UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] (Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: ended December 31 2016, 2022
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 001-40992
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) | (Zip Code) |
10624 S. Eastern Ave., Suite A-910, Henderson, NV 89052901-302-9587(Address of Principal Executive Offices) (Zip Code)
(800) 760-9689
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class – None
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | SURG | The Nasdaq Stock Market LLC (Nasdaq Capital Market) | ||
Common Stock Purchase Warrants | SURGW | The Nasdaq Stock Market LLC (Nasdaq Capital Market) |
Name of each exchange on which registered – N/A
Securities registered pursuant tounder Section 12(g) of the Exchange Act: None
Title of each class – Common Stock, $0.001 Par Value
Name of each exchange on which registered – N/A
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 (§229.405232.405 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 “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company |
Emerging growth company ☐ |
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 to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rulerule 12b-2 of the Exchange Act).
Yes [ ] ☐ No [X] ☒
StateThe number of shares of the registrant’s common stock outstanding as of March 30, 2023 was shares.
As of June 30, 2022, the aggregate market value 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 of 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, 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 of $0.001.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated$0.001 per share held by reference and the Partnon-affiliates of the Form 10-K (e.g., Part I, Part II, etc.) into whichregistrant was approximately $35,232,507 based on 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$4.83 closing price of 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).registrant’s common stock, par value $0.001 per share, on that date.
CAUTIONARY STATEMENTTABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information in thisThis Annual Report on Form 10-K may constitute “forward-looking(“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,” The words “believe,“may,” “expect,“will,” “anticipate,” “plan,” “intend,” “foresee,” “outlook,” “estimate,“estimates,” “potential,” “continues,” “may,“anticipates,” “will,“intends,” “seek,“expects,” “approximately,” “predict,” “anticipate,” “should,“could,” “would,” “could” or other“projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. Thesestatements. We have based these forward-looking statements are basedlargely on our current expectations and beliefs concerningprojections about future developmentsevents and their potential effect on us. While management believestrends that thesewe 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 reasonable assubject to a number of risks, uncertainties and whenassumptions, including those described in the “Risk Factors” in this Annual Report. Readers are urged to carefully review and consider the various disclosures made there can be no assurancein this Annual Report and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) 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 significantdisclose risks and uncertainties (somethat 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 are beyond our control) and assumptions that couldany factor, or combination of factors, may cause actual results to differ materially from our historical experiencethose contained in any forward-looking statements we may make. In light of these risks, uncertainties, and our present expectations or projections. Known material factors that could cause ourassumptions, the future events and circumstances discussed in this Annual Report may not occur and actual results tocould 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 described in “Risk Factors” herein.
Readers are cautioned not to place undue reliance onreasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements whichin this Annual Report are made only as of the date hereof. Weof this filing, and we do not undertake, no obligationand expressly disclaim any duty, to publicly update or revisesuch statements for any forward-looking statementsreason after the date they are made, whetherof this Annual Report or to conform statements to actual results or revised expectations, except as a resultrequired 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.
This Annual Report 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 new information, futurethose 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 otherwise.circumstances may differ materially from events and circumstances reflected in this 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.
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TABLE OF CONTENTSPART I
REFERENCES WITHIN THIS REPORTITEM 1. BUSINESS
All references to “Ksix,Business Overview
SurgePays, Inc (“SurgePays,” “Ksix Holdings,”“we” 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 OF BUSINESS
Corporate History and Overview
Ksix Media Holdings, Inc. (“KSIX Holdings” or “the Company”“Company”), was incorporated in Nevada on August 18, 2006, is a digitaltechnology and telecom company focused on the underbanked and underserved communities. SurgePhone and Torch Wireless provide subsidized mobile broadband to over 250,000 low-income subscribers nationwide. SurgePays fintech platform empowers clerks at thousands of convenience stores to provide a suite of prepaid wireless and financial products to underbanked customers.
About SurgePays, Inc.
SurgePays, Inc. is a financial technology and telecom company focused on providing these essential services to the underbanked community. The Company’s wireless subsidiaries provide mobile broadband, voice and SMS text messaging to both subsidized and direct retail prepaid customers. The Company’s blockchain fintech platform utilizes a suite of financial and prepaid products to convert corner stores into tech-hubs for underbanked neighborhoods.
SurgePhone Wireless and Torch Wireless
SurgePhone and Torch, wholly owned subsidiaries of SurgePays, are mobile virtual network operators (MVNO) licensed by the Federal Communications Commission (the “FCC”) to provide subsidized access to quality internet through mobile broadband services to consumers qualifying under the federal guidelines of the Affordable Connectivity Program (the “ACP”). The ACP (the successor program, as of March 1, 2022 to the Emergency Broadband Benefit program) provides SurgePhone and Torch up to a $100 reimbursement for the cost of each tablet device distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. SurgePhone and Torch combined are licensed to offer subsidized mobile broadband to all fifty states.
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Surge Fintech (ECS Business)
We refer to the collective operations of ECS Prepaid, LLC, a Missouri limited liability company, Electronic Check Services, Inc., a Missouri corporation, and Central States Legal Services, Inc., a Missouri corporation, as “Surge Fintech.” This was previously referred to as the “ECS Business.”
Surge Fintech has been a financial technology tech and wireless top-up platform for over 15 years. Through a series of transactions between October 2019 and January 2020, we acquired the ECS Business primarily for the favorable ACH banking relationship and a fintech transactions platform processing over 20,000 transactions a day at approximately 8,000 independently owned convenience stores. The platform serves as the proven backbone for wireless top-up transactions and wireless product aggregation for the SurgePays nationwide network.
ShockWave CRM™
SurgePays acquired the Software as a Service (SaaS) Customer Relationship Management (CRM) and Billing System software platform “MVNO Cloud Services” on June 7, 2022. SurgePays is rebranding the software as ShockWave CRM. Payment for the software consisted of $300,000 in cash, of which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued 85,000 shares of common stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.
ShockWave is an end-to-end cloud-based SaaS offering an Omnichannel CRM, billing system and carrier integrations specific to the telecommunication and broadband industry. Some of these services include sales agent management, device and SIM inventory management, order processing and provisioning, retail Point of Service (POS) activations and payments, customer service management, retention tools, billing, and payments.
Surge Blockchain
Surge Blockchain Software is a back-office marketplace (accessed through the SurgePays fintech portal for convenience stores) offering wholesale consumable goods direct to convenience stores who are transacting on the SurgePays Fintech platform. The wholesale e-commerce platform is easily accessed through the secure app interface – similar to a website. We believe what makes this sales platform unique is that it also offers the merchant the ability to order wholesale consumable goods at a significant discount from traditional distributors with one touch ease. We are able to sell products at a significant discount by using on demand Direct Store Delivery (DSD). Our platform is connected directly to manufactures, who ship products direct to the store while cutting out the middleman. The goal of the SurgePays Portal is to leverage the competitive advantage and efficiencies of e-commerce to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas, and supermarkets while increasing profit margins for these stores.
LogicsIQ, Inc.
LogicsIQ, Inc. is a lead generation and case management solutions company primarily serving law firms in the mass tort industry. The company’s CRM “Intake Logics” facilitates the entire life cycle of converting a lead into a signed retainer client integrated into the law firms case management software. Our proven strategy of delivering cost-effective retained cases to our attorney and law firm clients means those clients are better able to manage their media and advertising agency conglomerate serving customers worldwide onlinebudgets and across socialreach targeted audiences more quickly and effectively when utilizing our proprietary data driven analytics dashboards. Our ability to deliver transparent results through our integrated Business Intelligence (B.I.) dashboards has bolstered our reputation as an industry leader in the mass tort client acquisition field.
Centercom
Since 2019, we have owned a 40% equity interest in Centercom Global, S.A. de C.V. (“Centercom”). Centercom is a bilingual operations center providing the Company with sales support, customer service, IT infrastructure design, graphic media, gamingdatabase programming, software development, revenue assurance, lead generation, and other various operational back-office services. Centercom is based in El Salvador.
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Experienced Leadership Team
Our management team consists of four executives with over 20 years in the wireless, underbanked and convenience store distribution industry while presiding over companies with a collective revenue run of over $3 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.
Growth Strategies
We have different strategies for each of our sales channels:
SurgePhone and Torch Wireless
Federally Subsidized Mobile Broadband / Affordable Connectivity Program (ACP)
● | Prioritize sales channels with lower cost per acquisition in conjunction with shipping devices direct fulfillment for enhanced inventory controls and logistics. | |
● | Integrate Shockwave CRM into our SurgePays software to enable ACP enrollments initiated from convenience stores. | |
● | Integrate Shockwave CRM into existing ATM machines and Point of Sale registers to initiate ACP enrollments. | |
● | Partner with existing regional distribution companies already provide consumable goods to convenient stores. | |
● | Analyze attrition/retention data to continually monitor and improve customer experience with the goal of industry best retention. | |
● | Enhance our offering by adding a mix of smartphones. | |
● | Increase the national sales team nationally. |
SurgePays Fintech
Prepaid Wireless Top-ups and Underbanked Financial Products at Convenience Stores
● | Continue building a national sales team of in-house salespeople, Independent Sales Organizations, Chain Retail Stores, and Distributors, all incentivized to add store locations and drive increased sales per store. | |
● | Strategically acquire other companies that offer prepaid products and other complimentary fintech products. Integrating these acquisitions to an existing base of convenience stores allows us to deploy our comprehensive fintech suite to maximize the value of the existing relationships. | |
● | Continue to add value driven products such as payment processing and consumer retail hard goods via our marketplace to differentiate our competitive advantage over single product companies and diversify our revenue streams. | |
● | Create and offer our own MVNO products to all new and existing distribution channels adding further branding and revenue streams for SurgePays. |
SurgePays Blockchain
Wholesale Marketplace in the SurgePays platform offering Consumables Shipped Direct
● | Rollout a national sales team of in-house salespeople incentivized to add stores and sales per store. | |
● | Acquire other companies offering prepaid products to an existing base of convenience stores to deploy our comprehensive fintech suite to maximize the value of the existing relationships. | |
● | Integrate with more manufacturers of commonly sold consumable items to drive interest, sales and revenue. | |
● | Increase efforts in rural America where many distributors do not have routes to deliver affordable wholesale goods. |
Branded Prepaid Wireless
Proprietary Mobile Network Virtual Operator (MVNO)
● | Leverage the volume of buying power for wholesale carrier minutes/texts/data to build market low plans to offer customers using SIM kits in convenience stores transacting on the SurgePays network. | |
● | Penetrate rural America where there is less competition and higher consumer pricing. | |
● | Offer incentivized family plans to the rapidly growing base of subsidized customer households. |
LogicsIQ
Lead Generation and Signed Retainer Clients for Law Firms
● | Hire national salespeople incentivized to add law firm clients and top-line revenue. | |
● | Continue to develop a centralized software platform to maximize efforts and data collection | |
● | Identify additional revenue streams to complement existing revenue streams such as SSI enrollments and other lead generation services. |
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Competition
There are many competitors in the prepaid wireless and mobile platforms. The Company seeksbroadband industry. We feel what makes SurgePhone different is we are a grassroots company with our products placed in convenience stores where the underbanked shop. We can offer prepaid wireless and financial services, through these stores, at a lower price to acquire other niche marketingcustomers since we own the transaction software processing the activations and top-ups.
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 growtruck 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. We believe, in some cases, we will be able to partner with our competition through integration and compensate them for helping us grow due to the uniqueness of the suite of products we offer and the additional revenue stores can unlock. 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.
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 SurgePays 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 financial services and prepaid products to the underbanked market in an effective and efficient manner to ensure success. 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.
We have established relationships with distribution companies delivering significant sales per day for our subsidized mobile broadband product.
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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 convenience stores. 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 paced 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 through integrating with POS terminals, or more commonly referred to as “cash registers” 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. We’re also closely watching the development of AI tools to see how they could help in support of our merchants and customers.
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.
Employees, Affiliates and Exclusive Partners
As of March 30, 2023, our human capital resources consist of approximately twenty (20) SurgePays employees, a dedicated team of over forty (40) logistics, activation, and fulfilment personnel, and over two hundred (200) sales, customer service and back-office personnel in our near shore operations center.
We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel and work strategically utilizing exclusive partners and affiliates to maximize cash flow. 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.
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Reverse Stock Split
On November 1, 2021, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation, as amended, with the Secretary of State of the State of Nevada in connection with a 1-for-50 reverse stock split of the Company’s issued and outstanding shares of Common Stock (the “Reverse Split”). The Company wasReverse Split became effective on November 2, 2021.
All references in this Annual Report, including in our financial statements, to our Common Stock, share data, per share data and related information has been adjusted to reflect the Reverse Split.
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, 2020.
Both prior toHistorically, we operated through these 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”). Both of these companies were acquired by Ksix Media, Inc. from Paywall, Inc.a Nevada limited liability company that was formed on or about December 18, 2014 pursuant to the terms 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.
On October 15, 2015, KSIXLLC acquiredJanuary 29, 2009; (iv) DigitizeIQ, LLC (“DIQ”)an Illinois limited liability company that was formed on July 23, 2014; (v) Surge Cryptocurrency Mining, Inc., formerly North American Exploration, Inc., a digital advertising company which isNevada corporation that was incorporated on August 18, 2006 (this has been a full service digital advertising agency specializing in survey generation and landing page optimization specifically designed for mass tort class action lawsuits.
KSIXLLCdormant entity that does not own any assets since January 1, 2019); (vi) LogicsIQ, Inc., a Nevada corporation that 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 distributionformed 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.
October 2, 2018; (vii) 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”) withInc., an Oklahoma corporation (formerly True Wireless, LLC); (viii) Surge Payments, LLC, an Oklahoma Limited Liability Company (“TW”)a Nevada limited liability company; (ix) Surgephone Wireless, LLC, a Nevada limited liability company; 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”)(x) SurgePays Fintech, Inc., a resident ofNevada limited liability company. On January 22, 2021, 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,equity securities of DigitizeIQ, LLC and KSIX, LLC were transferred to LogicsIQ and became wholly-owned subsidiaries of LogicsIQ.
On May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc., however we retained $1,097,659 in liabilities which consisted of $1,077,659 in accounts payable and accrued expenses as well as $20,000 in related party loans. The balance at December 31, 2022 was $668,649. In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%, with a default interest rate of 10%. The Company will receive 25 payments of principal and accrued interest totaling $7,461 commencing in June 2023.
On January 30, 2020, the Company acquired ECS Prepaid, LLC, a TennesseeMissouri limited liability company, the beneficial owner of which is Cox.Electronic Check Services, Inc., a Missouri corporation, and Central States Legal Services, Inc., a Missouri corporation.
Additionally, pursuant to the terms of the Exchange Agreement,
On January 1, 2022, 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 manageracquired 100% 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 becomeTorch Wireless, LLC resulting in Torch becoming a wholly-owned subsidiary, ofin a transaction accounted for as a business combination. The Company paid $800,000 and agreed to pay the Sellers monthly residual payments for customers enrolled by the Company (collectively,through December 31, 2022 of either $2 or $3 per customer totaling $1,679,723.
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 “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 thereininformation contained in, or accessible through, our website will not be deemed to be completedincorporated by May 1, 2017.
Amended Master Agreement for the Exchange of Common Stock, Management,reference into this Annual Report 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 datedoes not constitute part of this filing, the Company’s investment in TW consists of the following:Annual Report.
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. Pursuant to the transaction, DIQ became a wholly owned subsidiary of the Company.
The Agreement provided for a purchase price of $1,250,000, paid as follows:
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AsITEM 1A. RISK FACTORS
Investing in our securities involves a great deal of risk. Careful consideration should be made of the datefollowing factors as well as other information included in this Annual Report before deciding to purchase our securities. There are many risks that affect our business and results of this filing,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 Company owes DIQ a total of $485,000 towards the purchasetrading price of DIQour 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 Government Regulation and Legal Proceedings
Changes in the regulatory framework under which is representedwe operate could adversely affect our business prospects or results of operations.
Our operations are subject to regulation by the Promissory Notes dueFCC and other federal, state and local agencies. These regulatory regimes frequently restrict or impose conditions on January 12, 2016our ability to operate in designated areas and March 12, 2016. Presently,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 Companyapplication of these requirements. It is in default on these Promissory Notesimpossible to predict with any certainty the outcome of pending federal and intendsstate regulatory proceedings relating to attemptour operations, or the reviews by federal or state courts of regulatory rulings. Without relief, existing laws and regulations may inhibit our ability to negotiate a full settlement with the holder. There is noexpand our business and introduce new products and services. Similarly, we cannot guarantee that any settlement can be achieved, or if one is achieved, itwe 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, terms beneficialcertain 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 Company.
Trademarked Productsexisting regulatory framework at the federal, state and Proprietary Technology:
RewardTool®- A proprietary “offer wall” or “ad container” that promotes hundreds of different advertising campaigns on a single web page. Offer walls, by definition, attract users withlocal level, such as those described below, could restrict 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 somethingways in return for the free currency. The RewardTool® displays up to 1,000 offerswhich we manage our wireline and automatically rewards users upon completion. It is customizablewireless networks 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 offersoperate our business, impose additional costs, impair revenue opportunities 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, thepotentially impede our ability to make even small gainsprovide services in efficiency benefitsa 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. | |
● | Regulation of broadband Internet access services - On June 11, 2018, the repeal of the FCC’s “net neutrality” rules took effect and returned to a “light-touch” regulatory framework. The prior rules were designed to ensure that all online content is treated the same by internet service providers and other companies that provide broadband services. Additionally, California and a number of other states are considering or have enacted legislation or executive actions that would regulate the conduct of broadband providers. We cannot predict whether the FCC order or state initiatives will be modified, overturned, or vacated by legal action of the court, federal legislation, or the FCC. With the repeal of net neutrality rules in effect, we could incur greater operating expenses, which could harm our results of operations. | |
● | “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 Companymarketplace and its network of partnerslimit the return we can expect to achieve on past and affiliates exponentially.future investments in our networks.
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 of 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 acquire will not be the subject of a successful unionization vote.
Smaller reporting companies are not required to provide the information required by this item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
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ITEM 2: DESCRIPTION OF PROPERTIESWe could be impacted by unfavorable results of legal proceedings, and may, from time to time, be involved in future litigation in which substantial monetary damages are sought.
We are currently subject to a number of litigations as described under the heading “Legal Proceedings.” In connection with certain of these litigations, we may be required to pay significant monetary damages. Defending against the current litigations is or can be time-consuming, expensive and cause diversion of our management’s attention.
In addition, we may from time to time be involved in future litigation in which substantial monetary damages are sought. Litigation claims may relate to intellectual property, contracts, employment, securities and other matters arising out of the conduct of our current and past business activities. Any claims, whether with or without merit, could be time-consuming, expensive to defend and could divert management’s attention and resources. We may maintain insurance against some, but not all, of these potential claims, and the levels of insurance we do maintain may not be adequate to fully cover any and all losses.
With respect to any litigation, our insurance may not reimburse us, or may not be sufficient to reimburse us, for the expenses or losses we may suffer in contesting and concluding such lawsuit. The Company leases office space at 6795 S. Edmond Street 3rd Floor, Las Vegas, Nevada 89118, which contains 65,000 square footresults of collaborative work space which allows usany future litigation or claims are inherently unpredictable and substantial litigation costs, including the substantial self-insured retention that we are required to expand and contract as needed. Currently wesatisfy before any insurance applies to a claim, unreimbursed legal fees or an adverse result in any litigation may have a year leasematerial adverse effect on our results of operations, cash from operating activities or financial condition.
Risks Related to Our Business, Industry and Operations
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.
Effects of the COVD-19 Pandemic on Our Business
Since March 2020 there has been, and there continues to be, a significant and growing volatility and uncertainty in the global economy due to the worldwide COVID-19 pandemic affecting all business sectors and industries. Broadly, negative global and national economic trends, such as decreased consumer and business spending, high unemployment levels and declining consumer and business confidence, pose challenges to our business and could result in declining revenues, profitability and cash flow.
The main specific impact of the COVID-19 pandemic on our business was on SurgePays Fintech. Its revenues went down by $8,309,490 in 2022 as compared to 2021. This was partly related to the continued impact of COVID-19 on SurgePays Fintech. During the economic lock-down of 2020 and 2021, the inability of our independent representatives to visit existing stores and seek out new stores, limited our revenue growth, both existing and new revenue. Combined with a thirty-day cancelation policyshift of prepaid wireless payments at stores to subsidized wireless expansion at the federal level, resulted in the lower revenue in 2022.
At this time, we cannot accurately predict whether there will be further effects of the COVID-19 pandemic on our business.
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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 costs $1,825 per month. The Company feels that its current office space described above is adequate formay 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 Companyacquired 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 next twenty-four (24) months.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.
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ITEM 3: LEGAL PROCEEDINGSOur success is substantially dependent on the continued service of our senior management.
The followingOur success is summarysubstantially dependent on the continued service of threatened, pending, asserted or un-asserted claims against the Company orour Chief Executive Officer (“CEO), Kevin Brian Cox and our Chief Financial Officer (“CFO”), Anthony Evers. We do not carry key person life insurance on any of its wholly owned subsidiaries.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, 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 product development capabilities and customer and employee relationships growth may be harmed and overall growth may be limited.
Claims by River North Equity, LLC against KSIX Media Holdings, Inc.:We may not have sufficient resources to effectively introduce and market our services and products, which could materially harm our operating results.
On June 29, 2017, River North Equity, LLC (“River North Equity”) filed suit againstContinuation 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 Companymarketing efforts and Carter Matzingerexpenditures 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, an entity that we own 40% of, 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 Circuit Courtlarger 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
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 39% of our outstanding voting equity. 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 proposals of the 18th Judicial DistrictBoard of DuPage County in Wheaton, IL (Case # 2017AR000989) arising outDirectors (the “Board”) that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of an Equity Purchase Agreement the Company entered into with River North Equity on July 11, 2016. The Complaint alleges that the Company entered intosignificant financing transactions.
Sales of a seriessignificant number of convertible promissory notesshares of our Common Stock in the aggregate face amountpublic market or the perception of $177,500 and that these notes are presently in default. The Complaint also alleges thatsuch possible sales, could depress the Company failed to maintain sufficient authorized capital to allow for conversionmarket price of the promissory notes; failed to honor conversion notices delivered with respect to the promissory notes; failed to fileour Common Stock.
Sales of a registration statement with the U.S. Securities and Exchange Commission with respect tosubstantial number of 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 damagesour Common Stock in the amountpublic markets, which include an offering of at least $27,500 plus accrued interestour preferred stock or Common Stock could depress the market price of our Common Stock and suchimpair 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 damagesequity-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 including, as of March 30, 2023, the ongoing military conflict between Russia and Ukraine (which has resulted in various countries, including the U.S., Canada and the United Kingdom, as well as the European Union, issuing broad-ranging economic sanctions against Russia) may have adverse effects on regional and global economic markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds and increasing the volatility of our share price; | |
● | 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 proven at trial. 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 Company is in discussions with River North Equity regarding a potential resolutionmarket price for our shares of this matter, however, there is no guarantee that this matter canCommon Stock may also be resolved on any basis which is favorableaffected by our ability to the Company,meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if at all. The $27,500 plus accrued interest is included in the Company’s Consolidated Balance Sheet at December 31, 2016.
Claims by TCA Global Credit Master Fund, L.P.
On or about May 9, 2017, TCA Global Credit Master Fund, L.P. (“TCA”) filed a civil action in Broward County Florida against the Company and its subsidiaries regarding an outstanding balance due under a Senior Secured Debt Facility Agreement dated February 26, 2016. The balance carried by the Company on account of the Senior Secured Debt Facility Agreement at December 31, 2016 was $261,043. The Company has retained counsel in Florida and is defending this action. The Company disputes this balance and has filed a counterclaim against TCA and related parties it believesminor, may be responsible for the alleged default. While settlement discussions are in process, there is no guarantee that this matter can be resolved on any basis which is favorable 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 employee of the Company) 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 there 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 Companymarket price of our shares of 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 its business. Thereyou 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.
The 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. These issuances may include substantial milestone-based issuances of securities to our executive officers as described in Item 11 of this Annual Report under the heading “Employment Agreements.” 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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We presently occupy space at 3 locations: 3124 Brother Blvd, Suite 410, Bartlett, TN 38133 (this building is no guarantee that this matter can be resolved on any basis which is favorable to the Company.owned by an entity owned by Mr. Cox, our CEO and Chairman), 1375 E Woodfield Road, Schaumburg IL 60173 and1615 S Ingram Mill, Building B, Springfield, Missouri 65804.
See pages F-42 and F-43 for detail lease information.
We will acquire additional office space as needed.
ITEM 4:3. LEGAL PROCEEDINGS
(1) | Global Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom believed Mr. Coffman and Mr. Carroll were in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as such, we believed True Wireless had a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc., but not in wireless sales. The case was dismissed without prejudice by the court on December 15, 2022. | |
(2) | Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary. | |
(3) | On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleged breach of contract and prayed for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion practice and discovery process. The case was settled and a settlement agreement entered into on January 30, 2023. The following payments were made pursuant to the settlement agreement: February 3, 2023 for $5,000, February 15, 2023 for $25,000 and March 15, 2023 for $30,000. The payments under the settlement agreement have been completed. Entry of a dismissal order is pending on the Court’s docket. |
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(4) | Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox. Written discovery is winding down and depositions are anticipated in the second and third quarters of 2023. | |
(5) | Robert Aliotta and Steve Vasquesz, on behalf of themselves and others similarly situated v. SurgePays, Inc. d/b/a Surge Logics, filed January 4, 2023, in the U.S. District Court for the Northern District of Illinois, Case No. 1:23-cv-00042. Plaintiffs’ allege violations of the Telephone Consumer Protection Act (TCPA) and the Florida Telephone Solicitations Act (FTSA) based on telephone solicitations allegedly made by or on behalf of SurgePays, Inc. Plaintiffs’ seek damages for themselves and seek certification of a class action on behalf of others similarly situated. Defendants intend to vigorously defend the action however most similar cases are eventually resolved by an out-of-court settlement. At this time, it is impossible to estimate the amount or range of potential loss, but similar matters are usually settled for $100,000.00 or less. SurgePays, Inc has been removed from the case following a Motion to Dismiss and LogicsIQ, Inc. has been named as the defendant. The case remains in the pleadings stage. | |
(6) | Meral Demiray v Surge Holdings, Inc. a/k/a SurgePays, Inc.: In the United States District Court for the Northern District of Illinois, Case # 22-cv-6591, filed November 23, 2022. Plaintiff filed a claim against SurgePays following her dismissal from her position as an employee of the company. Following negotiations among and between SurgePays, SurgePays’ insurance carrier and the Plaintiff, a settlement has been reached and has been completed and the case was dismissed by Stipulation of the Parties. | |
(7) | SurgePays, Inc. et al. v. Fina et al., Case No. CJ-2022-2782, District Court of Oklahoma County, Oklahoma. Plaintiffs SurgePays, Inc. and Kevin Brian Cox initiated this case against its former officer Mike Fina, his companies Blue Skies Connections, LLC, True Wireless, Inc., Government Consulting Solutions, Inc., Mussell Communications LLC and others. This case also arises from the June 2021 transaction by which SurgePays sold True Wireless to Blue Skies. During the litigation of CJ-2021-5327 described above, SurgePays learned information that showed Mike Fina breached his duties owed to True Wireless during his employment and consulting work for True Wireless prior to SurgePays’ sale of True Wireless to Blue Skies. SurgePays alleges that Mike Fina conspired with the other defendants to damage True Wireless thereby harming the value of the company and causing its eventual sale at a greatly reduced price. SurgePays asserts claims for (i) breach of contract; (ii) breach of fiduciary duty; (iii) fraud; (iv) tortious interference; and (v) unjust enrichment. At this stage no defendant has asserted a counter-claim against SurgePays. | |
The case is still at the early pleadings stage. SurgePays filed a Second Amended Petition on January 27, 2023. Defendants Fina, Blue Skies, True Wireless, and Government Consulting Solutions filed a Motion to Dismiss on March 10, 2023. It is SurgePays’ present intent to vigorously prosecute this case. At this early stage, no attempts at settlement have been made. |
ITEM 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
OurThe Common Stock $0.001 par value per share, is traded inand the OTC Markets Inc. Pink Current Information Tier (“Pink Sheets”) under the symbol “KSIX.” Until weWarrants began trading on July 24, 2007,the Nasdaq Capital Market under the symbols SURG and SURGW, respectively, on November 2, 2021.
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As of March 30, 2023, there was no public market for our common stock.
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 datewere approximately 3,657 holders 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 valuerecord of our securities have been, and will continue to be, materially affected by the trading on the Pink Sheets.
Penny Stock Considerations
Our shares will be “penny stocks” as that term is generally defined in the Securities Exchange Act of 1934 to mean equity securities with a price of less than $5.00. Our shares thus will be subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage inCommon Stock. Since certain transactions involving a penny stock.
Under 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 excess 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:
Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affectCommon Stock are held by brokers and other institutions on behalf of stockholders, the abilityforegoing number of selling shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities, ifCommon Stock is not representative of the number of beneficial holders of our securities become publicly traded. In addition, the liquidityCommon Stock.
The last reported sales price for our securitiesCommon Stock as reported on the Nasdaq Capital Market on March 28, 2023 was $4.45.
Dividends
We have not declared or paid any cash dividends on our Common Stock, and we do not anticipate declaring or paying cash dividends for the foreseeable future. We are not subject to any legal restrictions respecting the payment of dividends, except that we may decrease, with a corresponding decrease innot pay dividends if the pricepayment would render us insolvent. Any future determination as to the payment of cash dividends on our Common Stock will be at the discretion of our securities. OurBoard and will depend on our financial condition, operating results, capital requirements and other factors that the Board considers to be relevant.
Securities Authorized for Issuance under Equity Compensation Plans
None.
Preferred Stock
As of December 31, 2022, the Company does not have any shares in all probability will be subject to such pennyof preferred stock rules andoutstanding.
Transfer Agent
The transfer agent of our shareholders will, in all likelihood, find it difficult to sell their securities.Common Stock is VStock Transfer, LLC. Their address is 18 Lafayette Place, Woodmere, NY 11598.
RecentUnregistered Sales of UnregisteredEquity Securities
We have previously disclosed in our 10-Qs and 8-Ks filed in 2022 all 2022 sales of securities without registration under the Securities Act of 1933 other than the following:
During year ended December 31, 2016,
In 2022, the Company issued an aggregate of 21,213,469270,745 shares of common stock in unregistered transactions. Such issuances included shares soldat $4.01/share to investors in transactions not involving a public offering, shares issued as consideration for transactions, shares issued on conversionsettle $1,086,413 of debt instruments andprincipal. These shares issued to consultants. The prices of the shares ranged from $0.05-$0.20 per share.
During period commencing January 1, 2017 through October 30, 2017, the Company issued an aggregate of 23,563,134 shares of common stock in unregistered transactions. Such issuances included shares sold to investors in transactions not involving a public offering, shares 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.:
The shares of common stock were issued in reliance on Section 4(2) promulgated underpursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, (the “Securities Act”). The sharesafforded by Section 4(a)(2) thereof for the sale of common stock issued havesecurities 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.involving a public offering.
Holders
As of October 30, 2017, there are approximately 84 shareholders of record of the Company’s common stock, including 7,734,920 shares held by CEDE & Co. as nominee.
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 Purchases of Equity Securities
During the quarter ended December 31, 2016, the Company did not purchase any shares of its common stock.
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“Part I – Item 1A. Risk Factors.”
Business Overview
We were incorporated in Nevada on behalfAugust 18, 2006 and a technology and telecommunications company focused on the underbanked and underserved communities.
SurgePhone wireless companies provide mobile broadband (internet connectivity) to low-income consumers nationwide. SurgePays Fintech platform utilizes a suite of financial and prepaid products to convert corner stores and bodegas into tech-hubs for underbanked neighborhoods. We are aggressively cornering the Company.
Overview
Historical
The accompanying consolidated financial statements as of December 31, 2016 and December 31, 2015 and for 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 acquisitionunderbanked market directly to the year-end periods referred to above, as follows:consumer and in the stores they shop.
Please see the description in Item 1 of this Annual Report for a description of our SurgePhone, Torch Wireless, and LocoRabbit Wireless, Surge Blockchain, Shockwave CRM™, Surge Fintech (ECS Business), LogicsIQ, and CenterCom operations.
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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, 20162022 AND 20152021
Revenues and cost of revenue forduring the years ended December 31, 20162022 and 20152021 consisted of the following:
2022 | 2021 | |||||||
Revenue | $ | 121,544,190 | $ | 51,060,589 | ||||
Cost of revenue (exclusive of depreciation and amortization) | (108,074,782 | ) | (44,890,610 | ) | ||||
General and administrative | (12,835,623 | ) | (12,162,547 | ) | ||||
Income (Loss) from operations | $ | 633,785 | $ | (5,992,568 | ) |
Revenue increased overall by $70,483,601 (138%) from year ended December 31, 2021 to year ended December 31, 2022. The breakout was as follows:
For the Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
Revenues | ||||||||
Surge Phone and Torch Wireless | $ | 88,351,547 | $ | 7,289,239 | ||||
Surge Blockchain, LLC | 112,911 | 138,106 | ||||||
LogicsIQ, Inc. | 16,760,656 | 17,846,698 | ||||||
Surge Fintech & ECS | 16,319,076 | 24,628,566 | ||||||
True Wireless | - | 1,157,980 | ||||||
Surge Pays, Inc. | - | - | ||||||
Total | $ | 121,544,190 | $ | 51,060,589 |
SurgePhone and Torch Wireless revenues (as detailed in Notes 2 and 11 of the financial statements) increased by $81,062,308 related to the additional revenue stream generated by the increase in subscribers to over 200,000 at the end of 2022 from 30,000 at the end of 2021 for the Emergency Broadband Benefit and Affordable Connectivity programs (the “ACP”) started in August of 2021. LogicsIQ revenues decreased by $1,086,042 related to the maturity cycle of the various litigations we are delivering retained cases on. The overall case count went from 14,492 in 2021 to 9,362 in 2022. Surge Fintech (ECS) revenues decreased by $8,309,490 due to Covid-19 impact and the shifting of customers to the ACP from wireless prepaid services at our stores. True Wireless revenues decreased by $1,157,980 as a result of the May 7, 2021 disposition.
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 |
We expect revenues to grow for each segment of the Company in future periods, specifically our subscriber base and active store count.
For the Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
Income (loss) from operations | ||||||||
Surge Phone and Torch Wireless | $ | 11,921,855 | $ | 1,160,124 | ||||
Surge Blockchain, LLC | 56,823 | 124,704 | ||||||
LogicsIQ, Inc. | 324,259 | 705,224 | ||||||
Surge Fintech & ECS | (1,974,773 | ) | (546,665 | ) | ||||
True Wireless | - | 236,905 | ||||||
Surge Pays, Inc. | (9,694,379 | ) | (7,672,860 | ) | ||||
Total | $ | 633,785 | $ | (5,992,568 | ) |
Operations income improved overall by $6,626,353 from year ended December 31, 2021 to year ended December 31, 2022, primarily as a result of an increase in operating profit of $10,761,731 in SurgePhone and Torch Wireless, a decrease in operating profit of $380,965 in LogicsIQ, and a decrease in operating profit of $1,428,108 in Surge Fintech. Most of these changes are directly related to the change in revenue for each stream. Overall margins remained consistent in 2021 and 2022.
Cost of Revenue, Gross Profit and Gross Margin
Revenue and cost of revenue by subsidiary is 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 switch in demand from desktop games to mobile games and Effective April 1, 2016, the Company temporarily suspended its BLVD business operations and is reviewing a potential discontinuation 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%services primarily consists of tablet, phone and 89.5% for 2016 historical, 2015 historicalSIM cards and 2015 pro forma, respectively. Costassociated freight, shipping and handling costs, marketing services, data plan expenses, royalties, and out-sourced call center expenses.
We expect that our cost of revenue will increase or decrease to the extent that our revenue increases and decreases and depending on our subscriber base and store count.
Gross profit is calculated as revenue less cost of revenue. Gross profit margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods will depend on a variety of factors, including: market conditions that may impact our pricing, sales mix among devices, sales mix changes among consumables, excess and obsolete inventories, and our cost structure for KSIX was 52.6%, 66.5%manufacturing operations relative to volume. Our gross profit in future periods will vary based upon our revenue stream mix and 66.5%may increase based upon our distribution channels.
We expect that our gross profit margin for 2016 historical, 2015 historicalproduct 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 takingservice will increase over the new operationlong term as our sales and production volumes increase and our cost per unit decreases due to efficiencies of scale. We intend to use our design, information systems, and sales force capabilities to further advance and improve the efficiency of our revenue streams, which resultedwe believe will reduce costs and increase our gross margin.
General and administrative during the years ended December 31, 2022 and 2021 consisted of the following:
2022 | 2021 | |||||||
Depreciation and amortization | $ | 931,593 | $ | 759,383 | ||||
Selling, general and administration | 11,904,030 | 11,403,164 | ||||||
Total | $ | 12,835,623 | $ | 12,162,547 |
The increase in depreciation and amortization costs for 2022 is the cost exceeding the revenue.result of capitalizing costs associated with software enhancements to our various software platforms in 2022.
CostsSelling, general and administrative expenses during the years ended December 31, 20162022 and 2015 were as follows:
Years ended December 31, | Pro Forma | |||||||||||
2016 | 2015 | 2015 | ||||||||||
Depreciation and amortization | $ | 433,118 | $ | 501,091 | $ | 928,777 | ||||||
Asset impairment | 372,706 | - | - | |||||||||
Selling, general and administrative | 3,269,270 | 1,320,535 | 2,350,850 | |||||||||
Total | $ | 4,075,094 | $ | 1,821,626 | $ | 3,279,627 |
Depreciation and amortization in 2016 and 2015 is 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 result2021 consisted of the appraisal. Accordingly, the net expense recorded in 2016 associated with DIQ amortization was $49,076.following:
2022 | 2021 | |||||||
Contractors and consultants | $ | 1,667,016 | $ | 2,284,135 | ||||
Professional services | 1,204,133 | 1,758,055 | ||||||
Compensation | 4,780,885 | 3,872,765 | ||||||
Computer and internet | 403,583 | 552,455 | ||||||
Advertising and marketing | 259,393 | 661,238 | ||||||
Bad debt expense (recovery) | (7,767 | ) | 24,841 | |||||
Insurance | 1,535,687 | 791,535 | ||||||
Other | 2,061,100 | 1,458,140 | ||||||
Total | $ | 11,904,030 | $ | 11,403,164 |
The Company determined to not continue the operations of BLVD 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.
Selling, general and administrative costs (S, G & A) increased by $500,866 (4.4%). The changes are discussed below:
● | Contractors and consultants expense decreased by $617,119 or 27% from $2,284,135 in 2021 to $1,667,016 in 2022. |
● | Professional services decreased $553,922 in 2022 primarily due to a decrease in legal fees of $395,989. Legal proceedings and fees related to the listing of our common stock on the Nasdaq Capital Market were the main reason for the higher spending on professional services in 2021. |
● | Compensation increased from $3,872,765 in 2021 to $4,780,885 in 2022 primarily as a result of one-time bonuses paid to various management personnel in 2022. |
● | Computer and internet costs decreased by 26.9% to $403,583 in 2022 from $552,455 in 2021. |
● | Advertising and marketing costs decreased to $259,393 in 2022 from $661,238 in 2021 primarily due to the normalization of advertising spending in 2022. |
● | Bad debt expense recovery decreased to $(7,767) in 2022 from $24,841 in 2021. |
● | Insurance expense increased to $1,535,687 in 2022 from $791,535 in 2021 primarily as a result of a full year of additional coverage amounts related to the listing of our common stock on the Nasdaq Capital Market. |
● | Other costs increased to $2,061,100 in 2022 from $1,458,140 in 2021 primarily due to an increase various administrative expenses such as office, building, travel and bank fees. |
Other (expense) income during the years ended December 31, 20162022 and 2015 is as follows:2021 consisted of the following:
2022 | 2021 | |||||||
Interest, net | $ | (1,843,396 | ) | $ | (3,840,616 | ) | ||
Change in fair value of derivative liabilities` | - | 1,806,763 | ||||||
Derivative expense | - | (1,775,057 | ) | |||||
Gain (loss) on equity investment in Centercom | (89,082 | ) | 28,676 | |||||
Gain (loss) on settlement of liabilities | 336,726 | 1,469,641 | ||||||
Amortization of debt discount | (115,404 | ) | (3,677,121 | ) | ||||
Gain on deconsolidation of True Wireless | - | 1,895,871 | ||||||
Settlement expense | - | (3,750,000 | ) | |||||
Warrant modification expense | - | (74,476 | ) | |||||
Other income | 524,143 | 377,743 | ||||||
Total other (expense) income | $ | (1,187,013 | ) | $ | (7,538,576 | ) |
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 |
Selling,general and administrative expenses increased $1,948,735Interest expense decreased to $1,843,396 in 2016 as compared to 2015,2022 from $3,840,616 in 2021 primarily due to the short period DIQ was ownedpayoff of various debt instruments in 2021 as a result of the 2015 year. On a proforma basis, selling, general and administrative expense increased $918,420 (39.0%) in 2016 as compared to 2015. The following explainscash raised from the changes in specific expenses from 2015 to 2016listing of our common stock on a pro forma basis.the Nasdaq Capital Market.
Other income (expense) duringDuring the years ended December 31, 20162022 and 20152021, the Company recorded a change in fair value of derivative liabilities of $0 and $1,806,763, respectively. These amounts reflect a mark to market adjustment recorded to the accompanying consolidated statements of operations. During the year ended December 31, 2021, in connection with the repayment of convertible notes which contained embedded conversion features, the related derivative liabilities ceased to exist.
A reconciliation of the beginning and ending balances for the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:follows at December 31, 2022 and 2021:
Derivative liability - December 31, 2020 | 1,357,528 | |||
Fair value at commitment date | 1,877,250 | |||
Fair value mark to market adjustment | (1,806,763 | ) | ||
Gain on derivative liability upon related debt settled | (1,428,015 | ) | ||
Derivative liability - December 31, 2021 and 2022 | $ | - |
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 | ) |
Interest expense increased to $1,660,338Changes in 2016 from $15,201 in 2015. The 2016 amount includes $163,788 in interest accrued on notes payable and long-term debt and $30,000 in loan penalty. The remaining $1,466,550 represents the amortizationfair value of loan costs and debt discounts associated with the derivative liabilities which are determined fromincluded in other income (expense) in the Company’s convertible debt.accompanying consolidated statements of operations.
Other income in 2016 representsFor the recovery of a bad debt written off in 2015.
The change in value of derivatives occurred in 2016 for the first time whenyears ended December 31, 2022 and 2021, the Company issuedrecorded a derivative expense of $0 and $1,775,057, respectively.
During the years ended December 31, 2022 and 2021, the Company recorded a gain of $0 and $1,428,015, respectively, related to the settlement of convertible debt which resulted in recordingcontained an embedded conversion feature and was separately bifurcated and classified as a derivative liability. The change results from revaluingCompany has recorded these gains in the derivative ataccompanying consolidated statements of operations as a component of gain on settlement of liabilities.
19 |
The equity investment in Centercom decreased by $89,082 in 2022 compared to an increase of $28,676 in 2021.
During 2022, the quarterly balance sheet dates.Company received a forgiveness on a PPP loan totaling $524,143, of which $518,167 was for principal and $5,976 for accrued interest. The Company recorded this forgiveness as other income in the accompanying consolidated statements of operations.
In 2021, in connection with the listing of our common stock on the Nasdaq Capital Market, 433,017 warrants were repriced at a lower exercise price to better reflect the current market offering. No other terms had been modified. As a result, the Company recorded a warrant modification expense of $74,476 in the accompanying consolidated statements of operations with an offsetting increase to additional paid in capital.
Equity Transactions for the Year Ended December 31, 2022
Stock Issued as Direct Offering Costs
The lossCompany issued 200,000 shares of common stock for services rendered in connection with the listing of our common stock on debt settlement arosethe Nasdaq Capital Market 2021. As a result, the Company recorded the par value of the common stock issued with a corresponding charge to additional paid-in capital, resulting in 2016 whena net effect of $0 to stockholders’ equity.
Stock Issued for Acquisition of Software
The Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash and the Company issued 85,000 shares of common stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.
Exercise of Warrants (Cashless)
The Company issued 147,153 shares of common stock in connection with the cashless exercise of 498,750 warrants. These transactions had a net effect of $0 on stockholders’ equity.
Exercise of Warrants
The Company issued 100 shares of common stock in connection with an exercise of 100 warrants at an exercise price of $4.73 per share for proceeds of $473.
Equity Transactions for the Year Ended December 31, 2021
Stock Issued for Services
The Company issued 13,411 shares of common stock for convertible notes payable.services rendered, having a fair value of $99,436 ($5 - $14.05/share), based upon the quoted closing trading price.
Stock and Warrants Issued for Cash and Related Direct Offering Costs
The Company issued an aggregate 4,862,247 shares of common stock for $21,294,800 ($4.30 -$8/share). In connection with raising these funds, the Company paid $2,222,952 in direct offering costs, resulting in net proceeds of $19,076,710.
LIQUIDITY and 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, 20162022 and 2015,2021, our current assets were $758,837$27,563,785 and $346,043,$13,892,681, respectively, and our current liabilities were $4,059,894$23,464,062 and $2,597,008,$9,998,194, respectively, which resulted in a working capital deficitsurplus of $3,301,057$4,099,723 and $2,250,965,of $3,894,487, respectively. The increase in current assets is a result of expansion of the Affordable Connectivity Program, whereby inventory increased by $6,826,946 for tablets and phones and accounts receivable increased by $5,980,476.
Total assets at December 31, 20162022 and 20152021 amounted to $2,357,246$34,003,506 and $2,626,823,$19,500,202, respectively. The increase in total assets is a result of the expansion of the Affordable Connectivity Program, whereby inventory increased by $6,826,946 for tablets and phones and accounts receivable increased by $5,980,476. Total assets increased by $14,503,304 from December 31, 2021 to December 31, 2022. At December 31, 2016,2022, assets consisted of current assets of $758,837,$27,563,785, net property and equipment of $14,432,$643,373, net intangible assets of $217,195,$2,779,977, goodwill of $866,782$1,666,782, equity investment in Centercom of $354,206, note receivable of $176,851, internal use software of $387,180, and $500,000 in deposits on investments, asoperating lease right of use asset of $431,352 compared to current assets of $346,043,$13,892,681, net property and equipment of $14,422 and$200,448, net intangible assets of $2,266,358$3,433,484, goodwill of $866,782, equity investment in Centercom of $443,288, note receivable of $176,851, and operating lease right of use asset of $486,668 at December 31, 2015.2021.
At December 31, 2016,2022, our total liabilities of $4,172,295 increased $938,725 (29.0%) from $3,233,570were $28,885,253. This $12,936,372 increase (from $15,948,881 at December 31, 2015. The2021) was related to the installment sales liability increase primarily consists of $13,018,184 related to inventory purchases for the new derivative liability of $584,168.Affordable Connectivity Program.
At December 31, 2016,2022, our total stockholders’ deficitsurplus was $(1,815,049)$5,118,253 as compared to stockholders’ deficit of ($606,747)$3,551,321 at December 31, 2015. The principal reason2021.
We expect the positive operating income results of $3,322,294 for the decreaseperiod October 1, 2022 to December 31, 2022 will continue to be positive for each reporting period of 2023. The gross margin for the period of October 1, 2022 to December 31, 2022 was approximately 18%. Revenue streams are expecting to increase quarter over quarter in stockholders’ equity was the operating loss incurred partially offset by common stock issued.2023.
The following table sets forth the major sources and uses of cash for the years ended December 31, 20162022 and 2015.2021.
2022 | 2021 | |||||||
Net cash provided by or (used in) operating activities | $ | 793,272 | $ | (15,288,261 | ) | |||
Net cash used in investing activities | (1,498,582 | ) | (376,724 | ) | ||||
Net cash provided by financing activities | 1,457,468 | 21,274,486 | ||||||
Net change in cash and cash equivalents | $ | 752,158 | $ | 5,609,501 |
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 net positive cash provided by operating activities in 2022, the cash increased in 2022 by $752,158, compared to cash used in operations of $15,288,261 in 2021.
At December 31, 2016,2022, the Company had the following material commitments and contingencies.
AcquisitionsNotes payable – related party –- See Note 136 to the Consolidated Financial Statements.
Notes payable and long-term debt- $1,954,275 ($107,500 in related party debt), See NotesNote 8 andto the Consolidated Financial Statements.
Convertible promissory notes - See Note 9 to the Consolidated Financial Statements.
Accounts payableRelated party transactions - See page F-29 and accrued expenses - $775,624.F-30 to the Consolidated Financial Statements.
Advances from related party - $356,502
Cash requirements and capital expenditures–At the current level of operations, the Company does not anticipate borrowing funds to meet basic operating costs. The Company will be requiredmay need to make a cash payment of $1,500,000borrow funds to closemeet the acquisition of True Wireless, LLC as set forthhyper-growth expected to occur 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.ACP in 2023.
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 amountsCritical Accounting Policies and certaintyEstimates
Management’s discussion and analysis 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,and results of operations liquidity, capital expendituresis based on our consolidated financial statements, which were prepared in accordance with U.S. generally accepted accounting principles, or capital resources that are materialGAAP. The preparation of these consolidated financial statements requires us 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 affectfor 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.expenses. Our estimates will beare based on our historical experience and our interpretation of economic, political, regulatory, andon various other factors that affect our business prospects.we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly from these estimates under different assumptions or conditions, and any such differences may be material.
While our estimates.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates as a smaller reporting company and is not required to provide this information.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statementssignificant accounting policies are more fully described in Note 2—Summary of Ksix Media Holdings, Inc. together with the reports thereon of Paritz & Co., P.A. for the years ended December 31, 2016 and December 31, 2015, is set forth as follows:
Index to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of directors of and Stockholders of
Ksix Media Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Ksix Media Holdings, Inc. and Subsidiaries (“the Company”) as of December 31, 2016 and 2015, and the related statements of operations, stockholders’ deficit, and cash flows for the years ended December 31, 2016 and 2015. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standardsSignificant Accounting Policies of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration 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’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 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 position 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.
The accompanying consolidated financial statements have been prepared assuming 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 the past two years. The Company has not established 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 about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
KSIX MEDIA HOLDINGS, 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 |
See accompanying notes to consolidated financial statements
KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2016 and December 31, 2015
2016 | 2015 | |||||||
Revenue | $ | 3,296,747 | $ | 2,832,853 | ||||
Cost of revenue | 2,328,467 | 2,332,194 | ||||||
Gross profit | 968,280 | 500,659 | ||||||
Costs and expenses | ||||||||
Depreciation and amortization | 433,118 | 501,091 | ||||||
Asset impairment | 372,706 | - | ||||||
Selling, general and administrative | 3,269,270 | 1,320,535 | ||||||
Total costs and expenses | 4,075,094 | 1,821,626 | ||||||
Operating loss | (3,106,814 | ) | (1,320,967 | ) | ||||
Other income (expense): | ||||||||
Interest expense | (1,660,338 | ) | (15,201 | ) | ||||
Other income | 5,844 | 65 | ||||||
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 | ) | ||||
Net loss before provision for income tax | (4,600,176 | ) | (1,336,103 | ) | ||||
Provision for income tax | - | - | ||||||
Net loss | $ | (4,600,176 | ) | $ | (1,336,103 | ) | ||
Net loss per common share, basic and diluted | $ | (0.10 | ) | $ | (0.04 | ) | ||
Weighted average common shares outstanding | 44,796,318 | 33,221,122 |
See accompanying notes to consolidated financial statements
KSIX MEDIA HOLDINGS, 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 | - |
See accompanying notes to consolidated financial statements
KSIX MEDIA HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2016
1 BASIS OF PRESENTATION AND BUSINESS
Basis of presentation
The accompanying consolidated financial statements include the accounts of Ksix Media Holdings, Inc. (the “Company”), incorporated included in Nevada on August 18, 2006,Item 8, Financial Statements and its wholly owned subsidiaries, Ksix Media, Inc. (“Media”), incorporated in Nevada on November 5, 2014, Ksix, LLC (“KSIX”), a Nevada limited liability company that was formed on September 14, 2011, Blvd. Media Group, LLC (“BLVD”), a Nevada limited liability company that was formed on January 29, 2009, DigitizeIQ, LLC (“DIQ”) an Illinois limited liability company that was formed on July 23, 2014 and North American Exploration, Inc. (“NAE”), a Nevada corporation that was incorporated on August 18, 2006 (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
Business description
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 dateSupplementary Data of this consolidatedAnnual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial statement.condition and results of operations and which require our most difficult, subjective and complex judgments.
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, the Company entered into an Agreement for the Exchange of Common Stock (“Agreement”) with DIQ and its sole owner. DIQ is a full service digital advertising agency which became a wholly owned subsidiary of the Company (see Note 4).
On or about April 27, 2015, the Company entered into a Share Exchange Agreement (the “Agreement”) with all of the shareholders of Media, whose primary business is the operation of a diverse advertising network through its wholly-owned subsidiaries KSIX and BLVD. Pursuant to the Agreement, the Company acquired all of the issued and outstanding shares (22,600,000 shares) of the common stock of Media from Media’s shareholders in exchange for 28,000,000 restricted shares of the Company’s common stock. The acquisition was accounted for as a reverse merger, whereby Media is the accounting acquirer and the Company is the legal surviving reporting company. The historical financial statements represent those of Media since its inception on November 5, 2014.
In July 2015, the Company completed the change of its name from North American Energy Resources, Inc. to Ksix Media Holdings, Inc.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates in the presentation of financial statementsEstimates
The preparation ofPreparing 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 the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenuerevenues and expenses during each reportingthe reported period. Actual results could differ from those estimates.estimates, and those estimates may be material.
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 of the amount of profitable credit losses in its existing accounts receivable. The Company extends credit to its customers based on an evaluation of their financial condition and other factors. The Company generally does not require collateral or other security to support accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential bad debts if required.
The Company determines whether an allowance for doubtful accounts is required by evaluation of specific accounts where information indicates the customer may have an inability to meet financial obligations. In these cases, the Company uses assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable 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. ForSignificant estimates during the years ended December 31, 20162022 and 2015, the Company reported $36,9542021, respectively, include, allowance for doubtful accounts and $97,406other receivables, inventory reserves and classifications, valuation of bad debt expense.
Credit risk
In 2016 and 2015, the Company had cash deposits in certain banks that at times may have exceeded the maximum insured by the Federal Deposit Insurance Corporation. The Company monitors the financial conditionloss contingencies, valuation 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 numberderivative liabilities, valuation 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 contingenciesstock-based compensation, estimated useful lives related to legal proceeding that are pending against the Company or unasserted claims that may resultintangible assets, capitalized internal-use software development costs, and property and equipment, implicit interest rate 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 incurredright-of-use operating leases, uncertain tax positions, and the amountvaluation allowance on deferred tax assets.
Fair Value 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.Financial Instruments
Share-based compensation
The Company accounts for share-based compensation in accordance withfinancial instruments under Financial Accounting Standards Board (“FASB”) ASC 718, “Compensation-Stock Compensation.820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
● | Level 1 - Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; | |
● | Level 2 - Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and | |
● | Level 3 - Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
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Impairment of Long-lived Assets including Internal Use Capitalized Software Costs
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Under Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.
If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value recognition provisions of the assets.
Inventory Valuation
Inventory is stated at the lower of cost or net realizable value (first-in, first-out method). For items manufactured by third parties, cost is determined using the weighted average cost method (WAC). We write-down inventory when it has been determined that conditions exist that may not allow the inventory to be sold for at the intended price or the inventory is determined to be obsolete based on assumption about future demand and market conditions. The charge related to inventory write-downs is recorded as cost of goods sold. We evaluate inventory at least annually and at other times during the year. We have incurred and may in the future incur charges to write-down inventory.
Internal Use Software Development Costs
We capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not meet the qualification for capitalization, as further discussed below, are expensed as incurred and recorded in general and administrative expenses in the consolidated results of operations.
21 |
Revenue from Contracts with Customers
We account for revenue earned from contracts with customers under ASC 606, Revenue from Contracts with Customers (“ASC 606”), and ASC 842, Leases (“ASC 842”). The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify the contract with the customer.
● Step 2: Identify the performance obligations in the contract.
● Step 3: Determine the transaction price.
● Step 4: Allocate the transaction price to the performance obligations in the contract.
● Step 5: Recognize revenue when, or as, the company satisfies a performance obligation.
Stock-Based Compensation
The Company accounts for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value-based method. Under this pronouncement, share-basedmethod, 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 applicableservice period, which is usually the vesting period ofperiod. This guidance establishes standards for the stock award using the accelerated method. The excess tax benefit associated with stock compensation deductions have not been recordedaccounting for transactions in additional paid-in capital. When evaluating whetherwhich 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.
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 soldentity exchanges its equity instruments for goods or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gainservices. It also addresses transactions in which an entity incurs liabilities in exchange for goods 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 valueservices that 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 comparingon the fair value of the reporting unit to its carrying value (including attributable goodwill). Fair value for our reporting units is determined using an incomeentity’s equity instruments 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 determinationsthat may include both internal and third-party valuations. Unless circumstances otherwise dictate, we perform our annual impairment testing inbe settled by the fourth quarter.issuance of those equity instruments.
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 whenuses 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 Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a frameworkmethod for equity instruments granted to non-employees and use the Black-Scholes model for measuring fair value and expands disclosure of fair value measurements.
The estimatedthe 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.options.
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:
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 stock-based compensation is determined as of the derivativedate of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
Stock Warrants
In connection with certain financing (debt or equity), consulting and collaboration arrangements, the Company may issue warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments was valuedthat are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of warrants issued for compensation using the Black-Scholes option pricing model using the following assumptions as of December 31, 2016:the measurement date. However, for warrants issued that meet the definition of a derivative liability, fair value is determined based upon the use of a binomial pricing model.
Convertible Instruments
The Company evaluates and accounts for conversion options embeddedWarrants issued in convertible instruments in accordanceconjunction with ASC 815 “Derivatives and Hedging Activities”. Applicable GAAP requires companies 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) the economic characteristics and risksissuance of the embedded derivative instrumentcommon stock are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measuredinitially recorded at fair value underas a reduction in additional paid-in capital of the common stock issued. All other GAAP with changes inwarrants (for services) are recorded at fair value reported in earnings as they occur and (c)expensed over the requisite service period or at the date of issuance if there is not a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.service period.
Recent Accounting Pronouncements
Income taxes
We useIn the asset and liability methodnormal course of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion orbusiness, we evaluate 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 Holdings and became subject to income tax.
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
Asset impairment and disposal of long-lived assets
Long-lived assets, such as property, equipment 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 comparison of the carrying amount of an asset or asset group to 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year’s presentation.
Recentnew accounting pronouncements
In May 2014, issued by the Financial Accounting Standards Board, (the “FASB”) issuedSEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to Note 2 - Summary of Significant Accounting 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): DeferralPolicies 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 ableNotes 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.Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this guidance are clarifying the definition of a business 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 the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this new guidance is not expected to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this guidance to eliminate 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 assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. The guidance is effective for goodwill impairment tests in fiscal years beginning 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 for interim periods within those annual periods, is not expected to have any impact on the Company’s financial statement presentation or disclosures.
We have evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”) through the date these financial statements were available to be issued and find no recent accounting pronouncements that would have a material impact on the financial statements of the Company.
3 GOING CONCERN
The Company has not established sources of revenues sufficient 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 be cash flow positive after the end of the 2nd quarter ended 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 has executed an agreement with a FINRA licensed broker, as well as several institutional investors, to bring in equity investments to pay down existing debt obligations, cover short term shortfalls, and complete proposed acquisitions. Additionally, the Company is negotiating the closing of the acquisition of True Wireless, LLC, (“TW”) an Oklahoma Limited Liability Company. Upon the completion 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.
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
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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 |
The adjustment in assets acquired and liabilities assumed resulted in a decrease in amortization expense 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 through December 31, 2015 as if 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 contracts 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 amortizing the cost over that period.
DIQ - The customer lists 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.
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:
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 has utilized a credit card issued in the name of DIQ operation to pay for certain of its trade obligations. At December 31, 2016 and December 31, 2015, the Company’s credit card liability was $336,726 and $274,135, respectively. The bank charges no interest on the outstanding credit card balance, which is required to be repaid at the end of each billing cycle. In the event 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.
8 LONG-TERM DEBT – RELATED PARTY
As of December 31, 2016 and December 31, 2015, long-term debt due to a related party 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.
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 |
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:
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 amortizedITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index 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 of the Company and its subsidiaries. The payment due August 29, 2016 was acquired by Salksanna LLCConsolidated Financial Statements 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 provision 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, accrued 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 plus 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 was recorded on November 25, 2016 for $52,889. At December 31, 2016, the debt discount was fully amortized.
5Convertible 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. The debt discount has been amortized to a balance of $8,774 at December 31, 2016.
The Company has entered into a number of agreements with RNE wherein RNE has agreed to invest up to $3,000,000 in the common stock of the Company. These agreements require an effective Registration Statement to be on file by the Company and would allow the Company to require RNE to purchase the Company’s common stock at 90% of the lowest trading price of the Company’s common stock during the previous five trading days. The Company has not yet filed a Registration Statement with the SEC.
6The Company issued three convertible notes to Salksanna, LLC in exchange for payments made by Salksanna to TCA. The first note in the amount of $53,452 was converted into 1,953,399 shares of the Company’s common stock. The second note in the original amount of $53,452 was partially converted with $11,500 in principal and $44 in accrued interest converted into 383,525 shares of the Company’s common stock. The conversion of the first note and the partial conversion of the second note resulted in a loss on debt extinguishment of $107,104.
At December 31, 2016, the remaining notes with a principal balance of $95,405 have a debt discount of $87,379.
7In November 2016, the Company entered into four working capital notes in the original amount of $245,000 which require daily payments aggregating $2,956. The notes will be repaid between March 31, 2017 and July 31, 2017.
Derivative liability
The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note, if any, is recorded immediately to interest expense at inception.
The estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following assumptions:
10INCOME TAXES
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 | $ | - | $ | - |
The Company has approximately $4,768,000 of net operating losses (“NOL”) carried forward to offset taxable income in future years which expire commencing in fiscal 2034. 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 be realized. 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 all of the deferred tax assets relating to NOLs for every period because it is more likely than not that all of the deferred tax assets will not be realized.
11Stockholder’s equity
PREFERRED STOCK
The Company has 100,000,000 shares of its $0.001 par value preferred stock authorized. At 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.
Series “A” Preferred Stock
On May 6, 2016, 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:
On May 6, 2016, upon filing the Certificate of Designation which designated 10,000,000 shares 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.
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 $0.19 per share. The Company recorded compensation expense in the amount of $190,000.
COMMON 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, the Company issued a total of 3,150,000 shares 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 term of the agreement.
On September 19, 2016, 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 Options
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 datepage F-1 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.Annual Report.
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
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.
ITEM 9:9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A:9A. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controlsDisclosure Controls and proceduresProcedures
Under the PCAOB standards, a control deficiency exists when the design or operationAs 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 supervisionDecember 31, 2022, our Chief Executive Officer and with the participation of our management, including our principal executive officer and principal financial officer, weChief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securitiesrequired by Exchange Act of 1934, as amended (Exchange Act), as of December 31, 2016. Our management has determinedRule 13a-15. Management identified no material weaknesses in our internal control over financial reporting. Based on that as of December 31, 2016, the Company’sevaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are notwere effective due to a lack of segregation of duties.
Management’s report on internal control over financial reporting
Managementas of the Companyend of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
b) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effectiveadequate internal control over financial reporting as defined in RuleRules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. The Company’sAct of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer and chief financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with accounting principles generally accepted in the United States’ generally accepted accounting principles (US GAAP), includingStates of America (GAAP). Our internal control over financial reporting includes those policies and procedures thatthat: (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,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 of the Company are being made only in accordance with authorizationsauthorization of management and directors of the Company,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.
Management conducted an evaluation of the effectiveness of our control over financial reporting based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2022. During the year ended December 31, 2022, management identified no weaknesses.
Pursuant to Regulation S-K Item 308(b), as the Company is not an accelerated filer nor a large accelerated filer, this Annual Report does not include an attestation report of our company’s registered public accounting firm regarding internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determinedAlso, projections of any evaluation of effectiveness to be effectivefuture periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.
23 |
c) Changes in Internal Control over Financial Reporting
During the year ended December 31, 2022, there were no changes in our internal controls over financial reporting, which were identified in connection with respectour management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely 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 ofhave a materially affect, on 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.reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
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.Not applicable.
None.
ITEM 10:10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Listed below areThe following table and biographical summaries set forth information, including principal occupation and business experience, about 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.of March 30, 2023:
Directors and Executive Officers | Position/Title | Age | ||||
Kevin Brian Cox | 47 | |||||
Anthony Evers | Chief Financial Officer and | 59 | ||||
David C. Ansani | Chief Administrative Officer | 58 | ||||
David N. Keys | Independent Director | 66 | ||||
Laurie Weisberg | Independent Director | 53 | ||||
Independent Director | 59 | |||||
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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–Director. Mr. Cox has beenPresident, Chief Executive Officer Chief Financial Officer and a Director since July 2017. He been 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 and CEO of True Wireless sincefrom January 2011.2011 through April 2018, when True Wireless has beenbecame a leader and innovator inwholly owned subsidiary of the wireless industry with a focus on providing reduced cost cellular service to low income individuals.Company. Mr. Cox gotis an accomplished technology entrepreneur growing best-in-class and profitable companies for nearly 20 years. Throughout most of his startcareer, he has focused on delivering telecom, broadband and financial services to the unbanked and underserved segments of society. He began his career in telecom in 2004 when he founded his first prepaid telephone company (CLEC). Through which 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 sellingbeing sold 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 atattended Murray State University while majoring in Economics. We believe Mr. Cox is qualified to serve on our Board due to his experience as the Company’s Chief Executive Officer and his telecom leadership experience.
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 –Chief Administrative Officer. Mr. Ansani has been Chief Administrative Officer since August 2017, and was a directorDirector until February 2021. He was also appointed Secretary of the Company since August 2017.in February 2019. From 2010 to the present date, he has been and isserved 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.
Manuel FloresAnthony Evers – Chief Financial Officer. Mr. Evers has been the Chief Financial Officer of the Company since May 1, 2020. Mr. Evers has also served as Chief Financial Officer of LogicsIQ since August 2021. 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 Bachelor of Business Administration in Finance and Masters of Science in Accounting from the University of Wisconsin-Whitewater. Mr. Evers also successfully obtained his Certified Public Accountant and Certified Internal Auditor credentials.
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David N. Keys – Director –.Mr. FloresKeys has been a director of the Company since August 2017.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 August 2015, he2004, Mr. Keys has been an attorney at Arnstein & Lehr, LLP, Chicago, IL. His primary practice areas include: bankingindependent financial and consumer finance regulation,operations consultant. Mr. Keys currently serves on the Board of ARC Point, Inc. (TSXV: ARC), and compliance; land useon the Board of private companies, including Prosetta Biosciences Inc., Akonni Biosystems Inc. and zoning;Walker Digital Table Systems, LLC. He previously served on the Boards of Directors of RSC International Systems, Inc., AmFed Financial Inc., Norwest Bank of Nevada and government affairs.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). He received a Bachelor of Science in accounting from Oklahoma State University. We believe Mr. Keys is qualified to serve on our Board due to his financial and governance experience.
Laurie Weisberg – Director. Ms. Laurie Weisberg was appointed to the Board in December 2022. Ms. Weisberg served as a member of the Small Business Advisory Council (Illinois), FinTEx Chicago, Community Bankers AssociationBoard of IllinoisDirectors of Creatd, Inc. from July 2020 to September 2022 and Illinois Bankers Association.served in a number of executive officer positions while Creatd was traded on the Nasdaq Capital Market. Ms. Weisberg began her executive tenure at Creatd as Chief Operating Officer from October 2020 until August 2021. Ms. Weisberg then held the position of Co-Chief Executive Officer from August 2021 to February 2022. Ms. Weisberg was sole Chief Executive Officer from February 2022 to September 2022. Ms. Weisberg, who has served as the Chief Sales Officer at Intent since February 2019, has spent over 25 years at the forefront of sales and marketing innovation in the technology space, having held leadership positions at various technology companies including Thrive Global, Curalate, and Oracle Data Cloud. From November, 2012 through JanuaryOctober 2010 to April 2015, heMs. Weisberg was Acting Secretarya member of the Illinois Departmentexecutive leadership team at Datalogix, leading up to its acquisition by Oracle in 2015, at which point she assumed the role of FinancialVP of Oracle Data Cloud. Additionally, Ms. Weisberg has served on the Advisory Board at Crowdsmart, an intelligent data-driven investment prediction platform since April 2019. Ms. Weisberg was born and Professional Regulation (IDFPR), Springfield/Chicago, IL. In this capacity, heeducated in England. We believe Ms. Weisberg is qualified to serve on our Board due to her leadership experience working within the technology space.
Richard Schurfeld – Director. Mr. Schurfeld was appointed to the Board in December 2022. Since 2001, Mr. Schurfeld has served as Chief Executive Officer of Redsson, Ltd., a state regulatory agencyB2B software and services company that develops custom solutions to help utility companies, healthcare providers and payer organizations accelerate and streamline complicated manual processes and improve efficiencies. Mr. Schurfeld is a graduate of the United States Air Force Academy. We believe Mr. Schurfeld is qualified to serve on our Board due to his leadership experience working within the technology space.
David May – Director. Mr. May has been a director of the Company since February 2021. Mr. May has been a banking professional since 1994. Throughout his career, he has established himself as one of the leading convenience store and convenience store wholesaler financiers in the Mid-South through his cultivation of personal relationships and service to members of this close-knit community. David has been Senior Vice President of Commercial Banking since 2007 with an employee head countLandmark Community Bank, a Memphis based commercial bank with over a billion dollars in assets with offices in the Memphis and Nashville, Tennessee markets. He has been a bank officer for both community banks and large regional banks over his 27-year banking career. David is a graduate of 500the Southeastern School of Commercial Banking at Vanderbilt University and, an operating budgetin the past, served as Chairman of $111,000,000.the Board for seven years for The Agency for Youth and Family Development, a residential treatment facility for adolescent males. He is also a founding owner of Global Defense Specialists, a military aircraft fleet sustainment company specializing in Lockheed F-16’s and C-130’s and Northrop F-5 jet fighters. We believe Mr. May is qualified to serve on our Board due to his banking experience in the convenience store sector.
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 material to an evaluation of the ability or integrity of any director or executive officer.
Family Relationships
There are no family relationshiprelationships among the director andany of our directors or executive officers.
Board Meetings
Our Board held one formal Board meetings during the year ended December 31, 2022 and no formal Board meetings during the year ended December 31, 2021.
For the years ended December 31, 2021 and 2022, each incumbent director attended at least 75% of all meetings held by the Board and the committees of the Board on which they served during each year.
To the extent reasonably practicable, we encourage each of our directors to attend annual meetings of shareholders. All of our incumbent directors attended the 2022 Annual Meeting of Shareholders held in March 2023 either in person or remotely.
AUDIT COMMITTEEBoard Composition, Committees, and Independence
Audit Committee. The Company intends to establish anOur audit committee which will consistconsists of independent directors. David N. Keys, Richard Schurfeld, and Laurie Weisberg. Mr. Keys is chairperson of the audit committee and he qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K. Our Audit Committee held two formal meetings during the year ended December 31, 2022 and one formal meeting during the year ended December 31, 2021.
The audit committee’s duties would beare to recommend to the Company’sour board of directors the engagement of independent auditors to audit the Company’sour financial statements and to review its accounting and auditing principles. The audit committee wouldwill 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 wouldwill at all times be composed exclusively of directors who are, in the opinion of the Company’sour 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 COMMITTEECompensation Committee. Our board of directors does not have a standing compensation committee responsible for determining executiveconsists of David N. Keys, Richard Schurfeld, and director compensation. Instead, the entire board of directors fulfills this function, and each memberLaurie Weisberg. Ms. Weisberg is chairperson 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 separatecompensation committee. Our compensation committee would result in any improvement inheld one formal meeting during the compensation determination process. Accordingly,year ended December 31, 2022 and no formal meeting during 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.year ended December 31, 2021.
In considering and determining executive and director compensation, our board of directors’the compensation committee 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’sour officers. The board of directorscompensation committee also determines and approves any non-cash compensation paid to any employee. The Company doesWe do not engage any compensation consultants to assist in determining or recommending the compensation to the Company’sour officers or employees.
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of David N. Keys, Richard Schurfeld, and Laurie Weisberg. Mr. Schurfeld is chairperson of the nominating and corporate governance committee. Our nominating and corporate governance committee held one formal meeting during the year ended December 31, 2022 and no formal meeting during the year ended December 31, 2021.
The responsibilities of the nominating and corporate governance committee include the identification of individuals qualified to become Board members, the selection of nominees to stand for election as directors, the oversight of the selection and composition of committees of the Board, establishing procedures for the nomination process, oversight of possible conflicts of interests involving the Board and its members, developing corporate governance principles, and the oversight of the evaluations of the Board and management. The nominating and corporate governance committee has not established a policy with regard to the consideration of any candidates recommended by stockholders. If we receive any stockholder recommended nominations, the nominating and corporate governance committee will carefully review the recommendation(s) and consider such recommendation(s) in good faith.
ComplianceDirector Independence
We have determined, after considering all the relevant facts and circumstances, that David N. Keys, Laurie Weisberg, and Richard Schurfeld are independent directors as defined by the listing standards of the Nasdaq Stock Exchange and by the SEC because they have no relationship with us that would interfere with their exercise of independent judgment in carrying out their responsibilities as a director. Kevin Brian Cox and David May are not “independent” as defined by the listing standards as Mr. Cox is an executive officer of the Company and Mr. May was, in 2021, a controlling shareholder of an organization to which the Company made payments for services that exceeded the greater of $200,000 or five percent (5%) of the organization’s consolidated gross revenues for 2021.
Compensation Committee Interlocks and Insider Participation
None of the Company’s executive officers serves, or in the past has served, as a member of the Board of Directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of the Company’s Board or its Compensation Committee. None of the members of the Company’s Compensation Committee is, or has ever been, an officer or employee of the company.
Code of Ethics
The Board adopted a Code of Business Conduct and Ethics applicable to each officer, director, and employee of the Company. The full text of our Code of Business Conduct and Ethics is posted on our website at www.surgepays.com. We intend to disclose on our website any future amendments of our Code of Business Conduct and Ethics or waivers that exempt any principal executive officer, principal financial officer, principal accounting officer or controller, persons performing similar functions or our directors from provisions in the 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.
Delinquent Section 16(a) Of the Exchange ActReports
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’sour directors, executive officers directors and persons who beneficially own 10% or more than ten percentof a class of securities registered under Section 12 of the Company’s common stockExchange Act to file initial reports of beneficial ownership and changes in beneficial ownership with the SEC. Additionally, SECDirectors, executive officers and greater than 10% stockholders are required by the rules and regulations require that the Company identify any individuals for whom one of the referencedSEC to furnish us with copies of all reports was not filed on a timely basis during the most recent fiscal year or prior fiscal years.by them in compliance with Section 16(a). To the Company’sour knowledge, based solely on a review of reports furnished to it, none of the Company’sour officers, directors and ten percent holders have made the required filings.filings other than the following: (i) Mr. May did not timely file two Form 4S reporting acquisitions of shares; and (ii) Mr. Schurfeld did not timely file his Form 3 following his appointment as a director.
Code of Ethics
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Our Board of Directors has not adopted a Code of Business Conduct and Ethics.
ITEM 11:11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation for the Company’syears ended December 31, 2022 and 2021 for our Chief Executive Officer and allour two other executive officers of the Companywhose total compensation exceeded $100,000 in each year (the “Named Executive Officers”). In 2021, our Named Executive Officers were Kevin Brian Cox, Anthony Nuzzo, and any employee of the Company whose cash compensation exceeds $100,000 for the years ended December 31, 2016David Ansani. In 2022, our Named Executive Officers were Kevin Brian Cox, Anthony Evers, and 2015.David Ansani.
Annual Compensation | Long-Term Compensation | |||||||||||||||||||||||||||
Name and | Other Annual | Restricted | Securities | |||||||||||||||||||||||||
Principal | Salary | Bonus | Compensation | Stock | Underlying | Total | ||||||||||||||||||||||
Position | Year | -1 | -2 | -3 | Awards | Options | Compensation | |||||||||||||||||||||
Kevin Brian Cox | 2022 | $ | 548,139 | $ | 375,250 | $ | 160,491 | $ | — | $ | — | $ | 1,083,880 | |||||||||||||||
CEO and Chairman | 2021 | $ | 733,862 | $ | — | $ | 38,231 | $ | — | $ | — | $ | 772,093 | |||||||||||||||
Anthony P. Nuzzo, Jr | 2022 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
President and Director (through March 2022) | 2021 | $ | 579,157 | $ | — | $ | 65,629 | $ | — | $ | — | $ | 644,786 | |||||||||||||||
David C. Ansani | 2022 | $ | 231,626 | $ | 116,250 | $ | 18,374 | $ | — | $ | — | $ | 366,250 | |||||||||||||||
Chief Administrative Officer | 2021 | $ | 251,422 | $ | — | $ | 16,125 | $ | — | $ | — | $ | 267,547 | |||||||||||||||
Anthony Evers | 2022 | $ | 400,839 | $ | 351,250 | $ | 40,630 | $ | — | $ | — | $ | 792,719 | |||||||||||||||
CFO | 2021 | $ | 386,573 | $ | — | $ | 24,635 | $ | — | $ | — | $ | 411,208 |
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
(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) | Other annual compensation consists of paid medical insurance, auto allowances, and housing allowances. |
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On March 23, 2022, the Compensation Committee and Board approved the following one-time cash bonus payments to the following executives and members of the Board: (i) $375,000 to Mr. Cox (our CEO and Chairman); (ii) $126,000 to Mr. Evers (our CFO); (iii) $116,000 to David C. Ansani (our Chief Administrative Officer); (iv) $20,000 to David N. Keys (a member of the Board); (v) $10,000 to David May (a member of the Board); and (vi) $10,000 to Jay Jones (formerly a member of the Board). These one-time cash bonus payments were paid prior to April 21, 2022.
In addition, on March 23, 2022, the Compensation Committee and Board approved the Company issuing the independent members of the Board on the first day of April each year that an independent director is then serving on the Board the number of options to purchase shares of Common Stock (the “Director Options”) equivalent to $60,000 with the number of Director Options to be determined in accordance with the provisions of the 2022 Plan. As of March 30 2023, no Director Options have been issued.
Employment Agreements
On May 13, 2022, the Company entered into a new employment agreement with Mr. Cox (the “CEO Employment Agreement”).
Below is a summary of the key provisions of the CEO Employment Agreement.
Term of Employment: The CEO Employment Agreement had an effective date of May 13, 2022 and continues for a period of five years. The CEO Employment Agreement will automatically renew and continue for successive one-year terms unless terminated pursuant to qualifying termination events. In addition, either party may terminate the CEO Employment Agreement by sending written notice to the other party, not more than 270 days and not less than 90 days before the end of the then-existing term of employment, of such party’s desire to terminate the CEO Employment Agreement at the end of the then-existing term.
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Base Compensation: During the term of the CEO Employment Agreement, Mr. Cox will receive a base salary of $475,000 per year and, provided that the Company’s EBITDA was positive in the prior calendar year, the base salary will be increased on January 1 of each year by six percent (6%) per annum. Mr. Cox’s base salary did not increase on January 1, 2023 due to ongoing discussions between the Compensation Committee and Mr. Cox regarding the definition of EBITDA.
Cash Bonus: Mr. Cox will receive a cash bonus each year of the greater of (i) between 2.5% and 10% of the Company’s calendar year EBITDA (with the marginal percentage decreasing as EBITDA increases from $1 million to $3 million). By way of example only, if EBITDA is $1.5 million, Mr. Cox will receive $137,500 ((10% of $1 million = $100,000) plus (7.5% of $500,000 = $37,500)) and (ii) between 30% and 150% of base salary determined by the relationship between the Company’s annual performance and an annual target performance set each year by mutual agreement between the Board and Mr. Cox (with the percentage of base salary increasing as the percentage of target increases from 79% to over 150%).
As of March 30, 2023, no cash bonus has been paid to Mr. Cox as there are ongoing discussions between the Compensation Committee and Mr. Cox regarding the definition of EBITDA.
Stock Bonus: The Company will issue, out of the 2022 Plan and future equity incentive plans to be approved by the Company’s shareholders, three different categories of stock bonuses and one category of options. As of March 30, 2023, no stock bonuses or options have been issued to Mr. Cox as there are ongoing discussions between the Compensation Committee and Mr. Cox regarding the definition of EBITDA and the measurement period and payment dates for the non-EBITDA milestone-based payments.
(i) | EBITDA based issuances - 500,000 shares of common stock upon the Company first reaching positive cash flow EBITDA for a quarter of any amount and then reaching positive cash flow EBITDA for a quarter of milestones of $1 million, $3 million, and $5 million. | |
(ii) | Market Capitalization based issuances - 500,000 shares of common stock upon the Company reaching the following market capitalization milestones: $250 million, $500 million, $1 billion, $2 billion, $3 billion, $4 billion, and $5 billion. | |
(iii) | Business Metrics Growth based issuances - award incentives for achieving 25,000, 50,000, 100,000 active stores on the SurgePays network and 250,000, 500,000, 1,000,000 Wireless MVNO/Mobile broadband or digital content customers - up to a total of 2.75 million shares of common stock. In addition, Mr. Cox will be issued 500,000 shares of common stock per increment of 500,000 total subscribers (Wireless MVNO, Mobile Broadband or digital content customers) of the Company beyond 1 million total subscribers. | |
(iv) | Options to purchase 250,000 shares of common stock on January 1st of each year from 2023 through 2026. In addition, the Company was to issue 250,000 options to Mr. Cox in 2022 following shareholder approval of the 2022 Plan. |
Benefits: Mr. Cox will be eligible to participate in all health, medical, dental, and life insurance employee benefits as are available from time to time by a disinterested majority of our Board of Directors. No bonusesto other key executive employees and their families. Mr. Cox will be set until such time as the aforementioned occurs.entitled to receive an annual car allowance of up to $15,000 per year, home office expense reimbursement of up to $5,000 per month, and a remote housing allowance of up to $10,000 per month. Mr. Cox is also entitled to be reimbursed for up to $10,000 per year in costs associated with income tax preparation and estate planning.
³ Termination and Severance: The Company plansor Mr. Cox may terminate the CEO Employment Agreement and Mr. Cox’s employment in various circumstances and, depending on developing an “Employee Stock Option Plan” (“ESOP”) for both management and strategic consultants. However,the circumstances, the benefits that may be due following such termination are described below.
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For a termination by the Company does anticipate executing long-term employment contracts with both, along with other membersCause (as defined in the CEO Employment Agreement), no severance benefits are payable.
For a termination due to death, disability, by Mr. Cox following a Change in Control, or by Mr. Cox due to Constructive Termination (both as defined in the CEO Employment Agreement), Mr. Cox will be entitled to (a) a payment equal to the greater of (i) two (2) years’ worth of the future management team,then-existing Base and the last year’s bonus and (ii) the Base payable through the remaining Initial Term (if applicable). Mr. Cox will also be entitled to retain his benefits for the remainder of the Initial Term or Renewal Term, as then applicable.
Executive Covenants: In consideration of Mr. Cox’s continued employment with the Company and the benefits and payments described in the CEO Employment Agreement, Mr. Cox agrees to (i) nondisclosure of Company confidential information during his term of employment with the Company and for five years thereafter; (ii) not to compete with the Company during the 2017 calendar year. It is anticipated these management agreements will contain compensation termsterm of his employment (owning up to 10% of a publicly traded company 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,competes with the Company doesis permitted); (iii) for 12 months following termination of his Employment, not knowto solicit customers and not to recruit or hire the final structureCompany’s employees. The non-solicit and non-compete provisions are not applicable if termination of Employment was by Mr. Cox following a Change in Control or by Mr. Cox due to Constructive Termination; and (iv) not to disparage the Company or its officers, executives or Board members.
On August 8, 2022, the Company entered into a new employment agreement with Mr. Evers (the “CFO Employment Agreement”).
Below is a summary of the ESOPkey provisions of the CFO Employment Agreement.
Term of Employment: The CFO Employment Agreement had an effective date of August 8, 2022 and continues for a period of five years. The CFO Employment Agreement will automatically renew and continue for successive one-year terms unless terminated pursuant to qualifying termination events. In addition, either party may terminate the CFO Employment Agreement by sending written notice to the other party, not more than 270 days and not less than 90 days before the end of the then-existing term of employment, of such party’s desire to terminate the CFO Employment Agreement at the end of the then-existing term.
Base Compensation: During the term of the CFO Employment Agreement, Mr. Evers will receive a base salary of $450,000 per year and, provided that the Company’s EBITDA was positive in the prior calendar year, the base will be increased on January 1 of each year by six percent (6%) per annum. Mr. Evers’ base salary did not increase on January 1, 2023 due to ongoing discussions between the Compensation Committee and Mr. Evers regarding the definition of EBITDA.
Signing Bonus: The Company paid Mr. Evers a one-time signing bonus of Fifty percent (50%) of the base salary equivalent to $225,000) (the “Signing Bonus”) within thirty (30) days following August 8, 2022 less payroll deductions and all required withholdings. If Mr. Evers resigns from employment with the Company without Good Reason (as defined in the CFO Employment Agreement) or the proposed long term managementCompany terminates Mr. Evers’ employment contracts.
4Our Board of Directors will serve untilfor Cause (as defined in the next annual meetingCFO Employment Agreement), in each case prior to August 8, 2023, Mr. Evers must repay to the Company a pro rata portion of the stockholders and until successors are duly elected and qualified, unless earlier removed as provided inSigning Bonus representing the Company’s Corporate Bylaws. Executive officers serve at the pleasureremainder of the Board of Directors.
5As of the Company’s last fiscal year andperiod between the date of termination and August 8, 2023.
Restricted Vesting Shares: The Company shall grant to Mr. Evers under the filing2022 Plan a restricted stock award for 500,000 shares (the “Restricted Shares”) of this current report,common stock of the Company. Vesting of the Restricted Shares shall occur in bi-annual installments over five years commencing on December 31, 2022 on which date 50,000 shares of the Restricted Shares shall vest and continuing to vest thereafter on each of July 1 and December 31, for the years of 2023-2027. As of March 30, 2023, no securities have been issued to Mr. Evers as there are officially no other executive officersongoing discussions between the Compensation Committee and Mr. Evers regarding the definition of the Company besides Mr. Matzinger as is required to be disclosed under Item 402(m)(2)(ii) and (iii),EBITDA and the instructionsmeasurement period and payment dates for the non-EBITDA milestone-based payments.
Restricted Signing Shares: The Company shall grant 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 3,000,000Executive 100,000 shares of the Company’s common stock within five (5) business days of stockholder approval of the 2022 Plan.
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Cash Bonus: Mr. Evers will receive a cash bonus each year of the greater of (i) between 2.5% and a “Time Based 10% of the Company’s calendar year EBITDA (with the marginal percentage decreasing as EBITDA increases from $1 million to $3 million). By way of example only, if EBITDA is $1.5 million, Mr. Evers will receive $137,500 ((10% of $1 million = $100,000) plus (7.5% of $500,000 = $37,500)) and (ii) between 9% and 45% of base salary determined by the relationship between the Company’s annual performance and an annual target performance set each year by mutual agreement between the Board and Mr. Evers (with the percentage of base salary increasing as the percentage of target increases from 79% to over 150%). As of March 30, 2023, no cash bonus has been paid to Mr. Evers as there are ongoing discussions between the Compensation Committee and Mr. Evers regarding the definition of EBITDA.
Stock Option”Bonus: The Company will issue, out of the 2022 Plan and future equity incentive plans to be approved by the Company’s shareholders, three different categories of stock bonuses and one category of options:
(i) | EBITDA based issuances - 150,000 shares of common stock upon the Company first reaching positive cash flow EBITDA for a quarter of any amount and then reaching positive cash flow EBITDA for a quarter of milestones of $1 million, $3 million, and $5 million. | |
(ii) | Market Capitalization based issuances - 150,000 shares of common stock upon the Company reaching the following market capitalization milestones: $250 million, $500 million, $1 billion, $2 billion, $3 billion, $4 billion, and $5 billion. | |
(iii) | Business Metrics Growth based issuances - award incentives for achieving 25,000, 50,000, 100,000 active stores on the SurgePays network and 250,000, 500,000, 1,000,000 Wireless MVNO/Mobile broadband or digital content customers - up to a total of 825,000 shares of common stock. In addition, Executive will be issued 150,000 shares of common stock per increment of 500,000 total subscribers (Wireless MVNO, Mobile Broadband or digital content customers) of the Company beyond 1 million total subscribers. | |
(iv) | Options to purchase 75,000 shares of common stock on January 1 of each year from 2023 through 2026. In addition, the Company will issue 75,000 options to Executive in 2022 following shareholder approval of the 2022 Plan. |
Benefits: The Executive will be eligible to participate in all health, medical, dental, and life insurance employee benefits as are available from time to time to other key executive employees and their families. The Executive will be entitled to receive an annual car allowance of up to 3,000,000$3,750 per year and home office expense reimbursement of up to $500 per month. The Executive is also entitled to be reimbursed for up to $10,000 per year in costs associated with income tax preparation and estate planning.
Termination and Severance: The Company or the Executive may terminate the CFO Employment Agreement and the Executive’s employment in various circumstances and, depending on the circumstances, the benefits that may be due following such termination are described below.
For a termination by the Company with Cause (as defined in the CFO Employment Agreement), no severance benefits are payable.
For a termination due to death, disability, by Executive following a Change in Control, or by Executive due to Constructive Termination (both as defined in the CFO Employment Agreement), the Executive will be entitled to (a) a payment equal to the greater of (i) two (2) years’ worth of the then-existing Base and the last year’s bonus and (ii) the Base payable through the remaining Initial Term (if applicable). The Executive will also be entitled to retain his benefits for the remainder of the Initial Term or Renewal Term, as then applicable.
Executive Covenants: In consideration of the Executive’s continued employment with the Company and the benefits and payments described in the CFO Employment Agreement, the Executive agrees to (i) nondisclosure of Company confidential information during his term of employment with the Company and for five years thereafter; (ii) not to compete with the Company during the term of his employment (owning up to 10% of a publicly traded company that competes with the Company is permitted); (iii) for 12 months following termination of his Employment, not to solicit customers and not to recruit or hire the Company’s employees. The non-solicit and non-compete provisions are not applicable if termination of Employment was by Executive following a Change in Control or by Executive due to Constructive Termination; and (iv) not to disparage the Company or its officers, executives or Board members.
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2022 Plan
On August 3, 2022, the Board approved, authorized and adopted, subject to stockholder approval, the 2022 Plan. The 2022 Plan provides for the issuance of up to 3,500,000 shares of Common Stock plus (ii) an annual increase on the first day of each calendar year beginning January 1, 2023 and ending on and including January 1, 2031 equal to the lesser of (A) ten percent (10%) of the Company. Both setsCommon Stock outstanding on the final day of options come with Registrationthe immediately preceding calendar year, and (B) such smaller number of Common Stock shares as determined by the Board. The issuance of the shares of Common Stock shall be through the grant of Distribution Equivalent Rights, may Share Options, Non-Qualified Share Options, Performance Unit Awards, Restricted Share Awards, Restricted Share Unit Awards, Share Appreciation Rights, Tandem Share Appreciation Rights, Unrestricted Share Awards and when requested by Mr. Matzinger,other equity-based awards to directors, officers, employees, and consultants.
The objective of the 2022 Plan is to encourage and enable directors, officers, employees, and consultants of the Company and its subsidiaries, upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business, to acquire a proprietary interest in the Company.
Our ability to provide long-term incentives in the form of equity compensation aligns management’s interests with the interests of our stockholders and fosters an ownership mentality that drives optimal decision-making for the long-term health and profitability of our Company. Equally important, equity compensation is critical to our continuing ability to attract, retain and motivate qualified corporate executives and retain management. We expect our ability to grant equity compensation to be important in achieving our long-term growth.
In addition to our five directors (which includes our Chief Executive Officer), approximately 17 employees and approximately four consultants are eligible to participate in the 2022 Plan. The Board believes that adopting the 2022 Plan is consistent with the Company’s compensation philosophy (and with responsible compensation policies generally) and will preserve the Company’s ability to attract and retain capable directors, officers, employees, and consultants The Board believes it is imperative, in view of our compensation structure and strategy that the 2022 Plan be requiredapproved.
2022 Plan Highlights
The essential features of the 2022 Plan are outlined below. The following description is not complete and is qualified by reference to file a Form S-8 Registration Statement. The Time Based Stock the full text of the 2022 Plan, which is attached as Exhibit 10.18 to this Annual Report.
Options vested on September 24, 2016 onare subject to 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 Optionsfollowing conditions:
Time Based Stock Options (Vested)
Incentive Options may not be issued in an amount or manner where the amount of Incentive Options exercisable in one year entitles the holder to Common Stock | ||
|
The following assumptions were used to value the options:
greater than $100,000. |
NoAwards of Restricted Shares are subject to the following conditions:
(i) | The Committee determines the restrictions on each Restricted Share Award (as defined in the 2022 Plan). Upon the grant of a Restricted Share Award and the payment of any applicable purchase price, grantee is considered the record owner of the Restricted Shares and entitled to vote the Restricted Shares if such Restricted Shares are entitled to voting rights. | |
(ii) | Restricted Shares may not be delivered to the grantee until the Restricted Shares have vested. | |
(iii) | Restricted Shares may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as provided in the 2022 Plan or in the Restricted Share Award Agreement (as defined in the 2022 Plan). |
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Grants
Although all employees and all of the employees of our subsidiaries are eligible to receive grants under our Plan, the grant to any particular employee is subject to the discretion of the Board, or at the discretion of the Board, or the Compensation Committee of the Board or such other committee designated by the Board to administer the 2022 Plan (such body that administers the 2022 Plan, the “Committee”).
We have made and will make appropriate adjustments to outstanding grants and to the number or kind of shares subject to the 2022 Plan in the event of a stock split, reverse stock split, stock dividend, share combination or reclassification and certain other types of corporate transactions, including a merger or a sale of all or substantially all of our assets.
Administration
The Committee shall have the sole authority, in its discretion, to make all determinations under the 2022 Plan, including, but not limited to, who receives an award, the time or times when an award shall be made (the date of grant of an award shall be the date on which the award is awarded by the Committee), what type of award shall be granted, the term of an award, the date or dates on which an award vests (including acceleration of vesting), the form of any payment to be made pursuant to an award, the terms and conditions of an award (including the forfeiture of the award (and/or any financial gain) if the holder of the award violates any applicable restrictive covenant thereof), the Restrictions under a Restricted Share Award and the number of Common Stock which may be issued under an Award, all as applicable. In making such determinations, the Committee may take into account the nature of the services rendered by the respective employees, directors and consultants, their present and potential contribution to the Company’s (or the Affiliate’s) success and such other factors as the Committee, in its discretion, shall deem relevant.
Grant Instruments
All grants will be subject to the terms and conditions set forth in our Plan and to such other terms and conditions consistent with our Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument or an amendment to the grant instrument. All grants will be made conditional upon the acknowledgement of the grantee in writing or by acceptance of the grant, that all decisions and determinations of the Compensation Committee will be final and binding on the grantee, his or her beneficiaries and any other person having or claiming an interest under such grant.
Terms and Conditions of Grants
Under the 2022 Plan, the term “Fair Market Value” of the Common Stock on any given date means the fair market value was recorded forof the performance based stock options. The time based stock options were valued at $959,919,Common Stock determined in good faith by the Committee based on the assumptions above,reasonable application of a reasonable valuation method that is consistent with Section 409A of the Code. If the Stock is admitted to trade on a national securities exchange, the determination shall be made by reference to the closing price reported on such exchange. If there is no closing price for such date, the determination shall be made by reference to the last date preceding such date for which there is a closing price.
Transferability
No award under the 2022 Plan or any award agreement and no rights or interests therein, shall or may be assigned, transferred, sold, exchanged, encumbered, pledged or otherwise hypothecated or disposed of by a holder except (i) by will or by the laws of descent and distribution, or (ii) except for an accrualIncentive Share Option, by gift to any family member of $39,219 was recorded as amortizationthe holder. An award may be exercisable during the lifetime of this amountthe holder only by such holder or by the holder’s guardian or legal representative unless it has been transferred by gift to a family member of the holder, in 2015which case it shall be exercisable solely by such transferee.
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Amendment and $261,913 was recorded as amortization of this amount in 2016. $301,132 was recorded as additional paid in capital in 2016.Termination
7The 2022 Plan shall continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which it is adopted by the Board (except as to awards outstanding on that date). The Board, in its discretion, may terminate the 2022 Plan at any time with respect to any shares for which awards have not theretofore been granted; provided, however, that the 2022 Plan’s termination shall not materially and adversely impair the rights of a holder with respect to any Award theretofore granted without the consent of the holder. The Board shall have the right to alter or amend the 2022 Plan or any part hereof from time to time; provided, however, stockholder approval shall be required for ay modification of the 2022 Plan that (i) requires stockholder approval under the rules or regulations of the Securities and Exchange Commission or any securities exchange applicable to the Company, (ii) increases the number of shares authorized under the 2022 Plan, (iii) increases the dollar limitation specified in Section 5.4, or (iv) amends, modifies or suspends Section 7.8 (repricing prohibitions) or Article XV. In addition, unless otherwise permitted under the award agreement, no change in any award theretofore granted may be made which would materially and adversely impair the rights of a holder with respect to such award without the consent of the holder.
Outstanding Equity Awards at Fiscal Year-End | ||||||||||||||
Option Awards | ||||||||||||||
Number of Securities Underlying Unexercised Options | Option Exercise | Option Expiration | ||||||||||||
Name | Exercisable | Unexercisable | Price | Date | ||||||||||
Anthony Evers | 6,801 | 10,203 | $ | 16.00 | 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
The Company maintains a tax-qualified 401(k) savings plan which allows participants to defer eligible compensation up to the maximum permitted by the Internal Revenue Service and provides for discretionary matching contributions by the Company.
Compensation of Directors
We did not issue any equity to the members of the Board in 2022 but did make one-time cash bonus payments in April 2022 to the members of the Board as follows: $20,000 to David N. Keys (a member of the Board); $10,000 to David May (a member of the Board); and $10,000 to Jay Jones (formerly a member of the Board).
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 “Keys Indemnification Agreement”) with Mr. Keys. The Keys 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 Keys 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 Keys Indemnification Agreement provides for indemnification of Mr. Keys during his directorship and for a period of six (6) years thereafter.
On February 13, 2021, we entered into Director Agreements and Indemnification Agreements with each of David May 6, 2016, upon filingand Jay Jones that are substantially similar to the CertificateKeys Director Agreement and the Keys Indemnification Agreement.
Mr. Jones resigned from the Board on December 19, 2022. Such resignation was not the result of Designationany disagreement with the Company on any matter relating to the Company’s operations, policies or practices. In connection with Mr. Jones’ resignation, the Board entered into a Consulting Agreement with Mr. Jones dated December 19, 2022 (the “Consulting Agreement”).
Pursuant to such Consulting Agreement, the Company agrees to engage Mr. Jones as a consultant (“the Consultant”) to provide advice to the Board and senior management of the Company regarding general business matters. The Consultant has industry and Company knowledge that is valuable to the Company and its ongoing business ventures. The term of the Consultant Agreement is for a period of twelve (12) months, in which designated 10,000,000 sharesthe Consultant’s duties include reporting to the Board and senior management of the Company and advising them in respect to business matters. Following an annual or special meeting of the Company’s $0.001 parstockholders at which stockholders approve the 2022 Plan, the Consultant’s compensation will consist of stock options with a value preferred stock as Series “A”,of $5,000 on the boardfirst trading day of directors authorizedeach calendar month during the Companyterm. Each month’s options will have an exercise price equal to issue all 10,000,000 shares of Series “A” Preferred Stock to Carter Matzinger, Chief Executive Officer and Chairmanthe fair market value of the BoardCompany’s common stock on the last trading day of Directors,the previous calendar month. All options granted on the first trading day of each calendar month shall vest immediately, and the options will be issued quarterly in accordance with the 2022 Plan. The Consultant is considered an independent contractor and will be reimbursed for services previously rendered.(i) all reasonable out-of-pocket expenses and (ii) any costs associated with filing required to be made by him or any of the entities managed or controlled by the Consultant to report beneficial ownership or the acquisition or disposition of securities by the Company.
On December 19, 2022, David May notified the Company of his resignation, effectively immediately, as a member of the Board’s Audit Committee, Compensation Committee, and the Nominating and Corporate Governance Committee. Such resignation from the Board committees is not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Mr. May remains a member of the Board.
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 rateand Ms. Weisberg entered into a Director Agreement, dated December 19, 2022 (the “Weisberg Director Agreement”). Pursuant to the Weisberg Director Agreement, Ms. Weisberg shall make reasonable business efforts to attend all Board meetings and fulfill her other responsibilities as well as use her best efforts to promote the interests of 10 sharesthe Company. Following an annual or special meeting of preferred stock for each sharethe Company’s stockholders at which stockholders approve the 2022 Plan, Ms. Weisberg will receive options with a value of common stock based$5,000 on the first trading day of each calendar month. Each month’s options will have an exercise price equal to the fair market pricevalue of the common stock as of March 30, 2016 of $0.18 per share. The Company recorded compensation expense inon 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 formslast trading day of the compensation package are considered in total. Wherever possible, objective measurementsprevious calendar month. All options granted on the first trading day of each calendar month shall vest immediately and the options will be utilizedissued quarterly in accordance with the terms of the 2022 Plan.
Pursuant to quantify performance, but many subjective factors still come into play when determining performance.
Compensation Components
As a growth stage Companythe Weisberg Director Agreement, Ms. Weisberg shall be considered an independent contractor and shall be reimbursed for (i) all reasonable out-of-pocket expenses incurred by her in attending in-person meetings and (ii) any costs associated 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 standardsfiling required to be negotiated.
Base Salary
Asmade by her or any of the Company continuesentities managed or controlled by her to grow, both throughreport beneficial ownership or the acquisition or through revenue growth from existing business interests,of disposition of securities of the Company. Ms. Weisberg’s term, subject to nomination and financial conditions improve, these base salaries, bonuses, and incentive compensationelection at each of the Company’s annual stockholders meeting, 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 toterminate at the Company.
Compensationearliest of Directors
At the time of this filing, directors receive no remuneration for their services as directorsher resignation, death, termination by mutual agreement of the Company nor doesand herself, or the removal of Ms. Weisberg by the majority of the stockholders of the Company.
The Company and Mr. Schurfeld entered into a Director Agreement, dated December 19, 2022 (the “Schurfeld Director Agreement”). The terms of the Schurfeld Director Agreement are substantially the same as the terms of the Weisberg Director Agreement.
On December 19, 2022, the Company reimburse directorsentered into an Indemnification Agreement with each of Ms. Weisberg and Mr. Schurfeld (the “December 2022 Indemnification Agreements”).
The December 2022 Indemnification Agreements indemnifies to the fullest extent permitted under Nevada law for expenses incurredany claims arising out of or resulting from, amongst other things, (i) any actual, alleged or suspected act or failure to act by Ms. Weisberg and Mr. Schurfeld (together, the “Indemnitees”) in their servicecapacity as a director or agent of the Company and (ii) any actual, alleged or suspected act or failure to act by the BoardIndemnitees in respect of Directorsany business, transaction, communication, filing, disclosure or other activity of the Company. TheUnder the December 2022 Indemnification Agreements, the Indemnitees are indemnified for any losses pertaining to such claims, provided, however, that the losses shall not include expenses incurred by the Indemnitees in respect of any claim as which they shall have been adjudged liable to the Company, plans to put in place an industry standard director compensation package duringunless the fiscal year 2017.court having jurisdiction rules otherwise.
ITEM 12:12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following information table sets forth certain information as of March 30, 2023, regarding the number of shares of our Common Stock beneficially owned on October 30, 2017 by:by (i) each person who is known by the Company to ownthat we know beneficially owns more than 5% of itsour outstanding Common Stock;Stock, (ii) each directorof our directors andofficer; executive officers and (iii) allofficers of our directors and directorsexecutive officers as a group: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 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 thisthe table below, or his or her family members, has sole voting and investment power with respect to allsuch shares of common stock reflectedour Common Stock. Except as beneficially owned;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 (2) | ||||||
Directors and Executive Officers: | ||||||||
Kevin Brian Cox | 5,453,760 | (3) | 38.6 | % | ||||
Anthony Evers | 10,672 | (4) | * | |||||
David C. Ansani | 140 | (5) | * | |||||
David N. Keys | 17,043 | (6) | * | |||||
David May | 140,944 | 1.0 | ||||||
Richard Schurfeld | 42,201 | * | ||||||
All Directors and Executive Officers as a Group (6 persons) | ||||||||
5,661,359 | 40.1 | % | ||||||
5% Shareholders: |
* | 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 14,121,773 shares of Common Stock outstanding as of March 30, 2023. |
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(3) | Includes (i) 4,569,384 shares owned by BLC Family Investments, (ii) 561,758 shares owned by SMDMM, LLC, a Tennessee liability company and (iii) 270,745 shares owned by BC Family Holdings. Mr. Cox is a beneficial owner of all three entities. |
(4) | Includes 7,271 shares of Common Stock (held in Mr. Evers’ IRA) and 6,801 options that are currently exercisable. |
(5) | Shares are held in Mr. Ansani’s IRA. |
(6) | Includes (i) 1,666 shares held in an IRA owned by Mr. Keys’ wife, however, Mr. Keys shares investing and dipositive power over these holdings, (ii) 5,377 shares in total held by two different IRAs owned by Mr. Keys; and (iii) 10,000 shares are held by PCC Holdings LLC. Mr. Keys shares investing and dipositive power over these holdings. |
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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 2022 and 2021, the Company had trade payables to Axia of $163,583, respectively. Axia is owned by our Chief Executive Officer, Mr. Cox.
(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 intoFor the Common Stock ofyears ended December 31, 2022 and 2021, the Company that currentlyrented space from Carddawg Investments, LLC in the amount of $166,356 and $64,488, respectively. These costs are exercisable or convertible or that will become exercisable or convertible within sixty (60) daysincluded in the General and Administrative expenses in the consolidated statements of this filing except foroperations. Mr. Cox is sole owner of Carddawg Investments, LLC.
For the Time Based Stock Option for 3,000,000 shares held byyears ended December 31, 2022 and 2021, the Company purchased telecom services and access to wireless networks from 321 Communications in the amount of $16,035,093 and $690,398, respectively. These costs are included in Cost of Revenue in the consolidated statements of operations. Mr. Matzinger, see (6) below.
(3) Includes 1,600,000 shares owned by AnthonyP. NuzzoJr.Jones (formerly a Board member) is the majority owner of 321 Communications 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 beneficialminority owner. of 321 Communications.
(5)Each shareFor the years ended December 31, 2022 and 2021, the Company purchased telecom services and access to wireless networks from National Relief Telephone in the amount of Series A Preferred Stock$1,163,941 and $0, respectively. These costs are included in Cost of Revenue in the consolidated statements of operations. Mr. Jones (formerly a Board member) is entitled to vote ten (10) sharesthe majority owner of Common Stock for each one (1) share of Series A Preferred Stock held.National Relief Telephone.
(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, options2022 and 2021, the Company had trade payables to acquire up to 3,000,000 shares321 Communications of the Company’s common stock are exercisable,$279,380 and 2,000,000 shares are in the money and included in the beneficial ownership table above.$88,898, respectively.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes certain information as ofAt December 31, 20162022 and 2021, the Company had trade payables to National Relief Telephone of $0 and $0, respectively.
For the year ended December 31, 2015, with respect2021, the Company paid $1,217,790 in commissions on tablet sales 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 |
The Company has not yet formalized stock option plans for its officers, employees, directors and consultants. The Company’s chief executive officerGalaxy Distribution, Inc., an entity that Mr. May (a Board member) was granted the options summarized above, the specificsa controlling shareholder of which are summarized in Item 11 herein.2021.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe Company contracted with Centercom 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, 2022 and 2021 were $3,115.651 and $1,395,674, respectively, and are included in Cost of Revenue in the consolidated statements of operations. Mr. Nuzzo had a 50% interest in Centercom prior to his death in March 2022.
Certain RelationshipsAt December 31, 2022 and Related Party Transactions
A director of2021, the Company 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:had trade payables to Centercom of $972,029 and $555,069, respectively.
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 |
On May 10, 2016, the Company issued 1,000,000 sharesDuring 2021, Centercom forgave $429,010 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 amortizedaccounts payable owed by SurgePays to expense over the term of the agreement.Centercom.
On DecemberSee Note 6 2016, the consulting agreement with the director was amended to include provisions specifically related to the agreement to acquire TW as described in Note 13 of the Consolidated Financial Statements under “Director Consulting Agreement.”
The Company has non-interest bearing long-term debt due to a directorrelated parties.
Disclosure of SEC Position on Indemnification of Securities Act Liabilities
Our directors and officers are indemnified as provided by 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 amount of $107,500, which is due in four equal annual installments of $26,875 on April 28 of eachopinion of the four years beginning April 28, 2016. TheSEC 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 due April 28, 2016 has not been made. See Note 8 toof expenses incurred or paid by our director, officer or controlling person in the Consolidated Financial Statements.
Review, Approval and Ratification of Related Party Transactions
The board of directors has responsibility for establishing and maintaining guidelines relating 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 approvalsuccessful defense of any related party transactions, butaction, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, 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,unless in the opinion of our Board,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 person does not havein 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 relationship which would interfereclaim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the exercisesecurities being registered, we will, unless in the opinion of independent judgment in carrying outour legal counsel the responsibilitiesmatter has been settled by controlling precedent, submit the question of a director.
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 withindemnification is against public policy to a determination thatcourt of appropriate jurisdiction. We will then be governed by the director is independent. As this time, we have three independent directors, Anthony P. Nuzzo, Jr., David C. Ansani and Manual Flores.court’s decision.
Conflicts Relating 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 fact 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, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.
ITEM 14:14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
InFees Billed for Audit and Non-Audit Services
The following table presents for each of 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 independenceaggregate fees billed in their auditconnection with the audits 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 fromstatements and 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 conformance 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.our independent registered public accounting firm Rodefer Moss & Co, PLLC.
2022 | 2021 | |||||||
Audit Fees (1) | $ | 186,820 | $ | 166,554 |
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
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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
ITEM 16. FORM 10-K shall be deemed “furnished” and not “filed”.SUMMARY
5Included within financial statements filed herewith.
6Incorporated by reference to Forms 8-K filed July 20, 2016.Not applicable.
7Incorporated by reference to Forms 8-K filed August 1, 2016.
In accordance withPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ||
Date: March 30, 2023 | By: | /s/ Kevin Brian Cox |
Name: | Kevin Brian Cox | |
Chief Executive Officer |
In accordance withPursuant 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.
Title | Date | |||
/s/ Kevin Brian Cox | Chief Executive Officer and Director | March 30, 2023 | ||
Kevin Brian Cox | (Principal Executive Officer) | |||
/s/ Anthony Evers | Chief Financial Officer | March 30, 2023 | ||
Anthony Evers | (Principal Financial Officer and Principal Accounting Officer | |||
/s/ David N. Keys | Director | March 30, 2023 | ||
David N. Keys | ||||
/s/ David May | Director | March 30, 2023 | ||
David May | ||||
/s/ Laurie Weisberg | Director | March 30, 2023 | ||
Laurie Weisberg | ||||
/s/ Richard Schurfeld | Director | March 30, 2023 | ||
Richard Schurfeld |
42 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Cash Flows | F-7 |
Notes to Consolidated Financial Statements | F-8 |
F-1 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
SurgePays, Inc. & Subsidiaries
Bartlett, Tennessee
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of SurgePays, Inc. & Subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2022 and the 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, 2022 and 2021, 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, 2022, 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. Our responsibility is to express an opinion on the 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 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, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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 regarding the amounts and disclosures in the consolidated financial statements. 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 statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition Description of the matter
The Company generates revenue from the delivery of processing, service and product solutions. Revenue is measured based on consideration specified in a contract with a customer, and the Company recognizes revenue when it satisfies a performance obligation by processing the transaction, which is at a point in time.
The Company’s revenue consists of a significant volume of transactions sourced from systems and applications. The processing of such transactions and recording of the majority of revenue is system-driven and based on contractual terms with customers. The Company also has significant revenue in lead and case delivery to customers. Revenue is recognized when the services and products are delivered to the customers and control is transferred, which is at a point in time. The Company also has significant revenue from providing services and products under the Emergency Broadband Benefit program. Revenue is recognized after services and products have been delivered to a eligible customer based on contracts with the customer.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to revenue recognition included the following, among others:
We obtained and understanding and evaluated management’s significant accounting policies around revenue recognition for each of the company significant segments including management’s assessment of when control of goods and services is transferred to customers.
For a sample of revenue transactions, we tested selected transactions by agreeing the amounts of revenue recognized to source documents and testing the mathematical accuracy of the recorded revenue. We also evaluated the source documents to determine whether terms that may impact revenue recognition were identified and properly considered by management.
/s/ Rodefer Moss & Co, PLLC
We have served as the Company’s auditor since 2017
Brentwood, Tennessee
March 30, 2023
F-2 |
SURGEPAYS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2022 | December 31, 2021 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 7,035,654 | $ | 6,283,496 | ||||
Accounts receivable - net | 9,230,365 | 3,249,889 | ||||||
Inventory | 11,186,242 | 4,359,296 | ||||||
Prepaids | 111,524 | - | ||||||
Total Current Assets | 27,563,785 | 13,892,681 | ||||||
Property and equipment - net | 643,373 | 200,448 | ||||||
Other Assets | ||||||||
Note receivable | 176,851 | 176,851 | ||||||
Intangibles - net | 2,779,977 | 3,433,484 | ||||||
Internal use software development costs - net | 387,180 | - | ||||||
Goodwill | 1,666,782 | 866,782 | ||||||
Investment in CenterCom | 354,206 | 443,288 | ||||||
Operating lease - right of use asset - net | 431,352 | 486,668 | ||||||
Total Other Assets | 5,796,348 | 5,407,073 | ||||||
Total Assets | $ | 34,003,506 | $ | 19,500,202 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 5,784,374 | $ | 6,602,577 | ||||
Accounts payable and accrued expenses - related party | 1,728,721 | 1,389,798 | ||||||
Installment sale liability | 13,018,184 | - | ||||||
Deferred revenue | 243,110 | 276,250 | ||||||
Operating lease liability | 39,490 | 49,352 | ||||||
Notes payable - related parties | 1,108,150 | 1,553,799 | ||||||
Notes payable - SBA government | - | 126,418 | ||||||
Notes payable - net | 1,542,033 | - | ||||||
Total Current Liabilities | 23,464,062 | 9,998,194 | ||||||
Long Term Liabilities | ||||||||
Note payable | 53,134 | - | ||||||
Loans payable - related parties | 4,493,798 | 4,507,017 | ||||||
Notes payable - SBA government | 474,846 | 1,004,767 | ||||||
Operating lease liability | 399,413 | 438,903 | ||||||
Total Long-Term Liabilities | 5,421,191 | 5,950,687 | ||||||
Total Liabilities | 28,885,253 | 15,948,881 | ||||||
Commitments and Contingencies (Note 9) | - | - | ||||||
- | - | |||||||
Stockholders’ Equity | ||||||||
Series A, Convertible Preferred stock, $ | par value, shares authorized, and shares issued and outstanding, respectively- | 260 | ||||||
Series C, Convertible Preferred stock, $ | par value, shares authorized, and shares issued and outstanding, respectively- | - | ||||||
Preferred stock, value | - | - | ||||||
Common stock, $ | par value, shares authorized and shares issued and outstanding, respectively14,117 | 12,064 | ||||||
Additional paid-in capital | 40,780,707 | 38,662,340 | ||||||
Accumulated deficit | (35,804,106 | ) | (35,123,343 | ) | ||||
Stockholders’ equity | 4,990,718 | 3,551,321 | ||||||
Non-controlling interest | 127,535 | - | ||||||
Total Stockholders’ Equity | 5,118,253 | 3,551,321 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 34,003,506 | $ | 19,500,202 |
F-3 |
SURGEPAYS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
2022 | 2021 | |||||||
For the Year Ended December 31, | ||||||||
2022 | 2021 | |||||||
Revenues | $ | 121,544,190 | $ | 51,060,589 | ||||
Costs and expenses | ||||||||
Cost of revenue | 108,074,782 | 44,890,610 | ||||||
General and administrative expenses | 12,835,623 | 12,162,547 | ||||||
Total costs and expenses | 120,910,405 | 57,053,157 | ||||||
Income (loss) from operations | 633,785 | (5,992,568 | ) | |||||
Other income (expense) | ||||||||
Interest expense | (1,843,396 | ) | (3,840,616 | ) | ||||
Derivative expense | - | (1,775,057 | ) | |||||
Change in fair value of derivative liabilities | - | 1,806,763 | ||||||
Gain (loss) on investment in CenterCom | (89,082 | ) | 28,676 | |||||
Gain on settlement of liabilities | - | 1,469,641 | ||||||
Amortization of debt discount | (115,404 | ) | (3,677,121 | ) | ||||
Gain on deconsolidation of True Wireless | - | 1,895,871 | ||||||
Settlement expense | - | (3,750,000 | ) | |||||
Warrant modification expense | - | (74,476 | ) | |||||
Gain on forgiveness of PPP loan - government | 524,143 | - | ||||||
Other income | 336,726 | 377,743 | ||||||
Total other income (expense) - net | (1,187,013 | ) | (7,538,576 | ) | ||||
Net loss including non-controlling interest | (553,228 | ) | (13,531,144 | ) | ||||
Non-controlling interest | 127,535 | - | ||||||
Net loss available to common stockholders | $ | (680,763 | ) | $ | (13,531,144 | ) | ||
Loss per share - basic and diluted | $ | (0.05 | ) | $ | (3.09 | ) | ||
Weighted average number of shares - basic and diluted | 12,395,364 | 4,381,709 |
F-4 |
SURGEPAYS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Year Ended December 31, 2022
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||||||||
Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||||||||
December 31, 2021 | 260,000 | $ | 260 | - | $ | - | 12,063,834 | $ | 12,064 | $ | 38,662,340 | $ | (35,123,343 | ) | $ | - | $ | 3,551,321 | ||||||||||||||||||||||
Conversion of preferred stock to common stock - related parties | (260,000 | ) | (260 | ) | - | - | 1,300,000 | 1,300 | (1,040 | ) | - | - | - | |||||||||||||||||||||||||||
Conversion of debt into common stock - related party | - | - | - | - | 270,745 | 271 | 1,086,142 | - | - | 1,086,413 | ||||||||||||||||||||||||||||||
Stock issued for services | - | - | - | - | 50,000 | 50 | 103,450 | - | - | 103,500 | ||||||||||||||||||||||||||||||
Recognition of stock-based compensation - stock options | - | - | - | - | - | - | 37,176 | - | - | 37,176 | ||||||||||||||||||||||||||||||
Stock issued as direct offering costs | - | - | - | - | 200,000 | 200 | (200 | ) | - | - | - | |||||||||||||||||||||||||||||
Stock issued to purchase software | - | - | - | - | 85,000 | 85 | 411,315 | - | - | 411,400 | ||||||||||||||||||||||||||||||
Warrants issued as debt issue costs | - | - | - | - | - | - | 115,404 | - | - | 115,404 | ||||||||||||||||||||||||||||||
Warrants issued as interest expense | - | - | - | - | - | - | 365,794 | - | - | 365,794 | ||||||||||||||||||||||||||||||
Exercise of warrants (cashless) | - | - | - | - | 147,153 | 147 | (147 | ) | - | - | - | |||||||||||||||||||||||||||||
Exercise of warrants | - | - | - | - | 100 | - | 473 | - | - | 473 | ||||||||||||||||||||||||||||||
Non-controlling interest | - | - | - | - | - | - | - | - | 127,535 | 127,535 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (680,763 | ) | - | (680,763 | ) | ||||||||||||||||||||||||||||
December 31, 2022 | - | $ | - | - | $ | - | 14,116,832 | $ | 14,117 | $ | 40,780,707 | $ | (35,804,105 | ) | $ | 127,535 | $ | 5,118,253 |
F-5 |
SURGEPAYS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Year Ended December 31, 2021
Total | ||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Stockholders’ Equity | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||
December 31, 2020 | 260,000 | $ | 260 | 721,598 | $ | 722 | 2,542,624 | $ | 2,543 | $ | 10,862,708 | $ | (21,592,199 | ) | (10,725,966 | ) | ||||||||||||||||||||
Stock issued for services rendered and recognition of share-based compensation ($ | - $ /share)- | - | - | - | 13,411 | 13 | 3,562 | - | 3,575 | |||||||||||||||||||||||||||
Conversion of Series C, preferred stock into common stock | - | - | (721,598 | ) | (722 | ) | 3,607,980 | 3,608 | (2,886 | ) | - | - | ||||||||||||||||||||||||
Stock issued for cash ($ | - $ /share)- | - | - | - | 4,862,247 | 4,862 | 21,294,800 | - | 21,299,662 | |||||||||||||||||||||||||||
Direct offering costs paid in connection with stock issued for cash | - | - | - | - | - | - | (2,222,952 | ) | - | (2,222,952 | ) | |||||||||||||||||||||||||
Stock and warrants issued with debt recorded as a debt discount | - | - | - | - | 18,000 | 18 | 2,645,872 | - | 2,645,890 | |||||||||||||||||||||||||||
Conversion of debt ($.05 - $10.38/share) | - | - | - | - | 709,674 | 710 | 3,362,851 | - | 3,363,561 | |||||||||||||||||||||||||||
Stock issued under make-whole arrangement ($ | - $ /share)- | - | - | - | 15,147 | 15 | 90,386 | - | 90,401 | |||||||||||||||||||||||||||
Stock issued in connection with debt modification ($ | - $ /share)- | - | - | - | 13,916 | 14 | 108,917 | - | 108,931 | |||||||||||||||||||||||||||
Stock issued in settlement of liabilities ($ - $ /share) | - | - | - | - | 276,702 | 277 | 1,997,700 | - | 1,997,977 | |||||||||||||||||||||||||||
Stock issued for acquisition of membership interest in ECS ($ | /share)- | - | - | - | 2,000 | 2 | 17,898 | - | 17,900 | |||||||||||||||||||||||||||
Exercise of warrants ($ | /share)- | - | - | - | 2,133 | 2 | (2 | ) | - | - | ||||||||||||||||||||||||||
Warrant modification expense | - | - | - | - | - | - | 74,476 | - | 74,476 | |||||||||||||||||||||||||||
Forgiveness of accounts payable - CenterCom - related party | - | - | - | - | - | - | 429,010 | - | 429,010 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (13,531,144 | ) | (13,531,144 | ) | |||||||||||||||||||||||||
December 31, 2021 | 260,000 | $ | 260 | - | $ | - | 12,063,834 | $ | 12,064 | $ | 38,662,340 | $ | (35,123,343 | ) | 3,551,321 |
F-6 |
SURGEPAYS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
2022 | 2021 | |||||||
For the Year Ended December 31, | ||||||||
2022 | 2021 | |||||||
Operating activities | ||||||||
Net loss - including non-controlling interest | $ | (553,228 | ) | $ | (13,531,144 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operations | ||||||||
Bad debt expense (recovery) | (59,485 | ) | 24,841 | |||||
Provision for inventory obsolescence | 51,718 | - | ||||||
Depreciation and amortization | 933,384 | 759,383 | ||||||
Amortization of right-of-use assets | 55,316 | 158,085 | ||||||
Amortization of debt discount/debt issue costs | 115,404 | 3,677,121 | ||||||
Recognition of share-based compensation | 140,676 | 3,575 | ||||||
Warrants issued for interest expense | 365,794 | - | ||||||
Change in fair value of derivative liabilities | - | (1,806,763 | ) | |||||
Derivative expense | - | 1,775,057 | ||||||
Gain on settlement of liabilities | - | (1,443,016 | ) | |||||
(Gain) loss on equity method investment - CenterCom | 89,082 | (28,676 | ) | |||||
Gain on forgiveness of PPP loan | (524,143 | ) | (371,664 | ) | ||||
Gain on deconsolidation of subsidiary (True Wireless) | - | (1,895,871 | ) | |||||
Warrant modification expense | - | 74,476 | ||||||
Changes in operating assets and liabilities | ||||||||
(Increase) decrease in | ||||||||
Accounts receivable | (5,920,991 | ) | (3,094,231 | ) | ||||
Lifeline revenue - due from USAC | - | 105,532 | ||||||
Inventory | (6,878,664 | ) | (4,255,637 | ) | ||||
Prepaids | (111,524 | ) | 5,605 | |||||
Other | - | 61,458 | ||||||
Increase (decrease) in | ||||||||
Accounts payable and accrued expenses | (812,227 | ) | 4,056,812 | |||||
Accounts payable and accrued expenses - related party | 966,468 | 757,429 | ||||||
Installment sale liability - net | (13,018,184 | ) | - | |||||
Deferred revenue | (33,140 | ) | (167,050 | ) | ||||
Operating lease liability | (49,352 | ) | (153,583 | ) | ||||
Net cash provided by (used in) operating activities | 793,272 | (15,288,261 | ) | |||||
Investing activities | ||||||||
Purchase of property and equipment | (11,402 | ) | (51,408 | ) | ||||
Capitalized internal use software development costs | (387,180 | ) | - | |||||
Purchase of software | (300,000 | ) | - | |||||
Acquisition of Torch, Inc. | (800,000 | ) | - | |||||
Cash disposed in deconsolidation of subsidiary (True Wireless) | - | (325,316 | ) | |||||
Net cash used in investing activities | (1,498,582 | ) | (376,724 | ) | ||||
Financing activities | ||||||||
Proceeds from stock and warrants issued for cash | 473 | 21,299,662 | ||||||
Cash paid for direct offering costs | - | (2,222,952 | ) | |||||
Proceeds from loans - related party | - | 4,355,386 | ||||||
Repayments of loans - related party | - | (2,476,468 | ) | |||||
Proceeds from notes payable | 6,700,000 | 1,101,000 | ||||||
Repayments on notes payable | (5,231,251 | ) | (1,377,257 | ) | ||||
Proceeds from SBA notes | - | 518,167 | ||||||
Repayments on SBA notes | (11,754 | ) | - | |||||
Proceeds from convertible notes | - | 2,550,000 | ||||||
Repayments on convertible notes - net of overpayment | - | (2,473,052 | ) | |||||
Net cash provided by financing activities | 1,457,468 | 21,274,486 | ||||||
Net increase in cash | 752,158 | 5,609,501 | ||||||
Cash - beginning of year | 6,283,496 | 673,995 | ||||||
Cash - end of year | $ | 7,035,654 | $ | 6,283,496 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 523,005 | $ | 866,684 | ||||
Cash paid for income tax | $ | - | $ | - | ||||
Supplemental disclosure of non-cash investing and financing activities | ||||||||
Debt issue costs recorded in connection with notes payable | $ | 115,404 | $ | - | ||||
Stock issued to acquire software | $ | 411,400 | $ | - | ||||
Debt discount/issue costs recorded in connection with debt/derivative liabilities | $ | - | $ | 2,748,084 | ||||
Conversion of Series C, preferred stock into common stock | $ | - | $ | 722 | ||||
Gain on forgiveness of CenterCom AP - Related Party | $ | - | $ | 429,010 | ||||
Stock issued in settlement of liabilities | $ | - | $ | 1,997,977 | ||||
Conversion of debt into equity | $ | - | $ | 3,363,561 | ||||
Conversion of debt into equity - related party | $ | 1,086,413 | $ | - | ||||
Right-of-use asset obtained in exchange for new operating lease liability | $ | - | $ | 515,848 | ||||
Termination of ECS ROU lease | $ | - | $ | 228,752 | ||||
Stock issued in connection with debt modification | $ | - | $ | 108,931 | ||||
Stock issued under make-whole arrangement | $ | - | $ | 90,401 | ||||
Stock issued for acquisition of membership interest in ECS | $ | - | $ | 17,900 | ||||
Reclassification of SBA note payable - government to note payable | $ | 126,418 | $ | - | ||||
Reclassification of accrued interest - related party to note payable - related party | $ | 627,545 | $ | 692,458 | ||||
Deconsolidation of subsidiary (True Wireless) | $ | - | $ | 2,434,552 |
F-7 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Note 1 - Organization and Nature of Operations
Organization and Nature of Operations
SurgePays, Inc. (“SurgePays,” “SP,” “we,” “our” or “the Company”), and its operating subsidiaries, is a technology-driven company building a next generation supply chain software platform that can offer wholesale goods and services more cost efficiently than traditional and existing wholesale distribution models.
The parent (SurgePays, Inc.) and subsidiaries are organized as follows:
Schedule of Subsidiaries
Company Name | Incorporation Date | State of Incorporation | ||
SurgePays, Inc. | August 18, 2006 | Tennessee | ||
KSIX Media, Inc. | November 5, 2014 | Nevada | ||
KSIX, LLC | September 14, 2011 | Nevada | ||
Surge Blockchain, LLC | January 29, 2009 | Nevada | ||
Injury Survey, LLC | July 28, 2020 | Nevada | ||
DigitizeIQ, LLC | July 23, 2014 | Illinois | ||
LogicsIQ, Inc. | October 2, 2018 | Nevada | ||
Surge Payments, LLC | December 17, 2018 | Nevada | ||
Surgephone Wireless, LLC | August 29, 2019 | Nevada | ||
SurgePays Fintech, Inc. | August 22, 2019 | Nevada | ||
True Wireless, Inc. | * | October 29, 2020 | Oklahoma | |
ECS Prepaid, LLC | June 9, 2009 | Missouri | ||
Central States Legal Services, Inc. | August 1, 2003 | Missouri | ||
Electronic Check Services, Inc. | May 19, 1999 | Missouri | ||
Torch Wireless | ** | January 29, 2019 | Wyoming |
* | Entity was disposed of on May 7, 2021. |
** | Effective January 1, 2022, the Company acquired Torch Wireless |
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
F-8 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Liquidity and Management’s Plans
As reflected in the accompanying consolidated financial statements, for the year ended December 31, 2022, the Company had:
● | Net loss available to common stockholders of $680,763; and |
● | Net cash used in operations was $793,272 |
Additionally, at December 31, 2022, the Company had:
● | Accumulated deficit of $35,804,106 |
● | Stockholders’ equity of $5,118,253; and |
● | Working capital of $4,099,723 |
We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand of $7,035,654 at December 31, 2022.
The Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from the sales of its products and services to achieve profitable operations. There can be no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months ended December 31, 2023, and our current capital structure including equity-based instruments and our obligations and debts.
The Company believes it has sufficient cash resources on hand along with access to additional debt and/or equity-based capital from third parties and related parties as needed to meet its current obligations for a period that is one year from the issuance date of these financial statements.
F-9 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Management’s strategic plans include the following:
● | Continue the growth of the Affordable Connectivity Program revenue stream, |
● | Execution of business plan and significant revenue growth from prior period, |
● | Expand product and services offerings to a larger surrounding geographic area. |
● | Continuing to explore and execute prospective partnering or distribution opportunities; and |
● | Identifying unique market opportunities that represent potential positive short-term cash flow. |
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation and Non-Controlling Interest
These consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.
For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than the Company. The aggregate of the income or loss and corresponding equity that is not owned by us is included in Non-controlling Interests in the consolidated financial statements.
Business Combinations
The Company accounts for business acquisitions using the acquisition method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date.
The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
F-10 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Significant judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within the Company’s operating results.
Effective January 1, 2022, the Company executed a management agreement with Torch Wireless (“Torch”). Generally, the Company was engaged to handle the following services:
● | Oversee management of the business being conducted by Torch, | |
● | Involved in the performance of Torch’s obligations under contracts regarding its business operations and maintenance of Torch’s customer relationships, | |
● | Assist Torch with regulatory compliance, | |
● | Manage all billing and collection functions, including the right to collect revenues related to Torch’s business operations, as part of the agreement, Torch may not participate in this function; and | |
● | Manage all payment functions related to the business, including the right to disburse funds, as part of the agreement, Torch may not participate in this function |
Torch is a provider of subsidized mobile broadband services to consumers qualifying under the federal guidelines of the U.S. Federal Communication Commission’s Affordable Connectivity Program (“ACP”). The ACP provides the Company up to a $100 reimbursement for the cost of each tablet device distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. With the purchase of Torch, the Company now has approval to offer subsidized mobile broadband in all fifty states.
It was determined that the Company had acquired 100% of Torch, effective January 1, 2022, resulting in Torch becoming a wholly-owned subsidiary, in a transaction accounted for as a business combination. Pursuant to ASC 805-10-25-7, the Company determined that the acquisition date preceded the closing date as it was managing Torch and in full control of all operational decision making. At this time, the Company had obtained control of Torch through its management contract.
At the time of acquisition, Torch had no significant assets or liabilities. The Company paid $800,000. As a result of the acquisition, the Company recorded goodwill of $800,000.
F-11 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
At the time of acquisition, Torch had nominal revenues and losses. As a result, and given the immaterial nature of this acquisition, the Company has elected not to present any pro-forma financial information.
In addition, the Company will pay the Sellers monthly residual payments for customers enrolled by the Company through December 31, 2022 of either $2 or $3 per customer (depending on the category of customer).
For the year ended December 31, 2022, the Company incurred expenses of $1,679,723 related to the residual payments. All expenses are included as a component of cost of goods sold.
This transaction does not involve the purchase of a “significant amount of assets” as defined in the Instructions to Item 2.01 of Form 8-K. Additionally, the acquisition of Torch was not deemed to be significant at any level under SEC Regulation S-X 3.05 and does not require the presentation of any additional historical audits.
For financial reporting purposes, at December 31, 2022, Torch has been consolidated into the Company’s consolidated statements of financial position, results of operations, and cash flows.
At December 31, 2022 and 2021 goodwill was $1,666,782 and $866,782, respectively.
There were no impairment losses for the years ended December 31, 2022 or 2021, respectively.
Deconsolidation of Subsidiary
In accordance with ASC Topic 810-10-40, a parent company must deconsolidate a subsidiary as of the date the parent ceases to have a controlling interest in that subsidiary and recognize a gain or loss in net income at that time.
On May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc. (“TW”), however we retained $1,097,659 in liabilities which consisted of $1,077,659 in accounts payable and accrued expenses as well as $20,000 in related party loans. During 2021, the $20,000 in related party loans was forgiven.
In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%, with a default interest rate of 10%. The Company will receive twenty-five (25) payments of principal and accrued interest totaling $7,461 commencing in June 2023.
F-12 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Payments are scheduled as follows:
Schedule of Receivables
For the Year Ended December 31, 2022: | ||||
2023 | $ | 52,227 | ||
2024 | 89,532 | |||
2025 | 44,766 | |||
186,525 | ||||
Less: amount representing interest | (9,674 | ) | ||
Total | $ | 176,851 |
As a result of the sale, we deconsolidated our entire ownership interest in TW from our consolidated financial statements on May 7, 2021, (the effective date of the sale agreement), and recognized a gain on deconsolidation of $1,895,871 as follows:
Schedule of Deconsolidated Ownership
Consideration | ||||
Note receivable | $ | 176,851 | ||
Fair value of consideration received | 176,851 | |||
Recognized amounts of identifiable assets sold and liabilities assumed by buyer: | ||||
Cash | 325,316 | |||
Lifeline revenue due from USAC | 74,650 | |||
Inventory | 107,089 | |||
Property and equipment - net | 20,645 | |||
Operating lease - right of use asset - net | 10,981 | |||
Total assets sold | 538,681 | |||
Accounts payable and accrued expenses | 1,183,850 | |||
Line of credit | 912,870 | |||
Note payable - SBA government | 150,000 | |||
Operating lease liability | 10,981 | |||
Total liabilities assumed by buyer | 2,257,701 | �� | ||
Total net liabilities assumed by buyer | 1,719,020 | |||
Gain on deconsolidation of True Wireless | 1,895,871 |
F-13 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Business Segments and Concentrations
The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. The Company manages its business as multiple reportable segments. See Note 11 regarding segment disclosure.
The SurgePhone and Torch Wireless business segment made up approximately 73% of total consolidated revenue in 2022. Revenues related to this business segment are 100% derived from programs administered by the Federal Communications Commission (FCC), and all funds related to these programs are received directly from organizations under the direction of the FCC. Accounts receivable related to these programs was made up 96% of accounts receivable at December 31, 2022.
The SurgePhone and Torch Wireless business segment made up approximately 17% of total consolidated revenue in 2021. Revenues related to this business segment are 100% derived from programs administered by the Federal Communications Commission (FCC), and all funds related to these programs are received directly from organizations under the direction of the FCC. Accounts receivable related to these programs was made up 89% of accounts receivable at December 31, 2021.
Customers in the United States accounted for 100% of our revenues. We do not have any property or equipment outside of the United States.
See Note 11 regarding segment disclosure.
Use of Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant estimates during the years ended December 31, 2022 and 2021, respectively, include, allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of loss contingencies, valuation of derivative liabilities, valuation of stock-based compensation, estimated useful lives related to intangible assets, capitalized internal-use software development costs, and property and equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred tax assets.
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.
F-14 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The Company has experienced, and in the future may experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
● | Level 1 - Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; | |
● | Level 2 - Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and | |
● | Level 3 - Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
F-15 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
The Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, and accounts payable and accrued expenses – related party, are carried at historical cost. At December 31, 2022 and 2021, respectively, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.
ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding financial instruments.
Cash and Cash Equivalents and Concentration of Credit Risk
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.
At December 31, 2022 and 2021, respectively, the Company did not have any cash equivalents.
The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is $250,000. At December 31, 2022 and 2021, the Company did not experience any losses on cash balances in excess of FDIC insured limits.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding customer balances. Credit is extended to customers based on an evaluation of their financial condition and other factors. Interest is not accrued on overdue accounts receivable. The Company does not require collateral.
F-16 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. Accounts determined to be uncollectible are charged to operations when that determination is made.
Allowance for doubtful accounts was $17,525 and $137,218 at December 31, 2022 and 2021, respectively.
There was a bad debt recovery of $59,485 for the year ended December 31, 2022.
There was bad debt expense of $24,841 for the year ended December 31, 2021.
Bad debt expense (recovery) is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Inventory
Inventory primarily consists of tablets, cell phones and sim cards. Inventories are stated at the lower of cost or net realizable value using the average cost valuation method.
During the years ended December 31, 2022 and 2021, the Company recorded a provision for inventory obsolescence of $51,718 and $0, respectively.
At December 31, 2022 and 2021, the Company had inventory of $11,186,242 and $4,359,296, respectively.
Impairment of Long-lived Assets including Internal Use Capitalized Software Costs
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.
If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
F-17 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
There were no impairment losses for the years ended December 31, 2022 and 2021, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets.
Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.
Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
There were no impairment losses for the years ended December 31, 2022 and 2021, respectively.
Internal Use Software Development Costs
We capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not meet the qualification for capitalization, as further discussed below, are expensed as incurred and recorded in general and administrative expenses in the consolidated results of operations.
Software development activities generally consist of three stages:
(i) | planning stage, |
(ii) | application and infrastructure development stage, and |
(iii) | post implementation stage. |
Costs incurred in the planning and post implementation stages of software development, including costs associated with the post-configuration training and repairs and maintenance of the developed technologies, are expensed as incurred.
F-18 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
We capitalize costs associated with software developed for internal use when the planning stage is completed, management has authorized further funding for the completion of the project, and it is probable that the project will be completed and perform as intended. Costs incurred in the application and infrastructure development stages, including significant enhancements and upgrades, are capitalized. Capitalization ends once a project is substantially complete, and the software and technologies are ready for their intended purpose. There is judgment involved in estimating the stage of development as well as estimating time allocated to a particular project. A significant change in the time spent on each project could have a material impact on the amount capitalized and related amortization expense in subsequent periods.
We amortize internal use software development costs using a straight-line method over a three-year estimated useful life, commencing when the software is ready for its intended use. The straight-line recognition method approximates the manner in which the expected benefit will be derived. We determined the life of internal use software based on historical software upgrades and replacement.
On an ongoing basis, we assess if the estimated remaining useful lives of capitalized projects continue to be reasonable based on the remaining expected benefit and usage. If the remaining useful life of a capitalized project is revised, it is accounted for as a change in estimate and the remaining unamortized cost of the underlying asset is amortized prospectively over the updated remaining useful life.
We also evaluate internal use software for abandonment and use that as a significant indicator for impairment on a quarterly basis.
Right of Use Assets and Lease Obligations
The Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments over the lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.
F-19 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the performance of the business remains strong. Therefore, the Right of Use Asset and Lease Liability may include an assumption on renewal options that have not yet been exercised by the Company. The Company’s operating leases contained renewal options that expire at various dates with no residual value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities.
As the rate implicit in leases are not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. See Note 9.
Derivative Liabilities
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, (“ASC 480”), “Distinguishing Liabilities from Equity” and FASB ASC Topic No. 815, (“ASC 815”) “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The Company uses a binomial model to determine fair value.
Upon conversion of a note for shares of common stock where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at fair value, relieves all related notes, derivatives, and debt discounts, and recognizes a net gain or loss on debt extinguishment. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
Debt Issue Cost
Debt issuance cost paid to lenders, or third parties are amortized to interest expense in the consolidated statements of operations, over the life of the underlying debt instrument.
F-20 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely with the delivery of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
F-21 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
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, 2022 and December 31, 2021, respectively, contained a significant financing component.
Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
F-22 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.
The following reflects additional discussion regarding our revenue recognition policies for each of our material revenue streams. For each revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration is fixed and determinable at the initiation of the contract. Performance obligations for Torch, TW and LogicsIQ are satisfied when services are performed. Performance obligations for ECS and SB are satisfied at point of sale.
For each revenue stream we only have a single performance obligation.
Surge Phone Wireless (SPW) and Torch Wireless
SPW and Torch Wireless are licensed to provide subsidized mobile broadband services through the FCC’s Affordable Connectivity Program (ACP) to qualifying low-income customers in all fifty states. Revenues are recognized when an ACP application is completed and accepted. Each month we reconcile subscriber usage to ensure the service was utilized. A monthly file is submitted to the Universal Service Administrative Company for review and approval, at which time we have completed our performance obligation and recognize accounts receivable and revenue. Revenues are recorded in the month when services were rendered, with payment typically received on the 28th of the following month.
Surge Blockchain
Revenues are generated through the sale of various products such as energy drinks, CBD products, and other top selling products in convenience store and bodega nationwide. At the time in which our products are sold at the store our performance obligation is considered complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
F-23 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
LogicsIQ
LogicsIQ is an enterprise software development company providing marketing business intelligence (“BI”), plaintiff generation and case load management solutions for law firms representing plaintiffs in Mass Tort legal cases. Revenues are earned from our lead generation and retained services offerings.
Lead generation consist of sourcing leads, which requires us to drive traffic to our landing pages for a specific marketing campaign. We also achieve this in certain marketing campaigns by using third-party preferred vendors to meet the needs of our clients. Revenues are recognized at the time the lead is delivered to the client. If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed.
Retained service offerings consist of turning leads into a retained legal case. To provide this service to our customers, we qualify leads through verification of information collected during the lead generation process. Additionally, we further qualify these leads using a client questionnaire which assists in determining the services to be provided. The qualification process is completed using our call center operations.
If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed. At the time of delivery of leads and the creation of retained cases (customers are qualified at this point), our performance obligation has been completed and revenues are recognized. Arrangements with customers do not provide the customer with the right to take possession of our software or platform at any time. Once the advertising is delivered, it is non-refundable.
Surge Fintech and ECS
Revenues are generated through the sale of telecommunication products such as mobile phones, wireless top-up refills, and other mobile related products. At the time in which our products are sold through our online web portal (point of sale), our performance obligation is considered complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
F-24 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
True Wireless (TW) (Former Subsidiary)
TW was licensed to provide wireless services to qualifying low-income customers in five states. Revenues were recognized when a lifeline application was completed and accepted. Each month we reconciled subscriber usage to ensure the service was utilized. A monthly file was submitted to the Universal Service Administrative Company for review and approval, at which time we completed our performance obligation and recognized accounts receivable and revenue. Revenues were recorded in the month when services were rendered, with payment typically received on the 15th of the following month. If the subscriber did not utilize the Lifeline service during the month, we had 15-days to cure usage. If not cured, the subscriber was de-enrolled from the lifeline program at day 45. This process to verify usage and de-enrollment had been temporarily suspended due to the COVID-19 pandemic. Historically, we had had an insignificant amount of subscribers de-enrolled.
TW was sold in May 2021 and was deconsolidated at the disposal date.
Contract Liabilities (Deferred Revenue)
Contract liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer deposit is relieved and revenue is recognized.
At December 31, 2022 and 2021, the Company had deferred revenue of $243,110 and $276,250, respectively.
F-25 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The following represents the Company’s disaggregation of revenues for the years ended December 31, 2022 and 2021:
Schedule of Disaggregation of Revenue from Contracts with Customers
For the Year Ended December 31, | ||||||||||||||||
2022 | 2021 | |||||||||||||||
Revenue | Revenue | % of Revenues | Revenue | % of Revenues | ||||||||||||
Surge Phone and Torch Wireless | $ | 88,351,547 | 72.69 | % | $ | 7,289,239 | 14.28 | % | ||||||||
Surge Blockchain, LLC | 112,911 | 0.09 | % | 138,106 | 0.27 | % | ||||||||||
LogicsIQ, Inc. | 16,760,656 | 13.79 | % | 17,846,698 | 34.95 | % | ||||||||||
Surge Fintech & ECS | 16,319,076 | 13.43 | % | 24,628,566 | 48.23 | % | ||||||||||
True Wireless | - | 0.00 | % | 1,157,980 | 2.27 | % | ||||||||||
Total Revenues | $ | 121,544,190 | 100 | % | $ | 51,060,589 | 100 | % |
Cost of Revenues
Cost of revenues consists of purchased telecom services including data usage and access to wireless networks. Additionally, prepaid phone cards, marketing services and advertising costs.
Income Taxes
The Company accounts for income tax using the asset and liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of December 31, 2022 and 2021, respectively, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
The Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the years ended December 31, 2022 and 2021, respectively.
F-26 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Investment – Former Related Party
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. CenterCom also provides call center support for various third-party clients.
Anthony N. Nuzzo, a director and officer and the holder of approximately 10% of our voting equity had a controlling interest in CenterCom Global. During 2022, Mr. Nuzzo passed away. See Form 8-K filed on March 24, 2022.
The strategic partnership with CenterCom as a bilingual operations hub has powered our growth and revenue. CenterCom has been built to support the infrastructure required to rapidly scale in synergy and efficiency to support our sales growth, customer service and development.
We account for this investment under the equity method. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee’s income or loss. All investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable.
At December 31, 2022 and 2021, our investment in CenterCom was $354,206 and $443,288, respectively.
During the years ended December 31, 2022 and 2021, we recognized a loss of $89,082 and gain of $28,676, respectively.
During 2021, CenterCom forgave $429,010 of accounts payable owed by SurgePays to CenterCom. As a result of this debt forgiveness, occurring with a related party, accordingly, there was no gain recorded, the Company increased additional paid in capital.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs are included as a component of general and administrative expense in the consolidated statements of operations.
The Company recognized $259,393 and $661,238 in marketing and advertising costs during the years ended December 31, 2022 and 2021, respectively.
F-27 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Stock-Based Compensation
The Company accounts for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
The Company uses the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options.
The fair value of stock-based compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
When determining fair value of stock-based compensation, the Company considers the following assumptions in the Black-Scholes model:
● | Exercise price, |
● | Expected dividends, |
● | Expected volatility, |
● | Risk-free interest rate; and |
● | Expected life of option |
Stock Warrants
In connection with certain financing (debt or equity), consulting and collaboration arrangements, the Company may issue warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of warrants issued for compensation using the Black-Scholes option pricing model as of the measurement date. However, for warrants issued that meet the definition of a derivative liability, fair value is determined based upon the use of a binomial pricing model.
Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants (for services) are recorded at fair value and expensed over the requisite service period or at the date of issuance if there is not a service period.
F-28 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Pursuant to ASC 260-10-45, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the periods presented.
Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares may consist of common stock issuable for stock options and warrants (using the treasury stock method), convertible notes and common stock issuable. These common stock equivalents may be dilutive in the future. In the event of a net loss, diluted loss per share is the same as basic loss per share since the effect of the potential common stock equivalents upon conversion would be anti-dilutive.
Schedule of Diluted Net Income (Loss) Per Share
December 31, 2022 | December 31, 2021 | |||||||
Warrants | 5,681,392 | 5,852,984 | ||||||
Stock options | 6,801 | 3,401 | ||||||
Series A, convertible preferred stock (1) | - | 26,000 | ||||||
Total common stock equivalents | 5,688,193 | 5,882,385 |
1- | each share converts to 1/10 of a share of common stock |
Warrants and stock options included as common stock equivalents represent those that are vested and exercisable. See Note 10.
Based on the potential common stock equivalents noted above at December 31, 2022 and December 31, 2021, respectively, the Company has sufficient authorized shares of common stock () to settle any potential exercises of common stock equivalents.
Related Parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
During the years ended December 31, 2022 and 2021, the Company incurred expenses with related parties in the normal course of business totaling $20,125,153 and $4,157,192, respectively.
Schedule of Related Party Expenses
2022 | 2021 | |||||||
For the Years Ended | ||||||||
December 31, | ||||||||
2022 | 2021 | |||||||
Related party expenses | ||||||||
321 Communications, Inc | $ | 16,035,093 | $ | 690,398 | ||||
Axia Management, LLC | - | 95,415 | ||||||
Carddawg Investments, Inc. | 166,356 | 64,488 | ||||||
CenterCom USA, Inc | 2,759,763 | 2,089,101 | ||||||
Galaxy | - | 1,217,790 | ||||||
National Relief Telecom | 1,163,941 | - | ||||||
Total | $ | 20,125,153 | $ | 4,157,192 | ||||
Total related party expenses | $ | 20,125,153 | $ | 4,157,192 |
F-29 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The Company uses certain credit cards to pay expenses, these credit cards are in the names of certain of the Company’s officers and directors.
Recent Accounting Standards
Changes to accounting principles are established by the FASB in the form of Accounting Standards Updates (“ASU’s”) to the FASB’s Codification. We consider the applicability and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ equity, cash flows, or presentation thereof. Management has evaluated all recent accounting pronouncements issued through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the consolidated financial statements of the Company.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no material effect on the consolidated results of operations, stockholders’ equity, or cash flows.
Note 3 – Property and Equipment
Property and equipment consisted of the following:
Schedule of Property and Equipment
Estimated Useful | ||||||||||
Type | December 31, 2022 | December 31, 2021 | Lives (Years) | |||||||
Computer equipment and software | $ | 1,006,286 | $ | 283,484 | 3 - 5 | |||||
Furniture and fixtures | 82,752 | 82,752 | 5 - 7 | |||||||
1,089,038 | 366,236 | |||||||||
Less: accumulated depreciation/amortization | (445,665 | ) | (165,788 | ) | ||||||
Property and equipment - net | $ | 643,373 | $ | 200,448 |
In June 2022, the Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 as well as the issuance of shares of common stock having a fair value of $411,400 ($ /share), based upon the quoted closing trading price.
F-30 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Depreciation and amortization expense for the years ended December 31, 2022 and 2021 was $279,877 and $67,125 (including $5,019 of depreciation from TW prior to deconsolidation), respectively.
These amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Note 4 – Intangibles
Intangibles consisted of the following:
Schedule of Intangible Assets
Estimated Useful | ||||||||||
Type | December 31, 2022 | December 31, 2021 | Lives (Years) | |||||||
Proprietary Software | $ | 4,286,402 | $ | 4,286,402 | 7 | |||||
Tradenames/trademarks | 617,474 | 617,474 | 15 | |||||||
ECS membership agreement | 465,000 | 465,000 | 1 | |||||||
Noncompetition agreement | 201,389 | 201,389 | 2 | |||||||
Customer Relationships | 183,255 | 183,255 | 5 | |||||||
5,753,520 | 5,753,520 | |||||||||
Less: accumulated amortization | (2,973,543 | ) | (2,320,036 | ) | ||||||
Intangibles - net | $ | 2,779,977 | $ | 3,433,484 |
Amortization expense for the years ended December 31, 2022 and 2021 was $653,507 and $692,258, respectively.
F-31 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Estimated amortization expense for each of the five (5) succeeding years is as follows:
Schedule of Estimated Amortization Expenses
For the Year Ended December 31: | ||||
2023 | 653,507 | |||
2024 | 653,507 | |||
2025 | 653,507 | |||
2026 | 653,507 | |||
2027 | 165,949 | |||
Total | $ | 2,779,977 |
Note 5 – Internal Use Software Development Costs
Internal Use Software Development Costs consisted of the following:
Schedule of Property Plant and Equipment
Estimated Useful | ||||||||||
Type | December 31, 2022 | December 31, 2021 | Life (Years) | |||||||
Internal Use Software Development Costs | $ | 387,180 | $ | - | 3 | |||||
Less: accumulated amortization | - | - | ||||||||
Property and equipment - net | $ | 387,180 | $ | - |
Management has determined that all costs incurred in 2022 related to internal use software development costs related to the application and infrastructure development stage were completed at December 31, 2022. Amortization of these costs will begin in 2023.
Based on the Company’s internal use software development costs at December 31, 2022, excluding projects that are not ready for their intended use with a value of $387,180, estimated amortization expense is as follows for the years ended December 31:
Schedule of Amortization Expenses
2023 | 129,060 | |||
2024 | 129,060 | |||
2025 | 129,060 | |||
Total | $ | 387,180 |
F-32 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Note 6 – Debt
The following represents a summary of the Company’s notes payable – SBA government, notes payable – related parties, and notes payable, key terms, and outstanding balances at December 31, 2022 and 2021, respectively:
Notes Payable – SBA government
(1) Paycheck Protection Program - PPP Loan
Pertaining to the Company’s eighteen (18) month loan and in accordance with the Paycheck Protection Program (“PPP”) and Conditional Loan Forgiveness, the promissory note evidencing the loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company.
Under the terms of the PPP loan program, all or a portion of this Loan may be forgiven upon request from Borrower to Lender, provided the Loan proceeds are used in accordance with the terms of the Coronavirus Aid, Relief and Economic Security Act (the “Act” or “CARES”), Borrower is not in default under the Loan or any of the Loan Documents, and Borrower has provided documentation to Lender supporting such request for forgiveness that includes verifiable information on Borrower’s use of the Loan proceeds, to Lender’s satisfaction, in its sole and absolute discretion.
(2) Economic Injury Disaster Loan (“EIDL”)
This program was made available to eligible borrowers in light of the impact of the COVID-19 pandemic and the negative economic impact on the Company’s business. Proceeds from the EIDL are to be used for working capital purposes.
Installment payments, including principal and interest, are due monthly (beginning twelve (12) months from the date of the promissory note) in amounts ranging from $109 - $751/month. The balance of principal and interest is payable over the next thirty (30) years from the date of the promissory note. There are no penalties for prepayment. The EIDL Loan is not required to be refinanced by the PPP loan.
F-33 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Schedule of Notes Payable
PPP | EIDL | EIDL | PPP | |||||||||||||||||
Terms | SBA | SBA | SBA | SBA | Total | |||||||||||||||
Issuance dates of SBA loans | April 2020 | May 2020 | July 2020 | March 2021 | ||||||||||||||||
Term | 18 months | 30 Years | 30 Years | 5 Years | ||||||||||||||||
Maturity date | October 2021 | May 2050 | July 2050 | March 2026 | ||||||||||||||||
Interest rate | 1% | 3.75% | 3.75% | 1% | ||||||||||||||||
Collateral | Unsecured | Unsecured | Unsecured | Unsecured | ||||||||||||||||
Conversion price | N/A | N/A | N/A | N/A | ||||||||||||||||
Principal | $ | 498,082 | $ | 150,000 | $ | 486,600 | $ | 518,167 | $ | 1,652,849 | ||||||||||
Balance - December 31, 2020 | $ | 498,082 | $ | 150,000 | $ | 486,600 | $ | - | $ | 1,134,682 | ||||||||||
Gross proceeds | - | - | - | 518,167 | 518,167 | |||||||||||||||
Forgiveness of loan | (371,664 | ) | - | - | - | (371,664 | )1 | |||||||||||||
Deconsolidation of subsidiary (“TW”) | - | - | (150,000 | ) | - | (150,000 | )2 | |||||||||||||
Balance - December 31, 2021 | 126,418 | 150,000 | 336,600 | 518,167 | 1,131,185 | |||||||||||||||
Forgiveness of loan | - | - | - | (518,167 | ) | (518,167 | )3 | |||||||||||||
Repayments | - | (4,078 | ) | (7,676 | ) | - | (11,754 | ) | ||||||||||||
Reclassification to note payable | (126,418 | ) | - | - | - | (126,418 | ) | |||||||||||||
Balance - December 31, 2022 | $ | - | $ | 145,922 | $ | 328,924 | $ | - | $ | 474,846 |
1 | – | During 2021, the Company received a partial forgiveness on a PPP loan totaling $377,743, of which $371,664 was for principal and $6,079 for accrued interest. The Company recorded this forgiveness as other income in the accompanying consolidated statements of operations. In March 2022, the Company refinanced the balance with a third-party bank and the maturity date was extended to March 2025. Monthly payments are $3,566/month. See additional disclosure as part of notes payable summary note 6. |
2 | – | In connection with the deconsolidation of TW in 2021, $150,000 of debt was assumed by the buyer. |
3 | – | During 2022, the Company received a forgiveness on a PPP loan totaling $524,143, of which $518,167 was for principal and $5,976 for accrued interest. The Company recorded this forgiveness as other income in the accompanying consolidated statements of operations. |
F-34 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Notes Payable – Related Parties
Schedule of Notes Payable
1 | 2 | 3 | ||||||||||||||
Loan Payable | Loan Payable | Loan Payable | ||||||||||||||
Terms | Related Party | Related Party | Related Party | Total | ||||||||||||
Issuance dates of notes | Various | May 2020/January 2021 | August 2021 | |||||||||||||
Maturity date | January 1, 2023/January 1, 2024 | March 2021 | August 2031 | |||||||||||||
Interest rate | 10% | 15% | 10% | |||||||||||||
Collateral | Unsecured | Unsecured | Unsecured | |||||||||||||
Conversion price | N/A | N/A | N/A | |||||||||||||
Balance - December 31, 2020 | $ | 3,341,940 | $ | 147,500 | $ | - | $ | 3,489,440 | ||||||||
Gross proceeds | 3,825,000 | 63,000 | 467,385 | 4,355,385 | ||||||||||||
Accrued interest included in note balance | 692,458 | - | - | 692,458 | ||||||||||||
Conversion of debt into common stock | (2,265,967 | ) | - | - | (2,265,967 | ) | ||||||||||
Repayments | - | (210,500 | ) | - | (210,500 | ) | ||||||||||
Balance - December 31, 2021 | 5,593,431 | - | 467,385 | 6,060,816 | ||||||||||||
Less: short term | 1,553,799 | - | - | 1,553,799 | ||||||||||||
Long term | $ | 4,039,632 | $ | - | $ | 467,385 | $ | 4,507,017 | ||||||||
Balance - December 31, 2021 | $ | 5,593,431 | $ | - | $ | 467,385 | 6,060,816 | |||||||||
Conversion of debt into common stock | (1,086,413 | ) | - | - | (1,086,413 | ) | ||||||||||
Reclass of accrued interest to note payable | 627,545 | - | - | 627,545 | ||||||||||||
Balance - December 31, 2022 | 5,134,563 | - | 467,385 | 5,601,948 | ||||||||||||
Less: short term | 1,108,150 | - | - | 1,108,150 | ||||||||||||
Long term | $ | 4,026,413 | $ | - | $ | 467,385 | $ | 4,493,798 |
1 | Activity is with the Company’s Chief Executive Officer and Board Member (Kevin Brian Cox). Prior to September 30, 2021, these notes were either due on demand or had a specific due date. Additionally, these advances had interest rates from 6% - 15%. On September 30, 2021, all notes and related accrued interest were combined into two (2) new notes. The new notes had due dates of June 30, 2022 or January 1, 2023. In April 2022, the notes were extended to January 1, 2023 and January 1, 2024, respectively. All notes bear interest at 10%. |
F-35 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
In 2021, the Company included $692,458 of accrued interest in the new note balance. In 2021, the Company issued shares of common stock at $ /share to settle $2,415,560 of debt including principal of $2,265,967 and accrued interest of $149,593. As a result of the debt conversion with a related party, accordingly gains/losses are not recognized, however, the Company increased stockholders’ equity for $2,415,560.
In 2022, the Company included $627,545 of accrued interest in the new note balance. In 2022, the Company issued shares of common stock at $ /share to settle $1,086,413 of debt principal. As a result of the debt conversion with a related party, accordingly gains/losses are not recognized, however, the Company increased stockholders’ equity for $1,086,413.
2 | Activity is with the Company’s former President, Chief Operating Officer and Board Member (Anthony Nuzzo). Mr. Nuzzo passed away in March 2022. |
3 | Activity is with David May, who is a Board Member. In January 2023, the Company repaid principal of $467,385 and related accrued interest of $63,258 for a total payment of $530,643. |
Notes Payable
Schedule of Notes Payable
1 | 2 | 3 | 4 | 5 | ||||||||||||||||||||||||
Terms | Notes Payable | Notes Payable | Notes Payable | Note Payable | Notes Payable | Note Payable | Total | |||||||||||||||||||||
Issuance dates of notes | April/May 2022 | April/June 2022 | March 2022 | 2019 | 2021 | 2022 | ||||||||||||||||||||||
Maturity date | October/November 2022 | January/February 2023 | March 2023 | 2020 | 2022 | 2025 | ||||||||||||||||||||||
Interest rate | 19% | 24% | 19% | 18% | 10% | 1.00% | ||||||||||||||||||||||
Default interest rate | 26% | N/A | 26% | 0% | 0% | 0% | ||||||||||||||||||||||
Collateral | Unsecured | All assets | Unsecured | Unsecured | Unsecured | Unsecured | ||||||||||||||||||||||
Warrants issued as debt discount/issue costs | 36,000 | N/A | 15,000 | N/A | 2,406,250 | N/A | ||||||||||||||||||||||
Balance - December 31, 2020 | $ | - | $ | - | $ | - | $ | 250,000 | $ | - | $ | - | $ | 250,000 | ||||||||||||||
Gross proceeds | - | - | - | - | 1,101,000 | - | 1,101,000 | |||||||||||||||||||||
Debt discount | - | - | - | - | (672,254 | ) | - | (672,254 | ) | |||||||||||||||||||
Amortization of debt discount | - | - | - | - | 698,511 | - | 698,511 | |||||||||||||||||||||
Repayments | - | - | - | (250,000 | ) | (1,127,257 | ) | - | (1,377,257 | ) | ||||||||||||||||||
Balance - December 31, 2021 | - | - | - | - | - | - | - | |||||||||||||||||||||
Gross proceeds | 1,200,000 | 5,000,000 | 500,000 | - | - | - | 6,700,000 | |||||||||||||||||||||
Reclassification from SBA - PPP note payable | - | - | - | - | - | 126,418 | 126,418 | |||||||||||||||||||||
Repayments | (100,000 | ) | (5,000,000 | ) | (100,000 | ) | - | - | (31,251 | ) | (5,231,251 | ) | ||||||||||||||||
Debt issue costs | (76,451 | ) | - | (38,953 | ) | - | - | - | (115,404 | ) | ||||||||||||||||||
Amortization of debt issue costs | 76,451 | - | 38,953 | - | - | - | 115,404 | |||||||||||||||||||||
Balance - December 31, 2022 | $ | 1,100,000 | $ | - | $ | 400,000 | $ | - | $ | - | $ | 95,167 | $ | 1,595,167 |
F-36 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
1 | - | These notes were issued with 36,000, three (3) year warrants, which have been reflected as debt issue costs and are amortized over the life of the debt. |
2 | - | The Company executed a $5,000,000, secured, revolving promissory note with a third party. The Company may draw down on the note at 80% of eligible accounts receivable. The note was repaid in full in November 2022. See below secured revolving debt. |
3 | - | These notes were issued with 15,000, three (3) year warrants, which have been reflected as debt issue costs and were amortized over the life of the debt. Additionally, in 2022, the Company issued an additional 12,000, three (3) year warrants, which have been treated as interest expense in connection with extending the maturity date for notes totaling $400,000 to March 2023. In October 2022, the Company repaid $100,000. In March 2023, the remaining $400,000 plus all related accrued interest was repaid. |
4 | - | In the event of default, these notes were convertible at 75% of the market price based upon the VWAP in the preceding 10 days. Debt discount on notes totaling $1,101,000 in principle included original issue discounts of $101,000and debt discounts associated with warrants totaling $229,268. Additionally, the Company computed a beneficial conversion feature of $341,986. |
5 | – | See Notes Payable – SBA government note summary 1. |
Secured Revolving Debt
In April 2022, a maximum of $3,000,000 was made available to the Company, issued pursuant to a series of 270-day (9 months) revolving notes for purposes of purchasing inventory. In June 2022, this amount was increased to $5,000,000.
The notes accrued interest at a monthly rate of 2% (24% annualized). The Company took drawdowns based upon eligible accounts receivable. In the event that eligible accounts receivable were less than 80% of the loan amount, within four (4) business days, the Company would have been required to make a payment to the lender so that the loan amount was no greater than 80% of the then current eligible accounts receivable.
The maximum amount outstanding under the loan was the lesser of $5,000,000 or 80% of eligible accounts receivable. Additionally, any related accrued interest associated with this mandatory payment was also due. These advances were secured by all assets of the Company.
In 2022, the Company repaid the $5,000,000 plus accrued interest of $46,027 and the line was terminated.
F-37 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Convertible Notes Payable – Net
Schedule of Notes Payable
Convertible | Convertible | |||||||||||
Terms | Notes Payable | Notes Payable | Total | |||||||||
Issuance dates of notes | February 2020 - December 2020 | January 2021 - March 2021 | ||||||||||
Maturity date | February 2021 - September 2021 | May 2021 - March 2022 | ||||||||||
Interest rate | 10% - 14% | 5% - 12% | ||||||||||
Collateral | Unsecured | Unsecured | ||||||||||
Conversion price | -A | -B | ||||||||||
Balance - December 31, 2020 | $ | 1,516,170 | $ | - | $ | 1,516,170 | ||||||
Gross proceeds | - | 2,550,000 | 2,550,000 | |||||||||
Debt discount | - | (2,460,829 | ) | (2,460,829 | ) | |||||||
Amortization of debt discount | 517,781 | 2,460,829 | 2,978,610 | |||||||||
Repayments - cash | - | (2,550,000 | )D | (2,550,000 | ) | |||||||
Conversion to equity/debt modification | (2,110,898 | ) | - | (2,110,898 | ) | |||||||
Reclassified to receivable | 76,947 | C | - | 76,947 | ||||||||
Balance - December 31, 2021 | $ | - | $ | - | $ | - |
A | - | Convertible at 65% multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock during the ten (10) trading days prior to conversion. |
B | - | Convertible at 70% - 75% multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock during the ten (10) trading days prior to conversion. |
C | - | During 2021, the Company overpaid a note holder by $76,947 when settling the outstanding balance. This overpayment had been recorded as a receivable and was repaid in full in April 2021. |
D | - | During 2021, the Company repaid the $2,550,000 of convertible notes in full, however, one of the notes, having a principal of $2,300,000 was prepaid early. As a result, the Company paid an additional prepayment penalty equal to 120% of the outstanding amount due at the time of prepayment, resulting in additional interest expense of $465,239. Also, at the time of repayment, the embedded derivative liability ceased to exist. |
F-38 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Line of Credit
The Company had a $1,000,000 line of credit with a bank, bearing interest at 6%, which was due in April 2021. The line of credit was secured by all of the Company’s assets and was personally guaranteed by the owner of the majority of the Company’s voting shares. The balance at December 31, 2021 was $0. In connection with the deconsolidation of TW in May 2021, the buyer assumed the line of credit.
Debt Maturities
The following represents the maturities of the Company’s various debt arrangements for each of the five (5) succeeding years and thereafter as follows:
Schedule of Debt Maturities
For the Year Ended December 31, | Loans Payable - Related Parties | Notes Payable - SBA government | Note Payable | Total | ||||||||||||
2023 | $ | 1,108,150 | $ | - | $ | 1,542,033 | $ | 2,650,183 | ||||||||
2024 | 4,493,798 | - | 42,455 | 4,536,253 | ||||||||||||
2025 | - | - | 10,679 | 10,679 | ||||||||||||
2026 | - | - | - | - | ||||||||||||
2027 | - | - | - | - | ||||||||||||
Thereafter | - | 474,846 | - | 474,846 | ||||||||||||
Total | $ | 5,601,948 | $ | 474,846 | $ | 1,595,167 | $ | 7,671,961 |
Note 7 – Derivative Liabilities
During 2021, the above convertible notes contained embedded conversion options with a conversion price that could result in issuing an undeterminable amount of future common stock to settle the host contract. Accordingly, the embedded conversion option is required to be bifurcated from the host instrument (convertible note) and treated as a liability, which is calculated at fair value, and marked to market at each reporting period.
The Company used the binomial pricing model to estimate the fair value of its embedded conversion option liabilities with the following inputs:
Schedule of Weighted Average Assumptions
December 31, 2021 | ||||
Expected term (years) | 0.20 - 1 year | |||
Expected volatility | 143% - 291 | % | ||
Expected dividends | 0 | % | ||
Risk free interest rate | 0.03% - 0.09 | % |
F-39 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
A reconciliation of the beginning and ending balances for the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows at December 31, 2021:
Summary of Changes in Fair Value
Derivative liability - December 31, 2020 | $ | 1,357,528 | ||
Fair value at commitment date | 1,877,250 | |||
Fair value mark to market adjustment | (1,806,763 | ) | ||
Gain on derivative liability upon related debt settled | (1,428,015 | ) | ||
Derivative liability - December 31, 2021 | $ | - |
Changes in fair value of derivative liabilities are included in other income (expense) in the accompanying consolidated statements of operations.
During the years ended December 31, 2022 and 2021, the Company recorded a change in fair value of derivative liabilities of $0 and $1,806,763, respectively. These amounts reflect a mark to market adjustment recorded to the accompanying consolidated statements of operations.
In connection with bifurcating the embedded conversion option and accounting for this instrument at fair value, the Company computed a fair value on the commitment date, and upon the initial valuation of this instrument, determined that the fair value of the liability exceeded the proceeds of the debt host instrument. As a result, the Company recorded a debt discount at the maximum amount allowed (the face amount of the debt), which required the overage to be recorded as a derivative expense.
For the years ended December 31, 2022 and 2021, the Company recorded a derivative expense of $0 and $1,775,057, respectively.
During the year ended December 31, 2021, in connection with the repayment of convertible notes which contained embedded conversion features, the related derivative liabilities ceased to exist.
During the years ended December 31, 2022 and 2021, the Company recorded a gain of $0 and $136,487, respectively, related to the settlement of convertible debt which contained an embedded conversion feature and was separately bifurcated and classified as a derivative liability. The Company has recorded these gains in the accompanying consolidated statements of operations as a component of gain on settlement of liabilities.
During the years ended December 31, 2022 and 2021, the Company recorded a gain of $0 and $1,469,641, respectively.
F-40 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Note 8 – Fair Value of Financial Instruments
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made.
The Company did not have any assets or liabilities measured at fair value on a recurring basis at December 31, 2022 and 2021, respectively.
Note 9 – Commitments and Contingencies
Operating Lease
We have entered into various operating lease agreements, including our corporate headquarters. We account for leases in accordance with ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. In addition, a lessor is required to classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating. We determine if an arrangement is a lease, or contains a lease, at inception and record the lease in our financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at commencement to determine the present value of lease payments except when an implicit interest rate is readily determinable. We determine our incremental borrowing rate based on market sources including relevant industry data.
We have lease agreements with lease and non-lease components and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective with the exception of direct sales-type leases and production equipment classes embedded in supply agreements. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.
F-41 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
We have elected not to present short-term leases on the balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.
Our leases, where we are the lessee, do not include an option to extend the lease term. For purposes of calculating lease liabilities, lease term would include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, included as a component of general and administrative expenses, in the accompanying consolidated statements of operations.
Certain operating leases provide for annual increases to lease payments based on an index or rate, our lease has no stated increase, payments were fixed at lease inception. We calculate the present value of future lease payments based on the index or rate at the lease commencement date. Differences between the calculated lease payment and actual payment are expensed as incurred.
At December 31, 2022 and 2021, respectively, the Company has no financing leases as defined in ASC 842, “Leases.”
The tables below present information regarding the Company’s operating lease assets and liabilities at December 31, 2022 and 2021, respectively:
Schedule of Lease Expense
For the Year Ended | For the Year Ended | |||||||
December 31, 2022 | December 31, 2021 | |||||||
Operating Leases | $ | 55,316 | $ | 170,962 | ||||
Interest on lease liabilities | 22,718 | 38,093 | ||||||
Total net lease cost | $ | 78,034 | $ | 209,055 |
F-42 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Supplemental balance sheet information related to leases was as follows:
Schedule of Supplemental Information Related to Leases
December 31, 2022 | December 31, 2021 | |||||||
Operating leases | ||||||||
Operating lease ROU assets - net | $ | 431,352 | $ | 486,668 | ||||
Operating lease liabilities - current | 39,490 | 49,352 | ||||||
Operating lease liabilities - non-current | 399,413 | 438,903 | ||||||
Total operating lease liabilities | $ | 438,903 | $ | 488,255 |
Supplemental cash flow and other information related to leases was as follows:
Schedule of Supplemental Cash Flow and Other Information Related to Leases
For the Year Ended | For the Year Ended | |||||||
December 31, 2022 | December 31, 2021 | |||||||
Cash paid for amounts included in measurement of lease liabilities | ||||||||
Operating cash flows from operating leases | $ | 49,352 | $ | 145,684 | ||||
ROU assets obtained in exchange for lease liabilities | ||||||||
Operating leases | $ | - | $ | 515,848 | ||||
Weighted average remaining lease term (in years) | ||||||||
Operating leases | 7.49 | 8.25 | ||||||
Weighted average discount rate | ||||||||
Operating leases | 5 | % | 5 | % |
Future minimum lease payments at December 31:
Schedule of Future Minimum Payments
2023 | 60,294 | |||
2024 | 61,876 | |||
2025 | 63,460 | |||
Thereafter | 353,485 | |||
Total lease payments | 539,115 | |||
Less: amount representing interest | (100,212 | ) | ||
Total lease obligations | $ | 438,903 |
F-43 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
In May 2021, the Company and its landlord mutually agreed to terminate the outstanding lease for ECS. The Company had an outstanding ROU liability of $228,752 at the date of termination. There was no gain or loss on lease termination.
Contingencies – Legal Matters
True Wireless and Surge Holdings - Terracom Litigation
Global Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom believes Mr. Coffman and Mr. Carroll are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as such we believe True Wireless has a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc., but not in wireless sales. The complaint requests general damages plus fees and costs for tortious interference with a business relationship in their prayer for relief. They have made no written demand for damages at this point in time. The Company believes this matter is simply an anti-competitive attempt by Terracom to cause distress to True Wireless. The case was dismissed without prejudice by the Court on December 15, 2022.
Surge Holdings – Juno Litigation
Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary.
SurgePays – Ambess Litigation
On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of contract and prays for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion practice and discovery process. The case was settled and dismissed on January 30, 2023.
F-44 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
True Wireless and SurgePays – Litigation
Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox. Written discovery is winding down and depositions are anticipated in the 2nd and 3rd Q of 2023.
Aliotta and Vasquesz v SurgePays – Litigation
Robert Aliotta and Steve Vasquesz, on behalf of themselves and others similarly situated v. SurgePays, Inc. d/b/a Surge Logics, filed January 4, 2023, in the U.S. District Court for the Northern District of Illinois, Case No. 1:23-cv-00042. Plaintiffs’ allege violations of the Telephone Consumer Protection Act (TCPA) and the Florida Telephone Solicitations Act (FTSA) based on telephone solicitations allegedly made by or on behalf of SurgePays, Inc. Plaintiffs’ seek damages for themselves and seek certification of a class action on behalf of others similarly situated. Defendants intend to vigorously defend the action however most similar cases are eventually resolved by an out-of-court settlement. At this time, it is impossible to estimate the amount or range of potential loss, but similar matters are usually settled for $100,000.00 or less. SurgePays, Inc has been removed from the case following a Motion to Dismiss and LogicsIQ, Inc. has been named as the defendant. The case remains in the pleadings stage.
Demiray v. SurgePays, Inc.
Meral Demiray v Surge Holdings, Inc. a/k/a SurgePays, Inc.: In the United States District Court for the Northern District of Illinois, Case # 22-cv-6591, filed November 23, 2022. Plaintiff filed a claim against SurgePays following her dismissal from her position as an employee of the company. Following negotiations among and between SurgePays, SurgePays’ insurance carrier and the Plaintiff, a settlement has been reached and documentation is currently being drafted for full settlement, release, and dismissal of the claim.
Note 10 – Stockholders’ Equity
Reverse Stock Split
On November 2, 2021, the Company effected a 1 for 50 reverse stock split of all classes of its stock. All share and per share amounts have been retroactively restated to the earliest period presented.
At December 31, 2022, the Company had three (3) classes of stock:
Common Stock
- | shares authorized | |
- | Par value - $ | |
- | Voting at 1 vote per share |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Series A, Convertible Preferred Stock
- | shares authorized | |
- | issued and outstanding | |
- | Par value - $ | |
- | Voting at 10 votes per share | |
- | Ranks senior to any other class of preferred stock | |
- | Dividends - none | |
- | Liquidation preference – none | |
- | Rights of redemption - none | |
- | Conversion into 1/10 of a share of common stock for each share held |
In 2022, all Series A, Preferred stockholders, representing 0 on stockholders’ equity. shares issued and outstanding, agreed to convert their holdings into shares of common stock. The transaction had a net effect of $
Series C, Convertible Preferred Stock
- | shares authorized | |
- | issued and outstanding | |
- | Par value - $ | |
- | Voting at 250 votes per share | |
- | Ranks junior to any other class of preferred stock | |
- | Dividends – equal to the per share amount (as converted basis) as the common stockholders should the Board of Directors declare a dividend | |
- | Liquidation preference – original issue price plus any declared yet unpaid accrued dividends | |
- | Rights of redemption - none | |
- | Conversion into 250 shares of common stock for each share held |
In 2021, all Series C, Preferred stockholders, representing 0 on stockholders’ equity. shares issued and outstanding, agreed to convert their holdings into shares of common stock. The transaction had a net effect of $
F-46 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Equity Transactions for the Year Ended December 31, 2022
Stock Issued as Direct Offering Costs
The Company issued 200,000 shares of common stock for services rendered in connection with the listing of our common stock on the Nasdaq Capital Market in 2021. As a result, the Company recorded the par value of the common stock issued with a corresponding charge to additional paid-in capital, resulting in a net effect of $0 to stockholders’ equity.
Stock Issued for Acquisition of Software
The Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash and the Company issued shares of common stock having a fair value of $411,400 ($ /share), based upon the quoted closing trading price.
Exercise of Warrants (Cashless)
The Company issued 147,153 shares of common stock in connection with the cashless exercise of 498,750 warrants. These transactions had a net effect of $0 on stockholders’ equity.
Exercise of Warrants
The Company issued 100 shares of common stock in connection with an exercise of warrants at an exercise price of $4.73 per share for proceeds of $473.
Equity Transactions for the Year Ended December 31, 2021
NASDAQ Listing
On November 2, 2021, the Company was approved to be uplisted to NASDAQ. The common stock and warrants are traded on the Nasdaq Capital Market under the symbols SURG and SURGW, respectively.
Stock Issued for Services
The Company issued 99,436 ($ - $ /share), based upon the quoted closing trading price. shares of common stock for services rendered, having a fair value of $
Stock and Warrants Issued for Cash and Related Direct Offering Costs
The Company issued an aggregate 21,294,800 ($ -$ /share). In connection with raising these funds, the Company paid $2,222,952 in direct offering costs, resulting in net proceeds of $19,076,710. shares of common stock for $
F-47 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Of the shares issued in 2021, shares and were sold in connection with the Company’s uplist to NASDAQ as follows:
On November 4, 2021, the Company issued 19,786,900 ($19,780,000 from the sale of units at $ and $6,900 from the sale of over-allotment warrants at $ ). The warrants are exercisable immediately at $4.73/share and expire three (3) years from the issuance date. units consisting of and over-allotment warrants. The units were sold at $ per unit for gross proceeds of $
In connection with the Company’s sale of common stock, the Company incurred direct offering costs of $2,222,952 which were charged to additional paid-in capital. Net proceeds were $19,076,710.
On November 4, 2021, the Company issued 230,000 five (5) year warrants to the underwriters. These warrants are exercisable beginning May 1, 2022 until November 1, 2026. The exercise price is $4.73/share. The fair value of these warrants was $647,897 based upon the following assumptions:
Schedule of Fair Value of Warrants
Expected term (years) | 3 | |||
Expected volatility | 118 | % | ||
Expected dividends | 0 | % | ||
Risk free interest rate | 0.53 | % |
Since these warrants were issued as direct offering costs associated with the offering, the Company has accounted for these warrants as both a charge and increase to additional paid-in capital, resulting in a net effect on stockholders’ equity of $0.
These 230,000 warrants were exchanged for shares of common stock in July 2022 in a cashless exchange. The net effect on stockholders’ equity was $0.
Exercise of Warrants
The Company issued 2,133 shares of common stock in connection with a cashless exercise of warrants. The transaction had a net effect of $0 on stockholders’ equity.
F-48 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Stock and Warrants Issued as Debt Discount
During 2021, the Company issued stock and warrants in connection with the issuance of debt and derivative liabilities totaling $3,562,829, which were recorded as debt discounts to be amortized over the life of the debt. The Company issued 18,000 shares of common stock along with 137,500 three (3) year warrants, having an exercise price of $8/share. The aggregate discount recorded was $2,645,890 for the stock and warrants which are reflected in the accompanying consolidated statements of stockholders’ equity. An additional discount of $102,194 was recorded in connection with the commitment date fair value of derivative liabilities for an aggregate discount of $2,748,084.
Fair value of the warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
Expected term (years) | 3 | |||
Expected volatility | 118 | % | ||
Expected dividends | 0 | % | ||
Risk free interest rate | 0.53 | % |
Conversion of Debt
The Company issued 3,363,561 ($0.05 - $10.38/share), based upon the quoted closing trading price. shares of common stock in connection with the conversion of convertible debt, having a fair value of $
Make-whole Arrangement
The Company issued 90,401 ($ - $ /share), based upon the quoted closing trading price. shares of common stock to debt holders that were entitled to shares upon the settlement of debt and related accrued interest. The shares had a fair value of $
Stock Issued for Debt Modification
The Company issued 108,931 ($ - $ /share), based upon the quoted closing trading price. shares of common stock in connection with the modification of debt arrangements. The shares had a fair value of $
Stock Issued in Settlement of Liabilities
The Company issued 1,997,977 ($ - $ /share), based upon the quoted closing trading price. In connection with these debt settlements, the Company recorded a gain of $1,469,641. shares of common stock to various vendors and debt holders to settle accounts payable, debt and derivative liabilities. The shares had a fair value of $
F-49 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Stock Issued in Acquisition of Membership Interest in ECS
On January 30, 2020, the Company entered into a Membership Interest Purchase Agreement and Stock Purchase Agreement with ECS Prepaid, ECS, CSLS and the Winfrey’s. Pursuant to the agreements, the Company acquired all 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 17,900 ($ /share), based upon the quoted closing trading price. During 2020, the Company issued shares. shares of the Company’s Common Stock. In addition, the agreements called for shares of Common Stock to be issued to the Winfrey’s on a monthly basis over a 12-month period. During 2021, the Company issued shares of common stock in full settlement of the agreements. The shares had a fair value of $
Stock Options
Schedule of Stock Option Transactions
Weighted | Weighted | |||||||||||||||||
Weighted | Average | Average | ||||||||||||||||
Average | Remaining | Aggregate | Grant | |||||||||||||||
Number of | Exercise | Contractual | Intrinsic | Date | ||||||||||||||
Stock Options | Options | Price | Term (Years) | Value | Fair Value | |||||||||||||
Outstanding - December 31, 2020 | 17,004 | $ | 16.00 | $ | - | $ | - | |||||||||||
Vested and Exercisable - December 31, 2020 | - | $ | - | - | $ | - | $ | - | ||||||||||
Unvested and non-exercisable - December 31, 2020 | 17,004 | $ | 16.00 | $ | - | $ | - | |||||||||||
Granted | - | - | $ | - | ||||||||||||||
Exercised | - | - | ||||||||||||||||
Cancelled/Forfeited | - | - | ||||||||||||||||
Outstanding - December 31, 2021 | 17,004 | $ | 16.00 | $ | - | $ | - | |||||||||||
Vested and Exercisable - December 31, 2021 | 3,401 | $ | 16.00 | $ | - | $ | - | |||||||||||
Unvested and non-exercisable - December 31, 2021 | 13,603 | $ | 16.00 | $ | - | $ | - | |||||||||||
Granted | - | - | $ | - | ||||||||||||||
Exercised | - | - | ||||||||||||||||
Cancelled/Forfeited | - | - | ||||||||||||||||
Outstanding - December 31, 2022 | 17,004 | $ | 16.00 | $ | - | $ | - | |||||||||||
Vested and Exercisable - December 31, 2022 | 6,801 | $ | 16.00 | $ | - | $ | - | |||||||||||
Unvested and non-exercisable - December 31, 2022 | 10,203 | $ | 16.00 | $ | - | $ | - |
F-50 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
During 2022 and 2021, stock options vested each year ( in total), which were held by the Company’s Chief Financial Officer.
Compensation expense recorded for stock-based compensation is as follows for the years ended December 31, 2022 and 2021, was $37,176 and $37,176, respectively.
As of December 31, 2022, compensation cost related to the unvested options not yet recognized was $ .
Weighted average period in which compensation will vest (years) years. The unvested stock option expense is expected to be recognized through March 2024.
Warrants
Warrant activity for the years ended December 31, 2022 and 2021 are summarized as follows:
Schedule of Warrants Activity
Weighted | ||||||||||||||
Average | ||||||||||||||
Weighted | Remaining | Aggregate | ||||||||||||
Number of | Average | Contractual | Intrinsic | |||||||||||
Warrants | Warrants | Exercise Price | Term (Years) | Value | ||||||||||
Outstanding - December 31, 2020 | 194,317 | $ | 32.50 | $ | - | |||||||||
Vested and Exercisable - December 31, 2020 | 194,317 | $ | 32.50 | $ | - | |||||||||
Granted | 5,935,450 | $ | 8.01 | - | - | |||||||||
Exercised | (2,133 | ) | $ | 12.50 | - | - | ||||||||
Cancelled/Forfeited | (44,650 | ) | $ | 23.49 | - | - | ||||||||
Outstanding - December 31, 2021 | 6,082,984 | $ | 8.68 | $ | - | |||||||||
Vested and Exercisable - December 31, 2021 | 5,852,984 | $ | 8.70 | $ | - | |||||||||
Unvested - December 31, 2021 | 230,000 | $ | 8.00 | $ | - | |||||||||
Granted | 189,000 | $ | 4.73 | - | ||||||||||
Exercised | (498,850 | ) | $ | 6.49 | - | |||||||||
Cancelled/Forfeited | (91,743 | ) | $ | 40.02 | - | |||||||||
Outstanding - December 31, 2022 | 5,681,392 | $ | 5.05 | $ | 10,026,387 | |||||||||
Vested and Exercisable - December 31, 2022 | 5,681,392 | $ | 5.05 | $ | 10,026,387 | |||||||||
Unvested - December 31, 2022 | - | $ | - | $ | - |
F-51 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Warrant Transactions for the Year Ended December 31, 2022
Warrants Issued as Debt Issue Costs
In connection with $1,700,000 in notes payable (See Note 6), the Company issued 51,000 warrants, which are accounted for as debt issue costs, having a fair value of $115,404. These debt issue costs were amortized in full as of December 31, 2022.
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
Expected term (years) | 3 years | |||
Expected volatility | 119% - 120 | % | ||
Expected dividends | 0 | % | ||
Risk free interest rate | 2.45% - 2.80 | % |
Warrants Issued as Interest Expense
A vendor increased the amount of credit the Company had for making purchases. In consideration of the increase, the Company issued 90,000 warrants, which are accounted for as interest expense, having a fair value of $212,608.
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
Expected term (years) | 3 years | |||
Expected volatility | 120 | % | ||
Expected dividends | 0 | % | ||
Risk free interest rate | 2.71 | % |
In 2022, the Company extended the due dates of certain notes payable totaling $1,600,000 for an additional 6 months. In consideration for the extension of the maturity date, the Company issued 48,000 warrants, which are accounted for as additional interest expense, having a fair value of $153,186. The Company also determined that these transactions were classified as debt modifications and that extinguishment accounting did not apply.
F-52 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
Expected term (years) | 3 years | |||
Expected volatility | 116% - 119 | % | ||
Expected dividends | 0 | % | ||
Risk free interest rate | 4.13% - 4.25 | % |
Warrant Transactions for the Year Ended December 31, 2021
During 2021, the Company granted 3 – 5 years, and exercise prices of $8 - $12/share. warrants to convertible note holders and an additional warrants to note holders. These warrants were exercisable upon the grant date, had expiration dates ranging from
Additionally, in connection with the listing of our common stock on the Nasdaq Capital Market.., 5,290,000 warrants were sold for cash and an additional 230,000 warrants were issued as an underwriters’ discount. The 230,000 warrants are exercisable six (6) months from the grant date in May 2022. See above for additional discussion, including the cashless exercise of these warrants for 68,161 shares of common stock.
In connection with the listing of our common stock on the Nasdaq Capital Market. 433,017 warrants were repriced at a lower exercise price to better reflect the current market offering. No other terms had been modified. As a result, for the year ended December 31, 2021, the Company recorded a warrant modification expense of $74,476 in the accompanying consolidated statements of operations with an offsetting increase to additional paid in capital.
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
Expected term (years) | 3 - 5 | |||
Expected volatility | 119% - 146 | % | ||
Expected dividends | 0 | % | ||
Risk free interest rate | 0.07% - 1.15 | % |
Note 11 – Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer.
The Company evaluated the performance of its operating segments based on revenue and operating loss. All data below is prior to intercompany eliminations.
Segment information for the years ended December 31, 2022 and 2021, are as follows:
F-53 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Schedule of Operating Segments
2022 | 2021 | |||||||
For the Years Ended December 31, | ||||||||
2022 | 2021 | |||||||
Revenues | ||||||||
Surge Phone and Torch Wireless | $ | 88,351,547 | $ | 7,289,239 | ||||
Surge Blockchain, LLC | 112,911 | 138,106 | ||||||
LogicsIQ, Inc. | 16,760,656 | 17,846,698 | ||||||
Surge Fintech & ECS | 16,319,076 | 24,628,566 | ||||||
True Wireless | - | 1,157,980 | ||||||
Surge Pays, Inc. | - | - | ||||||
Total | $ | 121,544,190 | $ | 51,060,589 | ||||
Cost of revenues | ||||||||
Surge Phone and Torch Wireless | $ | 76,130,286 | $ | 6,082,121 | ||||
Surge Blockchain, LLC | 2,517 | 1,377 | ||||||
LogicsIQ, Inc. | 14,975,647 | 14,715,499 | ||||||
Surge Fintech & ECS | 16,966,332 | 23,785,551 | ||||||
True Wireless | - | 306,062 | ||||||
Surge Pays, Inc. | - | - | ||||||
Total | $ | 108,074,782 | $ | 44,890,610 | ||||
Operating expenses | ||||||||
Surge Phone and Torch Wireless | $ | 299,406 | $ | 46,994 | ||||
Surge Blockchain, LLC | 53,571 | 12,025 | ||||||
LogicsIQ, Inc. | 1,460,750 | 2,425,975 | ||||||
Surge Fintech & ECS | 1,327,517 | 1,389,680 | ||||||
True Wireless | - | 615,013 | ||||||
Surge Pays, Inc. | 9,694,379 | 7,672,860 | ||||||
Total | $ | 12,835,623 | $ | 12,162,547 | ||||
Income (loss) from operations | ||||||||
Surge Phone and Torch Wireless | $ | 11,921,855 | $ | 1,160,124 | ||||
Surge Blockchain, LLC | 56,823 | 124,704 | ||||||
LogicsIQ, Inc. | 324,259 | 705,224 | ||||||
Surge Fintech & ECS | (1,974,773 | ) | (546,665 | ) | ||||
True Wireless | - | 236,905 | ||||||
Surge Pays, Inc. | (9,694,379 | ) | (7,672,860 | ) | ||||
Total | $ | 633,785 | $ | (5,992,568 | ) |
F-54 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Segment information for the Company’s assets and liabilities at December 31, 2022 and 2021, are as follows:
December 31, 2022 | December 31, 2021 | |||||||
Total Assets | ||||||||
Surge Phone and Torch Wireless | $ | 27,239,365 | $ | (161,110 | ) | |||
Surge Blockchain, LLC | (550,782 | ) | (608,188 | ) | ||||
LogicsIQ, Inc. | 2,500,499 | 1,284,562 | ||||||
Surge Fintech & ECS | 1,906,212 | 3,870,409 | ||||||
True Wireless | - | - | ||||||
Surge Pays, Inc. | 2,908,212 | 15,114,529 | ||||||
Total | $ | 34,003,506 | $ | 19,500,202 | ||||
Total Liabilities | ||||||||
Surge Phone and Torch Wireless | $ | 15,484,392 | $ | 5,773 | ||||
Surge Blockchain, LLC | 198,197 | 197,614 | ||||||
LogicsIQ, Inc. | 2,619,521 | 2,056,886 | ||||||
Surge Fintech & ECS | 58,919 | 48,346 | ||||||
True Wireless | - | - | ||||||
Surge Pays, Inc. | 10,524,224 | 13,640,262 | ||||||
Total | $ | 28,885,253 | $ | 15,948,881 |
Note 12 – Installment Sale Liability
Agreement
In 2022, the Company executed a two-year (2) financing arrangement with Affordable Connectivity Financing (“ACF”, “Seller”) to receive up to $25,000,000 to purchase devices for sale.
This agreement is based upon the Company submitting a purchase order and ACF approving the request. The Company may cancel the purchase order prior to ACF paying for the devices. The agreement may be extended by a period of one (1) year upon mutual consent.
Under the terms of the agreement, ACF is directly purchasing products and reselling to the Company at a markup. At December 31, 2022, the markup was 9.85%. Effective April 1, 2023 and each quarter thereafter, this amount is subject to increase based upon the secured overnight financing rate.
F-55 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Repayment Period
Each installment sale contract shall be repaid over a period of nine (9) months.
Security
This arrangement is fully secured by all assets of the Company.
Minimum Outstanding Balance
3 month rolling average of 70% of the installment sale credit amount.
Prepayment Penalty
The Company is subject to a cancellation fee of 3% during the first year and 2% during the second year.
Administrative Fee
The Company is required to pay $2,000 per month.
Default Rate
For any unpaid amounts under this agreement, the Company is subject to a fee of 1.35% per month (16.2% annualized).
Commitment Fee
ACF charged a 2% commitment fee on the initial installment sale, and 2% for each incremental increase of $5,000,000 in the installment sale credit amount.
For example, if the initial installment sale credit amount is $15,000,000, the credit availability fee would be $300,000 (2%). Any subsequent increase of $5,000,000 or more would result in an additional fee of $100,000 (2%). Commitment fees are paid over a period of 12 months as part of the Seller’s monthly invoicing.
F-56 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Covenants
At December 31, 2022, the Company was in compliance with all of the following ratios:
1. | Company adjusted EBITDA, | |
2. | Total Leverage Ratio, | |
3. | Fixed Charge Coverage Ratio, | |
4. | Minimum Subscriber Base; and | |
5. | Minimum Liquidity |
Additionally, the Company is required to provide various data to the vendor on a periodic basis. The Company has not received notice from the vendor regarding any instances of non-compliance.
Lockbox
The Company will maintain a lockbox for the benefit of the Seller.
Accounts Payable and Accrued Expenses
At December 31, 2022 and 2021, the Company has recorded an installment sale liability of $13,018,184 and $0, respectively.
During the years ended December 31, 2022 and 2021, the Company paid fees of $1,499,007 and $0, respectively. These amounts have been included as a component of cost of goods sold in the accompanying consolidated statements of operations.
F-57 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
Note 13 – Income Taxes
The Company’s tax expense differs from the “expected” tax expense for the period (computed by applying the blended corporate rate and state tax rates of 26.14% to loss before taxes), are approximately as follows:
Schedule of Components of Income Tax Expense (Benefit)
December 31, 2022 | December 31, 2021 | |||||||
Federal income tax benefit - 19.64% | $ | (134,000 | ) | $ | (2,657,000 | ) | ||
State income tax - 6.5% | (44,000 | ) | (880,000 | ) | ||||
Non-deductible items | 1,000 | (495,000 | ) | |||||
Subtotal | (177,000 | ) | (4,032,000 | ) | ||||
Change in valuation allowance | 177,000 | 4,032,000 | ||||||
Income tax benefit | $ | - | $ | - |
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2022 and 2021, respectively, are approximately as follows:
Schedule of Deferred Tax Assets
December 31, 2022 | December 31, 2021 | |||||||
Bad debt | $ | 22,000 | $ | 6,000 | ||||
(Gain) loss on investment in Centercom - related party | 25,000 | 48,000 | ||||||
Amortization of ROU Assets | (14,000 | ) | - | |||||
Amortization of debt discount | 404,000 | 434,000 | ||||||
Share based payments/option compensation | (84,000 | ) | (47,000 | ) | ||||
Change in fair value of derivative liabilities | (321,000 | ) | (321,000 | ) | ||||
Other | - | (2,000 | ) | |||||
Net operating loss carryforwards | (8,869,000 | ) | (7,824,000 | ) | ||||
Total deferred tax assets | (8,837,000 | ) | (7,706,000 | ) | ||||
Less: valuation allowance | 8,837,000 | 7,706,000 | ||||||
Net deferred tax asset recorded | $ | - | $ | - |
Deferred tax assets and liabilities are computed by applying the federal and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carryforwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which these deductible temporary differences reverse.
F-58 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
During the year ended December 31, 2022, the valuation allowance increased by approximately $1,131,000. The total valuation allowance results from the Company’s estimate of its uncertainty in being unable to recover its net deferred tax assets.
At December 31, 2022, the Company has federal and state net operating loss carryforwards, which are available to offset future taxable income, of approximately 33,935,000 (approximately $8,869,000 at the blended tax rate). The Company is in the process of analyzing their NOL and has not determined if the Company has had any change of control issues that could limit the future use of these NOL’s. NOL carryforwards that were generated after 2017 may only be used to offset 80% of taxable income and are carried forward indefinitely. NOL’s generated prior to December 31, 2017 expire through 2037.
These carryforwards may be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state provisions if the Company experienced one or more ownership changes which would limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than fifty percentage points over a three- year period. The Company has not completed an IRC Section 382/383 analysis. If a change in ownership were to have occurred, NOL and tax credit carryforwards could be eliminated or restricted.
If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact the Company’s effective tax rate.
The Company files corporate income tax returns in the United States and State of Tennessee jurisdictions. Due to the Company’s net operating loss posture, all tax years are open and subject to income tax examination by tax authorities. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At December 31, 2022 and 2021, respectively, there are no unrecognized tax benefits, and there were no significant accruals for interest related to unrecognized tax benefits or tax penalties.
Note 14 - Subsequent Events
Employment Agreements
The Company is currently finalizing amendments to the terms of its executive employment agreements with its Chief Executive Officer and Chief Financial Officer. Both agreements have been approved by the Board of Directors. These agreements are expected to be completed during the second quarter of 2023.
Securities and Incentive Plan
In March 2023, the Company’s shareholders approved the 2022 Plan (the “Plan”) initially approved, authorized and adopted by the Board of Directors in August 2022.
The Plan provides for the following:
1. | shares of common stock | |
2. | An annual increase on the first day of each calendar year beginning January 1, 2023 and ending on January 31, 2031 equal to the lesser of: |
a. | 10% of the common stock outstanding on the final day of the immediately preceding calendar year, or | |
b. | Such smaller amount of common stock as determined by the Board of Directors. |
3. | The shares may be issued as follows to directors, officers, employees and consultants: |
a. | Distribution equivalent rights | |
b. | Incentive share options | |
c. | Non-qualified share options | |
d. | Performance unit awards | |
e. | Restricted share awards | |
f. | Restricted share unit awards | |
g. | Share appreciation rights | |
h. | Tandem share appreciation rights | |
i. | Unrestricted share awards |
See Schedule 14A Information filed with the US Securities and Exchange Commission on January 19, 2023 for a complete detail of the Plan.
Stock Issued For Services
The Company issued 119,200 ($ /share), based upon the quoted closing trading price.
shares of common stock for services rendered, having a fair value of $F-59 |