UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2019

 

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

 

SURGE HOLDINGS, 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)

 

(901) 302-9587
(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 [X] 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 [X] 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 [X] Smaller reporting company [X]
(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 [X]

 

The number of shares of the registrant’s common stock outstanding as of November 14, 2019 was 100,995,459 shares.

 

 

 

 
 

 

Explanatory Note

 

We filed our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 on November 14, 2019 (the “Original Report”). We are filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to (i) correct a typo in Note 5 to the Condensed Consolidated Financial Statements, to reflect that the pro-forma net revenues of the Company with the ECS Business, had the entities been combined on January 1, 2018, was, for the nine months ended September 30, 2019, $45,503,800 and not $4,847,467; and (ii) add additional disclosure to the Liquidity, Capital Resources And Going Concern Section under Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations, to disclose that the increase of $4,972,511 in the Company’s net intangible assets in 2019 is primarily due to the purchase of the ECS Business from GBT.

 

Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Amendment also contains new certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, which are attached hereto.

 

No other changes have been made to the Original Report. This Amendment No. 1 to the Original Report speaks as of the original filing date of the Original Report, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the Original Report.

 

   
 

 

TABLE OF CONTENTS

 

    Page
PART I – FINANCIAL INFORMATION  
     
Item 1. Condensed Consolidated Financial Statements (Unaudited) 3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
PART II - OTHER INFORMATION  
   
Item 6. Exhibits 34

 

 2 
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 

SURGE HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

   September 30, 2019   December 31, 2018 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $143,903   $444,612 
Accounts receivable, less allowance for doubtful accounts of $24,841 and $17,000, respectively   5,370,026    206,679 
Note receivable   222,045    190,000 
Lifeline revenue due from USAC   231,804    850,966 
Customer phone supply   1,500    1,356,701 
Prepaid expenses   111,462    10,862 
Total current assets   6,080,740    3,059,820 
Property and Equipment, less accumulated depreciation of $25,343 and $13,782, respectively   241,428    30,990 
Intangible assets less accumulated amortization of $346,864   5,037,780    65,269 
Goodwill   866,782    866,782 
Investment in Centercom   249,417    - 
Operating least right of use asset, net   195,797    - 
Other long-term assets   61,457    61,457 
Total assets  $12,733,401   $4,084,318 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable and accrued expenses - others  $5,304,744   $3,104,234 
Accounts payable and accrued expenses - related party   453,399    149,901 
Credit card liability   560,754    394,840 
Loss contingency   40,000    70,000 
Deferred revenue   -    50,000 
Derivative liability   18,511    51,058 
Operating lease liability   20,040    - 
Line of credit   912,870    - 
Advance from related party   -    389,502 
Notes payable and current portion of long-term debt, net   512,500    582,500 
Total current liabilities   7,822,818    4,792,035 
Long-term debt less current portion – related party   1,322,000    680,000 
Operating lease liability – net   175,757    - 
Trade payables - long term   864,140    600,516 
Convertible promissory notes payable   4,233,000    - 
Total liabilities   14,417,715    6,072,551 
           
Commitments and contingencies          
           
Stockholders’ deficit:          
           
Series A preferred stock: $0.001 par value; 100,000,000 shares authorized; 13,000,000 and 13,000,000 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively   13,000    13,000 
Series C convertible preferred stock; $0.001 par value; 1,000,000 shares authorized; 721,598 and 643,366 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively   722    643 
Common stock: $0.001 par value; 500,000,000 shares authorized; 101,966,436 shares and 88,046,391 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively   101,966    88,047 
Additional paid in capital   5,893,508    333,623 
Accumulated deficit   (7,693,510)   (2,423,546)
Total stockholders’ deficit   (1,684,314)   (1,988,233)
Total liabilities and stockholders’ deficit  $12,733,401   $4,084,318 

 

See accompanying notes to condensed consolidated financial statements

 

 3 
 

 

SURGE HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
                 
Revenue  $4,901,864   $4,051,027   $12,295,058   $11,536,590 
                     
Cost of revenue   3,023,292    2,240,447    7,814,614    6,160,717 
                     
Gross profit   1,878,572    1,810,580    4,480,444    5,375,873 
                     
Cost and expenses                    
Depreciation and amortization   17,926    40,029    39,050    102,842 
Selling, general and administrative   2,998,359    2,170,366    9,222,923    5,456,517 
Total costs and expenses   3,016,285    2,210,395    9,261,973    5,559,359 
                     
Operating loss   (1,137,713)   (399,815)   (4,781,529)   (183,486)
                     
Other expense (income):                    
Interest expense, net   20,767    40,833    93,157    128,242 
Change in fair value of derivative liability   -    6,724    -    4,105 
Change in fair value of LTC cryptocurrency   -    12,581    -    63,487 
Gain on investment in Centercom   (6,134)   -    (70,909)   - 
(Gain)/loss on settlement of liabilities   -    (61,709)   466,187    (61,709)
Total other expense (income)   14,633    1,571    488,435    134,125 
                     
Net loss before provision for income taxes   (1,152,346)   (398,244)   (5,269,964)   (317,611)
                     
Provision for income taxes   -    27,480    -    82,230 
                     
Net loss  $(1,152,346)  $(425,724)  $(5,269,964)  $(399,841)
                     
Net loss per common share, basic and diluted  $(0.01)  $(0.00)  $(0.06)  $(0.01)
                     
Weighted average common shares outstanding – basic and diluted   98,452,560    86,066,723    94,225,836    79,529,231 

 

See accompanying notes to condensed consolidated financial statements.

 

 4 
 

 

SURGE HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Deficit

(Unaudited)

 

Three Months ended September 30, 2019

 

   Preferred Stock   Series C Preferred   Common Stock   Additional
Paid-in
   Accumulated     
   Shares   Amount    Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                                     
Balance, June 30, 2019   13,000,000   $13,000    721,598   $722    97,988,818   $97,989   $4,604,735   $(6,541,164)  $(1,824,718)
                                              
Issuance of common stock and warrants for services rendered   -    -    -    -    50,000    50    84,700    -    84,750 
                                              
Sale of common stock and warrants   -    -    -    -    594,285    594    207,406    -    208,000 
                                              
Issuance of common shares for asset purchase   -    -    -    -    3,333,333    3,333    996,667    -    1,000,000 
                                              
Net loss   -    -    -    -    -    -    -    (1,152,346)   (1,152,346)
Balance, September 30, 2019     13,000,000   $13,000      721,598   $722      101,966,436   $  101,966   $5,893,508   $(7,693,510)  $(1,684,314)

 

Three Months ended September 30, 2018

 

   Preferred Stock   Series C Preferred   Common Stock   Additional
Paid-in
   Accumulated     
   Shares   Amount    Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                                     
Balance, June 30, 2018   13,000,000   $13,000    594,966   $595    84,182,669   $84,183   $(3,566,124)  $(856,585)  $(4,324,931)
                                              
Issuance of common stock and warrants for services rendered   -    -    -    -    -    -    24,613    -    24,613 
                                              
Issuance of common stock for settlement of accounts payable   -    -    -    -    1,155,703    1,156    229,985    -    231,141 
                                              
Issuance of common stock for settlement of debt and accrued interest   -    -    -    -    2,175,000    2,175    432,825    -    435,000 
                                              
Net loss   -    -    -    -    -    -    -    (425,724)   (425,724)
Balance, September 30, 2018     13,000,000   $13,000      594,966   $595      87,513,372   $87,514   $  (2,878,701)  $(1,282,309)  $(4,059,901)

 

 5 
 

 

Nine Months ended September 30, 2019

 

   Preferred Stock   Series C Preferred   Common Stock   Additional
Paid-in
   Accumulated     
   Shares   Amount    Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                                     
Balance, December 31, 2018   13,000,000   $3,000    643,366   $643    88,046,391   $88,047   $333,623   $(2,423,546)  $(1,988,233)
                                              
Issuance of common stock and warrants for services rendered   -    -    -    -    596,000    596    307,277    -    307,873 
                                              
Issuance of common stock for settlement of accounts payable   -    -    -    -    875,000    875    506,625    -    507,500 
                                              
Sale of common stock and warrants   -    -    -    -    9,115,712    9,115    3,181,385    -    3,190,500 
                                              
Issuance of common shares for asset purchase   -    -    -    -    3,333,333    3,333    996,667    -    1,000,000 
                                              
Issuance of Series C Preferred Stock for investment in Centercom   -    -    72,000    72    -    -    178,436    -    178,508 
                                              
Issuance of Series C Preferred Stock for conversion of related party advances   -    -    6,232    7    -    -    389,495    -    389,502 
                                              
Net loss   -    -    -    -    -    -    -    (5,269,964)   (5,269,964)
Balance, September 30, 2019     13,000,000   $13,000      721,598   $722      101,966,436   $  101,966   $  5,893,508   $(7,693,510)  $  (1,684,314)

 

Nine Months ended September 30, 2018

 

   Preferred Stock   Series C Preferred   Common Stock   Additional
Paid-in
   Accumulated     
   Shares   Amount    Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                                     
Balance, December 31, 2017   3,000,000   $3,000    -   $-    152,555,416   $152,555   $(155,555)  $(617,240)  $(617,240)
                                              
Recapitalization   10,000,000    10,000    -    -    79,888,784    79,889    (3,687,835)   (265,228)   (3,863,174)
                                              
Issuance of common stock for services rendered   -    -    -    -    480,000    480    153,733    -    154,213 
                                              
Issuance of common stock for settlement of accounts payable   -    -    -    -    1,155,703    1,156    229,985    -    231,141 
                                              
Issuance of common stock for settlement of debt and accrued interest   -    -    -    -    2,175,000    2,175    432,825    -    435,000 
                                              
Issuance of Series C Preferred Stock in exchange for Common Stock   -    -    594,966    595    (148,741,531)   (148,741)   148,146    -    - 
                                              
Net loss   -    -    -    -    -    -    -    (399,841)   (399,841)
Balance, September 30, 2018     13,000,000   $13,000      594,966   $595    87,513,372   $87,514   $  (2,878,701)  $(1,282,309)  $  (4,059,901)

 

 6 
 

 

SURGE HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Nine Months Ended
September 30,
 
   2019   2018 
Operating activities          
Net loss  $(5,269,964)  $(399,841)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Amortization and depreciation   39,051    102,842 
Amortization of right of use assets   35,015    - 
Stock-based compensation   307,873    154,213 
Change in fair value of LTC cryptocurrency coins   -    63,487 
Change in fair value of derivative liability   -    4,105 
Loss (gain) on settlement of liabilities   474,953    (61,709)
Gain on equity investment in Centercom   (70,909)   - 
Accrued interest on note receivable   (32,045)   - 
Changes in operating assets and liabilities:          
Accounts receivable   (5,163,347)   (41,797)
Lifeline revenue due from USAC   619,162    123,648 
Customer phone supply   1,355,201    (561,642)
LTC Cryptocurrency coins   -    (45,880)
Prepaid expenses   (100,600)   (5,635)
Credit card liability   165,914    - 
Deferred revenue   (50,000)   - 
Loss contingency   (30,000)   (41,500)
Current portion of operating lease liability   (35,015)   - 
Accounts payable and accrued expenses   2,767,632    897,660 
Net cash (used in) provided by operating activities   (4,987,079)   187,951 
           
Investing activities          
Purchase of equipment   (222,000)   - 
Net cash received in business combination   -    243,768 
Net cash (used in) provided by investing activities   (222,000)   243,768 
           
Financing activities          
Issuance of common stock   3,190,500    - 
Due from related party - net   -    17,554 
Note payable - borrowings   233,000    163,500 
Note payable - repayments   (70,000)   - 
Convertible promissory notes - borrowings   233,000    - 
Line of credit - advances   1,130,000    - 
Line of credit - repayments   (217,130)   - 
Loan proceeds under related party financing arrangement   1,316,000    - 
Loan repayments under related party financing arrangement   (674,000)   (477,741)
Net cash provided by (used in) financing activities   4,908,370    (296,687)
           
Net increase (decrease) in cash and cash equivalents   (300,709)   135,032 
           
Cash and cash equivalents, beginning of period   444,612    1,274,160 
           
Cash and cash equivalents, end of period  $143,903   $1,409,192 
           
Supplemental cash flow information          
Cash paid for interest and income taxes:          
Interest  $65,600   $6,851 
Income taxes  $-   $82,230 
           
Non-cash investing and financing activities:          
Exchange of related party advances for Series C Preferred Stock  $389,502   $- 
Exchange of investment in CenterCom for Series C Preferred Stock  $178,508   $- 
Operating lease liability  $230,812   $- 
Common shares issued in asset purchase  $1,000,000   $- 
Debt acquired in asset purchase  $4,000,000   $- 
Debt acquired in business combination  $-   $3,000,000 
Exchange of Common Stock for Series C Preferred Stock  $-   $148,741 
Liabilities settled in Common Stock  $-   $666,141 

 

See accompanying notes to condensed consolidated financial statements

 

 7 
 

 

SURGE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019

 

1 BUSINESS

 

The accompanying condensed consolidated financial statements include the accounts of Surge Holdings, Inc. (“Surge”), formerly Ksix Media Holdings, Inc., incorporated in Nevada on August 18, 2006, and its wholly owned subsidiaries, Ksix Media, Inc. (“Media”), incorporated in Nevada on November 5, 2014; Ksix, LLC (“KSIX”), a Nevada limited liability company that was formed on September 14, 2011; Surge Blockchain, LLC (“Blockchain”), formerly Blvd. Media Group, LLC (“BLVD”), a Nevada limited liability company that was formed on January 29, 2009; DigitizeIQ, LLC (“DIQ”) an Illinois limited liability company that was formed on July 23, 2014; Surge Cryptocurrency Mining, Inc. (“Crypto”), formerly North American Exploration, Inc. (“NAE”), a Nevada corporation that was incorporated on August 18, 2006 (since January 1, 2019, this has been a dormant entity that does not own any assets); Surge Logics Inc (“Logics”), an Nevada corporation that was formed on October 2, 2018; SurgePays Fintech Inc (“Tech”), an Nevada corporation that was formed on August 22, 2019; Surge Payments LLC (“Payments”), an Nevada corporation that was formed on December 17, 2018; SurgePhone Wireless LLC (“Surge Phone”), an Nevada corporation that was formed on August 29, 2019 and True Wireless, Inc., an Oklahoma corporation (formerly True Wireless, LLC) (“TW”), (collectively the “Company” or “we”). All significant intercompany balances and transactions have been eliminated in consolidation.

 

Recent Developments

 

As reported on Form 8-K filed with the SEC on April 16, 2018, on April 11, 2018, the Company closed the merger transaction (the “Merger”) that was the subject of that certain Agreement and Plan of Reorganization (the “Merger Agreement”) with True Wireless, Inc., an Oklahoma corporation (“TW”) dated as of April 11, 2018. At closing, in accordance with the Merger Agreement, TW merged with and into TW Acquisition Corporation, a Nevada corporation (“Merger Sub”), a wholly-owned subsidiary of Surge Holdings, Inc., with TW being the surviving corporation. As a result of the Merger, TW became a wholly-owned subsidiary of the Company.

 

As a result of the controlling financial interest of the former members of TW, for financial statement reporting purposes, the merger between the Company and TW has been treated as a reverse acquisition with TW deemed the accounting acquirer and the Company deemed the accounting acquiree under the acquisition method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The reverse acquisition is deemed a capital transaction and the net assets of TW (the accounting acquirer) are carried forward to the Company (the legal acquirer and the reporting entity) at their carrying value before the acquisition. The acquisition process utilizes the capital structure of the Company and the assets and liabilities of TW which are recorded at their historical cost. The equity of the Company is the historical equity of TW retroactively restated to reflect the number of shares issued by the Company in the transaction. See Note 4.

 

 8 
 

 

On January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global, S.A. de C.V (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Anthony N. Nuzzo, a director and officer and a 10% shareholder of the Company’s voting equity has a controlling interest in CenterCom Global. Centercom also provides call center support for various third-party clients. Centercom is involved with:

 

  On-boarding the SurgePays Portal into over 40,000 retail locations and subsequent ongoing support;
  Aggressively marketing the Company’s new “Free Wireless Service” program to substantially grow customer base while enhancing customer service;
  Supporting the Company’s IT infrastructure including database management; and
  Upselling-related FinTech products to our existing customer base to increase revenue.

 

On September 30, 2019, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with GBT Technologies Inc., a Nevada corporation (“GBT”).

 

Under the Purchase Agreement, the Company has purchased substantially all of the assets, and specified liabilities, of GBT’s ECS Prepaid business, Electronic Check Services business, and the Central State Legal Services business (collectively the “ECS Business”). The Purchase Agreement provides that the Company assumed GBT’s liabilities incurred after the effective date of the Purchase Agreement, but only to the extent such obligations and liabilities were not caused by or related to any action or inaction by GBT prior to the effective date of the Purchase Agreement. The Purchase Agreement provides, among other things, that on the terms and subject to the conditions set forth therein, the Company acquired substantially all of the assets related to the ECS Business for total consideration of five million dollars ($5,000,000). The Purchase Agreement provides that the consideration is to be paid by the Company through the issuance of a convertible promissory note in the amount of four million dollars ($4,000,000) to GBT (the “Note”), and through the issuance of three million three hundred thirty-three thousand three hundred thirty-three (3,333,333) restricted shares of the Company’s common stock to GBT (the “Shares”). GBT may not convert the Note to the extent that such conversion would result in beneficial ownership by GBT and/or its affiliates of more than 4.99% of the issued and outstanding common stock of the Company.

 

Business Overview

 

Surge Holdings, Inc. (“Surge Holdings” or “the Company”), incorporated in Nevada on August 18, 2006, is a company focused on Telecom, Media, and FinTech applications serving customers worldwide online and across social media, gaming and mobile platforms.

 

The Company’s current focus is the provision of financial and telecommunications services to the financially underserved (i.e. persons who have little or no access to credit) within the population. The Company provides a suite of services which are primarily marketed through small retail establishments which are utilized by members of its target market.

 

Commencing in 2018, the Company has significantly expanded its suite of services to include the pursuit of the following business models:

 

Surge Telecom

 

SurgePhone Wireless offers discounted talk, text, and 4G LTE data wireless plans at prices that average 30% – 50% lower than competitors. Available nationwide, SurgePhone Wireless utilizes ad impression revenue to help offset and, in many cases, eliminate the monthly wireless plans for low income customers (free service for the customer is paid for by ad revenue). Additionally, SurgePhone also offers strategic discounts such as the Surge Heroes campaign that rewards teachers, first responders, active military and veterans with a free Android smartphone.

 

Additionally, through the use of the SurgeRewardsApp, the Company is able to more aggressively rollout the SurgePhoneWireless service. Customers earn rewards from the ad impressions while unlocking their phone and also by opening the SurgeRewardsApp to watch videos and ads, as well as participate in short surveys in order to receive reward points that can be converted into statement credits for free cell phone service or cash.

 

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True Wireless is licensed to provide subsidized wireless service to qualifying low income customers in 5 states. Utilizing all 4 major USA wireless backbones, True Wireless provides discounted and free wireless service to over 25,000 veterans and other customers who qualify for certain federal programs such as SNAP (EBT) and Medicaid.

 

The SurgePhone Android Volt 5XL provides a large screen smartphone option to those unable to afford a more expensive phone.

 

Surge Fintech

 

SurgePays Visa launched late in the third quarter of 2019. We believe this card could be life enhancing by serving as a virtual checking account for the unbanked, underbanked, credit challenged or those unable to access traditional financial services. The SurgePays card will offer safety, security and convenience of using the card anywhere that accepts Visa and customers will be able to load their card via direct deposit or loading cash directly at 110,000 locations nationwide. Customers will be able to access and manage their accounts from the connected app. In addition, customers will also be able to take a picture of their paycheck and load the cash to their cards (eliminating costly check cashing fees).

 

Surge Software

 

SurgePays Portal is a multi-purpose software interface for convenience stores, bodegas and other corner merchants providing goods and services to the underbanked community. The merchant or clerk is able to use the portal interface – similar to a website – with image driven navigation to add wireless minutes to any prepaid wireless carrier’s phone and access to other services such as bill payment and loading debit cards. We believe what makes SurgePays unique is that it also offers the merchant the ability to order wholesale goods through the portal with one touch ease. SurgePays is essentially a wholesale e-commerce storefront that allows manufactures and distribution companies to have access to merchants while cutting out the middleman. The goal of the SurgePays Portal is to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas, and supermarkets. These products include energy drinks, dry foods, frozen foods, bagged snacks, processed meats, automotive parts and many more goods, all in one convenient e-commerce storefront.

 

Surge Digital Media

 

Surge Logics is a full-service digital advertising agency, specializing in lead generation, Pay Per Call, landing page optimization and managed ad spending. Our primary media buying platforms are Google AdWords, Facebook, Instagram and Bing. We have a call center that can handle Live Call Transfers, Customer Service Support, Lead Verification and Attorney Case Support.

 

Through the launch of Surge Intake Logistics (“InTake”), a proprietary CRM software solution that delivers signed retainer services to clients, InTake is proving to be a direct benefit to clients that do not have the staff and infrastructure to handle the volume of leads Surge Logics generates. Surge Logics has taken this a step further to provide qualified leads utilizing a strategic partnership with Centercom to be first in class for online lead generation This partnership and new software have significantly contributed to Surge Logic’s revenue which has grown to approximately $4.4 million for the nine months ended September 30, 2019.

 

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Lead generation describes the marketing process of stimulating and capturing interest in a product or service for the purpose of developing sales pipeline.

 

Pay-per-call (PPCall, also called cost-per-call) is an advertising model in which the rate paid by the advertiser is determined by the number of telephone calls made by viewers of an ad. Pay Per Call providers charge per call, per impression or per conversion.

 

Media buying is the process of buying media placements for advertising (on TV, in publications, on the radio, digital signage, apps or on websites).

 

A call center - centralized office used for receiving or transmitting a large volume of requests by telephone.

 

Centercom Global, S.A. de C.V.

 

On January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global, S.A. de C.V (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Anthony N. Nuzzo, a director and officer and a 10% shareholder of the Company’s voting equity has a controlling interest in CenterCom Global. Centercom also provides call center support for various third-party clients. Centercom is involved with:

 

  On-boarding the SurgePays Portal into over 40,000 retail locations and subsequent ongoing support;
  Aggressively marketing the Company’s new “Free Wireless Service” program to substantially grow customer base while enhancing customer service;
  Supporting the Company’s IT infrastructure including database management; and
  Upselling-related FinTech products to our existing customer base to increase revenue.

 

Due to the fact that a director, officer, and minority owner of the Company has a controlling interest in CenterCom Global, the Company recorded its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s net book value upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on the accompanying condensed consolidated balance sheets. The Company recorded its equity interest in Centercom’s results of operations as “Gain on investment in Centercom” in other income (expense) on the accompanying condensed consolidated statements of income. The Company periodically reviews its investment in Centercom for impairment. Management has determined that no impairment was required as of September 30, 2019.

 

ECS Business

 

On September 30, 2019, the Company entered into the Purchase Agreement with GBT Technologies Inc. (“GBT”) of the ECS Prepaid business, Electronic Check Services business and the Central States Legal Services business (collectively, “ECS”). Through its proprietary Fintech software platform, ECS is a leading provider of prepaid wireless load and top-ups, check cashing and wireless SIM activation to convenience stores and bodegas nationwide. Since 2008, ECS has grown to a network of over 9,800 retail locations and 160 independent sales organizations (“ISO”) processing over 18,000 transactions per day. Surge will integrate the ECS software with its SurgePays Network in order to offer both wholesale products from third-party manufacturers, as well as Surge products, including the SurgePays Reloadable Debit Card, SurgePhone Wireless and SIM Starter Kits. See Note 5.

 

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2019 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on April 1, 2019.

 

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Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Risks and Uncertainties

 

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

 

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

 

Concentration of Credit Risk

 

Financial instruments that potentially expose the Company to credit risk consist of cash and cash equivalents, and accounts receivable. The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is $250,000. Accounts receivables potentially subject the Company to concentrations of credit risk. Company closely monitors extensions of credit. Estimated credit losses have been recorded in the consolidated financial statements. Recent credit losses have been within management’s expectations. No customer accounted for more than 10% of revenues in 2019 or 2018.

 

Method of Accounting

 

Investments held in stock of entities other than subsidiaries, namely corporate joint ventures and other non-controlled entities usually are accounted for by one of three methods: (i) the fair value method (addressed in Topic 320), (ii) the equity method (addressed in Topic 323), or (iii) the cost method (addressed in Subtopic 325-20). Pursuant to Paragraph 323-10-05-5, the equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial policies of the investee.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. The Company held no cash equivalents at September 30, 2019 and December 31, 2018.

 

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.

 

Fair value measurements

 

The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

 

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.

 

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ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

 

  Level 1 — quoted prices in active markets for identical assets or liabilities.
  Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
  Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

 

Revenue recognition

 

The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect adjustment for initially applying the new revenue standard as an adjustment to the opening balance of retained earnings and the comparative information would not require to be restated and continue to be reported under the accounting standards in effect for those periods.

 

Based on the Company’s analysis the Company did not identify a cumulative effect adjustment for initially applying the new revenue standards. The Company principally generates revenue through providing product, services and licensing revenue.

 

The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:

 

1) Identify the contract with a customer

 

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

 

2) Identify the performance obligations in the contract

 

Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.

 

3) Determine the transaction price

 

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts as of September 30, 2019 contained a significant financing component.

 

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4) Allocate the transaction price to performance obligations in the contract

 

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

 

5) Recognize revenue when or as the Company satisfies a performance obligation

 

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

 

Disaggregation of Revenue from Contracts with Customers. The following table disaggregates gross revenue by entity for the nine months ended September 30, 2019 and 2018:

 

   For the Nine Months Ended 
   September 30, 2019   September 30, 2018 
True Wireless, Inc.  $3,583,806   $9,982,227 
Surge Blockchain, LLC   4,351,123    709,889 
Surge Logics, Inc.   4,355,370    781,810 
Other   4,759    62,664 
Total revenue  $12,295,058   $11,536,590 

 

True Wireless is licensed to provide wireless services to qualifying low income customers in five states. Revenues are recognized when the services have been provided and the government subsidy has been earned.

 

Surge Blockchain revenues are generated through the SurgePaysPortal multi-purpose software are recognized when the goods and services have been delivered and earned.

 

Surge Logics is a full-service digital advertising agency and revenues are recognized at a period in time once performance obligations are met and services are provided as customer deposits are received in advance.

 

Income taxes

 

We use the asset and liability method of accounting for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes”. Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.

 

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Through December 23, 2014, KSIX and BLVD operated as limited liability companies and all income and losses were passed through to the owners. Through October 12, 2015, DIQ operated as a limited liability company and all income and losses were passed through to its owner. Subsequent to the acquisition dates, these limited liability companies were owned by Surge and became subject to income tax.

 

Through April 1, 2018, TW operated as a limited liability company and all income and losses were passed through to the owners. In order to facilitate the merger discussed above, TW converted from a limited liability company to a Subchapter C Corporation.

 

ASC Topic 740-10-30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.

 

The Company is no longer subject to tax examinations by tax authorities for years prior to 2016.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current year’s presentation.

 

Recent accounting pronouncements

 

We have evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”) through the date these financial statements were available to be issued and find no recent accounting pronouncements that would have a material impact on the financial statements of the Company.

 

3 LIQUIDITY

 

The Company had a net loss of approximately $5.3 million for the nine months ended September 30, 2019. As of September 30, 2019, the Company had cash and working capital deficit of approximately $144,000 and $1.7 million, respectively.

 

Management has made the decision to invest in its infrastructure in order to cross market and maximize product rollouts allowing for larger scale revenue in Q4 2019 and beyond. As part of this strategy, the Company is rolling out the SurgePays Marketplace platform to the AATAC network of 40,000 retail plus locations. This process includes placement orders of 500,000 Sim Starter kits, wireless top-ups platform, a nationwide exclusive master distributorship for Weekend Warrior Wellness products that include CBD products and the exclusive distributor of Pastime Foods candy. The Company is in the first phase of the rollout, during which it fulfilled over $2,800,000 in purchase orders during the three months ended September 30, 2019. The asset purchase agreement of the ECS Business executed with GBT gives the Company access to a network of over 9,800 retail locations and 160 independent sales people processing over 18,000 transactions per day (see Note 1). ECS generates approximately $46,500,000 in annualized revenue through third party wireless services.

 

In addition, during the three months ended September 30, 2019, management made the decision to expedite programming, software development and integration to enable the successful launch of the SurgePays Prepaid Visa card.

 

To support the significant growth inflection, the Company has reorganized its human resources department, including building the administrative, legal and finance office in Bartlett, and the operations center in El Salvador which will be able to host 300 employees. Management believes the Company now has the ability to support its expected growth, which was a major goal for fiscal year 2019. During the nine months ended September 30, 2019, the Company was able to continue the utilization of the internal controls and operating procedures and techniques employed by the Company’s management in order to enhance the business by creating operating efficiencies and controlling costs. Lastly, the Company has significantly restructured its balance sheet to be an effective platform for growth as the Company continues to work towards listing on the Nasdaq Capital Market.

 

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These factors, among others, were addressed by management in determining whether the Company could continue as a going concern. The Company projects that it should be cash flow positive by the end of Quarter 1 2020 from ongoing operations by the combination of increased cash flow from its current subsidiaries, as well as the collection of outstanding receivables and the restructuring of the current debt burden. While management believes it is more likely than not the Company has the ability to continue as a going concern, this is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control operating expenses.

 

Additionally, if necessary, based on the Company’s history of being able to raise capital from both internal and external sources coupled with current favorable market conditions, management believes that debt and/or equity financing can be obtained from both related parties (management and members of the Board of Directors of the Company) and external sources to pay down existing debt obligations, cover short term shortfalls, meet the shareholders equity requirements for Nasdaq, and complete proposed acquisitions. Although the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. Therefore, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

 

Subsequent to September 30, 2019, the Company executed debt agreements resulting in gross proceeds of $750,000 to support short-term working capital needs.

 

4 MERGER AGREEMENT

 

As discussed in Note 1, the Company closed the merger transaction that was the subject of the Merger Agreement with True Wireless, Inc., dated as of April 11, 2018. At closing, in accordance with the Merger Agreement, TW merged with and into TW Acquisition Corporation, with TW being the surviving corporation. As a result of the Merger, TW became a wholly-owned subsidiary of the Company.

 

Pursuant to the terms of the Merger Agreement, TW merged into Acquisition Sub in a transaction where TW was the surviving company and become a wholly-owned subsidiary of the Company. The transaction was structured as a tax-free reverse triangular merger. In addition to the 12,000,000 shares of Company Common Stock and $500,000 cash which has been previously paid to the shareholders of TW, at the closing of the merger transaction, the shareholders of TW received the following as additional merger consideration:

 

● 152,555,416 shares of newly-issued Company Common Stock, which gave the shareholders of TW, on a proforma basis, a 69.5% interest in the Company’s total Common Shares.

 

● An additional number of shares of Company Common Stock, if any, which were necessary to vest 69.5% of the aggregate issued and outstanding Common Stock in the shareholders of TW at the Closing.

 

● A promissory note in the original face amount of $3,000,000, bearing interest at 3% per annum maturing on December 31, 2018.

 

● 3,000,000 shares of newly-issued Company Series A Preferred Stock

 

Following the closing of the merger transaction the Company’s investment in TW consisted of the following:

 

   Shares   Amount 
Consideration paid prior to Closing:          
Cash paid       $500,000 
Common stock issued   12,000,000    1,200,000 
Total consideration paid   12,000,000   $1,700,000 
Consideration paid at Closing:          
Common stock to be issued at closing (1)   152,555,416   $60,683,006 
Series A Preferred Stock to be issued at closing   3,000,000    120,000 
Note payable due December 31, 2018        3,000,000 
Total consideration to be paid       $63,803,006 
           
Total consideration       $65,503,006 

 

  (1) The common shares issued at closing of the merger transaction had a closing price of approximately $0.40 per share on the date of the transaction.

 

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Following the closing of the merger transaction, TW’s financial statements as of the closing were consolidated with the consolidated financial statements of the Company.

 

The following presents the unaudited pro-forma combined results of operations of the Company with the TW Business as if the entities were combined on January 1, 2018.

 

   Nine Months Ended 
   September 30, 2018 
Revenues, net  $5,547,888 
Net loss  $(664,837)
Net loss per share  $(0.01)
Weighted average number of shares outstanding   79,529,231 

 

The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisitions been completed as of January 1, 2018 or to project potential operating results as of any future date or for any future periods.

 

The Company consolidated TW as of the closing date of the agreement, and the results of operations of the Company include that of TW.

 

5 ASSET PURCHASE AGREEMENT

 

On September 30, 2019, the Company entered into the Purchase Agreement with GBT.

 

Under the Purchase Agreement, the Company has purchased substantially all of the assets, and specified liabilities, of GBT’s ECS Prepaid business, Electronic Check Services business, and the Central State Legal Services business. The Purchase Agreement provides that the Company assumed GBT’s liabilities incurred after the effective date of the Purchase Agreement, but only to the extent such obligations and liabilities were not caused by or related to any action or inaction by GBT prior to the effective date of the Purchase Agreement. The Purchase Agreement provides, among other things, that on the terms and subject to the conditions set forth therein, the Company acquired substantially all of the assets related to the ECS Business for total consideration of five million dollars ($5,000,000). The Purchase Agreement provides that the consideration is to be paid by the Company through the issuance of a convertible promissory note in the amount of four million dollars ($4,000,000) to GBT, and through the issuance of three million three hundred thirty-three thousand three hundred thirty-three (3,333,333) restricted shares of the Company’s common stock to GBT. As of the date of this report, the purchase price allocation has yet to be valued. GBT may not convert the Note to the extent that such conversion would result in beneficial ownership by GBT and/or its affiliates of more than 4.99% of the issued and outstanding common stock of the Company.

 

The Note has an effective date of September 27, 2019 and has a term of eighteen (18) months until the maturity date. The Note shall not bear interest and shall be convertible at the option of GBT starting from the sixth month anniversary of the effective date. The conversion price of the Note shall equal the volume weighted average price of the Company’s common stock on the trading market which the common stock is then trading over the previous twenty (20) days prior to the conversion date, provided that the conversion price shall never be lower than $0.10 or higher than $0.70. The Note provides that the Company retains the right to prepay all or any portion of the principal without any prepayment penalty. In addition, in connection with the issuance of the Note, GBT agreed that, for the eighteen (18) months following the effective date, GBT will not dispose of the Shares or shares issued as a result of the conversion of the Note, in an amount greater than seven and one-half percent (7.5%) of the trading volume of the Company’s shares of common stock during the previous month.

 

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The following presents the unaudited pro-forma combined results of operations of the Company with the ECS Business as if the entities were combined on January 1, 2018.

 

   Nine Months Ended 
   September 30, 2019 
Revenues, net  $45,503,800 
Net loss  $(5,381,401)
Net loss per share  $(0.06)
Weighted average number of shares outstanding   94,225,836 

 

   Nine Months Ended 
   September 30, 2018 
Revenues, net  $46,460,364 
Net income  $265,813 
Net income per share  $0.00 
Weighted average number of shares outstanding   79,529,231 

 

6 PROPERTY AND EQUIPMENT

 

Property and equipment stated at cost, less accumulated depreciation, consisted of the following:

 

   September 30, 2019   December 31, 2018 
Computer Equipment and Software  $233,263   $11,263 
Furniture and Fixtures   7,996    7,996 
Leasehold Improvements   25,513    25,513 
    266,772    44,771 
Less: Accumulated Depreciation   (25,344)   (13,782)
   $241,428   $30,990 

 

Depreciation expense was $39,050 and $75,353 for the nine months ended September 30, 2019 and 2018, respectively.

 

7 CRYPTOCURRENCY ASSET SALE

 

In December 2018, the Company executed an agreement with a related party for the sale of Cryptocurrency assets for proceeds of $891,192. In exchange for the purchased assets with a net book value of $523,743, the related party would assume the liabilities of the entity consisting of accounts payable of $40,235 and outstanding debt and accrued interest of $808,600. The Company recognized a gain on sale totaling $273,453.

 

The Company is no longer engaged in any line of business involving cryptocurrencies or digital assets. The Company previously announced an intention to issue Surge Utility Tokens in the future. The Company still plans on utilizing tokens as a reward program; however, these tokens will have no monetary value and will not involve cryptocurrency or blockchain technology. These tokens will not be able to be bought, sold, invested, or traded. Rather, these tokens will only be awarded by the Company to existing users of the Company’s products and will then only be able to be redeemed for rewards using a Surge Rewards website set up by the Company. The Company has not issued any Surge Utility Tokens to date and this name will not be utilized for any rewards tokens used as part of a future Surge Rewards program.

 

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8 CREDIT CARD LIABILITY

 

The Company previously utilized a credit card issued in the name of DIQ to pay for certain of its trade obligations. During the nine months ended September 30, 2019, the Company utilized a credit card issued in the name of Surge Holdings, Inc. to pay certain trade obligations totaling $1,106,280. At September 30, 2019 and December 31, 2018, the Company’s total credit card liability was $560,754 and $394,840, respectively.

 

9 NOTES PAYABLE – RELATED PARTY

 

In December 2018, the Company executed a promissory note payable agreement with SMDMM Funding, LLC (“SMDMM”), an entity that is owned by the Company’s chief executive officer. The promissory note was for a principal sum up to $1.0 million at an annual interest rate of 6%, due on December 27, 2021. During the nine months ended September 30, 2019, the Company drew net advances on the note totaling $642,000. As part of the Cryptocurrency transaction discussed in Note 6 above, $80,000 of the outstanding balance under the promissory note was assumed by the purchaser.

 

In August 2019, the Company executed a promissory note payable agreement with SMDMM. The promissory note was for a principal sum up to $217,000 at an annual interest rate of 6%, due on August 15, 2022. As of September 30, 2019, the Company drew advances on the note totaling $217,000.

 

During the nine months ended September 30, 2019, the Company made principal and accrued interest payments of $674,000 and $25,955, respectively. The outstanding principal balance under the promissory notes due to SMDMM was $1,105,000 and $680,000 at September 30, 2019 and December 31, 2018, respectively. Accrued interest owed to SMDMM was $32,960 and $10,718 at September 30, 2019 and December 31, 2018, respectively.

 

10 NOTES PAYABLE AND LONG-TERM DEBT

 

As of September 30, 2019 and December 31, 2018, notes payable and long-term debt consists of:

 

   September 30, 2019   December 31, 2018 
Note payable to former officer due in four equal annual installments of $25,313 on April 28 of each year; past due in 2016 and 2017; accruing interest at 6% per annum since April 28, 2016 on the past due portion  $-   $70,000 
Notes payable to seller of DigitizeIQ, LLC due as noted below 1   485,000    485,000 
Convertible note payable to River North Equity LLC dated July 13, 2016 with interest at 10% per annum; due April 13, 2017; convertible into common stock 2   27,500    27,500 
   $512,500   $582,500 

 

  1 Notes due seller of DigitizeIQ, LLC includes a series of notes as follows:

 

  A second non-interest-bearing promissory note made payable to the seller in the amount of $250,000, which was due on January 12, 2016; (Balance at September 30, 2019 and December 31, 2018 - $235,000).
     
  A third non-interest-bearing promissory note made payable to the seller in the amount of $250,000, which was due on March 12, 2016 and remains unpaid as of September 30, 2019.

 

 19 
 

 

The Company is renegotiating the terms of the notes. The notes bear interest at 5% per annum when in default (after the due date). The notes were non-interest bearing until due. Accordingly, a debt discount at 5% per annum was calculated for the notes and was amortized to interest expense until the due date of the notes.

 

2 Convertible note payable to River North Equity, LLC (“RNE”) - The Company evaluated the embedded conversion for derivative treatment and recorded an initial derivative liability and debt discount of $23,190. The debt discount is fully amortized.

 

Derivative Liability

 

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note, if any, is recorded immediately to interest expense at inception. As noted above, the Company reached an agreement with a debt holder to convert outstanding debt and interest into shares of common stock. As a result, the Company wrote-off the existing derivative liability of $34,556. In addition, the Company wrote-off outstanding principal balance on the note totaling $32,547.

 

11 CONVERTIBLE PROMISSORY NOTES

 

As of September 30, 2019 and December 31, 2018, convertible promissory notes payable consists of:

 

   September 30, 2019   December 31, 2018 
Convertible note payable to GBT Technologies Inc. dated September 27, 2019 with no interest; due March 27, 2021; convertible into common stock 1  $4,000,000   $             - 
Convertible note payable to Power Up Lending Group Ltd. dated September 18, 2019 with at 12% per annum; due September 18, 2020; convertible into common stock 2   233,000    - 
   $4,233,000   $- 

 

1 As discussed above in Note 5, the Purchase Agreement provides that the consideration is to be paid by the Company through the issuance of a convertible promissory note in the amount of $4,000,000 to GBT, and through the issuance of three million three hundred thirty-three thousand three hundred thirty-three restricted shares of the Company’s common stock. The conversion price of the note shall equal the volume weighted average price of the Company’s common stock on the trading market which the common stock is then trading over the previous twenty (20) days prior to the conversion date, provided that the conversion price shall never be lower than $0.10 or higher than $0.70. The note provides that the Company retains the right to prepay all or any portion of the principal without any prepayment penalty.

 

2 The conversion price of the note shall equal 65% the average price of the two lowest trading prices of the Company’s common stock on the trading market which the common stock is then trading over the previous twenty (20) days prior to the conversion date.

 

12 LINE OF CREDIT

 

On January 25, 2018 the Company obtained a $500,000 line of credit (LOC) with a Bank. The LOC bears interest at 5% per annum and is secured by essentially all of the Company’s assets. The note is personally guaranteed by the owner of the majority of the Company’s voting shares. On December 21, 2018, the Company and the bank agreed to increase the LOC to $1,000,000 at an interest rate of 6% per annum. During the nine months ended September 30, 2019, total advances and repayments under the LOC were $1,130,000 and $217,130, respectively. As of September 30, 2019 and December 31, 2018, the outstanding balance on the LOC was $912,870 and $0, respectively.

 

 20 
 

 

13 LEASES

 

The Company determines if an arrangement contains a lease at inception. Right of use (“ROU”) assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.

 

The Company’s leases consist of leaseholds on office and call center space. The Company utilized a portfolio approach in determining the discount rate. The portfolio approach takes into consideration the range of the term, the range of the lease payments, the category of the underlying asset and the Company’s estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company also considered its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating the incremental borrowing rates.

 

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

 

Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above.

 

The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company recognizes variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred.

 

The components of lease expense were as follows:

 

  

Nine Months Ended

September 30, 2019

 
     
Operating leases  $48,020 
Interest on lease liabilities   5,065 
Total net lease cost  $53,085 

 

Supplemental balance sheet information related to leases was as follows:

 

   September 30, 2019 
Operating leases:     
Operating lease ROU assets  $195,797 
      
Current operating lease liabilities, included in current liabilities  $20,040 
Noncurrent operating lease liabilities, included in long-term liabilities   175,757 
Total operating lease liabilities  $195,797 

 

 21 
 

 

Supplemental cash flow and other information related to leases was as follows:

 

   Nine Months Ended September 30, 2019 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $35,015 
ROU assets obtained in exchange for lease liabilities:     
Operating leases  $230,812 
Weighted average remaining lease term (in years):     
Operating leases   2.42 
Weighted average discount rate:     
Operating leases   5%

 

Total future minimum payments required under the lease obligations as of September 30, 2019 are as follows:

 

Twelve Months Ending December 31,    
2019 (thereafter)  $20,040 
2020   80,160 
2021   80,160 
2022   15,437 
Total lease payments  $195,797 
Less: amounts representing interest   (11,602)
Total lease obligations  $184,195 

  

14 STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Series “A” Preferred Stock

 

As of September 30, 2019 and December 31, 2018, there were 13,000,000 shares of Series A issued and outstanding.

 

Series “C” Convertible Preferred Stock

 

As discussed above in Note 1, on January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom. Upon execution of the agreement, the Company issued 72,000 shares of Preferred C stock (convertible into 18,000,000 shares of common stock) to a director, officer and minority owner of the Company who has a controlling interest in Centercom. The Company recorded its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s net book value upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on the accompanying condensed consolidated balance sheets.

 

On February 15, 2019, Carter Matzinger elected to exchange outstanding non-interest-bearing debt totaling $389,502 owed by the Company into 6,232 shares of Preferred C stock.

 

As of September 30, 2019 and December 31, 2018, there were 721,598 and 643,366 shares of Series C issued and outstanding, respectively.

 

Common Stock

 

During the nine months ended September 30, 2019, the Company granted consultants 96,000 restricted shares for services pursuant to consulting agreements.

 

On March 27, 2019, the Company reached a settlement with a consultant to issue 875,000 shares for services rendered. Upon execution of the settlement, the Company recorded a loss on settlement of $507,500.

 

 22 
 

 

As discussed above in Note 5, on September 30, 2019, the Company entered into a Purchase Agreement with GBT Technologies Inc. Pursuant to the agreement, the Company acquired substantially all of the assets related to the ECS Business for total consideration of five million dollars ($5,000,000). The Purchase Agreement provides that the consideration is to be paid by the Company through the issuance of a convertible promissory note in the amount of $4,000,000 and through the issuance of 3,333,333 restricted shares of the Company’s common stock.

 

During the nine months ended September 30, 2019, the Company sold an aggregate of 9,115,712 shares of common stock and 4,333,564 warrants, with each warrant exercisable for one share of Common Stock at an exercise price of $0.75, resulting in gross proceeds to the Company of $3,190,500.

 

During the nine months ended September 30, 2019, the Company recorded total stock-based compensation expense of $274,200 in relation to shares issued for services.

 

As of September 30, 2019 and December 31, 2018, there were 101,966,436 and 88,046,391 shares of Common Stock issued and outstanding, respectively.

 

Stock Warrants

 

On February 15, 2019, the Company executed a consulting agreement with a third party for professional services. Upon execution of the agreement, the Company agreed to issue 100,000 warrants to purchase the Company’s common stock with an exercise price of $3.00 per share, a term of 3 years, and immediate vesting. In addition, the consultant is eligible to receive 150,000 warrants upon achievement of certain milestones as discussed in the agreement.

 

The 250,000 warrants to be issued upon execution have an aggregated fair value of approximately $30,782 that was calculated using the Black-Scholes option-pricing model based on the assumptions below.

 

   September 30, 2019 
Risk-free interest rate   2.50%
Expected life of grants   3 years 
Expected volatility of underlying stock   168.71%
Dividends   0%

 

The estimated warrant life was determined based on the “simplified method,” giving consideration to the overall vesting period and the contractual terms of the award.

 

During the nine months ended September 30, 2019, the Company recorded total stock-based compensation expense related to the warrants of approximately $33,673. The unrecognized compensation expense at September 30, 2019 was approximately $0.

 

15 RELATED PARTY TRANSACTIONS

 

The Company’s former chief executive officer has advanced the Company various amounts on a non-interest-bearing basis, which is being used for working capital. The advance has no fixed maturity. As noted, Mr. Matzinger elected to exchange outstanding non-interest-bearing debt totaling $389,502 owed by the Company into 6,232 shares of Preferred C stock. As of September 30, 2019 and December 31, 2018, the outstanding balance due was $0 and $389,502, respectively.

 

For the nine months ended September 30, 2019 and 2018, outsourced management services fees of $765,000 was paid to Axia Management, LLC (“Axia”) as compensation for services provided. These costs are included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. Axia is owned by the majority owner of the Company.

 

At September 30, 2019 and December 31, 2018, the Company had trade payables to Axia of $160,018 and $66,535, respectively.

 

 23 
 

 

For the nine months ended September 30, 2019 and 2018, the Company purchased telecom services and access to wireless networks from 321 Communications in the amount of $499,356 and $826,401, respectively. These costs are included in Cost of revenue in the Condensed Consolidated Statements of Operations. The owner of the majority of the Company’s voting shares is a minority owner of 321 Communications.

 

At September 30, 2019 and December 31, 2018, the Company had trade payables to 321 Communications of $63,561 and $52,161, respectively.

 

The Company contracted with CenterCom Global, S.A. de C.V. (“CenterCom Global”) to provide customer service call center services, manage the sales process to include handling incoming orders, the collection and verification of all documents to comply with FCC regulations, monthly audit of all subscribers to file the USAC 497 form, yearly audit of all subscribers that have been active over one year to file the USAC 555 form (Recertification), information technology professionals to maintain company websites, sales portals and server maintenance. Billings for these services in the nine months ended September 30, 2019 and 2018 were $1,594,068 and $1,612,126, respectively, and are included in Cost of revenue in the Condensed Consolidated Statements of Operations. A director, officer, and minority owner of the Company has a controlling interest in CenterCom Global. As discussed in Note 1, on January 17, 2019 the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom for $178,508, the Company’s ownership percentage of the net book value of Centercom upon completion of the transaction.

 

At September 30, 2019 and December 31, 2018, the Company had trade payables to CenterCom Global of $203,095 and $175,000, respectively.

 

See Note 5 for long-term debt due to related parties.

 

15 COMMITMENTS AND CONTINGENCIES

 

On November 1, 2013, The Federal Communications Commission (“FCC”) issued a Notice of Apparent Liability for Forfeiture to the Company for requesting and/or receiving support for ineligible subscriber lines between the months of October 2012 and May 2013 and proposed a monetary forfeiture of $5,501,285. The Company has annual compliance audits with FCC approved audit firms that have found no compliance deficiencies. Management believes the proposed monetary forfeiture is without merit and if anything should result from this notice, the amount would not materially affect the financial position of the Company.

 

In October 2018, the Company signed an agreement with Pastime Foods (“Pastime”) in order to expand the Company’s distribution network for its SurgePays portal. The agreement will initiate distribution and sales to over 15,000 convenience and retail locations with a long-term target of greater than 40,000 locations. According to the agreement, Pastime commits to selling more than an average required minimum of $1,500 of monthly sales revenue per location. The Company will fund the initial placement costs and expenses with a total initial advance of $190,000 as well as fees of $10,000. Any advances will be offset by the sharing of distribution revenues for shipments paid by retailers directly to Pastime and the Company. The sharing percentage will be 100% of the net distribution profit until the advances have been covered. As of December 31, 2018, the outstanding receivable due to the Company pursuant to the agreement is $190,000 and is shown as Note Receivable on the consolidated balance sheet.

 

In November 2018, the Company entered into a settlement agreement with West Publishing Corporation (“West”) to remedy an outstanding civil action filed by West. Pursuant to the agreement, the Company will pay West the principal amount of $125,000 plus interest accruing at the annual rate of 7%.

 

As of September 30, 2019, all payments were made as required in the settlement agreement.

 

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16 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 performance of its operating segments based on revenue and operating profit (loss). Segment information for the three and nine months ended September 30, 2019 and 2018 and as of September 30, 2019 and December 31, 2018, are as follows:

 

   Surge   TW   Total 
Three Months ended September 30, 2019               
Revenue  $3,428,766   $1,473,098   $4,901,864 
Cost of revenue   (1,991,139)   (1,032,153)   (3,023,292)
Gross margin   1,437,627    440,945    1,878,572 
Costs and expenses   (2,154,161)   (862,124)   (3,016,285)
Operating loss   (716,534)   (421,179)   (1,137,713)
                
Three Months ended September 30, 2018               
Revenue  $819,149   $3,231,878   $4,051,027 
Cost of revenue   (648,590)   (1,591,857)   (2,240,447)
Gross margin   170,558    1,640,022    1,810,580 
Costs and expenses   (867,997)   (1,342,398)   (2,210,395)
Operating income (loss)   (697,438)   297,623    (399,815)
                
Nine Months ended September 30, 2019               
Revenue  $6,739,867   $5,555,191   $12,295,058 
Cost of revenue   (4,282,620)   (3,531,994)   (7,814,614)
Gross margin   2,457,247    2,023,197    4,480,444 
Costs and expenses   (6,389,314)   (2,872,659)   (9,261,973)
Operating loss   (3,932,067)   (849,462)   (4,781,529)
                
Nine Months ended September 30, 2018               
Revenue  $1,554,363   $9,982,227   $11,536,590 
Cost of revenue   (1,263,599)   (4,897,118)   (6,160,717)
Gross margin   290,764    5,085,109    5,375,873 
Costs and expenses   (1,638,265)   (3,921,094)   (5,559,359)
Operating income (loss)   (1,347,501)   1,164,015    (183,486)
                
September 30, 2019               
Total assets  $10,380,654   $2,352,747   $12,733,401 
Total liabilities   10,929,963    3,487,752    14,417,715 
                
December 31, 2018               
Total assets  $947,550   $3,136,768   $4,084,318 
Total liabilities   2,694,258    3,378,293    6,072,551 

 

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17 SUBSEQUENT EVENTS

 

On October 7, 2019, the Company entered into a Securities Purchase Agreement (the “SPA”), severally and not jointly, with BHP Capital NY Inc., a New York Corporation (“BHP”), Armada Capital Partners LLC, a Delaware limited liability company (“Armada”), and Jefferson Street Capital LLC, a New Jersey limited liability company (“Jefferson”), (“Buyer” or collectively the “Buyers”). In connection with the SPA, the Company issued three (3) notes, one to each Buyer, and three (3) warrants to purchase the Company’s common stock, one to each Buyer. The aggregate purchase price of the notes is $375,000 and the aggregate principal amount of the notes is $405,000.

 

Pursuant to the SPA, each of the Buyers purchased from the Company, for a purchase price of $125,000, a convertible promissory note, in the principal amount of $135,000. The purchase of each note was accompanied by the Company’s issuance of a warrant to purchase 125,000 shares of the Company’s common stock to each Buyer. On October 7, 2019, each Buyer delivered the purchase price to the Company as payment for each note.

 

Each note became effective as of October 7, 2019 and is due and payable on April 7, 2021. The notes entitle the Buyers to 8% interest per annum. Upon an Event of Default (as defined in the notes), the notes entitle the Buyers to interest at the rate of 18% per annum. The notes may be converted into shares of the Company’s common stock at a conversion price equal to 0.75 (representing a 25% discount) multiplied by the lesser of (i) the lowest one day volume weighted average price (“VWAP”) for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the conversion date, and (ii) the lowest one day VWAP for the common stock during the ten (10) trading day period ending on the latest complete trading day prior to the issue date. In the event of a default, without demand, presentment or notice, the note shall become immediately due and payable.

 

The warrants were issued to the Buyers by the Company on October 7, 2019 in connection with the SPA. The warrants entitle the Buyers, respectively, to exercise purchase rights represented by the warrants up to 125,000 shares per warrant. The warrants permit the Buyers to exercise the purchase rights at any time on or after October 7, 2019 through October 7, 2022. Each warrant contains an exercise price per share of $0.80, subject to adjustment, and also contains a provision permitting the cashless exercise of such exercise rights as defined therein. The Company has maintained the right to redeem each warrant in full at any time following payment in full of the amounts owing under each respective note.

 

On November 4, 2019, the Company entered into a promissory note agreement with a lender for the principal sum of $250,000. The note has a maturity of twelve months and bears interest at a rate of 18% compounded annually with an additional 100,000 shares of Company restricted stock.

 

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This statement contains forward-looking statements within the meaning of the Securities Act. Discussions containing such forward-looking statements may be found throughout this statement. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the matters set forth in this statement. The accompanying condensed consolidated financial statements as of September 30, 2019 and 2018 and for the three and nine months then ended includes the accounts of Holdings and its wholly owned subsidiaries during the period owned by Holdings.

 

Surge Holdings, Inc. (“Surge Holdings” or “the Company”), incorporated in Nevada on August 18, 2006, is a company focused on Telecom, Media, and FinTech applications serving customers worldwide online and across social media, gaming and mobile platforms.

 

The Company’s current focus is the provision of financial and telecommunications services to the financially underserved (i.e. persons who have little or no access to credit) within the population. The Company provides a suite of services which are primarily marketed through small retail establishments which are utilized by members of its target market.

 

Commencing in 2018, the Company has significantly expanded its suite of services to include the pursuit of the following business models:

 

Surge Telecom

 

SurgePhone Wireless offers discounted talk, text, and 4G LTE data wireless plans at prices that average 30% – 50% lower than competitors. Available nationwide, SurgePhone Wireless utilizes ad impression revenue to help offset and, in many cases, eliminate the monthly wireless plans for low income customers (free service for the customer is paid for by ad revenue). Additionally, SurgePhone also offers strategic discounts such as the Surge Heroes campaign that rewards teachers, first responders, active military and veterans with a free Android smartphone.

 

Additionally, through the use of the SurgeRewardsApp, the Company is able to more aggressively rollout the SurgePhoneWireless service. Customers earn rewards from the ad impressions while unlocking their phone and also by opening the SurgeRewardsApp to watch videos and ads, as well as participate in short surveys in order to receive reward points that can be converted into statement credits for free cell phone service or cash.

 

True Wireless is licensed to provide subsidized wireless service to qualifying low income customers in 5 states. Utilizing all 4 major USA wireless backbones, True Wireless provides discounted and free wireless service to over 25,000 veterans and other customers who qualify for certain federal programs such as SNAP (EBT) and Medicaid.

 

The SurgePhone Android Volt 5XL provides a large screen smartphone option to those unable to afford a more expensive phone.

 

Surge Fintech

 

SurgePays Visa launched late in the third quarter of 2019. We believe this card could be life enhancing by serving as a virtual checking account for the unbanked, underbanked, credit challenged or those unable to access traditional financial services. The SurgePays card will offer safety, security and convenience of using the card anywhere that accepts Visa and customers will be able to load their card via direct deposit or loading cash directly at 110,000 locations nationwide. Customers will be able to access and manage their accounts from the connected app. In addition, customers will also be able to take a picture of their paycheck and load the cash to their cards (eliminating costly check cashing fees).

 

Surge Blockchain, LLC is focused on expanding development and licensing for a Blockchain Service as a Software (SaaS) Payments Platform in order to deliver a real product that improves people’s lives.

 

Surge Software

 

SurgePays Portal is a multi-purpose software interface for convenience stores, bodegas and other corner merchants providing goods and services to the underbanked community. The merchant or clerk is able to use the portal interface – similar to a website – with image driven navigation to add wireless minutes to any prepaid wireless carrier’s phone and access to other services such as bill payment and loading debit cards. We believe what makes SurgePays unique is that it also offers the merchant the ability to order wholesale goods through the portal with one touch ease. SurgePays is essentially a wholesale e-commerce storefront that allows manufactures and distribution companies to have access to merchants while cutting out the middleman. The goal of the SurgePays Portal is to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas, and supermarkets. These products include energy drinks, dry foods, frozen foods, bagged snacks, processed meats, automotive parts and many more goods, all in one convenient e-commerce storefront.

 

Surge Digital Media

 

Surge Logics is a full-service digital advertising agency, specializing in lead generation, Pay Per Call, landing page optimization and managed ad spending. Our primary media buying platforms are Google AdWords, Facebook, Instagram and Bing. We have a call center that can handle Live Call Transfers, Customer Service Support, Lead Verification and Attorney Case Support.

 

Through the launch of Surge Intake Logistics (“InTake”), a proprietary CRM software solution that delivers signed retainer services to clients, InTake is proving to be a direct benefit to clients that do not have the staff and infrastructure to handle the volume of leads Surge Logics generates. Surge Logics has taken this a step further to provide qualified leads utilizing a strategic partnership with Centercom to be first in class for online lead generation This partnership and new software have significantly contributed to Surge Logic’s revenue which has grown to approximately $4.4 million for the nine months ended September 30, 2019.

 

 27 
 

 

Lead generation describes the marketing process of stimulating and capturing interest in a product or service for the purpose of developing sales pipeline.

 

Pay-per-call (PPCall, also called cost-per-call) is an advertising model in which the rate paid by the advertiser is determined by the number of telephone calls made by viewers of an ad. Pay Per Call providers charge per call, per impression or per conversion.

 

Media buying is the process of buying media placements for advertising (on TV, in publications, on the radio, digital signage, apps or on websites).

 

A call center - centralized office used for receiving or transmitting a large volume of requests by telephone.

 

Centercom Global, S.A. de C.V.

 

On January 17, 2019, the Company announced the completion of an agreement to acquire a 40% equity ownership of Centercom Global, S.A. de C.V (“Centercom”). Centercom is a dynamic operations center currently providing Surge sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Anthony N. Nuzzo, a director and officer and a 10% shareholder of the Company’s voting equity has a controlling interest in CenterCom Global. Centercom also provides call center support for various third-party clients. Centercom is involved with:

 

  On-boarding the SurgePays Portal into over 40,000 retail locations and subsequent ongoing support;
  Aggressively marketing the Company’s new “Free Wireless Service” program to substantially grow customer base while enhancing customer service;
  Supporting the Company’s IT infrastructure including database management; and
  Upselling-related FinTech products to our existing customer base to increase revenue.

 

Due to the fact that a director, officer, and minority owner of the Company has a controlling interest in CenterCom Global, the Company recorded its investment in Centercom of $178,508, which is the Company’s 40% ownership of Centercom’s net book value upon close of the completion of the transaction, as “Investment in Centercom” in long term assets on the accompanying condensed consolidated balance sheets. The Company recorded its equity interest in Centercom’s results of operations as “Gain on investment in Centercom” in other income (expense) on the accompanying condensed consolidated statements of income. The Company periodically reviews its investment in Centercom for impairment. Management has determined that no impairment was required as of September 30, 2019. 

 

ECS Business

 

On September 30, 2019, the Company entered into the Purchase Agreement with GBT Technologies Inc (“GBT”) of the ECS Prepaid business, Electronic Check Services business and the Central States Legal Services business (collectively, “ECS”). Through its proprietary Fintech software platform, ECS is a leading provider of prepaid wireless load and top-ups, check cashing and wireless SIM activation to convenience stores and bodegas nationwide. Since 2008, ECS has grown to a network of over 9,800 retail locations and 160 independent sales organizations (“ISO”) processing over 18,000 transactions per day. Surge will integrate the ECS software with its SurgePays Network in order to offer both wholesale products from third-party manufacturers, as well as Surge products, including the SurgePays Reloadable Debit Card, SurgePhone Wireless and SIM Starter Kits.

 

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

Revenues during the three months ended September 30, 2019 and 2018 consisted of the following:

 

   2019   2018 
Revenue  $4,901,864   $4,051,027 
Cost of revenue   3,023,292    2,240,447 
Gross profit  $1,878,572   $1,810,580 

 

Revenue increased $850,837 (21.0%) primarily due to revenue increases in Surge Blockchain, LLC in the amount of $2,452,995 (742.6%) and Surge Logics, Inc. in the amount of $1,576,415 (390.5%) and a decrease in revenues in True Wireless, Inc. in the amount of $1,758,780 (54.5%). Gross profit increased $67,992 (3.8%) primarily due to gross profit increases in Surge Blockchain, LLC in the amount of $598,994 (3,963.5%) and Surge Logics, Inc. in the amount of $702,720 (593.0%) and a decrease in gross profit in True Wireless, Inc. in the amount of $1,199,077 (73.2%).

 

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Costs and expenses during the three months ended September 30, 2019 and 2018 consisted of the following:

 

   2019   2018 
Depreciation and amortization  $17,926   $40,029 
Selling, general and administration   2,998,359    2,170,366 
Total  $3,016,285   $2,210,395 

 

 

Depreciation and amortization decreased $22,103 primarily as a result of the transfer of Surge Cryptocurrency Mining assets and liabilities to a third party under the sole control of Brian Cox, our CEO and Chairman of the Board, in December 2018.

 

Selling, general and administrative costs (S, G & A) increased $827,993 (38.1%) primarily as a result of the increase in in-house staff support positions ($275,887) (118.8%), contractors and consultants ($157,738) (47.9%) and in personnel in the telecom operations center ($139,574) (30.4%) to support the expected revenue increase in the coming months.

 

Selling, general and administrative expenses during the three months ended September 30, 2019 and 2018 consisted of the following:

 

   2019   2018 
Telecom operations center  $599,474   $459,900 
Contractors and consultants   487,535    329,797 
Compensation   508,254    232,367 
Webhosting/internet   152,066    281,142 
Professional services   490,296    489,405 
Advertising and marketing   189,528    210,942 
Other   571,204    166,813 
Total  $2,998,357   $2,170,366 

 

Total selling, general and administrative expense (S,G & A) increased $831.372 from $2,170,366 in 2018 to $2,998,357 in 2019. The detail changes are discussed below:

 

* Telecom operations center expenses increased from $459,900 in 2018 to $599,474 in 2019 primarily as a result of the contracting vendor providing increased services for Surge Blockchain, LLC.
* Contractors and consultants increased to $487,535 in 2019 from $329,797 in 2018 primarily due to outside IT services on the SurgePays portal.
* Compensation increased from $232,367 in 2018 to $508,254 in 2019 primarily as a result of the increase in staff support positions to support the expected increase in revenue in the coming months.
* Webhosting/internet costs decreased to $152,066 in 2019 from $281,142 in 2018.
* Professional services increased from $489,405 in 2018 to $490,296 in 2019.
* Advertising and marketing costs decreased to $189,528 in 2019 from $210,942 in 2018 primarily due to a reduction in new advertising and marketing campaigns.
* Other costs increased to $571,204 in 2019 from $166,813 in 2018 primarily due to an increase in fidelity, cyber security and professional liability insurance required for the issuance of the SurgePays Visa debit card, shareholder communications and travel.

 

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Other (expense) income during the three months ended September 30, 2019 and 2018 consisted of the following:

 

   2019   2018 
Interest, net  $(20,767)  $(40,833)
Change in fair value of derivative liability   -    (6,724)
Change in fair value of LTC cryptocurrency   -    (12,581)
Gain on equity investment in Centercom   6,134    - 
Gain on settlement of liabilities   -    61,709 
   $(14,633)  $(1,571)

 

Net interest decreased to $20,767 in 2019 from $40,833 in 2018 primarily due to converting a $3,000,000 note payable to Series C convertible preferred stock in December 2018.

 

The change in fair value of LTC cryptocurrency decreased to $0 in 2019 from $12,581 in 2018 due to the transfer of all assets and liabilities of Surge Cryptocurrency Mining to a third party under the sole control of Mr. Cox in December 2018.

 

The gain on equity investment in Centercom of $6,134 in 2019 is due to the 40% acquisition of Centercom in January 2019.

 

During the three months ended September 30, 2018, the Company settled outstanding liabilities through the issuance of 3,330,703 shares of common stock.

 

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

Revenues during the nine months ended September 30, 2019 and 2018 consisted of the following:

 

   2019   2018 
Revenue  $12,295,058   $11,536,590 
Cost of revenue   7,814,614    6,160,717 
Gross profit  $4,480,444   $5,375,873 

 

Revenue increased $758,468 (6.6%) primarily due to revenue increases in Surge Blockchain, LLC in the amount of $3,641,234 (513.0%) and Surge Logics, Inc. in the amount of $3,573,560 (457.1%) and a decrease in revenues in True Wireless, Inc. in the amount of $4,427,036 (44.4%). Gross profit decreased $895,429 (16.7%) primarily due to gross profit increases in Surge Blockchain, LLC in the amount of $883,517 (2,894.1%) and Surge Logics, Inc. in the amount of $1,333,884 (646.4%) and a decrease in gross profit in True Wireless, Inc. in the amount of $3,061,912 (60.3%). The revenue and gross profit in the Surge companies represent $439,876 and $172,014, respectively.

 

Costs and expenses during the nine months ended September 30, 2019 and 2018 consisted of the following:

 

   2019   2018 
Depreciation and amortization  $39,050   $102,842 
Selling, general and administration   9,222,923    5,456,517 
Total  $9,261,973   $5,559,359 

 

Depreciation and amortization decreased $63,792 primarily as of the transfer of Surge Cryptocurrency Mining assets and liabilities to a third party under the sole control of Mr. Cox in December 2018.

 

Selling, general and administrative costs (S, G & A) increased $3,766,406 (69.0%) primarily as a result of the merger between Surge Holdings, Inc. and True Wireless, Inc. The S, G & A expenses of the Surge companies represent $507,834 of the expenses that are not included in the 2018 expenses.

 

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Selling, general and administrative expenses during the nine months ended September 30, 2019 and 2018 consisted of the following:

 

   2019   2018 
Telecom operations center  $1,625,774   $1,386,137 
Contractors and consultants   1,539,057    925,595 
Compensation   1,326,821    477,355 
Webhosting/internet   457,996    520,091 
Professional services   1,341,768    1,369,329 
Advertising and marketing   1,079,715    315,928 
DRIP fees   547,000    - 
Other   1,304,792    462,082 
Total  $9,222,923   $5,456,517 

 

Total selling, general and administrative expense (S,G & A) increased $3,766,406 from $5,456,517 in 2018 to $9,222,923 in 2019. The 2019 period includes $507,834 in expenses for the Surge companies that are not included in the 2018 expenses. The detail changes are discussed below:

 

* Telecom operations center expenses increased from $1,386,137 in 2018 to $1,625,774 in 2019 primarily as a result of the contracting vendor providing additional services for Surge Blockchain, LLC.
* Contractors and consultants increased to $1,539,057 in 2019 from $925,595 in 2018 primarily due to outside IT services on the SurgePays portal. The 2019 period includes $170,943 in expenses of the Surge companies that are not included in the 2018 expenses.
* Compensation increased from $477,355 in 2018 to $1,326,821 in 2019 primarily as a result of the increase in staff support positions to support the expected increase in revenue in the coming months. The 2019 period includes $134,876 in expense of the Surge companies that are not included in the 2018 expenses.
* Webhosting/internet costs decreased to $457,996 in 2019 from $520,091 in 2018.
* Professional services decreased from $1,369,329 in 2018 to $1,341,768 in 2019.
* Advertising and marketing costs increased to $1,079,715 in 2019 from $315,928 in 2018 primarily due to the Company implementing new advertising and marketing campaigns.
* DRIP fees increased to $547,000 as a result of the Company entering into a Distributive Resolution & Integration Program (“DRIP”) with the Asian American Trade Association (“AATAC”) to provide products and services for up to 40,000 locations. The DRIP fees are a one-time location activation fee.
* Other costs increased to $1,304,792 in 2019 from $462,082 in 2018 primarily due to an increase in fidelity, cyber security and professional liability insurance required for the issuance of the SurgePays Visa debit card, shareholder communications and travel. The 2019 period includes $98,904 in expenses of the Surge companies that are not included in the 2018 expenses.

 

Other (expense) income during the nine months ended September 30, 2019 and 2018 consisted of the following:

 

   2019   2018 
Interest, net  $(93,157)  $(128,242)
Change in fair value of derivative liability   -    (4,105)
Change in fair value of LTC cryptocurrency   -    (63,487)
Gain on equity investment in Centercom   70,909    - 
Gain (loss) on settlement of liabilities   (466,187)   61,709 
   $(488,435)  $(134,125)

 

Net interest decreased to $93,157 in 2019 from $128,242 in 2018 primarily due to converting a $3,000,000 note payable to Series C convertible preferred stock in December 2018.

 

The change in fair value of LTC cryptocurrency decreased to $0 in 2019 from $63,487 in 2018 due to the decrease in the market value of LTC cryptocurrency. In December 2018, the Company entered into an asset purchase agreement by which the Company transferred the assets and liabilities to a third party.

 

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The gain on equity investment in Centercom of $70,909 in 2019 is due to the 40% acquisition of Centercom in January 2019.

 

During the nine months ended September 30, 2019, the Company settled outstanding liabilities through the issuance of 875,000 shares of common stock and recorded a loss on settlement of $507,000. This amount was offset by a gain of $41,313 on the settlement of outstanding debt. During the nine months ended September 30, 2018, the Company settled outstanding liabilities through the issuance of 3,330,703 shares of common stock.

 

LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

 

At September 30, 2019 and December 31, 2018, our current assets were $6,080,740 and $3,059,820, respectively, and our current liabilities were $7,822,818 and $4,792,035, respectively, which resulted in a working capital deficit of $1,742,078 and $1,732,215, respectively.

 

Total assets at September 30, 2019 and December 31, 2018 amounted to $12,733,401 and $4,084,318, respectively. At September 30, 2019, assets consisted of current assets of $6,080,740, net property and equipment of $241,428, net intangible assets of $5,037,780, goodwill of $866,782, equity investment in Centercom of $249,417, operating lease right of use asset of $195,797 and other long-term assets of $61,457, as compared to current assets of $3,059,820, net property and equipment of $30,990, net intangible assets of $65,269, goodwill of $866,782 and other long-term assets of $61,457 at December 31, 2018. The increase of $4,972,511 in net intangible assets in 2019 is primarily due to the purchase of the ECS Business from GBT.

 

At September 30, 2019, our total liabilities of $14,417,715 increased $8,345,164 from $6,072,551 at December 31, 2018.

 

At September 30, 2019, our total stockholders’ deficit was $1,684,314 as compared to total stockholders’ deficit of $1,988,233 at December 31, 2018. The principal reason for the decrease in stockholders’ deficit was the impact of the net loss of $5,269,964 offset by the equity issuances during the quarter.

 

The following table sets forth the major sources and uses of cash for the nine months ended September 30, 2019 and 2018.

 

   2019   2018 
         
Net cash provided by (used in) operating activities  $(4,987,079)  $187,951 
Net cash provided by (used in) investing activities   (222,000)   243,768 
Net cash provided by (used in) financing activities   4,980,370    (296,687)
Net increase (decrease) in cash and cash equivalents  $(300,709)  $135,032 

 

At September 30, 2019, the Company had the following material commitments and contingencies.

 

Notes payable – related party - See Note 9 to the Consolidated Financial Statements.

 

Notes payable and long-term debt - See Note 10 to the Consolidated Financial Statements.

 

Convertible promissory notes payable - See Note 11 to the Consolidated Financial Statements.

 

Advances from related party - See Note 15 to the Consolidated Financial Statements.

 

Cash requirements and capital expenditures – At the current level of operations, the Company has to borrow funds to meet basic operating costs. The Company plans to use debt and equity financing to meet the cash requirements of the TW acquisition.

 

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Known trends and uncertainties – The Company is planning to acquire other businesses that are similar to its operations. The uncertainty of the economy may increase the difficulty of raising funds to support the planned business expansion.

 

Liquidity The Company had a net loss of approximately $5.3 million for the nine months ended September 30, 2019. As of September 30, 2019, the Company had cash and working capital deficit of approximately $144,000 and $1.7 million, respectively.

 

Management has made the decision to invest in its infrastructure in order to cross market and maximize product rollouts allowing for larger scale revenue in Q4 2019 and beyond. As part of this strategy, the Company is rolling out the SurgePays Marketplace platform to the AATAC network of 40,000 retail plus locations. This process includes placement orders of 500,000 Sim Starter kits, wireless top-ups platform, a nationwide exclusive master distributorship for Weekend Warrior Wellness products that include CBD products and the exclusive distributor of Pastime Foods candy. The Company is in the first phase of the rollout, during which it fulfilled over $2,800,000 in purchase orders during the three months ended September 30, 2019. The asset purchase agreement of the ECS Business executed with GBT gives the Company access to a network of over 9,800 retail locations and 160 independent salespeople processing over 18,000 transactions per day (see Note 1). ECS generates approximately $46,500,000 in annualized revenue through third party wireless services.

 

In addition, during the three months ended September 30, 2019, management made the decision to expedite programming, software development and integration to enable the successful launch of the SurgePays Prepaid Visa card.

 

To support the significant growth inflection, the Company has reorganized its human resources department, including building the administrative, legal and finance office in Bartlett, and the operations center in El Salvador which will be able to host 300 employees. Management believes the Company now has the ability to support its expected growth, which was a major goal for fiscal year 2019. During the nine months ended September 30, 2019, the Company was able to continue the utilization of the internal controls and operating procedures and techniques employed by the Company’s management in order to enhance the business by creating operating efficiencies and controlling costs. Lastly, the Company has significantly restructured its balance sheet to be an effective platform for growth as the Company continues to work towards listing on the Nasdaq Capital Market.

 

These factors, among others, were addressed by management in determining whether the Company could continue as a going concern. The Company projects that it should be cash flow positive by the end of Quarter 1 2020 from ongoing operations by the combination of increased cash flow from its current subsidiaries, as well as the collection of outstanding receivables and the restructuring of the current debt burden. While management believes it is more likely than not the Company has the ability to continue as a going concern, this is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control operating expenses.

 

Additionally, if necessary, based on the Company’s history of being able to raise capital from both internal and external sources coupled with current favorable market conditions, management believes that debt and/or equity financing can be obtained from both related parties (management and members of the Board of Directors of the Company) and external sources to pay down existing debt obligations, cover short term shortfalls, meet the shareholders equity requirements for Nasdaq, and complete proposed acquisitions. Although the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. Therefore, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

 

Subsequent to September 30, 2019, the Company executed debt agreements resulting in gross proceeds of $750,000 to support short-term working capital needs.

 

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OFF-BALANCE SHEET ARRANGEMENTS

 

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

CRITICAL ACCOUNTING ESTIMATES

 

Our significant accounting policies are described in Note 2 of the Condensed Consolidated Financial Statements. During the nine months ending September 30, 2019, we were not required to make any material estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue and expenses. However, if we complete an acquisition, we will be required to make estimates and assumptions typical of other companies. For example, we will be required to make critical accounting estimates related to valuation and accounting for business combinations. The estimates will require us to rely upon assumptions that were highly uncertain at the time the accounting estimates are made, and changes in them are reasonably likely to occur from period to period. Changes in estimates used in these and other items could have a material impact on our financial statements in the future. Our estimates will be based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.

 

PART II - OTHER INFORMATION

 

ITEM 6: EXHIBITS

 

Exhibit       Incorporated by Reference  

Filed or

Furnished

Number   Exhibit Description   Form   Exhibit   Filing Date   Herewith
10.1  

Asset Purchase Agreement between Surge Holding In. and GBT Technologies Inc. executed September 30, 2019

  10-Q   10.1   11/14/2019  
10.2   Convertible Promissory Note Issued by Surge Holding Inc. to GBT Technologies Inc. dated September 27, 2019  

10-Q

 

10.2

 

11/14/2019

 
31.1*  

Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer

              X
31.2*  

Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer

              X
32.1**  

Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer

              X
32.2**  

Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer

              X
101.INS*   XBRL Instance Document               X
101.SCH*   XBRL Taxonomy Extension Schema Document               X
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document               X
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document               X
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document               X
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document               X

 

*Filed herewith.

 

** In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  SURGE HOLDINGS, INC.
Date: November 25, 2019    
  By: /s/ Kevin Brian Cox
    Chief Executive Officer

 

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