report are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Annual Report or to conform statements to actual results or revised expectations, except as required by law.
You should read this Annual Report and the documents that we reference herein and have filed with the SEC as exhibits to this Annual Report with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
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REFERENCES WITHIN THIS REPORT
All references to “Ksix,” “Ksix Holdings,” the “Company,” “we,” “us,” and “our” refer to KSIX Media Holdings, Inc. and its subsidiaries, unless the context otherwise requires or where otherwise indicated.
PART 1 - DESCRIPTION OFITEM 1. BUSINESS
Corporate History andBusiness Overview
Ksix Media Holdings,SurgePays, Inc. (“KSIX Holdings”SurgePays,” “we”, “our” or “the Company”), incorporated in Nevada on August 18, 2006, is a technology-driven company building a next generation supply chain software platform that can offer wholesale goods and services more cost efficiently than traditional and existing wholesale distribution models.
Our current focus is offering wholesale goods and services direct to convenience stores, bodegas, minimarts, tiendas and other corner stores providing goods and services primarily to the underbanked community. We leverage Direct Store Delivery and the cost saving efficiencies of direct e-commerce to provide as many commonly sold consumable products as possible while increasing profit margins for these stores. These products include herbal stimulants, energy shots, dry foods, communication accessories, novelties, PPP products, bagged snacks, processed meats, automotive parts and many more goods, all in one convenient wholesale e-commerce platform.
Surge Marketplace Software
SurgePays Blockchain Software is a multi-purpose e-commerce platform offering wholesale goods and services direct to convenience stores, bodegas, minimarts, tiendas and other corner stores providing goods and services primarily 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 us unique is that it also offers the merchant the ability to order wholesale consumable goods at a significant discount from traditional distributors through the portal with one touch ease. We are essentially a wholesale e-commerce storefront that offers products direct from manufactures while cutting out the middleman. The goal of the SurgePays Portal is to leverage the competitive advantage and efficiencies of direct e-commerce to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas, and supermarkets while increasing profit margins for these stores. These products include herbal stimulants, energy pills and shot drinks, dry foods, communication accessories, novelties, PPP products, bagged snacks, processed meats, automotive parts and many more goods, all in one convenient wholesale e-commerce platform.
ECS
Electronic Check Services (“ECS”) has been a financial technology tech and wireless top-up platform for over 15 years. On October 1, 2019, we acquired ECS primarily for the favorable ACH banking relationship. ECS is a fintech transactions platform processing over 20,000 transactions a day at approximately 8,000 independently owned retail stores. The goal was to incorporate our blockchain components into the existing EGS network. After a year of development and integration, we believe the ECS platform has been successfully merged into our platform with secure ledger data backups and will continue to serve as the proven backbone for wireless top-up transactions and wireless product aggregation.
LocoRabbit Wireless
LocoRabbit Wireless offers prepaid wireless plans with talk, text, and 4G LTE data at prices that average 30% – 50% lower than competitors. Available nationwide, LocoRabbit Wireless is sold online direct to consumers and by a nationwide network of convenience stores, gas stations, mini-marts, bodegas and tiendas connected to our software platform. Due to controlling the wireless company and the payment platform. We are able to exclusively offer an industry high commission to the retailer for top-ups paid monthly at the client’s store.
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True Wireless
True Wireless is licensed through the United States Federal Communications Commission to provide Lifeline Service (subsidized wireless service to qualifying low-income customers) in 5 states. Utilizing the T-Mobile wireless backbone, True Wireless provides discounted and free wireless service to veterans and other disadvantaged customers who qualify for certain federal programs such as SNAP (EBT) and Medicaid.
Surge Logics
Surge Logics, Inc. (“Logics”) is a performance-driven marketing firm focused on the mass tort industry for attorneys and law firms. We primarily perform client acquisition and retention services for attorneys and law firms by operating highly-scalable digital marketing campaigns, called performance campaigns, using our proprietary technology and data-driven analytics. These performance campaigns, and the related follow-up by our experienced in-house team, enable our attorney and law firm advertising agency conglomerate serving customers worldwide onlineclients to more effectively and across socialeconomically connect with potential clients they are seeking to represent in existing or planned litigation. Our proven strategy of delivering cost-effective lead acquisitions and retained cases to our attorney and law firm clients means those clients are better able to manage their media gaming and mobileadvertising budgets and reach targeted audiences more quickly and effectively.
Our customized performance campaign offers are targeted at clients interested in completing signed retainers. The first step is to understand the specific criteria of our client. After this, we proceed to generate consumer traffic to our digital media platforms or our clients’ media platforms. The Company seeksAlthough there is no assurance of generating revenue from this move, we go all the way, bearing all the costs and risks involved. When we use our resources in acquiring consumer traffic, we want to help our clients amass cost-effective retained cases effectively. This, in turn, guarantees maximum profit margins for them.
Centercom
On January 17, 2019, we announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global, S.A. de C.V. (“Centercom”). Centercom is a dynamic operations center currently providing the Company with sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other niche various operational support services. Anthony N. Nuzzo, a director and officer and a 10% shareholder of our voting equity has a 50% interest in Centercom. Centercom also provides call center support for various third-party clients. Centercom is based in El Salvador.
The strategic acquisition of a bilingual operations hub has powered the Company’s rapid growth and revenue. Centercom has been built to support the infrastructure required to rapidly scale in synergy and efficiency to support the Company’s sales growth, customer service and development.
Centercom manages or supports the following processes:
● | Sales and Contract Processing; | |
● | Customer Service and Support; | |
● | Software Development and Integration; | |
● | Data Processing and Programming; | |
● | Multimedia and Graphic Design Services; | |
● | Email and Live Chat Support; | |
● | Merchant Support and Onboarding; and | |
● | Lead Generation and Live Transfer. |
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Experienced Leadership Team
Our management team consists of 4 executives with over 20 years in the prepaid wireless, underbanked and convenience store distribution industry while presiding over companies with a collective revenue run of over $2 Billion. Our finance team is led by a CFO with a background in private equity backed, and publicly traded companies ranging from $100 million to over $1.3 billion in annual revenue while our software development team is led by a CTO who got his start in the early days of operating systems. The combination of operating skills from our management team with the experience of successfully leading major multi-million-dollar, multinational companies give our organization a significant strength relative to most small- and medium-sized beverage companies.
Growth Strategies
Our primary long-term goal is to become a top provider of goods and services to independently owned retail stores across the country. We intend to achieve this goal by driving organic growth and acquisitions behind our existing portfolio of life enhancing underbanked products, in all major markets and regions, through an aligned network of retailer and ISO partners.
Our key growth strategies include the following:
● | developing a powerful, performance-oriented, and metric-driven organizational culture; | |
● | developing sales/trade tool kits to empower our sales force network and ISOs to engage with customers nationwide; | |
● | developing brand/marketing tool kits for current and new brands and segments; | |
● | expanding distribution of same store sales with current clients, while adding new clients; | |
● | strengthening our supply chain to achieve best in class costs, on-time/as promised logistics and superior customer service; | |
● | improving gross product margins with rearchitected cost of goods sold, improved efficiency, and improved net revenue with new products; | |
● | continuous development and improvements to our software platforms improving efficiencies and overall clients experience | |
● | upgrading infrastructure, systems and processes with enterprise resource planning systems, improved financial reporting, operating expense control, and strengthened key metrics and accounting and control procedures; and | |
● | strengthening our financial foundation via accessing the capital markets, solidifying long-term banking partners and facilities, and pursuing transformative organic and acquisitory growth. |
SurgePays’ strategy for increasing revenues is based on developing, maintaining, and expanding our nationwide network of retail stores. Our relationship-driven approach to selling along with providing many of the top selling products at a wholesale discount greater than traditional distributors gives management confidence of continued growth into the foreseeable future.
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Sales and Marketing
Sales Growth will be through both acquisition and organic means:
Acquisitions
A key part of our business strategy includes acquiring companies to growsupport our growth and enhance our product portfolio. Our acquisition strategy has two channels.
● | We will acquire existing distributors of products with a sales network of stores. Upon acquisition, we will maximize the relationship with this store base by upselling our additional product offerings while utilizing the efficiencies and economies of scale from our core business to increase profit. | |
● | We will acquire manufacturers of products that are either currently sold to our target based of stores, or regionally established companies that we can take nationwide, increasing exposure and thus increasing profits margins. This channel will also increase our competitive advantage by exclusively offering certain products and or offering these products at a discount compared to traditional distributors. |
Organic – Sales team
Our business strategy of organically expanding our network of retail locations, or points of distribution, also includes the following two channels:
● | We currently have an in-house sales and merchandising team, whose compensation is highly variable and highly performance-based. Each salesperson has individual targets for increasing “base” volume through distribution expansion, and “incremental” volume through promotions and other in-store merchandising and display activity. As distribution to new major customers, new major channels, or new major markets increases, we will expand the sales and marketing team on a variable basis. | |
● | We will utilize the Independent Sales Organizations model similar to credit card processing vendors. These independent contractors represent various non-competing products and or already cover a sales route. While traveling or through a network of existing relationships, they sign up new stores to the SurgePays platform and are compensated a commission for ongoing sales. |
Disrupting the Supply Chain
The traditional distribution components of transportation, warehousing, profit, and labor normally accounts for 25% of the retail cost of a product sold in convenience stores. The value proposition is realized by us through eliminating the markup the old-school supply chain adds to the wholesale price of goods. With Direct Store Delivery (DSD), goods can be taken to the retailer directly from the manufacturer and this will invariably reduce the cost price of the product to the store owner. Store owners can make their orders using one-click ordering on our software interface to get commonly sold wholesale products shipped directly to them. We have established models and programs to market and sell these products or services of our stores. We have the capability and capacity to scale significantly quick to bring approved products into stores nationwide.
Competition
Many of our current and potential competitors are well established and have longer operating histories, significantly greater financial and operational resources, and name recognition than we have. Most traditional convenience store distributors are companies that have been in business for over 50 years and utilize the historical “manufacturing plant to truck to warehouse to truck to store” logistics model. However, we believe that with our diverse product line, better efficiencies resulting in lower wholesale cost of goods sold, we have the ability to obtain a large market share and increase efficiency as part of an accretive strategycontinue to generate sales growth and compete in the industry. The principal competitive factors in all our product markets are technical features, quality, availability, price, customer support, and distribution coverage. The relative importance of each of these factors varies depending on the region. We believe using our direct store distribution model nationwide will open significant opportunities for growth.
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The markets in which we operate can be generally categorized as highly fragmented digital advertising sector.competitive. In order to maximize our competitive advantages, we continue to expand our product portfolio to capitalize on market trends, changes in technology and new product releases. Based on available data for our served markets, we estimate that our market share of the convenience store sales business at this time is less than 1%. A substantial acquisition would be necessary to meaningfully and rapidly change our market share percentage.
Distributors generally do not have a broad set of product and service offerings or capabilities, and no single distributor currently provides all the top selling consumables while offering products and services to enhance the lifestyle of the underbanked such as prepaid wireless, gift cards, bill payment and reloadable debit cards. We believe this creates a significant opportunity for a dynamic paradigm shift to a nationwide wholesale e-commerce platform.
Nationwide Product Deployment
The CompanySurgePays Blockchain platform streamlines the process for bringing products directly to the retail store. Our sales protocols have been tested and proven transferable from one product offering to another while ultimately providing our network of stores with better pricing and a larger product selection.
Competitive Edge
Our competitive edge is simple; we have the ability through our software platform, along with our relationships, capacity, efficiency, economies of scale and experience necessary to bring our products or services to market in an effective and efficient manner to ensure success. Our blockchain platform streamlines the process for bringing products directly to the targeted retail store. Our sales protocols have been tested and proven transferable from one product offering to another while ultimately improving our target stores with better pricing and more product selection.
Our strategy for increasing revenues is based on developing, maintaining, and expanding our nationwide network of retail stores. Our relationship-driven approach to selling along with providing many of the top selling c-store products at a wholesale discount greater than traditional distributors gives management confidence of continued growth into the foreseeable future.
Research and Development Activities
We conduct research and development on an ongoing basis, including new and existing products to offer and software product development to ensure we are delivering the most efficient, secure, and fast transactions at the store level. The SurgePays software platform is housed on the Amazon Web Service Cloud for redundancy, stability, and reliability. Traditionally, convenience stores are high volume and fast paces stores where space at the register is at a premium, thus leaving no room for a computer so wireless top-ups or cell phone activations are done over a Verifone terminal traditionally used for processing credit cards. We believe that our future success will depend in part upon our ability to continue the enhancement of our software platform and application to transact via tablets and other smaller devices while developing new products that meet or anticipate such changes in our served markets. Many of the stores we serve are now connected to the internet. This has allowed us to innovate our software to be more adaptive to equipment that is more compatible with the space constraints of the register area in a store.
Much of the development for specific products we offer is done by the manufacturers and is dictated by market conditions. For example: When the iPhone 12 was released, we simply added iPhone 12 chargers and adapters to its suite of smartphone accessories. Our continuity is secure due to our ability to adapt through adding new products seamlessly.
Seasonality
We experience some seasonality whereby the peak tax season months show a higher level of sales and consumption. However, the structure of our business and range of products in our portfolio mitigate any major fluctuations. Our revenue during the peak tax season months in the spring have historically been approximately 5% greater than the peak other months, and as our product portfolio continues to expand, the level of seasonal peaks we expect to diminish.
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Employees
As of March 31, 2021 we had 30 full-time employees and 1 part-time employees. None of our employees are subject to a collective bargaining agreement, and we believe that relationship with our employees to be good.
We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees, advisors and consultants. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel through the granting of stock-based and cash-based compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives.
Where You Can Find More Information
Our website address is www.surgepays.com. We do not intend for our website address to be an active link or to otherwise incorporate by reference the contents of the website into this Form 10-K. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Corporate Information
We were previously known as North American Energy Resources, Inc. (“NAER”).and KSIX Media Holdings, Inc. Prior to April 27, 2015, the Companywe operated solely as an independent oil and natural gas company engaged in the acquisition, exploration and development of oil and natural gas properties and the production of oil and natural gas through its wholly owned subsidiary, North American Exploration, Inc.NAER. On April 27, 2015, NAER entered into a Share Exchange Agreement with KsixKSIX Media Inc. (“KSIX Media”) whereby KSIX Media became a wholly-owned subsidiary of NAER and which resulted in the shareholders of KSIX Media owning approximately 90% of the voting stock of the surviving entity. While the Companywe continued the oil and gas operations of NAER following this transaction, on August 4, 2015, the Companywe changed its name to KsixKSIX Media Holdings, Inc.
On December 21, 2017, we changed its name to Surge Holdings, Inc. to better reflect the diversity of its business operations. We changed its name to SurgePays, Inc. on October 29, 2021.
Both prior toHistorically, we operated through its direct and following this transaction,indirect subsidiaries: (i) KSIX Media, operated two wholly-owned subsidiaries, Ksix,Inc., incorporated in Nevada on November 5, 2014; (ii) KSIX, LLC, (“KSIXLLC”) and Blvda Nevada limited liability company that was formed on September 14, 2011; (iii) Surge Blockchain, LLC, formerly Blvd. Media Group, LLC, (“BLVD”). Botha Nevada limited liability company that was formed on January 29, 2009; (iv) DigitizeIQ, LLC an Illinois limited liability company that was formed on July 23, 2014; (v) Surge Cryptocurrency Mining, Inc., formerly North American Exploration, Inc., 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); (vi) Surge Logics Inc, an Nevada corporation that was formed on October 2, 2018; (vii) True Wireless, Inc., an Oklahoma corporation (formerly True Wireless, LLC); (viii) Surge Payments, LLC, a Nevada limited liability company; (ix) Surgephone Wireless, LLC, a Nevada limited liability company; and (x) SurgePays Fintech, Inc., a Nevada limited liability company. On January 22, 2021, the issued and outstanding equity securities of these companiesDIQ and KSIX were acquired by Ksix Media, Inc. from Paywall, Inc. on or about December 18, 2014 pursuanttransferred to the termsLogics and became wholly-owned subsidiaries of a “Membership Interest Purchase Agreement”. Pursuant such agreement, KSIX Media, Inc. assumed the remaining balance owed to under a Promissory Note to a third party in the original face amount of $362,257. As of December 31, 2016, the then amount outstanding on the Promissory Note was $68,973. Effective April 1, 2016, the Company temporarily suspended its BLVD business operations and is reviewing a potential discontinuation of the business.Logics.
On October 15, 2015, KSIXLLC acquired DigitizeIQ, LLC (“DIQ”), aHistorically, our principal business has been digital advertising companyand 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 class action lawsuits.
KSIXLLC was created as an advertising network designed to create revenue streams for affiliates and provide advertisers with increased measurable audience through targeted cross-platform marketing strategies. KSIXLLC provides performance based marketing solutions to drive traffic and conversions within a Cost-Per-Lead (“CPl”) business model. The KSIXLLC online advertising network works directly with advertisers and other networks to promote advertiser campaigns. KSIXLLC manages offer tracking, reporting and distribution on the third-party platform.
KSIXLLC deals with incentive based advertising. Incentive based advertising occurs when a user viewing the advertisement gets some sort of reward for participating in the advertisers offer. These types of transactions are demonstrated frequently in online/mobile video games where users need in game currency to purchase an in-game item. Online and mobile games will pay the users a certain amount of their game currency to participate with the advertisers offer to keep the user engaged in the game for free. Once the user completes the needed task with the advertisers offer, the advertiser pays us a commission for the action or lead generated and we split that commission with the game owner.
KSIXLLC will garner additional revenue through branding, graphic design, web development, mobile software application development, search engine optimization, and social media curation offering a full in-house suite of creative and marking services.
True Wireless, LLC
Master Agreement for the Exchange of Common Stock, Management, and Control
On or about December 7, 2016, the Company, entered into a Master Agreement for the Exchange of Common Stock, Management, and Control (the “Exchange Agreement”) with True Wireless, LLC, an Oklahoma Limited Liability Company (“TW”) and the members of TW (the “Members”). Hereinafter, the Company, TW, and its Members may be referred to as a “Party” individually or collectively as the “Parties”.
TW’s primary business operation is a full-service telecommunications company specializing in the Lifeline program as set forth by the Telecommunications Act of 1996, and regulated by the FCC which provides subsidized mobile phone services for low income individuals (“Lifeline Services”). TW currently has an FCC license to offer Lifeline Services in the following states: Oklahoma, Rhode Island, Maryland, Texas, and Arkansas.
Kevin Brian Cox (“Cox”), a resident of the State of Tennessee, is the sole owner of all of TW’s issued and outstanding membership interests, either directly or indirectly through EWP Communications, LLC, a Tennessee limited liability company, the beneficial owner of which is Cox.
Additionally, pursuant to the terms of the Exchange Agreement, the Company executed and entered into a “Management and Marketing Agreement” (“Management Agreement”) with TW (see below).
Pursuant to the Management Agreement, the Company agreed to enter into a Management Agreement with TW whereby the Company would act as the manager of TW until such time as the Exchange Agreement and the transactions contemplated thereunder are approved by the FCC. Following such approval (which has not occurred as of the date of this Report), the Parties will hold a final closing of the Exchange Agreement and TW would become a wholly-owned subsidiary of the Company (collectively, the “Transaction”).
First Addendum to Master Agreement for the Exchange of Equity, Management, and Control
On March 30, 2017, the Parties executed a First Addendum to the Exchange Agreement extending the time for all material deadlines contemplated therein to be completed by May 1, 2017.
Amended Master Agreement for the Exchange of Common Stock, Management, and Control
On July 18, 2017, the Parties entered into an Amended Master Agreement for the Exchange of Common Stock, Management, and Control (the “Amended Exchange Agreement”) which amended and restated the Exchange Agreement. The Amended Exchange Agreement reset certain of the milestones and timetables detailed in the Exchange Agreement. The material terms of the Amended Exchange Agreement are as follows:
TERMS
CLOSINGS
THE MANAGEMENT CLOSING
The Management Closing occurred on July 18, 2017 pursuant to the following material terms or actions which were approved by the Parties:
EQUITY CLOSING.
Conditioned upon the Parties, having completed all material requirements of the Amended Exchange Agreement, including all delivery of all Exhibits and Collateral Agreements contemplated thereby, and the receipt of any required third party approvals, the Parties agreed to proceed with the Equity Closing, as follows:
At the Equity Closing, the Company agreed to Issue to the Members:
TW and the Members agreed to issue to the Company:
Management and Marketing Agreement
On or about July 18, 2017, the Company executed and entered into a “Management and Marketing Agreement” (“Management Agreement”) with Cox. Pursuant to the Management Agreement, the Company is obligated to provide certain management services to Cox as detailed in the Management Agreement.
Company Investment in TW
At the date of this filing, the Company’s investment in TW consists of the following:
Shares | Amount | |||||||
Cash paid | $ | 500,000 | ||||||
$ | 500,000 | |||||||
Contingent consideration to be paid: | ||||||||
Cash at closing | $ | 1,500,000 | ||||||
Common stock to be issued prior to closing | 13,200,000 | 5,304,000 | ||||||
Common stock to be issued at closing | 103,200,000 | 51,600,000 | ||||||
Note payable due December 31, 2018 | 1,500,000 | |||||||
Total contingent consideration | $ | 59,904,000 | ||||||
Total consideration | $ | 60,404,000 |
Note to Table Above:
1 Common Stock to be issued upon prior to closing at an average price of approximately $0.40 per share.
2 Common Stock to be issued at closing at an average price of $0.50 per share. Upon the TW Closing described above, the Company will also: (1) issuer Warrants to purchase 45,000,000 shares of Company Common Stock on a “cashless” basis exercisable at $0.50 per share for a period of five years; (2) Cox and his assigns shall also be issued such additional Common Stock of KSIX as are required pursuant to the Anti-Dilution Provision.
DigitizeIQ, LLC
On October 12, 2015, the Company entered into an Agreement for the Exchange of Common Stock (“DIQ Agreement”) with DigitizeIQ, LLC (“DIQ”) and its sole owner. DIQ’s primary business is operation of a full service digital advertising agency specializing in survey generation and landing page optimization specifically designed for mass tort action lawsuits. Pursuantlawsuits and KSIX, which is an Internet marketing company and has an advertising network designed to the transaction, DIQ became a wholly owned subsidiary of the Company.
The Agreement providedcreate revenue streams for a purchase price of $1,250,000, paid as follows: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.
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AsOur current focus is offering wholesale goods and services direct to convenience stores, bodegas, minimarts, tiendas and other corner stores providing goods and services primarily to the underbanked community. SurgePays leverages Direct Store Delivery and the cost saving efficiencies of the datedirect e-commerce to provide as many commonly sold consumable products as possible while increasing profit margins for these stores. These products include herbal stimulants, energy shots, dry foods, communication accessories, novelties, PPP products, bagged snacks, processed meats, automotive parts and many more goods, all in one convenient wholesale e-commerce platform.
Historically, our principal business has been digital advertising and lead generation through two of this filing, the Company owes DIQ a total of $485,000 towards the purchase price of its wholly owned subsidiaries—DIQ, which is represented by the Promissory Notes due on January 12, 2016a full-service digital advertising agency specializing in survey generation and March 12, 2016. Presently, the Companylanding page optimization specifically designed for mass tort action lawsuits and KSIX, which is in default on these Promissory Notesan Internet marketing company and intendshas an advertising network designed to attemptcreate revenue streams for its affiliates and to negotiate a full settlementprovide advertisers with the holder. There is no guaranteeincreased measurable audience. KSIX has an online advertising network that any settlement can be achieved, or if one is achieved, it will be on terms beneficialworks directly with advertisers and other networks to the Company.promote advertiser campaigns and manage offer tracking, reporting and distribution.
Trademarked Products and Proprietary Technology:Corporate Information
RewardTool®- A proprietary “offer wall”Our executive offices are located at 3124 Brother Blvd, Suite 410, Bartlett, TN 38133, and our telephone number is (800) 760-9689. Our website is www.surgepays.com. Our website and the information contained in, or “ad container” that promotes hundreds of different advertising campaigns on a single web page. Offer walls, by definition, attract users with the premise of getting virtual currency without having to spend money. Instead they are asked to fill out a survey, download an app, watch a video, or sign up for something in return for the free currency. The RewardTool® displays up to 1,000 offers and automatically rewards users upon completion. It is customizable and completely systematizes all of the processes needed to successfully run these campaigns.
AccessTool®- A proprietary “content locker” that is used to monetize any type of premium digital content like videos, music, or eBooks. Content lockers, by definition, attract users with the premise of access to premium content without having to spend money. Instead, they are asked to complete an advertiser’s offer in return for free access to the content. The AccessTool® displays up to 1,000 offers and is customizable to match the design of any website.
Adsynthe- A proprietary technology used to manage facebook media buying. This software allows the company to monitor and manage campaigns spending and to leverage rules to limit non-effective campaign spending.
General Business Strategy:
The Company intends to grow by strategic acquisition of niche companies which demonstrate performance-based success in specific digital advertising and marketing platforms and other related industries. Because digital advertising and online marketing strategies are inherently low yield, the ability to make even small gains in efficiency benefits the Company and its network of partners and affiliates exponentially.
Employees and Labor Relations
At December 31, 2016, we had seven full-time employees and three consultants. We plan to add corporate and managerial staff as necessary consistent with the growth ofaccessible through, our operations.
We plan to concentrate on the acquisition of companies where the employees are not, and have not historically been, members of unions. However, there is no assurance that any company that we acquirewebsite will not be the subjectdeemed to be incorporated by reference into this Form 10-K and does not constitute part of a successful unionization vote.this Form 10-K.
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Smaller reportingInvesting in our securities involves a great deal of risk. Careful consideration should be made of the following factors as well as other information included in this Form 10-K before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond our control. Our business, financial condition or operating results could be materially harmed by any of these risks. This could cause the trading price of our securities to decline, and you may lose all or part of your investment. Additional risks that we do not yet know of or that we currently think are immaterial may also affect our business and results of operations.
RISKS RELATED TO OUR COMPANY
Changes in the regulatory framework under which we operate could adversely affect our business prospects or results of operations.
Our operations are subject to regulation by the FCC and other federal, state and local agencies. These regulatory regimes frequently restrict or impose conditions on our ability to operate in designated areas and provide specified products or services. We are frequently required to maintain licenses for our operations and conduct our operations in accordance with prescribed standards. We are often involved in regulatory and other governmental proceedings or inquiries related to the application of these requirements. It is impossible to predict with any certainty the outcome of pending federal and state regulatory proceedings relating to our operations, or the reviews by federal or state courts of regulatory rulings. Without relief, existing laws and regulations may inhibit our ability to expand our business and introduce new products and services. Similarly, we cannot guarantee that we will be successful in obtaining the licenses needed to carry out our business plan or in maintaining our existing licenses. For example, the FCC grants wireless licenses for terms generally lasting ten (10) years, subject to renewal. The loss of, or a material limitation on, certain of our licenses could have a material adverse effect on our business, results of operations and financial condition.
New laws or regulations or changes to the existing regulatory framework at the federal, state and local level, such as those described below, could restrict the ways in which we manage our wireline and wireless networks and operate our business, impose additional costs, impair revenue opportunities and potentially impede our ability to provide services in a manner that would be attractive to us and our customers.
● | Privacy and data protection - we are subject to federal, state and international laws related to privacy and data protection. A new privacy law scheduled took in California in 2020, also could have a significant impact on certain of our businesses. | |
● | Regulation of broadband Internet access services - In its 2015 Title II Order, the FCC nullified its longstanding “light touch” approach to regulating broadband Internet access services and “reclassified” these services as telecommunications services subject to utilities-style common carriage regulation. The FCC repealed the 2015 Title II Order in December 2017 and returned to its traditional light-touch approach for these services. The 2017 order has been appealed to the D.C. Circuit; the outcome and timing of this appeal or any other challenge remains uncertain. Several states have also adopted or are considering adopting laws or executive orders that would impose net neutrality and other requirements on some of our services (in some cases different from the FCC’s 2015 rules). The enforceability and effect of these state rules is uncertain. | |
● | “Open Access” - we hold certain wireless licenses that require us to comply with so-called “open access” FCC regulations, which generally require licensees of particular spectrum to allow customers to use devices and applications of their choice. Moreover, certain services could be subject to conflicting regulation by the FCC and/or various state and local authorities, which could significantly increase the cost of implementing and introducing new services. |
The further regulation of broadband, wireless and our other activities and any related court decisions could restrict our ability to compete in the marketplace and limit the return we can expect to achieve on past and future investments in our networks.
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Changes to the federal Lifeline Assistance Program could negatively impact the growth of our True Wireless business and its profitability.
True Wireless offers service to low-income subscribers eligible for the federal Lifeline Assistance Program. True Wireless provides a monthly discount to eligible subscribers in the form of free blocks of minutes and text messages. This discount is subsidized by the Low-Income Program of the federal USF and administered by the Universal Service Administrative Company. In 2012, the FCC adopted reforms to the Low Income program to increase program effectiveness and efficiencies. More stringent eligibility and certification requirements have made it more difficult for Lifeline service providers to sign up and retain Lifeline subscribers. Some regulators and legislators have questioned the structure of the current program, and the FCC is continuing to review and implement measures to improve the program, including enforcement action involving alleged rule violations, and roll-out of the National Lifeline Accountability Database. Changes in the Lifeline program as a result of the ongoing FCC proceeding or new legislation, or potential enforcement action, could negatively impact growth of True Wireless and/or the profitability of True Wireless.
If we are not able to adapt to changes and disruptions in technology and address changing consumer demand on a timely basis, we may experience a decline in the demand for our services, be unable to implement our business strategy and experience reduced profits.
Our industries are rapidly changing as new technologies are developed that offer consumers an array of choices for their communications needs and allow new entrants into the markets we serve. In order to grow and remain competitive, we will need to adapt to future changes in technology, enhance our existing offerings and introduce new offerings to address our customers’ changing demands. If we are unable to meet future challenges from competing technologies on a timely basis or at an acceptable cost, we could lose customers to our competitors. We may not be able to accurately predict technological trends or the success of new services in the market. In addition, there could be legal or regulatory restraints on our introduction of new services. If our services fail to gain acceptance in the marketplace, or if costs associated with the implementation and introduction of these services materially increase, our ability to retain and attract customers could be adversely affected. Additionally, we must phase out outdated and unprofitable technologies and services. If we are unable to do so on a cost-effective basis, we could experience reduced profits. In addition, there could be legal or regulatory restraints on our ability to phase out current services.
Unfavorable global economic, business, or political conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets, including conditions that are outside of our control, including the impact of health and safety concerns, such as those relating to the current COVID-19 coronavirus (“COVID-19”) pandemic.
On January 30, 2020 the World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The COVID-19 coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates.
Additionally, the global financial crisis in connection with the COVID-19 pandemic has caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including reduction in revenue stream across all segments of the Company. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.
Failure to develop new products, such as cross-media solutions, that are compelling for the marketplace in the expected time frame may adversely affect the combined company’s future results.
As the media and advertising industry looks to evaluate investments such as advertising campaigns across various forms of media, such as television, radio, online, and mobile, the ability to measure the combined size and composition of audiences across platforms is increasingly important and demanded. A primary strategic reason for this business combination is to allow our companies to more quickly and effectively develop cross-media capabilities using the combined talents and assets of the two companies to meet a growing market demand. The management of the combined company may face significant challenges in developing new products while integrating existing products and technologies. If the companies are not requiredsuccessful in developing credible products in the expected timeframe, the anticipated benefits of the merger may not be realized fully or at all or may take longer to providerealize than expected.
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We may expand through investments in, acquisitions of, or the development of new products with assistance from, other companies, any of which may not be successful and may divert our management’s attention.
In the past, we completed several strategic acquisitions. We also may evaluate and enter into discussions regarding an array of potential strategic transactions, including acquiring complementary products, technologies or businesses. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to be employed by us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. Moreover, we cannot assure you that the anticipated benefits of any acquisition, investment or business relationship would be realized timely, if at all, or that we would not be exposed to unknown liabilities. In connection with any such transaction, we may:
● | encounter difficulties retaining key employees of the acquired company or integrating diverse business cultures; | |
● | incur large charges or substantial liabilities, including without limitation, liabilities associated with products or technologies accused or found to infringe on third-party intellectual property rights or violate existing or future privacy regulations; | |
● | issue shares of our capital stock as part of the consideration, which may be dilutive to existing stockholders; | |
● | become subject to adverse tax consequences, legal disputes, substantial depreciation or deferred compensation charges; | |
● | use cash that we may otherwise need for ongoing or future operation of our business; | |
● | enter new geographic markets that subject us to different laws and regulations that may have an adverse impact on our business; | |
● | experience difficulties effectively utilizing acquired assets; | |
● | encounter difficulties integrating the information and financial reporting systems of acquired businesses, particularly those that operated under accounting principles other than those generally accepted in the U.S. prior to the acquisition by us; and | |
● | incur debt, which may be on terms unfavorable to us or that we are unable to repay. |
Our business could be adversely affected if we fail to implement and maintain effective disclosure controls and procedures and internal control over financial reporting.
If we are unable to maintain effective disclosure controls and procedures, or if there are identified significant deficiencies or material weaknesses in the future, our ability to produce accurate and timely financial statements and public reports could be impaired, which could adversely affect our business and financial condition. In addition, investors may lose confidence in our reported information and the market price of our Common Stock may decline.
If we are unable to obtain additional financing, business operations will be harmed and if we do obtain additional financing then existing shareholders may suffer substantial dilution.
We need substantial capital to implement our sales distribution strategy for our current products, strategic acquisitions to maximize existing technologies to create opportunities to create synergy and opportunity. Our capital requirements will depend on many factors, including but not limited to:
● | the problems, delays, expenses, and complications frequently encountered by early-stage companies; | |
● | market acceptance of our products; and | |
● | the success of our sales and marketing programs. |
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If adequate funds are not available or if we fail to obtain acceptable additional financing, we may be required to:
● | severely limit or cease our operations or otherwise reduce planned expenditures and forego other business opportunities, which could harm our business; | |
● | obtain financing with terms that may have the effect of substantially diluting or adversely affecting the holdings or the rights of the holders of our capital stock; or | |
● | obtain funds through arrangements with future collaboration partners or others that may require us to relinquish rights to some or all of our technologies or products. |
Our success is substantially dependent on the continued service of our senior management.
Our success is substantially dependent on the continued service of our Chief Executive Officer (“CEO), Kevin Brian Cox, our Chief Financial Officer (“CFO”), Tony Evers, and President, Anthony P. Nuzzo. We do not carry key person life insurance on any of its management, which would leave us uncompensated for the loss of any of its management. The loss of the services of any of our senior management could make it more difficult to successfully operate our business and achieve our business goals. In addition, our failure to retain qualified personnel in the diverse areas required for continuing its operations could harm our product development capabilities and customer and employee relationships, delay the growth of sales of our products and could result in the loss of key information, expertise or know-how.
We may not be able to hire or retain other key personnel required for our business, which could disrupt the development and sales of our products and limit our ability to grow.
Competition in our industry for senior management and other key personnel is intense. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, either because of competition in our industry for such personnel or because of insufficient financial resources, our growth may be limited.
Our CEO and Chairman, Kevin Brian Cox, has significant control over shareholder matters and the minority shareholders will have little or no control over our affairs.
Mr. Cox currently owns approximately 62% of our outstanding voting equity and, on a fully diluted basis, based on the conversion feature of the Series A and Series C Convertible Preferred Stock, 54% of our shares outstanding. Subject to any fiduciary duties owed to our other stockholders under Nevada law, Mr. Cox is able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have some control over our management and policies. Mr. Cox may have interests that are different from yours. For example, Mr. Cox may support proposals and actions with which you may disagree. The concentration of ownership could delay or prevent a change in control of our Company or otherwise discourage a potential acquirer from attempting to obtain control of our Company, which in turn could reduce the price of our stock. In addition, Mr. Cox could use his voting influence to maintain our existing management and directors in office, delay or prevent changes in control of our Company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.
We may not have sufficient resources to effectively introduce and market our services and products, which could materially harm our operating results.
Continuation of market acceptance for our existing services and products require substantial marketing efforts and will require our sales account executives and contract partners to make significant expenditures of time and money. In some instances, we will be significantly or totally reliant on the marketing efforts and expenditures of our contract partners, outside sales agents and distributors.
Because we currently have very limited marketing resources and sales capabilities, commercialization of our products, some of which require regulatory clearance prior to market entrance, we must either expand our own marketing and sales capabilities or consider collaborating with additional third parties to perform these functions. We may, in some instances, rely significantly on sales, marketing and distribution arrangements with collaborative partners and other third parties. In these instances, our future revenue will be materially dependent upon the success of the efforts of these third parties.
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Should we determine that expanding our own marketing and sales capabilities is required, we may not be able to attract and retain qualified personnel to serve in our sales and marketing organization, to develop an effective distribution network or to otherwise effectively support our commercialization activities. The cost of establishing and maintaining a more comprehensive sales and marketing organization may exceed its cost effectiveness. If we fail to further develop our sales and marketing capabilities, if sales efforts are not effective or if costs of increasing sales and marketing capabilities exceed their cost effectiveness, our business, results of operations and financial condition would be materially adversely affected.
Risks and uncertainties related to the Company’s foreign operations could negatively impact the Company’s operating results.
Centercom, our subsidiary, operates in El Salvador. Doing business in El Salvador, and in Latin America generally, involves increased risks related to geo-political events, political instability, corruption, economic volatility, property crime, drug cartel and gang-related violence, social and ethnic unrest including riots and looting, enforcement of property rights, governmental regulations, tax policies, banking policies or restrictions, foreign investment policies, public safety, health and security, anti-money laundering regulations, interest rate regulation and import/export regulations among others. As in many developing markets, there are also uncertainties as to how both local law and U.S. federal law is applied, including areas involving commercial transactions and foreign investment. As a result, actions or events could occur in El Salvador that are beyond the Company’s control, which could restrict or eliminate the Company’s ability to operate in El Salvador or significantly reduce customer traffic, product demand and the expected profitability of such operations.
We operate in a highly competitive industry.
We may encounter competition from local, regional or national entities, some of which have superior resources or other competitive advantages in the larger wireless services space. Intense competition may adversely affect our business, financial condition or results of operations. These competitors may be larger and more highly capitalized, with greater name recognition. We will compete with such companies on brand name, quality of services, level of expertise, advertising, product and service innovation and differentiation of product and services. As a result, our ability to secure significant market share may be impeded.
RISKS RELATED TO OUR SECURITIES
Sales of a significant number of shares of our Common Stock in the public market or the perception of such possible sales, could depress the market price of our Common Stock.
Sales of a substantial number of shares of our Common Stock in the public markets, which include an offering of our preferred stock or Common Stock could depress the market price of our Common Stock and impair our ability to raise capital through the sale of additional equity or equity-related securities. We cannot predict the effect that future sales of our Common Stock or other equity-related securities would have on the market price of our Common Stock.
Our share price could be volatile and our trading volume may fluctuate substantially.
The price of our Common Stock has been and may in the future continue to be extremely volatile. Many factors could have a significant impact on the future price of our shares of Common Stock, including:
● | our inability to raise additional capital to fund our operations, whether through the issuance of equity securities or debt; | |
● | our failure to successfully implement our business objectives; | |
● | compliance with ongoing regulatory requirements; | |
● | market acceptance of our products; | |
● | changes in government regulations; | |
● | general economic conditions and other external factors; | |
● | actual or anticipated fluctuations in our quarterly financial and operating results; and | |
● | the degree of trading liquidity in our shares of Common Stock. |
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A decline in the price of our shares of Common Stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.
The relatively low price of our shares of Common Stock, and a decline in the price of our shares of Common Stock, could result in a reduction in the liquidity of our Common Stock and a reduction in our ability to raise capital. Because a significant portion of our operations has been and will continue to be financed through the sale of equity securities, a decline in the price of our shares of Common Stock could be especially detrimental to our liquidity and our operations. Such reductions and declines may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plans and operations, including our ability to continue our current operations. If the price for our shares of Common Stock declines, it may be more difficult to raise additional capital. If we are unable to raise sufficient capital, and we are unable to generate funds from operations sufficient to meet our obligations, we will not have the resources to continue our operations.
The market price for our shares of Common Stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our shares of Common Stock.
Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our Common Stock.
FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may limit your ability to buy and sell our Common Stock and have an adverse effect on the market for our shares.
“Penny Stock” rules may make buying or selling our Common Stock difficult.
Trading in our Common Stock has previously been subject to the “penny stock” rules. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer that recommends our Common Stock to persons other than prior customers and accredited investors, must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our Common Stock, which could severely limit the market price and liquidity of our Common Stock.
We currently do not intend to pay dividends on our Common Stock. As result, your only opportunity to achieve a return on your investment is if the price of our Common Stock appreciates.
We currently do not expect to declare or pay dividends on our Common Stock. In addition, in the future we may enter into agreements that prohibit or restrict our ability to declare or pay dividends on our Common Stock. As a result, your only opportunity to achieve a return on your investment will be if the market price of our Common Stock appreciates and you sell your shares at a profit.
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We could issue additional Common Stock, which might dilute the book value of our Common Stock.
Our Board has authority, without action or vote of our shareholders, to issue all or a part of our authorized but unissued shares. Such stock issuances could be made at a price that reflects a discount or a premium from the then-current trading price of our Common Stock. In addition, in order to raise capital, we may need to issue securities that are convertible into or exchangeable for our Common Stock. These issuances would dilute the percentage ownership interest, which would have the effect of reducing your influence on matters requiring shareholders vote and might dilute the book value of our Common Stock. You may incur additional dilution if holders of stock warrants or options, whether currently outstanding or subsequently granted, exercise their options, or if warrant holders exercise their warrants to purchase shares of our Common Stock.
Future Issuance of Our Common Stock, Preferred Stock, Options and Warrants Could Dilute the Interests of Existing Stockholders.
We may issue additional shares of our Common Stock, preferred stock, options and warrants in the future. The issuance of a substantial amount of Common Stock, options and warrants could have the effect of substantially diluting the interests of our current stockholders. In addition, the sale of a substantial amount of Common Stock or preferred stock in the public market, or the exercise of a substantial number of warrants and options either in the initial issuance or in a subsequent resale by the target company in an acquisition which received such Common Stock as consideration or by investors who acquired such Common Stock in a private placement could have an adverse effect on the market price of our Common Stock.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements. These forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects, and other similar matters. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. These statements may be identified by words such as “expects,” “plans,” “projects,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates,” and other words of similar meaning.
These statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the section titled “Risk Factors” and elsewhere in this Form 10-K.
Any forward-looking statement in this Form 10-K reflects our current view with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our business, results of operations, industry and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Form 10-K and the documents that we reference herein and therein and have filed as exhibits hereto and thereto completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
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This Form 10-K also contains or may contain estimates, projections and other information concerning our industry, our business and the markets for our products, including data regarding the estimated size of those markets and their projected growth rates. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this item.information. Unless otherwise expressly stated, we obtained these industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which these data are derived.
ITEM 1B. UNRESOLVED STAFF COMMENTS
NoneNone.
ITEM 2: DESCRIPTION OF2. PROPERTIES
The Company leasesWe presently occupy space at 3 locations: 3124 Brother Blvd, Suite 410, Bartlett, TN 38133, (This building is owned by an entity owned by Mr. Cox, our CEO and Chairman and the controlling shareholder of the Company), 1375 E Woodfield Road, Schaumburg IL 60173 and1615 S Ingram Mill, Building B, Springfield, Missouri 65804.
We will acquire additional office space at 6795 S. Edmond Street 3rd Floor, Las Vegas, Nevada 89118, which contains 65,000 square foot of collaborative work space which allows us to expand and contract as needed. Currently we have a year lease with a thirty-day cancelation policy which costs $1,825 per month. The Company feels that its current office space described above is adequate for the business operations of the Company for the next twenty-four (24) months.needs warrant.
ITEM 3: LEGAL PROCEEDINGSFrom time to time, we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. Except as described below, we are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or results of operations.
The following is summary of threatened, pending, asserted or un-asserted claims against the Companyus or any of its wholly owned subsidiaries.
Claims by River North Equity, LLC against KSIX Media Holdings, Inc.:
1. | Regulatory matter before the Corporation Commission of Oklahoma: Oklahoma Corporation Commission v True Wireless, Inc., Cause No. PUD 202000038 |
On June 29, 2017, River North Equity, LLC (“River North Equity”)February 14, 2020, the Oklahoma Corporation Commission filed suita complaint against True Wireless, Inc., related to a compliance dispute. The Oklahoma Corporation Commission has taken issue with some subscribers enrolled outside the designated service area. Local counsel is preparing filing of exceptions and Motion for Hearing En Banc in before Oklahoma Corporation Commission. The Oklahoma Corporation Commission is seeking a substantial fine in excess of $100,000.00 and revocation of its license in Oklahoma.
2. | Global Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton County, TN, Docket # 20-00058, filed on Jan 21, 2020. |
On January 21, 2020, A complaint was filed related to a noncompetition dispute. Terracom believes Jonathan and Jerry are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma and TN do not adhere to non-competes and are not usually successful when in court, as such we believe it has a strong case against Terracom. The matter is entering the discovery process. Both Jerry Carroll and Jonathan Coffman are no longer working for True Wireless in sales. Carroll is no longer employed by the Company or any of its affiliates and Carter MatzingerCoffman works for SurgePays, Inc., but not in the Circuit Courtsales of the 18th Judicialwireless. The complaint requests general damages plus fees and costs for tortious interference with a business relationship in their prayer for relief. They have made no written demand for damages at this point in time. This matter is simply an anti-competitive attempt by Terracom to cause distress to True Wireless.
3. | Unimax Communications, LLC vs True Wireless and Surge Holdings, Inc., USDC, Central District of California Filed May 21, 2019, Case # 8:19-cv-00968 |
On May 21, 2019, a complaint was filed related to a breach of DuPage Countycontract dispute, alleging Unimax Communications, LLC sold defective phones to True Wireless which were not paid for by True Wireless, resulted in Wheaton, IL (Case # 2017AR000989) arising outdefault and entry of an Equity Purchase Agreement the Company entered into with River North Equity on July 11, 2016. The Complaint alleges that the Company entered into a series of convertible promissory notes in the aggregate face amount of $177,500 and that these notes are presently in default. The Complaint also alleges that the Company failed to maintain sufficient authorized capital to allow for conversion of the promissory notes; failed to honor conversion notices delivered with respect to the promissory notes; failed to file a registration statement with the U.S. Securities and Exchange Commission with respect to shares issuable on conversion of the promissory notes and failed to properly disclose the existence of the promissory notes and relevant details in its filings with the U.S. Securities and Exchange Commission. River North Equity is seeking damagesjudgment in the amount of at least $27,500$767,291, plus accrued interestfees and such other damages as may be proven at trial. The Company iscosts in discussions with River North Equity regarding a potential resolution of this matter, however, there is no guarantee that this matter can be resolved on any basis which is favorable toenforcing the Company, if at all. The $27,500 plus accrued interest is included in the Company’s Consolidated Balance Sheet at December 31, 2016.judgment entered against True Wireless and us.
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Claims by TCA Global Credit Master Fund, L.P.
4. | Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: |
On or about May 9, 2017, TCA Global Credit Master Fund, L.P. (“TCA”)March 23, 2020, a complaint was filed related to a breach of contract dispute. The complaint was brought by a factoring company regarding Account Stated and Open Account claims against us. We have filed a civil actioncross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. The matter is currently in Broward County Florida againstdiscovery. Juno Financial, a factoring company, is seeking in excess of $1,700,000.00. Surge never received any goods in this matter and has never owned or possessed the Company and its subsidiaries regarding an outstanding balance due under a Senior Secured Debt Facility Agreement dated February 26, 2016. The balance carried bygoods in this matter.
With the Company on accountexception of the Senior Secured Debt Facility Agreement at December 31, 2016 was $261,043. The Company has retained counselforegoing, we are not involved in Floridaany disputes and is defending this action. The Company disputes this balance and has filed a counterclaim against TCA and related parties it believes may be responsible for the alleged default. While settlement discussions are in process, theredo not have any litigation matters pending. There is no guarantee that this matter can be resolved onaction, suit, proceeding, inquiry or investigation before or by any basis which is favorablecourt, public board, government agency, self-regulatory organization or body pending or, to the Company.
Claims by American Express Bank FSB:
On or about August 26, 2016 American Express Bank FSB (“American Express”) filed a civil complaint against DIQ and Scott Kaplan (an employeeknowledge of the Company)executive officers of our Company, threatened against or affecting our Company or our Common Stock, in the District Court for Clark County, Nevada for approximately $336,726 due on a credit card issued to DIQ, which was allegedly guaranteed by Scott Kaplan, the vice president of business development for KSIX, LLC. This action was subsequently dismissed on July 19, 2017. While the Company was not a party to this action, ostensibly therean adverse decision could be an obligation on the part of the Company to indemnify Mr. Kaplan on this matter. As of this date, no claim for indemnification has been made against the Company and the Company seeks to resolve any issues relating to this matter on an amicable basis without incurring any liability. Failure to resolve this matter could potentially have a material adverse effect on the Company and its business. There is no guarantee that this matter can be resolved on any basis which is favorable to the Company.effect.
ITEM 4:4. MINE SAFETY DISCLOSURES
Not applicable.Applicable.
ITEM 5:5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock $0.001 par value per share, is traded inquoted on the OTC Markets Inc. Pink Current Information Tier (“Pink Sheets”)OTCQB under the trading symbol “KSIX.” Until we“SURG”. The Company’s shares began trading on July 24, 2007,2007.
As of March 1, 2021, there was no public marketwere approximately 1,885 holders of record of our Common Stock. The last reported sales price for our common stock.
OnCommon Stock as reported on the OTCQB on March 31, 2015, the Company effected a 1 for 23 reverse stock split. All share references included herein have been adjusted as if the change took place before the date of the earliest transaction reported.
The following table sets forth the quarterly high and low daily close for our common stock as reported by the OTCBB for the two years ended December 31, 2016 and 2015. The bids reflect inter dealer prices without adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions. There is a very limited market for the Company’s common stock.
Period ended | High | Low | |||||||
December 31, 2016 | $ | 0.450 | $ | 0.050 | |||||
September 30, 2016 | $ | 0.134 | $ | 0.060 | |||||
June 30, 2016 | $ | 0.204 | $ | 0.097 | |||||
March 31, 2016 | $ | 0.450 | $ | 0.060 | |||||
December 31, 2015 | $ | 0.550 | $ | 0.110 | |||||
September 30, 2015 | $ | 0.400 | $ | 0.200 | |||||
June 30, 2015 | $ | 0.750 | $ | 0.050 | |||||
March 31, 2015 | $ | 0.230 | $ | 0.138 |
The Pink Sheets is a quotation service sponsored by the Financial Industry Regulatory Authority (FINRA) that displays real-time quotes and volume information in over-the-counter (“OTC”) equity securities. The Pink Sheets does not impose listing standards or requirements, does not provide automatic trade executions and does not maintain relationships with quoted issuers. A company traded on the Pink Sheets may face loss of market makers and lack of readily available bid and ask prices for its stock and may experience a greater spread between the bid and ask price of its stock and a general loss of liquidity with its stock. In addition, certain investors have policies against purchasing or holding OTC securities. Both trading volume and the market value of our securities have been, and will continue to be, materially affected by the trading on the Pink Sheets.2021 was $0.25.
PennyCommon Stock Considerations
OurEach share of our Common Stock entitles its holder to one vote in the election of each director and on all other matters voted on generally by our stockholders, other than any matter that (1) solely relates to the terms of any outstanding series of preferred stock or the number of shares of that series and (2) does not affect the number of authorized shares of preferred stock or the powers, privileges and rights pertaining to the Common Stock. No share of our Common Stock affords any cumulative voting rights. This means that the holders of a majority of the voting power of the shares voting for the election of directors can elect all directors to be elected if they choose to do so.
Holders of our Common Stock will be “penny stocks”entitled to dividends in such amounts and at such times as that term is generally definedour Board of Directors in its discretion may declare out of funds legally available for the payment of dividends. We currently intend to retain our entire available discretionary cash flow to finance the growth, development and expansion of our business and do not anticipate paying any cash dividends on the Common Stock in the Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00. Our shares thusforeseeable future. Any future dividends will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.
Underpaid at the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or accredited investor must make a special suitability determination regarding the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excessdiscretion of $1,000,000, or annual income exceeding $100,000 individually or $300,000 together with his or her spouse, is considered an accredited investor. In addition, under the penny stock regulations the broker-dealer is required to:our Board of Directors.
If we liquidate or dissolve our business, the holders of our Common Stock will share ratably in all our assets that are available for distribution to our stockholders after our creditors are paid in full and the holders of all series of our outstanding preferred stock, if any, receive their liquidation preferences in full.
Our Common Stock has no preemptive rights and is not convertible or redeemable or entitled to the benefits of any sinking or repurchase fund.
As of March 31, 2021, there were 147,917,608 shares of Common Stock issued and outstanding.
Preferred Stock
Series “A” Preferred Stock
The Company, pursuant to the consent of the Board of Directors filed a Certificate of Designation with the Nevada Secretary of State which designated 10,000,000 shares of the Company’s authorized preferred stock as Series “A” Preferred Stock, par value $0.001. The Series “A” Preferred Stock has the following attributes:
● | ||
● | ||
● | ||
● | The Company does not have any rights of redemption; | |
● | Voting rights equal to ten shares of common stock | |
● | Entitled to same notice of meeting provisions as common stockholders; | |
● | Protective provisions require approval of 75% of the | |
● |
On March 29, 2018, the Company, pursuant to the consent of the Board of Directors, filed a Certificate of Amendment to Certificate of Designation with the Nevada Secretary of State which increased the amount of authorized Series A Preferred Stock from 10,000,000 to 13,000,000.
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sellOn April 11, 2018, the Company issued 3,000,000 shares of Series A Preferred Stock as consideration for the True Wireless, Inc. merger. As discussed in Note 1 to our common stock, which may affectaudited financial statements, the abilityequity of selling shareholders or other holdersthe Company is the historical equity of TW retroactively restated to sell theirreflect the number of shares issued by the Company in the secondary markettransaction. These preferred shares were recorded as a retroactive 2017 transaction as incentive to complete the merger.
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Upon close of the merger, the Company recorded 10,000,000 shares of Series A Preferred Stock as a part of the recapitalization transaction for services previously rendered by the Company’s former Chief Executive Officer and haveChairman of the effectBoard of reducing the levelDirectors.
As of trading activity in the secondary market. These additional sales practiceDecember 31, 2019, and disclosure requirements could impede the saleDecember 31, 2018, there were 13,000,000 and 13,000,000 shares of our securities, if our securities become publicly traded. In addition, the liquidity for our securities may decrease, with a corresponding decrease in the price of our securities. Our shares in all probability will be subject to such penny stock rulesSeries A issued and our shareholders will, in all likelihood, find it difficult to sell their securities.outstanding, respectively.
Recent Sales of Unregistered SecuritiesSeries “C” Convertible Preferred Stock
On June 22, 2018, the Board of Directors approved a Certificate of Designation for Company Series C Convertible Preferred stock, which was filed with the Secretary of State of the State of Nevada on that date. The Certificate of Designations approved the creation of a new series of preferred stock consisting of 1,000,000 shares of Series C Convertible Preferred Stock par value $0.001 (“Series C Preferred Stock”) with an original issue price of $100.00 per share.
The Series “C” Preferred Stock has the following attributes:
● | Ranks junior only to any other class or series of designated and outstanding preferred shares of the Company; | |
● | Bears a dividend per share of Series C Preferred Stock equal to the per share amount (as converted), and in the same form as, the dividend payable to the holders of the Common Stock; | |
● | With respect to such liquidation, dissolution or winding up, the holders of Series C Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Junior Securities but after distribution of such assets among, or payment thereof to holders of any Senior Preferred Stock, an amount equal to the Series C Original Issue Price for each share of Series C Preferred Stock plus an amount equal to all declared but unpaid dividends on Series C Preferred Stock; | |
● | The Company does not have any rights of redemption; | |
● | Voting rights equal to 250 shares of common stock for each share of Series “C” Preferred Stock; | |
● | Entitled to same notice of meeting provisions as common stockholders; | |
● | Protective provisions require approval of 75% of the Series “C” Preferred Shares outstanding to modify the provisions or increase the authorized Series “C” Preferred Shares; and | |
● | Each one Series “C” Preferred Share can be converted into two hundred fifty (250) shares of common stock at the option of the holder. |
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As noted above, each share of Series C Preferred Stock is convertible into 250 shares of Company Common Stock (the same conversion rate utilized in the exchange transaction), but is only convertible on the first to occur of the following events:
(i) | The Volume Weighted Average Price (“VWAP”) of the Company’s Common Stock during any then consecutive trading days is at least $2.00 per share; or | |
(ii) | June 30, 2019. |
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.
During the year ended December 31, 2016,2018, the Company issued 48,400 shares of Series C Preferred in exchange for the conversion of a note payable of $3,000,000 and accrued interest of $24,952.
As discussed in Note 1 to our audited financial statements, on January 17, 2019, the Company announced the completion of an aggregateagreement to acquire a 40% equity ownership of 21,213,469Centercom. Upon execution of the agreement, the Company issued 72,000 shares of Preferred C stock (convertible into 18,000,000 shares of common stock in unregistered transactions. Such issuances included shares soldstock) to investors in transactions not involving a public offering, shares issued as consideration for transactions, shares issued on conversion of debt instrumentsdirector, officer and shares issued to consultants. The pricesminority owner of the shares ranged from $0.05-$0.20 per share.
Company who has a 50% 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 consolidated balance sheets.
During period commencing January 1, 2017 through October 30, 2017,On February 15, 2019, Carter Matzinger elected to exchange outstanding non-interest-bearing debt totaling $389,502 owed by the Company issued an aggregate of 23,563,134into 6,232 shares of common stock in unregistered transactions. Such issuances includedPreferred C stock.
As of December 31, 2020, and December 31, 2019, there were 721,598 shares sold to investors in transactions not involving a public offering, sharesof Series C issued as consideration for transactions, shares issued on conversion of debt instruments and shares issued to consultants. The prices of the shares ranged from $0.05-$0.20 per share.:outstanding, respectively.
Transfer Agent
The sharestransfer agent of common stock were issued in reliance on Section 4(2) promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The shares of common stock issued have not been registered under the Securities Act or under any state securities laws and may not be offered or sold without registration with the United States Securities and Exchange Commission or an applicable exemption from the registration requirements.our Common Stock is VStock Transfer, LLC. Their address is 18 Lafayette Place, Woodmere, NY 11598.
Holders
As of October 30, 2017,March 1, 2021, there arewere approximately 84 shareholders1,885 registered holders of record of the Company’s common stock, including 7,734,920our Common Stock, 3 holders of record of our Series A Convertible Preferred Stock and 4 holders of record of our Series C Convertible Preferred Stock. Since certain shares of our Common Stock are held by CEDE & Co. as nominee.brokers and other institutions on behalf of stockholders, the foregoing number of holders of our Common Stock is not representative of the number of beneficial holders of our Common Stock.
Dividend Policy
The Board of Directors has never declared or paid a cash dividend. At this time, the Board of Directors does not anticipate paying dividends in the future. The Company is under no legal or contractual obligation to declare or to pay dividends, and the timing and amount of any future cash dividends and distributions is at the discretion of our Board of Directors and will depend, among other things, on the Company’s future after-tax earnings, operations, capital requirements, borrowing capacity, financial condition and general business conditions. The Company plans to retain any earnings for use in the operation of our business and to fund future growth.
Securities Authorized for Issuance Under Equity Compensation Plans
The Company does not currently have any equity compensation plans.
Issuer PurchasesUnregistered Sales of Equity Securities
DuringWe have previously disclosed all sales of securities without registration under the quarter ended December 31, 2016, the Company did not purchase any sharesSecurities Act of its common stock.1933.
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ITEM 6:6. SELECTED FINANCIAL DATA
The Company operates as a smaller reporting company and is not required to provide this information.Not applicable.
ITEM 7:7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Disclosure Regarding Forward Looking Statements
This Annual Report on Form 10-K includes forward lookingThe following discussion and analysis should be read in conjunction with our consolidated financial statements (“Forward Looking Statements”). All statements other than statements of historical fact includedand related notes appearing elsewhere in this report are Forward Looking Statements.Annual Report. In the normal course of its business, the Company, in an effortaddition to help keep its shareholdershistorical information, this discussion and the public informed about the Company’s operations, may from time-to-time issue certainanalysis contains forward-looking statements either in writing or orally, that contain or may contain Forward-Looking Statements. Although the Company believes that the expectations reflected in such Forward Looking Statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, pastinvolve risks, uncertainties, and possible future, of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by the Company, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating results. All phases of the Company operations are subject to a number of uncertainties, risks and other influences, many of which are outside the control of the Company and any one of which, or a combination of which, could materially affect the results of the Company’s proposed operations and whether Forward Looking Statements made by the Company ultimately prove to be accurate. Such important factors (“Important Factors”) and other factors could causeassumptions. Our actual results tomay differ materially from the Company’s expectations are disclosedthose anticipated in this report. All prior and subsequent written and oral Forward-Looking Statements attributablethese forward-looking statements as a result of certain factors, including but not limited to the Company or persons acting on its behalf are expressly qualified in their entirety by the Important Factors described below that could cause actual results to differ materially from the Company’s expectations asthose set forth in any Forward Looking Statement made by or on behalf of the Company.
“Part I – Item 1A. Risk Factors.”
Business Overview
SurgePays, incorporated in Nevada on August 18, 2006, is a technology-driven company building a next generation supply chain software platform that offers wholesale goods and services in a cost-efficient manner as an alternative to traditional wholesale supply chain distribution models. We offer goods and services direct to convenience stores, bodegas, minimarts, tiendas and other corner stores, providing goods and services primarily to the underbanked community. Our products are currently distributed nationwide using our direct to store distribution (“DSD”) system that reaches more than 8,000 outlets. We market our products using a range of marketing mediums, including in-store merchandising and promotions, experiential marketing, sales spiffs and incentives, digital marketing and social media, and internal regional salespeople.
HistoricalSurgePays Blockchain Software
SurgePays Blockchain Software is a multi-purpose e-commerce platform offering wholesale goods and services direct to convenience stores, bodegas, minimarts, tiendas and other corner stores providing goods and services primarily to the underbanked community. SurgePays leverages Direct Store Delivery (DSD) and the cost saving efficiencies of e-commerce to provide our customers as many commonly-sold consumable products as possible with a focus on increasing profit margins. These products include herbal stimulants, energy shots, dry foods, CBD products, communication accessories, novelties, PPP products, bagged snacks and food items, automotive parts and many more goods, all through one convenient wholesale e-commerce platform.
Surge Marketplace Software
Surge Marketplace Software allows the merchant to use the portal interface, which is 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 in that it also offers the merchant the ability to order wholesale consumable goods at a discount through the portal with one touch ease. SurgePays is essentially a wholesale e-commerce storefront that offers products direct from manufactures. The goal of the SurgePays Portal is to leverage the competitive advantage and efficiencies of direct e-commerce to provide as many commonly-sold consumable products as possible to convenience stores, all through one convenient wholesale e-commerce platform.
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Electronic Check Services (ECS)
ECS has been a financial technology tech and wireless top-up platform for over 15 years. On October 1, 2019, we acquired ECS primarily for the favorable ACH banking relationship; a fintech transactions platform processing over 20,000 transactions a day at approximately 8,000 independently owned retail stores. The goal was to incorporate our blockchain components into the existing EGS network. After a year of development and integration, we believe the ECS platform has been successfully merged into our platform with secure ledger data backups and will continue to serve as the proven backbone for wireless top-up transactions and wireless product aggregation.
LocoRabbit Wireless
LocoRabbit Wireless offers prepaid wireless plans with talk, text, and 4G LTE data at prices that are lower than direct competitors. Available nationwide, LocoRabbit Wireless is sold online direct to consumers and by a nationwide network of convenience stores, gas stations, mini-marts, bodegas and tiendas connected to the SurgePays software platform. Due to our wireless payment platform, SurgePays is able to exclusively offer an industry high commission to the retailer for top-ups paid monthly at the client’s store.
True Wireless
True Wireless is licensed through the FCC to provide Lifeline Service (subsidized wireless service to qualifying low-income customers) in five (5) states. Utilizing the T-Mobile backbone, True Wireless provides discounted and free wireless service to veterans and other disadvantaged customers who qualify for certain federal programs such as SNAP (EBT) and Medicaid.
Surge Logics
Surge Logics, Inc. is wholly owned subsidiary that operates as a performance-driven marketing firm focused on the mass tort industry for attorneys and law firms. We primarily perform client acquisition and retention services for attorneys and law firms by operating highly-scalable digital marketing campaigns, called performance campaigns, using our proprietary technology and data-driven analytics. These performance campaigns, and the related follow-up by our experienced in-house team, enable our attorney and law firm advertising clients to more effectively and economically connect with potential clients they are seeking to represent in existing or planned litigation. Our proven strategy of delivering cost-effective lead acquisitions and retained cases to our attorney and law firm clients means those clients are better able to manage their media and advertising budgets and reach targeted audiences more quickly and effectively.
Our customized performance campaign offers are targeted at clients interested in completing signed retainers. The first step is to understand the specific criteria of our client. After this, we proceed to generate consumer traffic to our digital media platforms or our clients’ media platforms. Although there is no assurance of generating revenue from this move, we go all the way, bearing all the costs and risks involved. When we use our resources in acquiring consumer traffic, we want to help our clients amass cost-effective retained cases effectively. This, in turn, guarantees maximum profit margins for them.
Centercom
On January 17, 2019, we announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global, S.A. de C.V. (“Centercom”). Centercom is a dynamic operations center currently providing sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Our Centercom team is based in El Salvador. Anthony N. Nuzzo, a director and officer and the holder of approximately 10% of our voting equity has a controlling interest in Centercom Global. Centercom also provides call center support for various third-party clients.
The accompanying consolidated financial statementsstrategic partnership with Centrecom as of December 31, 2016a bilingual operations hub has powered our growth and December 31, 2015revenue. Centercom has been built to support the infrastructure required to rapidly scale in synergy and forefficiency to support our sales growth, customer service and development.
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Centercom manages or supports the years then ended includes the accounts of Ksix and its wholly owned subsidiaries during the period owned by Holdings. Historical operations include the operations of the Company and its subsidiaries from the respective dates of acquisition to the year-end periods referred to above, as follows:following processes:
Sales and Contract Processing; | ||
Customer Service and Support; | ||
Software Development and Integration; | ||
| ||
● | Data Processing and Programming; | |
● | Multimedia and Graphic Design Services; | |
● | Email and Live Chat Support; | |
● | Merchant Support and Onboarding; and | |
● | Lead Generation and Live Transfer. |
Pro forma
The pro forma amounts below, for the year ended December 31, 2015, include the results of operations of the Company and its subsidiaries and the operation of DIQ, as if the acquisition had occurred on January 1, 2015.
COMPARISON OF YEARSYEAR ENDED DECEMBER 31, 20162020 AND 20152019
Revenues and cost of revenue forduring the years ended December 31, 20162020 and 20152019 consisted of the following:
Years ended December 31, | Pro Forma | |||||||||||
2016 | 2015 | 2015 | ||||||||||
Revenue | $ | 3,296,747 | $ | 2,832,853 | $ | 6,553,807 | ||||||
Cost of revenue | 2,328,467 | 2,332,194 | 5,273,497 | |||||||||
Gross profit | $ | 968,280 | $ | 500,659 | $ | 1,280,310 |
2020 | 2019 | |||||||
Revenue | $ | 54,406,788 | $ | 25,742,941 | ||||
Cost of revenue (exclusive of depreciation and amortization) | 51,938,111 | 22,623,521 | ||||||
Gross profit | $ | 2,468,677 | $ | 3,119,420 |
Revenue increased $28,663,847 (111%) primarily as a result of the increase of the ECS revenues of $24,094,753 and costan increase of revenue$9,195,691 in revenues from Surge Logics offset by subsidiary isdecreases of $3,044,411 in True Wireless, Inc. and $3,697,947 in Surge Blockchain LLC. Gross profit decreased by $650,743 (21%) primarily as follows:
Years ended December 31, | Pro Forma | |||||||||||
2016 | 2015 | 2015 | ||||||||||
Revenue | ||||||||||||
DIQ | $ | 2,143,652 | $ | 587,891 | $ | 4,308,845 | ||||||
KSIX | 1,149,198 | 2,014,359 | 2,014,359 | |||||||||
BLVD | 3,897 | 230,603 | 230,603 | |||||||||
$ | 3,296,747 | $ | 2,832,853 | $ | 6,553,807 | |||||||
Cost of revenue | ||||||||||||
DIQ | 1,723,301 | 915,092 | 3,856,395 | |||||||||
KSIX | 603,986 | 1,338,588 | 1,338,588 | |||||||||
BLVD | 1,180 | 78,514 | 78,514 | |||||||||
$ | 2,328,467 | $ | 2,332,194 | $ | 5,273,497 | |||||||
Gross profit | ||||||||||||
DIQ | 420,351 | (327,201 | ) | 452,450 | ||||||||
KSIX | 545,212 | 675,771 | 675,771 | |||||||||
BLVD | 2,717 | 152,089 | 152,089 | |||||||||
$ | 968,280 | $ | 500,659 | $ | 1,280,310 |
KSIX provides performance based marketing solutions to drive traffic and conversions within a Cost-Per-Lead (“CPL”) business model. KSIX works directly with advertisers and other networks to promote advertiser campaigns through their affiliates. KSIX’ revenues represented 35% of 2016 consolidated revenues and 71% of 2015 consolidated revenues. On a pro forma basis KSIX represented 31% of 2015 consolidated proforma revenues. KSIX revenues declined $865,161 (43%) in 2016 from the 2015 amount due to a shift in advertisers and affiliates to drive leads.
BLVDworked with online games and web publishers utilizing its proprietary Offer Wall that promoted hundreds of different advertiser’s campaigns on a single web page. Historically BLVD revenues amounted to 0% of 2016 consolidated revenues and 8% of 2015 consolidated revenues. On a pro forma basis BLVD represented 3% of 2015 consolidated pro forma revenues. BLVD revenues declined $226,706 (98%) in 2016 from the 2015 amount. The decline in BLVD revenues is primarily the result of a switchdecreases in demandgross profit of $201,847 in True Wireless, Inc. and $765,572 of Surge Blockchain LLC that offset the gross profit gains from desktop games to mobile games and Effective April 1, 2016, the Company temporarily suspended its BLVD business operations and is reviewing a potential discontinuationincreased revenues of the business.
DIQ is a full service digital advertising agency specializing in survey generation and landing page optimization specifically designed for mass tort action lawsuits. DIQ revenues represented 65% of 2016 consolidated revenues and 21% of 2015 consolidated revenues. On a pro forma basis, DIQ represented 66% of 2015 consolidated pro forma revenues. DIQ revenue declined $2,165,193 (50%) in 2016 from the 2015 pro forma amount due to the loss of a major advertiser.
Cost of revenue for DIQ was 80.8%, 155.7% and 89.5% for 2016 historical, 2015 historical and 2015 pro forma, respectively. Cost of revenue for KSIX was 52.6%, 66.5% and 66.5% for 2016 historical, 2015 historical and 2015 pro forma, respectively. Cost of revenue for BLVD was 30.3%, 34.0% and 34.0% for 2016 historical, 2015 historical and 2015 pro forma, respectively. During the shortened historical period for DIQ, the Company experienced a learning curve when taking over the new operation which resulted in the cost exceeding the revenue.other subsidiaries.
Costs and expenses during the years ended December 31, 20162020 and 2015 were as follows:2019 consisted of the following:
Years ended December 31, | Pro Forma | |||||||||||||||||||
2016 | 2015 | 2015 | ||||||||||||||||||
2020 | 2019 | |||||||||||||||||||
Depreciation and amortization | $ | 433,118 | $ | 501,091 | $ | 928,777 | $ | 1,173,369 | $ | 227,322 | ||||||||||
Asset impairment | 372,706 | - | - | |||||||||||||||||
Selling, general and administrative | 3,269,270 | 1,320,535 | 2,350,850 | |||||||||||||||||
Selling, general and administration | 11,440,976 | 10,660,126 | ||||||||||||||||||
Total | $ | 4,075,094 | $ | 1,821,626 | $ | 3,279,627 | $ | 12,614,345 | $ | 10,887,448 |
Depreciation and amortization in 2016 and 2015 isincreased $946,047 primarily the amortization of intangible assets which commenced December 23, 2014 (Ksix Media, Inc. and BLVD) and October 12, 2015 (DIQ), when acquired. Depreciation and amortization in 2016 amounted to $433,118 as compared to $501,091 in the 2015 historical period. Amortization for DIQ in 2015 amounted to $118,373. After completing the appraisal, the DIQ amortization for 2016 was $137,346. This amount was reduced by $88,270 which is the amount the 2015 amortization declined as a result of the appraisal. Accordingly,addition of the net expenseECS assets. The asset purchase agreement dated September 27, 2019 created an intangible asset. The amortization of this was recorded for a full year in 2016 associated with DIQ amortization was $49,076.
The Company determined to not continue the operations of BLVD2020 and only 3 month in 2016 temporarily. In addition, due to declining cash flow, the Company impaired the remaining net intangible assets of $372,706 associated with its KSIX, LLC and BLVD operations.2019.
Selling, general and administrative expenseexpenses during the years ended December 31, 20162020 and 2015 is as follows:2019 consisted of the following:
2020 | 2019 | |||||||
Contractors and consultants | $ | 2,170,279 | $ | 2,134,202 | ||||
Professional services | 1,043,459 | 1,761,292 | ||||||
Compensation | 3,605,624 | 1,895,932 | ||||||
Webhosting/internet | 683,276 | 651,370 | ||||||
Advertising and marketing | 273,031 | 1,116,046 | ||||||
DRIP fees | - | 547,000 | ||||||
Bad debt expense | 1,750,239 | 985,633 | ||||||
Other | 1,915,068 | 1,568,651 | ||||||
Total | $ | 11,440,976 | $ | 10,660,126 |
Years ended December 31, | Pro Forma | |||||||||||
2016 | 2015 | 2015 | ||||||||||
Payroll and payroll taxes | $ | 508,697 | $ | 519,633 | $ | 671,777 | ||||||
Outside contractors and consultants | 1,485,099 | 261,654 | 869,630 | |||||||||
Bad debt expense | 36,954 | 97,406 | 202,496 | |||||||||
Officer compensation | 451,913 | 39,219 | 39,219 | |||||||||
Professional services | 435,732 | 121,838 | 153,389 | |||||||||
Webhosting and internet | 100,420 | 51,200 | 54,123 | |||||||||
Advertising and marketing | 73,924 | 36,601 | 36,601 | |||||||||
Insurance | 44,345 | 44,403 | 44,816 | |||||||||
Dues and subscriptions | 32,091 | 24,466 | 32,924 | |||||||||
Rent | 20,490 | 24,698 | 33,746 | |||||||||
Other | 79,605 | 99,417 | 212,129 | |||||||||
Total | $ | 3,269,270 | $ | 1,320,535 | $ | 2,350,850 |
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Selling,general and administrative costs (S, G & A) increased by $780,850 (7%). The 2020 period includes $554,386 in expenses increased $1,948,735 in 2016 as compared to 2015, due tofor the short period DIQ was ownedECS companies that are not included in the 2015 year. On a proforma basis, selling, general and administrative expense increased $918,420 (39.0%) in 2016 as compared to 2015.2019 expenses. The following explains thedetail changes in specific expenses from 2015 to 2016on a pro forma basis.are discussed below:
● | ||
● | Professional services | |
● | ||
● | Webhosting/internet costs increased less than 5% to $683,276 in 2020 from $651,370 in 2019. | |
● | Distributive Resolution & Integration Program (“DRIP”) fees decreased from $547,000 in 2019 to $0 in 2020, as a result of the Company terminating a DRIP with the Asian American Trade Association to provide products and services for up to 40,000 locations in 2019. The DRIP fees were a one-time location activation fee. | |
● | Advertising and marketing costs | |
● | Bad debt expense increased to $1,750,239 in | |
● | Other costs increased to $1,915,068 in 2020 from $1,568,651 in 2019 primarily | |
Other (expense) income (expense) during the years ended December 31, 20162020 and 2015 is as follows:2019 consisted of the following:
Years ended December 31, | Pro Forma | |||||||||||
2016 | 2015 | 2015 | ||||||||||
Interest expense | $ | (1,660,338 | ) | $ | (15,201 | ) | $ | (15,201 | ) | |||
Other income | 5,844 | 65 | 65 | |||||||||
Change in fair value of derivatives | 268,236 | - | - | |||||||||
Loss on debt settlement | (107,104 | ) | - | - | ||||||||
Total | $ | (1,493,362 | ) | $ | (15,136 | ) | $ | (15,136 | ) |
2020 | 2019 | |||||||
Interest, net | $ | (3,383,996 | ) | $ | (227,016 | ) | ||
Change in fair value of derivative liability | 577,936 | 4,013 | ||||||
Derivative expense | (566,789 | ) | - | |||||
Gain on equity investment in Centercom | 210,912 | 25,192 | ||||||
Gain (loss) on settlement of liabilities | 2,575,979 | (481,187 | ) | |||||
Other income | 10,000 | - | ||||||
$ | (575,958 | ) | $ | (678,998 | ) |
Interest expense increased to $1,660,338$3,383,996 in 20162020 from $15,201$227,016 in 2015.2019 primarily due to an increase in total borrowings.
During the year ended December 31, 2020, the Company identified certain embedded features within its borrowings that required the Company to classify the features as derivative liabilities. The 2016 amount includes $163,788Company recognized a change in interest accrued on notes payable and long-term debt and $30,000fair value in loan penalty. The remaining $1,466,5502020 of $577,936. In addition, the Company recorded a derivative expense of $566,789 which represents the amortization of loan costsdebt discount and debt discounts associated withderivative features that exceed the derivative liabilities which are determined from the Company’s convertible debt.
Other income in 2016 represents the recovery of a bad debt written off in 2015.
The change inface value of derivatives occurredthe notes. The increase in 2016 forderivative expense is the first time when the Company issued convertible debt which resultedresult of additional borrowings in recording2020 with a derivative liability. The change results from revaluing the derivative at the quarterly balance sheet dates.
The loss on debt settlement arose in 2016 when the Company issued common stock for convertible notes payable.default note conversion trigger.
The gain on equity investment in Centercom of $210,912 in 2020 compared to $25,192 in 2019.
During 2019, the Company settled outstanding liabilities through the issuance of 875,000 shares of Common Stock and recorded a loss on settlement of $481,187. During 2020, the Company settled outstanding liabilities through the issuance of 8,150,000 shares of Common Stock and recorded a gain on settlement of $2,556,979.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
The Company is presently financing its cash needs through private sales of equity and long-term debt. The Company is also attempting to restructure its existing debt. There is no guarantee that these efforts will be successful in part or at all. The Company is in a growth mode, which results in increasing receivables and intermittent cash shortages. On October 12, 2015, the Company acquired DigitizeIQ, LLC, which had a total of $1,000,000 in cash requirements over the subsequent 150 days. As of December 31, 2016, the Company has made $515,000 of the required payments and still owes $485,000. The Company is negotiating with the seller of DIQ to reduce and restructure these payments.
At December 31, 20162020 and 2015,2019, our current assets were $758,837$1,251,029 and $346,043,$3,574,885, respectively, and our current liabilities were $4,059,894$15,306,509 and $2,597,008,$7,054,124, respectively, which resulted in a working capital deficit of $3,301,057$14,055,480 and $2,250,965,$3,479,239, respectively. The decrease in current assets is a result of recognizing bad debt expense to write off uncollectible accounts receivable. The increase in current liabilities is the result of incurring additional debt in 2020 with payment terms less than one-year.
Total assets at December 31, 20162020 and 20152019 amounted to $2,357,246$7,325,071 and $2,626,823,$9,986,373, respectively. The decrease in total assets is a result of recognizing bad debt expense to write off uncollectible accounts receivable. At December 31, 2016,2020, assets consisted of current assets of $758,837,$1,251,029, net property and equipment of $14,432,$236,810, net intangible assets of $217,195,$4,125,742, goodwill of $866,782, equity investment in Centercom of $414,612, and $500,000 in deposits on investments,operating lease right of use asset of $368,638, as compared to current assets of $346,043,$3,574,885, net property and equipment of $14,422 and$294,616, net intangible assets of $2,266,358$4,769,117, goodwill of $866,782, equity investment in Centercom of $203,700 and operating lease right of use asset of $210,816 at December 31, 2015.2019. The operating lease right of use increased related to a new lease acquired in the ECS assets purchase agreement.
At December 31, 2016,2020, our total liabilities of $4,172,295$18,051,037 increased $938,725 (29.0%)$3,365,049 from $3,233,570$14,685,988 at December 31, 2015.2019. The increase primarily consists of the new derivative liability of $584,168.Company entered into several promissory notes during 2020, creating additional debt in 2020 over 2019.
At December 31, 2016,2020, our total stockholders’ deficit was $(1,815,049)$10,725,966 as compared to stockholders’ deficit of ($606,747)$4,699,615 at December 31, 2015.2019. The principal reason for the decreaseincrease in stockholders’ equitydeficit was the operatingimpact of the net loss incurred partiallyof $10,721,626 offset by common stock issued.equity issuances during 2020.
We believe we will continue to incur net losses and do not expect positive cash flows from operations until the 4th quarter of 2021. At that time, we believe the impact of COVID-19 will have rescinded enough to allow us to fully implement our sales strategy, resulting in increased revenue in all segments of our business.
The following table sets forth the major sources and uses of cash for the years ended December 31, 20162020 and 2015.2019.
2020 | 2019 | |||||||
Net cash used in operating activities | $ | (4,348,048 | ) | $ | (6,533,141 | ) | ||
Net cash used in investing activities | 8,354 | (32,241 | ) | |||||
Net cash provided by financing activities | 4,645,649 | 6,466,810 | ||||||
Net change in cash and cash equivalents | $ | 327,955 | $ | (98,572 | ) |
2016 | 2015 | |||||||
Net cash used in operating activities | $ | (641,877 | ) | $ | (224,521 | ) | ||
Net cash provided by (used in) investing activities | (503,000 | ) | 18,331 | |||||
Net cash provided by financing activities | 1,139,097 | 237,862 | ||||||
Net change in cash and cash equivalents | $ | (5,780 | ) | $ | 31,672 |
As a result of increased financing activities in 2020, the cash increased in 2020 by $327,955.
At December 31, 2016,2020, the Company had the following material commitments and contingencies.
AcquisitionsNotes payable – related party –- See Note 138 to the Condensed Consolidated Financial Statements.
Notes payable and long-term debt- $1,954,275 ($107,500 in related party debt), See Notes 8 andNote 9 to the Condensed Consolidated Financial Statements.
Accounts payable and accrued expenses - $775,624.
Advances from relatedConvertible promissory notes - See Note 10 to the Condensed Consolidated Financial Statements.
Related party transactions - $356,502See Note 15 to the Condensed Consolidated Financial Statements.
Cash requirements and capital expenditures– TheAt the current level of operations, the Company will be requiredhas to make a cash payment of $1,500,000borrow funds to close the acquisition of True Wireless, LLC as set forth in Note 13 to the Consolidated Financial Statements. In addition, the majority of the Company’s debt is past due and substantial additional cash will be required.meet basic operating costs.
Known trends and uncertainties– The Company is planning to acquire other businesses that arewith similar to itsbusiness operations. The uncertainty of the economy may increase the difficulty of raising funds to support the planned business expansion.
Evaluation of the amounts and certainty of cash flows – In 2016, sales declined $3,257,060 (49.8%) from the 2015 pro forma amount. The loss of a major customer during the second quarter of 2015 reduced cash flows from operations. The Company acquired DIQ in October 2015, which had a requirement for net cash payments of $100,000 in October 2015 plus $750,000 in notes due over the 150 days following the acquisition. There can be no assurance that the Company will be able to replace the lost business, become proficient in operating its new business or be able to fund operations in the future.
Going Concern – Our financial statements have been presented on the basis that we continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, we incurred a net operating loss in the years ended December 31, 2016 and 2015. These factors create an uncertainty about our ability to continue as a going concern.The Company projects that it needs to raise $1-1.5 million of new capital investment in the short term, restructure literally all of its current debt and complete its acquisition of TW in order to reach a level of minimal viability. If these goals can be achieved in the next 90 days, management believes that the Company could achieve positive cash flow by the end of the 2nd quarter of 2018 (June 30, 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 is constantly seeking new investment from a variety of sources, debt, equity and hybrid. Additionally, the Company believes that it is moving toward the closing of the acquisition of TW. There are no guarantees that any of this will be achieved andthe Company’s ability to continue as a going concern is dependent on the success of these plans.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are described in Note 2 of the Consolidated Financial Statements. During the year ended December 31, 2016, we were required to make material estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue and expenses as a result of the acquisitions completed during the year. The estimates will require us to rely upon assumptions that were highly uncertain at the time the accounting estimates are made, and changes in them are reasonably likely to occur from period to period. Changes in estimates used in these and other items could have a material impact on our financial statements in the future. Our estimates will be based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.
ITEM 7A:7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates as a smaller reporting company and is not required to provide this information.Not applicable.
ITEM 8:8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Our management has determined has determined that, as of December 31, 2020, the Company’s disclosure controls are effective but the Company lacks segregation of duties similar to other companies our size.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table and biographical summaries set forth information, including principal occupation and business experience, about our directors and executive officers as of the date of this Form 10-K:
Directors and Executive Officers | Position/Title | Age | ||
Kevin Brian Cox | Chief Executive Officer and Chairman | 45 | ||
Anthony P. Nuzzo, Jr. | President and Director | 51 | ||
Anthony Evers | Chief Financial Officer | 57 | ||
David C. Ansani | Chief Administrative Officer | 55 | ||
Carter Matzinger | Chief Strategic Officer | 46 | ||
David N. Keys | Independent Director | 64 | ||
David May | Independent Director | 52 | ||
Jay Jones | Independent Director | 43 |
Kevin Brian Cox – Chief Executive Officer and a Director – Mr. Cox has been Chief Executive Officer and a Director since July 2017. He also served as Chief Financial Officer of the Company from July 2017 to March 2018 and as President of the Company from July 2017 to February 2019. He was the majority owner of True Wireless from January 2011 through April 2018, when True Wireless became a wholly owned subsidiary of the Company. He became CEO of True Wireless on January 2011 and served in this capacity until December 2, 2018. Mr. Cox got his start in telecom in 2004 when he founded his first telephone company (CLEC). Through organic growth and acquisition, he ran 3 CLECs providing service to 200,000 residential subscribers and became the largest prepaid home phone company in the country before selling in 2009. Mr. Cox is a minority partner, investor and or stakeholder in several other technology companies including telecom, wireless and network transactions and has realized over $550,000,000 in sales from companies he has founded or acquired. Mr. Cox graduated from Murray State University with a B.A. in Economics.
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Anthony P. Nuzzo Jr. – President , Chief Operating Officer and Director – Mr. Nuzzo has been the Chief Operating Officer and a director of the Company since July 2017. In February 2019, he was appointed President of the Company. In 1991 Mr. Nuzzo formed Nuzzo Enterprises, Inc. d/b/a Jackson Hewitt Tax Service, a tax franchise, and successfully expanded the company to include twenty-two locations spread over six counties in Chicago, IL and the Syracuse, NY area. In June 2003, Mr. Nuzzo became one of five co-founders and Managing Members to successfully launch Leading Edge Recovery Solutions, LLC., which, in 2008, was ranked 21st in the U.S. within the Financial Services Industry by the Inc. 500 Fastest Growing Private Companies Annual Publication received the honor of Inc. 500 Fastest Growing Private Companies Annual Publication being Ranked 346 overall by Inc. In 2009, Mr. Nuzzo left for a new challenge and purchased Glass Mountain Capital, LLC. Mr. Nuzzo set out to create an Accounts Receivable Management company that focused on helping the consumer while achieving goals set by the clients. In early 2017, Mr. Nuzzo successful launched a near shore BPO, Centercom Global, BPO in Central America. Centercom will give all clients a near shore option that will drive down costs and build efficiencies. Mr. Nuzzo received his B.A. from Kennesaw State University.
David C. Ansani – Secretary and Chief Administrative Officer – Mr. Ansani has been Chief Administrative Officer since August 2017, and was a Director until February 2021. He was also appointed Secretary of the Company in February 2019. From 2010 to the present date, he has served as Chief Compliance Officer/Human Resources Officer/In-House Counsel for Glass Mountain Capital, LLC, a start-up financial services company specializing in the recovery of distressed assets. In this capacity, he reviews and evaluates compliance issues and concerns within the organization. The position ensures that management and employees are in compliance with applicable laws, rules and regulations of regulatory agencies (FDCPA, TCPA, GLB, CFPB, etc.); that company policies and procedures are being followed; and that behavior in the organization meets the company’s standards of conduct. Ms. Ansani received his B.A. and MBA from the University of Chicago, and J.D. from the Chicago-Kent College of Law.
Anthony Evers – Chief Financial Officer – Mr. Evers has been the Chief Financial Officer of the Company since May 1, 2020. Prior to joining the Company, Mr. Evers served as Chief Financial Officer for Vista Health System from October 2019 to March 2020. Between June 2019 and October 2019, Mr. Evers served as CFO of Santa Cruz Valley Regional Hospital. Between 2015 and 2019, Mr. Evers served as CFO and CIO of KSB Hospital. Prior to that, he served as CFO of various organizations, including Norwegian American Hospital and Horizon Homecare and Hospice. During his career, Mr. Evers has been the financial lead in over 20 merger and divesture transactions ranging from a single physician practice to multi-entity nursing homes. Throughout his career, Mr. Evers has served on numerous boards of directors, including Wheaton Franciscan Healthcare, Covenant Healthcare, All Saints Health System, Rogers Hospital, and the Animal Shelter in Beaver Dam WI. He has also served as a member of the Dixon Illinois Chamber of Commerce. Mr. Evers has also served as the audit and finance committee chair at several of these organizations. Mr. Evers obtained his Bachelors of Business Administration in Finance and Masters of Science in Accounting from University of Wisconsin-Whitewater. Mr. Evers also successfully obtained his Certified Public Accountant and Certified Internal Auditor credentials.
Carter Matzinger – Chief Strategic Officer - Mr. Matzinger is the Chief Strategic Officer of the Company, and served as Chief Executive Officer and Chief Financial Officer of the Company from April 2015 to July 2017. He remains an employee of the Company and as President of Surge Logics, a wholly owned subsidiary of the Company. He has over 18 years of diverse experience including working with many Fortune 500 companies including: The Limited, CompuServe, Goodyear Tire, and Amoco. For the past nine years, Mr. Matzinger has worked in the field of online marketing and has specialized in building large affiliate networks. He works closely with online advertisers and advertising networks to expand the reach of profitability of the Company. His experience in search engine optimization, list management, and pay-per-click advertising provides a vast network of relationships and industry expertise. Mr. Matzinger is the co-founder and President of Blvd Media Group, LLC (now Surge Blockchain, LLC), and KSIX LLC. Mr. Matzinger is a graduate of the University of Utah in 1997 B.A. in Business Administration.
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David N. Keys – Director.- Mr. Keys has been a director of the Company since July 2019. Mr. Keys began his career with Deloitte serving in the audit group in the Las Vegas and New York City executive offices. David was the Executive Vice President, CFO and member of the executive committee of the Board of Directors of American Pacific, a chemical company that was publicly traded on the NASDAQ for the entirety of the time he was a director and executive officer. Since 2004, Mr. Keys has been an independent financial and operations consultant. Mr. Keys currently serves as Chairman of the Board and Audit Committee of RSI International Systems Inc. (TSXV: RSY), and on the Board of private companies, including Prosetta Biosciences Inc., Akonni Biosystems Inc., Walker Digital Table Systems, LLC, and Coast Flight Training and Management Inc. He previously served on the Boards of Directors of AmFed Financial Inc., Norwest Bank of Nevada and Wells Fargo Bank of Nevada. Mr. Keys also served on the Advisory Board of Directors of FM Global, a leading provider of property and casualty insurance. Mr. Keys is a Certified Public Accountant (CPA), Certified Valuation Analyst (CVA), Certified Management Accountant (CMA), Chartered Global Management Accountant (CGMA), Certified Information Technology Professional (CITP), Certified in Financial Forensics (CFF), and Certified in Financial Management (CFM). David is a member of the National Roster of Neutrals of the American Arbitration Association. He received a Bachelor of Science in accounting from Oklahoma State University.
The Financial StatementsDavid May – Director - David combines over 27 years of Ksix Mediaexperience in commercial banking. Mr. May has been involved with both community banks and large regional banks as a bank officer. Since 2007 he has served as Senior Vice President, Commercial Banking at Landmark Community Bank, a billion-dollar Memphis based commercial bank. Additionally, from 2000 to 2007, he served as Chairman of the Board for the Agency for Youth and Family Development, a residential treatment facility for adolescent males. Mr. May is also a founding member of Global Defense Specialists, a military aircraft fleet sustainment company specializing in Lockheed F-16’s and C-130’s as well as Northrop F-5 jet fighters. He has an undergraduate degree from Memphis State University and is a graduate of the Southeastern School of Commercial Banking at Vanderbilt University
None of the above directors and executive officers has been involved in any legal proceedings as listed in Regulation S-K, Section 401(f), except as follows:
On November 20, 2018, the Oklahoma Corporation Commission (the “OCC”) entered a Final Order Approving Consent Decree (the “Order”) regarding the operations of True Wireless Inc. (our wholly-owned subsidiary) as a wireless telecommunications provider in Oklahoma. This Order finalized a settlement resolving violations of the OCC’s rules governing the marketing of subsidized wireless telecommunications services from mobile locations (i.e., other than from brick and mortar locations). As part of that settlement, True Wireless agreed to restructure its management team to shift regulatory compliance and managerial responsibilities to other persons whose focus is on the day-to-day operations of True Wireless. As of December 7, 2018, Mr. Cox had resigned as an officer, director and manager of True Wireless. Mr. Cox is not an employee of True Wireless and does not participate in any of our or its subsidiaries’ operations in Oklahoma. Mr. Cox was expressly permitted by the settlement to remain as CEO of the Surge Holdings, Inc. together(now known as SurgePays, Inc.), the parent of True Wireless.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Board Composition, Committees, and Independence
Audit Committee. We intend to establish an audit committee, which will consist of independent directors. The audit committee’s duties would be to recommend to our board of directors the engagement of independent auditors to audit our financial statements and to review its accounting and auditing principles. The audit committee would review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee would at all times be composed exclusively of directors who are, in the opinion of our board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
Compensation Committee. Our board of directors does not have a standing compensation committee responsible for determining executive and director compensation. Instead, the entire board of directors fulfills this function, and each member of the Board participates in the determination. Given the small size of the Company and its Board and our limited resources, locating, obtaining and retaining additional independent directors is extremely difficult. In the absence of independent directors, the Board does not believe that creating a separate compensation committee would result in any improvement in the compensation determination process. Accordingly, the board of directors has concluded that the Company and its stockholders would be best served by having the entire board of directors’ act in place of a compensation committee. When acting in this capacity, the Board does not have a charter.
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In considering and determining executive and director compensation, our board of directors’ reviews compensation that is paid by other similar public companies to its officers and takes that into consideration in determining the compensation to be paid to our officers. The board of directors also determines and approves any non-cash compensation to any employee. We do not engage any compensation consultants to assist in determining or recommending the compensation to our officers or employees.
Code of Ethics
Our Board of Directors has not adopted a Code of Business Conduct and Ethics.
Term of Office
Our directors are appointed at the annual meeting of shareholders and hold office until the annual meeting of the shareholders next succeeding his or her election, or until his or her prior death, resignation or removal in accordance with our bylaws. Our officers are appointed by the Board and hold office until the annual meeting of the Board next succeeding his or her election, and until his or her successor shall have been duly elected and qualified, subject to earlier termination by his or her death, resignation or removal.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports thereon of Paritz & Co., P.A.beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish us with copies of all reports filed by them in compliance with Section 16(a). To our knowledge, based solely on a review of reports furnished to it, our officers, directors and ten percent holders have made the required filings
Involvement in Certain Legal Proceedings
To the best of our knowledge, other than as described above, none of our directors or executive officers has, during the past ten years:
● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
● | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; | |
● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; | |
● | been found by a court of competent jurisdiction in a civil action or by the SEC Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
● | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
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● | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation for our Chief Executive Officer and all other of our executive officers and any of our employees whose cash compensation exceeded $100,000 for the years ended December 31, 20162020 and December 31, 2015, is set forth as follows:2019.
Annual Compensation | Long-Term Compensation(3) | |||||||||||||||||||||||||||
Name and | Restricted | Securities | ||||||||||||||||||||||||||
Principal | Salary | Bonus | Other Annual | Stock | Underlying | Total | ||||||||||||||||||||||
Position | Year | (1) | (2) | Compensation | Awards | Options | Compensation | |||||||||||||||||||||
Carter Matzinger | 2020 | $ | 122,738 | $ | 60,000 | $ | 4,472 | $ | — | $ | — | $ | 187,210 | |||||||||||||||
Chief Strategic Officer | 2019 | $ | 122,738 | $ | 2,500 | $ | 2,679 | $ | — | $ | — | $ | 127,917 | |||||||||||||||
Kevin Brian Cox | 2020 | $ | 250,000 | $ | — | $ | 30,727 | $ | — | $ | — | $ | 280,727 | |||||||||||||||
CEO and Director | 2019 | $ | 67,708.35 | $ | — | $ | 26,524 | $ | — | $ | — | $ | 94,233 | |||||||||||||||
David C. Ansani | 2020 | $ | 250,979 | $ | — | $ | 11,587 | $ | — | $ | — | $ | 262,566 | |||||||||||||||
Chief Administrative Officer | 2019 | $ | 212,658 | $ | — | $ | 12,832 | $ | — | $ | — | $ | 225,490 | |||||||||||||||
Anthony Evers(4) | 2020 | $ | 225,092 | $ | — | $ | 12,033 | $ | — | $ | — | $ | 237,125 | |||||||||||||||
CFO | 2019 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Anthony P. Nuzzo | 2020 | $ | 323,333 | $ | — | $ | 21,698 | $ | — | $ | — | $ | 345,032 | |||||||||||||||
President and Director | 2019 | $ | 55,208 | $ | — | $ | 11,738 | $ | — | $ | — | $ | 66,946 |
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(1) | Management base salaries can be increased by our Board of Directors based on the attainment of financial and other performance guidelines set by our management. | |
(2) | Salaries listed do not include annual bonuses to be paid based on profitability and performance. These bonuses will be set, from time to time, by a disinterested majority of our Board of Directors. No bonuses will be set until such time as the aforementioned occurs. | |
(3) | We plan to adopt an Equity Incentive Plan (the “Incentive Plan”) for both management and strategic consultants following the Offering and intends to seek stockholder approval of the Incentive Plan. The Incentive Plan is expected to include incentive stock options, non-qualified stock options, or stock bonuses. In addition, we anticipate executing long-term employment contracts with both senior management and strategic contractors, along with other members of the future management team, during the 2021 calendar year. It is anticipated these management agreements will contain compensation terms that could include a combination of cash salary, annual bonuses, insurance and related benefits, matching IRA contributions, restricted stock awards based upon longevity and management incentive stock options. | |
(4) | Mr. Evers joined us as Chief Financial Officer effective May 1, 2020 |
Equity Incentive Plan
We plan to adopt, in 2021, an Incentive Plan to authorize the issuance of shares of Common Stock pursuant to options or shares of Common Stock granted pursuant to the Incentive Plan. The terms and conditions of any options granted, and the terms and conditions of any stock issued, including the price of the shares of Common Stock issuable on the exercise of vested options, will be governed by the provisions of the Incentive Plan and any agreements with the Incentive Plan participants.
Pursuant to the Incentive Plan, awards may be in the form of Incentive Stock Options, Non-Qualified Stock Options, or Stock Bonuses.
IndexIncentive Stock Options
All of our employees will be eligible to receive Incentive Stock Options pursuant to the Incentive Plan as may be determined by the Compensation Committee which, once established, will administer the Incentive Plan.
Options granted pursuant to the Incentive Plan terminate at such time as may be specified when the option is granted.
The total fair market value of the shares of Common Stock (determined at the time of the grant of the option) for which any employee may receive options which are first exercisable in any calendar year may not exceed $100,000.
In the discretion of the Compensation Committee, once established, options granted pursuant to the Incentive Plan may include instalment exercise terms for any option such that the option becomes fully exercisable in a series of cumulating portions. The Compensation Committee may also accelerate the date upon which any option (or any part of any option) is first exercisable. However, no option, or any portion thereof may be exercisable until one year following the date of grant. In no event shall an option granted to an employee then owning more than l0% of our Common Stock be exercisable by its terms after the expiration of five years from the date of grant, nor shall any other option granted pursuant to the Incentive Plan be exercisable by its terms after the expiration of ten (10) years from the date of grant.
Non-Qualified Stock Options
Our employees, directors and officers, and consultants or advisors will be eligible to receive Non-Qualified Stock Options pursuant to the Incentive Plan as may be determined by our Compensation Committee which, once established, will administer the Incentive Plan, provided however that bona fide services must be rendered by such consultants or advisors and such services must not be in connection with a capital-raising transaction or promoting our Common Stock.
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Options granted pursuant to the Incentive Plan shall terminate at such time as may be specified when the option is granted.
In the discretion of the Compensation Committee options granted pursuant to the Incentive Plan may include instalment exercise terms for any option such that the option becomes fully exercisable in a series of cumulating portions. The Compensation Committee may also accelerate the date upon which any option (or any part of any option) is first exercisable. In no event shall an option be exercisable by its terms after the expiration of ten years from the date of grant.
Stock Bonuses
Our employees, directors and officers, and consultants or advisors will be eligible to receive a grant of our shares, provided however that bona fide services must be rendered by such consultants or advisors and such services must not be in connection with a capital-raising transaction or promoting our Common Stock. The grant of the shares rests entirely with our Compensation Committee which, once established, will administer the Incentive Plan. It will also be left to the Compensation Committee to decide the type of vesting and transfer restrictions which will be placed on the shares.
Outstanding Equity Awards at Fiscal Year-End | ||||||||||||||
Option Awards | ||||||||||||||
Number of Securities Underlying Unexercised Options | Option Exercise | Option Expiration | ||||||||||||
Name | Exercisable | Unexercisable | Price | Date | ||||||||||
Tony Evers | 0 | 850,176 | $ | 0.32 | February 28, 2027 |
Option Exercises and Stock Vested | ||||||||||||||||
Option Awards | Stock Awards | |||||||||||||||
Number of Shares Acquired on Exercise | Value Realized on Exercise | Number of Shares Acquired on Vesting | Value Realized on Vesting | |||||||||||||
None. |
Employee Pension, Profit Sharing or other Retirement Plan
We do not have a defined benefit, pension plan, profit sharing or other retirement plan, although we may adopt one or more of such plans in the future.
Compensation of Executive Officers
Effective May 1, 2020, we began to compensate Mr. Anthony Evers, as our Chief Financial StatementsOfficer, an annual salary of $270,000 paid in accordance with our standard employee payroll practices. We also paid the full cost of Mr. Evers’ health insurance premiums.
Effective August 20, 2020, we began to compensate Mr. Kevin Brian Cox, our Chief Executive Officer and Chairman of the Board, an annual salary of $750,000 paid in accordance with our standard employee payroll practices. We also provide Mr. Cox with a monthly car allowance of $1,800.
Effective August 20, 2020, we began to compensate Mr. Anthony P. Nuzzo, our President, Chief Operating Officer and a member of the Board, an annual salary of $550,000 paid in accordance with our standard employee payroll practices. We also provided Mr. Nuzzo with a monthly car allowance of $1,800.
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Our Company’s executive compensation plan is based on attracting and retaining qualified professionals which possess the skills and leadership necessary to enable our Company to achieve earnings and profitability growth to satisfy our stockholders. We must, therefore, create incentives for these executives to achieve both Company and individual performance objectives through the use of performance-based compensation programs. No one component is considered by itself, but all forms of the compensation package are considered in total. Wherever possible, objective measurements will be utilized to quantify performance, but many subjective factors still come into play when determining performance.
As a growth stage Company with a plan of action of both vertical and horizontal industry acquisitions (and potential retention of management of acquired businesses), the main elements of compensation packages for executives shall consist of a base salary, stock options under the proposed plan discussed above under this section, and bonuses (cash and/or equity) based upon performance standards to be negotiated.
As we continue to grow, both through acquisition or through revenue growth from existing business interests, and financial conditions improve, these base salaries, bonuses, and incentive compensation will be reviewed for possible adjustments. Base salary adjustments will be based on both individual and Company performance and will include both objective and subjective criteria specific to each executive’s role and responsibility to us.
Compensation of Directors
We did not make any equity or other compensation payments to non-employee director during fiscal 2020.
On July 17, 2019, we entered into a Director Agreement with David N. Keys (the “Keys Director Agreement”) whereby Mr. Keys is to be reimbursed for (i) all reasonable out-of-pocket expenses incurred in attending any in-person meetings; and (ii) any costs associated with filings required to be made by Mr. Keys in regards to any beneficial ownership of securities.
In conjunction with the Keys Director Agreement, we entered into an Indemnification Agreement (the “Indemnification Agreement”) with Mr. Keys. The Indemnification Agreement indemnifies to the fullest extent permitted under Nevada law for any claims arising out of or resulting from, amongst other things, (i) any actual, alleged or suspected act or failure to act by Mr. Keys in his capacity as a director or agent of the Company and (ii) any actual, alleged or suspected act or failure to act by Mr. Keys in respect of any business, transaction, communication, filing, disclosure or other activity of the Company. Under the Indemnification Agreement, Mr. Keys is indemnified for any losses pertaining to such claims, provided, however, that the losses shall not include expenses incurred by Mr. Keys in respect of any claim as which he shall have been adjudged liable to us, unless the court having jurisdiction rules otherwise. The Indemnification Agreement provides for indemnification of Mr. Keys during his directorship and for a period of six (6) years thereafter.
Other than as provided above with respect to the Keys Director Agreement and the Indemnification Agreement, at the time of this filing, directors receive no remuneration for their services as directors of the Company, nor does the Company reimburse directors for expenses incurred in their service to our Board of Directors. We plan to put in place an industry standard director compensation package during the fiscal year 2021.
Change of Control
There are no arrangements, known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of us.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following sets forth information as of March 31, 2021, regarding the number of shares of our Common Stock beneficially owned by (i) each person that we know beneficially owns more than 5% of our outstanding Common Stock, (ii) each of our directors and executive officers and (iii) all of our directors and executive officers as a group.
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The amounts and percentages of our Common Stock beneficially owned are reported on the basis of SEC rules governing the determination of beneficial ownership of securities. Under the SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days through the exercise of any stock option, warrant or other right, and the conversion of preferred stock. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest. Unless otherwise indicated, each of the shareholders named in the table below, or his or her family members, has sole voting and investment power with respect to such shares of our Common Stock. Except as otherwise indicated, the address of each of the shareholders listed below is: 3124 Brother Blvd, Suite 410, Bartlett, TN 38133.
Name of Beneficial Owner(1) | Total Common Stock Shares Beneficially Owned | % of Common Stock Class(2) | Total Series A Preferred Shares Owned(5) | % of Series A Class(2) | Total Series C Preferred Shares Owned(6) | % of Series C Class(2) | Total % of Beneficial Ownership(9) | |||||||||||||||||||||
Directors and Executive Officers: | ||||||||||||||||||||||||||||
Kevin Brian Cox (3) | 26,213,282 | 17.72 | % | 10,500,000 | 80.77 | % | 603,364 | 83.62 | % | 61.54 | % | |||||||||||||||||
Anthony Evers (10) | 363,549 | * | - | - | - | - | * | |||||||||||||||||||||
Anthony P. Nuzzo (4) | 2,500,000 | 1.69 | % | - | - | 72,000 | 9.98 | % | 4.47 | % | ||||||||||||||||||
David C. Ansani (11) | 7,000 | * | * | |||||||||||||||||||||||||
Carter Matzinger (7) | 566,000 | * | 2,500,000 | 19.23 | % | 46,232 | 6.40 | % | 8.10 | % | ||||||||||||||||||
All Directors and Executive Officers as a Group (5 persons) | ||||||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||
5% Shareholders: | ||||||||||||||||||||||||||||
Sidney J. Lorio Jr. & Gloria D Lorio (8) | 8,309,398 | 5.00 | % | - | - | - | - | 1.81 | % |
Less than one (1) percent |
(1) | The person named in this table has sole voting and investment power with respect to all shares of Common Stock reflected as beneficially owned. |
(2) | Based on (i) 147,917,608 shares of Common Stock outstanding, (ii) 13,000,000 shares of Series A outstanding, and (iii) 721,596 shares of Series C outstanding as of January 22, 2021. |
(3) | Based on (i) 25,313,282 shares of Common Stock, including 20,499,397 shares owned by Kevin Brian Cox, 4,813,885 shares owned by EWP Communications, LLC, a Tennessee liability company, of which Mr. Cox is a beneficial owner, and 900,000 shares owned by BCAN Holdings, LLC, a Nevada limited liability company, of which Mr. Cox is a beneficial owner; (ii) shares of Series A Preferred Stock convertible into 105,000,000 shares of Common Stock, including 75,000 shares of Series A Preferred Stock owned by EWP Communications, LLC, a Tennessee liability company, of which Mr. Cox is a beneficial owner.; and (iii) shares of Series C Preferred Stock convertible into 150,841,000 shares of Common Stock. |
(4) | Based on (i) 2,500,000 shares of Common Stock, including 1,600,000 shares owned by Anthony P. Nuzzo Jr. and 900,000 shares owned by BCAN Holdings, LLC, a Nevada limited liability company, of which Mr. Nuzzo is managing member; and (ii) shares of Series C Preferred Stock convertible into 18,000,000 shares of Common Stock. |
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(5) | Each share of Series A Preferred Stock is entitled to vote ten (10) shares of Common Stock for each one (1) share of Series A Preferred Stock held and each 10 shares of Series A Preferred Stock is convertible into one share of Common Stock. |
(6) | Each share of Series C Preferred Stock is convertible into 250 shares of Common Stock. Series C Preferred Stock is entitled to vote on an as-converted basis. |
(7) | Based on (i) 566,000 shares of Common Stock owned by Thirteen Nevada, LLC, a Nevada limited liability company, of which Mr. Matzinger is a beneficial owner; (ii) shares of Series A Preferred Stock convertible into 25,000,000 shares of Common Stock; and (iii) shares of Series C Preferred Stock convertible into 11,558,000 shares of Common Stock, including 6,232 shares owned by Carter Matzinger, and 40,000 shares owned by Thirteen Nevada, LLC, a Nevada limited liability company, of which Mr. Matzinger is a beneficial owner. |
(8) | With an address at: 2116 Parkwood Drive, Bedford, TX 76021. |
(9) | Based on 458,316,608 shares calculated on fully diluted basis. |
(10) | Shares are held in Mr. Evers’ IRA, |
(11) | Shares are held in Mr. Ansani’s IRA. |
There are no arrangements, known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of us.
We are not aware of any arrangements that may result in “changes in control” as that term is defined by the provisions of Item 403(c) of Regulation S-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 had 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 December 31, 2020 and 2019, the outstanding balance due was $0.
For the years ended December 31, 2020 and 2019, outsourced management services fees of $0 and $1,020,000, respectively, were paid to Axia Management, LLC (“Axia”) as compensation for services provided. These costs are included in Selling, general and administrative expenses in the consolidated statements of operations. Axia is owned by the Company’s Chief Executive Officer.
At December 31, 2020 and 2019, the Company had trade payables to Axia of $373,012 and $666,112, respectively.
For the years ended December 31, 2020 and 2019, the Company purchased telecom services and access to wireless networks from 321 Communications in the amount of $218,334 and $704,683, respectively. These costs are included in Cost of revenue in the consolidated statements of operations. The Company’s Chief Executive Officer is a minority owner of 321 Communications.
At December 31, 2020 and 2019, the Company had trade payables to 321 Communications of $25,336 and $140,923, respectively.
34 |
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 year ended December 31, 2020 and 2019 were $2,821,925 and $2,384,780, respectively, and are included in Cost of revenue in the consolidated statements of operations. The Company’s President has a 50% interest in CenterCom Global.
At December 31, 2020 and 2019, the Company had trade payables to CenterCom Global of $1,252,331 and $282,159, respectively.
See Note 7 long-term debt due to related parties.
Director Independence
Our Common Stock is currently quoted on the OTCQB. Because our Common Stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
● | the director is, or at any time during the past three years was, an employee of the Company; | |
● | the director or a family member of the director accepted any compensation from the Company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service); | |
● | a family member of the director is, or at any time during the past three years was, an executive officer of the Company; | |
● | the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the Company made, or from which the Company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions); or | |
● | the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or the director or a family member of the director is a current partner of the Company’s outside auditor, or at any time during the past three years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s audit. |
35 |
We periodically review the independence of each director. Pursuant to this review, our directors and officers, on an annual basis, are required to complete and forward to the Corporate Secretary a detailed questionnaire to determine if there are any transactions or relationships between any of the directors or officers (including immediate family and affiliates) and us. If any transactions or relationships exist, we then consider whether such transactions or relationships are inconsistent with a determination that the director is independent. At this time the Board has determined that Mr. Keys qualifies as independent director.
Disclosure of SEC Position on Indemnification of Securities Act Liabilities
Our directors and officers are indemnified as provided by the Nevada corporate law and our bylaws. We have agreed to indemnify each of our directors and certain officers against certain liabilities, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the provisions described above, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
We have been advised that in the opinion of the SEC indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled by controlling precedent, submit the question of whether such indemnification is against public policy to a court of appropriate jurisdiction. We will then be governed by the court’s decision.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Billed for Audit and Non-Audit Services
The following table presents for each of the last two fiscal years the aggregate fees billed in connection with the audits of our financial statements and other professional services rendered by our independent registered public accounting firm Rodefer Moss & Co, PLLC.
2020 | 2019 | |||||||
Audit Fees (1) | $ | 125,000 | $ | 160,000 | ||||
Audit-Related Fees (2) | ||||||||
Tax Fees (3) | - | - | ||||||
All Other Fees (4) | - | - | ||||||
Total Accounting fees and Services | $ | 125,000 | $ | 160,000 |
(1) | Audit Fees. These are fees for professional services for the audit of our annual financial statements, and for the review of the financial statements included in our filings on Form 10-K and Form 10-Q, and for services that are normally provided in connection with statutory and regulatory filings or engagements. | |
(2) | Audit-Related Fees. These are fees for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of the registrant’s financial statements. | |
(3) | Tax Fees. These are fees for professional services rendered by the principal accountant with respect to tax compliance, tax advice, and tax planning. | |
(4) | All Other Fees. These are fees for products and services provided by the principal accountant, other than the services reported above. |
36 |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit | Incorporated by Reference | Filed or Furnished | ||||||||
Number | Exhibit Description | Form | Exhibit | Filing Date | Herewith | |||||
2.1 | Agreement and Plan of Reorganization, dated April 11, by and among Surge Holdings, Inc., True Wireless Acquisition, Inc., True Wireless, Inc., and Kevin Brian Cox | 8-K | 2.1 | 04/16/2018 | ||||||
3.1 | Articles of Incorporation | SB-2 | 3.1 | 03/14/2007 | ||||||
3.2 | Certificate of Amendment to Articles of Incorporation | 10-K/A | 3.1 | 05/14/2013 | ||||||
3.3 | Certificate of Amendment to Articles of Incorporation | 8-K/A | 3.1 | 12/11/2015 | ||||||
3.4 | Certificate of Designation of Series A Preferred Stock | 8-K | 10.1 | 08/01/2016 | ||||||
3.5 | Amendment to Certificate of Designation for Series A Convertible Preferred Stock | S-1 | 3.5 | 09/12/2019 | ||||||
3.6 | Certificate of Designation for Series C Convertible Preferred Stock | 8-K | 4.1 | 07/10/2018 | ||||||
3.7 | Amendment to Certificate of Designation for Series C Convertible Preferred Stock | S-1 | 3.7 | 09/12/2019 | ||||||
3.8 | Bylaws | SB-2 | 3.2 | 03/14/2007 | ||||||
3.9 | Amended Bylaws | 10-K/A | 3.2 | 05/14/2013 |
37 |
38 |
Not applicable.
39 |
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SurgePays, Inc. | ||
Date: April 1, 2021 | By: | /s/ Kevin Brian Cox |
Name: | Kevin Brian Cox | |
Title: | Chief Executive Officer | |
(Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Kevin Brian Cox | Chief Executive Officer, Director | April 1, 2021 | ||
Kevin Brian Cox | (Principal Executive Officer) | |||
/s/ Anthony Evers | Chief Financial Officer | April 1, 2021 | ||
Anthony Evers | (Principal Financial Officer, and Principal Accounting Officer | |||
/s/ Anthony Nuzzo | Director | April 1, 2021 | ||
Anthony Nuzzo | ||||
/s/ David N. Keys | Director | April 1, 2021 | ||
David N. Keys | ||||
/s/ David May | Director | April 1, 2021 | ||
David May | ||||
/s/ Jay Jones | Director | April 1, 2021 | ||
Jay Jones |
40 |
SURGEPAYS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
To the Board of directors ofDirectors and Stockholders of
Ksix Media Holdings,SurgePays, Inc. and& Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Ksix Media Holdings,SurgePays, Inc. and& Subsidiaries (“the Company”(the “Company”) as of December 31, 20162020 and 2015,2019, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the years in the two-year period ended December 31, 20162020 and 2015. Thethe related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the results of its consolidated operations and its consolidated cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management is responsible for these financial statements.management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The companyCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits, we are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positionEmphasis of Ksix Media Holdings, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years ended December 31, 2016 and 2015 in conformity with accounting principles generally accepted in the United States of America.Matter - Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has a stockholders’ deficit of $1,815,049 and a working capital deficiency of $3,301,057 as of December 31, 2016 and incurred losses for 2020 and 2019, and at December 31, 2020 had an accumulated deficit and negative working capital. Further, in March of 2020 the past two years. The Company has not establishedWorld Health Organization declared COVID-19 a pandemic. COVID-19 could disrupt the economy, the Company’s supply chain, and access to capital sources of revenues sufficient to fund the development of its business, or to pay projected operating expenses and commitments for the next year. These factors, among others, raise substantial doubt aboutthus adversely affecting the Company’s ability to continue as a going concern.its operations. Management’s evaluation of the events and conditions and management’s plans in regard to theseregarding those matters also are also described in Note 3. The consolidated financial statements do not include any adjustments that might result fromshould management be unable to successfully implement its plan. Our opinion is not modified with respect to this matter.
/s/ Rodefer Moss & Co, PLLC
We have served as the outcome of this uncertainty.Company’s auditor since 2017
Brentwood, Tennessee
March 31, 2021
F-2 |
KSIX MEDIA HOLDINGS,SURGEPAYS, INC. AND SUBSIDIARIES
December 31 2016 | December 31 2015 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 63,709 | $ | 69,489 | ||||
Accounts receivable, less allowance for doubtful accounts of $17,000 and $148, respectively | 126,428 | 275,092 | ||||||
Prepaid expenses | 568,700 | 1,462 | ||||||
Total current assets | 758,837 | 346,043 | ||||||
Property and Equipment, less accumulated depreciation of $4,675 and $1,685, respectively | 14,432 | 14,422 | ||||||
Intangible assets less accumulated amortization of $167,449 and $507,777, respectively | 217,195 | 2,266,358 | ||||||
Goodwill | 866,782 | - | ||||||
Deposits on acquisition | 500,000 | - | ||||||
Total assets | $ | 2,357,246 | $ | 2,626,823 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 775,624 | $ | 355,597 | ||||
Credit card liability | 336,726 | 274,135 | ||||||
Deferred revenue | 165,000 | 518,240 | ||||||
Derivative liability | 584,168 | - | ||||||
Advances from related party | 356,502 | 318,002 | ||||||
Current portion of long-term debt - related party, net of discount of $0 and $0, respectively | 53,750 | 26,875 | ||||||
Notes payable and current portion of long-term debt, net of discount of $8,774 and $0, respectively | 1,788,124 | 1,104,159 | ||||||
Total current liabilities | 4,059,894 | 2,597,008 | ||||||
Long-term debt - related party, net of discount of $0 and $0, respectively | 53,750 | 80,625 | ||||||
Long-term debt net of discount of $87,379 and $0, respectively | 58,651 | 555,937 | ||||||
Total liabilities | 4,172,295 | 3,233,570 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ deficit: | ||||||||
Preferred stock: $0.001 par value; 100,000,000 shares authorized; 10,000,000 and no shares issued and outstanding at December 31, 2016 and 2015, respectively | 10,000 | - | ||||||
Common stock: $0.001 par value; 100,000,000 shares authorized; 57,343,901 shares and 36,130,432 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively | 57,344 | 36,130 | ||||||
Additional paid in capital | 4,145,589 | 784,929 | ||||||
Accumulated deficit | (6,027,982) | (1,427,806 | ) | |||||
Total stockholders’ deficit | (1,815,049) | (606,747 | ) | |||||
Total liabilities and stockholders’ deficit | $ | 2,357,246 | $ | 2,626,823 |
December 31, 2020 | December 31, 2019 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 673,995 | $ | 346,040 | ||||
Accounts receivable, less allowance for doubtful accounts of $116,664 and $774,841, respectively | 180,499 | 3,056,213 | ||||||
Note receivable | — | 14,959 | ||||||
Lifeline revenue due from USAC | 212,621 | 60,790 | ||||||
Inventory | 178,309 | — | ||||||
Prepaid expenses | 5,605 | 96,883 | ||||||
Total current assets | 1,251,029 | 3,574,885 | ||||||
Property and Equipment, less accumulated depreciation of $105,484 and $38,656, respectively | 236,810 | 294,616 | ||||||
Intangible assets less accumulated amortization of $1,627,779 and $519,404, respectively | 4,125,742 | 4,769,117 | ||||||
Goodwill | 866,782 | 866,782 | ||||||
Investment in Centercom | 414,612 | 203,700 | ||||||
Operating lease right of use asset, net | 368,638 | 210,816 | ||||||
Other long-term assets | 61,458 | 66,457 | ||||||
Total assets | $ | 7,325,071 | $ | 9,986,373 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses - others | $ | 5,589,547 | $ | 3,637,577 | ||||
Accounts payable and accrued expenses - related party | 1,753,837 | 998,517 | ||||||
Credit card liability | 383,073 | 449,158 | ||||||
Deferred revenue | 443,300 | 38,040 | ||||||
Derivative liability | 1,357,528 | 190,846 | ||||||
Operating lease liability | 210,556 | 90,944 | ||||||
Line of credit | 912,870 | 912,870 | ||||||
Debt – related party | 2,369,000 | — | ||||||
Notes payable and current portion of long-term debt, net | 2,283,950 | 736,172 | ||||||
Total current liabilities | 15,306,509 | 7,054,124 | ||||||
Long-term debt less current portion – related party | 1,120,440 | 2,205,440 | ||||||
Operating lease liability – net | 155,167 | 119,872 | ||||||
Trade payables - long term | 854,868 | 869,868 | ||||||
Notes payable and long term portion of debt - net | 616,901 | — | ||||||
Convertible promissory notes payable - net | — | 4,436,684 | ||||||
Total liabilities | $ | 18,051,037 | $ | 14,685,988 | ||||
Commitments and contingencies | ||||||||
Stockholders’ deficit: | ||||||||
Series A preferred stock: $0.001 par value; 100,000,000 shares authorized; 13,000,000 and 13,000,000 shares issued and outstanding at December 31, 2020 and 2019, respectively | 13,000 | 13,000 | ||||||
Series C convertible preferred stock; $0.001 par value; 1,000,000 shares authorized; 721,598 and 721,598 shares issued and outstanding at December 31, 2020 and 2019, respectively | 722 | 722 | ||||||
Common stock: $0.001 par value; 500,000,000 shares authorized; 127,131,210 shares and 102,193,579 shares issued and outstanding at December 31, 2020 and 2019, respectively | 127,131 | 102,193 | ||||||
Additional paid in capital | 10,725,380 | 6,055,042 | ||||||
Accumulated deficit | (21,592,199 | ) | (10,870,572 | ) | ||||
Total stockholders’ deficit | (10,725,966 | ) | (4,699,615 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 7,325,071 | $ | 9,986,373 |
See accompanying notes to consolidated financial statements
KSIX MEDIA HOLDINGS,SURGEPAYS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2016 and December 31, 2015
For the Year Ended December 31, | ||||||||||||||||
2016 | 2015 | 2020 | 2019 | |||||||||||||
Revenue | $ | 3,296,747 | $ | 2,832,853 | $ | 54,406,788 | $ | 25,742,941 | ||||||||
Cost of revenue | 2,328,467 | 2,332,194 | ||||||||||||||
Cost of revenue (exclusive of depreciation and amortization shown below) | 51,938,111 | 22,623,521 | ||||||||||||||
Gross profit | 968,280 | 500,659 | 2,468,677 | 3,119,420 | ||||||||||||
Costs and expenses | ||||||||||||||||
Cost and expenses | ||||||||||||||||
Depreciation and amortization | 433,118 | 501,091 | 1,173,369 | 227,322 | ||||||||||||
Asset impairment | 372,706 | - | ||||||||||||||
Selling, general and administrative | 3,269,270 | 1,320,535 | 11,440,976 | 10,660,126 | ||||||||||||
Total costs and expenses | 4,075,094 | 1,821,626 | 12,614,345 | 10,887,448 | ||||||||||||
Operating loss | (3,106,814 | ) | (1,320,967 | ) | (10,145,668 | ) | (7,768,028 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (1,660,338 | ) | (15,201 | ) | (3,383,996 | ) | (227,016 | ) | ||||||||
Derivative expense | (566,789 | ) | — | |||||||||||||
Change in fair value of derivative liability | 577,936 | 4,013 | ||||||||||||||
Gain on investment in Centercom | 210,912 | 25,192 | ||||||||||||||
Gain/(loss) on settlement of liabilities | 2,575,978 | (481,187 | ) | |||||||||||||
Other income | 5,844 | 65 | 10,000 | — | ||||||||||||
Gain on change in fair value of derivatives | 268,236 | - | ||||||||||||||
Loss on debt settlement | (107,104 | ) | - | |||||||||||||
Total other income (expense) | (1,493,362 | ) | (15,136 | ) | (575,959 | ) | (678,998 | ) | ||||||||
Net loss before provision for income tax | (4,600,176 | ) | (1,336,103 | ) | ||||||||||||
Provision for income tax | - | - | ||||||||||||||
Net loss before provision for income taxes | (10,721,627 | ) | (8,447,026 | ) | ||||||||||||
Provision for income taxes | — | — | ||||||||||||||
Net loss | $ | (4,600,176 | ) | $ | (1,336,103 | ) | $ | (10,721,626 | ) | $ | (8,447,026 | ) | ||||
Net loss per common share, basic and diluted | $ | (0.10 | ) | $ | (0.04 | ) | $ | (0.10 | ) | $ | (0.09 | ) | ||||
Weighted average common shares outstanding | 44,796,318 | 33,221,122 | ||||||||||||||
Weighted average common shares outstanding – basic and diluted | 106,720,836 | 96,186,742 |
See accompanying notes to consolidated financial statementsstatements.
KSIX MEDIA HOLDINGS,SURGEPAYS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Deficit
Years ended December 31, 2016 and December 31, 2015
Preferred Stock | Common Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, December 31, 2014 | - | - | 28,000,000 | $ | 28,000 | $ | 12,000 | $ | (6,923 | ) | $ | 33,077 | ||||||||||||||||
Stock issued for: | ||||||||||||||||||||||||||||
Acquisition of Ksix Media, Inc. | - | - | 3,114,812 | 3,114 | (12,000 | ) | (84,780 | ) | (93,666 | ) | ||||||||||||||||||
Cash | - | - | 3,717,620 | 3,718 | 296,347 | - | 300,065 | |||||||||||||||||||||
Consulting contract | - | - | 48,000 | 48 | 14,832 | - | 14,880 | |||||||||||||||||||||
Acquisition | - | - | 1,250,000 | 1,250 | 473,750 | - | 475,000 | |||||||||||||||||||||
Net loss | (1,336,103 | ) | (1,336,103 | ) | ||||||||||||||||||||||||
Balance, December 31, 2015 | - | - | 36,130,432 | 36,130 | 784,929 | (1,427,806 | ) | (606,747 | ) | |||||||||||||||||||
Stock issued for: | ||||||||||||||||||||||||||||
Cash | - | - | 8,750,000 | 8,750 | 848,750 | - | 857,500 | |||||||||||||||||||||
Services | 10,000,000 | 10,000 | 7,890,000 | 7,890 | 1,389,898 | - | 1,407,788 | |||||||||||||||||||||
Loan costs | - | - | 1,782,000 | 1,782 | 298,218 | - | 300,000 | |||||||||||||||||||||
Convertible notes payable | - | - | 2,791,469 | 2,792 | 507,963 | - | 510,755 | |||||||||||||||||||||
Warrant issued for services | - | - | - | - | 389,698 | - | 389,698 | |||||||||||||||||||||
Option compensation | - | - | - | - | 301,133 | - | 301,133 | |||||||||||||||||||||
Measurement period adjustment | - | - | - | - | (375,000 | ) | - | (375,000 | ) | |||||||||||||||||||
Net loss | - | - | - | - | - | (4,600,176 | ) | (4,600,176 | ) | |||||||||||||||||||
Balance, December 31, 2016 | 10,000,000 | $ | 10,000 | 57,343,901 | $ | 57,344 | $ | 4,145,589 | $ | (6,027,982 | ) | $ | (1,815,049 | ) |
See accompanying notes to consolidated financial statements
KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2016 and December 31, 2015
2016 | 2015 | |||||||
Operating activities | ||||||||
Net loss | $ | (4,600,176 | ) | $ | (1,336,103 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Amortization and depreciation | 433,118 | 501,091 | ||||||
Common stock and warrants issued for services | 1,531,380 | 62,880 | ||||||
Changein fair value of derivatives | (268,236 | ) | - | |||||
Loss on debt settlement | 107,105 | - | ||||||
Bad debt expense | 36,954 | 97,406 | ||||||
Non-cash interest | 1,466,550 | 6,365 | ||||||
Loan penalty | 30,000 | - | ||||||
Asset impairment | 372,706 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 111,711 | (86,040 | ) | |||||
Prepaid expenses | - | 3,000 | ||||||
Deferred revenue | (353,240 | ) | 229,520 | |||||
Accounts payable and accrued expenses | 427,660 | 176,322 | ||||||
Credit card liability | 62,591 | 121,038 | ||||||
Net cash used in operating activities | (641,877 | ) | (224,521 | ) | ||||
Investing activities | ||||||||
Purchase of property and equipment | (3,000 | ) | (9,732 | ) | ||||
Cash paid in acquisition, net of refund | - | (100,000 | ) | |||||
Cash paid as deposit on acquisition | (500,000 | ) | - | |||||
Cash acquired in acquisition | - | 128,063 | ||||||
Net cash provided by (used in) investing activities | (503,000 | ) | 18,331 | |||||
Financing activities | ||||||||
Proceeds from sale of common stock for cash | 857,500 | 300,065 | ||||||
Advances from related party, net of repayment | 38,500 | 237,677 | ||||||
Loan proceeds | 770,000 | - | ||||||
Loan repayment | (526,903 | ) | (299,880 | ) | ||||
Net cash provided by financing activities | 1,139,097 | 237,862 | ||||||
Net increase (decrease) in cash and cash equivalents | (5,780 | ) | 31,672 | |||||
Cash and cash equivalents, beginning of year | 69,489 | 37,817 | ||||||
Cash and cash equivalents, end of year | $ | 63,709 | $ | 69,489 |
See accompanying notes to consolidated financial statements
KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2016 and December 31, 2015, Continued
2016 | 2015 | |||||||
Supplemental cash flow information | ||||||||
Cash paid for interest and income taxes: | ||||||||
Interest | $ | 30,268 | $ | 7,158 | ||||
Income taxes | - | - | ||||||
Non-cash investing and financing activities: | ||||||||
Common stock issued for public relation services contract | $ | - | $ | 14,880 | ||||
Notes payable issued in acquisition | - | 750,000 | ||||||
Common stock issued in acquisition | - | 475,000 | ||||||
Common stock issued for services to be rendered recorded as prepaid expenses | 218,111 | - | ||||||
Warrant issued for prepaid services | 349,127 | - | ||||||
Common stock issued in exchange for notes payable | 510,754 | - |
Series A Preferred | Series C Preferred | Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
Balance, January 1, 2019 | 13,000,000 | $ | 13,000 | 643,366 | $ | 643 | 88,046,391 | $ | 88,047 | $ | 333,623 | $ | (2,423,546 | ) | $ | (1,988,233 | ) | |||||||||||||||||||
Issuance of Common Stock and warrants for services rendered | - | - | - | - | 666,000 | 666 | 328,908 | - | 329,574 | |||||||||||||||||||||||||||
Issuance of Common Stock for settlement of accounts payable | - | - | - | - | 875,000 | 875 | 506,625 | - | 507,500 | |||||||||||||||||||||||||||
Issuance of Common Stock and warrants with debt | - | - | - | - | 100,000 | 100 | 119,960 | - | 120,060 | |||||||||||||||||||||||||||
Sale of Common Stock and warrants | - | - | - | - | 9,172,855 | 9,172 | 3,201,328 | - | 3,210,500 | |||||||||||||||||||||||||||
Issuance of Common Stock for asset purchase | - | - | - | - | 3,333,333 | 3,333 | 996,667 | - | 1,000,000 | |||||||||||||||||||||||||||
Issuance of Series C Preferred Stock for investment in Centercom | - | - | 72,000 | 72 | - | - | 178,436 | - | 178,508 | |||||||||||||||||||||||||||
Issuance of Series C Preferred Stock for conversion of related party advances | - | - | 6,232 | 7 | - | - | 389,495 | - | 389,502 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | (8,447,026 | ) | (8,447,026 | ) | |||||||||||||||||||||||||
Balance, December 31, 2019 | 13,000,000 | 13,000 | 721,598 | 722 | 102,193,579 | 102,193 | 6,055,042 | (10,870,572 | ) | (4,699,615 | ) | |||||||||||||||||||||||||
Issuance of Common Stock and options for services rendered | - | - | - | - | 86,000 | 86 | 182,882 | - | 182,968 | |||||||||||||||||||||||||||
Sale of Common Stock and warrants | - | - | - | - | 5,678,174 | 5,678 | 1,062,822 | - | 1,068,500 | |||||||||||||||||||||||||||
Issuance of Common Stock and warrants with debt recorded as debt discount | - | - | - | - | 2,892,000 | 2,892 | 990,888 | - | 993,780 | |||||||||||||||||||||||||||
Shares issued for conversion of debt | - | - | - | - | 13,426,698 | 13,427 | 2,271,613 | - | 2,285,040 | |||||||||||||||||||||||||||
Make whole Common Stock issued pursuant to SPA | - | - | - | - | 3,980,711 | 3,981 | 373,511 | - | 377,492 | |||||||||||||||||||||||||||
Issuance of Common Stock for modification of debt | - | - | - | - | 480,000 | 480 | 67,170 | - | 67,650 | |||||||||||||||||||||||||||
Issuance of Common Stock for an acquisition | - | - | - | - | 775,000 | 775 | 219,071 | - | 219,846 | |||||||||||||||||||||||||||
Repurchase of shares for cash | - | - | - | - | (2,380,952 | ) | (2,381 | ) | (497,619 | ) | - | (500,000 | ) | |||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (10,721,627 | ) | (8,447,026 | ) | |||||||||||||||||||||||||
Balance, December 31, 2020 | 13,000,000 | $ | 13,000 | 721,598 | $ | 722 | 127,131,210 | $ | 127,131 | $ | 10,725,380 | $ | (21,592,199 | ) | $ | (10,725,966 | ) |
See accompanying notes to consolidated financial statements
KSIX MEDIA HOLDINGS,SURGEPAYS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended December 31, | ||||||||
2020 | 2019 | |||||||
Operating activities | ||||||||
Net loss | $ | (10,721,627 | ) | $ | (8,447,026 | ) | ||
Adjustments to reconcile net income loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 1,173,369 | 227,322 | ||||||
Amortization of right of use assets | 197,381 | 55,608 | ||||||
Amortization of debt discount | 2,016,764 | 68,764 | ||||||
Stock-based compensation | 182,968 | 329,574 | ||||||
Change in fair value of derivative liability | (577,936 | ) | (4,013 | ) | ||||
Derivative expense | 566,789 | - | ||||||
Bad debt expense | 1,750,239 | 977,792 | ||||||
Accrued interest on note receivable | - | (38,471 | ) | |||||
(Gain) loss on settlement of liabilities | (2,644,960 | ) | 474,953 | |||||
Gain on equity investment in Centercom | (210,912 | ) | (25,192 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,146,611 | (3,599,534 | ) | |||||
Lifeline revenue due from USAC | (151,831 | ) | 790,176 | |||||
Customer phone supply | - | 1,356,701 | ||||||
Inventory | (178,309 | ) | - | |||||
Prepaid expenses | 91,278 | (86,021 | ) | |||||
Other assets | 4,999 | (4,999 | ) | |||||
Credit card liability | (63,156 | ) | 54,317 | |||||
Deferred revenue | 405,260 | (50,000 | ) | |||||
Loss contingency | - | (31,690 | ) | |||||
Current portion of operating lease liability | (200,296 | ) | (55,608 | ) | ||||
Accounts payable and accrued expenses | 2,887,321 | 1,474,476 | ||||||
Net cash used in operating activities | (4,326,048 | ) | (6,533,141 | ) | ||||
Investing activities | ||||||||
Advances under notes receivable | - | (14,959 | ) | |||||
Repayments of notes receivable | 14,959 | - | ||||||
Purchase of equipment | (6,605 | ) | (227,630 | ) | ||||
Net cash received in business combination | - | 210,348 | ||||||
Net cash provided by (used) in investing activities | 8,354 | (32,241 | ) | |||||
Financing activities | ||||||||
Issuance of Common Stock and warrants | 1,068,500 | 3,210,500 | ||||||
Repurchase of Common Stock | (500,000 | ) | - | |||||
Note payable, related party - borrowings | 1,579,710 | - | ||||||
Note payable, related party - repayments | (295,710 | ) | - | |||||
Note payable - borrowings | 3,481,582 | 250,000 | ||||||
Note payable - repayments | (280,636 | ) | (70,000 | ) | ||||
Convertible promissory notes - borrowings | - | 638,000 | ||||||
Convertible promissory notes - repayments | (245,797 | ) | - | |||||
Cash paid for debt issuance costs | (162,000 | ) | - | |||||
Line of credit - advances | - | 1,130,000 | ||||||
Line of credit - repayments | - | (217,130 | ) | |||||
Loan proceeds under related party financing arrangement | - | 2,199,440 | ||||||
Loan repayments under related party financing arrangement | - | (674,000 | ) | |||||
Net cash provided by financing activities | 4,645,649 | 6,466,810 | ||||||
Net change in cash and cash equivalents | 327,955 | (98,572 | ) | |||||
Cash and cash equivalents, beginning of period | 346,040 | 444,612 | ||||||
Cash and cash equivalents, end of period | $ | 673,995 | $ | 346,040 | ||||
Supplemental cash flow information | ||||||||
Cash paid for interest and income taxes: | ||||||||
Interest | $ | 98,113 | $ | 77,825 | ||||
Income taxes | $ | - | $ | - | ||||
Non-cash investing and financing activities: | ||||||||
Exchange of related party advances for Series C Preferred Stock | $ | - | $ | 389,502 | ||||
Exchange of investment in CenterCom for Series C Preferred Stock | $ | - | $ | 178,508 | ||||
Common Stock issued for an acquisition | $ | 210,794 | $ | 1,000,000 | ||||
Debt acquired in acquisition | $ | - | $ | 4,000,000 | ||||
Common Stock and warrants issued with debt recorded as debt discount | $ | 993,780 | $ | 120,060 | ||||
Derivative liability on convertible notes recorded as debt discount | $ | 1,457,402 | $ | 176,348 | ||||
Operating lease liability | $ | 355,203 | $ | 266,424 | ||||
Make whole Common Stock issued pursuant to SPA | $ | 165,000 | $ | - | ||||
Issuance of Common Stock for modification of debt | $ | 67,650 | $ | - |
See accompanying notes to consolidated financial statements
F-6 |
SURGEPAYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 20162020
1 BASIS OF PRESENTATION AND BUSINESS
1 | BUSINESS |
Basis of presentation
The accompanying consolidated financial statements include the accounts of SurgePays Inc., (“Surge”), formerly Ksix Media Holdings, Inc. (the “Company”)and Surge Holdings, Inc., incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, Ksix Media, Inc. (“Media”), incorporated in Nevada on November 5, 2014,2014; Ksix, LLC (“KSIX”), a Nevada limited liability company that was formed on September 14, 2011,2011; Surge Blockchain, LLC (“Blockchain”), formerly Blvd. Media Group, LLC (“BLVD”), a Nevada limited liability company that was formed on January 29, 2009,2009; DigitizeIQ, LLC (“DIQ”) an Illinois limited liability company that was formed on July 23, 2014 and2014; 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; SurgePays Fintech Inc (“Tech”), an Nevada corporation that was formed on August 22, 2019; Surge Payments LLC (“Payments”), an Nevada corporation that was formed on December 17, 2018; SurgePhone Wireless LLC (“Surge Phone”), an Nevada corporation that was formed on August 29, 2019 and True Wireless, Inc., an Oklahoma corporation (formerly True Wireless, LLC) (“TW”), (collectively the “Company” or “we”). On October 29, 2020, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation to change its name to SurgePays, Inc.
All significant intercompany balances and transactions have been eliminated in consolidation.
Business descriptionRecent Developments
The Company is doing business through two of its wholly owned subsidiaries. KSIX is an Internet marketing company. KSIX is an advertising network designed to create revenue streams for its affiliates and to provide advertisers with increased measurable audience. KSIX provides performance based marketing solutions to drive traffic and conversions within a Cost-Per-Lead (“CPL”) business model. KSIX has an online advertising network that works directly with advertisers and other networks to promote advertiser campaigns and manages offer tracking, reporting and distribution.
DIQ is a full service digital advertising agency specializing in survey generation and landing page optimization specifically designed for mass tort action lawsuits.
Other subsidiaries are inactive as of the date of this consolidated financial statement.
Effective December 7, 2016, the Company executed a Master Exchange Agreement for the exchange of Common Stock, Management and Control (the “Exchange Agreement”) with True Wireless, LLC (“TW”) and Kevin Brian Cox (“Cox”), the sole owner of TW’s issued and outstanding membership interests. TW’s primary business operation is a full-service telecommunications company specializing in the Lifeline program which provides subsidized mobile phone service for low income individuals. The acquisition has not closed as of the date of these financial statements (See Note 13 for details).
On October 12, 2015,September 30, 2019, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with GBT Technologies Inc., a Nevada corporation (“GBT”).
Under the Purchase Agreement, the Company has purchased substantially all of the assets, and specified liabilities, of GBT’s ECS Prepaid business, Electronic Check Services business, and the Central State Legal Services business (collectively the “ECS Business”). The Purchase Agreement provides that the Company assumed GBT’s liabilities incurred after the effective date of the Purchase Agreement, but only to the extent such obligations and liabilities were not caused by or related to any action or inaction by GBT prior to the effective date of the Purchase Agreement. The Purchase Agreement provides, among other things, that on the terms and subject to the conditions set forth therein, the Company acquired substantially all of the assets related to the ECS Business for total consideration of five million dollars ($5,000,000). The Purchase Agreement provides that the Exchangeconsideration is to be paid by the Company through the issuance of a convertible promissory note in the amount of four million dollars ($4,000,000) to GBT (the “Note”), and through the issuance of three million three hundred thirty-three thousand three hundred thirty-three (3,333,333) restricted shares of the Company’s Common Stock (“Agreement”to GBT (the “Shares”) with DIQ and. GBT may not convert the Note to the extent that such conversion would result in beneficial ownership by GBT and/or its sole owner. DIQ is a full service digital advertising agency which became a wholly owned subsidiaryaffiliates of more than 4.99% of the Company (see Note 4).issued and outstanding Common Stock of the Company.
Membership Interest Purchase Agreement
On or about April 27, 2015,January 30, 2020, the Company entered into a Share ExchangeMembership Interest Purchase Agreement (the “Agreement”“MIPA”) withby and among the Company, ECS Prepaid, LLC, a Missouri limited liability company (“ECS Prepaid”), Dennis R. Winfrey, an individual, and Peggy S. Winfrey, an individual (together, the “Winfreys”), whereby the Company purchased from the Winfreys all of the shareholdersMembership Interests of Media, whose primary business isECS Prepaid owned by the operation of a diverse advertising network through its wholly-owned subsidiaries KSIX and BLVD. Pursuant toWinfreys (the “ECS Prepaid Membership Interests”). In consideration for the Agreement,ECS Prepaid Membership Interests, the Company acquiredissued to Suray Holdings LLC, an entity jointly controlled by the Winfreys, 450,000 shares of Common Stock of the Company.
ECS and CSLS Stock Purchase Agreement
On January 30, 2020, the Company entered into a Stock Purchase Agreement (the “ECS and CSLS SPA”) by and among the Company, Electronic Check Services, Inc., a Missouri corporation (“ECS”), Central States Legal Services, Inc., a Missouri corporation (“CSLS”), and the Winfreys, whereby the Company purchased from the Winfreys all of the issued and outstanding shares (22,600,000 shares) of the common stock of Media from Media’s shareholders in exchangeeach of ECS and CSLS (the “ECS and CSLS Stock”). In consideration for 28,000,000 restrictedthe ECS and CSLS Stock, the Company issued 50,000 shares of the Company’s common stock. The acquisition was accounted for as a reverse merger, whereby Media is the accounting acquirerCommon Stock to Suray (the “ECS and the Company is the legal surviving reporting company. The historical financial statements represent those of Media since its inception on November 5, 2014.CLS Purchase Share Issuance”).
In July 2015, the Company completed the change of its name from North American Energy Resources, Inc. to Ksix Media Holdings, Inc.
2 |
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Use of estimates in the presentation of financial statementsEstimates and Assumptions and Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principlesU.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 datedates of the financial statements and the reported amounts of net revenuerevenues and expenses during eachthe reporting period.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 receivablereceivables 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. One customer accounted for more than 11% of revenues in 2020. One customer accounted for more than 16% of revenues in 2019.
Method of Accounting
Investments held in stock of entities other than subsidiaries, namely corporate joint ventures and allowanceother non-controlled entities usually are accounted for doubtful accountsby 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.
F-8 |
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 December 31, 2020 and 2019.
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.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are generally due thirty days from the invoice date. The Company has a policy of reserving for uncollectible accounts based on their best estimate ofstated at the amount of profitable credit losses in its existing accounts receivable. The Company extends creditmanagement expects to its customers based on an evaluation of their financial condition and other factors.collect from outstanding balances. The Company generally does not require collateral or other security to support accounts receivable.customer receivables. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential bad debts if required.
The Company determines whetherprovides an allowance for doubtful accounts is requiredbased upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by evaluationmanagement. As of specific accounts where information indicates the customer may have an inability to meet financial obligations. In these cases,December 31, 2020 and 2019, the Company uses assumptionshad reserves of $116,664 and judgment, based$774,841, respectively.
Concentrations
As of December 31, 2020 and 2019, one customer represented approximately 47% and 80% of total gross outstanding receivables, respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method. As of December 31, 2020 and 2019, the Company had inventory of $178,309 and $0, respectively.
Leases
In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842) which amended guidance for lease arrangements to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as ASC 842. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the best available factsbalance sheets for substantially all lease arrangements.
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and circumstances, to recordrecognized a specific allowance for those customers against amounts due to reduceright of use (“ROU”) asset and liability in the receivableconsolidated balance sheets related to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. The Company may also record a general allowance as necessary.
Direct write-offs are taken in the period when the Company has exhausted their efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that the Company should abandon such efforts. Foroperating lease for office space. Results for the years ended December 31, 20162020 and 2015,2019 are presented under ASC 842.
As part of the adoption the Company reported $36,954 and $97,406 of bad debt expense.elected the practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to:
Credit risk
1. | Not separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component. | |
2. | Not to apply the recognition requirements in ASC 842 to short-term leases. | |
3. | Not record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered immaterial. |
In 2016 and 2015, the Company had cash deposits in certain banks that at times may have exceeded the maximum insuredRefer to Note 12. Leases for additional disclosures required by the Federal Deposit Insurance Corporation. The Company monitors the financial condition of the banks and has experienced no losses on these accounts.
Earnings (loss) per common share
The Company is required to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potential dilutive shares outstanding. At December 31, 2016 and 2015, there were no potentially dilutive common stock equivalents. Accordingly, basic and diluted earnings (loss) per share are the same for each of the periods presented.
Contingencies
Certain conditions may exist as of the date financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. Company management and its legal counsel assess such contingencies related to legal proceeding that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a liability has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or if probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable would be disclosed.
Share-based compensation
The Company accounts for share-based compensation in accordance with Financial Accounting Standards Board (“FASB”) ASC 718, “Compensation-Stock Compensation.” Under the fair value recognition provisions of this pronouncement, share-based compensation cost is measured at the grant date based on the fair value of the award, reduced as appropriate based on estimated forfeitures, and is recognized as expense over the applicable vesting period of the stock award using the accelerated method. The excess tax benefit associated with stock compensation deductions have not been recorded in additional paid-in capital. When evaluating whether an excess tax benefit has been realized, share based compensation deductions are not considered realized until NOLs are no longer sufficient to offset taxable income. Such excess tax benefits will be recorded when realized.842.
Property and equipment
Property and equipment and software development costs are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the life of the lease if it is shorter than the estimated useful life. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. Computer and office equipment is generally three to five years and office furniture is generally seven years.
Business combinations
We allocate the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Goodwill
Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. Goodwill is not being amortized, but is reviewed at least annually for impairment. In our evaluation of goodwill impairment, we perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive, we proceed to a two-step process to test goodwill for impairment including comparing the fair value of the reporting unit to its carrying value (including attributable goodwill). Fair value for our reporting units is determined using an income or market approach incorporating market participant considerations and management’s assumptions on revenue growth rates, operating margins, discount rates and expected capital expenditures. Fair value determinations may include both internal and third-party valuations. Unless circumstances otherwise dictate, we perform our annual impairment testing in the fourth quarter.
We perform the allocation based on our knowledge of the market in which we operate, and our overall knowledge of the industry.
Revenue recognition
The Company recognizes revenue in accordance with Accounting Standard Codification (“ASC”) 605-10 (previously Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition).
Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The Company’s revenues are derived from online advertising sales and on a cost per lead (“CPL”) basis. Revenue from advertisers on a CPL basis is recognized in the period the leads are accepted by the client, following the execution of a service agreement and commencement of the services.
Deferred revenue
DIQ generally requires prepayment of the initial contract amount in advance of services being performed. As such, the advance payment is deferred as a current liability until DIQ delivers the surveys contracted. At that time revenue is recognized and the deferred revenue liability is reduced.
Fair value measurements
The Company adopted the provisions of ASC Topic 820, “Fair“Fair Value Measurements and Disclosures”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.
F-9 |
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:
Issued during the year ended December 31, 2016 | $ | 1,226,020 | ||
Converted | (373,616 | ) | ||
Change in fair value recognized in operations | (268,236 | ) | ||
Total | $ | 584,168 |
The estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following assumptions as of December 31, 2016:
Convertible InstrumentsDerivative Liabilities
The Company evaluates its options, warrants, convertible notes, or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and accountsSection 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. The change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for conversion optionsas a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.
The Company utilizes a binomial option pricing model to compute the fair value of the derivative liability and to mark to market the fair value of the derivative at each balance sheet date. The Company records the change in convertible instrumentsthe fair value of the derivative as other income or expense in the consolidated statements of operations.
The Company had derivative liabilities of $1,357,528 and $190,846 as of December 31, 2020 and 2019, respectively.
F-10 |
Revenue recognition
The Company recognizes revenue in accordance with ASC 815 “Derivatives and Hedging Activities”. Applicable GAAP requires companies606 to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria include circumstances in which (a)more closely align revenue recognition with the economic characteristics and risksdelivery of the embedded derivative instrumentCompany’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 clearlymet 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 December 31, 2020 and closely2019 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 economic characteristicsperformance 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.
F-11 |
Disaggregation of Revenue from Contracts with Customers. The following table disaggregates gross revenue by entity for the years ended December 31, 2020 and risks2019:
For the Years Ended | ||||||||
December 31, 2020 | December 31, 2019 | |||||||
True Wireless, Inc. | $ | 2,372,977 | $ | 3,446,003 | ||||
Surge Blockchain, LLC | 535,315 | 4,233,263 | ||||||
Surge Logics, Inc. | 16,430,057 | 7,234,366 | ||||||
ECS | 34,861,891 | 10,767,138 | ||||||
Other | 206,548 | 62,171 | ||||||
Total revenue | $ | 54,406,788 | $ | 25,742,941 |
True Wireless is licensed to provide wireless services to qualifying low-income customers in five states. Revenues are recognized when the services have been provided and the government subsidy has been earned.
Surge Blockchain revenues are generated through the SurgePaysPortal multi-purpose software are recognized when the goods and services have been delivered and earned.
Surge Logics is a full-service digital advertising agency and revenues are recognized at a period in time once performance obligations are met and services are provided as customer deposits are received in advance. The majority of the host contract, (b)revenue is recognized within the hybrid instrument that embodiesmonth the obligation was created and recognized, after the lead is identified and sent to the customer.
ECS is a leading provider of prepaid wireless load and top-ups, check cashing and wireless SIM activation to convenience stores and bodegas nationwide. Revenues are generated and recognized at time of sale.
Earnings per Share
Earnings per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the embedded derivative instrumentdividends declared in the period on preferred stock (whether or not paid) and the host contractdividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is not re-measured at fair value under other GAAP with changes in fair value reported in earningssimilar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
The following table shows the outstanding dilutive common shares excluded from the diluted net income (loss) per share calculation as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.were anti-dilutive:
Contingent shares issuance arrangement, stock options or warrants | ||||||||
For the Year Ended December 31, 2020 | For the Year Ended December 31,2019 | |||||||
Convertible note | 26,031,553 | 1,129,013 | ||||||
Common stock options | 850,176 | - | ||||||
Common stock warrants | 9,715,865 | 6,849,635 | ||||||
Total contingent shares issuance arrangement, stock options or warrants | 36,597,594 | 7,978,648 |
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.”“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 Ksix HoldingsSurge 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 740.10.30740-10-30 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 740.10.40740-10-40 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 2017.
Asset impairmentIn response to the COVID-19 pandemic, the Coronavirus Aid, Relief and disposalEconomic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of long-lived assets2017 (“2017 Tax Act”). Corporate taxpayers may carryback net operating losses (NOLs) originating between 2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.
Long-lived assets, such asIn addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property equipmentgenerally eligible for 15-year cost-recovery and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets or asset groups to be held and used is measured by a comparison100% bonus depreciation. The enactment of the carrying amount of an asset or asset groupCARES Act did not result in any material adjustments to our income tax provision for the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Assets to be disposed would be presented separately in the Consolidated Balance Sheet.year ended December 31, 2020.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year’s presentation.
F-13 |
Recent adopted accounting pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09 (ASU2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Based on the FASB’s Exposure Draft Update issued on April 29, 2015, and approved in July 2015, Revenue from Contracts With Customers (Topic 606): Deferral of the Effective Date, ASU 2014-09 is now effective for reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The adoption of ASU 2014-09 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805)2017-04 Intangibles-Goodwill and Other (“ASC 350”): ClarifyingSimplifying the DefinitionAccounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a Business.”reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019 and an entity should apply the amendments of ASU 2017-04 on a prospective basis. The adoption of ASU 2017-04 did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. This update is to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by U.S. GAAP that is most important to users of each entity’s financial statements. The amendments in this guidanceupdate apply to all entities that are clarifying the definition of a businessrequired, under existing U.S. GAAP, to assist entities when determining whether an integrated set of assets and activities meets the definition of a business. The update provides that when substantially all themake disclosures about recurring or nonrecurring fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted the new standard during the quarter ended March 31, 2020 and the adoption did not have a material effect on the consolidated financial statements and related disclosures.
Recent issued accounting pronouncements
In August 2020, the FASB issued ASU 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in Update No. 2020-06 simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the assets acquired is concentratedamendments focus on the guidance for convertible instruments and derivative scope exception for contracts in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidancean entity’s own equity. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2017,2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently in the process of determining the effect that the adoption will have on its financial position and results of this new guidance is not expected to have a material impact on our consolidated financial statements.operations.
In January 2017,March 2020, the FASB issued ASU 2017-04—Intangibles—GoodwillNo. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and Otherexceptions to account for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The amendments of ASU No. 2020-04 are effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company is evaluating the impact that the amendments of this standard would have on the Company’s consolidated financial statements
In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 350)740): Simplifying the TestAccounting for Goodwill Impairment. The amendments in thisIncome Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to eliminatereduce the requirement to calculate the implied fair value of goodwill to measure goodwill impairment charge (Step 2). As a result, an impairment charge will equal the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. An entity still has the option to perform the qualitative assessmentcomplexity in accounting for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. Theincome taxes. This guidance is effective for goodwill impairment tests in fiscal years beginningannual periods after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017. The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09 (ASU 2017-09), Compensation — Stock Compensation (Topic 718) Scope of Modification Accounting. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The adoption of ASU 2017-09 which will become effective for annual periods beginning after December 15, 2017 and for2020, including interim periods within those annual periods,periods. The Company is not expected to have anycurrently evaluating the potential impact of this guidance on the Company’sits consolidated financial statement presentation or disclosures.statements.
We haveManagement has 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 findfound no recent accounting pronouncements that wouldissued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the financial statements of the Company.
F-14 |
3 | LIQUIDITY |
At December 31, 2020 and 2019, our current assets were $1,251,029 and $3,574,885, respectively, and our current liabilities were $15,306,509 and $7,054,124, respectively, which resulted in a working capital deficit of $14,055,480 and $3,479,239, respectively.
Total assets at December 31, 2020 and 2019 amounted to $7,325,071 and $9,986,373, respectively. At December 31, 2020, assets consisted of current assets of $1,251,029, net property and equipment of $236,810, net intangible assets of $4,125,742, goodwill of $866,782, equity investment in Centercom of $414,612, and operating lease right of use asset of $368,638, as compared to current assets of $3,574,885, net property and equipment of $294,616, net intangible assets of $4,769,117, goodwill of $866,782, equity investment in Centercom of $203,700 and operating lease right of use asset of $210,816 at December 31, 2019.
At December 31, 2020, our total liabilities of $18,051,037 increased $3,365,049 from $14,685,988 at December 31, 2019.
At December 31, 2020, our total stockholders’ deficit was $10,725,966 as compared to $4,699,615 at December 31, 2019. The principal reason for the increase in stockholders’ deficit was the impact of the net loss of $10,721,626 offset by equity issuances during 2020.
The following table sets forth the major sources and uses of cash for the years ended December 31, 2020 and 2019.
2020 | 2019 | |||||||
Net cash used in operating activities | $ | (4,348,049 | ) | $ | (6,533,141 | ) | ||
Net cash used in investing activities | 8,354 | (32,241 | ) | |||||
Net cash provided by financing activities | 4,645,649 | 6.466,810 | ||||||
Net change in cash and cash equivalents | $ | 305,954 | $ | (98,572 | ) |
At December 31, 2020, the Company had the following material commitments and contingencies.
3 GOING CONCERNNotes payable – related party - See Note 8 to the Condensed Consolidated Financial Statements.
Notes payable and long-term debt - See Note 9 to the Condensed Consolidated Financial Statements.
Convertible promissory notes - See Note 10 to the Condensed Consolidated Financial Statements.
Related party transactions - See Note 15 to the Condensed Consolidated Financial Statements.
Cash requirements and capital expenditures – At the current level of operations, the Company has to borrow funds to meet basic operating costs.
Known trends and uncertainties – The Company hasis planning to acquire other businesses with similar business operations. The uncertainty of the economy may increase the difficulty of raising funds to support the planned business expansion.
We believe we will continue to incur net losses and do not established sourcesexpect positive cash flows from operations until the 4th quarter of revenues sufficient2021. At that time, we believe the impact of COVID-19 will have rescinded enough to allow us to fully implement our sales strategy, resulting in increased revenue in all segments of our business. The Company will continue to fund the development of its business, or to pay projected operating expenses and commitments for the next year. The Company has a stockholders’ deficit of $1,815,049, has a working capital deficiency of $3,301,057 as of December 31, 2016 and incurred losses for the past two years. These factors, among others, create an uncertainty about our ability to continue as a going concern.The Company projects that it should beoperations until cash flow positive afterthrough the use of promissory notes, both related and non-related party. These notes made up the majority of the $4,645,649 generated by financing activities during 2020.
F-15 |
On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and included a provision for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”). The PPP provides small businesses with funds to pay up to eight (8) weeks of payroll costs, including benefits. Funds received under the PPP may also be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or a portion of the loans may be forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from the date of issuance, and all payments are deferred for the first six (6) months of the loan. Any unforgiven balance of loan principal and accrued interest at the end of the 2nd quarter ended Junesix (6) month loan deferral period is amortized in equal monthly installments over the remaining 18-months of the loan term. On April 17, 2020, the Company closed a $498,082 SBA guaranteed PPP loan with Bank3. The Company expects to use the loan proceeds as permitted and apply for and receive forgiveness for the entire loan amount. In addition, the Company received $636,600 in several Economic Injury Disaster Loans with the Small Business Administration. These loans all carry a 3.75% interest rate payable over 30 2018years. First payment due 12 months from ongoing operationsdate of note.
4 | ASSET PURCHASE AGREEMENT |
On September 30, 2019, the Company entered into the Purchase Agreement with GBT.
Under the Purchase Agreement, the Company has purchased substantially all of the assets, and specified liabilities, of GBT’s ECS Prepaid business, Electronic Check Services business, and the Central State Legal Services business. The Purchase Agreement provides that the Company assumed GBT’s liabilities incurred after the effective date of the Purchase Agreement, but only to the extent such obligations and liabilities were not caused by or related to any action or inaction by GBT prior to the effective date of the Purchase Agreement. The Purchase Agreement provides, among other things, that on the terms and subject to the conditions set forth therein, the Company acquired substantially all of the assets related to the ECS Business for total consideration of five million dollars ($5,000,000). The Purchase Agreement provides that the consideration is to be paid by the combinationCompany through the issuance of increased cash flowa convertible promissory note in the amount of four million dollars ($4,000,000) to GBT, and through the issuance of three million three hundred thirty-three thousand three hundred thirty-three (3,333,333) restricted shares of the Company’s Common Stock to GBT. As of the date of this report, the purchase price allocation has yet to be valued. GBT may not convert the Note to the extent that such conversion would result in beneficial ownership by GBT and/or its affiliates of more than 4.99% of the issued and outstanding Common Stock of the Company.
The Note has an effective date of September 27, 2019 and has a term of eighteen (18) months until the maturity date. The Note shall not bear interest and shall be convertible at the option of GBT starting from its current subsidiaries, as well as restructuring our current debt burden.the sixth month anniversary of the effective date. The Company has executed an agreement with a FINRA licensed broker, as well as several institutional investors,conversion price of the Note shall equal the volume weighted average price of the Company’s Common Stock on the trading market which the common stock is then trading over the previous twenty (20) days prior to bring in equity investments to pay down existing debt obligations, cover short term shortfalls, and complete proposed acquisitions. Additionally,the conversion date, provided that the conversion price shall never be lower than $0.10 or higher than $0.70. The Note provides that the Company is negotiatingretains the right to prepay all or any portion of the principal without any prepayment penalty. In addition, in connection with the issuance of the Note, GBT agreed that, for the eighteen (18) months following the effective date, GBT will not dispose of the Shares or shares issued as a result of the conversion of the Note, in an amount greater than seven and one-half percent (7.5%) of the trading volume of the Company’s shares of Common Stock during the previous month.
Following the closing of the acquisition of True Wireless, LLC, (“TW”) an Oklahoma Limited Liability Company. Uponmerger transaction, the completionCompany’s investment in ECS consisted of the potential acquisition of TW as a wholly owned subsidiary, the Company believes it will become cash flow positive.The Company’s ability to continue as a going concern is dependent on the success of this plan.following:
Purchase Price | ||||
Convertible note | $ | 4,000,000 | ||
Common stock | 1,000,000 | |||
Total purchase price | $ | 5,000,000 | ||
Allocation of purchase price | ||||
Cash | $ | 210,348 | ||
Equipment | 63,289 | |||
Intangibles | 4,903,876 | |||
Accounts payable and accrued expenses | (177,513 | ) | ||
Total allocation of purchase price | $ | 5,000,000 |
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.
4 ACQUISITIONS
F-16 |
Following the closing of the merger transaction, ECS’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 ECS Business as if the entities were combined on January 1, 2019.
Year Ended | ||||
December 31, 2019 | ||||
Revenues | $ | 59,064,637 | ||
Net loss | $ | (8,902,134 | ) | |
Net loss per share | $ | (0.09 | ) | |
Weighted average number of shares outstanding | 96,186,742 |
5 |
|
Preliminary Amounts estimated by the Company | Adjustments | Appraised Value of Assets | ||||||||||
Cash | $ | 128,063 | - | $ | 128,063 | |||||||
Accounts receivable | 4,800 | - | 4,800 | |||||||||
Intangible assets (See Note 5) | 1,630,973 | (1,246,329 | ) | 384,644 | ||||||||
Goodwill | - | 866,782 | 866,782 | |||||||||
Total assets | 1,763,836 | (379,547 | ) | 1,384,289 | ||||||||
Accounts payable and accrued expenses | (6,244 | ) | (4,978) | (11,222 | ) | |||||||
Credit card liability | (153,097 | ) | - | (153,097 | ) | |||||||
Deferred revenue | (288,720 | ) | - | (288,720 | ) | |||||||
Net assets acquired | $ | 1,315,775 | $ | (384,525 | ) | $ | 931,250 | |||||
Cash and notes issued | $ | 840,775 | (9,525) | $ | 831,250 | |||||||
Value of common stock issued | 475,000 | (375,000 | ) | 100,000 | ||||||||
Total consideration | $ | 1,315,775 | $ | (384,525 | ) | $ | 931,250 |
Property and equipment stated at cost, less accumulated depreciation, consisted of the following:
December 31, 2020 | December 31, 2019 | |||||||
Computer Equipment and Software | $ | 312,796 | $ | 312,760 | ||||
Furniture and Fixtures | 9,774 | 1,416 | ||||||
Leasehold Improvements | 19,724 | 21,513 | ||||||
342,294 | 335,689 | |||||||
Less: Accumulated Depreciation | (105,484 | ) | (41,073 | ) | ||||
$ | 236,810 | $ | 294,616 |
Depreciation expense was $64,413 and $27,293 for the years ended December 31, 2020 and 2019, respectively.
6 | INTANGIBLE ASSETS |
Property and equipment stated at cost, less accumulated depreciation, consisted of the following:
December 31, 2020 | December 31, 2019 | |||||||
ECS Membership agreement | $ | 465,000 | $ | - | ||||
Customer relationships | 183,255 | 183,255 | ||||||
Noncompetition agreement | 201,389 | 201,389 | ||||||
Trade names | 617,474 | 617,474 | ||||||
Proprietary software | 4,286,403 | 4,286,402 | ||||||
5,753,521 | 5,288,520 | |||||||
Less: Accumulated Depreciation | (1,627,779 | ) | (519,403 | ) | ||||
$ | 4,125,742 | $ | 4,769,117 |
Amortization expense of intangible assets for the years ended December 31, 2020 and 2019 total $1,108,375 and $200,028, respectively. As of December 31, 2020, the weighted average remaining useful lives of these assets were 6.80 years.
The adjustment in assets acquired and liabilities assumed resulted in a decrease in amortization expensecarrying amount of $494,584, of which $88,270 relates to 2015 operations and $406,315 relates to 2016 operations. In addition, selling, general and administrative expense declined by $4,978 and interest expense increased by $9,525 in 2016.
Proforma operating results for the period from January 1, 2015 throughgoodwill was $866,782 at December 31, 2015 as if2020 and 2019. There were no changes in the acquisition had occurred on January 1, 2015 are as follows:
2015 | ||||
Revenue | $ | 3,720,955 | ||
Net income (loss) | $ | (250,664 | ) |
5 INTANGIBLE ASSETS
Intangible assets are as follows:
Ksix and BLVD - The customer lists and related contractscarrying amount of KSIX and BLVD were recorded at their fair value of $1,143,162 upon their acquisition on December 23, 2014. The Company determined a useful life of existing contracts and customer lists of three years and began amortizinggoodwill during the cost over that period.
DIQ - The customer listsNo impairment in the carrying amount of goodwill was recognized during the years ended December 31, 2020 and related contracts of DIQ were recorded at their initial estimated fair value of $1,630,973 upon their acquisition on October 12, 2015. After completing the appraisal (see Note 4), the Company made measurement period adjustments.2019.
Term | 2016 | 2015 | ||||||||||
KSIX and BLVD customer lists and related contracts | 3 years | $ | - | $ | 1,143,162 | |||||||
DIQ initial customer lists and contracts | 3 years | $ | - | $ | 1,630,973 | |||||||
DIQ customer relationships | 5 years | $ | 183,255 | $ | - | |||||||
DIQ noncompetition agreement | 2 years | $ | 201,389 | $ | - | |||||||
$ | 384,644 | $ | 2,774,135 | |||||||||
Accumulated amortization | $ | 167,449 | $ | 507,777 | ||||||||
$ | 217,195 | $ | 2,266,358 | |||||||||
Asset impairment | $ | 372,706 | $ | - | ||||||||
Amortization expense | $ | 430,128 | $ | 499,425 |
Effective April 1, 2016, the Company temporarily suspended its BLVD business operations and is reviewing a potential discontinuation of the business. BLVD had only nominal operations in 2016. In addition, the Company evaluated the operations of KSIX at the end of 2016 and determined that, due to declining cash flows, the unamortized balance of the intangible assets associated with KSIX and BLVD should be impaired. An impairment of $372,706 was recorded.
Goodwill:
7 | CREDIT CARD LIABILITY |
The Company completed the appraisal of assets acquired and liabilities assumed in the acquisition of DIQ (see Note 4) and recognized goodwill in the amount of $866,782.
6 DEFERRED REVENUE
The Company bills in advance for services to be rendered for the majority of the business of DIQ. As of December 31, 2016 and December 31, 2015, the Company had received $165,000 and $518,240 from its customers for which services had yet to be delivered, respectively.
7 CREDIT CARD LIABILITY
The Company haspreviously utilized a credit card issued in the name of DIQ operation to pay for certain of its trade obligations. During the year ended December 31, 2020 and 2019, the Company utilized a credit card issued in the name of Surge Holdings, Inc. to pay certain trade obligations totaling $102,941 and $1,106,280, respectively. At December 31, 20162020 and December 31, 2015,2019, the Company’s total credit card liability was $336,726$383,073 and $274,135,$449,158, respectively.
8 | NOTES PAYABLE – RELATED PARTY |
In December 2018, the Company executed a promissory note payable agreement with SMDMM Funding, LLC (“SMDMM”), an entity that is owned by the Company’s Chief Executive Officer. The bank charges nopromissory note was for a principal sum up to $1.1 million at an annual interest rate of 6%, due on December 27, 2021. During the year ended December 31, 2020, the Company did not withdraw any net advances on the outstanding credit card balance, which is requirednote.
In August 2019, the Company executed a promissory note payable agreement with SMDMM. The promissory note was for a principal sum up to be repaid$217,000 at an annual interest rate of 6%, due on August 15, 2022. During the end of each billing cycle. Inyear ended December 31, 2020, the eventCompany did not withdraw any net advances on the payment is not timely made, the bank charges a fee consistent with its billing agreement. The credit card liability isguaranteed by Scott Kaplan, the vice president of business development for KSIX, LLC.
note.
8 LONG-TERM DEBT – RELATED PARTYDuring the fourth quarter 2019, the Company executed a promissory note payable agreement with SMDMM. The promissory note was for a principal sum up to $883,000 at an annual interest rate of 15%, due on November 21, 2022. During the year ended December 31, the Company did not withdraw any net advances on the note.
During the year ended December 31, the Company executed a series of promissory notes payable agreement with SMDMM. The promissory notes were for a principal sum up to $1,136,500 at an annual interest rate of 10%, due on demand. During the year ended December 31, the Company drew advances on the note totaling $1,136,500 million.
During the year ended December 31, 2020, the Company made accrued interest payments of $39,600. The outstanding principal balance under the promissory notes due to SMDMM was $3,341,940 and $2,205,440 at December 31, 2020 and 2019, respectively. Accrued interest owed to SMDMM was $272,127 and $64,741 at December 31, 2020 and 2019, respectively.
During the year ended December 31, 2020, the Company executed a series of promissory notes with AN Holdings, LLC, an entity owned by the Company’s President. The promissory notes were for an aggregate principal sum of $443,210 at an annual interest rate of 15%, due on demand. During the year ended December 31, 2020, the Company made accrued interest payments of $15,164. The Company repaid $295,710. As of December 31, 2020, the outstanding balance on the notes was $147,500. Accrued interest owed to was $5,888 at December 31, 2020.
9 | NOTES PAYABLE AND LONG-TERM DEBT |
As of December 31, 20162020 and December 31, 2015,2019, notes payable and long-term debt, due to a related partynet of debt discount, consists of:
December 31, 2016 | December 31, 2015 | |||||||
Note payable to director due in four equal annual installments of $26,875 on April 28 of each year | 107,500 | 107,500 | ||||||
Less debt discount | - | - | ||||||
107,500 | 107,500 | |||||||
Less current portion - related party | 53,750 | 26,875 | ||||||
Long-term debt - related party | $ | 53,750 | $ | 80,625 |
On April 28, 2015, the Company issued a promissory note to a director for principal amount of $107,500. The promissory note is due in four equal annual payment of $26,875 on April 28 each year. Pursuant to the terms of the note, the note begins to accrue interest at 6% per annum on the portion of the note that falls in default and the past due portion is convertible into the Company’s common stock at a conversion price equal to 70% of the current price of the common stock.
The payment due April 28, 2016 has not been made. The Company has determined that the conversion feature for the past due portion of the note constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the note on the date of default. Accrued interest was $1,088 at December 31, 2016 and zero at December 31, 2015.
December 31, 2020 | December 31, 2019 | |||||||
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 | ||||||
Promissory note payable to a lender dated November 4, 2019; accruing interest at 18% per annum; due November 3, 2020; 100,000 shares of restricted Common Stock granted on execution recorded as a debt discount3 | 250,000 | 250,000 | ||||||
Promissory note payable to Bank3 dated April 17, 2020; accruing interest at 1% per annum, due October 17, 2021. | 498,082 | - | ||||||
Note payable to US Small Business Administration dated May 25, 2020; accruing interest at 3.75% per annum; due May 25, 2050. | 150,000 | - | ||||||
Note payable to US Small Business Administration dated July 5, 2020; accruing interest at 3.75% per annum; due July 5, 2050. | 150,000 | - | ||||||
Note payable to US Small Business Administration dated July 5, 2020; accruing interest at 3.75% per annum; due July 5, 2050. | 15,100 | - | ||||||
Note payable to US Small Business Administration dated July 7, 2020; accruing interest at 3.75% per annum; due July 7, 2050. | 150,000 | - | ||||||
Note payable to US Small Business Administration dated July 21, 2020; accruing interest at 3.75% per annum; due July 21, 2050. | 150,000 | - | ||||||
Note payable to US Small Business Administration dated July 21, 2020; accruing interest at 3.75% per annum; due July 21, 2050. | 21,500 | - | ||||||
Promissory note payable to BHP Capital NY dated January 30, 2020 with interest at 14% per annum; due February 5, 2021; convertible into shares of Common Stock upon default4 | 100,343 | - | ||||||
Promissory note payable to Armada Capital Partners LLC dated January 30, 2020 with interest at 14% per annum; due February 5, 2021; convertible into shares of Common Stock upon default4 | 118,394 | - | ||||||
Promissory note payable to Jefferson Street Capital LLC dated January 30, 2020 with interest at 14% per annum; due February 5, 2021; convertible into shares of Common Stock upon default4 | 148,500 | - | ||||||
Promissory note payable to GS Capital Partners dated February 7, 2020 with interest at 14% per annum; due February 6, 2021; convertible into shares of Common Stock upon default5 | 216,000 | - | ||||||
Promissory note payable to Fourth Man LLC dated February 7, 2020 with interest at 14% per annum; due April 5, 2021; convertible into shares of Common Stock upon default5 | 187,018 | - | ||||||
Promissory note payable to GS Capital Partners dated March 5, 2020 with interest at 14% per annum; due February 6, 2021; convertible into shares of Common Stock upon default6 | 378,000 | - | ||||||
Promissory note payable to Tangiers Global LLC dated March 15, 2020 with interest at 14% per annum; due March 15, 2021; convertible into shares of Common Stock upon default7 | 50,695 | - | ||||||
Promissory note payable to LGH Investments LLC dated May 29, 2020 with interest at 10% per annum; due March 29, 2021; convertible into shares of Common Stock upon default8 | 400,000 | - | ||||||
Promissory note payable to Vista Capital LLC dated July 21, 2020 with interest at 10% per annum; due March 29, 2021; convertible into shares of Common Stock upon default9 | 270,000 | - | ||||||
Promissory note payable to Lucas Ventures dated December 14, 2020 with interest at 10% per annum; due September 10, 2021; convertible into shares of Common Stock upon default10 | 165,000 | - | ||||||
3,418,632 | 762,500 | |||||||
Less: Debt discount | (517,781 | ) | (26,328 | ) | ||||
$ | 2,900,851 | $ | 736,172 |
9 NOTES PAYABLE AND LONG-TERM DEBT
As of December 31, 2016, notes payable and long-term debt consists of: | ||||||||||||
Note Balance | Debt Discount | Carrying Value | ||||||||||
On October 26, 2011, the Company entered into a note payable in the amount of $362,257, relating to a Unit redemption agreement bearing interest at 6% per annum and is payable in equal monthly installments of $7,003, inclusive of interest, past due | $ | 68,973 | $ | - | $ | 68,973 | ||||||
Convertible Promissory Note - Non-interest bearing; on January 19, 2016, the Company modified the terms of a secured note payable in the original amount of $950,000 and made the $700,000 balance convertible¹ | 590,000 | - | 590,000 | |||||||||
Note payable to former officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016; accruing interest at 6% per annum since April 28, 2016 | 101,250 | - | 101,250 | |||||||||
Notes payable to seller of DigitizeIQ, LLC due as noted below² | 485,000 | - | 485,000 | |||||||||
Senior Secured Credit Facility dated February 24, 2016; interest at 18% per annum; interest only for two months then 16 payments of $28,306 monthly³ | 261,043 | - | 261,043 | |||||||||
Note payable to Calvary Fund I. LP dated May 25, 2016 with interest at 18%4 | 130,000 | - | 130,000 | |||||||||
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 stock5 | 27,500 | 8,774 | 18,726 | |||||||||
Convertible promissory notes payable to Salksanna, LLC dated October 7, 2016 and December 21, 2016 with interest at 10% per annum; due March 13, 2018; convertible into common stock6 | 95,405 | 87,379 | 8,026 | |||||||||
Working capital notes7 | 183,757 | - | 183,757 | |||||||||
1,942,928 | 96,153 | 1,846,775 | ||||||||||
Less current portion | 1,796,898 | 8,774 | 1,788,124 | |||||||||
Long-term debt | $ | 146,030 | $ | 87,379 | $ | 58,651 |
1 | Notes due seller of DigitizeIQ, LLC includes a series of notes as follows: |
As of December 31, 2015, notes payable and long-term debt consists of: | ||||||||||||
Note Balance | Debt Discount | Carrying Value | ||||||||||
On October 26, 2011, the Company entered into a note payable in the amount of $362,257, relating to a Unit redemption agreement bearing interest at 6% per annum and is payable in equal monthly installments of $7,003, inclusive of interest, past due | $ | 91,706 | $ | - | $ | 91,706 | ||||||
Convertible Promissory Note - Non-interest bearing; on January 19, 2016, the Company modified the terms of a secured note payable in the original amount of $950,000 and made the $700,000 balance convertible¹ | 720,000 | - | 720,000 | |||||||||
Note payable to former officer due in four equal annual installments of $25,313 on April 28 of each year, non-interest bearing; past due in 2016 | 101,250 | - | 101,250 | |||||||||
Notes payable to seller of DigitizeIQ, LLC due as noted below² | 750,000 | 2,860 | 747,140 | |||||||||
1,662,956 | 2,860 | 1,660,096 | ||||||||||
Less current portion | 1,107,019 | 2,860 | 1,104,159 | |||||||||
Long-term debt | $ | 555,937 | $ | - | $ | 555,937 |
¹ TheConvertible Promissory Note was modified on January 19, 2016 to release the pledge of the holder’s former membership units in Ksix and BLVD, to make the note convertible into the Company’s common stock and to require an extra payment of $100,000 due within 90 days. The terms of the Convertible Note provided in the event the Note was not paid prior to the Maturity Date (January 1, 2017) or that payments are not made to the holder by the due date ($10,000 on the 1st and 15thof each month), the holder shall have the right thereafter, exercisable in whole or in part, to convert the outstanding principal or payment then due into shares of the common stock of the Company. The Convertible Promissory Note provided the note conversion price was determined by taking the lowest closing price of the Company’s common stock in the previous ten trading days and then applying a 45% discount. On March 23, 2016, the parties entered into an Addendum to the Convertible Promissory Note to allow an immediate conversion of the $20,000 payments due in April 2016 at the 45% discount rate; to modify the conversion discount rate from 45% to 35% for any future conversions; and to require an additional payment of $30,000 within sixty days. The Company evaluated the embedded conversion feature for derivative treatment and the debt discount is fully amortized at December 31, 2016.
The original note and the convertible promissory note provide for semi-monthly payments of $10,000 due on the 1st and 15thof the month, with any unpaid balance due on January 1, 2017. If the Company paid the unpaid balance on December 31, 2016, they were allowed a discount of $200,000 from the remaining balance. In addition, the modification and addendum, provided for two additional payments during 2016. Within 90 days of January 19, 2016, the Company was required to make an additional payment of $100,000 and within 60 days of March 23, 2016, the Company was required to make an additional payment of $30,000. As of January 1, 2017 the total balance is past due.
²Notes due seller of DigitizeIQ, LLC includes a series of notes as follows:
● | A | |
● | A third |
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.
³Senior Secured Credit Facility Agreement -On February 24, 2016, the Company executed a Senior Secured Credit Facility Agreement (“Senior Credit Facility”) in the maximum amount of $5,000,000 together with a Convertible Promissory Note (“Convertible Note”) in the amount of $750,000 with TCA Global Credit Master Fund, LP (“TCA”). The initial loan advance was $400,000 and requires monthly interest only payments for two months and then sixteen monthly payments of $28,306, including interest at 18% per annum. The obligation is secured by substantially all assets ofIn January 2020, the Company and its subsidiaries. The payment due August 29, 2016 was acquired by Salksanna LLCthe sellers settled the outstanding promissory notes and a gain on September 13, 2016 (See ⁶ below). The payment due September 29, 2016 was acquired by Salksanna, LLC on October 7, 2016 and the payment due October 29, 2016 was acquired by Salksanna, LLC on December 21, 2016. (See ⁶ below).
The Senior Credit Facility includes a provisionsettlement for advisory fees in the amount of $300,000 which was paid when the Company issued 1,782,000 shares of its common stock to TCA (the “Advisory Shares”) on or about March 24, 2016. If TCA is unable to collect the $300,000 from sales of the Advisory Shares within twelve months, the Company is obligated to issue additional shares to TCA until TCA is able to collect the full $300,000. Should TCA still be unable to collect the full $300,000, and after at least one year, TCA can require the Company to redeem any remaining shares for an amount equal to $300,000 less the sales proceeds that TCA has collected. In the event TCA sells the Advisory Shares for more than $300,000, the excess proceeds, together with unsold common shares will be returned to the Company. As long as there is no default under the terms of the Senior Credit Facility, TCA is limited to weekly sales of the Advisory Shares equal to no more than 20% of the average weekly volume of the Company’s common stock on its principal trading market. The stock was valued at the trading price on the date of the agreement and the resulting $300,000 was included as a direct reduction from the carrying amount of the debt liability and was fully amortized at December 31, 2016.
The Convertible Note is convertible into the Common Stock of the Company upon the event of: (1) a default under any of the loan documents between the Company and TCA; or (2) mutual agreement between the Company and TCA, at which time TCA may convert all or a portion of the outstanding principal accruedbalance $485,000 and unpaid interest into shares of the Common Stock of the Company calculated by the conversion amount divided by 85% of the lowest of the daily weighted average price of the Company’s Common Stock during five business days immediately prior to the date of the request of conversion (the “Conversion”). Pursuant to the terms of the Convertible Note, TCA is limited to beneficial ownership of not more than 4.99% of the issued and outstanding Common Stock of the Company after taking into effect the Common Stock to be issued pursuant to the Conversion.
The TCA note was restructured effective August 29, 2016, September 29, 2016 and October 29, 2016 to accommodate the payment of the amounts due on those dates by Salksanna, LLC and the issue by the Company of convertible notes payable to Salksanna for the amounts of those payments. (See6 below.) The restructured note to TCA added $25,146 to each payment for the loan fee originally paid with common stock. When the fee is paid in full, the 1,782,000 shares will be returned to the Company. The payments due TCA on November 29, 2016 and December 29, 2016 are currently unpaid and this default resulted in the note becoming convertible into common stock of the Company.
The Company evaluated the resulting embedded conversion feature for derivative treatment and recorded an initial derivative liability and debt discount of $163,883. The debt discount was fully amortized at December 31, 2016.
The Company is also responsible for other transaction, due diligence and legal fees of $42,500 if it draws the remaining $350,000 initially committed.
The proceeds from the loan were used to pay a $250,000 note to the seller of DIQ and for working capital.
4Calvary Fund I, LP Note –The Calvary note payable was due in installments of $25,000 plusrelated accrued interest on November 25, 2016; $18,750 plus accrued interest on December 25, 2016; $14,063 plus accrued interest on January 25, 2017 and a final payment of the unpaid balance plus accrued interest on May 25, 2017. The agreement provides for limitations on additional indebtedness. If an event of default, as defined in the agreement, occurs and if not cured within ten days, the note becomes convertible into the Company’s common stock at a rate equal to 65% of the average VWAP over the previous 5 trading days. If the event of default is for non-payment of any installment due, the amount convertible is limited to the amount of the unpaid installment. Pinz Capital is controlled by a director of the Company. Calvary Fund I, LP acquired the note from Pinz Capital in December 2016.
The payments due November 25, 2016 and December 25, 2016 were not made. As a result, the Company was penalized $30,000, which was added to the note balance and due to other past due obligations, it was determined the total balance was in default and due, making the note convertible. Accordingly, a debt discount for the derivative liability$97,806, was recorded on November 25, 2016 for $52,889. At December 31, 2016, the debt discount was fully amortized.consolidated statements of operations.
52 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 $23,339.$23,190. The debt discount has beenis fully amortized. In February 2020, the Company and RNE settled the outstanding debt.
3 Promissory note – The Company evaluated the 100,000 restricted shares of the Company’s Common Stock granted with the note and recorded a debt discount of $31,200. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations. There was unamortized debt discount of $0 and $26,328 as of December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, the Company recorded amortization of debt discount totaling $28,294.
4 On January 30, 2020, the Company entered into Securities Purchase Agreements (the “January 2020 SPAs”), with severally and not jointly, with BHP, Armada, Jefferson (the “January 2020 Investors”), pursuant to which the January 2020 Investors purchased from the Company, for an aggregate purchase price of $500,000 (the “January 2020 Purchase Price”), Promissory Notes in the aggregate principal amount of $540,000 (the “January 2020 Notes”). The January 2020 Notes will be repaid according to a schedule of fixed interest and principal payments beginning in August 2020. As additional consideration for the January 2020 Investors loaning the January 2020 Purchase Price to the Company, the Company issued to each of the January 2020 Investors 250,000 shares of Common Stock for a total of 750,000 shares (the “January 2020 Share Issuance”). In connection with the January 2020 SPAs, the Company paid issuance costs of $40,000 which is accounted for as a debt discount on the consolidated balance sheets and is being amortized over the life of $8,774the notes.
F-19 |
The January 2020 Notes shall accrue interest at December 31, 2016.a rate of fourteen percent (14%) per annum and will mature on February 5, 2021. No payments of principal or interest are due through July 2020 (five (5) months following issuance) and then there are seven (7) fixed payments of principal and interest due on a monthly basis until maturity. On August 7, 2020, the Company executed agreements with the January 2020 investors to postpone the first and second principal and interest payment due date to maturity date and extend the maturity date until April 5, 2021 in exchange for 195,000 shares of Common Stock. The shares were valued on day of grant with a fair value of $30,225 and is included as a component of interest expense in the consolidated statements of operations.
In the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable. The Company recorded a $260,001 debt discount relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost.
The Company hasvalued the 750,000 shares upon day of grant with a fair value of $240,000 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the statements of operations.
There was total unamortized debt discount related to the January 2020 SPAs of $52,258 as of December 31, 2020. During the year ended December 31, 2020, the Company recorded amortization of debt discount totaling $487,743.
5 On February 3 and February 6, 2020, the Company entered into Securities Purchase Agreements (the “February 2020 SPAs”), with severally and not jointly, with GS Capital Partners (“GSC”) and Fourth Man LLC (“Fourth”), (the “February 2020 Investors”), pursuant to which the February 2020 Investors purchased from the Company, for an aggregate purchase price of $400,000 (the “February 2020 Purchase Price”), Promissory Notes in the principal amount of $432,000 (the “February 2020 Notes”). The February 2020 Notes will be repaid according to a schedule of fixed interest and principal payments beginning in August 2020. As additional consideration for the February 2020 Investors loaning the February 2020 Purchase Price to the Company, the Company issued to each of the February 2020 Investors 300,000 shares of Common Stock for a total of 600,000 shares (the “February Share Issuance”). In connection with the February 2020 SPAs, the Company paid issuance costs of $32,000 which is accounted for as a debt discount on the consolidated balance sheets and is being amortized over the life of the notes. On August 5, 2020 and September 24, 2020, the Company executed agreements with the February 2020 Investors to postpone the first principal and interest payment due date to October 5, 2020 and extend the maturity date until April 5, 2021 in exchange for 225,000 shares of Common Stock. The shares were valued on day of grant with a fair value of $28,965 and is included as a component of interest expense in the consolidated statements of operations.
The terms of the February 2020 Notes are substantially the same as the terms of the January 2020 Notes. The Company recorded a debt discount of $214,000 relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost.
The Company valued the 600,000 shares upon day of grant with a fair value of $186,000 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
F-20 |
There was total unamortized debt discount related to the February 2020 SPAs of $42,658 as of December 31, 2020. During the year ended December 31, 2020, the Company recorded amortization of debt discount totaling $389,342.
6 On March 5, 2020, the Company entered into a numberSecurities Purchase Agreement (the “March 2020 SPA”), with GSC (the “March 2020 Investor”), pursuant to which the March 2020 Investor purchased from the Company, for an aggregate purchase price of agreements with RNE wherein RNE has agreed to invest up to $3,000,000$350,000 (the “March 2020 Purchase Price”), a Promissory Note in the common stockprincipal amount of $378,000 (the “March 2020 Note”). The March 2020 Note will be repaid according to a schedule of fixed interest and principal payments beginning in September 2020. As additional consideration for the March 2020 Investor loaning the March 2020 Purchase Price to the Company, the Company issued to the March 2020 Investor 400,000 shares of Common Stock of the Company. TheseIn connection with the March 2020 SPAs, the Company paid issuance costs of $28,000 which is accounted for as a debt discount on the consolidated balance sheets and is being amortized over the life of the notes.
The March 2020 Note shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on March 5, 2021. No payments of principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments of principal and interest due on a monthly basis until maturity.
In the event of default as defined in the agreements, requirethe notes may be converted into shares of the Company’s Common Stock at a conversion price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable. The Company recorded a debt discount of $241,200 relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost.
The Company valued the 400,000 shares upon day of grant with a fair value of $108,800 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
There was total unamortized debt discount related to the March 2020 SPAs of $47,018 as of December 31, 2020. During the year ended December 31, 2020, the Company recorded amortization of debt discount totaling $330,982.
7 On April 1, 2020, the Company entered into a Securities Purchase Agreement (the “April 2020 SPA”), with Tangiers Global (“Tangiers”) (the “April 2020 Investor”), pursuant to which the April 2020 Investor purchased from the Company, for an aggregate purchase price of $150,000 (the “April 2020 Purchase Price”), a Promissory Note in the principal amount of $162,000 (the “April 2020 Note”). The April 2020 Note will be repaid according to a schedule of fixed interest and principal payments beginning in September 2020. As additional consideration for the April 2020 Investor loaning the April 2020 Purchase Price to the Company, the Company issued to the April 2020 Investor 172,000 shares of Common Stock of the Company.
The April 2020 Note shall accrue interest at a rate of fourteen percent (14%) per annum and will mature on March 15, 2021. No payments of principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments of principal and interest due on a monthly basis until maturity.
In the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable. The Company recorded a debt discount of $103,560 relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost.
F-21 |
The Company valued the 172,000 shares upon day of grant with a fair value of $46,400 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective Registration Statementinterest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
There was total unamortized debt discount related to the April 2020 SPA of $32,843 as of December 31, 2020. During the year ended December 31, 2020, the Company recorded amortization of debt discount totaling $129,157.
8 On May 29, 2020, the Company entered into a Securities Purchase Agreement (the “May 2020 SPA”), with LGH Investments LLC (“LGH”) (the “May 2020 Investor”), pursuant to which the May 2020 Investor purchased from the Company, for an aggregate purchase price of $370,000 (the “May 2020 Purchase Price”), a Promissory Note in the principal amount of $400,000 (the “May 2020 Note”). The May 2020 Note will be repaid according to a schedule of fixed interest and principal payments beginning in September 2020. As additional consideration for the May 2020 Investor loaning the May 2020 Purchase Price to the Company, the Company issued to the May 2020 Investor 400,000 shares of Common Stock of the Company in addition to three-year warrants to purchase 500,000 shares of Common Stock.
The May 2020 Note shall accrue interest at a rate of fourteen percent (10%) per annum and will mature on fileMarch 29, 2021. No payments of principal or interest are due through August 2020 (five (5) months following issuance) and then there are seven (7) fixed payments of principal and interest due on a monthly basis until maturity.
In the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion price equal to 0.65 (representing a 35% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable. The Company recorded a debt discount of $149,604 relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost.
The Company valued the 400,000 shares upon day of grant with a fair value of $124,000 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
The warrants were issued to the Buyers by the Company on May 29, 2020 in connection with the SPA. The warrants entitle the Buyers, respectively, to exercise purchase rights represented by the warrants up to 500,000 shares per warrant. The warrants permit the Buyers to exercise the purchase rights at any time on or after May 29, 2020 through May 29, 2023. Each warrant contains an exercise price per share of $0.40, subject to adjustment, and would allowalso contains a provision permitting the cashless exercise of such exercise rights as defined therein. The Company has maintained the right to redeem each warrant in full at any time following payment in full of the amounts owing under each respective note. The Company valued the warrants upon day of grant with a fair value of $96,396 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
There was total unamortized debt discount related to the May 2020 SPA of $80,000 as of December 31, 2020. During the year ended December 31, 2020, the Company recorded amortization of debt discount totaling $320,000.
9 On July 20, 2020, the Company entered into a Securities Purchase Agreement (the “July 2020 SPA”), with Vista Capital Investments LLC (“Vista”) (the “July 2020 Investor”), pursuant to require RNEwhich the July 2020 Investor purchased from the Company, for an aggregate purchase price of $250,000 (the “July 2020 Purchase Price”), a Promissory Note in the principal amount of $270,000 (the “July 2020 Note”). The July 2020 Note will be repaid according to a schedule of fixed interest and principal payments beginning in September 2020. As additional consideration for the July 2020 Investor loaning the July 2020 Purchase Price to the Company, the Company issued to the July 2020 Investor 270,000 shares of Common Stock of the Company in addition to three-year warrants to purchase 338,000 shares of Common Stock.
F-22 |
The July 2020 Note shall accrue interest at a rate of fourteen percent (10%) per annum and will mature on April 20, 2021. No payments of principal or interest are due through January 2020 (six (6) months following issuance) and then there are three (3) fixed payments of principal and interest due on a monthly basis until maturity.
In the Company’s common stock at 90%event of default as defined in the lowest trading priceagreements, the notes may be converted into shares of the Company’s common stockCommon Stock at a conversion price equal to 0.70 (representing a 30% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the Common Stock during the previous fiveten (10) trading days.day period ending on the latest complete trading day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable. The Company recorded a debt discount of $145,538 relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost.
The Company valued the 270,000 shares upon day of grant with a fair value of $62,100 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
The warrants were issued to the Buyers by the Company on July 20, 2020 in connection with the SPA. The warrants entitle the Buyers, respectively, to exercise purchase rights represented by the warrants up to 338,000 shares per warrant. The warrants permit the Buyers to exercise the purchase rights at any time on or after July 20, 2020 through July 19, 2023. Each warrant contains an exercise price per share of $0.40, subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise rights as defined therein. The Company has not yet filedmaintained the right to redeem each warrant in full at any time following payment in full of the amounts owing under each respective note. The Company valued the warrants upon day of grant with a Registration Statementfair value of $42,362 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
There was total unamortized debt discount related to the July 2020 SPA of $108,394 as of December 31, 2020. During the year ended December 31, 2020, the Company recorded amortization of debt discount totaling $161,606.
10 On December 14, 2020, the Company entered into a Securities Purchase Agreement (the “December 2020 SPA”), with Lucas Ventures LLC (“Lucas”) (the “December 2020 Investor”), pursuant to which the December 2020 Investor purchased from the Company, for an aggregate purchase price of $153,000 (the “December 2020 Purchase Price”), a Promissory Note in the principal amount of $165,000 (the “December 2020 Note”). The December 2020 Note will be repaid according to a schedule of fixed interest and principal payments beginning in September 2020. As additional consideration for the December 2020 Investor loaning the December 2020 Purchase Price to the Company, the Company issued to the December 2020 Investor 300,000 shares of Common Stock of the Company in addition to three-year warrants to purchase 150,000 shares of Common Stock.
The December 2020 Note shall accrue interest at a rate of ten percent (10%) per annum and will mature on September 14, 2021. No payments of principal or interest are due through January 2021 (six (6) months following issuance) and then there are three (3) fixed payments of principal and interest due on a monthly basis until maturity.
In the event of default as defined in the agreements, the notes may be converted into shares of the Company’s Common Stock at a conversion price equal to 0.70 (representing a 30% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable. The Company recorded a debt discount of $77,318 relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost.
F-23 |
The Company valued the 300,000 shares upon day of grant with a fair value of $48,600 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
The warrants were issued to the Buyers by the Company on December 14, 2020 in connection with the SEC.SPA. The warrants entitle the Buyers, respectively, to exercise purchase rights represented by the warrants up to 150,000 shares per warrant. The warrants permit the Buyers to exercise the purchase rights at any time on or after December 14, 2020 through December 14, 2023. Each warrant contains an exercise price per share of $0.40, subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise rights as defined therein. The Company has maintained the right to redeem each warrant in full at any time following payment in full of the amounts owing under each respective note. The Company valued the warrants upon day of grant with a fair value of $39,082 and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations.
There was total unamortized debt discount related to the December 2020 SPA of $154,611 as of December 31, 2020. During the year ended December 31, 2020, the Company recorded amortization of debt discount totaling $10,389.
10 | CONVERTIBLE PROMISSORY NOTES |
As of December 31, 2020 and 2019, convertible promissory notes payable consists of:
December 31, 2020 | December 31, 2019 | |||||||
Convertible note payable to GBT Technologies Inc. dated September 27, 2019 with no interest; due March 27, 2021; convertible into Common Stock 1 | $ | - | $ | 4,000,000 | ||||
Convertible note payable to Power Up Lending Group Ltd. dated September 18, 2019 with at 12% per annum; due September 18, 2020; convertible into Common Stock 2 | - | 233,000 | ||||||
Convertible note payable to BHP Capital NY dated October 7, 2019 with interest at 8% per annum; due April 7, 2021; convertible into shares of Common Stock 3 | - | 135,000 | ||||||
Convertible note payable to Armada Capital Partners LLC dated October 7, 2019 with interest at 8% per annum; due April 7, 2021; convertible into shares of Common Stock 3 | - | 135,000 | ||||||
Convertible note payable to Jefferson Street Capital LLC dated October 7, 2019 with interest at 8% per annum; due April 7, 2021; convertible into shares of Common Stock 3 | - | 135,000 | ||||||
- | 4,638,000 | |||||||
Less: Debt discount | - | (201,316 | ) | |||||
$ | - | $ | 4,436,684 |
61 TheAs discussed above in Note 4, the Purchase Agreement provides that the consideration is to be paid by the Company issued threethrough the issuance of a convertible notes to Salksanna, LLC in exchange for payments made by Salksanna to TCA. The firstpromissory note in the amount of $53,452 was converted into 1,953,399$4,000,000 to GBT, and through the issuance of three million three hundred thirty-three thousand three hundred thirty-three restricted shares of the Company’s common stock.Common Stock. The secondconversion price of the note inshall equal the original amountvolume weighted average price of $53,452the Company’s Common Stock on the trading market which the Common Stock is then trading over the previous twenty (20) days prior to the conversion date, provided that the conversion price shall never be lower than $0.10 or higher than $0.70. The note provides that the Company retains the right to prepay all or any portion of the principal without any prepayment penalty. On June 23, 2020, the debt was partially converted with $11,500 in principal and $44 in accrued interest converted into 383,5258,000,000 shares of the Company’s common stock.Common Stock with a per share fair value of $0.24 per share. Upon issuance of the shares, the Company recorded a gain on settlement of $2,080,000 on the consolidated statements of operations.
F-24 |
2 The Company executed a convertible note with Power Up Lending Group (“PowerUp”) on September 18, 2019 and identified certain features embedded in the conversion feature of the note requiring the Company to classify it as a derivative liability. The conversion price of the first note andshall equal 65% the partial conversionaverage price of the secondtwo lowest trading prices of the Company’s Common Stock on the trading market which the Common Stock is then trading over the previous twenty (20) days prior to the conversion date. On March 6, 2020, the Company prepaid $233,000 in cash to fully satisfy the note resulted inwhich would have matured on September 18, 2020. No shares of the Company’s Common Stock were issued or conveyed to PowerUp as a loss on debt extinguishmentresult of $107,104.the prepayment.
At December 31, 2016, the remaining notes with a principal balance of $95,405 have a debt discount of $87,379.
3 On October 7,In November 2016, 2019, the Company entered into four working capitala Securities Purchase Agreement (the “SPA”), severally and not jointly, with BHP Capital NY Inc., a New York Corporation (“BHP”), Armada Capital Partners LLC, a Delaware limited liability company (“Armada”), and Jefferson Street Capital LLC, a New Jersey limited liability company (“Jefferson”), (“Buyer” or collectively the “Buyers”). In connection with the SPA, the Company issued three (3) notes, inone to each Buyer, and three (3) warrants to purchase the originalCompany’s Common Stock, one to each Buyer. The aggregate purchase price of the notes is $375,000 and the aggregate principal amount of $245,000 which require daily payments aggregating $2,956. Thethe notes will be repaid between March 31, 2017 and July 31, 2017.is $405,000.
Derivative liabilityPursuant to the SPA, each of the Buyers purchased from the Company, for a purchase price of $125,000, a convertible promissory note, in the principal amount of $135,000. The purchase of each note was accompanied by the Company’s issuance of a warrant to purchase 125,000 shares of the Company’s Common Stock to each Buyer. On October 7, 2019, each Buyer delivered the purchase price to the Company as payment for each note.
Each note became effective as of October 7, 2019 and is due and payable on April 7, 2021. The notes entitle the Buyers to 8% interest per annum. Upon an Event of Default (as defined in the notes), the notes entitle the Buyers to interest at the rate of 18% per annum. The notes may be converted into shares of the Company’s Common Stock at a conversion price equal to 0.75 (representing a 25% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and (ii) the lowest one day VWAP for the Common Stock during the ten (10) trading day period ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable. The Company recorded a $266,181 debt discount relating to the conversion feature of the notes. The debt discount is being accreted over the life of these notes to accretion of debt discount and issuance cost.
The warrants were issued to the Buyers by the Company on October 7, 2019 in connection with the SPA. The warrants entitle the Buyers, respectively, to exercise purchase rights represented by the warrants up to 125,000 shares per warrant. The warrants permit the Buyers to exercise the purchase rights at any time on or after October 7, 2019 through October 7, 2022. Each warrant contains an exercise price per share of $0.80, subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise rights as defined therein. The Company has maintained the right to redeem each warrant in full at any time following payment in full of the amounts owing under each respective note.
The Company has determined thatvalued the warrants using the Black-Scholes Option Pricing model and accounted for it as debt discount on the consolidated balance sheets. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion featureof the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements of operations. There was unamortized debt discount of $0 and $75,078 as of December 31, 2020 and 2019, respectively, related to the warrants issued. During the year ended December 31, 2020, the Company recorded amortization of debt discount related to these warrants totaling $161,217. During the year ended December 31, 2020, the Company paid $95,000 for the cancellation of 250,000 warrants. During the year ended December 31, 2020, the Company paid $245,797 of the outstanding balance in addition to converting $159,203 of outstanding balance to 13,426,98 shares of Company Common Stock. The aggregate outstanding balance on the notes was $0 and $405,000 as of December 31, 2020 and 2019, respectively.
F-25 |
Future maturities of all debt (excluding debt discount discussed above in Notes 8 and 9) are as follows:
For the Years Ending December 31, | ||||
2021 | $ | 5,565,820 | ||
2022 | 2,255,122 | |||
$ | 7,820,942 |
11 | DERIVATIVE LIABILITIES |
As discussed above in Note 10, during the year ended December 31, 2020, the Company executed convertible notes with lenders and received gross proceeds of $2,182,000. The Company identified certain features embedded in the notes referredrequiring the Company to above that contain a potential variableclassify the features as derivative liabilities. The 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 excessprice of the derivative value over the face amountnotes is subject to adjustment for issuances of the note, ifCompany’s Common Stock or any is recorded immediatelyequity linked instruments or securities convertible into the Company’s Common Stock at a purchase price of less than the prevailing conversion price or exercise price. Such adjustment shall result in the conversion price and exercise price being reduced to interest expense at inception.such lower purchase price.
The estimatedtable below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ended December 31, 2020:
Fair Value Measurement | ||||
Total | ||||
Balance, December 31, 2019 | $ | 190,846 | ||
Change in fair value of derivative liabilities | (577,936 | ) | ||
Derivative liabilities recorded on issuance of convertible notes | 2,024,191 | |||
Write-off of derivative liabilities upon settlement of debt | (279,573 | ) | ||
Balance, December 31, 2020 | $ | 1,357,528 |
During the year ended December 31, 2020, the fair value of the derivative instrumentsfeature was valued using the Black-Scholes option pricing model,calculated using the following weighted average assumptions:
December 31, 2020 | ||||
Risk-free interest rate | 0.08 – 1.51 | % | ||
Expected life of grants | 0.75 year | |||
Expected volatility of underlying stock | 96 - 132 | % | ||
0 | % |
As of December 31, 2020 and 2019, the derivative liability was $1,357,528 and $190,846, respectively. In addition, for the year ended December 31, 2020, the Company recorded $577,936 as a gain on the change in fair value of the derivative on the consolidated statement of operations. The Company determined that upon measuring the fair value of the derivative features, the total amount recorded as a debt discount exceed the face value of the notes issued and the Company therefore recorded derivative expense of $566,789 on the consolidated income statements.
LINE OF CREDIT |
10INCOME TAXESOn 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. As of December 31, 2020 and 2019, the outstanding balance on the LOC was $912,870. The LOC matures on April 24, 2021.
The income tax provision (benefit) consists of the following:
2016 | 2015 | |||||||
Federal: | ||||||||
Current | $ | - | $ | - | ||||
Deferred | (1,267,100 | ) | (454,300 | ) | ||||
Change in valuation allowance | 1,267,100 | 454,300 | ||||||
$ | - | $ | - |
The Company’s income is earned in Nevada, and is thus not subject to state income tax.
The expected tax benefit based on the statutory rate is reconciled with actual tax benefit as follows:
2016 | 2015 | |||||||
U.S. federal statutory rate | -34.0 | % | -34.0 | % | ||||
State income tax, net of federal benefit | 0.0 | % | 0.0 | % | ||||
Increase in valuation allowance | 34.0 | % | 34.0 | % | ||||
0.0 | % | 0.0 | % |
Deferred tax assets consist of the effects of temporary differences attributable to the following:
2016 | 2015 | |||||||
Deferred tax assets | ||||||||
Net operating losses | $ | 1,621,400 | $ | 443,400 | ||||
Option compensation accrual | 102,400 | 13,300 | ||||||
Deferred tax assets | 1,723,800 | 456,700 | ||||||
Valuation allowance | (1,723,800 | ) | (456,700 | ) | ||||
Deferred tax assets, net of valuation allowance | $ | - | $ | - |
13 | LEASES |
The Company has approximately $4,768,000determines if an arrangement contains a lease at inception. Right of net operating lossesuse (“NOL”ROU”) carried forwardassets represent the right to offset taxable incomeuse 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.
F-26 |
The Company leases office space in future years which expire commencingMemphis, TN and a call center space in fiscal 2034. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or allEl Salvador. The term of the deferred tax assets will be realized.office is for 2 years beginning on November 1, 2019 commencing with monthly payments of $1,600. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against allterm of the deferred tax assets relating to NOLscall center lease is for every period because it is more likely than not that all3 years beginning on March 1, 2019 commencing with monthly payments of $6,680. As part of the deferred tax assets will not be realized.
ECS transaction discussed above, the Company acquired office space in Springfield, MO. The term of the lease is for 3 years commencing on January 1, 2020 with monthly payments of $12,000.
11Stockholder’s equity
PREFERRED STOCKDuring the year ended December 31, 2020 and 2019, the Company paid lease obligations of $200,296 and $55,608, respectively, under the leases.
The Company has 100,000,000 sharesutilized 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 $0.001 parrecent debt issuances as well as publicly available data for instruments with similar characteristics when calculating the incremental borrowing rates.
The lease terms include options to extend the leases 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 preferred stock authorized. Atguarantees. 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 sheets, 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, including short term leases, were as follows:
For the Year Ended | For the Year Ended | |||||||
December 31, 2020 | December 31, 2019 | |||||||
Operating lease | $ | 324,728 | $ | 80,760 | ||||
Interest on lease liabilities | 50,062 | 7,002 | ||||||
Total net lease cost | $ | 374,790 | $ | 87,762 |
Supplemental balance sheet information related to leases was as follows:
December 31, 2020 | December 31, 2019 | |||||||
Operating leases: | ||||||||
Operating lease ROU assets - net | $ | 368,638 | $ | 210,816 | ||||
Current operating lease liabilities, included in current liabilities | $ | 210,556 | $ | 90,944 | ||||
Noncurrent operating lease liabilities, included in long-term liabilities | 155,167 | 119,872 | ||||||
Total operating lease liabilities | $ | 365,723 | $ | 210,816 |
F-27 |
Supplemental cash flow and other information related to leases was as follows:
For the Year Ended | For the Year Ended | |||||||
December 31, 2020 | December 31, 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 200,296 | $ | 55,608 | ||||
ROU assets obtained in exchange for lease liabilities: | ||||||||
Operating leases | $ | 355,203 | $ | 266,424 | ||||
Weighted average remaining lease term (in years): | ||||||||
Operating leases | 1.80 | 2.12 | ||||||
Weighted average discount rate: | ||||||||
Operating leases | 11.4 | % | 5.5 | % |
Total future minimum payments required under the lease obligations as of December 31, 2016 the Company had 10,000,000 issued and outstanding and at December 31, 2015, the Company had no preferred shares issued and outstanding.2020 are as follows:
Twelve Months Ending December 31, | ||||
2020 (remainder of year) | $ | 240,160 | ||
2021 | 164,041 | |||
2022 | - | |||
Total lease payments | $ | 404,201 | ||
Less: amounts representing interest | (38,474 | ) | ||
Total lease obligations | $ | 365,723 |
STOCKHOLDERS’ EQUITY |
Preferred Stock
Series “A” Preferred Stock
On May 6, 2016, theThe Company, pursuant to the consent of the Board of Directors filed a Certificate of Designation with the Nevada Secretary of State which designated 10,000,000 shares of the Company’s authorized preferred stock as Series “A” Preferred Stock, par value $0.001. The Series “A” Preferred Stock has the following attributes:
● | Ranks senior only to any other class or series of designated and outstanding preferred shares of the Company; | |
● | Bears no dividend; | |
● | Has no liquidation preference, other than the ability to convert to | |
● | The Company does not have any rights of redemption; | |
● | Voting rights equal to ten shares of | |
● | Entitled to same notice of meeting provisions as common | |
● | Protective provisions require approval of 75% of the Series “A” Preferred Shares outstanding to modify the provisions or increase the authorized Series “A” Preferred Shares; and | |
● | Each |
F-28 |
On May 6, 2016, upon filingApril 11, 2018, the Certificate of Designation which designated 10,000,000Company issued 3,000,000 shares of Series A Preferred Stock as consideration for the Company’s $0.001 par value preferred stock as Series “A”,True Wireless, Inc. merger. As discussed in Note 1, the boardequity of directors authorized the Company is the historical equity of TW retroactively restated to issue allreflect the number of shares issued by the Company in the transaction. These preferred shares were recorded as a retroactive 2017 transaction as incentive to complete the merger.
Upon close of the merger, the Company recorded 10,000,000 shares of Series “A”A Preferred Stock to Carter Matzinger,as a part of the recapitalization transaction for services previously rendered by the Company’s former Chief Executive Officer and Chairman of the Board of Directors, for services previously rendered.Directors.
The Company valued these shares based upon their conversion rateAs of 10December 31, 2020 and 2019, there were 13,000,000 shares of preferred stock for each share of common stock based on the market price of the common stock as of March 30, 2016 of $0.19 per share. The Company recorded compensation expense in the amount of $190,000.Series A issued and outstanding.
COMMON STOCKSeries “C” Convertible Preferred Stock
The Company has 100,000,000 shares of its $0.001 par value common stock authorized. At December 31, 2016 and December 31, 2015, the Company had 57,343,901 shares and 36,130,432 shares issued and outstanding, respectively.
2016 Transactions
Effective January 4, 2016, the Company issued 250,000 shares of its common stock pursuant to a legal services agreement. The common stock was valued at $112,500 based on the closing price of the common stock on that date.
Effective February 1, 2016, the Company issued 250,000 shares of its common stock pursuant to a consulting agreement. The common stock was valued at $30,000 based on the closing price of the common stock on that date.
On February 24, 2016, the Company issued 1,782,000 shares of its common stock for advisory fees pursuant to the Senior Secured Credit Facility Agreement (Note 9). The stock was valued at the trading price on the date of the agreement and the resulting $300,000 was included as a reduction of the related note payable and was fully amortized at December 31, 2016.
On April 1, 2016, the Company issued 454,545 shares of its common stock valued at $20,000 in exchange for principal payments in that amount due on a note payable.
On April 5, 2016, the Company issued 1,000,000 shares of its common stock valued at $180,000 in partial consideration for a six-month consulting agreement. The $180,000 was amortized to expense over the term of the agreement.
On April 18, 2016, the Company issued 100,000 shares of its common stock in exchange for cash in the amount of $10,000.
On May 10, 2016, the Company issued 1,000,000 shares of its common stock valued at $190,000 in partial consideration for a two-year consulting agreement with a director. The $190,000 is being amortized to expense over the term of the agreement.
On May 13, 2016, the Company issued 1,800,000 shares of its common stock as part of the Unit Subscription Agreement described in (1) below for consideration of $180,000.
On May 23, 2016, the Company issued 240,000 shares of its common stock as partial consideration for a six- month public relations consulting agreement. The shares were valued at $38,688, which was amortized to expense over the term of the agreement.
On June 10, 2016,22, 2018, the Board of Directors approved a Certificate of Designation for Company issuedSeries C Convertible Preferred stock, which was filed with the Secretary of State of the State of Nevada on that date. The Certificate of Designations approved the creation of a totalnew series of 3,150,000 sharespreferred stock consisting of its common stock to six employee/consultants in exchange for prior services. The stock was valued at $516,600 and the amount is included in selling, general and administrative expense.
On August 17, 2016, the Company issued 1,000,000 shares of its common stock valued at $100,000 in consideration for a one year consulting agreement. The amount is being amortized to expense over the termSeries C Convertible Preferred Stock par value $0.001 (“Series C Preferred Stock”) with an original issue price of the agreement.$100.00 per share.
On September 19, 2016,The Series “C” Preferred Stock has the Company issued 250,000 shares of its common stock in exchange for cash consideration of $20,000.
On September 22, 2016, the Company issued 625,000 shares of its common stock as part of the Unit Subscription Agreement described in (2) below for consideration of $50,000.
Effective October 6, 2016, the Company issued 1,000,000 shares of its common stock valued at $50,000 in partial consideration for a six-month consulting contract. This amount is being amortized to expense over the term of the agreement.
Effective October 26, 2016, the Company issued 1,953,399 shares of its common stock in exchange for the Company’s convertible note payable in the amount of $53,452 plus accrued interest of $5,345.
Effective October 26, 2016, the Company issued 383,525 shares of its common stock in exchange for a portion of the Company’s convertible note payable in the amount of $11,500 plus accrued interest of $44.
On November 23, 2016, the Company entered into a one year consulting agreement with an individual which called for compensation with a cashless warrant for 1,500,000 shares of the Company’s common stock. The warrant was valued at $389,699, which amount was included in repaid expense and additional paid in capital. The prepaid expense is being amortized over the one year term of the agreement.
During November and December 2016 the Company sold 5,975,000 Units at a price of $0.10 per Unit and consisting of one share of common stock and one-half warrant to purchase additional common stock at a purchase price of $0.50 per share for a period of three years as described in (3) below for consideration of $597,500.
2015 Transactions
Prior to the merger between the Company and Ksix Media, Inc., Ksix Media, Inc. issued its common stock valued at $48,000 in exchange for consulting services and issued 1,000,000 Ksix Media common shares in exchange for a $100,000 convertible note payable.
On April 27, 2015, the Company had 3,114,812 common shares outstanding when they issued 28,000,000 shares in the acquisition of Ksix Media, Inc. On May 18, 2015, the Company sold 930,000 shares for $75,065 in cash. On June 4, 2015, the Company sold 1,053,100 shares for $85,000 in cash. On July 16, 2015, the Company sold 1,734,520 shares for $140,000 in cash.
On September 29, 2015, the Company issued 48,000 shares of its common stock for a public relation services contract for services to be performed in the fourth quarter. The stock was valued at the trading price on the date of the agreement and the resulting $14,880 was included in consulting expense.
On October 12, 2015, the Company issued 1,250,000 shares of its common stock as a portion of the consideration for the acquisition of DIQ, see Note 4. The stock was valued at $475,000 based on its trading price on the date of the agreement.
COMMON STOCK OPTIONS
Pursuant to his employment agreement with the Company, Carter Matzinger was awarded a “Performance Based Stock Option” of 3,000,000 shares of the Company’s common stock and a “Time Based Stock Option” of up to 3,000,000 shares of Common Stock of the Company. Both sets of options come with Registration Rights and when requested by Mr. Matzinger, the Company will be required to file a Form S-8 Registration Statement. The Time Based Stock Options vested on September 24, 2016 on the one year anniversary of Mr. Matzinger’s employment contract. The terms of both types of common stock option awards are described as follows:
Performance Based Stock Optionsfollowing attributes:
● | ||
● | Bears a dividend per share of Series C Preferred Stock | |
● | With respect to such liquidation, dissolution or winding up, the holders of Series C Preferred Stock |
Time Based Stock Options
The following assumptions were used to value the options:
No value was recorded for the performance based stock options. The time based stock options were valued at $959,940 using Black-Scholes model, based on the assumptions above, which was amortized over the service period of four years.
UNIT SUBSCRIPTION AGREEMENT – WARRANTS
12 RELATED PARTY TRANSACTIONS
The Company’s 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. The activity is summarized as follows:
December 31, | December 31, | |||||||
2016 | 2015 | |||||||
Balance at beginning of year | $ | 318,002 | $ | 80,325 | ||||
New advances | 40,000 | 407,000 | ||||||
Repayment | (1,500 | ) | (169,323 | ) | ||||
Balance at end of year | $ | 356,502 | $ | 318,002 |
On May 10, 2016, the Company issued 1,000,000 shares of its common stock valued at $190,000 in partial consideration for a two year consulting agreement with a director. The $190,000 is being amortized to expense over the term of the agreement.
On May 6, 2016, the Company issued 10,000,000 shares of Series “A” Preferred Stock to Carter Matzinger, Chief Executive Officer and Chairman of the Board of Directors, for services previously rendered. (see Note 11).
See Note 8 for long-term debt due to a director.
13 COMMITMENTS AND CONTINGENCIES
True Wireless, LLC
Master Agreement for the Exchange of Common Stock, Management, and Control
On or about December 7, 2016, the Company, entered into a Master Agreement for the Exchange of Common Stock, Management, and Control (the “Exchange Agreement”) with True Wireless, LLC, an Oklahoma Limited Liability Company (“TW”) and the members of TW (the “Members”). Hereinafter, the Company, TW, and its Members may be referred to as a “Party” individually or collectively as the “Parties”.
TW’s primary business operation is a full-service telecommunications company specializing in the Lifeline program as set forth by the Telecommunications Act of 1996, and regulated by the FCC which provides subsidized mobile phone services for low income individuals (“Lifeline Services”). TW currently has an FCC license to offer Lifeline Services in the following states: Oklahoma, Rhode Island, Maryland, Texas, and Arkansas.
Kevin Brian Cox (“Cox”), a resident of the State of Tennessee, is the sole owner of all of TW’s issued and outstanding membership interests, either directly or indirectly through EWP Communications, LLC, a Tennessee limited liability company, the beneficial owner of which is Cox.
Pursuant to the agreement, the Company will issued 12 million shares of restricted common stock and make cash payment of $6 million and a one-year promissory note for $6 million upon closing. The acquisition has not closed as of the date of the consolidated financial statements issued.
On December 7, 2016, the company made cash payment of $500,000 o the owner of TW as a deposit on acquisition.
Additionally, pursuant to the terms of the Exchange Agreement, the Company executed and entered into a “Management and Marketing Agreement” (“Management Agreement”) with TW.
Pursuant to the Management Agreement, the Company would act as the manager of TW until such time as the Exchange Agreement and the transactions contemplated thereunder are approved by the FCC. Following such approval (which has not occurred as of the date of this Report), the Parties will hold a final closing of the Exchange Agreement will occur and TW would become a wholly-owned subsidiary of the Company.
Neither the Exchange Agreement nor the Management Agreement had closed as of December 31, 2016 (see Note 14 Subsequent Event).
Company Investment in TW
At the date of this filing, the Company’s investment in TW consists of the following:
Shares | Amount | |||||||
Cash paid | $ | 500,000 | ||||||
$ | 500,000 | |||||||
Contingent consideration to be paid: | ||||||||
Cash at closing | $ | 1,500,000 | ||||||
Common stock to be issued prior to closing | 13,200,000 | 5,304,000 | ||||||
Common stock to be issued at closing | 103,200,000 | 51,600,000 | ||||||
Note payable due December 31, 2018 | 1,500,000 | |||||||
Total contingent consideration | $ | 59,904,000 | ||||||
Total consideration | $ | 60,404,000 |
Note to Table Above:
1Common Stock to be issued upon prior to closing at an average price of approximately $0.40 per share.
2Common Stock to be issued at closing at an average price of $0.50 per share. Upon the TW Closing described above, the Company will also: (1) issuer Warrants to purchase 45,000,000 shares of Company Common Stock on a “cashless” basis exercisable at $0.50 per share for a period of five years; (2) Cox and his assigns shall also be issued such additional Common Stock of KSIX as are required pursuant to the Anti-Dilution Provision.
14 SUBSEQUENT EVENTS
The Company has evaluated events occurring subsequent to December 31, 2016 and through the date these financial statements were available to be issued and disclosure as following:
Common stock issued and conversion
Effective January 1, 2017, the Company agreed to issue 320,000 shares of its common stock in exchange for PR services to be performed over the following nine months. On March 24, 2017, the Company issued one-half of the shares owed.
On January 24, 2017, Calvary Fund I LP was issued 100,000 shares of our common stock in exchange for conversion of $3,200 in accrued interest and $4,800 in principal of our note payable obligation to them.
On March 8, 2017, the Company issued 310,675 shares of its common stock to Calvary Fund I LP in exchange for $7,500 in principal and $5,000 in accrued interest owed to Calvary.
On March 24, 2017, the Company issued 600,000 shares of its common stock pursuant to a consulting agreement with Anthony P. Nuzzo, a director of the Company. The shares were valued at $252,000 and this amount is included as a part of the deposit for the acquisition of TW.
On March 24, 2017, the Company issued 600,000 shares of its common stock pursuant to a modification of a consulting agreement. The shares were valued at $252,000 and this amount is included as a part of the deposit for the acquisition of TW.
On March 24, 2017, the Company issued 12,000,000 shares of its common stock to Brian Cox pursuant to a Master Agreement for the Exchange of Common Stock, Management and Control as a part of the planned acquisition of True Wireless, LLC.
On March 24, 2017, the Company issued 800,000 shares of its common stock to its attorney for legal fees in the amount of $76,250 which are included in accrued expense at December 31, 2016.
On March 24, 2017, the Company issued 800,000 shares of its common stock to a consultant for consulting fees in the amount of $152,355 which are included in accrued expenses at December 31, 2016.
On March 31, 2017, the Company issued 250,000 shares of its common stock to a consultant for consulting fees in the amount of $20,000 which are included in accrued expenses at December 31, 2016.
On May 3, 2017, the Company accepted a notice to convert $60,000 in principal of a convertible note payable into 1,923,077 shares of its common stock. The stock was valued at $96,346 on the conversion date.
On May 10, 2017, the Company accepted a notice to convert $30,000 in principal of a convertible note payable into 652,173 shares of its common stock. The stock was valued at $85,435 on the conversion date.
On May 15, 2017, the Company accepted a notice to convert $100,000 in principal of a convertible note payable into 1,508,296 shares of its common stock. The stock was valued at $218,703 on the conversion date.
On October 10, 2017, the Company effectuated an increase in its authorized capital to a total of 600,000,000 shares comprising 500,000,000 shares of Common Stock par value $0.001 and 100,000,000 shares of Preferred Stock par value $0.001.
Acquisition of TW
First Addendum to Master Agreement for the Exchange of Equity, Management, and Control
On March 30, 2017, the Parties executed a First Addendum to the Exchange Agreement extending the time for all material deadlines contemplated for the transactions related to the acquisition of TW to May 1, 2017.
Amended Master Agreement for the Exchange of Common Stock, Management, and Control
On July 18, 2017, the Parties entered into an Amended Master Agreement for the Exchange of Common Stock, Management, and Control (the “Amended Exchange Agreement”) which amended and restated the Exchange Agreement and First Amendment thereto. The Amended Exchange Agreement reset certain of the milestones and timetables detailed in the Exchange Agreement. The material terms of the Amended Exchange Agreement are as follows:
TERMS
● | The Company | |
● | Voting rights equal to | |
● | Entitled to | |
● | Protective provisions require approval of 75% of the | |
● |
CLOSINGS
THE MANAGEMENT CLOSING
The Management Closing occurredAs noted above, each share of Series C Preferred Stock is convertible into 250 shares of Company Common Stock (the same conversion rate utilized in the exchange transaction), but is only convertible on July 18, 2017 pursuantthe first to occur of the following material terms or actions which were approved by the Parties:events:
The |
EQUITY CLOSING.
Conditioned upon the Parties, having completed all material requirements of the Amended Exchange Agreement, including all delivery of all Exhibits and Collateral Agreements contemplated thereby, and the receipt of any required third party approvals, the Parties agreed to proceed with the Equity Closing, as follows:
At the Equity Closing, the Company agreed to Issue to the Members:
TW and the Members agreed to issue to the Company:
Management and Marketing Agreement
On or about July 18, 2017, the Company executed and entered into a “Management and Marketing Agreement” (“Management Agreement”) with Cox. Pursuant to the Management Agreement, the Company is obligated to provide certain management services to Cox as detailed in the Management Agreement.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of December 31, 2016. Our management has determined that, as of December 31, 2016, the Company’s disclosure controls and procedures are not effective due to a lack of segregation of duties.
Management’s report on internal control over financial reporting
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with the United States’ generally accepted accounting principles (US GAAP), including those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in its Internal Control - Integrated Framework. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2016 due to a lack of segregation of duties.
There were no significant changes in internal controls or in other factors that could significantly affect these controls during the quarter ended December 31, 2016.
None.
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Listed below are our directors and executive officers.
Set forth below is certain biographical information concerning our current executive officers and directors. We currently have two executive officers as described below.
The following information sets forth the backgrounds and business experience of the directors and executive officers.
Kevin Brian Cox –President, Chief Executive Officer Chief Financial Officer and a Director–Mr. Cox has beenPresident, Chief Executive Officer Chief Financial Officer and a Director since July 2017. He been the majority owner and CEO of True Wireless since January 2011. True Wireless has been a leader and innovator in the wireless industry with a focus on providing reduced cost cellular service to low income individuals. Mr. Cox got his start in telecom in 2004 when he founded his first telephone company (CLEC). Through organic growth and acquisition, he ran 3 CLECs providing service to 200,000 residential subscribers and became the largest prepaid home phone company in the country before selling in 2009. Mr. Cox is a minority partner, investor and or stakeholder in several other technology companies including telecom, wireless and network transactions. Mr. Cox has a proven track record of not only success but winning. Many aspects of his leadership style are contributed to what he learned on the football field while earning Team Captain and All-Conference honors at Murray State University while majoring in Economics.
Carter Matzinger - Director - Mr. Matzinger has been a director of the Company since April 2015 and served as President of the Company from 2015 to 2017. He has over 18 years of diverse experience including working with many Fortune 500 companies including: The Limited, CompuServe, Goodyear Tire, and Amoco. For the past nine years, Mr. Matzinger has worked in the field of online marketing and has specialized in building large affiliate networks. He works closely with online advertisers and advertising networks to expand the reach of profitability of the Company. His experience in search engine optimization, list management, and pay-per-click advertising provides a vast network of relationships and industry expertise. Mr. Matzinger is the co-founder and President of Blvd Media Group, LLC, and KSIX LLC. Mr. Matzinger is a graduate of the University of Utah in 1997 B.A. in Business Administration. Mr. Matzinger for that last six years has been the President of Ksix, LLC and Blvd Media Group, LLC.
Anthony P. Nuzzo Jr. – Chief Strategy Officer and Director – Mr. Nuzzo has been the Chief Strategy Officer and a director of the Company since July 2016. In 1991 Mr. Nuzzo formed Nuzzo Enterprises, Inc. d/b/a Jackson Hewitt Tax Service, a tax franchise, and successfully expanded the company to include twenty-two locations spread over six counties in Chicago, IL and the Syracuse, NY area. In June 2003, Mr. Nuzzo became one of five co-founders and Managing Members to successfully launch Leading Edge Recovery Solutions, LLC. In 2008 ranked 21st in the U.S. within the Financial Services Industry by the Inc. 500 Fastest Growing Private Companies annual Publication received the honor of Inc. 500 Fastest Growing Private Companies Annual Publication being Ranked 346 overall by Inc. In 2009, Mr. Nuzzo left for a new challenge and purchased Glass Mountain Capital, LLC. Mr. Nuzzo set out to create an Accounts Receivable Management company that focused on helping the consumer while achieving goals set by the clients. In 2013 under the leadership of Mr. Nuzzo Glass Mountain Capital, LLC was ranked 198 in the U.S. within the Financial Services Industry by the Inc. 500 Fastest Growing Private Companies annual Publication received the honor of Inc. 500 Fastest Growing Private Companies Annual Publication being overall by Inc. Magazine annual publishing of the Top 500 Fastest Growing Private Companies in the U.S. REVENUE: $6.9 Million. In early 2017, Mr. Nuzzo successful launched a near shore BPO, CenterCom Global, BPO in Central America. CenterCom will give all clients a near shore option that will drive down costs and build efficiencies.
David C. Ansani – Director –Mr. Ansani has been a director of the Company since August 2017. From 2010 to the present date, he has been and is Chief Compliance Officer/Human Resources Officer/In-House Counsel for Glass Mountain Capital, LLC, a start-up financial services company specializing in the recovery of distressed assets. In this capacity, he reviews and evaluates compliance issues and concerns within the organization. The position ensures that management and employees are in compliance with applicable laws, rules and regulations of regulatory agencies (FDCPA, TCPA, GLB, CFPB, etc.); that company policies and procedures are being followed; and that behavior in the organization meets the company’s standards of conduct.
Manuel Flores – Director –Mr. Flores has been a director of the Company since August 2017. Since August 2015, he has been an attorney at Arnstein & Lehr, LLP, Chicago, IL. His primary practice areas include: banking and consumer finance regulation, and compliance; land use and zoning; and government affairs. He is a member of the Small Business Advisory Council (Illinois), FinTEx Chicago, Community Bankers Association of Illinois and Illinois Bankers Association. From November, 2012 through January 2015, he was Acting Secretary of the Illinois Department of Financial and Professional Regulation (IDFPR), Springfield/Chicago, IL. In this capacity, he served as Chief Executive Officer of a state regulatory agency with an employee head count of 500 and an operating budget of $111,000,000.
None of the above directors and executive officers has been involved in any legal proceedings as listed in Regulation S-K, Section 401(f), except as disclosed above and there is no family relationship among the director and executive officers.
AUDIT COMMITTEE. The Company intends to establish an audit committee, which will consist of independent directors. The audit committee’s duties would be to recommend to the Company’s board of directors the engagement of independent auditors to audit the Company’s financial statements and to review its accounting and auditing principles. The audit committee would review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent public accountants, including their recommendations to improve the system of accounting and internal controls. The audit committee would at all times be composed exclusively of directors who are, in the opinion of the Company’s board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
COMPENSATION COMMITTEE. Our board of directors does not have a standing compensation committee responsible for determining executive and director compensation. Instead, the entire board of directors fulfills this function, and each member of the Board participates in the determination. Given the small size of the Company and its Board and the Company’s limited resources, locating, obtaining and retaining additional independent directors is extremely difficult. In the absence of independent directors, the Board does not believe that creating a separate compensation committee would result in any improvement in the compensation determination process. Accordingly, the board of directors has concluded that the Company and its stockholders would be best served by having the entire board of directors’ act in place of a compensation committee. When acting in this capacity, the Board does not have a charter.
In considering and determining executive and director compensation, our board of directors’ reviews compensation that is paid by other similar public companies to its officers and takes that into consideration in determining the compensation to be paid to the Company’s officers. The board of directors also determines and approves any non-cash compensation to any employee. The Company does not engage any compensation consultants to assist in determining or recommending the compensation to the Company’s officers or employees.
Compliance with Section 16(a) Of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers, directors and persons who own more than ten percent of the Company’s common stock to file initial reports of ownership and changes in ownership with the SEC. Additionally, SEC regulations require that the Company identify any individuals for whom one of the referenced reports was not filed on a timely basis during the most recent fiscal year or prior fiscal years. To the Company’s knowledge, based solely on a review of reports furnished to it, none of the Company’s officers, directors and ten percent holders have made the required filings.
Code of Ethics
Our Board of Directors has not adopted a Code of Business Conduct and Ethics.
ITEM 11: EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation for the Company’s Chief Executive Officer and all other executive officers of the Company and any employee of the Company whose cash compensation exceeds $100,000 for the years ended December 31, 2016 and 2015.
Annual Compensation | Long-Term Compensation³ | |||||||||||||||||||||||||||||||
Restricted | Securities | |||||||||||||||||||||||||||||||
Other Annual | Stock | Underlying | ||||||||||||||||||||||||||||||
Name and | Salary | Bonus | Compensation | Awards | Options | LTIP | All Other | |||||||||||||||||||||||||
Principal Position5 | Year | ($)¹ | ($)² | ($)7 | ($) | ($)6 | Payouts | Compensation | ||||||||||||||||||||||||
Carter Matzinger4 | 2016 | $ | 120,000 | $ | — | $ | 190,000 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
CEO, CFO and Director | 2015 | $ | 180,000 | $ | — | $ | — | $ | — | $ | 588,283 | $ | — | $ | — |
Footnotes to Executive Compensation:
¹ Management base salaries can be increased by our Board of Directors based on the attainment of financial and other performance guidelines set by the management of the Company.
² Salaries listed do not include annual bonuses to be paid based on profitability and performance. These bonuses will be set, from time to time, by a disinterested majority of our Board of Directors. No bonuses will be set until such time as the aforementioned occurs.
³ The Company plans on developing an “Employee Stock Option Plan” (“ESOP”) for both management and strategic consultants. However, the Company does anticipate executing long-term employment contracts with both, along with other members of the future management team, during the 2017 calendar year. It is anticipated these management agreements will contain compensation terms that could include a combination of cash salary, annual bonuses, insurance and related benefits, matching IRA contributions, restricted stock awards based upon longevity and management incentive stock options. At the current time, the Company does not know the final structure of the ESOP or the proposed long term management employment contracts.
4Our Board of Directors will serve until the next annual meeting of the stockholders and until successors are duly elected and qualified, unless earlier removed as provided in the Company’s Corporate Bylaws. Executive officers serve at the pleasure of the Board of Directors.
5As of the Company’s last fiscal year and the date of the filing of this current report, there are officially no other executive officers of the Company besides Mr. Matzinger as is required to be disclosed under Item 402(m)(2)(ii) and (iii), and the instructions to Item 402(m)(2) as set forth under regulation S-K. Additionally, there are no other employees who could even be considered to be an executive officer who make in excess of $100,000 USD per year.
6Pursuant to his employment agreement with the Company, Carter Matzinger was awarded a “Performance Based Stock Option” of 3,000,000 shares of the Company’s common stock and a “Time Based Stock Option” of up to 3,000,000 shares of Common Stock of the Company. Both sets of options come with Registration Rights and when requested by Mr. Matzinger, the Company will be required to file a Form S-8 Registration Statement. The Time Based Stock Options vested on September 24, 2016 on the one year anniversary of Mr. Matzinger’s employment contract and expire on September 24, 2019. The terms of both types of common stock option awards are described below:
Performance Based Stock Options
F-29 |
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.
During the year ended December 31, 2018, the Company issued 48,400 shares of Series C Preferred in exchange for the conversion of a note payable of $3,000,000 and accrued interest of $24,952.
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 50% 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 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 December 31, 2020 and 2019, there were 721,598 shares of Series C issued and outstanding.
Time BasedCommon Stock Options (Vested)
As discussed above in Note 1, on January 30, 2020, the Company entered into a Membership Interest Purchase Agreement and Stock Purchase Agreement with ECS Prepaid, ECS, CSLS and the Winfreys. Pursuant to the agreements, the Company acquired all of the membership interests of ECS Prepaid and all of the issued and outstanding stock of each ECS and CSLS. The agreements provide that the consideration is to be paid by the Company through the issuance of 500,000 shares of the Company’s Common Stock. In addition, the agreements called for 25,000 shares of Common Stock to be issued to the Winfreys on a monthly basis over a 12-month period. During the year ended December 31, 2020, the Company issued 275,000 shares of Common Stock pursuant to the agreements.
As discussed in Note 10 above, during the year ended December 31, 2020, the Company granted 2,892,000 shares of Common Stock pursuant to debt agreements executed with various lenders. The shares were valued on execution date and recorded as a debt discount on the consolidated balance sheets.
As discussed in Note 10 above, during the year ended December 31, 2020, the Company issued 13,426,698 shares of Common Stock for the conversion of debt totaling $2,280,040 in principal and interest.
During year ended December 31, 2020, the Company sold an aggregate of 5,678,174 shares of Common Stock and 2,839,087 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 $1,068,500.
During the year ended December 31, 2020, the Company executed consulting agreements with third parties for professional services. Upon execution of the agreement, the Company agreed to issue 86,000 shares of the Company’s Common Stock. The 86,000 shares have an aggregated fair value of approximately $11,103 which was expensed immediately upon execution of the agreement.
During the year ended December 31, 2019, the Company granted consultants 96,000 restricted shares for services pursuant to consulting agreements.
F-30 |
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.
As discussed above in Note 5, on September 30, 2019, the Company entered into a Purchase Agreement with GBT Technologies Inc. Pursuant to the agreement, the Company acquired substantially all of the assets related to the ECS Business for total consideration of five million dollars ($5,000,000). The Purchase Agreement provides that the consideration is to be paid by the Company through the issuance of a convertible promissory note in the amount of $4,000,000 and through the issuance of 3,333,333 restricted shares of the Company’s Common Stock.
In October 2019, the Company issued 70,000 shares of Common Stock to a consultant valued at $0.31 per share.
On November 4, 2019, the Company granted 100,000 shares of Common Stock pursuant to a debt agreement executed with a lender. The shares were valued at $0.31 per share and was recorded as a debt discount.
During the year ended December 31, 2019, the Company sold an aggregate of 9,172,855 shares of Common Stock and 4,462,135 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 $3,210,500.
During the year ended December 31, 2019 and 2018, the Company recorded total stock-based compensation expense of $295,900 and $146,000, respectively, in relation to shares issued for services.
As of December 31, 2020 and 2019, there were 127,131,210 and 102,193,579 shares of Common Stock issued and outstanding, respectively.
Stock Warrants
The following is a summary of the Company’s warrant activity:
Warrants | Weighted Average Exercise Price | |||||||
Outstanding – January 31, 2019 | 2,012,500 | $ | 0.43 | |||||
Exercisable – December 31, 2019 | 2,012,500 | $ | 0.43 | |||||
Granted | 984,284 | $ | 0.48 | |||||
Exercised | - | $ | - | |||||
Forfeited/Cancelled | - | $ | - | |||||
Outstanding – December 31, 2019 | 6,849,635 | $ | 0.71 | |||||
Granted | 3,116,230 | $ | 0.53 | |||||
Exercised | - | $ | - | |||||
Forfeited/Cancelled | (250,000 | ) | $ | - | ||||
Outstanding – December 31, 2020 | 9,715,865 | $ | 0.65 | |||||
Exercisable – December 31, 2020 | 9,715,865 | $ | 0.6 |
Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life (in years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||||||||||||
$ | 0.40 – 3.00 | 9,715,865 | 1.52 years | $ | 0.65 | 9,715,865 | $ | 0. 65 |
F-31 |
At December 31, 2020 the total intrinsic value of warrants outstanding and exercisable was $0.
As discussed in Note 9, during the year ended December 31, 2020, the Company paid $95,000 for the cancellation of 250,000 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 have an aggregated fair value of approximately $30,782 that was calculated using the Black-Scholes.
For the year ended December 31, 2019, when computing fair value of share-based payments, the Company has considered the following variables:
December 31, 2019 | |||
|
The following assumptions were used to value the options:
Risk-free interest rate | % | |||
Expected | 3 years | |||
Expected volatility of underlying stock | 168.71 | % | ||
Dividends | 0 | % | ||
No valueThe estimated warrant life was recorded for the performance based stock options. The time based stock options were valued at $959,919,determined based on the assumptions above,“simplified method,” giving consideration to the overall vesting period and an accrual of $39,219 was recorded as amortization of this amount in 2015 and $261,913 was recorded as amortization of this amount in 2016. $301,132 was recorded as additional paid in capital in 2016.
7On May 6, 2016, upon filing the Certificate of Designation which designated 10,000,000 sharescontractual terms of the Company’s $0.001 par value preferred stock as Series “A”, the board of directors authorized the Company to issue all 10,000,000 shares of Series “A” Preferred Stock to Carter Matzinger, Chief Executive Officer and Chairman of the Board of Directors, for services previously rendered.
Outstanding Equity Awards at Fiscal Year-End | ||||||||||||||||
Option Awards | ||||||||||||||||
Number of Securities Underlying Unexercised Options | Option Exercise | Option Expiration | ||||||||||||||
Name | Exercisable | Unexercisable | Price | Date | ||||||||||||
Carter Matzinger | ||||||||||||||||
Option 1 | 1,000,000 | $ | 0.12 | * | ||||||||||||
Option 2 | 1,000,000 | $ | 0.30 | * | ||||||||||||
Option 3 | 1,000,000 | $ | 0.50 | * | ||||||||||||
Option 4 | 1,000,000 | $ | 0.12 | September 24, 2019 | ||||||||||||
Option 5 | 1,000,000 | $ | 0.30 | September 24, 2019 | ||||||||||||
Option 6 | 1,000,000 | $ | 0.50 | September 24, 2019 |
* Three years from date vested.
Option Exercises and Stock Vested | ||||||||||||||||
Option Awards | Stock Awards | |||||||||||||||
Number of Shares Acquired on Exercise | Value Realized on Exercise | Number of Shares Acquired on Vesting | Value Realized on Vesting | |||||||||||||
Name | ||||||||||||||||
Carter Matzinger | ||||||||||||||||
Option 1 | ||||||||||||||||
Option 2 | ||||||||||||||||
Option 3 | ||||||||||||||||
Option 4 | 1,000,000 | $ | 246,397 | |||||||||||||
Option 5 | 1,000,000 | $ | 189,500 | |||||||||||||
Option 6 | 1,000,000 | $ | 152,386 | |||||||||||||
3,000,000 | $ | 588,283 |
The Company valued these shares based upon their conversion rate of 10 shares of preferred stock for each share of common stock based on the market price of the common stock as of March 30, 2016 of $0.18 per share. The Company recorded compensation expense in the amount of $190,000.
Compensation Policy
Our Company’s executive compensation plan is based on attracting and retaining qualified professionals which possess the skills and leadership necessary to enable our Company to achieve earnings and profitability growth to satisfy our stockholders. We must, therefore, create incentives for these executives to achieve both Company and individual performance objectives through the use of performance-based compensation programs. No one component is considered by itself, but all forms of the compensation package are considered in total. Wherever possible, objective measurements will be utilized to quantify performance, but many subjective factors still come into play when determining performance.
Compensation Components
As a growth stage Company with a plan of action of both vertical and horizontal industry acquisitions (and potential retention of management of acquired businesses), the main elements of compensation packages for executives shall consist of a base salary, stock options under the proposed plan discussed above under this section, and bonuses (cash and/or equity) based upon performance standards to be negotiated.
Base Salary
As the Company continues to grow, both through acquisition or through revenue growth from existing business interests, and financial conditions improve, these base salaries, bonuses, and incentive compensation will be reviewed for possible adjustments. Base salary adjustments will be based on both individual and Company performance and will include both objective and subjective criteria specific to each executive’s role and responsibility to the Company.
Compensation of Directors
At the time of this filing, directors receive no remuneration for their services as directors of the Company, nor does the Company reimburse directors for expenses incurred in their service to the Board of Directors of the Company. The Company plans to put in place an industry standard director compensation package during the fiscal year 2017.
ITEM 12:SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following information table sets forth certain information regarding the Common Stock owned on October 30, 2017 by: (i) each person who is known by the Company to own beneficially more than 5% of its outstanding Common Stock; (ii) each director andofficer;and (iii) allofficers and directors as a group:
Title of Class | Name and Address of Beneficial Owner1 | Title of Beneficial Owner | Amount of Beneficial Ownership | % of Class2 | ||||||||
Common | Carter Matzinger | Director | ||||||||||
10624 S. Eastern, Suite A-910 | 26,778,761 | 6 | 32.30 | % | ||||||||
Henderson, NV 89052 | ||||||||||||
Common | AnthonyP. NuzzoJr.3 1930 Thoreau Drive, Suite 100 Schaumberg, IL 60173 | Director | 3,400,000 | 4.20 | % | |||||||
Common | Kevin Brian Cox4 3124 Brother Blvd. #104 Bartlett, TN 38133 | Chairman, Director, President and Chief Executive Officer | 12,000,000 | 14.83 | % | |||||||
Series A Preferred | 10,000,000 | 5 | 100 | % | ||||||||
Common | David C. Ansani 1930 Thoreau Drive Suite 100 Schaumburg, IL 60173
| Director | 7,000 | * | ||||||||
Common | Manuel Flores 18 South Merrill Street Park Ridge, IL 60068 | Director | 0 | 0.00 | % | |||||||
Common | All Directors & Officers as a Group (5 persons) | 42,185,761 | 50.88 | % | ||||||||
Series A Preferred | 10,000,000 | 100 | % |
Notes:
(1) The person named in this table has sole voting and investment power with respect to all shares of common stock reflected as beneficially owned;
(2) based on 80,907,035 shares of common stock outstanding as of October 30, 2017; there are no underlying options or warrants to purchase shares of Common Stock, or other securities convertible into the Common Stock of the Company, that currently are exercisable or convertible or that will become exercisable or convertible within sixty (60) days of this filing except for the Time Based Stock Option for 3,000,000 shares held by Mr. Matzinger, see (6) below.
(3) Includes 1,600,000 shares owned by AnthonyP. NuzzoJr. and 1,800,000 shares owned by BCAN Holdings, LLC, a Nevada limited liability company, of which Mr. Nuzzo is managing member;
(4) Includes 11,000,000 shares owned by Kevin Brian Cox and 1,000,000 shares ownedbyEWP Communications, LLC,aTennessee liability company,of which Mr. Cox is a beneficial owner.
(5)Each share of Series A Preferred Stock is entitled to vote ten (10) shares of Common Stock for each one (1) share of Series A Preferred Stock held.
(6) Mr. Matzinger was granted options to acquire up to 6,000,000 shares of the Company’s common stock as described in Item 11 herein. At December 31, 2016, options to acquire up to 3,000,000 shares of the Company’s common stock are exercisable, and 2,000,000 shares are in the money and included in the beneficial ownership table above.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes certain information as of December 31, 2016 and December 31, 2015, with respect to compensation plans (including individual compensation arrangements) under which our common stock is authorized for issuance:
Number of securities to be | Weighed average exercise | |||||||||||
issued upon exercise of | price of outstanding | Number of securities | ||||||||||
outstanding options, | options, warrants and | remaining available | ||||||||||
Plan category | warrants and rights | rights | for future issuance | |||||||||
Performance based | 3,000,000 | $ | 0.31 | - | ||||||||
stock options | ||||||||||||
Time Based | 3,000,000 | $ | 0.31 | - | ||||||||
stock options |
award.
The Company hasdid not yet formalized stock option plansissue any warrants as compensation for its officers, employees, directors and consultants. The Company’s chief executive officer was grantedservices during the options summarized above, the specifics of which are summarized in Item 11 herein.year ended December 31, 2020.
During the year ended December 31, 2020 and 2019, the Company recorded total stock-based compensation expense related to the warrants of $0 and $33,700, respectively. The unrecognized compensation expense at December 31, 2020 was approximately $0.
RELATED PARTY TRANSACTIONS |
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Party Transactions
A director of the CompanyThe Company’s former Chief Executive Officer has advanced the Company various amounts on a non-interest bearingnon-interest-bearing basis, which is being used for working capital. The advance hashad no fixed maturity. The activity is summarized as follows: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 December 31, 2020 and 2019, the outstanding balance due was $0.
December 31, | December 31, | |||||||
2016 | 2015 | |||||||
Balance at beginning of period | $ | 318,002 | $ | 80,325 | ||||
New advances | 40,000 | 407,000 | ||||||
Repayment | (1,500 | ) | (169,323 | ) | ||||
Balance at end of period | $ | 356,502 | $ | 318,002 |
For the years ended December 31, 2020 and 2019, outsourced management services fees of $0 and $1,020,000, respectively, were paid to Axia Management, LLC (“Axia”) as compensation for services provided. These costs are included in Selling, general and administrative expenses in the consolidated statements of operations. Axia is owned by the Company’s Chief Executive Officer.
At December 31, 2020 and 2019, the Company had trade payables to Axia of $373,012 and $666,112, respectively.
For the years ended December 31, 2020 and 2019, the Company purchased telecom services and access to wireless networks from 321 Communications in the amount of $218,334 and $704,683, respectively. These costs are included in Cost of revenue in the consolidated statements of operations. The Company’s Chief Executive Officer is a minority owner of 321 Communications.
At December 31, 2020 and 2019, the Company had trade payables to 321 Communications of $25,336 and $140,923, respectively.
F-32 |
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 year ended December 31, 2020 and 2019 were $2,821,925 and $2,384,780, respectively, and are included in Cost of revenue in the consolidated statements of operations. The Company’s President has a 50% interest in CenterCom Global.
At December 31, 2020 and 2019, the Company had trade payables to CenterCom Global of $1,252,331 and $282,159, respectively.
See Note 9 long-term debt due to related parties.
16 | COMMITMENTS AND CONTINGENCIES |
On May 10, 2016,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.
On January 15, 2020, the Company and Carter Matzinger (a member of the Company’s Board of Directors) (collectively, the “Surge Party”), and the former owners of the Company’s wholly-owned subsidiary, DigitizeIQ, LLC (collectively, the “DigitizeIQ Party” and, together with the Surge Party, the “Parties”), entered into a settlement agreement (the “DigitizeIQ Settlement Agreement”) to settle any claims the Parties may have had against each other. The parties made claims against each other with regard to alleged breaches of an Exchange Agreement, a Non-Compete Agreement, and promissory notes issued 1,000,000 sharesby the Company to the DigitzeIQ Party (the “DigitzeIQ Promissory Notes”). Pursuant to the DigitizeIQ Settlement Agreement, the Parties, in addition to releasing all claims against each other, agreed to cooperate to ensure the complete transfer and assignment of the domain “digitizeiq.com” to the Company and agreed that the DigitizeIQ Promissory Notes are deemed terminated. As a result of the DigitizeIQ Promissory Notes being terminated, the Company reduced its common stock valued at $190,000liabilities by approximately $580,000.
On March 1, 2020, in partial considerationconnection with Mr. Evers’ appointment as Chief Financial Officer of the Company, the Company and Mr. Evers entered into an employment agreement (the “Evers Employment Agreement”), whereby as compensation for his services, the Company shall pay Mr. Evers a twosalary of $270,000 per year. Pursuant to the terms of the Evers Employment Agreement, the Company will pay the full cost of Mr. Evers’ health insurance premiums. In the event Mr. Evers’ employment with the Company shall terminate, Mr. Evers shall be entitled to a severance payment of a full year consulting agreement with a director. The $190,000of salary and benefits. In addition, Mr. Evers is being amortized to expense overeligible for equity awards as approved by the term ofBoard as defined in the agreement.
On December 6, 2016,July 9, 2020, the consultingCompany entered into a settlement and release agreement with Unimax Communications, LLC (“Unimax”). The settlement is related to a complaint filed by Unimax alleging the directorCompany is indebted pursuant to a purchase order and additional financing terms. The Company agreed to pay Unimax the total sum of $785,000 over a 24-month period. The settlement amount is included accounts payable and accrued expenses – other on the consolidated balance sheets. Subsequent to December 31, 2021, the Company has agreed to pay off the balance by April 30, 2021.
17 | INCOME TAXES |
Deferred Tax Assets
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Bill”) was amendedsigned into law. Prior to includethe enactment of the Tax Reform Bill, the Company measured its deferred tax assets at the federal rate of 34%. The Tax Reform Bill reduced the federal tax rate to 21% resulting in the re-measurement of the deferred tax asset as of December 31, 2017. Beginning January 1, 2018, the lower tax rate of 21% will be used to calculate the amount of any federal income tax due on taxable income earned during 2018.
F-33 |
For the periods from inception through the date of conversion to a C corporation in April 2018, the Company reported its income under True Wireless LLC, a limited liability company. As a result, the Company’s income for federal and state income tax purposes were reportable on the tax returns of the individual partners. Accordingly, no recognition has been made for federal or state income taxes in the accompanying financial statements of the Company through the date of conversion.
At December 31, 2020, the Company has available for U.S. federal income tax purposes a net operating loss (“NOL”) carry-forwards of approximately $18.1 million that may be used to offset future taxable income through the fiscal year ending December 31, 2040. If not used, these NOLs may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under the regulations. The Company plans on undertaking a detailed analysis of any historical and/or current Section 382 ownership changes that may limit the utilization of the net operating loss carryovers. No tax benefit has been reported with respect to these net operating loss carry-forwards in the accompanying consolidated financial statements since the Company believes that the realization of its net deferred tax asset of approximately $3.9 million was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are fully offset by a valuation allowance of $3.9 million.
Deferred tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred tax assets because of the uncertainty regarding its realizability. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future generation for taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all the information available, Management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance. The valuation allowance increased by approximately $1.9 million and $1.7 million for the years ended December 31, 2020 and 2019, respectively.
F-34 |
The Company evaluated the provisions specificallyof ASC 740 related to the agreementaccounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions that the Company has taken or expects to acquire TWtake in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as described“unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other expenses – Interest expense” in Note 13the statement of operations. Penalties would be recognized as a component of “General and administrative.”
No material interest or penalties on unpaid tax were recorded during the year ended December 31, 2020 and 2019. As of December 31, 2020 and 2019, no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next year.
Components of deferred tax assets are as follows:
December 31, 2020 | December 31, 2019 | |||||||
Net deferred tax assets – Non-current: | ||||||||
Expected income tax benefit from NOL carry-forwards | $ | 3,913,365 | $ | 2,002,427 | ||||
Less valuation allowance | (3,913,365 | ) | (2,002,427 | ) | ||||
Deferred tax assets, net of valuation allowance | $ | - | $ | - |
F-35 |
Income Tax Provision in the Consolidated Statements of Operations
A reconciliation of the Consolidated Financial Statements under “Director Consulting Agreement.”federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:
For the Year Ended December 31, 2020 | For the Year Ended December 31, 2019 | |||||||
Federal statutory income tax rate | 21.0 | % | 21.0 | % | ||||
Change in valuation allowance on net operating loss carry-forwards | (21.0 | )% | (21.0 | )% | ||||
Effective income tax rate | 0.0 | % | 0.0 | % |
18 | SEGMENT INFORMATION |
Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer.
The Company has non-interest bearing long-term debt due toevaluated performance of its operating segments based on revenue and operating loss. Segment information for the years ended December 31, 2020 and 2019, are as follows:
Surge Blockchain & Other | Surge Logics | TW | ECS | Total | ||||||||||||||||
Year ended December 31, 2020 | ||||||||||||||||||||
Revenue | $ | 741,863 | $ | 16,430,057 | $ | 2,372,977 | $ | 34,861,891 | $ | 54,406,788 | ||||||||||
Cost of revenue (exclusive of depreciation and amortization) | (849,225 | ) | (14,213,769 | ) | (3,003,099 | ) | (33,872,018 | ) | (51,938,111 | ) | ||||||||||
Gross margin | (107,362 | ) | 2,216,288 | (630,122 | ) | 989,873 | 2,468,677 | |||||||||||||
Costs and expenses | (8,066,653 | ) | (2,147,406 | ) | (937,196 | ) | (1,463,090 | ) | (12,614,345 | ) | ||||||||||
Operating profit (loss) | $ | (8,174,015 | ) | $ | 68,882 | $ | (1,567,318 | ) | $ | (473,217 | ) | $ | (10,145,668 | ) | ||||||
Year ended December 31, 2019 | ||||||||||||||||||||
Revenue | $ | 4,295,434 | $ | 7,234,366 | $ | 3,446,003 | $ | 10,767,138 | $ | 25,742,941 | ||||||||||
Cost of revenue (exclusive of depreciation and amortization) | (1,665,839 | ) | (4,721,923 | ) | (5,845,663 | ) | (10,390,096 | ) | (22,623,521 | ) | ||||||||||
Gross margin | 2,629,595 | 2,512,443 | (2,399,660 | ) | 377,042 | 3,119,420 | ||||||||||||||
Costs and expenses | (6,340,282 | ) | (2,388,181 | ) | (1,749,975 | ) | (409,010 | ) | (10,887,448 | ) | ||||||||||
Operating loss | $ | (3,710,687 | ) | $ | 124,262 | $ | (4,149,635 | ) | $ | (31,968 | ) | $ | (7,768,028 | ) | ||||||
December 31, 2020 | ||||||||||||||||||||
Total assets | $ | 1,729,041 | $ | 199,366 | $ | (353,476 | ) | $ | 4,883,357 | $ | 7,325,071 | |||||||||
Total liabilities | 10,912,205 | 2,450,888 | 4,301,249 | 386,695 | 18,051,037 | |||||||||||||||
December 31, 2019 | ||||||||||||||||||||
Total assets | $ | 4,782,722 | $ | 249,196 | $ | (33,718 | ) | $ | 4,988,173 | $ | 9,986,373 | |||||||||
Total liabilities | 10,115,799 | 734,875 | 3,815,175 | 20,139 | 14,685,988 |
F-36 |
19 | SUBSEQUENT EVENTS |
On March 8, 2021, the Company entered an agreement for a director15% OID convertible promissory note in the amount of $107,500, which is due in four equal annual installments$2,3000,000. The proceeds from this transaction and cash on hand was used to pay down $2,284,075 of $26,875a total of $2,485,250 of promissory notes with various rates and maturities.
On February 12, 2021, the Company filed Form S-1/A with the Securities and Exchange Commission with the intent of listing on April 28 of each of the four years beginning April 28, 2016. The payment due April 28, 2016 has not been made. See Note 8Nasdaq within 90 days.
On January 22, 2021, we entered into a stock purchase agreement (the “Digitize IQ Agreement”), by and between us and Surge Logics, Inc. Pursuant to the Consolidated Financial Statements.Digitize IQ Agreement, we sold one hundred percent (100%) of its ownership interests in Digitize IQ, LLC to Surge Logics, Inc. for a purchase price of $10.
On January 22, 2021, we entered into a stock purchase agreement (the “KSIX Agreement”), by and between us and Surge Logics, Inc. Pursuant to the KSIX Agreement, we sold one hundred percent (100%) of its ownership interests in KSIX, LLC to Surge Logics, Inc. for a purchase price of $10.
Review, ApprovalOn February 11, 2021, David C Ansani and RatificationCarter Matzinger resigned from the Board of Related Party Transactions
The boardDirectors of directors has responsibility for establishing and maintaining guidelines relatingSurgePays, Inc. Neither Mr. Matzinger’s nor Mr. Ansani’s resignations were due to any related party transactions between us and any of our officers or directors. We do not currently have any written guidelines for the board of directors which will set forth the requirements for review and approval of any related party transactions, but we plan to adopt such guidelines once we add additional independent board members.
Director Independence
Our common stock is currently quoted on the Pink Sheets (OTC Markets Inc. Pink Current Information Tier). Since the Pink Sheets does not have rules for director independence, we use the definition of independence established by the NYSE MKT (formerly the American Stock Exchange). Under applicable NYSE MKT rules, a director will only qualify as an “independent director” if, in the opinion of our Board, that person does not have a relationship which would interferedisagreements with the exercise of independent judgment in carrying out the responsibilities of a director.
We periodically review the independence of each director. Pursuant to this review, our directors and officers,Company on an annual basis, are required to complete and forward to the Corporate Secretary a detailed questionnaire to determine if there are any transactions or relationships between any of the directorsCompany’s operations, policies or officers (including immediatepractices. On February 23, 2021, Jay Jones and David May were appointed to the Board of Directors. There are no family relationships between either Mr. May or Mr. Jones and affiliates) and us. Ifany director or other executive officer of the Company, nor are there any transactions to which the Company was or relationships exist, we then consider whether such transactionsare a participant and in which either Mr. May or relationshipsMr. Jones have a material interest subject to disclosure under Item 404(a) of Regulation S-K. There are inconsistent with a determination that the director is independent. As this time, we have three independent directors, Anthony P. Nuzzo, Jr., David C. Ansanino arrangements or understandings between either Mr. May or Mr. Jones and Manual Flores.
Conflicts Relatingany other person pursuant to Officers and Directors
To date, we do not believe that there are any conflicts of interest involving our officers or directors, unless disclosed above. With respect to transactions involving real or apparent conflicts of interest, we have not adopted any formal policies or procedures. In the absence of any formal policies and procedures regarding conflicts, we intend to follow these guidelines: (i) the factwhich they were selected as members of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of our disinterested outside directors,Board. Mr. May and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
In the last two fiscal years ended December 31, 2015 and 2016, we have retained Paritz & Company, P.A., as our principal accountants. We understand the need for our principal accountants to maintain objectivity and independence in their audit of our financial statements. To minimize relationships that could appear to impair the objectivity of our principal accountants, our board has restricted the non-audit services that our principal accountants may provide to us primarily to audit related services. We are only to obtain non-audit services from our principal accountants when the services offered by our principal accountants are more effective or economical than services available from other service providers, and, to the extent possible, only after competitive bidding. The board has adopted policies and procedures for pre-approving work performed by our principal accountants. After careful consideration, the board has determined that payment of the audit fees is in conformanceMr. Jones will both enter into compensatory arrangements with the independent status of our principal independent accountants.
Audit Fees – During 2016, $15,679 was billed for the completion of the 2015 audit and the quarterly reviews for 2016. The aggregate fees billed as of February 28, 2015 for professional services rendered by the Company’s accountant was approximately $63,847 for the audit of the Company’s annual financial statements and the quarterly reviews for the fiscal year ended December 31, 2015. The 2014 audit and the audits required by the acquisitions are included in the 2015 amount.
Audit-Related Fees – None.
Tax Fees – None.
All Other Fees – Other than the services described above, no other fees were billed for services rendered by the principal accountant.
Audit Committee Policies and Procedures – Not applicable.
If greater than 50 percent, disclose the percentage of hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees – Not applicable.
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, SIGNATURES
¹ Incorporated by reference to Form 8-K/A-2 filed December 11, 2015.
² Incorporated by reference to Form SB-2 filed March 14, 2007.
³ Filed herewith
4In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Annual Report on Form 10-K shall be deemed “furnished” and not “filed”.
5Included within financial statements filed herewith.
6Incorporated by reference to Forms 8-K filed July 20, 2016.
7Incorporated by reference to Forms 8-K filed August 1, 2016.Company at a later date.
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.