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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2024

 

or

 

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

 

For the transition period from ________________ to ________________

 

Commission file number 001-40992

 

SURGEPAYS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   98-0550352

(State or other jurisdiction of

incorporation or organization)

 

(I. R. S. Employer

Identification No.)

 

3124 Brother Blvd, Suite 104    
Bartlett TN   38133
(Address of principal executive offices)   (Zip Code)

 

901-302-9587

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   SURG  

The Nasdaq Stock Market LLC

(Nasdaq Capital Market)

Common Stock Purchase Warrants   SURGW  

The Nasdaq Stock Market LLC

(Nasdaq Capital Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No

 

The number of shares of the registrant’s common stock outstanding as of May 7, 2024 was 19,411,549 shares.

 

 

 

 
 

 

SurgePays, Inc. and Subsidiaries

 

    Page(s)
     
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 910)    
     
Consolidated Balance Sheets   2
     
Consolidated Statements of Income   3
     
Consolidated Statements of Changes in Stockholders’ Equity   4- 5
     
Consolidated Statements of Cash Flows   6
     
Notes to Consolidated Financial Statements   7- 59

 

 1 

 

 

SurgePays, Inc. and Subsidiaries

Consolidated Balance Sheets

 

   March 31, 2024   December 31, 2023 
   (Unaudited)     
Assets          
Current Assets          
Cash  $42,945,078   $14,622,060 
Accounts receivable - net   8,271,878    9,536,074 
Inventory   7,343,739    9,046,594 
Prepaids and other   499,908    161,933 
Total Current Assets   59,060,603    33,366,661 
           
Property and equipment - net   291,458    361,841 
           
Other Assets          
Note receivable   176,851    176,851 
Intangibles - net   1,963,093    2,126,470 
Internal use software development costs - net   483,717    539,424 
Goodwill   4,166,782    1,666,782 
Investment in CenterCom   480,562    464,409 
Operating lease - right of use asset - net   420,107    387,869 
Deferred income taxes - net   2,542,000    2,835,000 
Total Other Assets   10,233,112    8,196,805 
           
Total Assets  $69,585,173   $41,925,307 
           
Liabilities and Stockholders’ Equity          
           
Current Liabilities          
Accounts payable and accrued expenses  $6,506,061   $6,439,120 
Accounts payable and accrued expenses - related party   564,389    1,048,224 
Accrued income taxes payable   700,000    570,000 
Deferred revenue   -    20,000 
Operating lease liability   94,244    43,137 
Note payable - related party   1,567,254    4,584,563 
Total Current Liabilities   9,431,948    12,705,044 
           
Long Term Liabilities          
Note payable - related party   3,147,879    - 
Notes payable - SBA government   477,403    460,523 
Operating lease liability   342,444    356,276 
Total Long-Term Liabilities   3,967,726    816,799 
           
Total Liabilities   13,399,674    13,521,843 
           
Stockholders’ Equity          
Common stock, $0.001 par value, 500,000,000 shares authorized 19,431,549 and 14,403,261 shares issued and outstanding, respectively   19,435    14,404 
Additional paid-in capital   69,985,592    43,421,019 
Accumulated deficit   (13,961,608)   (15,186,203)
Stockholders’ equity   56,043,419    28,249,220 
Non-controlling interest   142,080    154,244 
Total Stockholders’ Equity   56,185,499    28,403,464 
           
Total Liabilities and Stockholders’ Equity  $69,585,173   $41,925,307 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 2 

 

 

SurgePays, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

   2024   2023 
  

For the Three Months

Ended March 31,

 
   2024   2023 
         
Revenues  $31,429,135   $34,776,443 
           
Costs and expenses          
Cost of revenues   23,246,468    27,081,960 
General and administrative expenses   6,430,806    2,989,421 
Total costs and expenses   29,677,274    30,071,381 
           
Income from operations   1,751,861    4,705,062 
           
Other income (expense)          
Interest expense   (132,583)   (192,326)
Gain on investment in CenterCom   16,153    33,029 
Total other income (expense) - net   (116,430)   (159,297)
           
Net income before provision for income taxes   1,635,431    4,545,765 
           
Provision for income tax benefit (expense)  $(423,000)   - 
           
Net income including non-controlling interest   1,212,431    4,545,765 
           
Non-controlling interest   (12,164)   (576)
           
Net income available to common stockholders  $1,224,595   $4,546,341 
           
Earnings per share - attributable to common stockholders          
Basic  $0.07   $0.32 
Diluted  $0.07   $0.31 
           
Weighted average number of shares outstanding - attributable to common stockholders          
Basic   17,693,283    14,131,276 
Diluted   18,678,136    14,535,222 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 3 

 

 

SurgePays, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2024

 

   Shares   Amount   Capital   Deficit   Interest   Equity 
           Additional           Total 
   Common Stock   Paid-in   Accumulated   Non-Controlling   Stockholders’ 
   Shares   Amount   Capital   Deficit   Interest   Equity 
                         
December 31, 2023   14,403,261   $14,404   $43,421,019   $(15,186,203)  $154,244   $   28,403,464 
                               
Stock issued for cash   3,080,356    3,081    17,246,913    -    -    17,249,994 
                               
Cash paid as direct offering costs   -    -    (1,395,000)   -    -    (1,395,000)
                               
Exercise of warrants - cash   1,860,308    1,861    8,797,396    -    -    8,799,257 
                               
Exercise of warrants - cashless   40,238    41    (41)   -    -    - 
                               
Stock issued for services   47,386    48    411,692    -    -    411,740 
                               
Recognition of stock based compensation - unvested shares - related parties   -    -    1,497,417    -    -    1,497,417 
                               
Recognition of stock-based compensation - related party   -    -    6,196    -    -    6,196 
                               
Non-controlling interest   -    -    -    -    (12,164)   (12,164)
                               
Net income   -    -    -    1,224,595    -    1,224,595 
                               
March 31, 2024   19,431,549   $19,435   $69,985,592   $(13,961,608)  $142,080   $56,185,499 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 4 

 

 

SurgePays, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2023

(Unaudited)

 

           Additional           Total 
   Common Stock   Paid-in   Accumulated   Non-Controlling   Stockholders’ 
   Shares   Amount   Capital   Deficit   Interest   Equity 
                         
December 31, 2022   14,116,832   $14,117   $40,780,707   $(35,804,106)  $127,535   $     5,118,253 
                               
Stock issued for services   60,082    60    307,398    -    -    307,458 
                               
Recognition of stock based compensation - stock options   -    -    9,294    -    -    9,294 
                               
Non-controlling interest   -    -    -    -    (576)   (576)
                               
Net income   -    -    -    4,546,341    -    4,546,341 
                               
March 31, 2023   14,176,914   $14,177   $41,097,399   $(31,257,765)  $126,959   $9,980,770 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 5 

 

 

SurgePays, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   2024   2023 
   For the Three Months Ended March 31, 
   2024   2023 
         
Operating activities          
Net income - including non-controlling interest  $1,212,431   $4,545,765 
Adjustments to reconcile net income (loss) to net cash provided by operations:          
Depreciation and amortization   233,760    233,758 
Amortization of right-of-use assets   23,363    10,687 
Amortization of internal use software development costs   55,707    32,265 
Stock issued for services   411,740    307,458 
Recognition of stock based compensation - unvested shares - related parties   1,497,417    - 
Recognition of share based compensation - options - related party   6,196    9,294 
Interest expense adjustment - SBA loans   19,750    - 
Right-of-use asset lease payment adjustment true up   (46,338)   - 
Gain on equity method investment - CenterCom   (16,153)   (33,029)
Changes in operating assets and liabilities          
(Increase) decrease in          
Accounts receivable   1,264,196    (429,187)
Inventory   1,702,855    (4,335,727)
Prepaids and other   (337,975)   (58,428)
Deferred income taxes - net   293,000    - 
Increase (decrease) in          
Accounts payable and accrued expenses   (2,433,059)   1,418,337 
Accounts payable and accrued expenses - related party   15,156    (1,322,773)
Accrued income taxes payable   130,000   - 
Installment sale liability - net   -    2,026,713 
Deferred revenue   (20,000)   470,211 
Operating lease liability   28,012    (9,548)
Net cash provided by operating activities   4,040,058    2,865,796 
           
Investing activities          
Capitalized internal use software development costs   -    (157,044)
Net cash used in investing activities   -    (157,044)
           
Financing activities          
Proceeds from stock issued for cash   17,249,994    - 
Proceeds from exercise of common stock warrants   8,799,257    - 
Cash paid as direct offering costs   (1,395,000)     
Repayments of loans - related party   (368,421)   (467,385)
Repayments on notes payable   -    (410,468)
Repayments on notes payable - SBA government   (2,870)   (4,468)
Net cash provided (used in) by financing activities   24,282,960    (882,321)
           
Net increase in cash   28,323,018    1,826,431 
           
Cash - beginning of period   14,622,060    7,035,654 
           
Cash - end of period  $42,945,078   $8,862,085 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $129,003   $100,074 
Cash paid for income tax  $-   $- 
           
Supplemental disclosure of non-cash investing and financing activities          
           
Reclassification of accrued interest - related party to note payable - related party  $498,991   $- 
Exercise of warrants - cashless  $41   $- 
Right-of-use asset obtained in exchange for new operating lease liability  $98,638   $- 
Goodwill (ClearLine Mobile, Inc.)  $2,500,000   $- 

 

 6 

 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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 Company and its subsidiaries are organized as follows:

  

Company Name (Active)   Incorporation Date   State of Incorporation   Segment
SurgePays, Inc.   August 18, 2006   Nevada   Corporate Parent
Surge Blockchain, LLC   January 29, 2009   Nevada   Other
ECS Prepaid, LLC   June 9, 2009   Missouri   Comprehensive Platform Services
LogicsIQ, Inc.   October 2, 2018   Nevada   Lead Generation
Torch Wireless   January 29, 2019   Wyoming   Mobile Virtual Network Operators
SurgePays Fintech, Inc.   August 22, 2019   Nevada   Comprehensive Platform Services
SurgePhone Wireless, LLC   August 29, 2019   Nevada   Mobile Virtual Network Operators
Injury Survey, LLC   July 28, 2020   Nevada   Lead Generation

 

All of the following entities have nominal operations.

 

Company Name (Inactive)   Incorporation Date   State of Incorporation
Electronic Check Services, Inc.   May 19, 1999   Missouri
Central States Legal Services, Inc.   August 1, 2003   Missouri
KSIX, LLC   September 14, 2011   Nevada
DigitizeIQ, LLC   July 23, 2014   Illinois
KSIX Media, Inc.   November 5, 2014   Nevada
Surge Payments, LLC   December 17, 2018   Nevada

 

 7 

 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.

 

In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2024 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the operating results for the full fiscal year or any future period.

 

These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 12, 2024.

 

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

 

Liquidity and Management’s Plans

 

As reflected in the accompanying consolidated financial statements, for the three months ended March 31, 2024, the Company had:

 

Net income available to common stockholders of $1,224,595; and
Net cash provided by operations was $4,040,058

 

Additionally, at March 31, 2024, the Company had:

 

Accumulated deficit of $13,961,608
Stockholders’ equity of $56,185,499; and
Working capital of $49,628,655

 

We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand of $42,945,078 at March 31, 2024.

 

 8 

 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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, or if achieved, and could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months ended March 31, 2025, and our current capital structure including equity-based instruments and our obligations and debts.

 

The Company believes it has sufficient cash resources on hand to meet its current obligations for a period that is one year from the issuance date of these financial statements.

 

Management’s strategic plans include the following:

 

Sustain our growth of the Affordable Connectivity Program revenue stream, based upon continued funding by Congress,
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.

 

 9 

 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

Business Combinations and Asset Acquisitions

 

The Company accounts for acquisitions that qualify as business combinations by applying the acquisition method according to Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”).

 

Transaction costs related to the acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred.

 

The identifiable assets acquired, liabilities assumed, and noncontrolling interests in an acquired entity are recognized and measured at their estimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed, and noncontrolling interests in an acquired entity, net of the fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimates and assumptions.

 

Purchase price allocations may be preliminary, and, during the measurement period not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined.

 

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 earnings.

 

 10 

 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

The Company evaluates acquisitions of assets and other similar transactions to assess whether the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the transaction is accounted for as an asset acquisition. If not, further determination is required as to whether the Company has acquired inputs and processes that can create outputs that would meet the definition of a business. When applying the screen test, significant judgment is required to determine whether an acquisition is a business combination or an acquisition of assets.

 

Accounting for asset acquisitions falls under the guidance of Topic 805, Business Combinations, specifically Subtopic 805-50. A cost accumulation model is used to determine an asset acquisition’s cost. Assets acquired are based on their cost, generally allocated to them on a relative fair value basis. Direct acquisition-related costs are included in the cost of the acquired assets.

 

The distinction between business combinations and asset acquisitions involves judgment, particularly when applying the screen test to determine the nature of the transaction. Incorrect judgments or changes in decisions in these areas could materially affect the determination of goodwill, the recognition and measurement of acquired assets and assumed liabilities, and, consequently, our financial position and results of operations.

 

Acquisition of ClearLine Mobile, Inc

 

On January 5, 2024, the Company closed a purchase agreement and acquired ClearLine Mobile, Inc’s. (“CLMI”) related software development in exchange for $2,500,000.

 

CLMI produces a touchscreen display, positioned by the cash register, that is integrated into the SurgePays software platform and markets SurgePays products 24/7 from a central server. SurgePays can advertise its entire suite of products and services while utilizing the POS device for transactions.

 

Following the guidance of ASC 805, we performed the screen test to evaluate whether the acquired set is a business or a group of assets. The acquired group of assets included inputs and a substantive process that together significantly contributed to the ability to create outputs. At the time of purchase, CLMI had insignificant operations, however, the transaction was accounted for as a business combination in accordance with ASC 805-50.

 

 11 

 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

Payments are due as follows:

 

  - $100,000 at signing,
  - $800,000 at closing,
  - $800,000 90 days from closing (April 2024)
  - $800,000 180 days from closing (July 2024)

 

In connection with this business combination, the Company assumed a right-of-use operating lease and corresponding lease liability of $98,638 with a remaining period of two (2) years. Additionally, the acquired technology/software had a net carrying amount of $0. As a result, the Company determined that it has acquired both tangible and intangible assets.

 

The table below summarizes the estimated fair value of the assets acquired and the liabilities assumed at the effective acquisition date.

 

     
Consideration    
Cash  $2,500,000 
      
Fair value of consideration transferred   2,500,000 
      
Recognized amounts of identifiable assets acquired and liabilities assumed:     
      
Right-of-use operating lease   98,638 
Total assets acquired   98,638 
      
Right-of-use operating lease   98,638 
Total liabilities assumed   98,638 
      
Total identifiable net assets   - 
      
Goodwill  $2,500,000 

 

At the time of acquisition, CLMI had nominal revenues and historical losses from operations. As a result, and given the immaterial nature of this acquisition, the Company elected not to present any pro-forma financial information during the three months ended March 31, 2024.

 

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 to the Company at any level under SEC Regulation S-X 3.05 and did not require the presentation of any additional historical audited financial statements.

 

 12 

 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

At March 31, 2024 and December 31, 2023 goodwill was $4,166,782 and $1,666,782, respectively.

 

There were no impairment losses for the three months ended March 31, 2024 and 2023, respectively.

 

Note Receivable (Sale of Former Subsidiary)

 

On May 7, 2021, the Company disposed of its former subsidiary True Wireless, Inc.

 

In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%, with a default interest rate of 10%. The Company was expected to receive twenty-five (25) monthly payments of principal and accrued interest totaling $7,461 commencing in June 2023.

 

Payments were scheduled as follows:

 

For the Year Ended December 31,      In Default 
         
2024 (9 months)  $141,759**  $74,610 
2025   44,766      
    186,525      
Less: amount representing interest   (9,674)     
Total  $176,851      

 

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 $176,851 (the “Note”). Pursuant to the terms of the Note, SurgePays, Inc. accelerated the amount due.

 

**The amount due for the nine months ended December 31, 2024 is $74,610, which includes $52,227 of payments which were due as of December 31, 2023 and an additional $22,383 of payments which were due as of March 31, 2024.

 

As of March 31, 2024, the Company believes the note is collectible.

 

See Note 8 for Contingencies – Legal Matters for additional discussion.

 

 13 

 

 

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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.

 

The Mobile Virtual Network Operator (SurgePhone and Torch Wireless) business segment made up approximately 92% and 82% of total consolidated revenues for the three months ended March 31, 2024 and 2023, respectively.

 

Revenues related to this business segment are 100% derived from programs administered by the Federal Communications Commission (FCC), and all funds related to these programs are received directly from organizations under the direction of the FCC and subject to administrative rulings, statutory changes, and other funding restrictions that could impact the Company’s operations in this segment.

 

Accounts receivable related to these programs made up 99% and 98% of accounts receivable at March 31, 2024 and December 31, 2023, respectively.

 

Customers in the United States accounted for 100% of our revenues. We do not have any property or equipment outside of the United States.

 

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 three months ended March 31, 2024 and 2023, 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.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

The three tiers are defined as follows:

 

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

 

The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate. Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.

 

The Company’s financial instruments, including cash, accounts receivable, note receivable, accounts payable and accrued expenses, and accounts payable and accrued expenses – related party, are carried at historical cost. At March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, respectively, the Company did not have any cash equivalents.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is $250,000.

 

At March 31, 2024 and December 31, 2023, 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 $17,525 at March 31, 2024 and December 31, 2023, respectively.

 

There was bad debt expense of $0 for the three months ended March 31, 2024 and 2023, respectively.

 

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 no provision for obsolescence for the three months ended March 31, 2024 and 2023, respectively.

 

At March 31, 2024 and December 31, 2023, the Company had inventory of $7,343,739 and $9,046,594, respectively.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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 no impairment losses for the three months ended March 31, 2024 and 2023, respectively.

 

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets.

 

Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.

 

Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

 

There were no impairment losses for the three months ended March 31, 2024 and 2023, respectively.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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 (3) 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.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

We also evaluate internal use software for abandonment and use that as a significant indicator for impairment on a quarterly basis.

 

There were no impairment losses for the three months ended March 31, 2024 and 2023, respectively.

 

Right of Use Assets and Lease Obligations

 

The Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments over the lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.

 

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.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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:

 

Step 1: Identify the contract(s) with customers

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to performance obligations

Step 5: Recognize revenue when the entity satisfies a performance obligation

 

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.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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 (40% investment ownership).

 

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. Effective January 1, 2024, the Company no longer provides these services. The total revenue from these services for the three months ended March 31, 2024 and 2023, was $0 and $427,786, respectively.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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 March 31, 2024 and December 31, 2023, the Company had deferred revenue of $0 and $20,000, respectively.

 

The following represents the Company’s disaggregation of revenues for the three months ended March 31, 2024 and 2023:

 

   For the Three Months Ended March 31, 
   2024   2023 
Revenue   Revenue     % of Revenues    Revenue     % of Revenues 
                     
Mobile Virtual Network Operators  $28,892,590    91.93%  $28,659,384    82.41%
Comprehensive Platform Services   2,530,589    8.05%   2,934,346    8.44%
Lead Generation   -    0.00%   3,170,845    9.12%
Other   5,956    0.02%   11,868    0.03%
Total Revenues  $31,429,135    100%  $34,776,443    100%

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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 Injury Survey); and

Other (Surge Blockchain)

 

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 tablet purchases, mobile phone purchases, call center costs, 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 March 31, 2024 and 2023, respectively, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

 

The Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the three months ended March 31, 2024 and the year ended December 31, 2023, respectively.

 

For the year ended December 31, 2023 and for the three months ended March 31, 2024, the Company generated net income. The Company currently has an unapplied net operating loss carryforward (deferred tax asset), which have been evaluated for applicability in offsetting 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.

 

At March 31, 2024 and December 31, 2023, the Company has an accrued income tax liability of $700,000 and $570,000, respectively. See Note 12.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

Investment

 

On January 17, 2019, we announced the completion of an agreement to acquire a 40% equity ownership of CenterCom Global, S.A. de C.V. (“CenterCom”). CenterCom is a dynamic operations center currently providing sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Our CenterCom team is based in El Salvador. CenterCom also provides call center support for various third-party clients.

 

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.

 

The following is a summary of our investment at March 31, 2024 and December 31, 2023:

 

Balance - December 31, 2022  $354,206 
Gain on investment in CenterCom   110,203 
Balance - December 31, 2023   464,409 
Gain on investment in CenterCom   16,153 
Balance - March 31, 2024  $480,562 

 

During the three months ended March 31, 2024 and 2023, we recognized a gain of $16,153 and $33,029, respectively.

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs are included as a component of general and administrative expense in the consolidated statements of operations.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

The Company recognized $16,806 and $32,336 in marketing and advertising costs during the three months ended March 31, 2024 and 2023, respectively.

 

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.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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.

 

Basic and Diluted Earnings (Loss) per Share

 

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.

 

The following potentially dilutive equity securities outstanding as of March 31, 2024 and 2023 were as follows:

 

   March 31, 2024   March 31, 2023 
Warrants   3,619,278    5,681,392 
Stock options   121,276    11,903 
Total common stock equivalents   3,740,554    5,693,295 

 

Warrants and stock options included as common stock equivalents represent those that are fully vested and exercisable. See Note 9.

 

Based on the potential common stock equivalents noted above at March 31, 2024, the Company has sufficient authorized shares of common stock (500,000,000) to settle any potential exercises of common stock equivalents.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

The following table shows the computation of basic and diluted earnings per share for the three months ended March 31, 2024 and 2023:

 

   Three Months Ended   Three Months Ended 
   March 31, 2024   March 31, 2023 
         
Numerator          
Net income  $1,224,595   $4,546,341 
           
Denominator          
Weighted average shares outstanding - basic   17,693,283    14,131,276 
Effect of dilutive securities   984,853    403,946 
Weighted average shares outstanding - diluted   18,678,136    14,535,222 
           
Earnings per share - basic  $0.07   $0.32 
Earnings per share - diluted  $0.07   $0.31 

 

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.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

During the three months ended March 31, 2024 and 2023, respectively, the Company incurred expenses with related parties in the normal course of business totaling $41,589 as follows:

 

Related Party  March 31, 2024   March 31, 2023 
Carddawg Investments, Inc.   41,589    41,5891
Total  $41,589   $41,589 

 

1- represents an affiliate of our Chief Executive Officer (Kevin Brian Cox)

 

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, except as follows:

 

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. 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.

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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:

 

            Estimated Useful
Type   March 31, 2024   December 31, 2023   Lives (Years)
          
Computer equipment and software   $1,006,286   $1,006,286   3 - 5
Furniture and fixtures    82,752    82,752   5 - 7
     1,089,038    1,089,038 
Less: accumulated depreciation/amortization    (797,580)   (727,197)
Property and equipment - net   $291,458   $361,841 

 

Depreciation and amortization expense for the three months ended March 31, 2024 and 2023 was $70,383, respectively.

 

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

 

Note 4 – Intangibles

 

Intangibles consisted of the following:

           Estimated Useful 
Type  March 31, 2024   December 31, 2023   Lives (Years) 
             
Proprietary Software  $4,286,402   $4,286,402    7 
Tradenames/trademarks   617,474    617,474    15 
ECS membership agreement   465,000    465,000    1 
Noncompetition agreement   201,389    201,389    2 
Customer Relationships   183,255    183,255    5 
Intangible assets gross   5,753,520    5,753,520      
Less: accumulated amortization   (3,790,427)   (3,627,050)     
Intangibles - net  $1,963,093   $2,126,470      

 

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

Amortization expense for the three months ended March 31, 2024 and 2023 was $163,377, respectively.

 

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

 

For the Years Ended December 31:    
     
2024 (9 Months)   490,130 
2025   653,507 
2026   653,507 
2027   165,949 
Total  $1,963,093 

 

Note 5 – Internal Use Software Development Costs

 

Internal Use Software Development Costs consisted of the following:

           Estimated Useful
Type  March 31, 2024   December 31, 2023   Life (Years)
            
Internal Use Software Development Costs  $668,484   $668,484   3
Less: accumulated amortization   (184,767)   (129,060)   
Internal Use Software Development Costs - net  $483,717   $539,424    

 

Costs incurred for Internal Use Software Development Costs

 

Management has determined that all costs incurred in 2023 ($281,304) related to internal use software development costs related to the application and infrastructure development stage were completed as of December 31, 2023. Amortization of these costs began in 20