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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission file number 000-52522

 

SURGEPAYS, INC.

(Exact name of registrant as specified in 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)

 

847-648-7541

(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   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
(Do not check if a 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 rule 12b-2 of the Exchange Act).

Yes ☐ No

 

The number of shares of the registrant’s common stock outstanding as of August 13, 2021 was 163,312,758 shares.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I – FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements F-1-47
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
     
Item 4. Controls and Procedures 10
     
PART II - OTHER INFORMATION 11
   
Item 1. Legal Proceedings 11
     
Item 1A. Risk Factors 12
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
   
Item 3. Defaults upon Senior Securities 13
     
Item 4. Mine Safety Disclosures 13
     
Item 5. Other Information 13
     
Item 6. Exhibits 13

 

2

 

 

SURGEPAYS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

 

Consolidated Balance Sheets as of June 30, 2021 (unaudited) December 31, 2020 (audited) F-2
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited) F-3
Consolidated Statement of Stockholders’ Deficit for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited) F-4
Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited) F-6
Notes to Consolidated Financial Statements F-7

 

 F-1 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

  

June 30,

2021

  

December 31,

2020

 
   (Unaudited)   (Audited) 
           
Assets          
Current Assets          
Cash  $574,824   $673,995 
Accounts receivable - net   592,442    180,499 
Lifeline revenue - due from USAC   -    212,621 
Inventory   175,359    178,309 
Prepaids   6,067    5,605 
Total Current Assets   1,348,692    1,251,029 
           
Property and equipment - net   229,411    236,810 
           
Other Assets          
Note receivable   176,851    - 
Intangibles - net   3,760,238    4,125,742 
Goodwill   866,782    866,782 
Investment in Centercom - related party   389,984    414,612 
Operating lease - right of use asset - net   552,222    368,638 
Other   61,458    61,458 
Total Other Assets   5,807,535    5,837,232 
           
Total Assets  $7,385,638   $7,325,071 
           
Liabilities and Stockholders’ Deficit          
           
Current Liabilities          
Accounts payable and accrued expenses  $5,800,859   $6,827,487 
Accounts payable and accrued expenses - related party   448,559    1,753,837 
Deferred revenue   565,900    443,300 
Operating lease liability   97,880    210,556 
Line of credit   -    912,870 
Loans payable - related parties   4,419,000    2,389,000 
Notes payable   -    250,000 
Convertible notes payable - net   837,741    1,516,170 
Derivative liabilities   1,459,167    1,357,528 
Total Current Liabilities   13,629,106    15,660,748 
           
Long Term Liabilities          
Loans payable - related parties   1,130,440    1,100,440 
Notes payable - SBA government   

1,502,849

    

1,134,682

 
Operating lease liability   454,342    155,167 
Total Long Term Liabilities   3,087,631    

2,390,289

 
           
Total Liabilities   16,716,737    18,051,037 
           
Stockholders’ Deficit          
Series A, Convertible Preferred stock, $0.001 par value, 100,000,000 shares authorized, 13,000,000 and 13,000,000 shares issued and outstanding, respectively   13,000    13,000 
Series C, Convertible Preferred stock, $0.001 par value, 1,000,000 shares authorized, 721,598 and 721,598 shares issued and outstanding, respectively   722    722 
Common stock, $0.001 par value, 500,000,000 shares authorized 161,504,920 and 127,131,210 shares issued and outstanding, respectively   161,505    127,131 
Additional paid-in capital   17,115,280    10,725,380 
Accumulated deficit   (26,621,606)   (21,592,199)
Total Stockholders’ Deficit   (9,331,099)   (10,725,966)
           
Total Liabilities and Stockholders’ Deficit  $7,385,638   $7,325,071 

 

See accompanying notes to consolidated financial statements

 

 F-2 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

 

   2021   2020   2021   2020 
   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2021   2020   2021   2020 
                 
Revenues  $11,377,928   $14,514,796   $22,366,876   $30,302,595 
                     

Costs and expenses

               

 
Cost of revenue   10,051,119    14,381,822    19,908,428    29,835,974 

General and administrative expenses

   2,736,435    

4,165,436

    5,976,244    

7,174,322

 
                     
Total costs and expenses   

12,787,554

    

18,547,258

    

25,884,672

    

37,010,296

 
                     
Loss from operations   (1,409,626)   (4,032,462)   (3,517,796)   (6,707,701)
                     
Other income (expense)                    
Interest expense   (2,096,600)   (701,044)   (3,400,459)   (1,183,766)
Derivative expense   -    (147,721)   (1,775,057)   (496,055)
Change in fair value of derivative liabilities   645,830    224,378    949,680    192,562 
Gain (loss) on investment in Centercom - related party   49,145    112,967    (24,628)   145,336 
Gain on settlement of liabilities   701,404    2,108,543    842,982    2,556,979 
Gain on deconsolidation of True Wireless   1,895,871    -    1,895,871    - 
Other income   -    10,000    -    10,000 
Total other income (expense) - net   1,195,650    1,607,123    (1,511,611)   1,225,056 
                     
Net loss  $(213,976)  $(2,425,339)  $(5,029,407)  $(5,482,645)
                     
Loss per share - basic and diluted  $(0.00)  $(0.02)  $(0.03)  $(0.05)
                     
Weighted average number of shares - basic   154,394,068    106,063,237    145,130,334    104,974,691 

 

See accompanying notes to consolidated financial statements.

 

 F-3 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Deficit

(unaudited)

 

Three and Six Months Ended June 30, 2021

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
  

Series A

Preferred Stock

  

Series C

Preferred Stock

   Common Stock  

Additional

Paid-in

   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                                     
December 31, 2020   13,000,000   $13,000    721,598   $722    127,131,210   $127,131   $  10,725,380   $(21,592,199)       (10,725,966)
                                              
Stock issued for services rendered and recognition of share based compensation ($0.147 - $0.281/share)   -    -    -    -    63,000    63    12,348    -    12,411 
                                              
Recognition of stock option expense   -    -    -    -    -    -    49,160    -    49,160 
                                              
Stock issued for cash ($0.10 - $0.16/share)   -    -    -    -    13,000,000    13,000    1,497,000    -    1,510,000 
                                              
Stock and warrants issued with debt recorded as a debt discount ($0.107/share)   -    -    -    -    900,000    900    2,037,735         2,038,635 
                                              
Conversion of debt ($0.068 - $0.208/share)   -    -    -    -    6,614,537    6,615    851,543    -    858,158 
                                              
Stock issued under make-whole arrangement ($0.112 - $0.12/share)   -    -    -    -    757,345    757    89,644    -    90,401 
                                              
Stock issued in connection with debt modification ($0.112 - $0.16/share)   -    -    -    -    695,818    696    108,235    -    108,931 
                                              
Stock issued in settlement of liabilities ($0.09 - $0.27/share)   -    -    -    -    3,586,850    3,587    461,126    -    464,713 
                                              
Stock issued for acquisition of membership interest in ECS ($0.179/share)   -    -    -    -    100,000    100    17,800    -    17,900 
                                              
Net loss   -    -    -    -    -    -    -    (4,815,431)   (4,815,431)
                                              
March 31, 2021   13,000,000    13,000    721,598    722    152,848,760    152,849    15,849,971    (26,407,630)   (10,391,088)
                                              
Stock issued for services rendered and recognition of share based compensation ($0.119 - $0.22/share)   -    -    -    -    63,000    63    10,206    -    10,269 
                                              
Recognition of stock option expense and related true up adjustment   -    -    -    -    -    -    (26,741)   -    (26,741)
                                              
Stock issued in settlement of liabilities ($0.128 - $0.20/share)   -    -    -    -    8,593,160    8,593    1,281,844    -    1,290,437 
                                              
Net loss   -    -    -    -    -    -    -    (213,976)   (213,976)
                                              
June 30, 2021   13,000,000   $13,000    721,598   $722    161,504,920   $  161,505   $17,115,280   $(26,621,606)   (9,331,099)

 

 F-4 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Deficit

(unaudited)

 

Three and Six Months Ended June 30, 2020

 

  

Series A

Preferred Stock

  

Series C

Preferred Stock

   Common Stock  

Additional

Paid-in

    Accumulated  

Total

Stockholders’

 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital    Deficit   Deficit 
                                      
December 31, 2019   13,000,000   $13,000    721,598   $722    102,193,579   $102,193   $  6,055,042    $(10,870,572)        (4,699,615)
                                               
Recognition of share based compensation   -    -    -    -    -    -    16,901     -    16,901 
                                               
Stock and warrants issued for cash   -    -    -    -    428,457    429    149,571     -    150,000 
                                               
Stock issued with debt recorded as a debt discount   -    -    -    -    1,750,000    1,750    533,050          534,800 
                                               
Stock issued for acquisition   -    -    -    -    550,000    550    177,226     -    177,776 
                                               
Net loss   -    -    -    -    -    -    -     (3,057,306)   (3,057,306)
                                               
March 31, 2020   13,000,000    13,000    721,598    722    104,922,036    104,922    6,931,790     (13,927,878)   (6,877,444)
                                               
Recognition of share based compensation   -    -    -    -    -    -    51,268     -    51,268 
                                               
Stock and warrants issued for cash   -    -    -    -    1,585,714    1,586    553,414     -    555,000 
                                               
Stock and warrants issued with debt recorded as a debt discount   -    -    -    -    572,000    572    266,264     -    266,836 
                                               
Stock issued for conversion of debt   -    -    -    -    8,150,000    8,150    1,938,490     -    1,946,640 
                                               
Stock issued for acquisition   -    -    -    -    75,000    75    20,365     -    20,440 
                                               
Stock repurchased for cash   -    -    -    -    (2,380,952)   (2,382)   (497,618)    -    (500,000)
                                               
Net loss   -    -    -    -    -    -    -     (2,425,339)   (2,425,339)
                                               
June 30, 2020   13,000,000   $13,000    721,598   $722    112,923,798   $  112,923   $9,263,973    $(16,353,217)  $(6,962,599)

 

See accompanying notes to consolidated financial statements

 

 F-5 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited) 

 

   2021   2020 
   For the Six Months Ended June 30, 
   2021   2020 
Operating activities          
Net loss  $(5,029,407)  $(5,482,645)
Adjustments to reconcile net loss to net cash used in operations          
Depreciation and amortization   398,240    569,811 
Amortization of right-of-use assets   92,531    92,867 
Amortization of debt discount   1,351,351    796,863 
Recognition of share based compensation   45,099    68,169 
Change in fair value of derivative liabilities   (949,680)   (192,562)
Derivative expense   1,775,057    496,055 
Gain on settlement of liabilities   (840,932)   (2,681,586)
Gain (loss) on equity method investment - Centercom - related party   24,628    (145,336)
Gain on deconsolidation of subsidiary (True Wireless)   (1,895,871)   - 
Changes in operating assets and liabilities          
(Increase) decrease in          
Accounts receivable   (411,943)   2,241,635 
Lifeline revenue - due from USAC   105,532    (172,300)
Inventory   (71,700)   (102,682)
Prepaids   (462)   64,534 
Other   -    66,457 
Increase (decrease) in          
Accounts payable and accrued expenses   1,824,604    1,971,652 
Accounts payable and accrued expenses - related party   (1,305,278)   - 
Deferred revenue   122,600    317,148 
Gain contingency   -    (38,040)
Operating lease liability   (89,616)   (101,029)
Net cash used in operating activities   (4,855,247)   (2,230,989)
           
Investing activities          
Purchase of property and equipment   (45,983)   (2,836)
Cash disposed in deconsolidation of subsidiary (True Wireless)   (325,316)   - 
Net cash used in investing activities   (371,299)   (2,836)
           
Financing activities          
Proceeds from stock and warrants issued for cash   1,510,000    705,000 
Repurchase of common stock   -    (500,000)
Proceeds from loans - related party   2,123,000    200,000 
Repayments of loans - related party   (63,000)   (100,000)
Proceeds from notes payable   -    648,082 
Repayments on notes payable   (250,000)   (27,500)
Proceeds from SBA notes   518,167    - 
Proceeds from convertible notes   2,550,000    1,912,000 
Repayments on convertible notes - net of overpayment   (1,260,792)   (468,000)
Cash paid for debt issuance costs   -    (142,000)
Net cash provided by financing activities   5,127,375    2,227,582 
           
Net decrease in cash   (99,171)   (6,243)
           
Cash - beginning of period   673,995    346,040 
           
Cash - end of period  $574,824   $339,797 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $113,810   $64,646 
Cash paid for income tax  $-   $- 
           
Supplemental disclosure of non-cash investing and financing activities          
           
Deconsolidation of subsidiary (True Wireless)  $

2,434,552

   $- 
Debt discount/issue costs recorded in connection with derivative liabilities  $2,140,829   $1,234,546 
Stock issued in settlement of liabilities  $1,755,150   $- 
Conversion of debt into equity  $858,158   $- 
Right-of-use asset obtained in exchange for new operating lease liability  $515,848   $355,203 
Termination of ECS right-of-use 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   $- 
Stock issued for acquisition  $-   $165,000 
Stock and warrants issued with debt recorded as a debt discount  $-   $801,636 

 

See accompanying notes to consolidated financial statements

 

 F-6 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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:

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
DigitizelIQ, LLC  July 23, 2014  Illinois
Surge Logics, 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
       
* Entity was disposed of on May 7, 2021.  See below.      

 

* Entity was disposed of on May 7, 2021.  See below.

Impact of COVID-19

 

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The COVID-19 pandemic has the potential to significantly impact the Company’s supply chain, distribution centers, or logistics and other service providers.

 

 F-7 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand for products and services and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly.

 

We have implemented adjustments to our operations designed to keep employees safe and comply with international, federal, state, and local guidelines, including those regarding social distancing. The extent to which COVID-19 may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence. In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic.

 

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations.

 

Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition, and results of operations.

 

To date, the Company has not experienced any significant economic impact due to COVID-19.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2021 and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on April 2, 2021.

 

 F-8 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

Management acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the consolidated results of its operations for the periods presented.

 

Liquidity, Going Concern and Management’s Plans

 

These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

 

As reflected in the accompanying consolidated financial statements, for the six months ended June 30, 2021, the Company had:

 

Net loss of $5,029,407; and
Net cash used in operations was $4,855,247

 

Additionally, at June 30, 2021, the Company had:

 

Accumulated deficit of $26,621,606
Stockholders’ deficit of $9,331,099; and
Working capital deficit of $12,280,414

 

We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand of $574,824 at June 30, 2021. Although the Company intends to raise additional debt or equity capital, the Company expects to continue to incur significant losses from operations and have negative cash flows from operating activities for the near-term. These losses could be significant as product and service sales ramp up along with continuing expenses related to compensation, professional fees, development and regulatory are incurred.

 

 F-9 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

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 June 30, 2022, and our current capital structure including equity-based instruments and our obligations and debts.

 

If the Company does not obtain additional capital, the Company will be required to reduce the scope of its business development activities or cease operations. The Company continues to explore obtaining additional capital financing and the Company is closely monitoring its cash balances, cash needs, and expense levels.

 

These factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve month period subsequent to the date that these consolidated financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

 

Management’s strategic plans include the following:

 

Pursuing additional capital raising opportunities,
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

 

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.

 

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 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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. At June 30, 2021 and December 31, 2020, goodwill was $866,782, 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. 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. Payments are scheduled as follows:

 

For the Year Ended December 31, 2021    
     
2021 (6 months)  $- 
2022   - 
2023   52,227 
2024   89,532 
2025   44,766 
Notes Receivable Gross   186,525 
Less: amount representing interest receivable   (9,674)
Total  $176,851 

 

 F-11 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

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:

 

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 
Loan 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 

 

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.

 

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 10 regarding segment disclosure.

 

 F-12 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

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 six months ended June 30, 2021 and 2020, respectively, include, allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of beneficial conversion features in convertible debt, valuation of loss contingencies, valuation of derivative liabilities, valuation of stock-based compensation, estimated useful lives related to intangible assets and property and equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred tax assets.

 

Risks and Uncertainties

 

The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.

 

The Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.

 

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.

 

 F-13 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.

 

The three tiers are defined as follows:

 

Level 1 —Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.

 

The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.

 

Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.

 

The Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, and accounts payable and accrued expenses – related party, are carried at historical cost. At June 30, 2021 and December 31, 2020, 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.

 

 F-14 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

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 June 30, 2021 and December 31, 2020, 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. There were no accounts in excess of this insured limit.

 

Accounts Receivable

 

Accounts receivable are stated at the amount management expects to collect from outstanding customer balances. Credit is extended to customers based on an evaluation of their financial condition and other factors. Interest is not accrued on overdue accounts receivable. The Company does not require collateral.

 

Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. Accounts determined to be uncollectible are charged to operations when that determination is made.

 

Allowance for doubtful accounts was $116,664 at June 30, 2021 and December 31, 2020, respectively.

 

For the three months ended June 30, 2021 and 2020, the Company recorded bad debt expense of $0 and $0, respectively.

 

For the six months ended June 30, 2021 and 2020, the Company recorded bad debt expense of $4,287 and $0, respectively. Bad debt expense has been recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.

 

Inventory

 

Inventory primarily consists of masks, hand sanitizer and other miscellaneous items. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method. As of June 30, 2021 and December 31, 2020, the Company had inventory of $175,359 and $178,309, respectively.

 

 F-15 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

Impairment of Long-lived Assets

 

Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.

 

If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

There were no impairment losses for the three and six months ended June 30, 2021 and 2020, 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 three and six months ended June 30, 2021 and 2020, respectively.

 

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-16 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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. At June 30, 2021, the Company’s operating leases contained renewal options for periods ranging from three to five years that expire at various dates with no residual value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities.

 

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.

 

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 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 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.

 

The Company has adopted ASU 2017-11, “Earnings per share (Topic 260)”, provided that when determining whether certain financial instruments should be classified as liability or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock.

 

 F-17 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

The guidance simplifies the accounting for certain equity-linked financial instruments and embedded features with down round features that reduce the exercise price when the pricing of a future round of financing is lower. This allows the company to treat such instruments or their embedded features as equity instead of considering them as a derivative liability. If such a feature is triggered the value is measured pre-trigger and post-trigger. The difference in these two measurements is treated as a dividend, reducing income, which will reduce the income available to common stockholders.

 

If a down round feature on the conversion option embedded in the note is triggered, the Company will evaluate whether a beneficial conversion feature exists, the Company will record the amount as a debt discount and will amortize it over the remaining term of the debt.

 

Convertible Notes with Fixed Rate Conversion Options

 

The Company may enter into convertible notes, some of which may contain fixed rate conversion features, whereby the outstanding principal and accrued interest may be converted, by the holder, into common shares at a fixed discount to the price of the common stock at the time of conversion. The Company measures the fair value of the notes at the time of issuance, which is the result of the share price discount at the time of conversion and records the premium to interest expense on the note issuance date.

 

Beneficial Conversion Features

 

For instruments that are not considered liabilities under ASC 480 or ASC 815, the Company applies ASC 470-20 to convertible securities with beneficial conversion features that must be settled in stock. ASC 470-20 requires that the beneficial conversion feature be valued at the commitment date as the difference between the effective conversion price and the fair market value of the common stock (whereby the conversion price is lower than the fair market value) into which the security is convertible, multiplied by the number of shares into which the security is convertible limited to the amount of the loan. This amount is recorded as a debt discount and amortized to interest expense in the Consolidated Statements of Operations.

 

Debt Issue Cost

 

Debt issuance cost paid to lenders, or third parties are recorded as debt discounts and amortized to interest expense in the consolidated statements of operations, over the life of the underlying debt instrument.

 

 F-18 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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.

 

Determine the transaction price

 

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts as of December 31, 2020 and 2019 contained a significant financing component.

 

 F-19 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

Allocate the transaction price to performance obligations in the contract

 

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

 

Recognize revenue when or as the Company satisfies a performance obligation

 

The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.

 

The following reflects additional discussion regarding our revenue recognition policies for each of our material revenue streams. For each revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration is fixed and determinable at the initiation of the contract.

 

Performance obligations for 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.

 

True Wireless (TW)

 

TW is licensed to provide wireless services to qualifying low-income customers in five states. Revenues are recognized when a lifeline 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 15th of the following month. If the subscriber did not utilize the Lifeline service during the month, we have 15-days to cure usage. If not cured, the subscriber is de-enrolled from the lifeline program at day 45. This process to verify usage and de-enrollment has been temporarily suspended due to the COVID-19 pandemic. Historically, we have had an insignificant amount of subscribers de-enrolled. TW was sold in May 2021 and has been deconsolidated.

 

 F-20 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

ECS and Surge Blockchain (SB)

 

Revenues are generated through the re-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.

 

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.

 

 F-21 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

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. The Company recorded $565,900 of deferred revenue as of June 30, 2021 and $443,300 as of December 31, 2020.

 

The following represents the Company’s disaggregation of revenues for the six months ended June 30, 2021 and 2020:

 

   Six Months Ended June 30, 
   2021   2020 
Revenue  Revenue   % of Revenues   Revenue   % of Revenues 
                 
ECS  $13,172,325    58.89%  $18,724,604    61.79%
LogicsIQ, Inc.   7,897,455    35.31%   9,908,046    32.70%
True Wireless   1,157,837    5.18%   1,044,848    3.45%
Surge Blockchain, LLC   77,918    0.35%   423,478    1.40%
Other   61,341    0.27%   201,619    0.67%
Total Revenues  $22,366,876    100%  $30,302,595    100%

 

Cost of Revenues

 

Cost of revenues primarily consists of purchased telecom services and access to wireless networks.

 

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.

 

 F-22 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

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 June 30, 2021 and December 31, 2020, respectively, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

 

The Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the three and six months ended June 30, 2021 and 2020, respectively.

 

As of June 30, 2021, tax years 2018-2020 remain open for IRS audit.

 

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Corporate taxpayers may carryback net operating losses (NOLs) originating between 2018 and 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act.

 

In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three and six months ended June 30, 2021 and 2020, respectively.

 

Investment – 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. Anthony N. Nuzzo, a director and officer and the holder of approximately 10% of our voting equity has a controlling interest in CenterCom Global. CenterCom also provides call center support for various third-party clients.

 

 F-23 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

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 June 30, 2021 and December 31, 2020, our investment in CenterCom was $389,984 and $414,612, respectively.

 

During the three months ended June 30, 2021 and 2020, we recognized a gain of $49,145 and $112,967, respectively.

 

During the six months ended June 30, 2021 and 2020, we recognized a loss of $24,628 and a gain of $49,145 and a gain of $145,336, respectively.

 

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 $115,533 and $52,405 in marketing and advertising costs during the three months ended June 30, 2021 and 2021, respectively.

 

The Company recognized $562,292 and $152,957 in marketing and advertising costs during the six months ended June 30, 2021 and 2021, respectively.

 

Stock-Based Compensation

 

We account for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

 

 F-24 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

We use 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 stock based fair value 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, 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

 

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU No 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards.

 

Common Stock Awards

 

The Company may grant common stock awards to non-employees in exchange for services provided. The Company measures the fair value of these awards using the fair value of the services provided or the fair value of the awards granted, whichever is more reliably measurable. The fair value measurement date of these awards is generally the date the performance of services is complete. The fair value of the awards is recognized on a straight-line basis as services are rendered. The share-based payments related to common stock awards for the settlement of services provided by non-employees is recorded in accordance with ASU 2018-07 (June 2018) on the consolidated statement of operations in the same manner and charged to the same account as if such settlements had been made in cash.

 

Stock Warrants

 

In connection with certain financing, 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 the awards using the Black-Scholes option pricing model as of the measurement date. 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 are recorded at fair value as expense over the requisite service period or at the date of issuance if there is not a service period.

 

 F-25 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

Basic and Diluted Earnings (Loss) per Share and Reverse Stock Split

 

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.

 

The following potentially dilutive equity securities outstanding as of June 30, 2021 and 2020 were as follows:

 

   June 30, 2021   June 30, 2020 
Convertible notes payable  and related accrued interest (1)   25,406,041    12,461,539 
Warrants (2)   21,380,865    7,063,919 
Stock options (3)   170,035    850,176 
Series A, convertible preferred stock (4)   1,300,000    1,300,000 
Series C, convertible preferred stock (5)   180,399,500    180,399,500 
Total common stock equivalents   228,656,441    202,075,134 

 

1 - exercise prices $0.0838 - $0.1001/share

2 - exercise prices $0.16 - $3/share

3 - exercise price $0.32/share

4 - each share converts to 1/10 of a share of common stock

5 - each share converts to 250 shares of common stock

 

The convertible notes contain exercise prices that have a discount to market ranging from 70% - 75% of the 10 or 20 days (See Note 4). As a result, the amount computed for common stock equivalents could change given the quoted closing trading price at each reporting period.

 

Warrants and stock options included as commons stock equivalents represent those that are vested and exercisable.

 

Based on the potential common stock equivalents noted above at June 30, 2021, the Company has sufficient authorized shares of common stock (500,000,000) to settle any potential exercises of common stock equivalents.

 

 F-26 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

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.

 

Recent Accounting Standards

 

Changes to accounting principles are established by the FASB in the form of 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’ deficit, cash flows, or presentation thereof. Management has evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”) through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the financial statements of the Company.

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for certain companies until fiscal years beginning after December 15, 2022. The new standard will be effective for the Company in the first quarter of fiscal year beginning October 1, 2023, and early adoption is permitted. The Company has not completed its review of the impact of this standard on its consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have material effect on the Company’s consolidated financial statements.

 

 F-27 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

However, based on the Company’s history of immaterial credit losses from trade receivables, management does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

 

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 is effective for interim and annual periods beginning after December 15, 2023, with early adoption permitted. We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have material effect on the Company’s consolidated financial statements.

 

Reclassifications

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations, stockholders’ deficit, or cash flows.

 

At June 30, 2021 and December 31, 2020, respectively, on the consolidated balance sheets, the Company separated its various types of debt into more distinct categories. Certain accounts payable were reclassified from non-current to current.

 

For the three and six months ended June 30, 2021 and 2020, respectively, on the consolidated statements of operations, the Company reclassified certain expenses amongst general and administrative and cost of revenues.

 

 F-28 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

Note 3 – Property and Equipment

 

Property and equipment consisted of the following:

 

           Estimated Useful
Type  June 30, 2021   December 31, 2020   Lives (Years)
            
Computer equipment and software  $315,138   $273,256   3 - 5
Furniture and fixtures   45,684    47,526   5 - 7
Leasehold improvements   1,789    21,512   15
Property and equipment, gross   362,611    342,294    
Less: accumulated depreciation   (133,200)   (105,484)   
Property and equipment - net  $229,411   $236,810    

 

Depreciation expense for the three months ended June 30, 2021 and 2020 was $16,905 and $15,557, respectively.

 

Depreciation expense for the six months ended June 30, 2021 and 2020 was $32,736 and $30,981, respectively.

 

These amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.

 

In connection with the deconsolidation of TW, the Company disposed of property and equipment with a net carrying amount of $20,645.

 

Note 4 – Intangibles

 

Intangibles consisted of the following:

 

           Estimated Useful
Type  June 30, 2021   December 31, 2020   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   (1,993,282)   (1,627,778)   
Intangibles - net  $3,760,238   $4,125,742    

 

ECS has been a financial technology tech and wireless top-up platform for over 15 years. On October 1, 2019, we acquired ECS primarily for the favorable ACH banking relationships and a fintech transactions platform (proprietary software) processing over 20,000 transactions a day at approximately 8,000 independently owned retail stores. The goal was to incorporate our blockchain components into the existing ECS network (proprietary software). After a year of development and integration, we believe the ECS platform has been successfully merged into our platform with secure ledger data backups and will continue to serve as the proven backbone for wireless top-up transactions and wireless product aggregation. The majority of the purchase price was allocated to the “Proprietary Software” category being amortized straight-line over seven years.

 

 F-29 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

Amortization expense for the three months ended June 30, 2021 and 2020, was $163,377 and $288,790, respectively.

 

Amortization expense for the six months ended June 30, 2021 and 2020, was $365,504 and $538,830, respectively.

 

Estimated amortization expense for each of the five (5) succeeding years and thereafter is as follows:

 

For the Year Ended December 31, 2021    
     
2021 (6 months)  $326,754 
2022  $653,508 
2023  $653,508 
2024  $653,508 
2025  $653,508 
Thereafter   819,452 
Total  $3,760,238 

 

Note 5 – Debt

 

The following represents a summary of the Company’s notes payable – SBA government, loans payable – related parties, notes payable and convertible notes, key terms, and outstanding balances at June 30, 2021 and December 31, 2020, 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.

 

 F-30 
 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 

(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. Based upon guidance issued by the SBA on June 19, 2020, the EIDL Loan is not required to be refinanced by the PPP loan.

 

   PPP  EIDL  EIDL  EIDL
Terms  SBA  SBA  SBA  SBA