SurgePays, Inc 10-K for FY2023
SurgePays, Inc. (SURG)
About this 10-K
SurgePays, Inc filed this 10-K on March 12, 2024, covering the fiscal year ended December 31, 2023 (FY2023).
Headline figures
Fiscal year ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $137.14M
- up 12.8% from $121.54M a year earlier
- Net income
- $20.62M
- compared with a net loss of $680.76K a year earlier
- Diluted EPS
- $1.38
- compared with -$0.05 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the fiscal year ended
or
Commission
File Number
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
| (Address of Principal Executive Offices) | (Zip Code) |
(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 | ||
The
(Nasdaq Capital Market) | ||||
The
(Nasdaq Capital Market) |
Securities registered under Section 12(g) of the Exchange Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐
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by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
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 ☐ |
| 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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate
by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously
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Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes
☐
The number of shares of the registrant’s common stock outstanding as of March 8, 2024 was shares.
As
of June 30, 2023, the aggregate market value of the shares of common stock, par value $0.001 per share held by non-affiliates of the
registrant was approximately $
TABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Annual Report, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, potential growth or growth prospects, future research and development, sales and marketing and general and administrative expenses, and our objectives for future operations, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” in this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Annual Report are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Annual Report or to conform statements to actual results or revised expectations, except as required by law.
You should read this Annual Report and the documents that we reference herein and have filed with the SEC as exhibits to this Annual Report with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.
This Annual Report also contains or may contain estimates, projections and other information concerning our industry, our business and the markets for our products, including data regarding the estimated size of those markets and their projected growth rates. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market and other data from reports, research surveys, studies and similar data prepared by third parties, industry and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which these data are derived.
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PART I
ITEM 1. BUSINESS
Company Overview and History
About SurgePays, Inc.
SurgePays, Inc. (“SurgePays”, “we”, the “Company”) is a financial technology and telecom company focused on providing these essential services to the underbanked community. We were previously known as North American Energy Resources, Inc. and KSIX Media Holdings, Inc. Prior to April 27, 2015, we operated solely as an independent oil and natural gas company engaged in the acquisition, exploration and development of oil and natural gas properties and the production of oil and natural gas through its wholly owned subsidiary, NAER. On April 27, 2015, NAER entered into a Share Exchange Agreement with KSIX Media whereby KSIX Media became a wholly owned subsidiary of NAER and which resulted in the shareholders of KSIX Media owning approximately 90% of the voting stock of the surviving entity. While we continued the oil and gas operations of NAER following this transaction, on August 4, 2015, we changed its name to KSIX Media Holdings, Inc. On December 21, 2017, we changed its name to Surge Holdings, Inc. to better reflect the diversity of its business operations. We changed our name to SurgePays, Inc. on October 29, 2020.
As described in more detail below, we currently operate in three different business segments through the following subsidiaries: (i) Surge Blockchain, LLC, formerly Blvd. Media Group, LLC, a Nevada limited liability company; (ii) LogicsIQ, Inc., a Nevada corporation; (iii) SurgePhone Wireless, LLC, a Nevada limited liability company; (iv) SurgePays Fintech, Inc., a Nevada limited liability company; (v) ECS Prepaid, LLC, a Missouri limited liability company and (vi) Torch Wireless, LLC a Wyoming limited liability company.
Our Business Segments
Mobile Virtual Network Operators
We provide mobile broadband (internet connectivity), voice and SMS text messaging to both subsidized and direct retail prepaid customers through SurgePhone Wireless, LLC and Torch Wireless, LLC, wholly owned subsidiaries of SurgePays. We consider this the Mobile Virtual Network Operators (MVNO) segment of our business. Further, we provide two types of MVNO’s, subsidized and non-subsidized. Our subsidized MVNO’s are licensed by the Federal Communications Commission (the “FCC”) to provide subsidized access to the internet through mobile broadband services to consumers qualifying under the federal guidelines of the Affordable Connectivity Program (the “ACP”). We provide these services by supplying consumers eligible for the ACP with tablet devices with mobile broadband capabilities for use in their homes. For providing mobile broadband on tablets to these eligible customers, the ACP (the successor program, as of March 1, 2022 to the Emergency Broadband Benefit program) reimburses us up to a $100 for the cost of each tablet device we distribute and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. SurgePhone and Torch combined are licensed to offer subsidized mobile broadband to all fifty states. Revenue from this portion of our business currently accounts for 86% of our total revenue. However, according to the FCC website, on February 7, 2024, the ACP stopped accepting new applications and enrollments and the ACP will cease to be funded after April 2024. The Company hopes that the program will be funded by Congress, however, at this time, we cannot predict any outcome.
Through our subsidiary LinkUp Mobile, we plan to roll-out in the second quarter of 2024 a non-subsidized portion of our MVNO business to leverage the volume of buying power we have with our subsidized subscriber base to build low-cost plans using SIM kits in convenience stores transacting on the SurgePays network. Our market will be to penetrate rural America where there is less competition and higher consumer pricing and offer incentivized family plans to the rapidly growing base of subsidized customer households. The revenue will be generated by subscribers paying a monthly fee for talk, text and data carrier services on a prepaid basis. If the ACP is not funded, we plan to competitively market our non-subsidized MVNO business to our current ACP customers and hope to be able to retain them as customers in this segment.
Comprehensive Platform Services
We provide financial technology and a wireless top-up platform to independently owned convenience stores throughout the country via our subsidiaries SurgePays Fintech, ECS Prepaid, LLC, Electronic Check Services, Inc. and Central States Legal Services, Inc. We consider these services the “Comprehensive Platform Services” segment of our business.
Specifically, our Comprehensive Platform Services provides ACH banking relationships and a fintech transactions platform that processes thousands of transactions a day at independently owned convenience stores. The Comprehensive Platform Service also provides wireless top-up transactions and wireless product aggregation for our nationwide network of convenience stores. By linking together the customer, the carrier plan and the convenience store to allow all parties to have one location to get what they need.
Our revenue is derived from the transaction that takes place when an individual using a prepaid cellular carrier plan needs to add more minutes to their cellular phone. These services are vital to convenience store operations and we believe we can utilize our relationships with convenience stores from our ACP services to expand the network for our Comprehensive Platform Services. The Company expects this segment to be the biggest percent of year-over-year revenue growth opportunity for 2024 and plans to hire a new head of sales for our Comprehensive Platform Service segment to tap into such growth opportunity.
Lead Generation
We refer to LogicsIQ, Inc. as the Lead Generation segment of our business. LogicsIQ is a lead generation and case management solutions company primarily serving law firms in the mass tort industry. Revenues from this segment of our business are earned from our lead generation retained services offerings and call center activities through CenterCom. Lead generation consist of sourcing leads, which requires us to drive traffic to our landing pages for a specific marketing campaign. We also achieve this in certain marketing campaigns by using third-party preferred vendors to meet the needs of our clients. Revenues are recognized at the time the lead is delivered to the client. If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed. Retained service offerings consist of turning leads into a retained legal case. To provide this service to our customers, we qualify leads through verification of information collected during the lead generation process. Additionally, we further qualify these leads using a client questionnaire which assists in determining the services to be provided. The qualification process is completed using our call center operations.
In 2023, we decided to focus less on this segment of our business and the Company is in the process of determining how best this service fits into the overall plans of SurgePays. The Company still derived revenue from this segment of our business in 2023, however, we plan to make a final decision on whether to maintain or discontinue the Lead Generation segment of its business in the second quarter of fiscal year ended 2024.
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Growth Strategies
We have different strategies for each of our current business segments:
Mobile Virtual Network Operators
Assuming the ACP is extended, we plan to do the following for the federally subsidized portion of our MVNO business:
| ● | Prioritize sales channels with lower cost per subscriber acquisition. | |
| ● | Continue to integrate Shockwave CRM and Clearline Mobile into our Comprehensive Platform Service software to enable ACP enrollments initiated from convenience stores. | |
| ● | Integrate Shockwave CRM into existing ATM machines and Point of Sale registers to initiate ACP enrollments. | |
| ● | Partner with existing regional distribution companies already provide consumable goods to convenient stores. | |
| ● | Analyze attrition/retention data to continually monitor and improve customer experience with the goal of industry best retention. | |
| ● | Increase the national sales team nationally. |
We also plan to do the following for the non-subsidized MVNO portion of our MVNO business:
| ● | Leverage the volume of buying power for wholesale carrier minutes/texts/data to build market low plans to offer customers using SIM kits in convenience stores transacting on the SurgePays network. | |
| ● | Penetrate rural America where there is less competition and higher consumer pricing. | |
| ● | Offer incentivized family plans to the rapidly growing base of subsidized customer households. |
Comprehensive Platform Services
We plan to do the following for our Comprehensive Platform Services business:
| ● | Build a national sales team of in-house salespeople, Independent Sales Organizations, Chain Retail Stores, and Distributors, all incentivized to add store locations and drive increased sales per store. | |
| ● | Strategically acquire other companies that offer prepaid products and other complimentary fintech products. Integrating these acquisitions to an existing base of convenience stores allows us to deploy our comprehensive fintech suite to maximize the value of the existing relationships. | |
| ● | Continue to add value driven products such as payment processing and consumer retail hard goods via our marketplace to differentiate our competitive advantage over single product companies and diversify our revenue streams. | |
| ● | Create and offer our own MVNO products to all new and existing distribution channels adding further branding and revenue streams for SurgePays. |
If the ACP is not funded, we will take the resources dedicated to the subsidized MVNMO business and move into the non-subsidized MVNO quicker than currently planned. We believe there is an opportunity to accomplish both goals, expand subscribers and add stores simultaneously. We also believe there is an opportunity to convert the subsidized subscribers into a non-subsidized plan. Those individuals currently utilizing the ACP may be looking for an alternative.
Lead Generation
We currently have no set plans on how to grow our Lead Generation business as we are making a final decision on whether to maintain or discontinue the Lead Generation segment of its business in the second quarter of fiscal year ended 2024.
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Market Opportunity
Mobile Virtual Network Operators
Subsidized
As currently implemented, individuals are eligible for ACP if they are eligible for the following other government subsidized programs: (i) the Supplemental Nutrition Assistance Program (SNAP) in the United States, (ii) Medicaid, (iii) Supplemental Security Income (SSI), (iv) Federal Public Housing Assistance, (v) Women, Infants and Children Assistance and (vi) the Lifeline program. Accordingly, as of February 2024, the government estimated that 51.7 million households were eligible for the ACP. As of this same time, the government estimates that only 23.3 million households have enrolled in ACP to date. If ACP is funded, we believe that we can tap into the estimated 28.4 million households eligible for ACP that are not currently enrolled in the program.
Non-subsidized
If the ACP is not funded, we expect the subsidized market opportunity listed above could become the market opportunity for our non-subsidized prepaid phone and internet services we believe these households will look to continue with an MVNO. In addition to those individuals, as of December 12, 2023, there were approximately 330.8 million cell phone users in the United States. As of the end of 2021, approximately 36% of these cell phone users were using prepaid cell phones. Once we launch our non-subsidized MVNO’s, we hope to be able to entice some of these prepaid cell phone users to our products.
Comprehensive Platform Services
Our market opportunity for our Comprehensive Platform Services continues to be smaller convenience stores, bodegas, mercados and tiendas. As of December 31, 2023, there were 152,396 convenience stores operating across the United States. This represents a 1.5% increase from the store count in the previous year, reversing a four-year decline. We continue to expand our product portfolio to capitalize on market trends, changes in technology and new product releases. Based on available data for our served markets, we estimate that our market share of the convenience store sales business at this time is substantially less than 1% and we plan to utilize a new sales force to expand our customers in this market.
Marketing and Sales
We utilize different marketing methods for each segment of business that we operate. For the federally subsidized portion of our MVNO business, we utilize third parties to help identify potential customers for ACP and additional convenience stores where we can sell our ACP products. Additionally, we have a campaign where we utilize social media platforms to help identify potential customers for ACP and provide knowledge to individuals who are not aware that they are eligible for ACP so they can utilize our ACP services. We currently do not market for the non-subsidized portion of our MVNO business but we plan to move forward by marketing our business to families of those who are ACP eligible. Also, in the event that the ACP is not extended, we plan to utilize a marketing effort to get our current ACP clients to utilize our non-subsidized MVNO’s. For our Comprehensive Platform Services, we plan to hire a new head of sales to market our platform to their existing convenience store connections and create a national strategy to market our platform in rural areas that may not currently have the capabilities our platform can provide. In the past, we have utilized social media platforms to market to specific segment of the population to identify potential plaintiffs for our Lead Generation segment. However, we have stopped these campaigns as we decide the future of our Lead Generation business.
Competition
There are many competitors in the prepaid wireless and mobile broadband industry. We feel what makes SurgePhone different is we are a grassroots company with our products placed in convenience stores where the underbanked shop. We can offer prepaid wireless and financial services, through these stores, at a lower price to customers since we own the transaction software processing the activations and top-ups.
Many of our current and potential competitors are well established and have longer operating histories, significantly greater financial and operational resources, and name recognition than we have. Most traditional convenience store distributors are companies that have been in business for over 50 years and utilize the historical “manufacturing plant to truck to warehouse to truck to store” logistics model. However, we believe that with our diverse product line and better efficiencies, we have the ability to obtain a large market share and continue to generate sales growth and compete in the industry. We believe, in some cases, we will be able to partner with our competition through integration and compensate them for helping us grow due to the uniqueness of the suite of products we offer and the additional revenue stores can unlock. The principal competitive factors in all our product markets are technical features, quality, availability, price, customer support, and distribution coverage. The relative importance of each of these factors varies depending on the region. We believe using our direct store distribution model nationwide will open significant opportunities for growth.
The markets in which we operate can be generally categorized as highly competitive. In order to maximize our competitive advantages, we continue to expand our product portfolio to capitalize on market trends, changes in technology and new product releases. Based on available data for our served markets, we estimate that our market share of the convenience store sales business at this time is substantially less than 1%. A substantial acquisition would be necessary to meaningfully and rapidly change our market share percentage.
Distributors generally do not have a broad set of product and service offerings or capabilities, and no single distributor currently provides all the top selling consumables while offering products and services to enhance the lifestyle of the underbanked such as prepaid wireless, gift cards, bill payment and reloadable debit cards. We believe this creates a significant opportunity for a dynamic paradigm shift to a nationwide wholesale e-commerce platform.
Competitive Edge
Our competitive edge is simple: we have the ability through our software platform, along with our relationships, capacity, efficiency, economies of scale and experience necessary to bring our financial services and prepaid products to the underbanked market in an effective and efficient manner to ensure success. Our sales protocols have been tested and proven transferable from one product offering to another while ultimately improving our target stores with better pricing and more product selection.
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Our strategy for increasing revenues is based on developing, maintaining, and expanding our nationwide network of retail stores. Our relationship-driven approach to selling along with providing many of the top selling c-store products at a wholesale discount greater than traditional distributors gives management confidence of continued growth into the foreseeable future.
We have established relationships with distribution companies delivering significant sales per day for our subsidized mobile broadband product.
Additionally, our management team consists of four executives with over 20 years in the wireless, underbanked and convenience store distribution industry while presiding over companies with substantial revenue. Our finance team is led by a CFO with a background in private equity backed and publicly traded companies ranging with substantial revenue.
Research and Development Activities
We conduct research and development on an ongoing basis, including new and existing products to offer and software product development to ensure we are delivering the most efficient, secure, and fast transactions at convenience stores. The SurgePays software platform is housed on the Amazon Web Service Cloud for redundancy, stability, and reliability. Traditionally, convenience stores are high volume and fast paced stores where space at the register is at a premium, thus leaving no room for a computer so wireless top-ups or cell phone activations are done over a Verifone terminal traditionally used for processing credit cards. We believe that our future success will depend in part upon our ability to continue the enhancement of our software platform through integrating with POS terminals, or more commonly referred to as “cash registers” while developing new products that meet or anticipate such changes in our served markets. Many of the stores we serve are now connected to the internet. This has allowed us to innovate our software to be more adaptive to equipment that is more compatible with the space constraints of the register area in a store. We are also closely watching the development of AI tools to see how they could help in support of our merchants and customers.
Seasonality
We experience some seasonality whereby the peak tax season months show a higher level of sales and consumption. However, the structure of our business and range of products in our portfolio mitigate any major fluctuations. Our revenue during the peak tax season months in the spring have historically been approximately 5% greater than the peak other months, and as our product portfolio continues to expand, the level of seasonal peaks we expect to diminish.
Employees, Affiliates and Exclusive Partners
As of March 10, 2024, our human capital resources consist of approximately twenty-two (22) SurgePays employees, providing accounting, finance, human resources, programming, sales and back office departments, a dedicated team of over forty (40) logistics, activation, and fulfilment personnel, and over two hundred (200) sales, customer service and back-office personnel located in El Salvador with our third-party relationship with CenterCom.
We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel and work strategically utilizing exclusive partners and affiliates to maximize cash flow. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees, advisors and consultants. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel through the granting of stock-based and cash-based compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives.
Corporate Information
Our executive offices are located at 3124 Brother Blvd, Suite 410, Bartlett, TN 38133, and our telephone number is (800) 760-9689. Our website is www.surgepays.com. Our website and the information contained in, or accessible through, our website will not be deemed to be incorporated by reference into this Annual Report and does not constitute part of this Annual Report.
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ITEM 1A. RISK FACTORS
Investing in our securities involves a great deal of risk. Careful consideration should be made of the following factors as well as other information included in this Annual Report before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond our control. Our business, financial condition or operating results could be materially harmed by any of these risks. This could cause the trading price of our securities to decline, and you may lose all or part of your investment. Additional risks that we do not yet know of or that we currently think are immaterial may also affect our business and the results of operations.
Risks Related to Government Regulation and Legal Proceedings
The United States Government’s dissolution or reduction of the Affordable Connectivity Program (“ACP”) could have a substantial adverse effect on our current and planned business operations.
Since the introduction of the ACP, we have derived over 70% of our revenue from reimbursement payments from the federal government under the ACP. According to the Federal Communications Commission (the “FCC”) website, the government entity that oversees the ACP, the ACP is winding down and they have stopped accepting new applications and enrollments as of February 7, 2024. The FCC has also indicated that the last fully funded month of the ACP is April 2024 due to lack of additional funding from Congress. If the ACP is allowed to expire, as indicated that it will on the FCC website, the governmental agencies will reduce or cease reimbursement payments, which will have a substantial adverse effect on our business, financial condition, and operating results.
Furthermore, the percentage of revenue from our ACP business has been growing year over year while revenue from other business segments has been decreasing. If the ACP is not funded and we need to shift our focus to other business segments, there is no guarantee that we will be able to successfully do so, which will have a substantial adverse effect on our business, financial condition, and operating results.
Additionally, some of our growth plans for the non-ACP business segments of the Company are dependent on the growth of the ACP customers. Therefore, if the ACP business is not funded, we may lose the opportunity to expand our other business segments, which will have a substantial adverse effect on our business, financial condition, and operating results.
Changes in the regulatory framework under which we operate could adversely affect our business prospects or results of operations.
Our operations are subject to regulation by the FCC and other federal, state and local agencies. These regulatory regimes frequently restrict or impose conditions on our ability to operate in designated areas and provide specified products or services. We are frequently required to maintain licenses for our operations and conduct our operations in accordance with prescribed standards. We are often involved in regulatory and other governmental proceedings or inquiries related to the application of these requirements. It is impossible to predict with any certainty the outcome of pending federal and state regulatory proceedings relating to our operations, or the reviews by federal or state courts of regulatory rulings. Without relief, existing laws and regulations may inhibit our ability to expand our business and introduce new products and services. Similarly, we cannot guarantee that we will be successful in obtaining the licenses needed to carry out our business plan or in maintaining our existing licenses. For example, the FCC grants wireless licenses for terms generally lasting ten (10) years, subject to renewal. The loss of, or a material limitation on, certain of our licenses could have a material adverse effect on our business, results of operations and financial condition.
New laws or regulations or changes to the existing regulatory framework at the federal, state and local level, such as those described below, could restrict the ways in which we manage our wireline and wireless networks and operate our business, impose additional costs, impair revenue opportunities and potentially impede our ability to provide services in a manner that would be attractive to us and our customers.
| ● | Privacy and data protection - we are subject to federal, state and international laws related to privacy and data protection. | |
| ● | Regulation of broadband Internet access services - On June 11, 2018, the repeal of the FCC’s “net neutrality” rules took effect and returned to a “light-touch” regulatory framework. The prior rules were designed to ensure that all online content is treated the same by internet service providers and other companies that provide broadband services. Additionally, California and a number of other states are considering or have enacted legislation or executive actions that would regulate the conduct of broadband providers. We cannot predict whether the FCC order or state initiatives will be modified, overturned, or vacated by legal action of the court, federal legislation, or the FCC. With the repeal of net neutrality rules in effect, we could incur greater operating expenses, which could harm our results of operations. | |
| ● | “Open Access” - we hold certain wireless licenses that require us to comply with so-called “open access” FCC regulations, which generally require licensees of a particular spectrum to allow customers to use devices and applications of their choice. Moreover, certain services could be subject to conflicting regulation by the FCC and/or various state and local authorities, which could significantly increase the cost of implementing and introducing new services. |
The further regulation of broadband, wireless and our other activities and any related court decisions could restrict our ability to compete in the marketplace and limit the return we can expect to achieve on past and future investments in our networks.
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We could be impacted by unfavorable results of legal proceedings, and may, from time to time, be involved in future litigation in which substantial monetary damages are sought.
We are currently subject to a number of litigations as described under the heading “Legal Proceedings.” In connection with certain of these litigations, we may be required to pay significant monetary damages. Defending against the current litigations is or can be time-consuming, expensive and cause diversion of our management’s attention.
In addition, we may from time to time be involved in future litigation in which substantial monetary damages are sought. Litigation claims may relate to intellectual property, contracts, employment, securities and other matters arising out of the conduct of our current and past business activities. Any claims, whether with or without merit, could be time-consuming, expensive to defend and could divert management’s attention and resources. We may maintain insurance against some, but not all, of these potential claims, and the levels of insurance we do maintain may not be adequate to fully cover any and all losses.
With respect to any litigation, our insurance may not reimburse us, or may not be sufficient to reimburse us, for the expenses or losses we may suffer in contesting and concluding such lawsuit. The results of any future litigation or claims are inherently unpredictable and substantial litigation costs, including the substantial self-insured retention that we are required to satisfy before any insurance applies to a claim, unreimbursed legal fees or an adverse result in any litigation may have a material adverse effect on our results of operations, cash from operating activities or financial condition.
Risks Related to Our Business, Industry and Operations
If we are not able to adapt to changes and disruptions in technology and address changing consumer demand on a timely basis, we may experience a decline in the demand for our services, be unable to implement our business strategy and experience reduced profits.
Our industries are rapidly changing as new technologies are developed that offer consumers an array of choices for their communications needs and allow new entrants into the markets we serve. In order to grow and remain competitive, we will need to adapt to future changes in technology, enhance our existing offerings and introduce new offerings to address our customers’ changing demands. If we are unable to meet future challenges from competing technologies on a timely basis or at an acceptable cost, we could lose customers to our competitors. We may not be able to accurately predict technological trends or the success of new services in the market. In addition, there could be legal or regulatory restraints on our introduction of new services. If our services fail to gain acceptance in the marketplace, or if costs associated with the implementation and introduction of these services materially increase, our ability to retain and attract customers could be adversely affected. Additionally, we must phase out outdated and unprofitable technologies and services. If we are unable to do so on a cost-effective basis, we could experience reduced profits. In addition, there could be legal or regulatory restraints on our ability to phase out current services.
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We may expand through investments in, acquisitions of, or the development of new products with assistance from, other companies, any of which may not be successful and may divert our management’s attention.
In the past, we completed several strategic acquisitions. We also may evaluate and enter into discussions regarding an array of potential strategic transactions, including acquiring complementary products, technologies or businesses. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to be employed by us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. Moreover, we cannot assure you that the anticipated benefits of any acquisition, investment or business relationship would be realized timely, if at all, or that we would not be exposed to unknown liabilities. In connection with any such transaction, we may:
| ● | encounter difficulties retaining key employees of the acquired company or integrating diverse business cultures; | |
| ● | incur large charges or substantial liabilities, including without limitation, liabilities associated with products or technologies accused or found to infringe on third-party intellectual property rights or violate existing or future privacy regulations; | |
| ● | issue shares of our capital stock as part of the consideration, which may be dilutive to existing stockholders; | |
| ● | become subject to adverse tax consequences, legal disputes, substantial depreciation or deferred compensation charges; | |
| ● | use cash that we may otherwise need for ongoing or future operation of our business; | |
| ● | enter new geographic markets that subject us to different laws and regulations that may have an adverse impact on our business; | |
| ● | experience difficulties effectively utilizing acquired assets; | |
| ● | encounter difficulties integrating the information and financial reporting systems of acquired businesses, particularly those that operated under accounting principles other than those generally accepted in the U.S. prior to the acquisition by us; and | |
| ● | incur debt, which may be on terms unfavorable to us or that we are unable to repay. |
We have undertaken in the past, and may in the future undertake, strategic acquisitions. Failure to integrate acquisitions could adversely affect our value.
One of the ways we have grown our business in the past is through strategic acquisitions of other businesses, products, and technologies. We may, from time to time, evaluate additional acquisition opportunities, and may, in the future, strategically make further acquisitions of, and investments in, businesses, products and technologies when we believe the opportunity is advantageous to our prospects, such as the acquisition of Clearline Mobile, Inc (“Clearline”). There can be no assurance that in the future we will be able to find appropriate acquisitions or investments. In connection with these acquisitions or investments, we may:
| ● | issue stock that would dilute our shareholders’ percentage of ownership; | |
| ● | be obligated to make milestone or other contingent or non-contingent payments; | |
| ● | incur debt and assume liabilities; and/ or | |
| ● | incur amortization expenses related to intangible assets or incur large and immediate write-offs. |
We also may be unable to find suitable acquisition candidates and may not be able to complete acquisitions on favorable terms, if at all, or obtain adequate financing for such acquisitions. If we do complete an acquisition, such as with Clearline, we may not be able to successfully integrate the acquired business into our preexisting business, and we may not ultimately strengthen our competitive position or ensure that we will not be viewed negatively by customers, financial markets or investors. Further, acquisitions could also pose numerous additional risks to our operations, including:
| ● | problems integrating the purchased business, products or technologies without substantial costs, delays or other problems; | |
| ● | increases to our expenses; | |
| ● | the failure to have discovered undisclosed liabilities of the acquired asset or company for which we may not be adequately indemnified; | |
| ● | diversion of management’s attention from their day-to-day responsibilities and our core business; | |
| ● | inability to enforce indemnification and non-compete agreements; | |
| ● | the failure to successfully incorporate acquired products or technologies into our business; | |
| ● | the failure of the acquired business, products or technologies to perform as well as anticipated; | |
| ● | the failure to realize expected synergies and cost savings; | |
| ● | harm to our operating results or financial condition, particularly during the first several reporting periods after the acquisition is completed; | |
| ● | entrance into markets in which we have limited or no prior experience; and | |
| ● | potential loss of key employees or customers, particularly those of the acquired entity. |
Our business could be adversely affected if we fail to implement and maintain effective disclosure controls and procedures and internal control over financial reporting.
If we are unable to maintain effective disclosure controls and procedures, or if there are identified significant deficiencies or material weaknesses in the future, our ability to produce accurate and timely financial statements and public reports could be impaired, which could adversely affect our business and financial condition. In addition, investors may lose confidence in our reported information and the market price of our Common Stock may decline.
Our success is substantially dependent on the continued service of our senior management.
Our success is substantially dependent on the continued service of our Chief Executive Officer (“CEO”), Kevin Brian Cox and our Chief Financial Officer (“CFO”), Anthony Evers. We do not carry key person life insurance on any of its management, which would leave us uncompensated for the loss of any of its management. The loss of the services of any of our senior management could make it more difficult to successfully operate our business and achieve our business goals. In addition, competition in our industry for senior management and other key personnel is intense. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, either because of competition in our industry for such personnel or because of insufficient financial resources, our product development capabilities and customer and employee relationships growth may be harmed and overall growth may be limited.
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We offer competitive compensation packages in order to retain the services of our senior management, and we could be required to pay significant compensation payments in the case we are unable to retain our senior management.
As the continued employment of our executive officers is critical to the Company’s success, we have entered into competitive employment agreements in order to retain the services of our existing officers. In addition to guaranteed base compensation, we have offered our CEO incentive compensation upon the Company’s completion of milestones including achieving certain annual revenue, annual EBITDA, and market capitalization goals, that could require the Company to pay large equity grants for the achievement of each milestone completed.
In the case our CEO were to terminate their employment agreement due to breach of contract, a substantial downturn in the Company’s business or personnel, a reduction in officer’s role, responsibilities, or compensation, or significant change in the Company’s location of business and operations, the Company would be required to pay a severance package that, in combination with the compensation that would need to be paid to a replacement executive, could have a severe strain on the Company’s finances.
We may not have sufficient resources to effectively introduce and market our services and products, which could materially harm our operating results.
Continuation of market acceptance for our existing services and products require substantial marketing efforts and will require our sales account executives and contract partners to make significant expenditures of time and money. In some instances, we will be significantly or totally reliant on the marketing efforts and expenditures of our contract partners, outside sales agents and distributors.
Because we currently have very limited marketing resources and sales capabilities, commercialization of our products, some of which require regulatory clearance prior to market entrance, we must either expand our own marketing and sales capabilities or consider collaborating with additional third parties to perform these functions. We may, in some instances, rely significantly on sales, marketing and distribution arrangements with collaborative partners and other third parties. In these instances, our future revenue will be materially dependent upon the success of the efforts of these third parties.
Should we determine that expanding our own marketing and sales capabilities is required, we may not be able to attract and retain qualified personnel to serve in our sales and marketing organization, to develop an effective distribution network or to otherwise effectively support our commercialization activities. The cost of establishing and maintaining a more comprehensive sales and marketing organization may exceed its cost effectiveness. If we fail to further develop our sales and marketing capabilities, if sales efforts are not effective or if costs of increasing sales and marketing capabilities exceed their cost effectiveness, our business, results of operations and financial condition would be materially adversely affected.
We operate in a highly competitive industry.
We may encounter competition from local, regional or national entities, some of which have superior resources or other competitive advantages in the larger wireless services space. Intense competition may adversely affect our business, financial condition or results of operations. These competitors may be larger and more highly capitalized, with greater name recognition. We will compete with such companies on brand name, quality of services, level of expertise, advertising, product and service innovation and differentiation of product and services. As a result, our ability to secure significant market share may be impeded.
Risks Related to Our Securities
Our CEO and Chair, Kevin Brian Cox, has significant control over shareholder matters and the minority shareholders will have little or no control over our affairs.
Mr. Cox currently owns approximately 28.5% of our outstanding voting equity. Subject to any fiduciary duties owed to our other stockholders under Nevada law, Mr. Cox is able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have some control over our management and policies. Mr. Cox may have interests that are different from yours. For example, Mr. Cox may support proposals and actions with which you may disagree. The concentration of ownership could delay or prevent a change in control of our Company or otherwise discourage a potential acquirer from attempting to obtain control of our Company, which in turn could reduce the price of our stock. In addition, Mr. Cox could use his voting influence to maintain our existing management and directors in office, delay or prevent changes in control of our Company, or support or reject other management and proposals of the Board of Directors (the “Board”) that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.
Sales of a significant number of shares of our Common Stock in the public market or the perception of such possible sales, could depress the market price of our Common Stock.
Sales of a substantial number of shares of our Common Stock in the public markets, which include an offering of our preferred stock or Common Stock could depress the market price of our Common Stock and impair our ability to raise capital through the sale of additional equity or equity-related securities. We cannot predict the effect that future sales of our Common Stock or other equity-related securities would have on the market price of our Common Stock.
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Our share price could be volatile and our trading volume may fluctuate substantially.
The price of our Common Stock has been and may in the future continue to be extremely volatile. Many factors could have a significant impact on the future price of our shares of Common Stock, including:
| ● | our inability to raise additional capital to fund our operations, whether through the issuance of equity securities or debt; | |
| ● | our failure to successfully implement our business objectives; | |
| ● | compliance with ongoing regulatory requirements; | |
| ● | market acceptance of our products; | |
| ● | changes in government regulations; | |
| ● | the discontinuation of the ACP program; | |
| ● | actual or anticipated fluctuations in our quarterly financial and operating results; and | |
| ● | the degree of trading liquidity in our shares of Common Stock. |
A decline in the price of our shares of Common Stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.
The decline in the price of our shares of Common Stock, could result in a reduction in the liquidity of our Common Stock and a reduction in our ability to raise capital. Because a significant portion of our operations has been and will continue to be financed through the sale of equity securities, a decline in the price of our shares of Common Stock could be especially detrimental to our liquidity and our operations. Such reductions and declines may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plans and operations, including our ability to continue our current operations. If the price for our shares of Common Stock declines, it may be more difficult to raise additional capital. If we are unable to raise sufficient capital, and we are unable to generate funds from operations sufficient to meet our obligations, we will not have the resources to continue our operations.
The market price for our shares of Common Stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our shares of Common Stock.
We currently do not intend to pay dividends on our Common Stock. As result, your only opportunity to achieve a return on your investment is if the price of our Common Stock appreciates.
We currently do not expect to declare or pay dividends on our Common Stock. In addition, in the future we may enter into agreements that prohibit or restrict our ability to declare or pay dividends on our Common Stock. As a result, your only opportunity to achieve a return on your investment will be if the market price of our Common Stock appreciates and you sell your shares at a profit.
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We could issue additional Common Stock, which might dilute the book value of our Common Stock.
The Board has authority, without action or vote of our shareholders, to issue all or a part of our authorized but unissued shares. Such stock issuances could be made at a price that reflects a discount or a premium from the then-current trading price of our Common Stock. In addition, in order to raise capital, we may need to issue securities that are convertible into or exchangeable for our Common Stock. These issuances would dilute the percentage ownership interest, which would have the effect of reducing your influence on matters requiring shareholders vote and might dilute the book value of our Common Stock. You may incur additional dilution if holders of stock warrants or options, whether currently outstanding or subsequently granted, exercise their options, or if warrant holders exercise their warrants to purchase shares of our Common Stock.
Future Issuance of Our Common Stock, Preferred Stock, Options and Warrants Could Dilute the Interests of Existing Stockholders.
We may issue additional shares of our Common Stock, preferred stock, options and warrants in the future. These issuances may include substantial milestone-based issuances of securities to our executive officers as described in Item 11 of this Annual Report under the heading “Employment Agreements.” The issuance of a substantial amount of Common Stock, options and warrants could have the effect of substantially diluting the interests of our current stockholders. In addition, the sale of a substantial amount of Common Stock or preferred stock in the public market, or the exercise of a substantial number of warrants and options either in the initial issuance or in a subsequent resale by the target company in an acquisition which received such Common Stock as consideration or by investors who acquired such Common Stock in a private placement could have an adverse effect on the market price of our Common Stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Cybersecurity Risk Management and Strategy
We have developed and maintain a cybersecurity risk management methodology intended to protect the confidentiality, integrity, and availability of our critical systems and information. Our cybersecurity risk management methodology is integrated into our overall enterprise risk management, and shares common methodologies, reporting channels and governance processes that apply across the Company to other legal, compliance, strategic, operational, and financial risk areas. As part of our overall risk management processes and procedures, we have instituted a cybersecurity awareness designed to identify, assess and manage material risks from cybersecurity threats, including by engaging a third-party cybersecurity service provider, which communicates directly with our management and compliance personnel. The cyber risk management methodology involves risk assessments, implementation of security measures and ongoing monitoring of systems and networks, including networks on which we rely. Through our cybersecurity awareness, the current threat landscape is actively monitored in an effort to identify material risks arising from new and evolving cybersecurity threats. We may engage external experts, including cybersecurity assessors, consultants and auditors to evaluate cybersecurity measures and risk management processes as needed. We also depend on and engage various third parties, including suppliers, vendors and service providers in connection with our operations. Our risk management, legal, and compliance personnel oversee and identify, including through a third-party cybersecurity service provider, material risks from cybersecurity threats associated with our use of such entities.
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Our cybersecurity risk management methodology includes:
| ● | risk assessments designed to help identify material cybersecurity risks to our critical systems, information, services, and our broader enterprise IT environment; | |
| ● | individuals, including employees and external third-party service providers, who are responsible for managing our cybersecurity risk assessment processes, our security controls, and our response to cybersecurity incidents; | |
| ● | the use of external service providers, where appropriate, to assess, test or otherwise assist with aspects of our security controls; | |
| ● | cybersecurity awareness training of our employees, incident response personnel, and senior management; | |
| ● | a cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents; and | |
| ● | a third-party risk management process for service providers, suppliers, and vendors. |
We have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected us, including our operations, business strategy, results of operations, or financial condition. We face risks from cybersecurity threats that, if realized, are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition.
Cybersecurity Governance
Our Board provides strategic oversight on cybersecurity matters, including material risks associated with cybersecurity threats. The Board has delegated to the Audit Committee oversight of cybersecurity and other information technology risks. The Audit Committee oversees management’s implementation of our cybersecurity risk management methodology. Our Board and the Audit Committee receives periodic updates from our Chief Financial Officer and more frequently as needed, regarding the overall state of our cybersecurity preparedness, information on the current threat landscape, and material risks from cybersecurity threats and cybersecurity incidents. The Audit Committee and our management team are informed about and monitor the prevention, detection, mitigation, and remediation of cybersecurity incidents, including through the receipt of notifications from third-party service providers and reliance on communications with our risk management, legal, and/or compliance personnel.
The Audit Committee reports to the full Board regarding cybersecurity activities. The full Board also receives briefings from management on cyber risk issues and best practices. Our management team is responsible for assessing and managing our material risks from cybersecurity threats. The team has primary responsibility for developing and maintaining our overall cybersecurity risk methodology and supervises both our internal cybersecurity personnel and our retained external cybersecurity consultants. Our management team supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us; and alerts and reports produced by security tools deployed in the information technology environment.
ITEM 2. PROPERTIES
We presently occupy space at 3 locations: 3124 Brother Blvd, Suite 410, Bartlett, TN 38133 (this building is owned by an entity owned by Mr. Cox, our CEO and Chair), which houses our corporate headquarters along with back office, inventory and marketing departments, 1375 E Woodfield Road, Schaumburg IL 60173, which houses our finance and human resources departments, and 1615 S Ingram Mill, Building B, Springfield, Missouri 65804, which houses our Comprehensive Platform Services technical operations.
See pages F-25 - F-27 for detailed lease information.
We will acquire additional office space as needed.
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ITEM 3. LEGAL PROCEEDINGS
| (1) | Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox. Written discovery is winding down and depositions began in the third quarter of 2023 and are expected to continue in 2024. The case is anticipated set for trial in January 2025. | |
| In the Circuit Court of Tennessee for the 30th Judicial District at Memphis, Docket # CT-3219-23. On August 8, 2023, a complaint was filed by SurgePays for breach of a promissory note by Blue Skies Connections, LLC. The note at issue is dated June 14, 2021, and requires Blue Skies Connections to repay the principal sum of $176,850.56, by monthly payments of $7,461.37 commencing on June 1, 2023. Blue Skies Connections has failed to make any payments due under the terms of the note, and this breach entitles SurgePays to demand payment of the entire amount of the note together with all accrued interest. Blue Skies Connections has responded by preparing a Motion to Dismiss or, in the alternative, a Motion to Stay, taking the position that, under the prior suit pending doctrine, the subject promissory note is subject to the prior litigation instituted by Blue Skies Connections against SurgePays, styled Skies Connections, LLC and True Wireless, Inc. v. SurgePays, Inc., et al., Case No. CJ-2021-5327, District Court of Oklahoma County, Oklahoma. Counsel for Blue Skies Connections has requested that Surge Pays either voluntarily dismiss the subject action or agree to stay the subject action until conclusion of the Oklahoma litigation. | ||
| (2) | SurgePays, Inc. et al. v. Fina et al., Case No. CJ-2022-2782, District Court of Oklahoma County, Oklahoma. Plaintiffs SurgePays, Inc. and Kevin Brian Cox initiated this case against its former officer Mike Fina, his companies Blue Skies Connections, LLC, True Wireless, Inc., Government Consulting Solutions, Inc., Mussell Communications LLC, and others. This case also arises from the June 2021 transaction by which SurgePays sold True Wireless to Blue Skies. During the litigation of CJ-2021-5327 described above, SurgePays learned information that showed Mike Fina breached his duties owed to True Wireless during his employment and consulting work for True Wireless prior to SurgePays’ sale of True Wireless to Blue Skies. SurgePays alleges that Mike Fina conspired with the other defendants to damage True Wireless thereby harming the value of the company and causing its eventual sale at a greatly reduced price. SurgePays asserts claims for (i) breach of contract; (ii) breach of fiduciary duty; (iii) fraud; (iv) tortious interference; and (v) unjust enrichment. At this stage, no defendant has asserted a counterclaim against SurgePays. |
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| SurgePays filed a Second Amended Petition on January 27, 2023. Defendants Fina, Blue Skies, True Wireless, and Government Consulting Solutions filed a Motion to Dismiss on March 10, 2023. On June 29, 2023, the Court granted the Motion to Dismiss, ruling the claims asserted are “derivative” and could only be asserted by the True Wireless entity now owed by Blue Skies. The Court rejected SurgePays’ request to certify this ruling for immediate appeal. Defendant Misty Garrett has filed a Motion for Summary Judgment seeking the same relief as the Motion to Dismiss granted by the Court. Defendants Rob Rowlen and Terracom, LLC remain as defendants in the case after answering the Second Amended Petition. It is SurgePays’ present intent to vigorously appeal the Court’s dismissal of Fina, Blue Skies, True Wireless, and Government Consulting Solutions, and to continue prosecuting the case against the other Defendants. At this stage, no attempts at settlement have been made. | ||
| (3) | Robert Aliotta and Steve Vasquesz, on behalf of themselves and others similarly situated v. SurgePays, Inc. d/b/a Surge Logics, filed January 4, 2023, in the U.S. District Court for the Northern District of Illinois, Case No. 1:23-cv-00042. Plaintiffs allege violations of the Telephone Consumer Protection Act (TCPA) and the Florida Telephone Solicitations Act (FTSA) based on telephone solicitations allegedly made by or on behalf of SurgePays, Inc. Plaintiffs seek damages for themselves and seek certification of a class action on behalf of others similarly situated. Defendants intend to vigorously defend the action however most similar cases are eventually resolved by an out-of-court settlement. At this time, it is difficult to estimate the amount or range of potential loss. SurgePays Inc has been removed from the case following a Motion to Dismiss and LogicsIQ, Inc. has been named as the defendant. The case has begun written discovery and depositions are expected later this year. | |
| (4) | Consumer Attorney Marketing Group, LLC v. LogicsIQ, Inc. and SurgePays, Inc. On February 13, 2024, in the Superior Court of California, Los Angeles County, Case No. 24 ST CV 03653, Consumer Attorney Marketing Group, LLC (“CAMG”) filed a complaint naming SurgePays, Inc. (the “Company”) a defendant and alleging claims for breach of contract, declaratory judgment and express and implied indemnity. The complaint demands that defendants indemnify CAMG for any damages or losses that CAMG may incur in the case Robert Aliotta, et al. v. SurgePays, Inc. d/b/a SurgeLogics, Case No. 23 C 00042, pending in the U.S. District Court for the Northern District of Illinois. CAMG’s claims against the Company are solely based upon theories of participatory and vicarious liability. The Company was served on or about February 27, 2024. The Company’s answer or other pleading is currently due on March 28, 2024. This case is in the initial stages. The Company has not yet filed an appearance in the matter, and the Court has not scheduled any dates or deadlines. The Company is reviewing the claims and determining its defenses. At this time, it is not possible to estimate the amount or range of potential loss. | |
| (5) | On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of contract and prays for damages of approximately $73,000, plus fees, costs and interest. Litigation counsel is managing the motion practice and discovery process. The case was settled and dismissed in 2023 for $60,000, which has been recorded as a component of general and administrative expenses. |
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Common Stock and the Warrants began trading on the Nasdaq Capital Market under the symbols SURG and SURGW, respectively, on November 2, 2021.
As of March 5, 2024, there were approximately 7,277 holders of record of our Common Stock. Since certain shares of our Common Stock are held by brokers and other institutions on behalf of stockholders, the foregoing number of holders of our Common Stock is not representative of the number of beneficial holders of our Common Stock.
The last reported sales price for our Common Stock as reported on the Nasdaq Capital Market on March 5, 2024 was $6.64.
Dividends
We have not declared or paid any cash dividends on our Common Stock, and we do not anticipate declaring or paying cash dividends for the foreseeable future. We are not subject to any legal restrictions respecting the payment of dividends, except that we may not pay dividends if the payment would render us insolvent. Any future determination as to the payment of cash dividends on our Common Stock will be at the discretion of our Board and will depend on our financial condition, operating results, capital requirements and other factors that the Board considers to be relevant.
Securities Authorized for Issuance under Equity Compensation Plans
See the information incorporated by reference in “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” for information regarding shares of our common stock authorized for issuance under our stock compensation plans, which information is incorporated herein by reference.
Preferred Stock
As of December 31, 2023, the Company does not have any shares of preferred stock outstanding.
Transfer Agent
The transfer agent of our Common Stock is VStock Transfer, LLC. Their address is 18 Lafayette Place, Woodmere, NY 11598.
Unregistered Sales of Equity Securities
We have previously disclosed in our 10-Qs and 8-Ks filed in 2023 all 2023 sales of securities without registration under the Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth in “Part I – Item 1A. Risk Factors.”
Business Overview
We were incorporated in Nevada on August 18, 2006 and a technology and telecommunications company focused on the underbanked and underserved communities.
Our Mobile Virtual Network Operators consisting of SurgePhone Wireless and Torch Wireless provide mobile broadband (internet connectivity) to low-income consumers nationwide. Our Comprehensive Platform Services consisting of SurgePays Fintech, ECS Prepaid, LLC, Electronic Check Services, Inc. and Central States Legal Services, Inc. provides ACH banking relationships and a fintech transactions platform that processes thousands of transactions a day independently owned convenience stores. We are aggressively pursuing the underbanked market directly to the consumer and in the stores they shop.
Please see the description in Item 1 of this Annual Report for a description of our Mobile Virtual Network Operators, Comprehensive Platform Services and Lead Generation business segments.
COMPARISON OF YEAR ENDED DECEMBER 31, 2023 AND 2022
We measure our performance on a consolidated basis as well as the performance of each segment.
We report our financial performance based on the following segments: Mobile Virtual Network Operators (MVNO), Comprehensive Platform Service (Top-up) and Lead Generation. The MVNO segment is further broken down into subsidized and non-subsidized components. The subsidized component or ACP is the result of the mobile broadband (internet connectivity) services provided by SurgePhone Wireless and Torch Wireless to low-income consumers and accounts for the majority of our revenue. The Comprehensive Platform Service segment is comprised of Surge Fintech and ECS as previously shown. The Lead Generation is comprised of LogicsIQ as previously shown.
The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. Additional information on our reportable segments is contained in Note 10 – Segment Information and Geographic Data of the Notes to Financial Statements.
Revenues during the years ended December 31, 2023 and 2022 consisted of the following:
| 2023 | 2022 | |||||||
| Revenue | $ | 137,141,832 | $ | 121,544,190 | ||||
| Cost of revenue (exclusive of depreciation and amortization) | (101,499,341 | ) | (108,074,782 | ) | ||||
| General and administrative | (16,777,107 | ) | (12,835,623 | ) | ||||
| Income (Loss) from operations | $ | 18,865,384 | $ | 633,785 | ||||
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Revenue increased overall by $15,597,642 (12.8%) from year ended December 31, 2022 to year ended December 31, 2023. The breakout was as follows:
| For the Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues: | ||||||||
| Mobile Virtual Network Operator | $ | 118,577,920 | $ | 88,351,547 | ||||
| Comprehensive Platform Services | 11,341,183 | 16,319,076 | ||||||
| Lead Generation | 7,184,283 | 16,760,656 | ||||||
| Other | 38,446 | 112,911 | ||||||
| Total | $ | 137,141,832 | $ | 121,544,190 | ||||
Mobile Virtual Network Operators consisting of SurgePhone Wireless and Torch Wireless revenues (as detailed in Notes 2 and 10 of the financial statements) increased by $30,226,373 (34.2%) relating to the additional revenue stream generated by the increase in subscribers to over 260,000 at the end of 2023 from 200,000 at the end of 2022 since ACP started in August of 2021. According to the FCC website, on February 7, 2024, the ACP stopped accepting new applications and enrollments and the ACP will cease to be funded after April 2024.
Lead Generation services consisting of LogicsIQ revenues decreased by $9,576,373 as a result of operational changes by management in 2023. The Company is still in the process of determining how best this service fits into the overall plans of SurgePays.
Comprehensive Platform Services revenues decreased by $4,977,893 as a result of focusing our efforts on our MVNO segment, specifically the ACP component of the MVNO segment while we strategized on how to enhance our sales and on-boarding approach to adding convenience stores to our platform. The Company expects this segment to be the biggest percent of year-over-year revenue growth opportunity for 2024 and plans to hire a new head of sales for our Comprehensive Platform Service segment to tap into such growth opportunity.
If the ACP is fully funded, we expect revenue to grow overall for the Company in 2024 and we will be focusing our business efforts on the continued growth of our Mobile Virtual Network Operators and rolling out a new sales approach for the Comprehensive Platform Service segments. Specifically, we plan to grow our Comprehensive Platform Service business by increasing our subscriber base and active store counts in 2024 by hiring a new head of sales. Our planned new head of sales has substantial experience and connections with convenience stores that we believe can be added to our platform services. However, if the ACP is not renewed, we expect revenue for the Company in 2024 to substantially decrease because ACP reimbursement we derive a substantial portion of our revenue from the ACP. Additionally, the Company plans to make a final decision on whether to maintain or discontinue the Lead Generation segment of its business in the second quarter of fiscal year ending 2024.
Cost of Revenue, Gross Profit and Gross Margin
For the year of 2023, cost of revenue for services primarily consists of data plan expenses ($28,612,000), devices ($28,476,000), marketing and advertising ($23,227,000), and other expenses such as royalties and call-center expenses ($3,604,000). For the year of 2022, cost of revenue for services primarily consists of data plan expenses ($21,056,000), devices ($35,313,000), marketing and advertising ($17,449,000), and other expenses such as royalties and call-center expenses ($2,312,000).
We expect that our cost of revenue will increase or decrease to the extent that our revenue increases and decreases.
The Company expects to continue the improvement of gross margin in the MVNO segment, assuming the ACP program if fully funded for 2024. The Company expects the overall cost to acquire a new ACP subscriber will decrease in 2024 as we introduce new social media approaches to capture new subscribers. We anticipate the cost of device acquisition will continue to be lower in 2024 as we transition from buying devices to using SIM cards to capture and switch subscribers to our services. As we roll out new approaches to acquire an ACP subscriber, our marketing-related expenses should decrease.
In addition, the Company plans to implement a new sales force for Comprehensive Platform Services to capture what we believe is an untapped underbanked convenience store market.
| For the Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cost of Revenue (exclusive of depreciation and amortization): | ||||||||
| Mobile Virtual Network Operator | $ | 83,918,968 | $ | 76,130,286 | ||||
| Comprehensive Platform Services | 11,281,722 | 16,966,332 | ||||||
| Lead Generation | 6,228,650 | 14,975,647 | ||||||
| Other | 70,001 | 2,517 | ||||||
| Total | $ | 101,499,341 | $ | 121,544,190 | ||||
Gross profit margin is calculated as revenue less cost of revenue. Gross profit margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods will depend on a variety of factors, including market conditions that may impact our pricing, sales mix among devices, sales mix changes among consumables, excess and obsolete inventories, and the cost of our products from manufacturers. Our gross profit in future periods will vary based upon our revenue stream mix and may increase based upon our distribution channels.
| For the Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Gross Profit (Loss) (exclusive of depreciation and amortization): | ||||||||
| Mobile Virtual Network Operator | $ | 34,658,952 | $ | 12,221,261 | ||||
| Comprehensive Platform Services | 59,461 | (647,256 | ) | |||||
| Lead Generation | 955,633 | 1,785,009 | ||||||
| Other | (31,555 | ) | 110,394 | |||||
| Total | $ | 35,642,491 | $ | 13,469,408 | ||||
The Company expects to continue the improvement of gross margin in all segments, assuming the ACP program is fully funded for 2024.
| For the Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Gross Margin: | ||||||||
| Mobile Virtual Network Operator | % | 29.2 | % | 13.8 | ||||
| Comprehensive Platform Services | 0.5 | (4.0 | ) | |||||
| Lead Generation | 13.3 | 10.6 | ||||||
| Other | (82.1 | ) | 97.8 | |||||
| Total | % | 26.0 | % | 11.1 | ||||
| 16 |
We expect that our gross profit margin for product and service will increase over the long term as our sales and production volumes increase and our cost per unit decreases due to efficiencies of scale.
General and administrative during the years ended December 31, 2023 and 2022 consisted of the following:
| 2023 | 2022 | |||||||
| Depreciation and amortization | $ | 1,064,099 | $ | 931,593 | ||||
| Selling, general and administration | 15,713,008 | 11,904,030 | ||||||
| Total | $ | 16,777,107 | $ | 12,835,623 | ||||
The increase in depreciation and amortization costs for 2023 is the result of capitalizing costs associated with software enhancements to our various software platforms in 2023.
Selling, general and administrative expenses during the years ended December 31, 2023 and 2022 consisted of the following:
| 2023 | 2022 | |||||||
| Contractors and consultants | $ | 2,715,605 | $ | 1,667,016 | ||||
| Professional services | 1,949,407 | 1,204,133 | ||||||
| Compensation | 6,342,955 | 4,780,885 | ||||||
| Computer and internet | 858,041 | 403,583 | ||||||
| Advertising and marketing | 152,851 | 259,393 | ||||||
| Bad debt expense (recovery) | - | (7,767 | ) | |||||
| Insurance | 1,249,556 | 1,535,687 | ||||||
| Other | 2,444,593 | 2,061,100 | ||||||
| Total | $ | 15,713,008 | $ | 11,904,030 | ||||
Selling, general and administrative costs (S, G & A) increased by $3,808,978 (32.0%). The changes are discussed below:
| ● | Contractors and consultants expense increased by $1,048,589 or 62.9% from $1,667,016 in 2022 to $2,715,605 in 2023. The Company engaged several contractors to overhaul the financial platform to allow for the conversion to a tablet-based transaction at the store level from the outdated VeriFone terminal. The Company also engaged with consultants to provide advisory services specifically in the area of investment relations to identify opportunities to increase our shareholder value. |
| ● | Professional services increased $745,274 or 61.9% in 2023 primarily due to an increase in legal fees of $599,535. Specifically, the legal fees for the Blue Skies Connections, LLC litigation increased by $199,153 from 2022 to 2023. |
| ● | Compensation increased from $4,780,885 in 2022 to $6,342,955 in 2023 primarily as a result of one-time bonuses paid to various management personnel and the implementation of an employee stock program in 2023. There was a non-cash component for $576,625 related to the implementation of a stock option plan for all employees except the executives. The overall cash payment to executives increased by less than 10% year over year. The remaining increase in 2023 was related to additional hires over the course of 2022. |
| ● | Computer and internet costs increased to $858,041 in 2023 from $403,583 in 2022. The increase was primarily the result of increased internet support services and database management costs. A significant portion of the increase was related to the continued maintenance and enhancements of the shockwave software platform. In 2022, the expenses for the Shockwave software represented only a 6-month period of time whereas the 2023 activity includes 12 months of similar expenses. |
| ● | Advertising and marketing costs decreased to $152,851 in 2023 from $259,393 in 2022 primarily as a result of a shift from marketing-oriented vendors to investor relation type vendors. This also relates to the increase in the overall spending with contractors and consultants to try to obtain new ACP customers through direct marketing efforts to individuals and social media marketing efforts to educate individuals that they may be eligible for ACP. |
| ● | Insurance expense decreased to $1,249,556 in 2023 from $1,535,687 in 2022 primarily as a result of improved premium rates for the renewal of coverage in 2023. |
| ● | Other costs increased to $2,444,593 in 2023 from $2,061,100 in 2022 primarily due to an increase in the vesting of options for the board of directors and cybersecurity insurance premiums, as well as various administrative expenses such as office, building, travel and bank fees. |
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Other (expense) income during the years ended December 31, 2023 and 2022 consisted of the following:
| 2023 | 2022 | |||||||
| Interest, net | $ | (595,975 | ) | $ | (1,843,396 | ) | ||
| Gain (loss) on equity investment in Centercom | 110,203 | (89,082 | ) | |||||
| Gain (loss) on settlement of liabilities | - | 336,726 | ||||||
| Amortization of debt discount | - | (115,404 | ) | |||||
| Other income | - | 524,143 | ||||||
| Total other (expense) income | $ | (485,772 | ) | $ | (1,187,013 | ) | ||
Interest expense decreased to $595,975 in 2023 from $1,843,396 in 2022 primarily due to the payoff of various debt instruments in 2023.
The equity investment in Centercom, an unconsolidated subsidiary of the Company in which we are a minority owner, increased by $110,203 in 2023 compared to a decrease of $89,082 in 2022.
During 2022, the Company received a forgiveness on a PPP loan totaling $524,143, of which $518,167 was for principal and $5,976 for accrued interest. The Company recorded this forgiveness as other income in the accompanying consolidated statements of operations.
Equity Transactions for the Year Ended December 31, 2023
Stock Issued for Services
The Company issued 242,615 shares of common stock for services rendered, having a fair value of $1,290,024 ($4.19 - $9.40/share), based upon the quoted closing trading price. All of these shares are for consultants based upon agreements.
Exercise of Warrants
The Company issued 43,814 shares of common stock in June 2023 upon an exercise of warrants with an exercise price of $4.73 for $207,240.
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Non-Vested Shares – Related Parties
Chief Financial Officer
In 2023, the Company granted common stock to its Chief Financial Officer having a fair value of $3,114,000 ($5.19/share), based upon the quoted closing trading price. The vesting schedule is as follows:
| July 1, 2024 | 66,667 shares | |
| August 1, 2024 | 66,667 shares | |
| September 1, 2024 | 66,667 shares | |
| October 1, 2024 | 66,667 shares | |
| November 1, 2024 | 66,667 shares | |
| December 1, 2024 | 66,665 shares | |
| December 31, 2025 | 200,000 shares |
For the year ended December 31, 2023, the Company recognized stock compensation expense of $486,242 related to vesting.
Board Directors
In 2023, the Company granted an aggregate 95,000 shares of common stock to various members of the Board of Directors, having a fair value of $519,500 ($5.14 - $5.53/share), based upon the quoted closing trading price.
The shares will vest at the earlier to occur:
| - | Board Member no longer serves in that capacity for any reason, except for reasons related to cause, | |
| - | Occurrence of a change in control; and | |
| - | Fifth anniversary of the effective date (2028) |
The Company records stock compensation expense over the five (5) year vesting period. All shares are expected to vest in accordance with the terms of the service agreement.
For the year ended December 31, 2023, the Company recognized stock compensation expense of $43,292 related to vesting.
For the year ended December 31, 2023, total related stock compensation expense due to vesting was $529,534.
Equity Transactions for the Year Ended December 31, 2022
Stock Issued as Direct Offering Costs
The Company issued 200,000 shares of common stock for services rendered in connection with the listing of our common stock on the Nasdaq Capital Market 2021. As a result, the Company recorded the par value of the common stock issued with a corresponding charge to additional paid-in capital, resulting in a net effect of $0 to stockholders’ equity.
Stock Issued for Acquisition of Software
The Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash and the Company issued 85,000 shares of common stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.
Exercise of Warrants (Cashless)
The Company issued 147,153 shares of common stock in connection with the cashless exercise of 498,750 warrants. These transactions had a net effect of $0 on stockholders’ equity.
Exercise of Warrants
The Company issued one hundred (100) shares of common stock in connection with an exercise of one hundred (100) warrants at an exercise price of $4.73 per share for proceeds of $473.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2023 and 2022, our current assets were $33,366,661 and $27,563,785, respectively, and our current liabilities were $12,705,044 and $23,464,062, respectively, which resulted in a working capital surplus of $20,661,617 and of $4,099,723, respectively. The increase in current assets is a result of expansion of the Affordable Connectivity Program, whereby cash increased by $7,586,406.
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Total assets at December 31, 2023 and 2022 amounted to $41,925,307 and $34,003,506, respectively. The increase in total assets is a result of the expansion of the Affordable Connectivity Program, whereby cash increased by $ 7,586,406 and inventory decreased by $2,139,648. Total assets increased by $7,921,801 from December 31, 2022 to December 31, 2023. At December 31, 2023, assets consisted of current assets of $33,366,661, net property and equipment of $361,841, net intangible assets of $2,126,470, goodwill of $1,666,782, equity investment in Centercom of $464,409, note receivable of $176,851, internal use software of $539,424, operating lease right of use asset of $387,869, and deferred income taxes of $2,835,000 compared to current assets of $27,563,785, net property and equipment of $643,373, net intangible assets of $2,779,977, goodwill of $1,666,782, equity investment in Centercom of $354,206, note receivable of $176,851, internal use software of $387,180, and operating lease right of use asset of $431,352.
At December 31, 2023, our total liabilities were $13,521,843 compared to total liabilities of $28,885,253 at December 31, 2022. This $15,363,410 decrease was related to the repayment during 2023 of the installment sales liability of $13,018,184 at December 31, 2022.
At December 31, 2023, our total stockholders’ surplus was $28,403,464 as compared to $5,118,253 at December 31, 2022.
The Company’s cash position on February 29, 2024 was approximately $40,500,000. This position was due to a capital raise we conducted in mid-January, resulting in net proceeds of approximately $13,700,000 (2,678,571 shares of common stock) and the allotment exercise in mid-February for an additional $2,000,000 (401,785 shares of common stock). Additionally, the Company has seen a steady flow of tradeable warrants being exercised as of the new year. In January 2024, 4,125 warrants were exercised at $4.73 for cash proceeds of $19,511 and in February 2024, 1,773,606 warrants were exercised at $4.73 for cash proceeds of $8,389,156. The outstanding warrant balance as of February 29, 2024 is 3,468,355. As long as the tradeable warrants are in the money, the Company expects to see continued exercise of warrants for the remainder of the year, as these tradeable warrants expire in early November 2024.
Additionally, on March 12, 2024, the Company entered into an amended and restated promissory note (the “Amended Note”) with SMDMM Funding, LLC, a Company owned and controlled by our CEO, with which the Company currently has two outstanding notes, one in the original principal amount of $1,108,150.31 that was due on December 31, 2023 (the “One Year Note”), and another in the original principal amount of $4,026,413.00 due on December 31, 2024 (the “Two Year Note”). The Amended Note consolidated the One Year Note and Two Year Note into one note with outstanding principal of $4,758,088.74 and sets the principal and established interest to be paid over the course of thirty-three equal monthly payments beginning March 31, 2024, and ending December 31, 2026. Assuming we do not take on additional debt, this will effectively eliminate the debt from the balance sheet by the end of 2026. There will remain an SBA long-term note with favorable terms for approximately $460,000.
We also expect the positive operating income results of 2023 to continue into 2024, assuming the ACP program is fully funded for the remainder of 2024. The Company has contingency plans in place if the funding is delayed or not approved. While this event would impact all aspects of the Company, we believe the current cash position would be sufficient to bridge the gap as we continued our efforts to grow other parts of the Company. The gross margins for each segment of the Company are also expected to improve over the course of 2024, assuming the ACP program is fully funded for the remainder of 2024. The Company believes there continues to be operating and logistic savings to be implemented during 2024, directly impact our cost to acquire subscribers and manage the relationship with the convenience store base.
The following table sets forth the major sources and uses of cash for the years ended December 31, 2023 and 2022.
| 2023 | 2022 | |||||||
| Net cash provided by or (used in) operating activities | $ | 10,287,345 | $ | 793,272 | ||||
| Net cash used in investing activities | (281,304 | ) | (1,498,582 | ) | ||||
| Net cash provided by financing activities | (2,419,635 | ) | 1,457,468 | |||||
| Net change in cash and cash equivalents | $ | 7,586,406 | $ | 752,158 | ||||
As a result of net positive cash provided by operating activities in 2023, the cash increased in 2023 by $7,586,406, compared to an increase of cash increase provided in operations of $793,272 in 2022.
At December 31, 2022, the Company had the following material commitments and contingencies.
Cash requirements and capital expenditures –At the current level of operations, the Company does not anticipate borrowing funds to meet basic operating costs. Based on the current financial position of the Company, even if the ACP program is delayed or not funded in 2024, we have sufficient resources for the next twelve months.
Known trends and uncertainties – The Company is planning to acquire other businesses with similar business operations. The uncertainty of the economy and program funding for the ACP program may delay the planned business expansion.
| 20 |
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which were prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue and expenses. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.
While our significant accounting policies are more fully described in Note 2—Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and which require our most difficult, subjective and complex judgments.
Use of Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant estimates during the years ended December 31, 2023 and 2022, respectively, include, allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of loss contingencies, valuation of stock-based compensation, estimated useful lives related to intangible assets, capitalized internal-use software development costs, and property and equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred tax assets.
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
| ● | Level 1 - Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; | |
| ● | Level 2 - Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and | |
| ● | Level 3 - Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
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Impairment of Long-lived Assets including Internal Use Capitalized Software Costs
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.
If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Inventory Valuation
Inventory is stated at the lower of cost or net realizable value (first-in, first-out method). For items manufactured by third parties, cost is determined using the weighted average cost method (WAC). We write down inventory when it has been determined that conditions exist that may not allow the inventory to be sold for at the intended price or the inventory is determined to be obsolete based on assumption about future demand and market conditions. The charge related to inventory write-downs is recorded as cost of goods sold. We evaluate inventory at least annually and at other times during the year. We have incurred and may in the future incur charges to write down inventory.
Internal Use Software Development Costs
We capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not meet the qualification for capitalization, as further discussed below, are expensed as incurred and recorded in general and administrative expenses in the consolidated results of operations.
Revenue from Contracts with Customers
We account for revenue earned from contracts with customers under ASC 606, Revenue from Contracts with Customers (“ASC 606”), and ASC 842, Leases (“ASC 842”). The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
● Step 1: Identify the contract with the customer.
● Step 2: Identify the performance obligations in the contract.
● Step 3: Determine the transaction price.
● Step 4: Allocate the transaction price to the performance obligations in the contract.
● Step 5: Recognize revenue when, or as, the company satisfies a performance obligation.
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Stock-Based Compensation
The Company accounts for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
The Company uses the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options.
The fair value of stock-based compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
Stock Warrants
In connection with certain financing (debt or equity), consulting and collaboration arrangements, the Company may issue warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of warrants issued for compensation using the Black-Scholes option pricing model as of the measurement date. However, for warrants issued that meet the definition of a derivative liability, fair value is determined based upon the use of a binomial pricing model.
Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants (for services) are recorded at fair value and expensed over the requisite service period or at the date of issuance if there is not a service period.
Recent Accounting Pronouncements
In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2023, our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15. Management identified no material weaknesses in our internal control over financial reporting. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
b) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer and chief financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management conducted an evaluation of the effectiveness of our control over financial reporting based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2023. During the year ended December 31, 2023, management identified no weaknesses.
Pursuant to Regulation S-K Item 308(b), as the Company is not an accelerated filer nor a large accelerated filer, this Annual Report does not include an attestation report of our company’s registered public accounting firm regarding internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.
| 24 |
c) Changes in Internal Control over Financial Reporting
During the year ended December 31, 2023, there were no changes in our internal controls over financial reporting, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
The information required by Part III is omitted from this Annual Report in that we will file a definitive proxy statement pursuant to Regulation 14A with respect to our 2024 Annual Meeting (the “Proxy Statement”) on the date hereof and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item will be included in the Proxy Statement.
Item 11. Executive Compensation
The information required by this item will be included in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owner and Management and Related Stockholder Matters.
The information required by this item will be included in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in the Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item will be included in the Proxy Statement.
| 25 |
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| 26 |
ITEM 16. FORM 10-K SUMMARY
Not applicable.
| 27 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SurgePays, Inc. | ||
| Date: March 12, 2024 | By: | /s/ Kevin Brian Cox |
| Name: | Kevin Brian Cox | |
| Title: | Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Kevin Brian Cox | Chief Executive Officer and Director | March 12, 2024 | ||
| Kevin Brian Cox | (Principal Executive Officer) | |||
| /s/ Anthony Evers | Chief Financial Officer | March 12, 2024 | ||
| Anthony Evers | (Principal Financial Officer and Principal Accounting Officer | |||
| /s/ David N. Keys | Director | March 12, 2024 | ||
| David N. Keys | ||||
| /s/ David May | Director | March 12, 2024 | ||
| David May | ||||
| /s/ Laurie Weisberg | Director | March 12, 2024 | ||
| Laurie Weisberg | ||||
| /s/ Richard Schurfeld | Director | March 12, 2024 | ||
| Richard Schurfeld |
| 28 |
SurgePays, Inc. and Subsidiaries
| Page(s) | ||
| Report of Independent Registered Public Accounting Firm (PCAOB ID No. |
F-2 | |
| Consolidated Balance Sheets | F-3 | |
| Consolidated Statements of Operations | F-4 | |
| Consolidated Statements of Changes in Stockholders’ Equity | F-5 - F-6 | |
| Consolidated Statements of Cash Flows | F-7 | |
| Notes to Consolidated Financial Statements | F-8 - F-42 |
| F-1 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
SurgePays, Inc. & Subsidiaries
Bartlett, Tennessee
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of SurgePays, Inc. & Subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2023 and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the results of its consolidated operations and its consolidated cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition
Description of the matter
The Company generates revenue from the delivery of processing, service and product solutions. Revenue is measured based on consideration specified in a contract with a customer, and the Company recognizes revenue when it satisfies a performance obligation by processing the transaction, which is at a point in time. The Company’s revenue consists of a significant volume of transactions sourced from systems and applications. The processing of such transactions and recording of the majority of revenue is system-driven and based on contractual terms with customers. Revenue is recognized when the services and products are delivered to the customers and control is transferred, which is at a point in time. The Company also has significant revenue from providing services and products under the Affordable Connectivity Program. Revenue is recognized after services and products have been delivered to an eligible customer based on contracts with the customer.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to revenue recognition included the following, among others:
We obtained and understanding and evaluated management’s significant accounting policies around revenue recognition for each of the company significant segments including management’s assessment of when control of goods and services is transferred to customers.
For a sample of revenue transactions, we tested selected transactions by agreeing the amounts of revenue recognized to source documents and testing the mathematical accuracy of the recorded revenue. We also evaluated the source documents to determine whether terms that may impact revenue recognition were identified and properly considered by management.
/s/
We have served as the Company’s auditor since 2017
March 12, 2024
| F-2 |
SurgePays, Inc. and Subsidiaries
Consolidated Balance Sheets
| December 31, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable - net | ||||||||
| Inventory | ||||||||
| Prepaids and other | ||||||||
| Total Current Assets | ||||||||
| Property and equipment - net | ||||||||
| Other Assets | ||||||||
| Note receivable | ||||||||
| Intangibles - net | ||||||||
| Internal use software development costs - net | ||||||||
| Goodwill | ||||||||
| Investment in CenterCom | ||||||||
| Operating lease - right of use asset - net | ||||||||
| Deferred income taxes - net | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accounts payable and accrued expenses - related party | ||||||||
| Accrued income taxes payable | ||||||||
| Installment sale liability | ||||||||
| Deferred revenue | ||||||||
| Operating lease liability | ||||||||
| Notes payable - related parties | ||||||||
| Notes payable | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Note payable | ||||||||
| Notes payable - related parties | ||||||||
| Notes payable - SBA government | ||||||||
| Operating lease liability | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, $ par value, shares authorized and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Stockholders’ equity | ||||||||
| Non-controlling interest | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
| F-3 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Operations
| 2023 | 2022 | |||||||
| For the Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | $ | ||||||
| Costs and expenses | ||||||||
| Cost of revenues | ||||||||
| General and administrative expenses | ||||||||
| Total costs and expenses | ||||||||
| Income from operations | ||||||||
| Other income (expense) | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Gain (loss) on investment in CenterCom | ( | ) | ||||||
| Amortization of debt discount | ( | ) | ||||||
| Gain on forgiveness of PPP loan - government | ||||||||
| Other income | ||||||||
| Total other income (expense) - net | ( | ) | ( | ) | ||||
| Net income (loss) before provision for income taxes | ( | ) | ||||||
| Provision for income tax benefit (expense) | ||||||||
| Net income (loss) including non-controlling interest | ( | ) | ||||||
| Non-controlling interest | ||||||||
| Net income (loss) available to common stockholders | $ | $ | ( | ) | ||||
| Earnings (loss) per share - attributable to common stockholders | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| Weighted average number of shares outstanding - attributable to common stockholders | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| F-4 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Year Ended December 31, 2023
| Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||
| December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Stock issued for services | ||||||||||||||||||||||||
| Recognition of stock-based compensation - unvested shares - related parties | - | |||||||||||||||||||||||
| Recognition of stock-based compensation - stock options | - | |||||||||||||||||||||||
| Recognition of stock-based compensation - stock options - related party | - | |||||||||||||||||||||||
| Exercise of warrants for cash | ||||||||||||||||||||||||
| Non-controlling interest | - | |||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| December 31, 2023 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| F-5 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Year Ended December 31, 2022
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Conversion of preferred stock to common stock - related parties | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||
| Conversion of debt into common stock - related party | - | - | ||||||||||||||||||||||||||||||||||||||
| Stock issued for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Recognition of stock-based compensation - stock options | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock issued as direct offering costs | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock issued to purchase software | - | - | ||||||||||||||||||||||||||||||||||||||
| Warrants issued as debt issue costs | - | - | - | |||||||||||||||||||||||||||||||||||||
| Warrants issued as interest expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Exercise of warrants (cashless) | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||
| F-6 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| For the Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating activities | ||||||||
| Net income (loss) - including non-controlling interest | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operations | ||||||||
| Bad debt expense (recovery) | ( | ) | ||||||
| Provision for inventory obsolescence | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Amortization of debt discount/debt issue costs | ||||||||
| Amortization of internal use software development costs | ||||||||
| Stock issued for services | ||||||||
| Recognition of stock-based compensation - unvested shares - related parties | ||||||||
| Recognition of share-based compensation - options | ||||||||
| Recognition of share-based compensation - options - related party | ||||||||
| Recognition of share based compensation - options | ||||||||
| Warrants issued for interest expense | ||||||||
| (Gain) loss on equity method investment - CenterCom | ( | ) | ||||||
| Gain on forgiveness of PPP loan | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| (Increase) decrease in | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepaids | ( | ) | ( | ) | ||||
| Deferred income taxes - net | ( | ) | ||||||
| Increase (decrease) in | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accounts payable and accrued expenses - related party | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Accrued income taxes payable | ||||||||
| Installment sale liability - net | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Capitalized internal use software development costs | ( | ) | ( | ) | ||||
| Purchase of software | ( | ) | ||||||
| Acquisition of Torch, Inc. | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Proceeds from exercise of common stock warrants | ||||||||
| Repayments of loans - related party | ( | ) | ||||||
| Proceeds from notes payable | ||||||||
| Repayments on notes payable | ( | ) | ( | ) | ||||
| Repayments on notes payable - SBA government | ( | ) | ( | ) | ||||
| Net cash provided (used in) by financing activities | ( | ) | ||||||
| Net increase in cash | ||||||||
| Cash - beginning of year | ||||||||
| Cash - end of year | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Debt issue costs recorded in connection with notes payable | $ | $ | ||||||
| Stock issued to acquire software | $ | $ | ||||||
| F-7 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Note 1 - Organization and Nature of Operations
Organization and Nature of Operations
SurgePays, Inc. (“SurgePays,” “SP,” “we,” “our” or “the Company”), and its operating subsidiaries, is a technology-driven company building a next generation supply chain software platform that can offer wholesale goods and services more cost efficiently than traditional and existing wholesale distribution models.
The parent (SurgePays, Inc.) and subsidiaries are organized as follows:
Schedule of Subsidiaries
| Company Name | Incorporation Date | State of Incorporation | ||
| * |
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements (“U.S. GAAP”).
Liquidity and Management’s Plans
As reflected in the accompanying consolidated financial statements, for the year ended December 31, 2023, the Company had:
| ● | Net
income available to common stockholders of $ |
| ● | Net cash provided by operations was $ |
Additionally, at December 31, 2023, the Company had:
| ● | Accumulated deficit of $ |
| ● | Stockholders’ equity of $ |
| ● | Working capital of $ |
We
manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand
of $
The Company has historically incurred significant losses and has not, prior to 2023, demonstrated an ability to generate sufficient revenues from the sales of its products and services to achieve profitable operations. There can be no assurance that profitable operations will continue to be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months ended December 31, 2024, and our current capital structure including equity-based instruments and our obligations and debts.
The Company believes it has sufficient cash resources on hand along with access to additional debt and/or equity-based capital from third parties and related parties as needed to meet its current obligations for a period that is one year from the issuance date of these financial statements.
| F-8 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Management’s strategic plans include the following:
| ● | Sustain our growth of the Affordable Connectivity Program revenue stream, |
| ● | Expand product and services offerings to a larger surrounding geographic area, |
| ● | Continuing to explore and execute prospective partnering or distribution opportunities; and |
| ● | Identifying unique market opportunities that represent potential positive short-term cash flow. |
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation and Non-Controlling Interest
These consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.
For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than the Company. The aggregate of the income or loss and corresponding equity that is not owned by us is included in Non-controlling Interests in the consolidated financial statements.
Business Combinations
The Company accounts for business acquisitions using the acquisition method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date.
The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.
Significant judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within the Company’s operating results.
Effective January 1, 2022, the Company executed a management agreement with Torch Wireless (“Torch” or “TW”). Generally, the Company was engaged to handle the following services:
| ● | Oversee management of the business being conducted by Torch, | |
| ● | Involved in the performance of Torch’s obligations under contracts regarding its business operations and maintenance of Torch’s customer relationships, | |
| ● | Assist Torch with regulatory compliance, | |
| ● | Manage all billing and collection functions, including the right to collect revenues related to Torch’s business operations, as part of the agreement, Torch may not participate in this function; and | |
| ● | Manage all payment functions related to the business, including the right to disburse funds, as part of the agreement, Torch may not participate in this function |
| F-9 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Torch
is a provider of subsidized mobile broadband services to consumers qualifying under the federal guidelines of the U.S. Federal Communication
Commission’s Affordable Connectivity Program (“ACP”). The ACP provides the Company with up to a $
It
was determined that the Company had acquired
At
the time of acquisition, Torch had no significant assets or liabilities. The Company paid $
At the time of acquisition, Torch had nominal revenues and losses. As a result, and given the immaterial nature of this acquisition, the Company elected not to present any pro-forma financial information during the year ended December 31, 2022.
In
addition, the Company was required to pay the Sellers monthly residual payments for customers enrolled by the Company through December
31, 2022 of either $
For
the years ended December 31, 2023 and 2022, the Company incurred expenses of $
This transaction did not involve the purchase of a “significant amount of assets” as defined in the Instructions to Item 2.01 of Form 8-K. Additionally, the acquisition of Torch was not deemed to be significant at any level under SEC Regulation S-X 3.05 and did not require the presentation of any additional historical audited financial statements.
For financial reporting purposes, Torch has been consolidated into the Company’s consolidated statements of financial position, results of operations, and cash flows.
At
December 31, 2023 and December 31, 2022 goodwill was $
There
were
Note Receivable (Sale of Former Subsidiary)
On May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc.
In
connection with the sale, the Company received an unsecured note receivable for $
Payments are scheduled as follows:
Schedule of Receivables
| For the Year Ended December 31, | ||||
| 2024 | $ | ** | ||
| 2025 | ||||
| Less: amount representing interest | ( | ) | ||
| Total | $ | |||
On
July 12, 2023, Notice of Default was provided by SurgePays, Inc. to Blue Skies Connections, LLC for failure to pay amounts due under
that certain Promissory Note dated June 14, 2021 by Blue Skies Connections, LLC in favor of SurgePays, Inc. in the original principal
amount of $
See Note 8 for Contingencies – Legal Matters for additional discussion.
**The
amount due for the year ended December 31, 2024 includes $
As of December 31, 2023, the Company believes the note is collectible.
Business Segments and Concentrations
The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. The Company manages its business as multiple reportable segments. See Note 10 regarding segment disclosure.
| F-10 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
The
Mobile Virtual Network Operators consisting of SurgePhone Wireless and Torch Wireless business segment made up approximately
Revenues
related to this business segment are
Accounts
receivable related to these programs made up
Customers
in the United States accounted for
Use of Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant estimates during the years ended December 31, 2023 and 2022, respectively, include, allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of loss contingencies, valuation of stock-based compensation, estimated useful lives related to intangible assets, capitalized internal-use software development costs, and property and equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, income tax payable and the valuation allowance on deferred tax assets.
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition and changes 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 may experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.
Effective February 7, 2024, the Affordable Connectivity Program (“ACP”) stopped accepting new applications and enrollments. The program will cease to be funded after April 2024. The Company believes that the program will be funded by Congress, however, at this time, we cannot predict any outcome. See discussion below regarding revenue recognition.
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
| ● | Level 1 – Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; | |
| ● | Level 2 – Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and | |
| ● | Level 3 – Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
| F-11 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate. Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
The Company’s financial instruments, including cash, accounts receivable, note receivable, accounts payable and accrued expenses, and accounts payable and accrued expenses – related party, are carried at historical cost. At December 31, 2023 and 2022, respectively, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.
ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding financial instruments.
Cash and Cash Equivalents and Concentration of Credit Risk
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.
At December 31, 2023 and 2022, respectively, the Company did not have any cash equivalents.
The
Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent
account balances exceed the amount insured by the FDIC, which is $
At December 31, 2023 and 2022, respectively, the Company did not experience any losses on cash balances in excess of FDIC insured limits.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding customer balances. Credit is extended to customers based on an evaluation of their financial condition and other factors. Interest is not accrued on overdue accounts receivable. The Company does not require collateral.
Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. Accounts determined to be uncollectible are charged to operations when that determination is made.
Allowance
for doubtful accounts was $
There
was bad debt expense of $
Bad debt expense (recoveries) is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Inventory
Inventory primarily consists of tablets, cell phones and sim cards. Inventories are stated at the lower of cost or net realizable value using the average cost valuation method.
There
was a provision for inventory obsolescence of $ and $
During 2023, management determined that $
At
December 31, 2023 and 2022, the Company had inventory of $
| F-12 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Impairment of Long-lived Assets including Internal Use Capitalized Software Costs
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.
If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
There
were
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets.
Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.
Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
There
were
Internal Use Software Development Costs
We capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not meet the qualification for capitalization, as further discussed below, are expensed as incurred and recorded in general and administrative expenses in the consolidated results of operations.
Software development activities generally consist of three stages:
| (i) | planning stage, |
| (ii) | application and infrastructure development stage, and |
| (iii) | post implementation stage. |
Costs incurred in the planning and post implementation stages of software development, including costs associated with the post-configuration training and repairs and maintenance of the developed technologies, are expensed as incurred.
We capitalize costs associated with software developed for internal use when the planning stage is completed, management has authorized further funding for the completion of the project, and it is probable that the project will be completed and perform as intended. Costs incurred in the application and infrastructure development stages, including significant enhancements and upgrades, are capitalized. Capitalization ends once a project is substantially complete, and the software and technologies are ready for their intended purpose. There is judgment involved in estimating the stage of development as well as estimating time allocated to a particular project. A significant change in the time spent on each project could have a material impact on the amount capitalized and related amortization expense in subsequent periods.
We amortize internal use software development costs using a straight-line method over a three-year estimated useful life, commencing when the software is ready for its intended use. The straight-line recognition method approximates the manner in which the expected benefit will be derived. We determined the life of internal use software based on historical software upgrades and replacement.
On an ongoing basis, we assess if the estimated remaining useful lives of capitalized projects continue to be reasonable based on the remaining expected benefit and usage. If the remaining useful life of a capitalized project is revised, it is accounted for as a change in estimate and the remaining unamortized cost of the underlying asset is amortized prospectively over the updated remaining useful life.
We also evaluate internal use software for abandonment and use that as a significant indicator for impairment on a quarterly basis.
| F-13 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Right of Use Assets and Lease Obligations
The Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments over the lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.
Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the performance of the business remains strong. Therefore, the Right of Use Asset and Lease Liability may include an assumption on renewal options that have not yet been exercised by the Company. The Company’s operating leases contained renewal options that expire at various dates with no residual value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities.
As the rate implicit in leases are not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment.
See Note 8 regarding operating leases.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely with the delivery of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
| F-14 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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 contain a significant financing component and there are no contracts with variable consideration.
Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.
The following reflects additional discussion regarding our revenue recognition policies for each of our material revenue streams. For each revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration is fixed and determinable at the initiation of the contract. Performance obligations for Torch and LogicsIQ are satisfied when services are performed. Performance obligations for ECS and SB are satisfied at point of sale. For each of our revenue streams we only have a single performance obligation.
Mobile Virtual Network Operators
SurgePhone Wireless (“SPW”) and Torch Wireless are licensed to provide subsidized mobile broadband services through the ACP to qualifying low-income customers to all fifty (50) states. Revenues are recognized when an ACP application is completed and accepted. Each month we reconcile subscriber usage to ensure the service was utilized. A monthly file is submitted to the Universal Service Administrative Company for review and approval, at which time we have completed our performance obligation and recognize accounts receivable and revenue. Revenues are recorded in the month when services were rendered, with payment typically received on the 28th of the following month.
Lead Generation Services
LogicsIQ, Inc. is a lead generation and case management solutions company primarily serving law firms in the mass tort industry. Revenues are earned from our lead generation retained services offerings and call center activities through CenterCom.
| F-15 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Lead generation consist of sourcing leads, which requires us to drive traffic to our landing pages for a specific marketing campaign. We also achieve this in certain marketing campaigns by using third-party preferred vendors to meet the needs of our clients. Revenues are recognized at the time the lead is delivered to the client. If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed.
Retained service offerings consist of turning leads into a retained legal case. To provide this service to our customers, we qualify leads through verification of information collected during the lead generation process. Additionally, we further qualify these leads using a client questionnaire which assists in determining the services to be provided. The qualification process is completed using our call center operations.
Effective
February 1, 2023, LogicsIQ started offering call center services to existing clients. These services are similar in nature to the services
CenterCom offers LogicsIQ. The total revenue from these services for the years ended December 31, 2023 and 2022, was $
If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed. At the time of delivery of leads and the creation of retained cases (customers are qualified at this point), our performance obligation has been completed and revenues are recognized. Arrangements with customers do not provide the customer with the right to take possession of our software or platform at any time. Once the advertising is delivered, it is non-refundable.
Comprehensive Platform Services
Revenues are generated through the sale of telecommunication products such as mobile phones, wireless top-up refills, and other mobile related products. At the time in which our products are sold through our online web portal (point of sale), our performance obligation is considered complete. At point of sale (completion of performance obligation), our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
Contract Liabilities (Deferred Revenue)
Contract liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer deposit is relieved and revenue is recognized.
At
December 31, 2023 and 2022, the Company had deferred revenue of $
The following represents the Company’s disaggregation of revenues for the years ended December 31, 2023 and 2022:
Schedule of Disaggregation of Revenue from Contracts With Customers
| For the Year Ended December 31, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Revenue | Revenue | % of Revenues | Revenue | % of Revenues | ||||||||||||
| Mobile Virtual Network Operators | $ | % | $ | % | ||||||||||||
| Comprehensive Platform Services | % | % | ||||||||||||||
| Lead Generation | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| Total Revenues | $ | % | $ | % | ||||||||||||
The above disaggregation of revenues includes the following entities:
Mobile Virtual Network Operators (SPW and TW),
Comprehensive Platform Services (Surge Fintech and ECS),
Lead Generation (LogicsIQ); and
Other (Surge Blockchain)
| F-16 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Cost of Revenues
Cost of revenues consists of purchased telecom services including data usage and access to wireless networks. Additionally, cost of revenues consists of prepaid phone cards, commissions, and advertising costs.
Income Taxes
The Company accounts for income tax using the asset and liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of December 31, 2023 and 2022, respectively, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
The Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the years ended December 31, 2023 and 2022, respectively.
For the year ended December 31, 2023, the Company generated net income. The Company currently has an unapplied net operating loss carryforward (deferred tax asset), which was evaluated for applicability in offsetting the current taxable net income. The Company has determined that the net operating loss carryforward is limited to 80% of the current year’s net taxable income.
The
Company has accrued an income tax liability of $
Investment – Former Related Party
On
January 17, 2019, we announced the completion of an agreement to acquire a
Anthony N. Nuzzo, a former director and officer and the holder of approximately 10% of our voting equity, had a controlling interest in CenterCom Global. During 2022, Mr. Nuzzo passed away. See Form 8-K filed on March 24, 2022.
The strategic partnership with CenterCom as a bilingual operations hub has powered our growth and revenue. CenterCom has been built to support the infrastructure required to rapidly scale in synergy and efficiency to support our sales growth, customer service and development.
We account for this investment under the equity method. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee’s income or loss. All investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable. The financial information used to account for the investment is unaudited.
At
December 31, 2023 and December 31, 2022, our investment in CenterCom was $
During
the years ended December 31, 2023 and 2022, we recognized a gain of $
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs are included as a component of general and administrative expense in the consolidated statements of operations.
The
Company recognized $
| F-17 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Stock-Based Compensation
The Company accounts for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
The Company uses the fair value method for equity instruments granted to non-employees and uses the Black-Scholes model for measuring the fair value of options.
The fair value of stock-based compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
When determining fair value of stock-based compensation, the Company considers the following assumptions in the Black-Scholes model:
| ● | Exercise price, |
| ● | Expected dividends, |
| ● | Expected volatility, |
| ● | Risk-free interest rate; and |
| ● | Expected life of option |
Stock Warrants
In connection with certain financing (debt or equity), consulting and collaboration arrangements, the Company may issue warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of warrants issued for compensation using the Black-Scholes option pricing model as of the measurement date. However, for warrants issued that meet the definition of a derivative liability, fair value is determined based upon the use of a binomial pricing model.
Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants (for services) are recorded at fair value and expensed over the requisite service period or at the date of issuance if there is not a service period.
Pursuant to ASC 260-10-45, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the periods presented.
Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
Potentially dilutive common shares may consist of contingently issuable shares, common stock issuable upon the conversion of stock options and warrants (using the treasury stock method), and convertible debt. These common stock equivalents may be dilutive in the future.
In the event of a net loss, diluted loss per share is the same as basic loss per share since the effect of the potential common stock equivalents upon conversion would be anti-dilutive.
Schedule of Diluted Net Income (Loss) Per Share
| December 31, 2023 | December 31, 2022 | |||||||
| Warrants | ||||||||
| Stock options | ||||||||
| Total common stock equivalents | ||||||||
Warrants and stock options included as commons stock equivalents represent those that are fully vested and exercisable. See Note 9.
Based on the potential common stock equivalents noted above at December 31, 2023, the Company has sufficient authorized shares of common stock () to settle any potential exercises of common stock equivalents.
| F-18 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Schedule of Earnings per Share Basic and Diluted
| Year Ended | Year Ended | |||||||
| December 31, 2023 | December 31, 2022 | |||||||
| Numerator | ||||||||
| Net income | $ | $ | ( | ) | ||||
| Denominator | ||||||||
| Weighted average shares outstanding - basic | ||||||||
| Effect of dilutive securities | ||||||||
| Weighted average shares outstanding - diluted | ||||||||
| Earnings (loss) per share - basic | $ | $ | ( | ) | ||||
| Earnings (loss) per share - diluted | $ | $ | ( | ) | ||||
Related Parties
Parties are considered to be related to the Company if the parties, directly or indirectly, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
During
the years ended December 31, 2023 and 2022, the Company incurred expenses with related parties in the normal course of business totaling
$
Schedule of Related Party Expenses
| Related Parties | December 31, 2023 | December 31, 2022 | |||||||
| 321 Communications, Inc. | $ | $ | 3 | ||||||
| Carddawg Investments, Inc. | 1 | ||||||||
| CenterCom USA, Inc. | 2 | ||||||||
| National Relief Telecom | 3 | ||||||||
| Total | $ | $ | |||||||
| 1 |
| 2 |
| 3 |
From time to time, the Company may use credit cards to pay corporate expenses, these credit cards are in the names of certain of the Company’s officers and directors. These amounts are insignificant.
See Note 6 for debt transactions with our Chief Executive Officer.
Recent Accounting Standards
Changes to accounting principles are established by the FASB in the form of Accounting Standards Updates (“ASU’s”) to the FASB’s Codification. We consider the applicability and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ equity, cash flows, or presentation thereof. Management has evaluated all recent accounting pronouncements issued through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the consolidated financial statements of the Company.
In March 2022, the Financial Accounting Standards Board (the “FASB”) issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in ASC 310, Receivables (Topic 310), and requires entities to provide disclosures about current period gross write-offs by year of origination. Also, ASU 2022-02 updates the requirements related to accounting for credit losses under ASC 326, Financial Instruments – Credit Losses (Topic 326), and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 was effective for the Company January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements.
| F-19 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
This guidance was adopted on January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements.
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our consolidated financial position, results of operations or cash flows.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no material effect on the consolidated results of operations, stockholders’ equity, or cash flows.
Note 3 – Property and Equipment
Property and equipment consisted of the following:
Schedule of Property and Equipment
| Estimated Useful | ||||||||||
| Type | December 31, 2023 | December 31, 2022 | Lives (Years) | |||||||
| Computer equipment and software | $ | $ | ||||||||
| Furniture and fixtures | ||||||||||
| Less: accumulated depreciation/amortization | ||||||||||
| Property and equipment - net | $ | $ | ||||||||
In
June 2022, the Company acquired software having a fair value of $
Depreciation
and amortization expense for the years ended December 31, 2023 and 2022 was $
These amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Note 4 – Intangibles
Intangibles consisted of the following:
Schedule of Intangible Assets
| Estimated Useful | ||||||||||
| Type | December 31, 2023 | December 31, 2022 | Lives (Years) | |||||||
| Proprietary Software | $ | $ | ||||||||
| Tradenames/trademarks | ||||||||||
| ECS membership agreement | ||||||||||
| Noncompetition agreement | ||||||||||
| Customer Relationships | ||||||||||
| Intangible assets gross | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangibles - net | $ | $ | ||||||||
Amortization
expense for the years ended December 31, 2023 and 2022 was $
Estimated amortization expense for each of the five (5) succeeding years is as follows:
Schedule of Estimated Amortization Expenses
| For the Years Ended December 31: | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ | |||
| F-20 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Note 5 – Internal Use Software Development Costs
Internal Use Software Development Costs consisted of the following:
Schedule of Intangible Assets
| Estimated Useful | ||||||||||
| Type | December 31, 2023 | December 31, 2022 | Life (Years) | |||||||
| Internal Use Software Development Costs | $ | $ | ||||||||
| Less: accumulated amortization | ||||||||||
| Internal Use Software Development Costs - net | $ | $ | ||||||||
Costs incurred for Internal Use Software Development Costs
Management
has determined that all costs incurred in 2023 ($
Management
determined that all costs incurred in 2022 ($
For
the years ended December 31, 2023 and 2022, amortization of internal use software development costs was $
Estimated amortization expense is as follows for the years ended December 31:
Schedule of Estimated Amortization Expenses
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total | $ |
Note 6 – Debt
The following represents a summary of the Company’s notes payable – SBA government, notes payable – related parties, and notes payable, key terms, and outstanding balances at December 31, 2023 and December 31, 2022, respectively:
Notes Payable – SBA government
| (1) | Paycheck Protection Program - PPP Loan |
Pertaining to the Company’s eighteen (18) month loan and in accordance with the Paycheck Protection Program (“PPP”) and Conditional Loan Forgiveness, the promissory note evidencing the loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company.
Under the terms of the PPP loan program, all or a portion of this Loan may be forgiven upon request from Borrower to Lender, provided the Loan proceeds are used in accordance with the terms of the Coronavirus Aid, Relief and Economic Security Act (the “Act” or “CARES”), Borrower is not in default under the Loan or any of the Loan Documents, and Borrower has provided documentation to Lender supporting such request for forgiveness that includes verifiable information on Borrower’s use of the Loan proceeds, to Lender’s satisfaction, in its sole and absolute discretion.
| (2) | Economic Injury Disaster Loan (“EIDL”) |
This program was made available to eligible borrowers in light of the impact of the COVID-19 pandemic and the negative economic impact on the Company’s business. Proceeds from the EIDL are to be used for working capital purposes.
| F-21 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Installment
payments, including principal and interest, are due monthly (beginning twelve (12) months from the date of the promissory note) in amounts
ranging from $
Schedule of Notes Payable
| PPP | EIDL | EIDL | PPP | ||||||||||||||||||
| Terms | SBA | SBA | SBA | SBA | Total | ||||||||||||||||
| Issuance dates of SBA loans | |||||||||||||||||||||
| Term | |||||||||||||||||||||
| Maturity date | |||||||||||||||||||||
| Default interest rate | |||||||||||||||||||||
| Interest rate | |||||||||||||||||||||
| Collateral | |||||||||||||||||||||
| Warrants issued as debt discount/issue costs | |||||||||||||||||||||
| Conversion price | N/A | N/A | N/A | N/A | |||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||
| Forgiveness of loan | ( | ) | ( | ) | 1 | ||||||||||||||||
| Conversion of debt into common stock | |||||||||||||||||||||
| Reclass of accrued interest to note payable | |||||||||||||||||||||
| Gross proceeds | |||||||||||||||||||||
| Reclassification from SBA - PPP note payable | |||||||||||||||||||||
| Debt issue costs | |||||||||||||||||||||
| Amortization of debt issue costs | |||||||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | |||||||||||||||
| Reclassification to note payable | ( | ) | ( | ) | 2 | ||||||||||||||||
| Balance - December 31, 2022 | |||||||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | |||||||||||||||
| Balance - December 31, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||
| 1 |
| 2 |
| F-22 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Notes Payable – Related Parties
Schedule of Notes Payable
| 1 | 2 | |||||||||||
| Note Payable | Note Payable | |||||||||||
| Terms | Related Party | Related Party | Total | |||||||||
| Issuance dates of notes | ||||||||||||
| Maturity dates | ||||||||||||
| Interest rate | ||||||||||||
| Collateral | ||||||||||||
| Conversion price | N/A | N/A | ||||||||||
| Balance - December 31, 2021 | $ | $ | ||||||||||
| Conversion of debt into common stock | ( | ) | ( | ) | ||||||||
| Reclass of accrued interest to note payable | ||||||||||||
| Balance - December 31, 2022 | ||||||||||||
| Less: short term | ||||||||||||
| Long term | $ | $ | $ | |||||||||
| Balance - December 31, 2022 | $ | $ | $ | |||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ||||||
| Balance - December 31, 2023 | ||||||||||||
| Less: short term | ||||||||||||
| Long term | $ | $ | $ |
| 1- |
In
2022, the Company included $
At
December 31, 2023, of the total $
| F-23 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
In
March 2024, as approved by the Audit Committee, the Company consolidated all remaining outstanding principal ($
Subsequent to year end the Company is current in all payments due.
| 2- |
Notes Payable
Schedule of Notes Payable
| 1 | 2 | 3 | 4 | |||||||||||||||||
| Terms | Notes Payable | Notes Payable | Notes Payable | Note Payable | Total | |||||||||||||||
| Issuance dates of notes | ||||||||||||||||||||
| Maturity date | ||||||||||||||||||||
| Interest rate | ||||||||||||||||||||
| Default interest rate | N/A | |||||||||||||||||||
| Collateral | ||||||||||||||||||||
| Warrants issued as debt discount/issue costs | N/A | N/A | ||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| Gross proceeds | ||||||||||||||||||||
| Reclassification from SBA - PPP note payable | ||||||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Debt issue costs | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Amortization of debt issue costs | ||||||||||||||||||||
| Balance - December 31, 2022 | ||||||||||||||||||||
| Repayments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Balance - December 31, 2023 | $ | $ | $ | $ | $ |
| 1- |
| F-24 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| 2- |
| 3- |
| 4- |
Secured Revolving Debt
In
April 2022, a maximum of $
The
notes accrued interest at a monthly rate of
The
maximum amount outstanding under the loan was the lesser of $
In
2022, the Company repaid the $
Debt Maturities
The following represents the maturities of the Company’s various debt arrangements for each of the five (5) succeeding years and thereafter as follows:
Schedule of Debt Maturities
| For the Year Ended December 31, | Notes Payable - Related Parties | Notes Payable - SBA Government | Total | |||||||||
| 2024 | $ | $ | $ | |||||||||
| Thereafter | ||||||||||||
| Total | $ | $ | $ | |||||||||
Note 7 – Fair Value of Financial Instruments
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made.
The Company did not have any assets or liabilities measured at fair value on a recurring basis at December 31, 2023 and 2022, respectively.
Note 8 – Commitments and Contingencies
Operating Leases
We have entered into various operating lease agreements, including our corporate headquarters. We account for leases in accordance with ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. In addition, a lessor is required to classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating. We determine if an arrangement is a lease, or contains a lease, at inception and record the lease in our financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.
| F-25 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at commencement to determine the present value of lease payments except when an implicit interest rate is readily determinable. We determine our incremental borrowing rate based on market sources including relevant industry data.
We have lease agreements with lease and non-lease components and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective with the exception of direct sales-type leases and production equipment classes embedded in supply agreements. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.
We have elected not to present short-term leases on the balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.
Our leases, where we are the lessee, do not include an option to extend the lease term. For purposes of calculating lease liabilities, lease term would include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, included as a component of general and administrative expenses, in the accompanying consolidated statements of operations.
Certain operating leases provide for annual increases to lease payments based on an index or rate, our lease has no stated increase, payments were fixed at lease inception. We calculate the present value of future lease payments based on the index or rate at the lease commencement date. Differences between the calculated lease payment and actual payment are expensed as incurred.
At December 31, 2023 and 2022, respectively, the Company had no financing leases as defined in ASC 842, “Leases.”
The tables below present information regarding the Company’s operating lease assets and liabilities at December 31, 2023 and 2022, respectively:
Schedule of Lease Expense
| For the Year Ended | For the Year Ended | |||||||
| December 31, 2023 | December 31, 2022 | |||||||
| Operating Leases | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total net lease cost | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
Supplemental cash flow and other information related to leases was as follows:
Schedule of Supplemental Cash Flow and Other Information Related to Leases
| For the Year Ended | For the Year Ended | |||||||
| December 31, 2023 | December 31, 2022 | |||||||
| Cash paid for amounts included in measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| ROU assets obtained in exchange for lease liabilities | ||||||||
| Operating leases | $ | $ | ||||||
| Weighted average remaining lease term (in years) | ||||||||
| Operating leases | ||||||||
| Weighted average discount rate | ||||||||
| Operating leases | % | % | ||||||
| F-26 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Future minimum lease payments for the years ended December 31:
Schedule of Future Minimum Payments
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: amount representing interest | ( | ) | ||
| Total lease obligations | ||||
| Less: short term lease liability | ( | ) | ||
| Long term lease liability | $ |
Employment Agreements (Chief Executive Officer and Chief Financial Officer)
Chief Financial Officer
In November 2023, the Company finalized the terms of its employment agreement with its Chief Financial Officer as follows:
| 1. | Base salary |
| a. | For
the year ended December 31, 2023 - $ | |
| b. | For
the year ended December 31, 2024 - $ | |
| c. | For
the year ended December 31, 2025 - $ |
| 2. | Annual cash bonus |
| a. | For
the year ended December 31, 2023 - $ | |
| b. | Future years – to be determined by the Board of Directors |
| 3. | Restricted Stock Awards |
| a. | Effective November 10, 2023, an award of shares of common stock. The fair value of this grant was $, based upon the quoted closing price of $/share. | |
| b. | The shares will vest as follows (see below for table on non-vested shares): |
| i. | shares ratably over the period July 2024 – December 2024 ( shares per month over a six-month period); and | |
| ii. | on December 31, 2025, | |
| iii. | Shares shall immediately vest if any of the following occur and the Chief Financial Officer is employed by the Company at the time of: |
| 1. | Death, | |
| 2. | Total disability, | |
| 3. | Termination without cause; and | |
| 4. | Change in control |
| F-27 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| 4. | Other |
| a. | Vacation, | |
| b. | Car
allowance of $ | |
| c. | Home
office expense reimbursement of $ | |
| d. | 401(K) plan participation, | |
| e. | Life insurance; and | |
| f. | Liability insurance |
See Note 9 regarding the vesting provisions of these shares.
Chief Executive Officer
In December 2023, the Company finalized the terms of its employment agreement with its Chief Financial Officer as follows:
| 1. | Term – through December 31, 2028 | |
| 2. | Base salary |
| a. | For
the year ended December 31, 2023 - $ | |
| b. | For
each year thereafter an increase of |
| 3. | Annual cash bonus |
| a. | For
the year ended December 31, 2023 - $ | |
| b. | Future years – to be determined by the Board of Directors |
| 4. | Restricted Stock Awards |
| a. | Effective March 1, 2024, future stock awards totaling shares of common stock. | |
| b. | The shares will be issued and vest as follows: |
| i. | shares ratably over the period July 2024 – December 2024 ( shares per month over a six-month period). The fair value of this grant was $, based upon the quoted closing price of $/share. | |
| ii. | on June 1, of each subsequent year (2025, 2026, 2027 and 2028), at which time these shares will have their fair value determined. These shares have no stated performance or service requirements, other than to be remain as the Chief Executive Officer, and the expense will be recorded on the grant date; and | |
| iii. | Shares shall immediately vest if any of the following occur and the Chief Executive Officer is employed by the Company at the time of: |
| 1. | Death, | |
| 2. | Total disability, | |
| 3. | Termination without cause; and | |
| 4. | Change in control |
| 5. | Annual Revenue Goals (only one (1) award per goal may be earned until next threshold is achieved |
| a. | ||
| b. | ||
| c. | ||
| d. | ||
| e. |
| F-28 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| 6. | Annual EBITDA Goals (only one (1) award per goal may be earned until next threshold is achieved |
| a. | ||
| b. | ||
| c. |
| 7. | Market Capitalization Goals (only one (1) award per goal may be earned until next threshold is achieved |
| a. | ||
| b. | ||
| c. | ||
| d. | ||
| e. |
| 8. | Other |
| a. | Vacation, | |
| b. | Car
allowance of $ | |
| c. | Home
office expense reimbursement of $ | |
| d. | 401(K) plan participation, | |
| e. | Life insurance; and | |
| f. | Liability insurance |
Contingencies – Legal Matters
During the normal course of business, the Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with Financial Accounting Standards Board (“FASB”) ASC 450-20-50, “Contingencies”. The Company evaluates its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals.
As of December 31, 2023, for all matters listed below, the Company is not aware of any contingent liabilities that should be reflected in the consolidated financial statements.
| F-29 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| (1) | Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. The case remains in discovery but has been inactive for some time. Following analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary. The case remains on the docket and has no court dates set at this time. | |
| (2) | Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox. Written discovery is winding down and depositions began in the third quarter of 2023 and are expected to continue in 2024. The case is anticipated set for trial in January 2025. | |
| In the Circuit Court of
Tennessee for the 30th Judicial District at Memphis, Docket # CT-3219-23. On August 8, 2023, a complaint was filed by SurgePays for
breach of a promissory note by Blue Skies Connections, LLC. The note at issue is dated | ||
| (3) | SurgePays, Inc. et al. v. Fina et al., Case No. CJ-2022-2782, District Court of Oklahoma County, Oklahoma. Plaintiffs SurgePays, Inc. and Kevin Brian Cox initiated this case against its former officer Mike Fina, his companies Blue Skies Connections, LLC, True Wireless, Inc., Government Consulting Solutions, Inc., Mussell Communications LLC, and others. This case also arises from the June 2021 transaction by which SurgePays sold True Wireless to Blue Skies. During the litigation of CJ-2021-5327 described above, SurgePays learned information that showed Mike Fina breached his duties owed to True Wireless during his employment and consulting work for True Wireless prior to SurgePays’ sale of True Wireless to Blue Skies. SurgePays alleges that Mike Fina conspired with the other defendants to damage True Wireless thereby harming the value of the company and causing its eventual sale at a greatly reduced price. SurgePays asserts claims for (i) breach of contract; (ii) breach of fiduciary duty; (iii) fraud; (iv) tortious interference; and (v) unjust enrichment. At this stage, no defendant has asserted a counterclaim against SurgePays. |
| SurgePays filed a Second Amended Petition on January 27, 2023. Defendants Fina, Blue Skies, True Wireless, and Government Consulting Solutions filed a Motion to Dismiss on March 10, 2023. On June 29, 2023, the Court granted the Motion to Dismiss, ruling the claims asserted are “derivative” and could only be asserted by the True Wireless entity now owed by Blue Skies. The Court rejected SurgePays’ request to certify this ruling for immediate appeal. Defendant Misty Garrett has filed a Motion for Summary Judgment seeking the same relief as the Motion to Dismiss granted by the Court. Defendants Rob Rowlen and Terracom, LLC remain as defendants in the case after answering the Second Amended Petition. It is SurgePays’ present intent to vigorously appeal the Court’s dismissal of Fina, Blue Skies, True Wireless, and Government Consulting Solutions, and to continue prosecuting the case against the other Defendants. At this stage, no attempts at settlement have been made. | ||
| (4) | Robert Aliotta and Steve Vasquesz, on behalf of themselves and others similarly situated v. SurgePays, Inc. d/b/a Surge Logics, filed January 4, 2023, in the U.S. District Court for the Northern District of Illinois, Case No. 1:23-cv-00042. Plaintiffs allege violations of the Telephone Consumer Protection Act (TCPA) and the Florida Telephone Solicitations Act (FTSA) based on telephone solicitations allegedly made by or on behalf of SurgePays, Inc. Plaintiffs seek damages for themselves and seek certification of a class action on behalf of others similarly situated. Defendants intend to vigorously defend the action however most similar cases are eventually resolved by an out-of-court settlement. At this time, it is difficult to estimate the amount or range of potential loss. SurgePays Inc has been removed from the case following a Motion to Dismiss and LogicsIQ, Inc. has been named as the defendant. The case has begun written discovery and depositions are expected later this year. | |
| (5) | Consumer Attorney Marketing Group, LLC v. LogicsIQ, Inc. and SurgePays, Inc. On February 13, 2024, in the Superior Court of California, Los Angeles County, Case No. 24 ST CV 03653, Consumer Attorney Marketing Group, LLC (“CAMG”) filed a complaint naming SurgePays, Inc. (the “Company”) a defendant and alleging claims for breach of contract, declaratory judgment and express and implied indemnity. The complaint demands that defendants indemnify CAMG for any damages or losses that CAMG may incur in the case Robert Aliotta, et al. v. SurgePays, Inc. d/b/a SurgeLogics, Case No. 23 C 00042, pending in the U.S. District Court for the Northern District of Illinois. CAMG’s claims against the Company are solely based upon theories of participatory and vicarious liability. The Company was served on or about February 27, 2024. The Company’s answer or other pleading is currently due on March 28, 2024. This case is in the initial stages. The Company has not yet filed an appearance in the matter, and the Court has not scheduled any dates or deadlines. The Company is reviewing the claims and determining its defenses. At this time, it is not possible to estimate the amount or range of potential loss. | |
| (6) | On
December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach
of contract and prays for damages of approximately $ |
| F-30 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Consumer Attorney Marketing Group, LLC v. LogicsIQ, Inc. and SurgePays, Inc.
Consumer Attorney Marketing Group, LLC v. LogicsIQ, Inc. and SurgePays, Inc. On February 13, 2024, in the Superior Court of California, Los Angeles County, Case No. 24 ST CV 03653, Consumer Attorney Marketing Group, LLC (“CAMG”) filed a complaint naming SurgePays, Inc. (the “Company”) a defendant and alleging claims for breach of contract, declaratory judgment and express and implied indemnity. The complaint demands that defendants indemnify CAMG for any damages or losses that CAMG may incur in the case Robert Aliotta, et al. v. SurgePays, Inc. d/b/a SurgeLogics, Case No. 23 C 00042, pending in the U.S. District Court for the Northern District of Illinois. CAMG’s claims against the Company are solely based upon theories of participatory and vicarious liability. The Company was served on or about February 27, 2024. The Company’s answer or other pleading is currently due on March 28, 2024. This case is in the initial stages. The Company has not yet filed an appearance in the matter, and the Court has not scheduled any dates or deadlines. The Company is reviewing the claims and determining its defenses. At this time, it is not possible to estimate the amount or range of potential loss.
Demiray v. SurgePays, Inc.
Meral
Demiray v Surge Holdings, Inc. a/k/a SurgePays, Inc.: In the United States District Court for the Northern District of Illinois, Case
# 22-cv-6591, filed November 23, 2022. Plaintiff filed a claim against SurgePays following her dismissal from her position as an employee
of the company. Following negotiations among and between SurgePays, SurgePays’ insurance carrier and the Plaintiff, a settlement
has been reached and documentation is currently being drafted for full settlement, release, and dismissal of the claim. The case was
settled and dismissed in 2023 for $
SurgePays – Ambess Litigation
On
December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of
contract and prays for damages of approximately $
True Wireless and Surge Holdings - Terracom Litigation
Global Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom believes Mr. Coffman and Mr. Carroll are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as such we believe True Wireless has a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc., but not in wireless sales. The complaint requests general damages plus fees and costs for tortious interference with a business relationship in their prayer for relief. They have made no written demand for damages at this point in time. The Company believes this matter is simply an anti-competitive attempt by Terracom to cause distress to True Wireless. The case was dismissed without prejudice by the Court on December 15, 2022.
| F-31 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Note 9 – Stockholders’ Equity
At December 31, 2023, the Company had three (3) classes of stock:
Common Stock
| - | shares authorized | |
| - | Par value - $ | |
| - |
Series A, Convertible Preferred Stock
| - | shares authorized | |
| - | issued and outstanding | |
| - | Par value - $ | |
| - | ||
| - | Ranks senior to any other class of preferred stock | |
| - | Dividends - none | |
| - | Liquidation preference – none | |
| - | Rights of redemption - none | |
| - |
In
2022, all Series A, Preferred stockholders, representing shares issued and outstanding, agreed to convert their holdings into
shares of common stock. The transaction had a net effect of $
Series C, Convertible Preferred Stock
| - | shares authorized | |
| - | issued and outstanding | |
| - | Par value - $ | |
| - | ||
| - | Ranks junior to any other class of preferred stock | |
| - | Dividends – equal to the per share amount (as converted basis) as the common stockholders should the Board of Directors declare a dividend | |
| - | Liquidation preference – original issue price plus any declared yet unpaid accrued dividends | |
| - | Rights of redemption - none | |
| - |
| F-32 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Securities and Incentive Plan
In March 2023, the Company’s shareholders approved the 2022 Plan (the “Plan”) initially approved, authorized and adopted by the Board of Directors in August 2022.
The Plan initially provided for the following:
| 1. | shares of common stock |
| 2. | An annual increase on the first day of each calendar year beginning January 1, 2023 and ending on January 31, 2031 equal to the lesser of: |
| a. | ||
| b. | Such smaller amount of common stock as determined by the Board of Directors. |
| 3. | The shares may be issued as follows to directors, officers, employees, and consultants: |
| a. | Distribution equivalent rights | |
| b. | Incentive share options | |
| c. | Non-qualified share options | |
| d. | Performance unit awards | |
| e. | Restricted share awards | |
| f. | Restricted share unit awards | |
| g. | Share appreciation rights | |
| h. | Tandem share appreciation rights | |
| i. | Unrestricted share awards |
See the proxy statement filed with the SEC on January 19, 2023 for a complete detail of the Plan.
Effective
January 1, 2024, in accordance with the Plan, we increased the available amount of shares by
Of the total shares authorized and available, the Company has reserved shares for its officers, directors and employees for non-vested shares that are expected to vest in accordance with the terms of the related employment agreements and stock options that may be converted into common stock. At December 31, 2023, the Company had sufficient authorized shares to settle any possible awards that vested or stock options eligible for conversion.
| F-33 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Equity Transactions for the Year Ended December 31, 2023
Stock Issued for Services
The
Company issued shares of common stock for services rendered, having a fair value of $
Exercise of Warrants
The
Company issued
Non-Vested Shares – Related Parties
Chief Financial Officer
In
2023, the Company granted common stock to its Chief Financial Officer (
shares – see Note 8), having a fair value of $
The shares will vest as noted above (see Note 8). The Company records stock compensation expense over these vesting periods. All shares are expected to vest in accordance with the terms of the agreement.
For the year ended December 31, 2023, the Company recognized stock compensation expense of $ related to vesting.
Board Directors
In
2023, the Company granted an aggregate shares of common stock to various members of the Board of Directors, having a fair value
of $
The shares will vest at the earlier to occur:
| - | Board Member no longer serves in that capacity for any reason, except for reasons related to cause, | |
| - | Occurrence of a change in control; and | |
| - | 5th anniversary of the effective date (2028) |
The Company records stock compensation expense over the five () year vesting period. All shares are expected to vest in accordance with the terms of the agreement.
| F-34 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
For the year ended December 31, 2023, the Company recognized stock compensation expense of $ related to vesting.
For the year ended December 31, 2023, total related stock compensation expense due to vesting was $.
Schedule of Non-vested Shares Related Parties
| Weighted Average | ||||||||
| Non-Vested Shares | Number of Shares | Grant Date Fair Value | ||||||
| Balance - December 31, 2022 | $ | - | ||||||
| Granted | ||||||||
| Vested | - | |||||||
| Cancelled/Forfeited | - | |||||||
| Balance - December 31, 2023 | $ | |||||||
| Unrecognized Compensation | $ | |||||||
| Weighted average period (years) | ||||||||
See Note 8 for discussion of common stock award to the Company’s Chief Financial Officer pursuant to an employment agreement.
Equity Transactions for the Year Ended December 31, 2022
Stock Issued as Direct Offering Costs
The
Company issued shares of common stock for services rendered in connection with the Company’s NASDAQ uplisting in 2021.
As a result, the Company recorded the par value of the common stock issued with a corresponding charge to additional paid-in capital,
resulting in a net effect of $
Stock Issued for Acquisition of Software
The
Company acquired software having a fair value of $
Exercise of Warrants (Cashless)
The
Company issued shares of common stock in connection with a cashless exercise of
| F-35 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Exercise of Warrants
The
Company issued shares of common stock in connection with the exercise of
Stock Options
Schedule of Stock Option Transactions
| Stock Options | Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | Weighted Average Grant Date Fair Value | |||||||||||||||
| Outstanding - December 31, 2021 | $ | $ | ||||||||||||||||||
| Vested and Exercisable - December 31, 2021 | $ | $ | - | |||||||||||||||||
| Unvested and non-exercisable - December 31, 2021 | $ | $ | - | |||||||||||||||||
| Granted | $ | |||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Cancelled/Forfeited | ||||||||||||||||||||
| Outstanding - December 31, 2022 | $ | $ | ||||||||||||||||||
| Vested and Exercisable - December 31, 2022 | $ | $ | - | |||||||||||||||||
| Unvested and non-exercisable - December 31, 2022 | $ | $ | - | |||||||||||||||||
| Granted | $ | |||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Cancelled/Forfeited | ||||||||||||||||||||
| Outstanding - December 31, 2023 | $ | $ | ||||||||||||||||||
| Vested and Exercisable - December 31, 2023 | $ | $ | - | |||||||||||||||||
| Unvested and non-exercisable - December 31, 2023 | $ | $ | - | |||||||||||||||||
| F-36 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Stock Options - Related Party
During 2023 and 2022, and stock options vested each year, respectively, and were held by the Company’s Chief Financial Officer. The remaining stock options vest in 2024.
Stock-based compensation expense for the years ended December 31, 2023 and 2022 was $ and $, respectively.
Stock Options - Employees
In
2023, the Company granted seven () year stock options to various employees for services rendered, having a fair value of $
Schedule of Fair Value of Stock Options
| Expected term | ||
| Expected volatility | ||
| Expected dividends | ||
| Risk free interest rate |
Total stock-based compensation expense for the years ended December 31, 2023 and 2022 was $ and $, respectively.
Weighted average period in which unrecognized compensation ($) will vest is years. The unvested stock option expense is expected to be recognized through March 2024.
Warrants
Warrant activity for the years ended December 31, 2023 and 2022 are summarized as follows:
Schedule of Warrants Activity
| Warrants | Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||
| Outstanding - December 31, 2021 | $ | $ | ||||||||||||||
| Vested and Exercisable - December 31, 2021 | $ | $ | ||||||||||||||
| Unvested - December 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | - | ||||||||||||||
| Exercised | ( | ) | $ | - | ||||||||||||
| Cancelled/Forfeited | ( | ) | $ | - | ||||||||||||
| Outstanding - December 31, 2022 | $ | $ | ||||||||||||||
| Vested and Exercisable - December 31, 2022 | $ | $ | ||||||||||||||
| Unvested - December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | - | ||||||||||||||
| Exercised | ( | ) | $ | - | ||||||||||||
| Cancelled/Forfeited | ( | ) | $ | - | ||||||||||||
| Outstanding - December 31, 2023 | $ | $ | ||||||||||||||
| Vested and Exercisable - December 31, 2023 | $ | $ | ||||||||||||||
| Unvested and non-exercisable - December 31, 2023 | $ | $ | ||||||||||||||
Warrant Transactions for the Year Ended December 31, 2022
Warrants Issued as Debt Issue Costs
In
connection with $
| F-37 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected term (years) | ||
| Expected volatility | ||
| Expected dividends | ||
| Risk free interest rate |
Warrants Issued as Interest Expense
A
vendor increased the amount of credit the Company had for making purchases. In consideration for the increase, the Company issued
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected term (years) | ||
| Expected volatility | ||
| Expected dividends | ||
| Risk free interest rate |
In
2022, the Company extended the due dates of certain notes payable totaling $
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
Schedule of Fair Value of Warrants
| Expected term (years) | ||
| Expected volatility | ||
| Expected dividends | ||
| Risk free interest rate |
Note 10 – Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer.
The Company evaluated the performance of its operating segments based on revenue and operating loss. All data below is prior to intercompany eliminations.
| F-38 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Segment information for the Company’s operations for the years ended December 31, 2023 and 2022, are as follows:
Schedule of Operating Segments
| 2023 | 2022 | |||||||
| For the Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | ||||||||
| Mobile Virtual Network Operator | $ | $ | ||||||
| Comprehensive Platform Services | ||||||||
| Lead Generation | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| Cost of revenues | ||||||||
| Mobile Virtual Network Operator | $ | $ | ||||||
| Comprehensive Platform Services | ||||||||
| Lead Generation | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
| Operating expenses | ||||||||
| Mobile Virtual Network Operator | $ | $ | ||||||
| Comprehensive Platform Services | ||||||||
| Lead Generation | ||||||||
| Other | ||||||||
| Corporate overhead | ||||||||
| Total | $ | $ | ||||||
| Income (loss) from operations | ||||||||
| Mobile Virtual Network Operator | $ | $ | ||||||
| Comprehensive Platform Services | ( | ) | ( | ) | ||||
| Lead Generation | ||||||||
| Other | ( | ) | ||||||
| Corporate overhead | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Segment information for the Company’s assets and liabilities at December 31, 2023 and 2022, are as follows:
| December 31, 2023 | December 31, 2022 | |||||||
| Total Assets | ||||||||
| Mobile Virtual Network Operator | $ | $ | ||||||
| Comprehensive Platform Services | ||||||||
| Lead Generation | ||||||||
| Other | ||||||||
| Corporate overhead | ||||||||
| Total | $ | $ | ||||||
| Total Liabilities | ||||||||
| Mobile Virtual Network Operator | $ | $ | ||||||
| Comprehensive Platform Services | ||||||||
| Lead Generation | ||||||||
| Other | ||||||||
| Corporate overhead | ||||||||
| Total | $ | $ | ||||||
All
intercompany accounts are separately presented above as both a component of the assets and liabilities. These amounts net to $
Note 11 – Installment Sale Liability
Agreement
In
2022, the Company executed a two-year (2) financing arrangement with Affordable Connectivity Financing (“ACF”, “Seller”)
to receive up to $
This
agreement was based upon the Company submitting a purchase order and ACF approving the request. The Company could cancel the purchase
order prior to ACF paying for the devices.
Under
the terms of the agreement, ACF was directly purchasing products and reselling to the Company at a markup. At December 31, 2022, the
markup was
| F-39 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Repayment Period
Each installment sale contract was to be repaid over a period of nine (9) months.
Security
This arrangement was fully secured by all assets of the Company.
Minimum Outstanding Balance
Prepayment Penalty
Administrative Fee
The
Company was required to pay $
Default Rate
Commitment Fee
ACF
charged a
Covenants
At December 31, 2023 and December 31, 2022, respectively, the Company was in compliance with all of the following ratios:
| 1. | Company adjusted EBITDA, | |
| 2. | Total Leverage Ratio, | |
| 3. | Fixed Charge Coverage Ratio, | |
| 4. | Minimum Subscriber Base; and | |
| 5. | Minimum Liquidity |
Additionally, the Company is required to provide various data to the vendor on a periodic basis. The Company has not received notice from the vendor regarding any instances of non-compliance.
Lockbox
The Company will maintain a lockbox for the benefit of the Seller.
Installment Sale Liability
At
December 31, 2023 and 2022, the Company has recorded an installment sale liability of $ and $
During
the years ended December 31, 2023 and 2022, the Company paid fees of $
The liability was repaid in full in 2023.
| F-40 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Note 12 – Income Taxes
Provision (benefit) for Income Taxes and Effective Income Tax Rate
Schedule of Income Taxes and Effective Income Tax Rate
| December 31, 2023 | December 31, 2022 | |||||||
| Federal | ||||||||
| Current | $ | $ | ||||||
| Deferred | ( | ) | ||||||
| Total provision (benefit) | $ | ( | ) | $ | ||||
| State | ||||||||
| Current | $ | $ | ||||||
| Deferred | ||||||||
| Total provision (benefit) | $ | $ | ||||||
A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate of 21% to income before provision for income taxes for the years ended December 31, 2023 and 2022, respectively, is as follows:
Schedule of Components of Income Tax Expense (Benefit)
| December 31, 2023 | December 31, 2022 | |||||||
| Federal income tax expense (benefit) - | $ | $ | ( | ) | ||||
| Federal income tax expense (benefit) - | $ | $ | ( | ) | ||||
| State income tax expense (benefit) - | ( | ) | ||||||
| Tax-exempt income | ( | ) | ||||||
| Non-deductible items | ||||||||
| Subtotal | ( | ) | ||||||
| Change in valuation allowance | ( | ) | ||||||
| Income tax expense (benefit) | $ | ( | ) | $ | ||||
| Effective tax rate | - | % | % | |||||
Deferred Tax Assets and Liabilities
As of December 31, 2023 and 2022, respectively, the significant components of deferred tax assets and liabilities is as follows:
Schedule of Deferred Tax Assets
| December 31, 2023 | December 31, 2022 | |||||||
| Deferred Tax Assets | ||||||||
| Reserve for uncollectible accounts | $ | $ | ||||||
| Net operating loss carryforwards | ||||||||
| Total deferred tax assets | ||||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | ||||||||
| Deferred Tax Liabilities | ||||||||
| Depreciation | ||||||||
| Deferred income taxes - net | $ | $ | ||||||
Deferred tax assets and liabilities are computed by applying the federal and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carryforwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which these deductible temporary differences reverse.
As
of December 31, 2023, the Company had federal and state net operating loss carryforwards of approximately $
During
the year ended December 31, 2023, the valuation allowance decreased by approximately $
The Company is in the process of analyzing their NOL and has not determined if the Company has had any change of control issues that could limit the future use of these NOL’s. As of December 31, 2023, all federal NOL carryforwards that were generated after 2017 may only be used to offset 80% of taxable income and are carried forward indefinitely.
| F-41 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
The Company follows the provisions of ASC 740, which requires the computations of current and deferred income tax assets and liabilities only consider tax positions that are more likely than not (defined as greater than 50% chance) to be sustained if the taxing authorities examined the positions. There are no significant differences between the tax provisions represented in the accompanying consolidated financial statements and that reported in the Company’s income tax returns. The Company is subject to U.S. Federal and State income tax examination by taxing authorities for the years after December 31, 2020.
The Company files corporate income tax returns in the United States and State of Tennessee jurisdictions. Due to the Company’s net operating loss posture, all tax years are open and subject to income tax examination by tax authorities. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At December 31, 2023 and 2022, respectively, there are no unrecognized tax benefits, and there were no significant accruals for interest related to unrecognized tax benefits or tax penalties.
Note 13 – Subsequent Events
Acquisition of ClearLine Mobile, Inc (Asset Purchase)
On January 5, 2024, the Company closed a purchase agreement and acquired ClearLine Mobile, Inc’s. (“CLMI”) software development and point-of-sale (“POS”) equipment and operations in exchange for $2,500,000. Payments are due as follows:
| - | $ | |
| - | $ | |
| - | $ | |
| - | $ |
At the time of purchase, CLMI’s assets and operations were insignificant.
Pursuant to ASU 2017-01, Business Combinations (Topic 805): “Clarifying the Definition of a Business”, this acquisition was determined to be that of an asset and not a business, therefore, there was not a business combination requiring acquisition accounting or related financial reporting. Since this was deemed to be an asset purchase, this did not result in the recognition of goodwill or other identifiable intangible assets.
This transaction did not involve the purchase of a “significant amount of assets” as defined in the Instructions to Item 2.01 of Form 8-K. Additionally, the acquisition of CLMI was not deemed to be significant at any level under SEC Regulation S-X 3.05 and did not require the presentation of any additional historical audited financial statements.
Stock Issued for Cash - Capital Raise
On
January 17, 2024, the Company, entered into an underwriting agreement (the “Underwriting Agreement”) with Titan Partners
Group, a division of American Capital Partners, as representative of the underwriters named therein (the “Underwriters”)
relating to the issuance and sale of
The Offering was made pursuant to the Company’s registration statement on Form S-3 (File No. 333-273110) previously filed with the Securities and Exchange Commission (the “SEC”) on July 3, 2023, as amended, and declared effective by the SEC on November 3, 2023. A preliminary and final prospectus supplement were filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933 (the “Securities Act”) on January 17, 2024 and January 19, 2024, respectively. The Offering closed on January 22, 2024.
On
February 12, 2024, the underwriters exercised their over-allotment option to purchase an additional shares of common stock for
$
Exercise of Warrants
From January 1, 2024 through March 6,
2024, the Company issued shares of common stock in connection with the exercise of warrants for $
Consolidated Amended and Restated Note
On March 12, 2024, the Company
entered into an amended and restated promissory note (the “Amended Note”) with SMDMM Funding, LLC, with which the Company
currently has two outstanding notes, one in the original principal amount of $
SMDMM Funding, LLC is a Wyoming limited liability company for which the Company’s CEO, Brian Cox, is the Manager.
| F-42 |
Exhibit 10.25
CONSOLIDATED, AMENDED AND RESTATED PROMISSORY NOTE
| $4,758,088.74 | [____], 2024 |
THIS CONSOLIDATED, AMENDED AND RESTATED PROMISSORY NOTE (this “Promissory Note”) is made and entered into as of the date first above written, by and between SurgePays, Inc., a Nevada corporation (“Maker”), promises to pay to the order of SMDMM Funding, LLC, a Wyoming limited liability company (“SMDMM”).
RECITALS
WHEREAS, on May 2, 2022, Maker issued SMDMM a promissory in the original principal amounts of Four Million One Hundred Thirty-Four Thousand Four Hundred Sixty-Two and 47/100 Dollars ($4,134,462.47) (“Original Note”) due on demand after January 1, 2024;
WHEREAS, on December 30, 2022, Maker and SMDMM agreed to amend the Original Note and Maker issued SMDMM two new promissory notes, one in the original principal amount of One Million One Hundred Eight Thousand One Hundred Fifty Dollars and Thirty One Cents ($1,108,150.31) due on December 31, 2023 (the “One Year Loan”), which One Year Loan is evidenced by that certain Promissory Note dated as of December 30, 2022, made by Maker and payable to the order of SMDMM (the “One Year Note”) and one in the original principal amount of Four Million Twenty Six Thousand Four Hundred Thirteen Dollars ($4,026,413.00) due on December 31, 2024 (the “Two Year Loan”), which Two Year Loan is evidenced by that certain Promissory Note dated as of December 30, 2022, made by Maker and payable to the order of SMDMM (the “Two Year Note”); and
WHEREAS, Maker paid SMDMM One Hundred Sixty-four Thousand One Hundred Thirty-one and 97/100 Dollars ($164,131.97) on January 31, 2024 and February 29, 2024, respectively, as partial payment on the One Year Note;
WHEREAS, Maker and SMDMM desire to consolidate, amend, and restate the One Year Note and the Two Year Note in their entirety in accordance herewith and to provide for the payment schedule of the amounts due under this Note in accordance with the terms hereof;
NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Maker and SMDMM agree that the One Year Note and Two Year Note are hereby consolidated, amended, and restated in their entirety by this Promissory Note. Maker acknowledges and agrees that all amounts outstanding under the One Year Note and Two Year Note as of the date hereof aggregate in the outstanding principal sum of $4,758,088.74 and Maker has no defenses, claims, counterclaims, or rights of offset with respect to such amount, the One Year Note and Two Year Note, or any other document or instrument evidencing or securing the One Year Note and Two Year Note. For the avoidance of doubt, Maker does hereby release SMDMM from any and all claims and counterclaims Maker may have under or with respect to the One Year Note, Two Year Note, or any other document evidencing or securing any of the indebtedness thereunder. Nothing herein shall be construed as a novation of the amounts outstanding under the One Year Note or Two Year Note, which amounts shall remain outstanding under the terms of this Promissory Note.
In further consideration of the foregoing, Maker agrees and promises to pay SMDMM as follows: thirty-three (33) equal payments of principal and interest in the amount of One Hundred Sixty-four Thousand One Hundred Thirty-one and 97/100 Dollars ($164,131.97) on the last day of each month starting on March 31, 2024 plus a final payment of One Hundred Fifty-eight Thousand Six Hundred Thirty-one and 85/100 Dollars ($158,631.85) December 31, 2026.
Except as hereinafter provided, the principal balance of this Promissory Note remaining from time to time unpaid shall bear interest prior to Default or maturity at the rate of ten percent (10.0%) per annum computed on the basis of actual days elapsed over a year of 365 days.
All such payments on account of the indebtedness evidenced by this Promissory Note shall be first applied to the unpaid principal balance and the remainder to the interest on the unpaid principal balance. The principal balance of this Promissory Note shall bear interest after Default or maturity, computed on the basis of actual days elapsed over a year of 365 days, at a rate equal to fifteen percent (15%) per annum.
Maker shall have the right to prepay in whole or in part, without premium or penalty, the entire outstanding principal indebtedness and all accrued interest due under this Note. Prepayments shall be applied to the principal balance of the loan.
The Maker, without notice or demand of any kind, shall be in default under this Agreement upon the occurrence of any of the following events (“Default”):
| a) | Any amount due and owing on this Promissory Note, whether by its terms or as otherwise provided herein, is not paid within thirty (30) days after notice is provided to the Maker by SMDMM that payment was due; | |
| b) | Any failure to perform or default in the performance of any covenant, condition or agreement contained in this Promissory Note and, if capable of being cured, such failure to perform or default in performance continues for a period of sixty (60) days after the Maker receives notice from any source of such failure to perform or default in performance; | |
| c) | Maker makes an assignment for the benefit of creditors, fails to pay, or admits in writing its inability to pay its debts as they mature; or if a trustee is applied for or appointed, and in the case of such trustee being appointed in a proceeding brought against such Maker, the Maker, by any action or failure to act indicates its approval of, consent to, or acquiescence in such appointment and such appointment is not vacated, stayed on appeal or otherwise shall not have ceased to continue in effect within one-hundred twenty (120) days after the date of such appointment; or | |
| d) | Any proceeding involving Maker, is commenced by or against such Maker under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law or statute of the federal government or any state government, and in the case of any such proceeding being instituted against such Maker, (i) such Maker, by any action or failure to act indicates its approval of, consent to or acquiescence therein, or (ii) an order shall be entered approving the petition in such proceedings and such order is not vacated, stayed on appeal or otherwise shall not have ceased to continue in effect within one-hundred twenty (120) days after the entry thereof. |
Upon the occurrence of a Default, at the option of SMDMM hereof and upon written notice to Maker in the manner provided herein, SMDMM may declare the entire unpaid principal balance of this Promissory Note and all interest accrued thereon and all other sums due from Maker hereunder to be immediately due and payable and/or pursue any and all other rights and remedies under this Promissory Note or at law or in equity.
Maker waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest, notice of protest, and protest of this Promissory Note, and all other notices in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Promissory Note, and agrees that the liability shall be unconditional without regard to the liability of any other party and shall not be in any manner affected by an indulgence, extension of time, renewal, waiver, or modification granted or consented to by SMDMM hereof, and Maker and all endorsers, sureties and guarantors hereof consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by SMDMM hereof with respect to the payment or other provisions of this Promissory Note.
SMDMM shall not by any act of omission or commission be deemed to waive any of its rights or remedies hereunder unless such waiver is in writing and signed by SMDMM hereof, and then only to the extent specifically set forth therein. A waiver of one event shall not be construed as continuing or as a bar to a waiver of such right or remedy on a subsequent event.
This Promissory Note shall not be assignable by Maker without the express written consent of SMDMM. SMDMM may assign this Promissory Note, in whole or in part, without consent of Maker, however Maker must be given 30 days written notice by SMDMM.
Maker further agrees to reimburse SMDMM upon demand for all reasonable out-of-pocket expenses, including, without limitation, reasonable attorneys’ fees, in connection with the enforcement of the obligations and liabilities of Maker to SMDMM under this Promissory Note.
This Promissory Note and any other instrument evidencing or securing the indebtedness evidenced by this Promissory Note shall be construed in accordance with and governed by the laws of the State of Tennessee. MAKER HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE CIRCUIT COURT OR FEDERAL COURT LOCATED WITHIN THE STATE OF TENNESSEE, IN SHELBY COUNTY. MAKER AND SMDMM WAIVE TRIAL BY JURY AND WAIVE ANY OBJECTION WHICH THE MAKER MAY HAVE BASED ON IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY PROCEEDING INSTITUTED HEREUNDER AND CONSENT TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, Maker has caused this Consolidated, Amended and Restated Promissory Note to be duly executed as of the date first above written by their duly authorized representatives.
| SurgePays, Inc., a Nevada corporation | ||
| By: | ||
| Name: | Anthony Evers | |
| Title: | CFO | |
Agreed and Accepted:
| SMDMM Funding, LLC, a Wyoming limited liability company | ||
| By: | ||
| Name: | K. Brian Cox | |
| Title: | Manager | |
Exhibit 19.1
Insider Trading Compliance Manual
SurgePays, Inc.
Adopted: November 29, 2023
In order to take an active role in the prevention of insider trading violations by its officers, directors, employees, consultants, attorneys, advisors and other related individuals, the Board of Directors (the “Board”) of SurgePays, Inc., a Nevada corporation (the “Company”), has adopted the policies and procedures described in this Insider Trading Compliance Manual.
I. Adoption of Insider Trading Policy.
Effective as of the date first written above, the Board has adopted the Insider Trading Policy attached hereto as Exhibit A (as the same may be amended from time to time by the Board, the “Policy”), which prohibits trading based on “material, nonpublic information” regarding the Company or any company whose securities are listed for trading or quotation in the United States (“Material Non-Public Information”).
This Policy covers all officers and directors of the Company and its subsidiaries, all other employees of the Company and its subsidiaries, and consultants or contractors to the Company or its subsidiaries who have or may have access to Material Non-Public Information and members of the immediate family or household of any such person. This Policy (and/or a summary thereof) is to be delivered to all employees, consultants and related individuals who are within the categories of covered persons upon the commencement of their relationships with the Company.
II. Designation of Certain Persons.
A. Section 16 Individuals. All directors and executive officers of the Company will be subject to the reporting and liability provisions of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules and regulations promulgated thereunder (“Section 16 Individuals”).
B. Other Persons Subject to Policy. In addition, certain employees, consultants, and advisors of the Company as described in Section I above have, or are likely to have, from time to time access to Material Non-Public Information and together with the Section 16 Individuals, are subject to the Policy, including the pre-clearance requirement described in Section IV. A. below.
C. Post-Termination Transactions. This Policy continues to apply to transactions in Company securities even after an employee, officer or director has resigned or terminated employment. If the person who resigns or separates from the Company is in possession of Material Non-Public Information at that time, he or she may not trade in Company securities until that information has become public or is no longer material.
| 1 |
III. Appointment of Insider Trading Compliance Officer.
By the adoption of this Policy, the Board has appointed David Ansani as the Insider Trading Compliance Officer (the “Compliance Officer”).
IV. Duties of Compliance Officer.
The Compliance Officer has been designated by the Board to handle any and all matters relating to the Company’s Insider Trading Compliance Program. Certain of those duties may require the advice of outside counsel with special expertise in securities issues and relevant law. The duties of the Compliance Officer shall include the following:
A. Pre-clearing all transactions involving the Company’s securities by the Section 16 Individuals and those individuals having regular access to Material Non-Public Information in order to determine compliance with the Policy, insider trading laws, Section 16 of the Exchange Act and Rule 144 promulgated under the Securities Act of 1933, as amended (“Rule 144”). Attached hereto as Exhibit B is a Pre-Clearance Checklist to assist the Compliance Officer’s performance of this duty.
B. Assisting in the preparation and filing of Section 16 reports (Forms 3, 4 and 5) for all Section 16 Individuals, bearing in mind, however, that the preparation of such reports is undertaken by the Company as a courtesy only and that the Section 16 Individuals alone (and not the Company, its employees or advisors) shall be solely responsible for the content and filing of such reports and for any violations of Section 16 under the Exchange Act and related rules and regulations.
C. Serving as the designated recipient at the Company of copies of reports filed with the Securities and Exchange Commission (“SEC”) by Section 16 Individuals under Section 16 of the Exchange Act.
D. Performing periodic reviews of available materials, which may include Forms 3, 4 and 5, Form 144, officers and director’s questionnaires, and reports received from the Company’s stock administrator and transfer agent, to determine trading activity by officers, directors and others who have, or may have, access to Material Non-Public Information.
E. Circulating the Policy (and/or a summary thereof) to all covered employees, including Section 16 Individuals, on an annual basis, and providing the Policy and other appropriate materials to new officers, directors and others who have, or may have, access to Material Non-Public Information.
F. Assisting the Board in implementation of the Policy and all related Company policies.
G. Coordinating with Company internal or external legal counsel regarding all securities compliance matters.
H. Retaining copies of all appropriate securities reports and maintaining records of his or her activities as Compliance Officer.
[Acknowledgement Appears on the Next Page]
| 2 |
ACKNOWLEDGMENT
I hereby acknowledge that I have received a copy of SurgePays, Inc.’s Insider Trading Compliance Manual (the “Insider Trading Manual”). Further, I certify that I have reviewed the Insider Trading Manual, understand the policies and procedures contained therein and agree to be bound by and adhere to these policies and procedures.
| Dated: | |||
| Signature | |||
| Name: |
| 3 |
Exhibit A
SurgePays, Inc.
Insider Trading Policy
and Guidelines with Respect to Certain Transactions in Company Securities
APPLICABILITY OF POLICY
This Policy applies to all transactions in the Company’s securities, including common stock, options and warrants to purchase common stock and any other securities the Company may issue from time to time, such as preferred stock, warrants and convertible notes, as well as to derivative securities relating to the Company’s stock, whether or not issued by the Company, such as exchange-traded options. It applies to all officers and directors of the Company, all other employees of the Company and its subsidiaries, and consultants or contractors to the Company or its subsidiaries who have or may have access to Material Nonpublic Information (as defined below) regarding the Company and members of the immediate family or household of any such person. This group of people is sometimes referred to in this Policy as “Insiders.” This Policy also applies to any person who receives Material Nonpublic Information from any Insider.
Any person who possesses Material Nonpublic Information regarding the Company is an Insider for so long as such information is not publicly known.
DEFINITION OF MATERIAL NONPUBLIC INFORMATION
It is not possible to define all categories of material information. However, the U.S. Supreme Court and other federal courts have ruled that information should be regarded as “material” if there is a substantial likelihood that a reasonable investor:
| (1) | would consider the information important in making an investment decision; and | |
| (2) | would view the information as having significantly altered the “total mix” of available information about the Company. |
“Nonpublic” information is information that has not been previously disclosed to the general public and is otherwise not available to the general public.
While it may be difficult to determine whether particular information is material, there are various categories of information that are particularly sensitive and, as a general rule, should always be considered material. In addition, material information may be positive or negative. Examples of such information may include:
| ● | Financial results | |
| ● | Information relating to the Company’s stock exchange listing or SEC regulatory issues | |
| ● | Information regarding regulatory review of Company products | |
| ● | Intellectual property and other proprietary/scientific information | |
| ● | Projections of future earnings or losses | |
| ● | Major contract awards, cancellations or write-offs | |
| ● | Joint ventures/commercial partnerships with third parties | |
| ● | Research milestones and related payments or royalties | |
| ● | News of a pending or proposed merger or acquisition | |
| ● | News of the disposition of material assets | |
| ● | Impending bankruptcy or financial liquidity problems | |
| ● | Gain or loss of a substantial customer or supplier | |
| ● | New product announcements of a significant nature | |
| ● | Significant pricing changes | |
| ● | Stock splits | |
| ● | New equity or debt offerings | |
| ● | Significant litigation exposure due to actual or threatened litigation | |
| ● | Changes in senior management or the Board of Directors of the Company | |
| ● | Capital investment plans | |
| ● | Changes in dividend policy |
| A-1 |
CERTAIN EXCEPTIONS
For purposes of this Policy:
1. Stock Options Exercises. For purposes of this Policy, the Company considers that the exercise of stock options under the Company’s stock option plans (but not the sale of the underlying stock) to be exempt from this Policy. This Policy does apply, however, to any sale of stock as part of a broker-assisted “cashless” exercise of an option, or any market sale for the purpose of generating the cash needed to pay the exercise price of an option.
2. 401(k) Plan. This Policy does not apply to purchases of Company stock in the Company’s 401(k) plan resulting from periodic contributions of money to the plan pursuant to payroll deduction elections. This Policy does apply, however, to certain elections that may be made under the 401(k) plan, including (a) an election to increase or decrease the percentage of periodic contributions that will be allocated to the Company stock fund, if any, (b) an election to make an intra-plan transfer of an existing account balance into or out of the Company stock fund, (c) an election to borrow money against a 401(k) plan account if the loan will result in a liquidation of some or all of a participant’s Company stock fund balance and (d) an election to pre-pay a plan loan if the pre-payment will result in allocation of loan proceeds to the Company stock fund.
3. Employee Stock Purchase Plan. This Policy does not apply to purchases of Company stock in the Company’s employee stock purchase plan, if any, resulting from periodic contributions of money to the plan pursuant to the elections made at the time of enrollment in the plan. This Policy also does not apply to purchases of Company stock resulting from lump sum contributions to the plan, provided that the participant elected to participate by lump-sum payment at the beginning of the applicable enrollment period. This Policy does apply to a participant’s election to participate in or increase his or her participation in the plan, and to a participant’s sales of Company stock purchased pursuant to the plan.
4. Dividend Reinvestment Plan. This Policy does not apply to purchases of Company stock under the Company’s dividend reinvestment plan, if any, resulting from reinvestment of dividends paid on Company securities. This Policy does apply, however, to voluntary purchases of Company stock that result from additional contributions a participant chooses to make to the plan, and to a participant’s election to participate in the plan or increase his level of participation in the plan. This Policy also applies to his or her sale of any Company stock purchased pursuant to the plan.
5. General Exceptions. Any exceptions to this Policy other than as set forth above may only be made by advance written approval of each of: (i) the Company’s President or Chief Executive Officers, (ii) the Company’s Insider Trading Compliance Officer and (iii) the Chairperson of the Governance and Nominating Committee of the Board. Any such exceptions shall be immediately reported to the remaining members of the Board.
STATEMENT OF POLICY
General Policy
It is the policy of the Company to prohibit the unauthorized disclosure of any nonpublic information acquired in the workplace and the misuse of Material Nonpublic Information in securities trading related to the Company or any other company.
Specific Policies
1. Trading on Material Nonpublic Information. With certain exceptions, no Insider shall engage in any transaction involving a purchase or sale of the Company’s or any other company’s securities, including any offer to purchase or offer to sell, during any period commencing with the date that he or she possesses Material Nonpublic Information concerning the Company, and ending at the close of business on the second Trading Day following the date of public disclosure of that information, or at such time as such nonpublic information is no longer material. However, see Section 2 under “Permitted Trading Period” below for a full discussion of trading pursuant to a pre-established plan or by delegation.
As used herein, the term “Trading Day” shall mean a day on which national stock exchanges are open for trading.
2. Tipping. No Insider shall disclose (“tip”) Material Nonpublic Information to any other person (including family members) where such information may be used by such person to his or her profit by trading in the securities of companies to which such information relates, nor shall such Insider or related person make recommendations or express opinions on the basis of Material Nonpublic Information as to trading in the Company’s securities.
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Regulation FD (Fair Disclosure) is an issuer disclosure rule implemented by the SEC that addresses selective disclosure of Material Nonpublic Information. The regulation provides that when the Company, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the Company’s securities who may well trade on the basis of the information), it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or unintentional; for an intentional selective disclosure, the Company must make public disclosures simultaneously; for a non-intentional disclosure the Company must make public disclosure promptly. Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
It is the policy of the Company that all public communications of the Company (including, without limitation, communications with the press, other public statements, statements made via the Internet or social media outlets, or communications with any regulatory authority) be handled only through the Company’s President and/or Chief Executive Officer (the “CEO”), an authorized designee of the CEO or the Company’s public or investor relations firm. Please refer all press, analyst or similar requests for information to the CEO and do not respond to any inquiries without prior authorization from the CEO. If the CEO is unavailable, the Company’s Chief Financial Officer (or the authorized designee of such officer) will fill this role.
3. Confidentiality of Nonpublic Information. Nonpublic information relating to the Company is the property of the Company and the unauthorized disclosure of such information (including, without limitation, via email or by posting on Internet message boards, blogs or social media) is strictly forbidden.
4. Duty to Report Inappropriate and Irregular Conduct. All employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within the company, consistent with generally accepted accounting principles and both federal and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or irregularities, whether by witnessing the incident or being told of it, must report it to their immediate supervisor and to any member of the Company’s Audit Committee. In certain instances, employees are allowed to participate in federal or state proceedings. For a more complete understanding of this issue, employees should consult their employee manual and/or seek the advice from their direct report or the Company’s principal executive officers (who may, in turn, seek input from the Company’s outside legal counsel).
POTENTIAL CRIMINAL AND CIVIL LIABILITY
AND/OR DISCIPLINARY ACTION
1. Liability for Insider Trading. Insiders may be subject to penalties of up to $5,000,000 for individuals (and $25,000,000 for a business entity) and up to twenty (20) years in prison for engaging in transactions in the Company’s securities at a time when they possess Material Nonpublic Information regarding the Company. In addition, the SEC has the authority to seek a civil monetary penalty of up to three times the amount of profit gained or loss avoided by illegal insider trading. “Profit gained” or “loss avoided” generally means the difference between the purchase or sale price of the Company’s stock and its value as measured by the trading price of the stock a reasonable period after public dissemination of the nonpublic information.
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2. Liability for Tipping. Insiders may also be liable for improper transactions by any person (commonly referred to as a “tippee”) to whom they have disclosed Material Nonpublic Information regarding the Company or to whom they have made recommendations or expressed opinions on the basis of such information as to trading in the Company’s securities. The SEC has imposed large penalties even when the disclosing person did not profit from the trading. The SEC, the stock exchanges and the National Association of Securities Dealers, Inc. use sophisticated electronic surveillance techniques to monitor and uncover insider trading.
3. Possible Disciplinary Actions. Individuals subject to the Policy who violate this Policy shall also be subject to disciplinary action by the Company, which may include suspension, forfeiture of perquisites, ineligibility for future participation in the Company’s equity incentive plans and/or termination of employment.
PERMITTED TRADING PERIOD
1. Black-Out Period and Trading Window.
To ensure compliance with this Policy and applicable federal and state securities laws, the Company requires that all officers, directors, members of the immediate family or household of any such person and others who are subject to this Policy refrain from conducting any transactions involving the purchase or sale of the Company’s securities, other than during the period in any fiscal quarter commencing at the close of business on the second Trading Day following the date of public disclosure of the financial results for the prior fiscal quarter or year and ending on the fifteenth day of the third month of the fiscal quarter (the “Trading Window”). If such public disclosure occurs on a Trading Day before the markets close, then such date of disclosure shall be considered the first Trading Day following such public disclosure.
It is the Company’s policy that the period when the Trading Window is “closed” is a particularly sensitive periods of time for transactions in the Company’s securities from the perspective of compliance with applicable securities laws. This is because Insiders will, as any quarter progresses, are increasingly likely to possess Material Nonpublic Information about the expected financial results for the quarter. The purpose of the Trading Window is to avoid any unlawful or improper transactions or the appearance of any such transactions.
It should be noted that even during the Trading Window any person possessing Material Nonpublic Information concerning the Company shall not engage in any transactions in the Company’s (or any other companies, as applicable) securities until such information has been known publicly for at least two Trading Days. The Company has adopted the policy of delaying trading for “at least two Trading Days” because the securities laws require that the public be informed effectively of previously undisclosed material information before Insiders trade in the Company’s stock. Public disclosure may occur through a widely disseminated press release or through filings, such as Forms 10-Q and 8-K, with the SEC. Furthermore, in order for the public to be effectively informed, the public must be given time to evaluate the information disclosed by the Company. Although the amount of time necessary for the public to evaluate the information may vary depending on the complexity of the information, generally two Trading Days is a sufficient period of time.
| A-4 |
From time to time, the Company may also require that Insiders suspend trading because of developments known to the Company and not yet disclosed to the public. In such event, such persons may not engage in any transaction involving the purchase or sale of the Company’s securities during such period and may not disclose to others the fact of such suspension of trading.
Although the Company may from time to time require during a Trading Window that Insiders and others suspend trading because of developments known to the Company and not yet disclosed to the public, each person is individually responsible at all times for compliance with the prohibitions against insider trading. Trading in the Company’s securities during the Trading Window should not be considered a “safe harbor,” and all directors, officers and other persons should use good judgment at all times.
Notwithstanding these general rules, Insiders may trade outside of the Trading Window provided that such trades are made pursuant to a legally compliant, pre-established plan or by delegation established at a time that the Insider is not in possession of material nonpublic information. These alternatives are discussed in the next section.
2. Trading According to a Pre-established Plan (10b5-1) or by Delegation.
The SEC has adopted Rule 10b5-1 (which was amended in December 2022) under which insider trading liability can be avoided if Insiders follow very specific procedures. In general, such procedures involve trading according to pre-established instructions, plans or programs (a “10b5-1 Plan”) after a required “cooling off” period described below.
10b5-1 Plans must:
(a) Be documented by a contract, written plan, or formal instruction which provides that the trade take place in the future. For example, an Insider can contract to sell his or her shares on a specific date, or simply delegate such decisions to an investment manager, 401(k) plan administrator or similar third party. This documentation must be provided to the Company’s Insider Trading Compliance Officer;
(b) Include in its documentation the specific amount, price and timing of the trade, or the formula for determining the amount, price and timing. For example, the Insider can buy or sell shares in a specific amount and on a specific date each month, or according to a pre-established percentage (of the Insider’s salary, for example) each time that the share price falls or rises to pre-established levels. In the case where trading decisions have been delegated (i.e., to a third party broker or money manager), the specific amount, price and timing need not be provided;
(c) Be implemented at a time when the Insider does not possess material non-public information. As a practical matter, this means that the Insider may set up 10b5-1 Plans, or delegate trading discretion, only during a “Trading Window” (discussed in Section 1, above), assuming the Insider is not in possession of material non-public information;
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(d) Remain beyond the scope of the Insider’s influence after implementation. In general, the Insider must allow the 10b5-1 Plan to be executed without changes to the accompanying instructions, and the Insider cannot later execute a hedge transaction that modifies the effect of the 10b5-1 Plan. Insiders should be aware that the termination or modification of a 10b5-1 Plan after trades have been undertaken under such plan could negate the 10b5-1 affirmative defense afforded by such program for all such prior trades. As such, termination or modification of a 10b-5 Plan should only be undertaken in consultation with your legal counsel. If the Insider has delegated decision-making authority to a third party, the Insider cannot subsequently influence the third party in any way and such third party must not possess material non-public information at the time of any of the trades;
(e) Be subject to a “cooling off” period. Effective February 27, 2023, Rule 10b5-1 contains “cooling-off period” for directors and officers that prohibit such insiders from trading in a 10b5-1 Plan until the later of (i) 90 days following the plan’s adoption or modification or (ii) two business days following the Company’s disclosure (via a report filed with the SEC) of its financial results for the fiscal quarter in which the plan was adopted or modified; and
(f) Contain Insider certifications. Effective February 27, 2023, directors and officers are required to include a certification in their 10b5-1 Plans to certify that at the time the plan is adopted or modified: (i) they are not aware of Material Nonpublic Information about the Company or its securities and (ii) they are adopting the 10b5-1 Plan in good faith and not as part of a plan or scheme to evade the anti-fraud provisions of the Exchange Act.
Important: In addition, effective February 27, 2023: (i) Insiders are prohibited from having multiple overlapping 10b5-1 Plans or more than one plan in any given year, (ii) a modification relating to amount, price and timing of trades under a 10b5-1 Plan is deemed a plan termination which requires a new cooling off period, and (iii) whether a particular trade is undertaken pursuant to a 10b5-1 Plan will need to be disclosed (by checkoff box) on the applicable Forms 4 or 5 of the Insider.
Pre-Approval Required: Prior to implementing a 10b5-1 Plan, all officers and directors must receive the approval for such plan from (and provide the details of the plan to) the Company’s Insider Trading Compliance Officer.
3. Pre-Clearance of Trades.
Even during a Trading Window, all Insiders, must comply with the Company’s “pre-clearance” process prior to trading in the Company’s securities, implementing a pre-established plan for trading, or delegating decision-making authority over the Insider’s trades. To do so, each Insider must contact the Company’s Insider Trading Compliance Officer prior to initiating any of these actions. The Company may also find it necessary, from time to time, to require compliance with the pre-clearance process from others who may be in possession of Material Nonpublic Information.
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4. Individual Responsibility.
Every person subject to this Policy has the individual responsibility to comply with this Policy against insider trading, regardless of whether the Company has established a Trading Window applicable to that Insider or any other Insiders of the Company. Each individual, and not necessarily the Company, is responsible for his or her own actions and will be individually responsible for the consequences of their actions. Therefore, appropriate judgment, diligence and caution should be exercised in connection with any trade in the Company’s securities. An Insider may, from time to time, have to forego a proposed transaction in the Company’s securities even if he or she planned to make the transaction before learning of the Material Nonpublic Information and even though the Insider believes he or she may suffer an economic loss or forego anticipated profit by waiting.
APPLICABILITY OF POLICY TO INSIDE INFORMATION
REGARDING OTHER COMPANIES
This Policy and the guidelines described herein also apply to Material Nonpublic Information relating to other companies, including the Company’s customers, vendors or suppliers (“business partners”), when that information is obtained in the course of employment with, or other services performed on behalf of the Company. Civil and criminal penalties, as well as termination of employment, may result from trading on Material Nonpublic Information regarding the Company’s business partners. All Insiders should treat Material Nonpublic Information about the Company’s business partners with the same care as is required with respect to information relating directly to the Company.
PROHIBITION AGAINST BUYING AND SELLING
COMPANY COMMON STOCK WITHIN A SIX-MONTH PERIOD
Directors, Officers and 10% Shareholders
Purchases and sales (or sales and purchases) of Company common stock occurring within any six-month period in which a mathematical profit is realized result in illegal “short-swing profits.” The prohibition against short-swing profits is found in Section 16 of the Exchange Act. Section 16 was drafted as a rather arbitrary prohibition against profitable “insider trading” in a company’s securities within any six-month period regardless of the presence or absence of material nonpublic information that may affect the market price of those securities. Each executive officer, director and 10% shareholder of the Company is subject to the prohibition against short-swing profits under Section 16. Such persons are required to file Forms 3, 4 and 5 reports reporting his or her initial ownership of the Company’s common stock and any subsequent changes in such ownership. The Sarbanes-Oxley Act of 2002 requires executive officers and directors who must report transactions on Form 4 to do so by the end of the second business day following the transaction date, and amendments to Form 4 adopted effective February 2023 require the reporting person to check on the form if the purchase or sale was undertaken pursuant to a 10b5-1 Plan. Profit realized, for the purposes of Section 16, is calculated generally to provide maximum recovery by the Company. The measure of damages is the profit computed from any purchase and sale or any sale and purchase within the short-swing (i.e., six-month) period, without regard to any setoffs for losses, any first-in or first-out rules, or the identity of the shares of common stock. This approach sometimes has been called the “lowest price in, highest price out” rule.
The rules on recovery of short-swing profits are absolute and do not depend on whether a person has Material Nonpublic Information. In order to avoid trading activity that could inadvertently trigger a short-swing profit, it is the Company’s policy that no executive officer, director and 10% shareholder of the Company who has a 10b5-1 Plan in place may engage in voluntary purchases or sales of Company securities outside of and while such 10b5-1 Plan remains in place.
INQUIRIES
Please direct your questions as to any of the matters discussed in this Policy to the Company’s Insider Trading Compliance Officer.
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Exhibit B
SurgePays, Inc.
Insider Trading Compliance Program - Pre-Clearance Checklist
Individual Proposing to Trade:_________________________
Number of Shares covered by Proposed Trade:_________________________
Date:_________________________
| ☐ | Trading Window. Confirm that the trade will be made during the Company’s “trading window.” |
| ☐ | Section 16 Compliance. Confirm, if the individual is subject to Section 16, that the proposed trade will not give rise to any potential liability under Section 16 as a result of matched past (or intended future) transactions. Also, ensure that a Form 4 has been or will be completed and will be timely filed. |
| ☐ | Prohibited Trades. Confirm, if the individual is subject to Section 16, that the proposed transaction is not a “short sale,” put, call or other prohibited or strongly discouraged transaction. |
| ☐ | Rule 144 Compliance (as applicable). Confirm that: |
| ☐ | Current public information requirement has been met; | |
| ☐ | Shares are not restricted or, if restricted, the one year holding period has been met; | |
| ☐ | Volume limitations are not exceeded (confirm that the individual is not part of an aggregated group); | |
| ☐ | The manner of sale requirements have been met; and | |
| ☐ | The Notice of Form 144 Sale has been completed and filed. |
| ☐ | Rule 10b-5 Concerns. Confirm that (i) the individual has been reminded that trading is prohibited when in possession of any material information regarding the Company that has not been adequately disclosed to the public, and (ii) the Insider Trading Compliance Officer has discussed with the individual any information known to the individual or the Insider Trading Compliance Officer which might be considered material, so that the individual has made an informed judgment as to the presence of inside information. |
| ☐ | Rule 10b5-1 Matters. Confirm whether the individual has implemented, or proposes to implement, a pre-arranged trading plan under Rule 10b5-1. If so, obtain details of the plan. |
| Signature of Insider Trading Compliance Officer |
Exhibit 21.1
| Subsidiaries | State of Incorporation | |
| KSIX Media, Inc. | Nevada | |
| KSIX, LLC | Nevada | |
| Surge Blockchain, LLC | Nevada | |
| DigitizeIQ, LLC | Illinois | |
| Surge Cryptocurrency Mining, Inc., | Nevada | |
| LogicsIQ Inc. | Nevada | |
| Torch Wireless | Wyoming | |
| Surge Payments, LLC | Nevada | |
| SurgePhone Wireless, LLC | Nevada | |
| SurgePays Fintech, Inc. | Nevada |
| ECS Prepaid, LLC | Missouri | |
| Central States Legal Services, Inc. | Missouri | |
| Electronic Check Services, Inc. | Missouri | |
| Injury Survey, LLC | Nevada |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (the “Registration Statement”) Form S-3 (No. 333- 273110) and Form S-3 (No. 333-273393) of SurgePays Inc., and Subsidiaries of our report dated March 12, 2024 relating to the financial statements which appears in this Form 10-K.
Very truly yours,
/s/ Rodefer Moss & Co, PLLC
Johnson City, Tennessee
March 12, 2024
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO
EXCHANGE ACT RULE 13A-14(A),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin Brian Cox, certify that:
1. I have reviewed this annual report on Form 10-K of SurgePays, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly for the period in which this annual report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
Date: March 12, 2024
| /s/ Kevin Brian Cox | |
Kevin Brian Cox Chief Executive Officer |
|
| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
EXCHANGE ACT RULE 13A-14(A),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony Evers, certify that:
1. I have reviewed this annual report on Form 10-K of SurgePays, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly for the period in which this annual report is being prepared; | |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting. |
Date: March 12, 2024
| /s/ Anthony Evers | |
| Anthony Evers | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of SurgePays, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2023, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Kevin Brian Cox, Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | Such Annual Report on Form 10-K for the year ended December 31, 2023, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in such Annual Report on Form 10-K for the year ended December 31, 2023, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: March 12, 2024 | By: | /s/ Kevin Brian Cox |
| Kevin Brian Cox | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of SurgePays, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2023, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Anthony Evers, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | Such Annual Report on Form 10-K for the year ended December 31, 2023, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in such Annual Report on Form 10-K for the year ended December 31, 2023, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: March 12, 2024 | By: | /s/ Anthony Evers |
| Anthony Evers | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) |
Exhibit 97.1
SURGEPAYS, INC.
EXECUTIVE COMPENSATION CLAWBACK POLICY
Adopted as of November 29, 2023
The Board of Directors (the “Board”) of SurgePays, Inc. (the “Company”) has adopted the following executive compensation clawback policy (this “Policy”). This Policy shall supplement any other clawback or compensation recovery policy or policies adopted by the Company or included in any agreement between the Company, or any subsidiary of the Company, and a person covered by this Policy. If any such other policy or agreement provides that a greater amount of compensation shall be subject to clawback, such other policy or agreement shall apply to the amount in excess of the amount subject to clawback under this Policy.
This Policy shall be interpreted to comply with Securities and Exchange Commission (“SEC”) Rule 10D-1 and Listing Rule 5608 (the “Listing Rule”) of The Nasdaq Stock Market, LLC (“Nasdaq”), as may be amended or supplemented and interpreted from time to time by Nasdaq. To the extent this Policy is in any manner deemed inconsistent with the Listing Rule, this Policy shall be treated as having been amended to be compliant with the Listing Rule.
1. Definitions. Unless the context otherwise the following definitions apply for purposes of this Policy:
(a) Executive Officer. An executive officer is the Company’s Chief Executive Officer, President, Chief Financial Officer, and a Secretary. The Corporation may also have, at the discretion of the Board of Directors, a Chairperson of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of the Company’s Amended Bylaws. Executive officers of the Company’s parent(s) or subsidiaries are deemed executive officers of the Company if they perform such policy making functions for the Company. Policy-making function is not intended to include policy-making functions that are not significant. Identification of an executive officer for purposes of the Listing Rule would include at a minimum executive officers identified in the Listing Rule.
(b) Financial Reporting Measures. Financial reporting measures are measures that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures. Stock price and total shareholder return are also financial reporting measures. A financial reporting measure need not be presented within the financial statements or included in a filing with the SEC and may be such financial measures as may be determined by the Board or the Compensation Committee thereof (the “Compensation Committee”).
(c) Incentive-Based Compensation. Incentive-based compensation is any compensation that is granted, earned or vested based wholly or in part upon the attainment of a financial reporting measure.
(d) Received. Incentive-based compensation is deemed “received” in the Company’s fiscal period during which the financial reporting measure specified in the incentive-based compensation award is attained, even if the payment or grant of the incentive-based compensation occurs after the end of that period.
2. Application of this Policy. This recovery of Incentive-Based Compensation from an Executive Officer as provided for in this Policy shall apply only in the event that the Company is required to prepare an accounting restatement due to the material noncompliance of Company with any financial reporting requirement under the United States securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
3. Recovery Period.
(a) The Incentive-Based Compensation subject to recovery is the Incentive-Based Compensation Received during the three (3) completed fiscal years immediately preceding the date that the Company is required to prepare an accounting restatement as described in Section 2 above, provided that the person served as an Executive Officer at any time during the performance period applicable to the Incentive-Based Compensation in question. The date that the Company is required to prepare an accounting restatement shall be determined pursuant to the Listing Rule.
(b) Notwithstanding the foregoing, this Policy shall only apply if the Incentive-Based Compensation is Received (i) while the Company has a class of securities listed on Nasdaq and (ii) on or after October 2, 2023.
(c) The provisions of the Listing Rule shall apply with respect to Incentive-Based Compensation received during a transition period arising due to a change in the Company’s fiscal year.
4. Erroneously Awarded Compensation. The amount of Incentive-Based Compensation subject to recovery from the applicable Executive Officers under this Policy (“Erroneously Awarded Compensation”) shall be equal to the amount of Incentive-Based Compensation Received that exceeds the amount of Incentive Based-Compensation that otherwise would have been Received had it been determined based on the restated amounts and shall be computed without regard to any taxes paid. For Incentive-Based Compensation based on stock price or total shareholder return, where the amount of Erroneously Awarded Compensation is not subject to mathematical recalculation directly from the information in an accounting restatement: (a) the amount shall be based on a reasonable estimate by the Company’s Chief Financial Officer (or principal accounting officer, if the office of Chief Financial Officer is not then filled) of the effect of the accounting restatement on the stock price or total shareholder return upon which the Incentive-Based Compensation was received, which estimate shall be subject to the review and approval of the Compensation Committee; and (b) the Company must maintain reasonable documentation of the determination of that reasonable estimate and provide such documentation to Nasdaq if requested. Notwithstanding the foregoing, if the proposed Incentive-Based Compensation recovery would affect compensation paid to the Company’s Chief Financial Officer, the determination shall be made by the Compensation Committee.
5. Timing of Recovery. The Company shall recover any Erroneously Awarded Compensation reasonably promptly except to the extent that the conditions of paragraphs (a), (b), or (c) below apply. The Compensation Committee shall determine the repayment schedule for each amount of Erroneously Awarded Compensation in a manner that complies with this “reasonably promptly” requirement. Such determination shall be consistent with any applicable legal guidance by the SEC, Nasdaq, judicial opinion, or otherwise. The determination of “reasonably promptly” may vary from case to case and the Compensation Committee is authorized to adopt additional rules or policies to further describe what repayment schedules satisfy this requirement.
(a) Erroneously Awarded Compensation need not be recovered if the direct expense paid to a third party to assist in enforcing (or making determinations in connection with the enforcement of) this Policy would exceed the amount to be recovered and the Compensation Committee has made a determination that recovery would be impracticable. Before concluding that it would be impracticable to recover any amount of Erroneously Awarded Compensation based on expense of enforcement, the Company shall (i) make a reasonable attempt to recover such Erroneously Awarded Compensation, (ii) document such reasonable attempt or attempts to recover, and (iii) provide appropriate documentation to the Compensation Committee or Nasdaq, if requested.
(b) Erroneously Awarded Compensation need not be recovered if recovery would violate home country law where that law was adopted prior to November 28, 2022. Before concluding that it would be impracticable to recover any amount of Erroneously Awarded Compensation based on a violation of home country law, the Company shall obtain an opinion of home country counsel, in form an substance that would be reasonably acceptable to Nasdaq, that recovery would result in such a violation and shall provide such opinion to Nasdaq, if requested.
(c) Erroneously Awarded Compensation need not be recovered if recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and the regulations thereunder (as such provision may be amended, modified or supplemented).
6. Compensation Committee Decisions. Decisions of the Compensation Committee with respect to this Policy shall be final, conclusive and binding on all Executive Officers subject to this Policy.
7. No Indemnification. Notwithstanding anything to the contrary in any other policy of the Company or any agreement between the Company and an Executive Officer, no Executive Officer shall be indemnified by the Company against the loss arising from the recovery of any Erroneously Awarded Compensation.
8. Agreement to Policy by Executive Officers. The Company shall take reasonable steps to inform Executive Officers of this Policy and obtain their express agreement to this Policy, which steps may constitute the inclusion of this Policy as an attachment to any award that is accepted by an Executive Officer. This Policy shall be deemed to apply to each employment or grant agreement between the Company or any of its subsidiaries and any Executive Officer subject to this Policy.