UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 001-40992
SURGEPAYS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 98-0550352 | |
(State or other jurisdiction of incorporation or organization) |
(I. R. S. Employer Identification No.) |
| 3124 Brother Blvd, Suite 104 | ||
| Bartlett TN | 38133 | |
| (Address of principal executive offices) | (Zip Code) |
847-648-7541
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| 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 August 11, 2022 was shares.
SurgePays, Inc. and Subsidiaries
SurgePays, Inc. and Subsidiaries
Consolidated Balance Sheets
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 8,704,526 | $ | 6,283,496 | ||||
| Accounts receivable - net | 8,322,807 | 3,249,889 | ||||||
| Inventory | 5,675,741 | 4,359,296 | ||||||
| Prepaids | 44,054 | |||||||
| Total Current Assets | 22,747,128 | 13,892,681 | ||||||
| Property and equipment - net | 887,374 | 200,448 | ||||||
| Other Assets | ||||||||
| Note receivable | 176,851 | 176,851 | ||||||
| Intangibles - net | 3,106,730 | 3,433,484 | ||||||
| Goodwill | 1,666,782 | 866,782 | ||||||
| Investment in Centercom - former related party | 453,624 | 443,288 | ||||||
| Operating lease - right of use asset - net | 452,374 | 486,668 | ||||||
| Total Other Assets | 5,856,361 | 5,407,073 | ||||||
| Total Assets | $ | 29,490,863 | $ | 19,500,202 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 11,292,759 | $ | 6,602,577 | ||||
| Accounts payable and accrued expenses - related party | 2,184,896 | 1,389,798 | ||||||
| Deferred revenue | 107,500 | 276,250 | ||||||
| Operating lease liability | 37,733 | 49,352 | ||||||
| Loans payable - related parties | 1,086,413 | 1,553,799 | ||||||
| Notes payable - SBA government | 126,418 | |||||||
| Notes payable - net | 6,621,664 | |||||||
| Total Current Liabilities | 21,330,965 | 9,998,194 | ||||||
| Long Term Liabilities | ||||||||
| Loans payable - related parties | 4,974,403 | 4,507,017 | ||||||
| Notes payable - SBA government | 593,522 | 1,004,767 | ||||||
| Operating lease liability | 419,574 | 438,903 | ||||||
| Total Long-Term Liabilities | 5,987,499 | 5,950,687 | ||||||
| Total Liabilities | 27,318,464 | 15,948,881 | ||||||
| Commitments and Contingencies (Note 8) | ||||||||
| Stockholders’ Equity | ||||||||
| Series A, Convertible Preferred stock, $ par value, shares authorized, and shares issued and outstanding, respectively | 260 | 260 | ||||||
| Series C, Convertible Preferred stock, $ par value, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Common stock, $ par value, shares authorized and shares issued and outstanding, respectively | 12,349 | 12,064 | ||||||
| Additional paid-in capital | 39,420,055 | 38,662,340 | ||||||
| Accumulated deficit | (37,308,714 | ) | (35,123,343 | ) | ||||
| Stockholders’ equity | 2,123,950 | 3,551,321 | ||||||
| Non-controlling interest | 48,449 | |||||||
| Total Stockholders’ Equity | 2,172,399 | 3,551,321 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 29,490,863 | $ | 19,500,202 | ||||
The accompanying notes are an integral part of these consolidated financial statements
| 1 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Operations
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Revenues | $ | 28,005,144 | $ | 11,377,928 | $ | 49,146,515 | $ | 22,366,876 | ||||||||
| Costs and expenses | ||||||||||||||||
| Cost of revenue | 25,814,153 | 10,051,119 | 44,321,894 | 19,908,428 | ||||||||||||
| General and administrative expenses | 3,038,529 | 2,736,435 | 6,722,310 | 5,976,244 | ||||||||||||
| Total costs and expenses | 28,852,682 | 12,787,554 | 51,044,204 | 25,884,672 | ||||||||||||
| Loss from operations | (847,538 | ) | (1,409,626 | ) | (1,897,689 | ) | (3,517,796 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (566,999 | ) | (2,096,600 | ) | (736,644 | ) | (3,400,459 | ) | ||||||||
| Derivative expense | (1,775,057 | ) | ||||||||||||||
| Change in fair value of derivative liabilities | 645,830 | 949,680 | ||||||||||||||
| Gain (loss) on investment in Centercom | 35,519 | 49,145 | 10,336 | (24,628 | ) | |||||||||||
| Gain on settlement of liabilities | 701,404 | 842,982 | ||||||||||||||
| Amortization of debt discount | (37,068 | ) | 1,895,871 | (37,068 | ) | 1,895,871 | ||||||||||
| Gain on forgiveness of PPP loan - government | 524,143 | 524,143 | ||||||||||||||
| Total other income (expense) - net | (44,405 | ) | 1,195,650 | (239,233 | ) | (1,511,611 | ) | |||||||||
| Net loss including non-controlling interest | (891,943 | ) | (213,976 | ) | (2,136,922 | ) | (5,029,407 | ) | ||||||||
| Non-controlling interest | 81,094 | 48,449 | ||||||||||||||
| Net loss available to common stockholders | $ | (973,037 | ) | $ | (213,976 | ) | $ | (2,185,371 | ) | $ | (5,029,407 | ) | ||||
| Loss per share - basic and diluted | $ | (0.07 | ) | $ | (0.07 | ) | $ | (0.18 | ) | $ | (1.73 | ) | ||||
| Weighted average number of shares - basic and diluted | 12,268,669 | 3,087,881 | 12,166,817 | 2,902,607 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
| 2 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the Three and Six Months Ended June 30, 2022
(Unaudited)
| Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Non-Controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||||||||
| December 31, 2021 | 260,000 | $ | 260 | $ | 12,063,834 | $ | 12,064 | $ | 38,662,340 | $ | (35,123,343 | ) | $ | $ | 3,551,321 | |||||||||||||||||||||||||
| Recognition of stock-based compensation | - | - | - | 9,294 | 9,294 | |||||||||||||||||||||||||||||||||||
| Warrants issued as debt issue costs | - | - | - | 38,953 | 38,953 | |||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | (32,645 | ) | (32,645 | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | (1,212,334 | ) | (1,212,334 | ) | |||||||||||||||||||||||||||||||||
| March 31, 2022 | 260,000 | 260 | 12,063,834 | 12,064 | 38,710,587 | (36,335,677 | ) | (32,645 | ) | 2,354,589 | ||||||||||||||||||||||||||||||
| Recognition of stock-based compensation | - | - | - | 9,294 | 9,294 | |||||||||||||||||||||||||||||||||||
| Stock issued as direct offering costs | - | - | 200,000 | 200 | (200 | ) | ||||||||||||||||||||||||||||||||||
| Stock issued to purchase software | - | - | 85,000 | 85 | 411,315 | 411,400 | ||||||||||||||||||||||||||||||||||
| Warrants issued as debt issue costs | - | - | - | 76,451 | 76,451 | |||||||||||||||||||||||||||||||||||
| Warrants issued as interest expense | - | - | - | 212,608 | 212,608 | |||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | 81,094 | 81,094 | |||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | (973,037 | ) | (973,037 | ) | |||||||||||||||||||||||||||||||||
| June 30, 2022 | 260,000 | $ | 260 | $ | 12,348,834 | $ | 12,349 | $ | 39,420,055 | $ | (37,308,714 | ) | $ | 48,449 | $ | 2,172,399 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
| 3 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ (Deficit)
For the Three and Six Months Ended June 30, 2021
(Unaudited)
| Series A Preferred Stock | Series C Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||
| December 31, 2020 | 260,000 | $ | 260 | 721,598 | $ | 722 | 2,542,624 | $ | 2,543 | $ | 10,862,708 | $ | (21,592,199 | ) | $ | (10,725,966 | ) | |||||||||||||||||||
| Stock issued for services rendered and recognition of share-based compensation | - | - | 1,260 | 1 | 61,570 | 61,571 | ||||||||||||||||||||||||||||||
| Stock issued for cash | - | - | 260,000 | 260 | 1,509,740 | 1,510,000 | ||||||||||||||||||||||||||||||
| Stock and warrants issued with debt recorded as a debt discount | - | - | 18,000 | 18 | 2,038,617 | 2,038,635 | ||||||||||||||||||||||||||||||
| Conversion of debt | - | - | 132,291 | 132 | 858,026 | 858,158 | ||||||||||||||||||||||||||||||
| Stock issued under make-whole arrangement | - | - | 15,147 | 15 | 90,386 | 90,401 | ||||||||||||||||||||||||||||||
| Stock issued in connection with debt modification | - | - | 13,916 | 14 | 108,917 | 108,931 | ||||||||||||||||||||||||||||||
| Stock issued in settlement of liabilities | - | - | 71,737 | 72 | 464,641 | 464,713 | ||||||||||||||||||||||||||||||
| Stock issued for acquisition of membership interest in ECS | - | - | 2,000 | 2 | 17,898 | 17,900 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | (4,815,431 | ) | (4,815,431 | ) | |||||||||||||||||||||||||||||
| March 31, 2021 | 260,000 | 260 | 721,598 | 722 | 3,056,975 | 3,057 | 16,012,503 | (26,407,630 | ) | (10,391,088 | ) | |||||||||||||||||||||||||
| Stock issued for services rendered and recognition of share-based compensation | - | - | 1,260 | 1 | 10,268 | 10,269 | ||||||||||||||||||||||||||||||
| Recognition of stock option expense and related true up adjustment | - | - | - | (26,741 | ) | (26,741 | ) | |||||||||||||||||||||||||||||
| Stock issued in settlement of liabilities | - | - | 171,863 | 172 | 1,290,265 | 1,290,437 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | (213,976 | ) | (213,976 | ) | |||||||||||||||||||||||||||||
| June 30, 2021 | 260,000 | $ | 260 | 721,598 | $ | 722 | 3,230,098 | $ | 3,230 | $ | 17,286,295 | $ | (26,621,606 | ) | $ | (9,331,099 | ) | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
| 4 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| For the Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Operating activities | ||||||||
| Net loss - including non-controlling interest | $ | (2,136,922 | ) | $ | (5,029,407 | ) | ||
| Adjustments to reconcile net loss to net cash used in operations | ||||||||
| Depreciation and amortization | 362,629 | 398,240 | ||||||
| Amortization of right-of-use assets | 34,294 | 92,531 | ||||||
| Amortization of debt discount/debt issue costs | 37,068 | 1,351,351 | ||||||
| Recognition of share-based compensation | 18,588 | 45,099 | ||||||
| Warrants issued for interest expense | 212,608 | |||||||
| Change in fair value of derivative liabilities | (949,680 | ) | ||||||
| Derivative expense | 1,775,057 | |||||||
| Gain on settlement of liabilities | (840,932 | ) | ||||||
| (Gain) loss on equity method investment - Centercom - former related party | (10,336 | ) | 24,628 | |||||
| Gain on forgiveness of PPP loan | (524,143 | ) | ||||||
| Gain on deconsolidation of subsidiary (True Wireless) | (1,895,871 | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| (Increase) decrease in | ||||||||
| Accounts receivable | (5,072,918 | ) | (411,943 | ) | ||||
| Lifeline revenue - due from USAC | 105,532 | |||||||
| Inventory | (1,316,445 | ) | (71,700 | ) | ||||
| Prepaids | (44,054 | ) | (462 | ) | ||||
| Increase (decrease) in | ||||||||
| Accounts payable and accrued expenses | 4,696,158 | 1,824,604 | ||||||
| Accounts payable and accrued expenses - related party | 795,098 | (1,305,278 | ) | |||||
| Deferred revenue | (168,750 | ) | 122,600 | |||||
| Operating lease liability | (30,948 | ) | (89,616 | ) | ||||
| Net cash used in operating activities | (3,148,073 | ) | (4,855,247 | ) | ||||
| Investing activities | ||||||||
| Purchase of property and equipment | (11,401 | ) | (45,983 | ) | ||||
| Purchase of software | (300,000 | ) | ||||||
| Acquisition of Torch, Inc. | (800,000 | ) | ||||||
| Cash disposed in deconsolidation of subsidiary (True Wireless) | (325,316 | ) | ||||||
| Net cash used in investing activities | (1,111,401 | ) | (371,299 | ) | ||||
| Financing activities | ||||||||
| Proceeds from stock and warrants issued for cash | 1,510,000 | |||||||
| Proceeds from loans - related party | 2,123,000 | |||||||
| Repayments of loans - related party | (63,000 | ) | ||||||
| Proceeds from notes payable | 6,700,000 | |||||||
| Repayments on notes payable | (250,000 | ) | ||||||
| Proceeds from SBA notes | 518,167 | |||||||
| Repayments on SBA notes | (19,496 | ) | ||||||
| Proceeds from convertible notes | 2,550,000 | |||||||
| Repayments on convertible notes - net of overpayment | (1,260,792 | ) | ||||||
| Net cash provided by financing activities | 6,680,504 | 5,127,375 | ||||||
| Net increase (decrease) in cash | 2,421,030 | (99,171 | ) | |||||
| Cash - beginning of period | 6,283,496 | 673,995 | ||||||
| Cash - end of period | $ | 8,704,526 | $ | 574,824 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | 195,950 | $ | |||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Debt issue costs recorded in connection with notes payable | $ | 115,404 | $ | |||||
| Stock issued to acquire software | $ | 411,400 | ||||||
| Debt discount/issue costs recorded in connection with debt/derivative liabilities | $ | $ | 2,140,829 | |||||
| Stock issued in settlement of liabilities | $ | $ | 1,755,150 | |||||
| Conversion of debt into equity | $ | $ | 858,158 | |||||
| Right-of-use asset obtained in exchange for new operating lease liability | $ | $ | 515,848 | |||||
| Termination of ECS ROU lease | $ | $ | 228,752 | |||||
| Stock issued in connection with debt modification | $ | $ | 108,931 | |||||
| Stock issued under make-whole arrangement | $ | $ | 90,401 | |||||
| Stock issued for acquisition of membership interest in ECS | $ | $ | 17,900 | |||||
| Deconsolidation of subsidiary (True Wireless) | $ | $ | 2,434,552 | |||||
The accompanying notes are an integral part of these consolidated financial statements
| 5 |
Note 1 - Organization and Nature of Operations
Organization and Nature of Operations
SurgePays, Inc. (“SurgePays,” “SP,” “we,” “our” or “the Company”), and its operating subsidiaries, is a technology-driven company building a next generation supply chain software platform that can offer wholesale goods and services more cost efficiently than traditional and existing wholesale distribution models.
The parent (SurgePays, Inc.) and subsidiaries are organized as follows:
| Company Name | Incorporation Date | State of Incorporation | |||
| SurgePays, Inc. | August 18, 2006 | Tennessee | |||
| KSIX Media, Inc. | November 5, 2014 | Nevada | |||
| KSIX, LLC | September 14, 2011 | Nevada | |||
| Surge Blockchain, LLC | January 29, 2009 | Nevada | |||
| Injury Survey, LLC | July 28, 2020 | Nevada | |||
| DigitizeIQ, LLC | July 23, 2014 | Illinois | |||
| LogicsIQ, Inc. | October 2, 2018 | Nevada | |||
| Surge Payments, LLC | December 17, 2018 | Nevada | |||
| SurgePhone Wireless, LLC | August 29, 2019 | Nevada | |||
| SurgePays Fintech, Inc. | August 22, 2019 | Nevada | |||
| True Wireless, Inc. | * | October 29, 2020 | Oklahoma | ||
| ECS Prepaid, LLC | June 9, 2009 | Missouri | |||
| Central States Legal Services, Inc. | August 1, 2003 | Missouri | |||
| Electronic Check Services, Inc. | May 19, 1999 | Missouri | |||
| Torch Wireless | ** | January 29, 2019 | Wyoming |
| * | Entity was disposed of on May 7, 2021. |
| ** | Effective January 1, 2022, the Company acquired Torch Wireless |
| 6 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Impact of COVID-19
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The COVID-19 pandemic has the potential to significantly impact the Company’s supply chain, distribution centers, or logistics and other service providers.
In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand for products and services and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly.
We have implemented adjustments to our operations designed to keep employees safe and comply with international, federal, state, and local guidelines, including those regarding social distancing. The extent to which COVID-19 may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence. In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations.
Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition, and results of operations.
To date, the Company has not experienced any significant negative economic impact due to COVID-19.
| 7 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2022 and the results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 2022 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, 2021 filed with the SEC on March 24, 2022.
Management acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the consolidated results of its operations for the periods presented.
Liquidity, Going Concern and Management’s Plans
These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
As reflected in the accompanying consolidated financial statements, for the six months ended June 30, 2022, the Company had:
| ● | Net loss available to common stockholders of $2,185,371; and |
| ● | Net cash used in operations was $3,148,073 |
Additionally, at June 30, 2022, the Company had:
| ● | Accumulated deficit of $37,308,714 |
| ● | Stockholders’ equity of $2,172,399; and |
| ● | Working capital of $1,416,163 |
| 8 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand of $8,704,526 at June 30, 2022.
The Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from the sales of its products and services to achieve profitable operations. There can be no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months ended June 30, 2023, and our current capital structure including equity-based instruments and our obligations and debts.
These factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve-month period subsequent to the date that these consolidated financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Management’s strategic plans include the following:
| ● | Continue the hyper growth of the Affordable Connectivity Program revenue stream, |
| ● | Execution of business plan and significant revenue growth from prior period, |
| ● | Pursuing a line of credit to achieve the hyper growth of the Affordable Connectivity Program, |
| ● | 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. |
| 9 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
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 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.
| 10 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Effective January 1, 2022, the Company executed a management agreement with Torch Wireless (“Torch”). Generally, the Company was engaged to handle the following services:
| ● | Oversee management of the business being conducted by Torch, | |
| ● | Involved in the performance of Torch’s obligations under contracts regarding its business operations and maintenance of Torch’s customer relationships, | |
| ● | Assist Torch with regulatory compliance, | |
| ● | Manage all billing and collection functions, including the right to collect revenues related to Torch’s business operations, as part of the agreement, Torch may not participate in this function | |
| ● | 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; and |
Torch is a provider of subsidized mobile broadband services to consumers qualifying under the federal guidelines of the U.S. Federal Communication Commission’s Affordable Connectivity Program (“ACP”). The ACP provides the Company up to a $100 reimbursement for the cost of each tablet device distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. With the purchase of Torch, the Company now has approval to offer subsidized mobile broadband in all fifty states.
During June 2022, it was determined that the Company had acquired 100% of Torch, effective January 1, 2022, resulting in Torch becoming a wholly owned subsidiary, in a transaction accounted for as a business combination. Pursuant to ASC 805-10-25-7, the Company determined that the acquisition date preceded the closing date as it was managing Torch and in full control of all operational decision making. At this time, the Company had obtained control of Torch through its management contract.
At the time of acquisition, Torch had no significant assets or liabilities. The Company agreed to pay $800,000, of which $400,000 was paid in May 2022, and the balance of $400,000 was paid in August 2022. As a result of the acquisition, the Company recorded goodwill of $800,000.
At the time of acquisition, Torch had nominal revenues and losses. As a result, and given the immaterial nature of this acquisition, the Company has elected not to present any pro-forma financial information.
In addition, the Company will pay the Sellers monthly residual payments for customers enrolled by the Company through December 31, 2022 of either $2 or $3 per customer (depending on the category of customer).
| 11 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
This transaction does not involve the purchase of a “significant amount of assets” as defined in the Instructions to Item 2.01 of Form 8-K. Additionally, the acquisition of Torch was not deemed to be significant at any level under Rule 3-05 of Regulation S-X and does not require any additional historical audits.
At June 30, 2022, Torch has been consolidated with the Company’s consolidated statements of financial position, results of operations, and cash flows.
At June 30, 2022 and December 31, 2021 goodwill was $1,666,782 and $866,782, respectively. There were no impairment losses for the three and six months ended June 30, 2022 or 2021, respectively.
Deconsolidation of Subsidiary
In accordance with ASC Topic 810-10-40, a parent company must deconsolidate a subsidiary as of the date the parent ceases to have a controlling interest in that subsidiary and recognize a gain or loss in net income at that time.
On May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc. (“TW”), however we retained $1,097,659 in liabilities which consisted of $1,077,659 in accounts payable and accrued expenses as well as $20,000 in related party loans. During 2021, the $20,000 was forgiven. In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%, with a default interest rate of 10%. The Company will receive twenty-five (25) payments of principal and accrued interest totaling $7,461 commencing in June 2023. Payments are scheduled as follows:
| For the Year Ended December 31, 2021 | ||||
| 2022 | $ | |||
| 2023 | 52,227 | |||
| 2024 | 89,532 | |||
| 2025 | 44,766 | |||
| 186,525 | ||||
| Less: amount representing interest | (9,674 | ) | ||
| Total | $ | 176,851 | ||
| 12 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
As a result of the sale, we deconsolidated our entire ownership interest in TW from our consolidated financial statements on May 7, 2021, the effective date of the sale agreement, and recognized a gain on deconsolidation of $1,895,871 as follows:
| Consideration | ||||
| Note receivable | $ | 176,851 | ||
| Fair value of consideration received | 176,851 | |||
| Recognized amounts of identifiable assets sold and liabilities assumed by buyer: | ||||
| Cash | 325,316 | |||
| Lifeline revenue due from USAC | 74,650 | |||
| Inventory | 107,089 | |||
| Property and equipment - net | 20,645 | |||
| Operating lease - right of use asset - net | 10,981 | |||
| Total assets sold | 538,681 | |||
| Accounts payable and accrued expenses | 1,183,850 | |||
| Line of credit | 912,870 | |||
| Note payable - SBA government | 150,000 | |||
| Operating lease liability | 10,981 | |||
| Total liabilities assumed by buyer | 2,257,701 | |||
| Total net liabilities assumed by buyer | 1,719,020 | |||
| Gain on deconsolidation of True Wireless | 1,895,871 |
Business Segments and Concentrations
The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. The Company manages its business as multiple reportable segments.
Customers in the United States accounted for 100% of our revenues. We do not have any property or equipment outside of the United States.
See Note 10 regarding segment disclosure.
| 13 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Use of Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant estimates during the six months ended June 30, 2022 and the year ended December 31, 2021, respectively, include, allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of loss contingencies, valuation of derivative liabilities, valuation of stock-based compensation, estimated useful lives related to intangible assets and property and equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred tax assets.
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.
The Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
| 14 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
| ● | Level 1 —Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; | |
| ● | Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and | |
| ● | Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
The Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, and accounts payable and accrued expenses – related party, are carried at historical cost. At June 30, 2022 and December 31, 2021, respectively, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.
ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding financial instruments.
| 15 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Cash and Cash Equivalents and Concentration of Credit Risk
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.
At June 30, 2022 and December 31, 2021, respectively, the Company did not have any cash equivalents.
The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is $250,000. At June 30, 2022 and December 31, 2021, the Company did not experience any losses on cash balances in excess of FDIC insured limits.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding customer balances. Credit is extended to customers based on an evaluation of their financial condition and other factors. Interest is not accrued on overdue accounts receivable. The Company does not require collateral.
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 $137,218 and $137,218 at June 30, 2022 and December 31, 2021, respectively.
There was no bad debt expense for the three and six months ended June 30, 2022 and 2021, respectively.
Bad debt expense (recovery) is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.
| 16 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Inventory
Inventory primarily consists of primarily of tablets and sim cards. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method.
During the three and six months ended June 30, 2022, the Company recorded a provision for inventory obsolescence of $51,718, respectively.
During the three and six months ended June 30, 2021, the Company recorded a provision for inventory obsolescence of $0, respectively.
At June 30, 2022 and December 31, 2021, the Company had inventory of $5,675,741 and $4,359,296, respectively.
Impairment of Long-lived Assets
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.
If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
There were no impairment losses for the three and six months ended June 30, 2022 and 2021, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets.
Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.
Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
There were no impairment losses for the three and six months ended June 30, 2022 and 2021, respectively.
| 17 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
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.
Derivative Liabilities
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, (“ASC 480”), “Distinguishing Liabilities from Equity” and FASB ASC Topic No. 815, (“ASC 815”) “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The Company uses a binomial model to determine fair value.
Upon conversion of a note for shares of common stock where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at fair value, relieves all related notes, derivatives, and debt discounts, and recognizes a net gain or loss on debt extinguishment. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
| 18 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Debt Issue Cost
Debt issuance cost paid to lenders, or third parties are amortized to interest expense in the consolidated statements of operations, over the life of the underlying debt instrument.
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.
| 19 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts as of June 30, 2022 and December 31, 2021, respectively, contained a significant financing component.
Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
| 20 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.
The following reflects additional discussion regarding our revenue recognition policies for each of our material revenue streams. For each revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration is fixed and determinable at the initiation of the contract. Performance obligations for Torch, TW and LogicsIQ are satisfied when services are performed. Performance obligations for ECS and SB are satisfied at point of sale.
For each revenue stream we only have a single performance obligation.
Surge Phone Wireless (SPW)
SPW is licensed to provide subsidized mobile broadband services through the FCC’s Affordable Connectivity Program (ACP) to qualifying low-income customers in fourteen 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.
Torch Wireless
Torch Wireless is licensed to provide subsidized mobile broadband services through the FCC’s Affordable Connectivity Program (ACP) to qualifying low-income customers in all fifty states. Revenues are recognized when an ACP application is completed and accepted. Each month we reconcile subscriber usage to ensure the service was utilized. A monthly file is submitted to the Universal Service Administrative Company for review and approval, at which time we have completed our performance obligation and recognize accounts receivable and revenue. Revenues are recorded in the month when services were rendered, with payment typically received on the 28th of the following month.
| 21 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Surge Blockchain
Revenues are generated through the sale of various products such as energy drinks, CBD products, and other top selling products in convenience store and bodega nationwide. At the time in which our products are sold at the store our performance obligation is considered complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
LogicsIQ
LogicsIQ is an enterprise software development company providing marketing business intelligence (“BI”), plaintiff generation and case load management solutions for law firms representing plaintiffs in Mass Tort legal cases. Revenues are earned from our lead generation and retained services offerings.
Lead generation consist of sourcing leads, which requires us to drive traffic to our landing pages for a specific marketing campaign. We also achieve this in certain marketing campaigns by using third-party preferred vendors to meet the needs of our clients. Revenues are recognized at the time the lead is delivered to the client. If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed.
Retained service offerings consist of turning leads into a retained legal case. To provide this service to our customers, we qualify leads through verification of information collected during the lead generation process. Additionally, we further qualify these leads using a client questionnaire which assists in determining the services to be provided. The qualification process is completed using our call center operations.
If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed. At the time of delivery of leads and the creation of retained cases (customers are qualified at this point), our performance obligation has been completed and revenues are recognized. Arrangements with customers do not provide the customer with the right to take possession of our software or platform at any time. Once the advertising is delivered, it is non-refundable.
| 22 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Surge Fintech and ECS
Revenues are generated through the sale of telecommunication products such as mobile phones, wireless top-up refills, and other mobile related products. At the time in which our products are sold through our online web portal (point of sale), our performance obligation is considered complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.
True Wireless (TW) (Former Subsidiary)
TW was licensed to provide wireless services to qualifying low-income customers in five states. Revenues were recognized when a lifeline application was completed and accepted. Each month we reconciled subscriber usage to ensure the service was utilized. A monthly file was submitted to the Universal Service Administrative Company for review and approval, at which time we completed our performance obligation and recognized accounts receivable and revenue. Revenues were recorded in the month when services were rendered, with payment typically received on the 15th of the following month. If the subscriber did not utilize the Lifeline service during the month, we had 15-days to cure usage. If not cured, the subscriber was de-enrolled from the lifeline program at day 45. This process to verify usage and de-enrollment had been temporarily suspended due to the COVID-19 pandemic. Historically, we had had an insignificant amount of subscribers de-enrolled.
TW was sold in May 2021 and has been deconsolidated as of the disposal date.
Contract Liabilities (Deferred Revenue)
Contract liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer deposit is relieved and revenue is recognized.
At June 30, 2022 and 2021, the Company had deferred revenue of $107,500 and $276,250, respectively.
The following represents the Company’s disaggregation of revenues for the six months ended June 30, 2022 and 2021:
| Six Months Ended | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Revenue | Revenue | % of Revenues | Revenue | % of Revenues | ||||||||||||
| Surge Phone Wireless | $ | 22,008,923 | 44.78 | % | $ | 2,231 | 0.01 | % | ||||||||
| Surge Fintech and ECS | 9,057,142 | 18.43 | % | 13,131,841 | 58.71 | % | ||||||||||
| Torch Wireless | 12,107,763 | 24.64 | % | 0.00 | % | |||||||||||
| LogicsIQ, Inc. | 5,925,016 | 12.06 | % | 7,996,905 | 35.75 | % | ||||||||||
| Surge Blockchain, LLC | 47,671 | 0.10 | % | 77,918 | 0.35 | % | ||||||||||
| True Wireless | 0.00 | % | 1,157,981 | 5.18 | % | |||||||||||
| Total Revenues | $ | 49,146,515 | 100 | % | $ | 22,366,876 | 100 | % | ||||||||
| 23 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Cost of Revenues
Cost of revenues consists of purchased telecom services including data usage and access to wireless networks. Additionally, 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 June 30, 2022 and December 31, 2021, respectively, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
The Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the six months ended June 30, 2022 and 2021, respectively.
| 24 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Investment – Former Related Party
On January 17, 2019, we announced the completion of an agreement to acquire a 40% equity ownership of CenterCom Global, S.A. de C.V. (“CenterCom”). CenterCom is a dynamic operations center currently providing sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Our CenterCom team is based in El Salvador. CenterCom also provides call center support for various third-party clients.
Anthony N. Nuzzo, a director and officer and the holder of approximately 10% of our voting equity had a controlling interest in CenterCom Global. During 2022, Mr. Nuzzo passed away. See Form 8-K filed on March 24, 2022.
The strategic partnership with CenterCom as a bilingual operations hub has powered our growth and revenue. CenterCom has been built to support the infrastructure required to rapidly scale in synergy and efficiency to support our sales growth, customer service and development.
We account for this investment under the equity method. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee’s income or loss. All investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable.
At June 30, 2022 and December 31, 2021, our investment in CenterCom was $453,624 and $443,288, respectively.
During the three months ended June 30, 2022 and 2021, we recognized a gain of $35,519 and $49,145, respectively.
During the six months ended June 30, 2022 and 2021, we recognized a gain of $10,336 and a loss of $24,628, respectively.
During 2021, CenterCom forgave $429,010 of accounts payable owed by SurgePays to CenterCom. As a result of this debt forgiveness, occurring with a related party, accordingly, there was no gain recorded, the Company increased additional paid in capital.
| 25 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
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 $52,524 and $115,533 in marketing and advertising costs during the three months ended June 30, 2022 and 2021, respectively.
The Company recognized $136,006 and $562,292 in marketing and advertising costs during the six months ended June 30, 2022 and 2021, respectively.
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 it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
The Company uses the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options.
The fair value of stock-based compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
When determining fair value of stock-based compensation, the Company considers the following assumptions in the Black-Scholes model:
| ● | Exercise price, |
| ● | Expected dividends, |
| ● | Expected volatility, |
| ● | Risk-free interest rate; and |
| ● | Expected life of option |
| 26 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
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 common stock issuable for stock options and warrants (using the treasury stock method), convertible notes and common stock issuable. These common stock equivalents may be dilutive in the future. In the event of a net loss, diluted loss per share is the same as basic loss per share since the effect of the potential common stock equivalents upon conversion would be anti-dilutive.
| 27 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
| June 30, 2022 | June 30, 2021 | |||||||
| Convertible notes payable and related accrued interest (1) | 508,121 | |||||||
| Warrants (2) | 6,051,256 | 427,617 | ||||||
| Stock options (3) | 6,801 | 3,401 | ||||||
| Series A, convertible preferred stock (4) | 26,000 | 26,000 | ||||||
| Series C, convertible preferred stock (5) | 3,607,990 | |||||||
| Total common stock equivalents | 6,084,057 | 4,573,129 | ||||||
| 1 | - exercise prices variable |
| 1 | - exercise prices variable |
| 3 | - weighted average exercise price - $/share and $/share, respectively |
| 4 | - each share converts to 1/10 of a share of common stock |
| 5 | - each share converts to shares of common stock |
The convertible notes contained exercise prices that had a discount to market ranging from 70% - 75% of the 10 or 20 days (See Note 5). As a result, the amount computed for common stock equivalents could have changed given the quoted closing trading price at each reporting period.
Warrants and stock options included as commons stock equivalents represent those that are vested and exercisable. See Note 9.
Based on the potential common stock equivalents noted above at June 30, 2022 and December 31, 2021, respectively, the Company has sufficient authorized shares of common stock () to settle any potential exercises of common stock equivalents.
Related Parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
The Company uses certain credit cards to pay expenses, these credit cards are in the names of certain of the Company’s officers and directors.
During the three and six months ended June 30, 2022, the Company incurred expenses with related parties in the normal course of business totaling $5,222,380 and $7,217,513, respectively. These expenses related to transactions with an entity affiliated with one of the non-employee members of the Company’s Board of Directors.
Recent Accounting Standards
Changes to accounting principles are established by the FASB in the form of ASU’s to the FASB’s Codification. We consider the applicability and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ deficit, cash flows, or presentation thereof. Management has evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”) through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the consolidated financial statements of the Company.
| 28 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
In June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
For SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intra period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.
We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s consolidation financial statements.
| 29 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
In August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity; Own Equity (“ASU 2020-06”), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year.
We adopted this pronouncement on January 1, 2022; however, the adoption of this standard did not have a material effect on the Company’s consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no material effect on the consolidated results of operations, stockholders’ equity (deficit), or cash flows.
| 30 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Note 3 – Property and Equipment
Property and equipment consisted of the following:
| Estimated Useful | ||||||||||
| Type | June 30, 2022 | December 31, 2021 | Lives (Years) | |||||||
| Computer equipment and software | $ | 1,004,530 | $ | 283,484 | 3 - 5 | |||||
| Furniture and fixtures | 84,507 | 82,752 | 5 - 7 | |||||||
| 1,089,037 | 366,236 | |||||||||
| Less: accumulated depreciation | (201,663 | ) | (165,788 | ) | ||||||
| Property and equipment - net | $ | 887,374 | $ | 200,448 | ||||||
In June 2022, the Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash, of which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued shares of common stock having a fair value of $411,400 ($/share), based upon the quoted closing trading price.
Depreciation expense for the three months ended June 30, 2022 and 2021 was $28,184 and $16,905, respectively.
Depreciation expense for the six months ended June 30, 2022 and 2021 was $35,875 and $32,736, respectively.
These amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
| 31 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Note 4 – Intangibles
Intangibles consisted of the following:
| Type | June 30, 2022 | December 31, 2021 | Estimated Useful Lives (Years) | |||||||||
| Proprietary Software | $ | 4,286,402 | $ | 4,286,402 | 7 | |||||||
| Tradenames/trademarks | 617,474 | 617,474 | 15 | |||||||||
| ECS membership agreement | 465,000 | 465,000 | 1 | |||||||||
| Noncompetition agreement | 201,389 | 201,389 | 2 | |||||||||
| Customer Relationships | 183,255 | 183,255 | 5 | |||||||||
| 5,753,520 | 5,753,520 | |||||||||||
| Less: accumulated amortization | (2,646,790 | ) | (2,320,036 | ) | ||||||||
| Intangibles - net | $ | 3,106,730 | $ | 3,433,484 | ||||||||
ECS has been a financial technology and wireless top-up platform for over 15 years. On October 1, 2019, we acquired ECS primarily for the favorable ACH banking relationships and a fintech transactions platform (proprietary software) processing over 20,000 transactions a day at approximately 8,000 independently owned retail stores. The goal was to incorporate our blockchain components into the existing ECS network (proprietary software). After a year of development and integration, we believe the ECS platform has been successfully merged into our platform with secure ledger data backups and will continue to serve as the proven backbone for wireless top-up transactions and wireless product aggregation. The majority of the purchase price was allocated to the “Proprietary Software” category being amortized straight-line over seven years.
Amortization expense for the three months ended June 30, 2022 and 2021 was $163,377 and $163,377, respectively.
Amortization expense for the six months ended June 30, 2022 and 2021 was $326,754 and $365,504, respectively.
| 32 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Estimated amortization expense for each of the five (5) succeeding years is as follows:
| For the Year Ended December 31, 2022: | ||||
| 2022 (6 months) | $ | 326,754 | ||
| 2023 | 653,508 | |||
| 2024 | 653,508 | |||
| 2025 | 653,508 | |||
| 2026 | 653,508 | |||
| 2027 | 165,944 | |||
| Total | $ | 3,106,730 | ||
Note 5 – Debt
The following represents a summary of the Company’s notes payable – SBA government, loans payable – related parties, notes payable and convertible notes, key terms, and outstanding balances at June 30, 2022 and December 31, 2021, respectively:
Notes Payable – SBA government
(1) Paycheck Protection Program - PPP Loan
Pertaining to the Company’s eighteen (18) month loan and in accordance with the Paycheck Protection Program (“PPP”) and Conditional Loan Forgiveness, the promissory note evidencing the loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company.
Under the terms of the PPP loan program, all or a portion of this Loan may be forgiven upon request from Borrower to Lender, provided the Loan proceeds are used in accordance with the terms of the Coronavirus Aid, Relief and Economic Security Act (the “Act” or “CARES”), Borrower is not in default under the Loan or any of the Loan Documents, and Borrower has provided documentation to Lender supporting such request for forgiveness that includes verifiable information on Borrower’s use of the Loan proceeds, to Lender’s satisfaction, in its sole and absolute discretion.
| 33 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
(2) Economic Injury Disaster Loan (“EIDL”)
This program was made available to eligible borrowers in light of the impact of the COVID-19 pandemic and the negative economic impact on the Company’s business. Proceeds from the EIDL are to be used for working capital purposes.
Installment payments, including principal and interest, are due monthly (beginning twelve (12) months from the date of the promissory note) in amounts ranging from $109 - $751/month. The balance of principal and interest is payable over the next thirty (30) years from the date of the promissory note. There are no penalties for prepayment. Based upon guidance issued by the SBA on June19, 2020, the EIDL Loan is not required to be refinanced by the PPP loan.
| PPP | EIDL | EIDL | PPP | |||||||
| Terms | SBA | SBA | SBA | SBA | ||||||
| Issuance dates of SBA loans | April 2020 | May 2020 | July 2020 | March 2021 | ||||||
| Term | 18 months | 30 Years | 30 Years | 5 Years | ||||||
| Maturity date | October 2021 | May 2050 | July 2050 | March 2026 | ||||||
| Interest rate | 1% | 3.75% | 3.75% | 1% | ||||||
| Collateral | Unsecured | Unsecured | Unsecured | Unsecured | ||||||
| Conversion price | N/A | N/A | N/A | N/A |
| 34 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
| Total | ||||||||||||||||||||
| Principal | $ | 498,082 | $ | 150,000 | $ | 486,600 | $ | 518,167 | $ | 1,652,849 | ||||||||||
| Balance - December 31, 2020 | $ | 498,082 | $ | 150,000 | $ | 486,600 | $ | $ | 1,134,682 | |||||||||||
| Gross proceeds | 518,167 | 518,167 | ||||||||||||||||||
| Forgiveness of loan | (371,664 | ) | (371,664 | )1 | ||||||||||||||||
| Deconsolidation of subsidiary (“TW”) | (150,000 | ) | (150,000 | )2 | ||||||||||||||||
| Balance - December 31, 2021 | 126,418 | 150,000 | 336,600 | 518,167 | 1,131,185 | |||||||||||||||
| Forgiveness of loan | (518,167 | ) | (518,167 | )3 | ||||||||||||||||
| Repayments | (11,267 | ) | (2,986 | ) | (5,243 | ) | (19,496 | ) | ||||||||||||
| Balance - June 30, 2022 | $ | 115,151 | $ | 147,014 | $ | 331,357 | $ | $ | 593,522 | |||||||||||
| 1 | During 2021, the Company received a partial forgiveness on a PPP loan totaling $377,743, of which $371,664 was for principal and $6,079 for accrued interest. The Company recorded this forgiveness as other income in the accompanying consolidated statements of operations. |
| 2 | In connection with the deconsolidation of TW in 2021, $150,000 of debt was assumed by the buyer. |
| 3 | During 2022, the Company received 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. |
| 35 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Notes Payable – Related Parties
| 1 | 2 | 3 | ||||||||||||||
| Loan Payable | Loan Payable | Loan Payable | ||||||||||||||
| Terms | Related Party | Related Party | Related Party | Total | ||||||||||||
| Issuance dates of notes | Various | May 2020/January 2021 | August 2021 | |||||||||||||
| Maturity date | January 1, 2023/January 1, 2024 | March 2021 | August 2031 | |||||||||||||
| Interest rate | 10% | 15% | 10% | |||||||||||||
| Collateral | Unsecured | Unsecured | Unsecured | |||||||||||||
| Conversion price | N/A | N/A | N/A | |||||||||||||
| Balance - December 31, 2020 | $ | 3,341,940 | $ | 147,500 | $ | $ | 3,489,440 | |||||||||
| Gross proceeds | 3,825,000 | 63,000 | 467,385 | 4,355,385 | ||||||||||||
| Accrued interest included in note balance | 692,458 | 692,458 | ||||||||||||||
| Conversion of debt into common stock | (2,265,967 | ) | (2,265,967 | ) | ||||||||||||
| Repayments | (210,500 | ) | (210,500 | ) | ||||||||||||
| Balance - December 31, 2021 | 5,593,431 | 467,385 | 6,060,816 | |||||||||||||
| No activity - 2022 | ||||||||||||||||
| Balance - June 30, 2022 | $ | 5,593,431 | $ | $ | 467,385 | $ | 6,060,816 |
| 1 | Activity is with the Company’s Chief Executive Officer and Board Director (Kevin Brian Cox). Prior to September 30, 2021, these notes were either due on demand or had a specific due date. Additionally, these advances had interest rates from 6% - 15%. On September 30, 2021, all notes and related accrued interest were combined into two (2) new notes. |
| The new notes had due dates of June 30, 2022 or January 1, 2023. In April 2022, the notes were extended to January 1, 2023 and January 1, 2024, respectively. All notes bear interest at 10%. At September 30, 2021, the Company included $692,458 of accrued interest in the new note balance. In 2021, the Company issued shares of common stock at $/share to settle $2,415,560 of debt including principal of $2,265,967 and accrued interest of $149,593. As a result of the debt conversion with a related party, accordingly gains/losses are not recognized, however, the Company increased additional paid-in capital for $2,415,560. | |
| 2 | Activity is with the Company’s former President, Chief Operating Officer and Board Director (Anthony Nuzzo). Mr. Nuzzo passed away in March 2022. |
| 3 | Activity is with David May, who is a Board Member. |
| 36 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Notes Payable
| 1 | 2 | 3 | 4 | |||||||||||||||||||||||||
| Terms | Notes Payable | Notes Payable | Notes Payable | Note Payable | Notes Payable | Total | In-Default | |||||||||||||||||||||
| Issuance dates of notes | April/May 2022 | April/June 2022 | March 2022 | 2019 | 2021 | |||||||||||||||||||||||
| Maturity date | October/November 2022 | January/February 2023 | September 2022 | 2020 | 2022 | |||||||||||||||||||||||
| Interest rate | 19% | 24% | 19% | 18% | 10% | |||||||||||||||||||||||
| Default interest rate | 26% | N/A | 26% | 0% | 0% | |||||||||||||||||||||||
| Collateral | Unsecured | All assets | Unsecured | Unsecured | Unsecured | |||||||||||||||||||||||
| Warrants issued as discount/issue costs | 36,000 | N/A | 15,000 | N/A | 2,406,250 | |||||||||||||||||||||||
| Principal | $ | 1,200,000 | $ | 5,000,000 | $ | 500,000 | $ | 250,000 | $ | 1,101,000 | $ | 8,051,000 | ||||||||||||||||
| Balance - December 31, 2020 | 250,000 | 250,000 | $ | 250,000 | ||||||||||||||||||||||||
| Gross proceeds | 1,101,000 | 1,101,000 | ||||||||||||||||||||||||||
| Debt discount | (672,254 | ) | (672,254 | ) | ||||||||||||||||||||||||
| Amortization of debt discount | 698,511 | 698,511 | ||||||||||||||||||||||||||
| Repayments | (250,000 | ) | (1,127,257 | ) | (1,377,257 | ) | ||||||||||||||||||||||
| Balance - December 31, 2021 | ||||||||||||||||||||||||||||
| Gross proceeds | 1,200,000 | 5,000,000 | 500,000 | 6,700,000 | ||||||||||||||||||||||||
| Debt issue costs | (76,451 | ) | (38,953 | ) | (115,404 | ) | ||||||||||||||||||||||
| Amortization of debt issue costs | 17,698 | 19,370 | 37,068 | |||||||||||||||||||||||||
| Balance - June 30, 2022 | $ | 1,141,247 | $ | 5,000,000 | $ | 480,417 | $ | $ | $ | 6,621,664 |
| 1 | - | These notes were issued with 36,000, three (3) year warrants, which have been reflected as debt issue costs and are amortized over the life of the debt. |
| 2 | - | The Company executed a $5,000,000, secured, revolving promissory note with a third party. The Company may draw down on the note at 80% of eligible accounts receivable. See below. |
| 3 | - | These notes were issued with 15,000, three (3) year warrants, which have been reflected as debt issue costs and are amortized over the life of the debt. |
| 4 | - | In the event of default, these notes were convertible at 75% of the market price based upon the VWAP in preceding 10 days. There were defaults. |
Debt discount on notes totaling $1,101,000 in principal included original issue discounts of $101,000 and debt discounts associated with warrants totaling $229,268. Additionally, the Company computed a beneficial conversion feature of $341,986.
| 37 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Secured Revolving Debt
In April 2022, a maximum of $3,000,000 was made available to the Company, issued pursuant to a series of 270-day (9 months) revolving notes for purposes of purchasing inventory. In June 2022, this amount was increased to $5,000,000.
The notes will accrue interest a monthly rate of 2% (24% annualized). The Company may take drawdowns based upon eligible accounts receivable. In the event that eligible accounts receivable is less than 80% of the loan amount, within four (4) business days, the Company will be required to make a payment to the lender so that the loan amount is no greater than 80% of the then current eligible accounts receivable. The maximum amount outstanding under the loan is the lesser of $5,000,000 or 80% of eligible accounts receivable. Additionally, any related accrued interest associated with this mandatory payment will also be due. These advances are secured by all assets of the Company.
Convertible Notes Payable – Net
| Convertible | Convertible | Convertible | ||||||||||||||
| Terms | Notes Payable | Notes Payable | Notes Payable | Total | ||||||||||||
| Issuance dates of notes | 2019 and Prior | February 2020 - December 2020 | January 2021 - March 2021 | |||||||||||||
| Maturity date | 2020 | February 2021 - September 2021 | May 2021 - March 2022 | |||||||||||||
| Interest rate | 14% | 10% - 14% | 5% - 12% | |||||||||||||
| Collateral | Unsecured | Unsecured | Unsecured | |||||||||||||
| Conversion price | A | A | B | |||||||||||||
| Principal | $ | $ | 2,347,000 | $ | 2,550,000 | $ | 4,897,000 | |||||||||
| Balance - December 31, 2020 | $ | $ | 1,516,170 | $ | $ | 1,516,170 | ||||||||||
| Gross proceeds | 2,550,000 | 2,550,000 | ||||||||||||||
| Debt discount | (2,460,829 | ) | (2,460,829 | ) | ||||||||||||
| Amortization of debt discount | 517,781 | 2,460,829 | 2,978,610 | |||||||||||||
| Repayments - cash | (2,550,000 | )D | (2,550,000 | ) | ||||||||||||
| Conversion to equity/debt modification | (2,110,898 | ) | (2,110,898 | ) | ||||||||||||
| Reclassified to receivable | 76,947 | C | 76,947 | |||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | ||||||||||||
| 38 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
| A | – | Convertible at 65% multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock during the ten (10) trading days prior to conversion. |
| B | – | Convertible at 70% - 75% multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock during the ten (10) trading days prior to conversion. |
| C | - | During 2021, the Company overpaid a note holder by $76,947 when settling the outstanding balance. This overpayment had been recorded as a receivable and was repaid in full in April 2021. |
| D | - | During 2021, the Company repaid the $2,550,000 of convertible notes in full, however, one of the notes, having a principal of $2,300,000 was prepaid early. As a result, the Company paid an additional prepayment penalty equal to 120% of the outstanding amount due at the time of prepayment, resulting in additional interest expense of $465,239. Also, at the time of repayment, the embedded derivative liability ceased to exist. |
Line of Credit
The Company had a $1,000,000 line of credit with a bank, bearing interest at 6%, which was due in April 2021. The line of credit was secured by all of the Company’s assets and was personally guaranteed by the owner of the majority of the Company’s voting shares. The balance at December 31, 2021 was $0. In connection with the deconsolidation of TW in May 2021, the buyer assumed the line of credit.
| 39 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Note 6 – Derivative Liabilities
During 2021, the above convertible notes contained embedded conversion options with a conversion price that could result in issuing an undeterminable amount of future common stock to settle the host contract. Accordingly, the embedded conversion option is required to be bifurcated from the host instrument (convertible note) and treated as a liability, which is calculated at fair value, and marked to market at each reporting period.
The Company used the binomial pricing model to estimate the fair value of its embedded conversion option liabilities with the following inputs:
| December 31, 2021 | |||
| Expected term (years) | 0.20 - 1 year | ||
| Expected volatility | 143% - 291% | ||
| Expected dividends | 0% | ||
| Risk free interest rate | 0.03% - 0.09% | ||
A reconciliation of the beginning and ending balances for the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows at December 31, 2021:
| Derivative liability - December 31, 2020 | $ | 1,357,528 | ||
| Fair value at commitment date | 1,877,250 | |||
| Fair value mark to market adjustment | (1,806,763 | ) | ||
| Gain on derivative liability upon related debt settled | (1,428,015 | ) | ||
| Derivative liability - December 31, 2021 | $ |
Changes in fair value of derivative liabilities are included in other income (expense) in the accompanying consolidated statements of operations.
During the three months ended June 30, 2022 and 2021, the Company recorded a change in fair of derivative liabilities of $ and $645,830, respectively. These amounts reflect a mark to market adjustment recorded to the accompanying consolidated statements of operations.
During the six months ended June 30, 2022 and 2021, the Company recorded a change in fair of derivative liabilities of $ and $949,680, respectively. These amounts reflect a mark to market adjustment recorded to the accompanying consolidated statements of operations.
| 40 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
In connection with bifurcating the embedded conversion option and accounting for this instrument at fair value, the Company computed a fair value on the commitment date, and upon the initial valuation of this instrument, determined that the fair value of the liability exceeded the proceeds of the debt host instrument. As a result, the Company recorded a debt discount at the maximum amount allowed (the face amount of the debt), which required the overage to be recorded as a derivative expense.
For the three months years ended June 30, 2022 and 2021, the Company recorded a derivative expense of $ and $, respectively.
For the six months years ended June 30, 2022 and 2021, the Company recorded a derivative expense of $ and $1,775,057, respectively.
During the year ended December 31, 2021, in connection with the repayment of convertible notes which contained embedded conversion features, the related derivative liabilities ceased to exist.
During the three months ended June 30, 2022 and 2021, the Company recorded a gain of $ and $701,404, respectively, related to the settlement of convertible debt which contained an embedded conversion feature and was separately bifurcated and classified as a derivative liability. The Company has recorded these gains in the accompanying consolidated statements of operations as a component of gain on settlement of liabilities.
During the six months ended June 30, 2022 and 2021, the Company recorded a gain of $ and $842,982, respectively,
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 June 30, 2022 and December 31, 2021, respectively
| 41 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Note 8 – Commitments and Contingencies
Operating Lease
We have entered into various operating lease agreements, including our corporate headquarters. We account for leases in accordance with ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. In addition, a lessor is required to classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating. We determine if an arrangement is a lease, or contains a lease, at inception and record the lease in our financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at commencement to determine the present value of lease payments except when an implicit interest rate is readily determinable. We determine our incremental borrowing rate based on market sources including relevant industry data.
We have lease agreements with lease and non-lease components and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective with the exception of direct sales-type leases and production equipment classes embedded in supply agreements. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.
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.
| 42 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Our leases, where we are the lessee, do not include an option to extend the lease term. Our lease also includes an option to terminate the lease prior to the end of the agreed upon 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 June 30, 2022 and December 31, 2021, respectively, the Company has no financing leases as defined in ASC 842, “Leases.”
The tables below present information regarding the Company’s operating lease assets and liabilities at June 30, 2022 and December 31, 2021, respectively:
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Operating Leases | $ | 34,294 | $ | 73,618 | ||||
| Interest on lease liabilities | 11,598 | 6,542 | ||||||
| Total net lease cost | $ | 45,892 | $ | 80,160 | ||||
Supplemental balance sheet information related to leases was as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| Operating leases | ||||||||
| Operating lease ROU assets - net | $ | 452,374 | $ | 486,668 | ||||
| Operating lease liabilities - current | 37,733 | 49,352 | ||||||
| Operating lease liabilities - non-current | 419,574 | 438,903 | ||||||
| Total operating lease liabilities | $ | 457,307 | $ | 488,255 | ||||
| 43 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Supplemental cash flow and other information related to leases was as follows:
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, 2022 | June 30, 2021 | |||||||
| Cash paid for amounts included in measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases | $ | 30,948 | $ | 67,716 | ||||
| ROU assets obtained in exchange for lease liabilities | ||||||||
| Operating leases | $ | $ | 518,848 | |||||
| Weighted average remaining lease term (in years) | ||||||||
| Operating leases | 7.99 | 6.09 | ||||||
| Weighted average discount rate | ||||||||
| Operating leases | 5 | % | 8 | % | ||||
Future minimum lease payments at June 30, 2022
| 2022 (6 months) | $ | 29,526 | ||
| 2023 | 60,294 | |||
| 2024 | 61,876 | |||
| 2025 | 63,460 | |||
| Thereafter | 349,177 | |||
| Total lease payments | 564,333 | |||
| Less: amount representing interest | (107,026 | ) | ||
| Total lease obligations | $ | 457,307 |
In May 2021, the Company and its landlord mutually agreed to terminate the outstanding lease for ECS. The Company had an outstanding ROU liability of $228,752 at the date of termination. There was no gain or loss on lease termination.
| 44 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Contingencies – Legal Matters
True Wireless and Surge Holdings - Terracom Litigation
Global Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom believes Mr. Coffman and Mr. Carroll are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as such we believe True Wireless has a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc., but not in wireless sales. The complaint requests general damages plus fees and costs for tortious interference with a business relationship in their prayer for relief. They have made no written demand for damages at this point in time. The Company believes this matter is simply an anti-competitive attempt by Terracom to cause distress to True Wireless.
Surge Holdings – Juno Litigation
Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary.
Unimax - Litigation
On July 9, 2020, the Company entered into a settlement and release agreement with Unimax Communications, LLC (“Unimax”). The settlement is related to a complaint filed by Unimax alleging the Company is indebted pursuant to a purchase order and additional financing terms. The Company agreed to pay Unimax the total sum of $785,000 over a 24-month period. The settlement amount is included accounts payable and accrued expenses on the consolidated balance sheets. The balance was repaid in April 2021.
SurgePays – Ambess Litigation
On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of contract and prays for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion practice and discovery process.
| 45 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
True Wireless and Surge Pays - Litigation
Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox.
Note 9 – Stockholders’ Equity
Reverse Stock Split
On November 2, 2021, the Company effected a 1 for 50 reverse stock split of all classes of its stock. All share and per share amounts have been retroactively restated to the earliest period presented.
At June 30, 2022, the Company had three (3) classes of stock:
Common Stock
| - | shares authorized | |
| - | Par value - $ | |
| - | Voting at 1 vote per share |
| 46 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Series A, Convertible Preferred Stock
| - | shares authorized | |
| - | issued and outstanding | |
| - | Par value - $ | |
| - | 2/10s of a vote for each Series A share held (2,600,000 votes) | |
| - | Ranks senior to any other class of preferred stock | |
| - | Dividends - none | |
| - | Liquidation preference – none | |
| - | Rights of redemption - none | |
| - | Conversion into 1/10 of a share of common stock for each share held (1,300,000 common stock equivalents) |
Series C, Convertible Preferred Stock
| - | shares authorized | |
| - | ||
| - | Par value - $ | |
| - | Voting at 250 votes per share | |
| - | Ranks junior to any other class of preferred stock | |
| - | Dividends – equal to the per share amount (as converted basis) as the common stockholders should the Board of Directors declare a dividend | |
| - | Liquidation preference – original issue price plus any declared yet unpaid accrued dividends | |
| - | Rights of redemption - none | |
| - | Conversion into 250 shares of common stock for each share held |
In October 2021, all Series C, Preferred stockholders, representing shares issued and outstanding, agreed to convert their holdings into shares of common stock. The transaction had a net effect of $0 on stockholders’ equity.
Equity Transactions for the Six Months Ended June 30, 2022
Stock Issued as Direct Offering Costs
In April 2022, 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 $0 to stockholders’ equity.
| 47 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Stock Issued for Acquisition of Software
In June 2022, the Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash, of which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued shares of common stock having a fair value of $411,400 ($/share), based upon the quoted closing trading price.
Equity Transactions for the Year Ended December 31, 2021
NASDAQ Listing
On November 2, 2021, the Company was approved to be uplisted to NASDAQ. The common stock and warrants are traded on the Nasdaq Capital Market under the symbols SURG and SURGW, respectively.
Stock Issued for Services
The Company issued shares of common stock for services rendered, having a fair value of $99,436 ($ - $/share), based upon the quoted closing trading price.
Stock and Warrants Issued for Cash and Related Direct Offering Costs
The Company issued an aggregate shares of common stock for $21,294,800 ($ -$/share). In connection with raising these funds, the Company paid $2,222,952 in direct offering costs, resulting in net proceeds of $19,076,710.
Of the shares issued in 2021, shares and were sold in connection with the Company’s uplist to NASDAQ as follows:
On November 4, 2021, the Company issued units consisting of and over-allotment warrants. The units were sold at $ per unit for gross proceeds of $19,786,900 ($19,780,000 from the sale of units at $ and $6,900 from the sale of over-allotment warrants at $). The warrants are exercisable immediately at $4.73/share and expire three (3) years from the issuance date.
In connection with the Company’s sale of common stock, the Company incurred direct offering costs of $2,222,952 which were charged to additional paid-in capital. Net proceeds were $19,076,710.
| 48 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
On November 4, 2021, the Company issued 230,000 five (5) year warrants to the underwriters. These warrants are exercisable beginning May 1, 2022 until November 1, 2026. The exercise price is $4.73/share. The fair value of these warrants was $647,897 based upon the following assumptions:
| Expected term (years) | 5 | |
| Expected volatility | % | |
| Expected dividends | ||
| Risk free interest rate | 0.53% |
Since these warrants were issued as direct offering costs associated with the offering, the Company has accounted for these warrants as both a charge and increase to additional paid-in capital, resulting in a net effect on stockholders’ equity of $0.
Exercise of Warrants
The Company issued 2,133 shares of common stock in connection with a cashless exercise of warrants. The transaction had a net effect of $0 on stockholders’ equity.
Stock and Warrants Issued as Debt Discount
During 2021, the Company issued stock and warrants in connection with the issuance of debt and derivative liabilities totaling $3,562,829, which were recorded as debt discounts to be amortized over the life of the debt. The Company issued 18,000 shares of common stock along with 137,500 three (3) year warrants, having an exercise price of $8/share. The aggregate discount recorded was $2,645,890 for the stock and warrants which are reflected in the accompanying consolidated statements of stockholders’ equity. An additional discount of $102,194 was recorded in connection with the commitment date fair value of derivative liabilities for an aggregate discount of $2,748,084.
Fair value of the warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | 3 years | |
| Expected volatility | ||
| Expected dividends | ||
| Risk free interest rate | 0.53% |
| 49 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Conversion of Debt
The Company issued shares of common stock in connection with the conversion of convertible debt, having a fair value of $3,363,561 ($0.05 - $10.38/share), based upon the quoted closing trading price.
Make-whole Arrangement
The Company issued shares of common stock to debt holders that were entitled to shares upon the settlement of debt and related accrued interest. The shares had a fair value of $90,401 ($ - $/share), based upon the quoted closing trading price.
Stock Issued for Debt Modification
The Company issued shares of common stock in connection with the modification of debt arrangements. The shares had a fair value of $108,931 ($ - $/share), based upon the quoted closing trading price.
Stock Issued in Settlement of Liabilities
The Company issued shares of common stock to various vendors and debt holders to settle accounts payable, debt and derivative liabilities. The shares had a fair value of $1,997,977 ($ - $/share), based upon the quoted closing trading price. In connection with these debt settlements, the Company recorded a gain of $1,469,641.
Stock Issued in Acquisition of Membership Interest in ECS
On January 30, 2020, the Company entered into a Membership Interest Purchase Agreement and Stock Purchase Agreement with ECS Prepaid, ECS, CSLS and the Winfrey’s. Pursuant to the agreements, the Company acquired all of the membership interests of ECS Prepaid and all of the issued and outstanding stock of each ECS and CSLS. The agreements provide that the consideration is to be paid by the Company through the issuance of shares of the Company’s Common Stock. In addition, the agreements called for shares of Common Stock to be issued to the Winfrey’s on a monthly basis over a 12-month period. During 2021, the Company issued shares of common stock in full settlement of the agreements. The shares had a fair value of $17,900 ($/share), based upon the quoted closing trading price. During 2020, the Company issued shares.
| 50 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Stock Options
| 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, 2020 | 17,004 | $ | 16.00 | $ | $ | |||||||||||||||
| Vested and Exercisable - December 31, 2020 | $ | - | $ | - | $ | - | ||||||||||||||
| Unvested and non-exercisable - December 31, 2020 | 17,004 | $ | 16.00 | $ | - | $ | - | |||||||||||||
| Granted | $ | - | ||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Cancelled/Forfeited | ||||||||||||||||||||
| Outstanding - December 31, 2021 | 17,004 | $ | 16.00 | $ | $ | |||||||||||||||
| Vested and Exercisable - December 31, 2021 | 3,401 | $ | 16.00 | $ | - | $ | - | |||||||||||||
| Unvested and non-exercisable - December 31, 2021 | 13,603 | $ | 16.00 | $ | - | $ | - | |||||||||||||
| Granted | $ | - | ||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Cancelled/Forfeited | ||||||||||||||||||||
| Outstanding - June 30, 2022 | 17,004 | $ | 16.00 | $ | $ | |||||||||||||||
| Vested and Exercisable - June 30, 2022 | 6,801 | $ | 16.00 | $ | - | $ | - | |||||||||||||
| Unvested and non-exercisable - June 30, 2022 | 10,202 | $ | 16.00 | $ | - | $ | - | |||||||||||||
During 2022 and 2021, stock options vested, which were held by the Company’s Chief Financial Officer.
Compensation expense recorded for stock-based compensation is as follows for the three months ended June 30, 2022 and 2021, was $9,294 and $9,294, respectively.
Compensation expense recorded for stock-based compensation is as follows for the six months ended June 30, 2022 and 2021, was $18,588 and $18,588, respectively.
As of June 30, 2022, compensation cost related to the unvested options not yet recognized was $.
Weighted average period in which compensation will vest (years) years. The unvested stock option expense is expected to be recognized through March 2024.
| 51 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Warrants
Warrant activity for the six months ended June 30, 2022 and the year ended December 31, 2021 are summarized as follows:
| Warrants | Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||
| Outstanding - December 31, 2020 | 194,317 | $ | 32.50 | $ | ||||||||||||
| Vested and Exercisable - December 31, 2020 | 194,317 | $ | 32.50 | $ | ||||||||||||
| Granted | 5,935,450 | $ | 8.01 | - | - | |||||||||||
| Exercised | (2,133 | ) | $ | 12.50 | - | - | ||||||||||
| Cancelled/Forfeited | (44,650 | ) | $ | 23.49 | - | - | ||||||||||
| Outstanding - December 31, 2021 | 6,082,984 | $ | 8.68 | $ | ||||||||||||
| Vested and Exercisable - December 31, 2021 | 5,852,984 | $ | 8.70 | $ | ||||||||||||
| Unvested - December 31, 2021 | 230,000 | $ | 8.00 | $ | ||||||||||||
| Granted | 141,000 | $ | 4.73 | - | ||||||||||||
| Exercised | $ | - | ||||||||||||||
| Cancelled/Forfeited | (82,728 | ) | $ | 40.22 | - | |||||||||||
| Outstanding - June 30, 2022 | 6,141,256 | $ | 8.16 | $ | 14,100 | |||||||||||
| Vested and Exercisable - June 30, 2022 | 6,141,256 | $ | 8.16 | $ | 14,100 | |||||||||||
| Unvested and non-exercisable - June 30, 2022 | $ | $ | ||||||||||||||
Warrant Transactions for the Six Months Ended June 30, 2022
Debt Issue Costs
In connection with $1,700,000 in notes issued in March, April and May 2022 (See Note 5), the Company issued 51,000 warrants, which are accounted for as debt issue costs, having a fair value of $115,504.
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | 3 years | |
| Expected volatility | 119% - 120% | |
| Expected dividends | 0% | |
| Risk free interest rate | 2.45% - 2.80% |
| 52 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Interest Expense
In May 2022, a vendor increased the amount of credit the Company had for making purchases. In consideration for the increase, the Company issued 90,000 warrants, which are accounted for as interest expense, having a fair value of $212,608.
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | 3 | |
| Expected volatility | ||
| Expected dividends | ||
| Risk free interest rate | 2.71% |
Warrant Transactions for the Year Ended December 31, 2021
During 2021, the Company granted warrants to convertible note holders and additional warrants to note holders. These warrants were exercisable upon the grant date, had expiration dates ranging from 3 – 5 years, and exercise prices of $8 - $12/share.
Additionally, in connection with the NASDAQ uplisting, 5,290,000 warrants were sold for cash and an additional 230,000 warrants were issued as an underwriters’ discount. The 230,000 warrants are exercisable six (6) months from the grant date in May 2022. See above for additional discussion.
In connection with the Company’s NASDAQ uplisting, 433,017 warrants were repriced at a lower exercise price to better reflect the current market offering. No other terms had been modified. As a result, for the year ended December 31, 2021, the Company recorded a warrant modification expense of $74,476 in the accompanying consolidated statements of operations with an offsetting increase to additional paid in capital.
The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | 3 - 5 | |
| Expected volatility | 119% - 146% | |
| Expected dividends | 0% | |
| Risk free interest rate | 0.07% - 1.15% |
| 53 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
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 performance of its operating segments based on revenue and operating loss. All data below is prior to intercompany eliminations.
Segment information for the three and six months ended June 30, 2022 and 2021, are as follows:
| Three Months Ended June 30, 2022 | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| SurgePhone Wireless | $ | 11,023,046 | $ | 1,153 | $ | 22,008,923 | $ | 2,231 | ||||||||
| Torch Wireless | 9,045,610 | 12,107,763 | ||||||||||||||
| Surge Blockchain | 17,842 | 42,031 | 47,671 | 77,918 | ||||||||||||
| LogicsIQ | 3,631,943 | 4,588,502 | 5,925,016 | 7,996,905 | ||||||||||||
| Surge Fintech & ECS | 4,286,703 | 6,216,586 | 9,057,142 | 13,131,841 | ||||||||||||
| True Wireless | 529,656 | 1,157,981 | ||||||||||||||
| SurgePays | ||||||||||||||||
| Total | $ | 28,005,144 | $ | 11,377,928 | $ | 49,146,515 | $ | 22,366,876 | ||||||||
| Cost of revenues | ||||||||||||||||
| SurgePhone Wireless | $ | 9,601,230 | $ | 5,200 | $ | 18,388,023 | $ | 7,669 | ||||||||
| Torch Wireless | 9,057,816 | 12,150,025 | ||||||||||||||
| Surge Blockchain | 1,500 | 1,500 | 1,966 | |||||||||||||
| LogicsIQ | 2,763,592 | 3,833,860 | 4,764,012 | 6,800,813 | ||||||||||||
| Surge Fintech & ECS | 4,390,015 | 6,093,459 | 9,018,334 | 12,791,918 | ||||||||||||
| True Wireless | 118,600 | 306,062 | ||||||||||||||
| SurgePays | ||||||||||||||||
| Total | $ | 25,814,153 | $ | 10,051,119 | $ | 44,321,894 | $ | 19,908,428 | ||||||||
| Operating expenses | ||||||||||||||||
| SurgePhone Wireless | $ | 2,312 | $ | 12,151 | $ | 37,506 | $ | 23,913 | ||||||||
| Torch Wireless | 66,252 | 93,383 | ||||||||||||||
| Surge Blockchain | 52,601 | 4,169 | 52,971 | 12,644 | ||||||||||||
| LogicsIQ | 348,303 | 602,503 | 1,008,197 | 958,133 | ||||||||||||
| Surge Fintech & ECS | 300,195 | 375,809 | 642,319 | 773,349 | ||||||||||||
| True Wireless | 321,489 | 553,555 | ||||||||||||||
| SurgePays | 2,268,866 | 1,420,314 | 4,887,934 | 3,654,650 | ||||||||||||
| Total | $ | 3,038,529 | $ | 2,736,435 | $ | 6,722,310 | $ | 5,976,244 | ||||||||
| Income (loss) from operations | ||||||||||||||||
| SurgePhone Wireless | $ | 1,419,504 | $ | (16,198 | ) | $ | 3,583,394 | $ | (29,352 | ) | ||||||
| Torch Wireless | (78,458 | ) | (135,645 | ) | ||||||||||||
| Surge Blockchain | (36,259 | ) | 37,862 | (6,800 | ) | 63,308 | ||||||||||
| LogicsIQ | 520,048 | 152,139 | 152,807 | 237,959 | ||||||||||||
| Surge Fintech & ECS | (403,507 | ) | (252,682 | ) | (603,511 | ) | (433,426 | ) | ||||||||
| True Wireless | 89,567 | 298,364 | ||||||||||||||
| SurgePays | (2,268,866 | ) | (1,420,314 | ) | (4,887,934 | ) | (3,654,650 | ) | ||||||||
| Total | $ | (847,538 | ) | $ | (1,409,626 | ) | $ | (1,897,689 | ) | $ | (3,517,796 | ) | ||||
| 54 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(UNAUDITED)
Segment information for the Company’s assets and liabilities at June 30, 2022 and December 31, 2021, are as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| Total Assets | ||||||||
| SurgePhone Wireless | $ | 6,279,990 | $ | (107,845 | ) | |||
| Torch Wireless | 967,535 | |||||||
| Surge Blockchain | (614,404 | ) | (703,014 | ) | ||||
| LogicsIQ | 1,750,266 | 1,896,130 | ||||||
| Surge Fintech & ECS | 3,254,130 | 4,461,210 | ||||||
| True Wireless | (988,169 | ) | ||||||
| SurgePays | 17,853,346 | 14,941,890 | ||||||
| Total | $ | 29,490,863 | $ | 19,500,202 | ||||
| Total Liabilities | ||||||||
| SurgePhone Wireless | $ | 2,863,479 | $ | 28,933 | ||||
| Torch Wireless | 1,103,179 | |||||||
| Surge Blockchain | 198,197 | 202,045 | ||||||
| LogicsIQ | 2,373,351 | 3,181,807 | ||||||
| Surge Fintech & ECS | 36,178 | 275,351 | ||||||
| True Wireless | 2,430,268 | |||||||
| SurgePays | 20,744,080 | 9,830,477 | ||||||
| Total | $ | 27,318,464 | $ | 15,948,881 | ||||
Note 11 – Subsequent Events
Warrant Exercise
In July 2022, the Company issued shares of common stock in connection with a cashless exercise of warrants.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This statement contains forward-looking statements within the meaning of the Securities Act. Discussions containing such forward-looking statements may be found throughout this statement. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the matters set forth in this statement. The accompanying consolidated financial statements as of June 30, 2022 and 2021 and for the three months and six months then ended includes the accounts of SurgePays, Inc. and its wholly owned subsidiaries during the period owned by SurgePays, Inc.
SurgePays, Inc (“SurgePays”, “we” the “Company”) was incorporated in Nevada on August 18, 2006, is technology and telecommunications company focused on the underbanked and underserved communities. SurgePays blockchain fintech platform utilizes a suite of financial and prepaid products to convert corner stores and bodegas into tech-hubs for underbanked neighborhoods. SurgePays telecom subsidiaries SurgePhone Wireless and Torch Wireless provide mobile broadband to low-income consumers nationwide.
About SurgePays, Inc.
SurgePays, Inc. is a financial technology and telecommunications company focused on providing essential services to the underbanked community. The Company’s blockchain fintech platform utilizes a suite of financial and prepaid products to convert corner stores into tech-hubs for underbanked neighborhoods. The Company’s telecom subsidiaries provide mobile broadband, voice and SMS text messaging to both subsidized and direct retail prepaid customers.
SurgePhone Wireless, Torch Wireless and LocoRabbit Wireless
SurgePhone and Torch, wholly owned subsidiaries of SurgePays, are a mobile virtual network operator (MVNO) company with 2 branded channels of business. SurgePhone and Torch are licensed by the Federal Communications Commission (the “FCC”) to provide subsidized access to quality internet through mobile broadband services to consumers qualifying under the federal guidelines of the Affordable Connectivity Program (the “ACP”). The ACP (the successor program, as of March 1, 2022 to the Emergency Broadband Benefit program) provides SurgePhone and Torch up to a $100 reimbursement for the cost of each tablet device distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. SurgePhone and Torch combined are licensed to offer subsidized mobile broadband to all fifty states.
LocoRabbit is the retail pure prepaid wireless offering with talk, text, and 4G LTE data at prices that are lower than other well-known prepaid competitors. Available nationwide, LocoRabbit is sold online direct to consumers through the nationwide network of convenience stores, gas stations, mini-marts, bodegas and tiendas connected to the SurgePays software platform. The SIM kits usually hang from a peg hook on the SurgePays gift card rack. Due to owning the payment platform, SurgePays is able to exclusively offer an industry high commission to the retailer for top-ups paid monthly at the client’s store.
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SurgePays Fintech (ECS Business)
We refer to the collective operations of ECS Prepaid, LLC, a Missouri limited liability company, Electronic Check Services, Inc., a Missouri corporation, and Central States Legal Services, Inc., a Missouri corporation, as “SurgePays Fintech.” This was previously referred to as the “ECS Business.”
SurgePays Fintech has been a financial technology tech and wireless top-up platform for over 15 years. Through a series of transactions between October 2019 and January 2020, we acquired the ECS Business primarily for the favorable ACH banking relationship; a fintech transactions platform processing over 20,000 transactions a day at approximately 8,000 independently owned retail stores. The goal was to incorporate our blockchain components into the existing ECS Business network. As of January 1, 2021, we believe the ECS Business platform has been successfully merged into our platform with secure ledger data backups and will continue to serve as the proven backbone for wireless top-up transactions and wireless product aggregation for the SurgePays nationwide network.
ShockWave CRM™
SurgePays acquired the Software as a Service (SaaS) Customer Relationship Management (CRM) and Billing System software platform “MVNO Cloud Services” on June 7, 2022. SurgePays is rebranding the software as ShockWave CRM. Payment for the software consisted of $300,000 in cash, of which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued 85,000 shares of common stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.
ShockWave is an end-to-end cloud-based SaaS offering an Omnichannel CRM, Billing system and carrier integrations specific to the telecommunication and broadband industry. Some of these services include sales agent management, device and SIM inventory management, order processing and provisioning, retail POS activations and payments, customer service management, retention tools, billing, and payments.
Surge Blockchain
SurgePays Blockchain Software is a back-office marketplace platform offering wholesale consumable goods direct to convenience stores, bodegas, minimarts, tiendas and other corner stores who are transacting on the SurgePays Fintech platform. The wholesale e-commerce platform is easily accessed through the secure app interface – similar to a website. We believe what makes this sales platform unique is that it also offers the merchant the ability to order wholesale consumable goods at a significant discount from traditional distributors with one touch ease. We are able to sell products at a significant discount by using on demand Direct Store Delivery (DSD.) Our platform is connected directly to manufactures, who ship products direct to the store while cutting out the middleman. The goal of the SurgePays Portal is to leverage the competitive advantage and efficiencies of e-commerce to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas, and supermarkets while increasing profit margins for these stores. These products include herbal stimulants, energy pills and shot drinks, dry foods, communication accessories, novelties, PPP products, bagged snacks, processed meats, automotive parts and many more goods, all in one convenient wholesale e-commerce platform.
LogicsIQ, Inc.
LogicsIQ, Inc. is a software development company providing marketing business intelligence (“BI”), lead generation, and case management solutions primarily to law firms in the mass tort industry. The company’s CRM “Intake Logics” facilitates the entire life cycle of converting a potential lead into a signed retainer client integrated into the law firms case management software. Our proven strategy of delivering cost-effective retained cases to our attorney and law firm clients means those clients are better able to manage their media and advertising budgets and reach targeted audiences more quickly and effectively when utilizing our proprietary data driven analytics dashboards. Our ability to deliver transparent results has bolstered our reputation as an industry leader and solidified a solid client base.
On April 29, 2022, we confidentially submitted an amended draft registration statement on Form S-1 with the SEC relating to an initial public offering of LogicsIQ’s common stock. If, after the SEC completes its review process, and subject to market and other conditions, the registration statement is declared effective and the initial public offering closes, LogicsIQ will still remain majority owned by SurgePays.
Centercom
Since 2019, we have owned a 40% equity interest in Centercom Global, S.A. de C.V. (“Centercom”). Centercom is a bilingual operations center providing the Company with sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Centercom is based in El Salvador.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2022 AND 2021
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations, stockholders’ deficit, or cash flows.
At June 30, 2022 and December 31, 2021, respectively, on the consolidated balance sheets, the Company separated its various types of debt into more distinct categories. Certain accounts payable were reclassified from non-current to current.
For the three months and six months ended June 30, 2022 and 2021, respectively, on the consolidated statements of operations, the Company reclassified certain expenses amongst general and administrative and cost of revenues.
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Revenues during the three months ended June 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Revenue | $ | 28,005,144 | $ | 11,377,928 | ||||
| Cost of revenue (exclusive of depreciation and amortization) | 25,814,153 | 10,051,119 | ||||||
| General and administrative expenses | 3,038,529 | 2,736,435 | ||||||
| Loss from operations | $ | (847,538 | ) | $ | (1,409,626 | ) | ||
Revenue increased $16,627,216 (146%) primarily as a result of an increases in revenue for: SurgePhone Wireless of $11,021,892 and Torch Wireless of $9,045,610 offset by a decrease in Surge Fintech/ECS of $2,029,477 and LogicsIQ of $956,558. Loss from operations decreased by $562,088 (40%) primarily as a result of an increase in operating income in SurgePhone Wireless and Torch Wireless.
General and administrative expenses during the three months ended June 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Depreciation and amortization | $ | 191,561 | $ | 180,282 | ||||
| Selling, general and administration | 2,846,968 | 2,556,153 | ||||||
| Total | $ | 3,038,529 | $ | 2,736,435 | ||||
Depreciation and amortization increased $11,279 primarily as a result of purchased software during the quarter.
Selling, general and administrative expenses during the three months ended June 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Contractors and consultants | $ | 421,560 | $ | 711,768 | ||||
| Professional services | 500,247 | 191,800 | ||||||
| Compensation | 853,960 | 965,890 | ||||||
| Webhosting/internet | 63,499 | 147,477 | ||||||
| Advertising and marketing | 52,524 | 115,533 | ||||||
| Other | 955,178 | 423,685 | ||||||
| Total | $ | 2,846,968 | $ | 2,556,153 | ||||
| 58 |
Selling, general and administrative costs (S, G & A) increased by $290,815 (11%). The detail changes are discussed below:
| * | Contractors and consultants decreased to $421,560 in 2022 from $711,768 in 2021 primarily due to reclassing of the call center expenses to cost of goods sold in 2022. |
| * | Professional services increased from $191,800 in 2021 to $500,247 in 2022 primarily as a result of legal expenses related to various legal proceedings. |
| * | Compensation decreased from $965,890 in 2021 to $853,960 in 2022 primarily as a result of elimination of the President position after the passing of Anthony Nuzzo, Jr. |
| * | Webhosting/internet costs decreased to $63,499 in 2022 from $147,477 in 2021. |
| * | Advertising and marketing costs decreased to $52,524 in 2022 from $115,533 in 2021 primarily due to a normalization of advertising costs in 2022. The Company implemented new advertising and marketing campaigns in the first half of 2021. |
| * | Other costs increased to $955,178 in 2022 from $423,685 in 2021 primarily due to the following changes period over period: |
| ● | Building expenses decreased by $22,624 | |
| ● | insurance expense increased by $357,326 as a result of additional coverages required as part of uplisting to Nasdaq in the fourth quarter of 2021. | |
| ● | Office expenses increased by $21,015 | |
| ● | other operating expense increased by $116,455 as a result of additional costs related to the Nasdaq listing. |
Other (expense) income during the three months ended June 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Interest, net | $ | (566,999 | ) | $ | (2,096,600 | ) | ||
| Change in fair value of derivative liability | - | 645,830 | ||||||
| PPP loan forgiveness | 524,143 | - | ||||||
| Amortization of debt discount | (37,068 | ) | - | |||||
| Gain on equity investment in Centercom | 35,519 | 49,145 | ||||||
| Gain on deconsolidation (True Wireless) | - | 1,895,871 | ||||||
| Gain (loss) on settlement of liabilities | - | 701,404 | ||||||
| Total Other (expense) income - net | $ | (44,405 | ) | $ | 1,195,650 | |||
Interest expense decreased due to the repayment of various notes during 2021.
The gain on equity investment in Centercom of $35,519 in 2022 compared to an equity gain of $49,145 in 2021.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2022 AND 2021
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations, stockholders’ deficit, or cash flows.
At June 30, 2022 and December 31, 2021, respectively, on the consolidated balance sheets, the Company separated its various types of debt into more distinct categories. Certain accounts payable were reclassified from non-current to current.
For the three months and six months ended June 30, 2022 and 2021, respectively, on the consolidated statements of operations, the Company reclassified certain expenses amongst general and administrative and cost of revenues.
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Revenues during the six months ended June 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Revenue | $ | 49,146,515 | $ | 22,366,876 | ||||
| Cost of revenue (exclusive of depreciation and amortization) | 44,321,894 | 19,908,428 | ||||||
| General and administrative expenses | 6,722,310 | 5,976,244 | ||||||
| Loss from operations | $ | (1,897,689 | ) | $ | (3,517,796 | ) | ||
Revenue increased $26,779,639 (120%) primarily as a result of an increases in revenue for: SurgePhone Wireless of $22,006,692 and Torch Wireless of $12,107,763 offset by a decrease in Surge Fintech/ECS of $4,174,293 and LogicsIQ of $2,071,889. Loss from operations decreased by $1,620,107 (46%) primarily as a result of an increase in operating income in SurgePhone Wireless and Torch Wireless.
General and administrative expenses during the six months ended June 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Depreciation and amortization | $ | 360,839 | $ | 398,240 | ||||
| Selling, general and administration | 6,361,471 | 5,578,004 | ||||||
| Total | $ | 6,722,310 | $ | 5,976,244 | ||||
Depreciation and amortization decreased $37,401 primarily as a result of fully depreciated assets.
Selling, general and administrative expenses during the six months ended June 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Contractors and consultants | $ | 971,150 | $ | 1,090,317 | ||||
| Professional services | 666,537 | 729,120 | ||||||
| Compensation | 2,582,442 | 1,927,093 | ||||||
| Webhosting/internet | 157,499 | 365,877 | ||||||
| Advertising and marketing | 136,006 | 562,292 | ||||||
| Other | 1,847,837 | 903,305 | ||||||
| Total | $ | 6,361,471 | $ | 5,578,004 | ||||
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Selling, general and administrative costs (S, G & A) increased by $783,467 (14%). The detail changes are discussed below:
| * | Contractors and consultants decreased to $971,150 in 2022 from $1,090,317 in 2021 primarily due to reclassing of the call center expenses to cost of goods sold in 2022. |
| * | Professional services decreased from $729,120 in 2021 to $666,537 in 2022 primarily as a result of legal expenses related to the uplist to Nasdaq. |
| * | Compensation increased from $1,927,093 in 2021 to $2,582,442 in 2022 primarily as a result of one-time bonuses paid to various management personnel. |
| * | Webhosting/internet costs decreased to $157,499 in 2022 from $365,877 in 2021. |
| * | Advertising and marketing costs decreased to $136,006 in 2022 from $562,292 in 2021 primarily due to a normalization of advertising costs in 2022. The Company implemented new advertising and marketing campaigns in the first half of 2021. |
| * | Other costs increased to $1,847,837 in 2022 from $903,305 in 2021 primarily due to the following changes period over period: |
| ● | Building expenses decreased by $36,576 | |
| ● | insurance expense increased by $709,748 as a result of additional coverages required as part of uplisting to Nasdaq in the fourth quarter of 2021. | |
| ● | Office expenses increased by $33,655. | |
| ● | other operating expense increased by $112,820 as a result of additional costs related to the Nasdaq listing. |
Other (expense) income during the six months ended June 30, 2022 and 2021 consisted of the following:
| 2022 | 2021 | |||||||
| (unaudited) | (unaudited) | |||||||
| Interest, net | $ | (736,644 | ) | $ | (3,400,459 | ) | ||
| Change in fair value of derivative liability | - | 949,680 | ||||||
| PPP loan forgiveness | 524,143 | - | ||||||
| Derivative expense | - | (1,775,057 | ) | |||||
| Amortization of debt discount | (37,068 | ) | - | |||||
| Gain on equity investment in Centercom | 10,336 | (24,628 | ) | |||||
| Gain on deconsolidation | - | 1,895,870 | ||||||
| Gain (loss) on settlement of liabilities | - | 842,982 | ||||||
| Total Other (expense) income - net | $ | (239,233 | ) | $ | (1,511,611 | ) | ||
Interest expense decreased due to the repayment of various notes during 2021.
The loss on equity investment in Centercom of $10,336 in 2022 compared to an equity loss of $24,628 in 2021.
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.
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The Company evaluated performance of its operating segments based on revenue and operating loss. Segment information for the three and nine months ended June 30, 2022 and 2021, are as follows:
| Three Months Ended June 30, 2022 | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | ||||||||||||||||
| SurgePhone Wireless | $ | 11,023,046 | $ | 1,153 | $ | 22,008,923 | $ | 2,231 | ||||||||
| Torch Wireless | 9,045,610 | - | 12,107,763 | - | ||||||||||||
| Surge Blockchain | 17,842 | 42,031 | 47,671 | 77,918 | ||||||||||||
| LogicsIQ | 3,631,943 | 4,588,502 | 5,925,016 | 7,996,905 | ||||||||||||
| Surge Fintech & ECS | 4,286,703 | 6,216,586 | 9,057,142 | 13,131,841 | ||||||||||||
| True Wireless | - | 529,656 | - | 1,157,981 | ||||||||||||
| SurgePays | - | - | - | - | ||||||||||||
| Total | $ | 28,005,144 | $ | 11,377,928 | $ | 49,146,515 | $ | 22,366,876 | ||||||||
| Cost of revenues | ||||||||||||||||
| SurgePhone Wireless | $ | 9,601,230 | $ | 5,200 | $ | 18,388,023 | $ | 7,669 | ||||||||
| Torch Wireless | 9,057,816 | - | 12,150,025 | - | ||||||||||||
| Surge Blockchain | 1,500 | - | 1,500 | 1,966 | ||||||||||||
| LogicsIQ | 2,763,592 | 3,833,860 | 4,764,012 | 6,800,813 | ||||||||||||
| Surge Fintech & ECS | 4,390,015 | 6,093,459 | 9,018,334 | 12,791,918 | ||||||||||||
| True Wireless | - | 118,600 | - | 306,062 | ||||||||||||
| SurgePays | - | - | - | - | ||||||||||||
| Total | $ | 25,814,153 | $ | 10,051,119 | $ | 44,321,894 | $ | 19,908,428 | ||||||||
| Operating expenses | ||||||||||||||||
| SurgePhone Wireless | $ | 2,312 | $ | 12,151 | $ | 37,506 | $ | 23,913 | ||||||||
| Torch Wireless | 66,252 | - | 93,383 | - | ||||||||||||
| Surge Blockchain | 52,601 | 4,169 | 52,971 | 12,644 | ||||||||||||
| LogicsIQ | 348,303 | 602,503 | 1,008,197 | 958,133 | ||||||||||||
| Surge Fintech & ECS | 300,195 | 375,809 | 642,319 | 773,349 | ||||||||||||
| True Wireless | - | 321,489 | - | 553,555 | ||||||||||||
| SurgePays | 2,268,866 | 1,420,314 | 4,887,934 | 3,654,650 | ||||||||||||
| Total | $ | 3,038,529 | $ | 2,736,435 | $ | 6,722,310 | $ | 5,976,244 | ||||||||
| Income (loss) from operations | ||||||||||||||||
| SurgePhone Wireless | $ | 1,419,504 | $ | (16,198 | ) | $ | 3,583,394 | $ | (29,352 | ) | ||||||
| Torch Wireless | (78,458 | ) | - | (135,645 | ) | - | ||||||||||
| Surge Blockchain | (36,259 | ) | 37,862 | (6,800 | ) | 63,308 | ||||||||||
| LogicsIQ | 520,048 | 152,139 | 152,807 | 237,959 | ||||||||||||
| Surge Fintech & ECS | (403,507 | ) | (252,682 | ) | (603,511 | ) | (433,426 | ) | ||||||||
| True Wireless | - | 89,567 | - | 298,364 | ||||||||||||
| SurgePays | (2,268,866 | ) | (1,420,314 | ) | (4,887,934 | ) | (3,654,650 | ) | ||||||||
| Total | $ | (847,538 | ) | $ | (1,409,626 | ) | $ | (1,897,689 | ) | $ | (3,517,796 | ) | ||||
| 62 |
Segment information for the Company’s assets and liabilities at June 30, 2022 and December 31, 2021, are as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| Total Assets | ||||||||
| SurgePhone Wireless | $ | 6,279,990 | $ | (107,845 | ) | |||
| Torch Wireless | 967,535 | - | ||||||
| Surge Blockchain | (614,404 | ) | (703,014 | ) | ||||
| LogicsIQ | 1,750,266 | 1,896,130 | ||||||
| Surge Fintech & ECS | 3,254,130 | 4,461,210 | ||||||
| True Wireless | - | (988,169 | ) | |||||
| SurgePays | 17,853,346 | 14,941,890 | ||||||
| Total | $ | 29,490,863 | $ | 19,500,202 | ||||
| Total Liabilities | ||||||||
| SurgePhone Wireless | $ | 2,863,479 | $ | 28,933 | ||||
| Torch Wireless | 1,103,179 | - | ||||||
| Surge Blockchain | 198,197 | 202,045 | ||||||
| LogicsIQ | 2,373,351 | 3,181,807 | ||||||
| Surge Fintech & ECS | 36,178 | 275,351 | ||||||
| True Wireless | - | 2,430,268 | ||||||
| SurgePays | 20,744,080 | 9,830,477 | ||||||
| Total | $ | 27,318,464 | $ | 15,948,881 | ||||
SurgePhone Wireless and Torch Wireless
The SurgePhone Wireless revenue for the three months ended June 30,2022 increased by $11,021,893 as compared to the three months ended June 30, 2021. The increase was a result of being newly licensed to provide the Emergency Broadband Benefit (“EBB”) program and Affordable Connectivity Program (“ACP”). These programs provided $11,020,520 in new revenue for the quarter ended June 30, 2022. Cost of revenues for the three months ended June 30, 2022, increased by $9,596,030 from the same period ended June 30, 2021, as a result of the purchases of devices, data usage expenses and commission paid for the ACP program. The operating income increased from a loss of $16,198 as of the three months ended June 30, 2021, to operating income of $1,419,504 as of three months ended June 30, 2022.
The Torch Wireless revenue for the three months ended June 30,2022 increased by $9,045,610 as compared to the three months ended June 30, 2021. The increase was a result of the acquisition of Torch Wireless on January 1, 2022 which is licensed to provide the Emergency Broadband Benefit (“EBB”) program and Affordable Connectivity Program (“ACP”). This program provided $9,045,610 in new revenue from the same period ended June 30, 2021, Cost of revenues for the three months ended June 30, 2022 increased by $9,057,816 as a result of the purchases of devices, data usage expenses and commission paid for the ACP program. The operating loss was $78,458 as of three months ended June 30, 2022.
The SurgePhone Wireless revenue for the six months ended June 30,2022 increased by $22,006,692 as compared to the six months ended June 30, 2021. The increase was a result of being newly licensed to provide the Emergency Broadband Benefit (“EBB”) program and Affordable Connectivity Program (“ACP”). These programs provided $22,004,660 in new revenue for the six months ended June 30, 2022. Cost of revenues for the six months ended June 30, 2022, increased by $ 18,380,354 from the same period ended June 30, 2021, as a result of the purchases of devices, data usage expenses and commission paid for the ACP program. The operating income increased from a loss of $29,352 as of the six months ended June 30, 2021, to operating income of $3,583,394 as of six months ended June 30, 2022.
The Torch Wireless revenue for the six months ended June 30,2022 increased by $12,107,763 as compared to the six months ended June 30, 2021. The increase was a result of the acquisition of Torch Wireless on January 1, 2022 which is licensed to provide the Emergency Broadband Benefit (“EBB”) program and Affordable Connectivity Program (“ACP”). This program provided $12,107,763 in new revenue from the same period ended June 30, 2021, Cost of revenues for the six months ended June 30, 2022 increased by $12,150,025 as a result of the purchases of devices, data usage expenses and commission paid for the ACP program. The operating loss was $135,645 as of six months ended June 30, 2022.
Surge Blockchain
The revenue for the three months ended June 30, 2022 decreased by $24,189 compared to the three months ended June 30, 2021. The operating income for the three months ended June 30, 2022 decreased by $74,121 compared to the same period in 2021.
The revenue for the six months ended June 30, 2022 decreased by $30,247 compared to the six months ended June 30, 2021. The operating income for the six months ended June 30, 2022 decreased by $70,108 compared to the same period in 2021.
LogicsIQ
The revenue for the three months ended June 30, 2022 decreased by $956,559 compared to the three months ended June 30, 2021. LogicsIQ has two main revenue streams, leads generation and retained services. The lead generation segment decreased by $264,267 as of the three months ended June 30, 2022 from the same period in 2021. The retained services segment decreased by $692,292 as of the three months ended June 30, 2022 from the same period in 2021. Operating income increased by $367,909 for comparable periods of 2022 to 2021. LogicsIQ ended with an operating gain of $520,048 for the three months ended June 30, 2022 compared to an operating income of $152,139 for the same period in 2021.
The revenue for the six months ended June 30, 2022 decreased by $2,071,889 compared to the six months ended June 30, 2021. LogicsIQ has two main revenue streams, leads generation and retained services. The lead generation segment decreased by $851,336 as of the six months ended June 30, 2022 from the same period in 2021. The retained services segment decreased by $1,220,553 as of the six months ended June 30, 2022 from the same period in 2021. Operating income decreased by $85,152 for comparable periods of 2022 to 2021. LogicsIQ ended with an operating gain of $152,807 for the six months ended June 30, 2022 compared to an operating income of $237,959 for the same period in 2021.
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Surge Fintech and ECS
The revenue for the three months ended June 30, 2022 was $4,286,703 compared to $6,216,586 for the same period in 2021. The decrease of 31% was a continuing result of the impact of COVID-19 and our strategic plan to move our salesforce from independent contractors to employed salespersons.
The revenue for the six months ended June 30, 2022 was $9,057,142 compared to $13,131,841 for the same period in 2021. The decrease of 31% was a continuing result of the impact of COVID-19 and our strategic plan to move our salesforce from independent contractors to employed salespersons.
True Wireless (TW)
On May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc. (“TW”), however we retained $1,097,659 in liabilities which consisted of $1,077,659 in accounts payable and accrued expenses as well as $20,000 in related party loans. In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%, with a default interest rate of 10%. The Company will receive 25 payments of principal and accrued interest totaling $7,461 commencing in September 2023.
Overall
Each segment was impacted by COVID-19 in varying degrees, however, the overall increase in revenue of $16,627,216 from 2021 to 2022 for the three months ended June 30, can be attributable to opening of some markets and the new revenue stream of the EBB program. The net operating loss improved by $562,088 from three months ended June 30, 2021 to the three months ended June 30, 2022.
The overall increase in revenue of $26,779,639 from 2021 to 2022 for the six months ended June 30, can be attributable to opening of some markets and the new revenue stream of the EBB program. The net operating loss improved by $1,620,107 from six months ended June 30, 2021 to the six months ended June 30, 2022.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
At June 30, 2022 and December 31, 2021, our current assets were $22,747,128 and $13,892,681 respectively, and our current liabilities were $21,330,965 and $9,998,194, respectively, which resulted in a working capital surplus of $1,416,163 on June 30, 2022 and a working capital surplus of $3,894,487 on December 31, 2021.
Total assets at June 30, 2022 and December 31, 2021 amounted to $29,490,863 and $19,500,202, respectively. At June 30, 2022, assets consisted of current assets of $22,747,128, net property and equipment of $887,374, net intangible assets of $3,106,730, goodwill of $1,666,782, equity investment in Centercom (related party) of $453,624, note receivable of $176,851 and net operating lease right of use asset of $452,374, as compared to current assets of $13,892,681, net property and equipment of $200,448, net intangible assets of $3,433,484, goodwill of $866,782, equity investment in Centercom (related party) of $443,288, notes receivable of $176,851 and net operating lease right of use asset of $486,668 at December 31, 2021.
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At June 30, 2022, our total liabilities of $27,318,464 increased by $11,369,583 from $15,948,881 at December 31, 2021.
At June 30, 2022, our total stockholders’ equity was $2,172,399 as compared to $3,551,321 at December 31, 2021. The principal reason for the decrease in stockholders’ equity was the impact of the net loss for the period.
The following table sets forth the major sources and uses of cash for the three months ended June 30, 2022 and 2021.
| June 30, 2022 | June 30, 2021 | |||||||
| Net cash used in operating activities | $ | (3,148,073 | ) | $ | (4,855,247 | ) | ||
| Net cash used in investing activities | (1,111,401 | ) | (371,299 | ) | ||||
| Net cash provided by financing activities | 6,680,504 | 5,127,375 | ||||||
| Net change in cash and cash equivalents | $ | 2,421,030 | $ | (99,171 | ) | |||
At December 31, 2021, the Company had the following material commitments and contingencies.
Debt See Note 5 to the Consolidated Financial Statements.
Related party transactions - See Notes 2, 5 and 8 to the Consolidated Financial Statements.
Cash requirements and capital expenditures – At the current level of operations, the Company has to borrow funds to meet basic operating costs.
Known trends and uncertainties – The Company is planning to acquire other businesses with similar business operations. The uncertainty of the economy may increase the difficulty of raising funds to support the planned business expansion.
We believe we will have a net income for the three months ended September 30, 2022 and continue to increase net income over the remaining periods of 2022. We expect the ACP revenue stream to increase month over month for the remainder of 2022. Our attention will shift quickly from our hyper growth in the broadband sector to the emphasis of on-boarding merchants and stores on our fintech platform. This will allow us to fully implement our sales strategy, resulting in increased revenue in all segments of our business. At this point in time, the Company does not anticipate the need to raise capital through any equity plays. We may need from time to time a line of credit to enhance the hyper growth in the ACP programs.
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On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and included a provision for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”). The PPP provides small businesses with funds to pay up to eight (8) weeks of payroll costs, including benefits. Funds received under the PPP may also be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or a portion of the loans may be forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from the date of issuance, and all payments are deferred for the first nine (6) months of the loan. Any unforgiven balance of loan principal and accrued interest at the end of the nine (6) month loan deferral period is amortized in equal monthly installments over the remaining 18-months of the loan term. On January 25, 2022, the Company was notified of $371,665 in forgiveness of the $498,082 SBA guaranteed PPP loan with Bank3. The outstanding balance of $126,418 is a 30-year, 1% annual interest rate. In addition, the Company received $636,600 in several Economic Injury Disaster Loans with the Small Business Administration. These loans all carry a 3.75% interest rate payable over 30 years. First payment due 12 months from date of note.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Our management has determined that, as of June 30, 2022, the Company’s disclosure controls are effective, but the Company lacks segregation of duties similar to other companies our size.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
From time to time, we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. Except as described below, we are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or results of operations.
The following is summary of threatened, pending, asserted or un-asserted claims against us or any of our wholly owned subsidiaries for which there have been material developments since December 31, 2021.
| (1) | 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.
| (2) | Surge Holdings – Juno Litigation |
Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary.
| (3) | Unimax - Litigation |
On July 9, 2020, the Company entered into a settlement and release agreement with Unimax Communications, LLC (“Unimax”). The settlement is related to a complaint filed by Unimax alleging the Company is indebted pursuant to a purchase order and additional financing terms. The Company agreed to pay Unimax the total sum of $785,000 over a 24-month period. The settlement amount is included accounts payable and accrued expenses on the consolidated balance sheets. The balance was repaid in April 2021.
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| (4) | SurgePays – Ambess Litigation |
On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of contract and prays for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion practice and discovery process.
| (5) | True Wireless and Surge Pays - Litigation |
Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox.
ITEM 1A: RISK FACTORS
Not applicable.
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ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three-month period ended June 30, 2022, the Company did not issue any shares not previously reported in Current Report on Form 8-K or a quarterly report on Form 10-Q except as follows:
SurgePays acquired the Software as a Service (SaaS) Customer Relationship Management (CRM) and Billing System software platform “MVNO Cloud Services” on June 7, 2022. In addition to a cash payment, 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.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4: MINE SAFETY DISCLOSURES.
Not applicable
ITEM 5: OTHER INFORMATION.
We are reporting the following information in lieu of reporting on a Current Report on Form 8-K under Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
To finance the purchase of inventory, in March 2022 through May 2022, the Company borrowed a total of $1.7 million. This amount was comprised of (a) $1 million in total via four loans from one lender; (b) $400,000 ($200,000 from each of two lenders); (c) $200,000 ($100,000 from each of two lenders); and (d) $100,000 ($50,000 from each of two lenders). The loans were evidenced by promissory notes with a maturity date of six (6) months from the date of issuance.
Together with these notes the Company issued a total of 51,000 three (3) year warrants with each such warrant having an exercise price of $4.73.
The preceding description of the promissory notes and warrants is a summary of their material terms, does not purport to be complete, and is qualified in its entirety by reference to the forms of promissory notes and warrants, copies of which are being filed as, respectively, Exhibits 4.1 and 4.2 to this Quarterly Report on Form 10-Q and are incorporated herein by reference.
We are reporting the following information in lieu of reporting on a Current Report on Form 8-K under Items 1.01 1 Entry into a Material Definitive Agreement and 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
In April 2022, a maximum of $3,000,000 was made available to the Company, issued pursuant to a series of 270-day (9 months) revolving notes for purposes of purchasing inventory. In June 2022, this amount was increased to $5,000,000. In addition to the revolving notes, the Company entered into a loan agreement and security agreement in connection with these loans.
The notes will accrue interest a monthly rate of 2% (24% annualized). The Company may take drawdowns based upon eligible accounts receivable. In the event that eligible accounts receivable is less than 80% of the loan amount, within four (4) business days, the Company will be required to make a payment to the lender so that the loan amount is no greater than 80% of the then current eligible accounts receivable. The maximum amount outstanding under the loan is the lesser of $5,000,000 or 80% of eligible accounts receivable. Additionally, any related accrued interest associated with this mandatory payment will also be due. These advances are secured by all assets of the Company.
The preceding description of the revolving notes, loan agreement (as amended), and security agreement is a summary of their material terms, does not purport to be complete, and is qualified in its entirety by reference to the forms of the revolving notes, loan agreement (as amended), and security agreement, copies of which are being filed as, respectively, Exhibits 4.3, 10.1, and 10.2 to this Quarterly Report on Form 10-Q and are incorporated herein by reference.
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We are reporting the following information in lieu of reporting on a Current Report on Form 8-K under Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
Mr. Anthony Evers (the “Executive”) has been the Chief Financial Officer of the Company since May 2020. On August 8, 2022, the Company entered into a new employment agreement (the “Agreement”) with the Executive.
Following is a summary of the key provisions of the Agreement.
Term of Employment: The Agreement has an effective date of August 8, 2022 and continues for a period of five years (the “Initial Term”). The Agreement will automatically renew and continue for successive one year terms unless terminated pursuant to qualifying termination events (the “Renewal Term”). In addition, either party may terminate the Agreement by sending written notice to the other party, not more than 270 days and not less than 90 days before the end of the then-existing term of employment, of such party’s desire to terminate the Agreement at the end of the then-existing term.
Base Compensation: During the term of the Agreement, the Executive will receive a base salary of $450,000 per year (the “Base”) and, provided that the Company’s EBITDA was positive in the prior calendar year, the Base will be increased on January 1 of each year by six percent (6%) per annum.
Signing Bonus: The Company shall pay the Executive a one-time signing bonus of Fifty percent (50%) of the base salary equivalent to $225,000) (the “Signing Bonus”) within thirty (30) days following August 8, 2022 less payroll deductions and all required withholdings. If the Executive resigns from employment with the Company without Good Reason (as defined in the Agreement) or the Company terminates the Executive’s employment for Cause (as defined in the Agreement), in each case prior to August 8, 2023, the Executive must repay to the Company a pro rata portion of the Signing Bonus representing the remainder of the period between the date of termination and August 8, 2023.
Restricted Vesting Shares: The Company shall grant to the Executive under the yet to be adopted incentive plan a restricted stock award for 500,000 shares (the “Restricted Shares”) of common stock of the Company. Vesting of the Restricted Shares shall occur in bi-annual installments over five years commencing on December 31, 2022 on which date 50,000 shares of the Restricted Shares shall vest and continuing to vest thereafter on each of July 1 and December 31, for the years of 2023-2027.
Restricted Signing Shares: The Company shall grant to the Executive 100,000 shares of the Company’s common stock within five (5) business days of stockholder approval of the incentive plan.
Cash Bonus: The Executive will receive a cash bonus each year of the greater of (i) between 2.5% and 10% of the Company’s calendar year EBITDA (with the marginal percentage decreasing as EBITDA increases from $1 million to $3 million). By way of example only, if EBITDA is $1.5 million, Executive will receive $137,500 ((10% of $1 million = $100,000) plus (7.5% of $500,000 = $37,500)) and (ii) between 9% and 45% of base salary determined by the relationship between the Company’s annual performance and an annual target performance set each year by mutual agreement between the Board of Directors of the Company (the “Board”) and the Executive (with the percentage of base salary increasing as the percentage of target increases from 79% to over 150%).
Stock Bonus: The Company will issue, out of its equity incentive plan to be approved by its shareholders in the future, three different categories of stock bonuses and one category of options:
| (i) | EBITDA based issuances - 150,000 shares of common stock upon the Company first reaching positive cash flow EBITDA for a quarter of any amount and then reaching positive cash flow EBITDA for a quarter of milestones of $1 million, $3 million, and $5 million. | |
| (ii) | Market Capitalization based issuances - 150,000 shares of common stock upon the Company reaching the following market capitalization milestones: $250 million, $500 million, $1 billion, $2 billion, $3 billion, $4 billion, and $5 billion. | |
| (iii) | Business Metrics Growth based issuances - award incentives for achieving 25,000, 50,000, 100,000 active stores on the SurgePays network and 250,000, 500,000, 1,000,000 Wireless MVNO/Mobile broadband or digital content customers - up to a total of 825,000 shares of common stock. In addition, Executive will be issued 150,000 shares of common stock per increment of 500,000 total subscribers (Wireless MVNO, Mobile Broadband or digital content customers) of the Company beyond 1 million total subscribers. | |
| (iv) | Options to purchase 75,000 shares of common stock on January 1st of each year from 2023 through 2026. In addition, the Company will issue 75,000 options to Executive in 2022 following shareholder approval of the Company’s equity incentive plan. |
Benefits: The Executive will be eligible to participate in all health, medical, dental, and life insurance employee benefits as are available from time to time to other key executive employees and their families. The Executive will be entitled to receive an annual car allowance of up to $3,750 per year and home office expense reimbursement of up to $500 per month. The Executive is also entitled to be reimbursed for up to $10,000 per year in costs associated with income tax preparation and estate planning.
Termination and Severance: The Company or the Executive may terminate the Agreement and the Executive’s employment in various circumstances and, depending on the circumstances, the benefits that may be due following such termination are described below.
For a termination by the Company with Cause (as defined in the Agreement), no severance benefits are payable.
For a termination due to death, disability, by Executive following a Change in Control, or by Executive due to Constructive Termination (both as defined in the Agreement), the Executive will be entitled to (a) a payment equal to the greater of (i) two (2) years’ worth of the then-existing Base and the last year’s bonus and (ii) the Base payable through the remaining Initial Term (if applicable). The Executive will also be entitled to retain his benefits for the remainder of the Initial Term or Renewal Term, as then applicable.
Executive Covenants: In consideration of the Executive’s continued employment with the Company and the benefits and payments described in the Agreement, the Executive agrees to (i) nondisclosure of Company confidential information during his term of employment with the Company and for five years thereafter; (ii) not to compete with the Company during the term of his employment (owning up to 10% of a publicly traded company that competes with the Company is permitted); (iii) for 12 months following termination of his Employment, not to solicit customers and not to recruit or hire the Company’s employees. The non-solicit and non-compete provisions are not applicable if termination of Employment was by Executive following a Change in Control or by Executive due to Constructive Termination; and (iv) not to disparage the Company or its officers, executives or Board members.
The preceding description of the Agreement is a summary of its material terms, does not purport to be complete, and is qualified in its entirety by reference to the Agreement, a copy of which is being filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
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ITEM 6: EXHIBITS
+ Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
*Filed herewith.
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SURGEPAYS, INC. | ||
| Date: August 11, 2022 | ||
| By: | /s/ Kevin Brian Cox | |
| Kevin Brian Cox | ||
Chief Executive Officer (Principal Executive Officer) | ||
| Date: August 11, 2022 | /s/ Anthony Evers |
| Anthony Evers | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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Exhibit 4.1
SurgePays, Inc.
Promissory Note
| Issuance Date: March 25, 2022 | Principal Amount: | $100,000.00 |
FOR VALUE RECEIVED, SurgePays, Inc., a Nevada corporation (the “Company”), hereby promises to pay to the order of [Name of Lender] with primary address at [Address] (the “Holder”) the amount set out above as the Principal Amount (the “Principal”) when due, whether upon the Maturity Date (as defined below), acceleration or otherwise (in each case in accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding Principal at the applicable Interest Rate from the date set out above as the Issuance Date (the “Issuance Date”) until the same becomes due and payable, upon the Maturity Date or acceleration, redemption or otherwise (in each case in accordance with the terms hereof).
The Principal Amount is $100,000.00. The Holder shall pay $100,000.00 of consideration upon the Issuance Date.
(1) GENERAL TERMS
(a) Payment of Principal. The “Maturity Date” shall be the earlier of (i) the date that is six months from the Issuance Date, and (ii) the occurrence of Event of Default.
(b) Interest. An interest charge of nineteen percent (19%) per annum (“Interest Rate”) shall accrue on any outstanding balance owing hereunder. Interest hereunder shall be paid on the Maturity Date to the Holder or its assignee in whose name this Note is registered on the records of the Company regarding registration and transfers of Notes.
(c) Security. This Note shall not be secured by any collateral or any assets pledged to the Holder.
(d) Warrant. As additional consideration for agreeing to fund the proceeds of under this Note, the Company shall issue on the Issuance Date a common stock purchase warrant entitling the Holder to purchase up to 3000 shares of the Company’s common stock, in the form attached hereto as Exhibit A (the “Warrant”)
(2) EVENTS OF DEFAULT.
(a) An “Event of Default”, wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
(i) The Company’s failure to pay to the Holder any amount of Principal, Interest, or other amounts when and as due under this Note (including, without limitation, the Company’s failure to pay any redemption payments or amounts hereunder);
(ii) The Company or any subsidiary of the Company shall commence, or there shall be commenced against the Company or any subsidiary of the Company under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company or any subsidiary of the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary of the Company or there is commenced against the Company or any subsidiary of the Company any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of sixty-one (61) days; or the Company or any subsidiary of the Company is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary of the Company suffers any appointment of any custodian, private or court appointed receiver or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of sixty-one (61) days; or the Company or any subsidiary of the Company makes a general assignment for the benefit of creditors; or the Company or any subsidiary of the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any subsidiary of the Company shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any subsidiary of the Company shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary of the Company for the purpose of effecting any of the foregoing;
(iii) The Company or any subsidiary of the Company shall default in any of its obligations under any other note or any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of the Company or any subsidiary of the Company in an amount exceeding $50,000, whether such indebtedness now exists or shall hereafter be created; and
(iv) The Company shall become late or delinquent in its filing requirements as a fully-reporting issuer registered with the Securities & Exchange Commission; and
(3) Other Provisions.
(a) Prepayment. The Company may prepay this Note at any time without penalty.
(b) Default Interest. Following an Event of Default this Note shall bear interest at twenty-six percent (26%) per annum until the Event of Default is cured, if capable of being cured.
(4) REISSUANCE OF THIS NOTE.
(a) Assignability. The Company may not assign this Note. This Note will be binding upon the Company and its successors and will inure to the benefit of the Holder and its successors and assigns and may be assigned by the Holder to anyone of its choosing without Company’s approval.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note representing the outstanding Principal.
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(5) NOTICES. Any notices, consents, waivers or other communications required or permitted to be given under the terms hereof must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party) (iii) upon receipt, when sent by email; or (iv) one (1) business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be those set forth in the communications and documents that each party has provided the other immediately preceding the issuance of this Note or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) business days prior to the effectiveness of such change. Written confirmation of receipt (i) given by the recipient of such notice, consent, waiver or other communication, (ii) mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (iii) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.
The addresses for such communications shall be:
If to the Company, to:
SurgePays, Inc.
ATTN: KEVIN BRIAN COX, CEO
3124 Brother Blvd
Suite 104
Bartlett, TN 38133
Email:
If to the Holder:
[LENDER]
[ADDRESS]
EMAIL:
(6) APPLICABLE LAW AND VENUE. This Note shall be governed by and construed in accordance with the laws of the State of Nevada, without giving effect to conflicts of laws thereof. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of Nevada or in the federal courts located in the city of Las Vegas, in the State of Nevada. Both parties and the individuals signing this Agreement agree to submit to the jurisdiction of such courts.
(7) WAIVER. Any waiver by the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note. Any waiver must be in writing.
(8) LIQUIDATED DAMAGES. Holder and Company agree that in the event Company fails to comply with any of the terms or provisions of this Note, Holder’s damages would be uncertain and difficult (if not impossible) to accurately estimate because of the parties’ inability to predict future interest rates and other relevant factors. Accordingly, Holder and Company agree that any fees, balance adjustments, default interest or other charges assessed under this Note are not penalties but instead are intended by the parties to be, and shall be deemed, liquidated damages.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Convertible Note to be duly executed by a duly authorized officer as of the date set forth above.
| COMPANY: | ||
| SurgePays, Inc. | ||
| By: | /s/ Tony Evers | |
| Name: | Tony Evers | |
| Title: | Chief Financial Officer | |
| HOLDER: | |
| [NAME OF LENDER] | |
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EXHIBIT A
Form of Warrant
THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SURGEPAYS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
SurgePays, Inc.
WARRANT TO PURCHASE SHARES OF COMMON STOCK
1. Issuance. In consideration of good and valuable consideration as set forth in the Note, the receipt and sufficiency of which are hereby acknowledged by SurgePays, Inc., a Nevada corporation (the “Company”); [HOLDER], its successors and/or registered assigns (the “Holder”), is hereby granted the right to purchase at any time on or after the First Exercise Date (as defined below) until March __, 2025 (the “Expiration Date”), 3000 fully paid and nonassessable shares (the “Warrant Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), as such number of Warrant Shares may be adjusted from time to time pursuant to the terms and conditions of this Warrant to Purchase Shares of Common Stock (this “Warrant”). This Warrant is being issued pursuant to that certain Promissory Note of the Company issued to the Holder in the principal amount of $100,000.00 on March __, 2022 (the “Note”).
This Warrant was originally issued to the Holder on March __, 2022 (the “Issue Date”).
2. Exercise of Warrant.
2.1. General.
(a) This Warrant is exercisable in whole or in part at any time and from time to time commencing on the Issue Date and ending on the Expiration Date. Such exercise shall be effectuated by submitting to the Company (either by delivery to the Company or by email or facsimile transmission) a completed and duly executed Notice of Exercise substantially in the form attached to this Warrant as Exhibit A (the “Notice of Exercise”). The date such Notice of Exercise is either faxed, emailed or delivered to the Company shall be the “Exercise Date,” provided that, if such exercise represents the full exercise of the outstanding balance of the Warrant, the Holder shall tender this Warrant to the Company within five (5) Trading Days thereafter, but only if the Warrant Shares to be delivered pursuant to the Notice of Exercise have been delivered to the Holder as of such date. The Notice of Exercise shall be executed by the Holder and shall indicate (i) the number of Warrant Shares (as defined below) to be issued pursuant to such exercise, and (ii) if applicable (as provided below), whether the exercise is a cashless exercise.
For purposes of this Warrant, the term “Trading Day” means any day during which the principal market on which the Common Stock is traded (the “Principal Market”) shall be open for business.
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(b) To the extent this Warrant is not previously exercised, and in the event that the Warrant Shares are not registered under an effective registration statement of the Company, the Holder may elect to receive Warrant Shares, in lieu of a cash exercise, equal to the value of this Warrant determined in the manner described below (or of any portion thereof remaining unexercised) by surrender of this Warrant and a Notice of Exercise, in which event the Company shall issue to Holder a number of Shares computed using the following formula:
X = Y (A-B)
A
| Where | X = | the number of Warrant Shares to be issued to Holder. | |
| Y = | the number of Warrant Shares that the Holder elects to purchase under this Warrant (at the date of such calculation). | ||
| A = | the Market Price (at the date of such calculation). | ||
| B = | Exercise Price (as adjusted to the date of such calculation). |
For the purposes of this Warrant, the following terms shall have the following meanings:
“Affiliate” shall mean an affiliate as such term is defined in Rule 144 under the Securities Act of 1933, as amended (or a successor rule).
“Closing Price” shall mean the 4:00 P.M. last sale price of the Common Stock on the Principal Market on the relevant Trading Day(s), as reported by Bloomberg LP (or if that service is not then reporting the relevant information regarding the Common Stock, a comparable reporting service of national reputation selected by the Holder and reasonably acceptable to the Company) (“Bloomberg”) for the relevant date.
“DWAC” shall mean the Deposit/Withdrawal at Custodian system.
“DWAC Conditions” shall mean those conditions necessary to permit a person to receive shares electronically via DWAC.
“Exercise Price” shall mean $4.73 per share of Common Stock, subject to adjustments herein.
“First Exercise Date” shall mean the date that is six months after the date upon which the Common Stock was listed for trading on the Nasdaq.
“Market Price” shall mean the Closing Price for the Common Stock on the Trading Day that is two Trading Days prior to the Exercise Date.
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(c) If the Notice of Exercise form elects a “cash” exercise (or if the cashless exercise referred to in the immediately preceding subsection (b) is not available in accordance with the terms hereof), the Exercise Price per share of Common Stock for the Warrant Shares shall be payable, at the election of the Holder, in cash or by certified or official bank check or by wire transfer in accordance with instructions provided by the Company at the request of the Holder.
(d) Upon the appropriate payment to the Company, if any, of the Exercise Price for the Warrant Shares, together with the surrender of this Warrant (if required), the Company shall promptly, but in no case later than the date that is three (3) Trading Days following the date the Exercise Price is paid to the Company (or with respect to a “cashless exercise,” the date that is three (3) Trading Days following the Exercise Date) (the “Delivery Date”), provided that all DWAC Eligible Conditions are then satisfied, deliver or cause the Company’s transfer agent (the “Transfer Agent”) to deliver the applicable Warrant Shares electronically via DWAC to the account designated by the Holder on the Notice of Exercise. If all DWAC Eligible Conditions are not then satisfied, the Company shall instead issue and deliver or cause to be issued and delivered (via reputable overnight courier) to the address as specified in the Notice of Exercise, a certificate, registered in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder shall be entitled. For the avoidance of doubt, the Company has not met its obligation to deliver Warrant Shares by the Delivery Date unless the Transfer Agent has posted the shares for DWAC pickup and the Holder or its broker, as applicable, has been notified of this availability, or if the DWAC Eligible Conditions are not then satisfied, has actually received the certificate representing the applicable Warrant Shares no later than the close of business on the relevant Delivery Date pursuant to the terms set forth above.
(e) The Holder shall be deemed to be the holder of the Warrant Shares issuable to it in accordance with the provisions of this Section 2.1 on the Exercise Date.
2.2. Ownership Limitation. If at any time after the Closing, the Holder shall or would receive shares of Common Stock in payment of interest or principal under Note, upon conversion of Note, under the Warrant, or upon exercise of the Warrant, so that the Buyer would, together with other shares of Common Stock held by it or its Affiliates, own or beneficially own by virtue of such action or receipt of additional shares of Common Stock a number of shares exceeding 9.99% of the number of shares of Common Stock outstanding on such date (the “Maximum Percentage”), the Company shall not be obligated and shall not issue to the Holder and the Holder shall not receive any shares of Common Stock which would exceed the Maximum Percentage, but only until such time as the Maximum Percentage would no longer be exceeded by any such receipt of shares of Common Stock by the Holder. The foregoing limitations are enforceable, unconditional and non-waivable and shall apply to all Affiliates and assigns of the Holder.
3. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver to the Holder a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void.
4. Rights of the Holder. The Holder shall not, by virtue of this Warrant alone, be entitled to any rights of a stockholder in the Company, either at law or in equity, and the rights of the Holder with respect to or arising under this Warrant are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein.
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5. Certain Adjustments.
5.1. Capital Adjustments. If the Company shall at any time prior to the expiration of this Warrant subdivide the Common Stock, by split-up or stock split, or otherwise, or combine its Common Stock, or issue additional shares of its Common Stock as a dividend, the number of Warrant Shares issuable upon the exercise of this Warrant shall forthwith be automatically increased proportionately in the case of a subdivision, split or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the Exercise Price, Market Price (in the event of a cashless exercise), and other applicable amounts. Any adjustment under this Section 5.1 shall become effective automatically at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.
5.2. Reclassification, Reorganization and Consolidation. In case of any reclassification, capital reorganization, or change in the capital stock of the Company (other than as a result of a subdivision, combination, or stock dividend provided for in Section 5.1 above), then the Company shall make appropriate provision so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities and property receivable in connection with such reclassification, reorganization, or change by a holder of the same number of shares of Common Stock as were purchasable by the Holder immediately prior to such reclassification, reorganization, or change. In any such case appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities and property deliverable upon exercise hereof, and appropriate adjustments shall be made to the purchase price per Warrant Share payable hereunder, provided the aggregate purchase price shall remain the same.
6. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock issuable on the exercise of this Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder and any Warrant Agent (as defined below) appointed pursuant to Section 8 hereof. Nothing in this Section 6 shall be deemed to limit any other provision contained herein.
7. Transfer to Comply with the Securities Act. This Warrant, and the Warrant Shares, have not been registered under the 1933 Act. This Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant may only be sold, transferred, pledged or hypothecated (other than to an Affiliate) if (a) there exists an effective registration statement under the 1933 Act relating to such security or (b) the Company has received an opinion of counsel reasonably satisfactory to the Company that registration is not required under the 1933 Act. Until such time as registration has occurred under the 1933 Act, each certificate for this Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section 7. Any such transfer shall be accompanied by a transferor assignment substantially in the form attached to this Warrant as Exhibit B (the “Transferor Assignment”), executed by the transferor and the transferee and submitted to the Company. Upon receipt of the duly executed Transferor Assignment, the Company shall register the transferee thereon as the new Holder on the books and records of the Company and such transferee shall be deemed a “registered holder” or “registered assign” for all purposes hereunder, and shall have all the rights of the Holder.
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8. Warrant Agent. The Company may, by written notice to the Holder, appoint an agent (a “Warrant Agent”) for the purpose of issuing shares of Common Stock on the exercise of this Warrant pursuant hereto, exchanging this Warrant pursuant hereto, and replacing this Warrant pursuant hereto, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such Warrant Agent.
9. Transfer on the Company’s Books. Until this Warrant is transferred on the books of the Company, the Company may treat the Holder as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.
10. Notices. Any notice required or permitted hereunder shall be given in the manner provided in the subsection titled “Notices” in the Note, the terms of which are incorporated herein by reference.
11. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant, together with the Note, taken together, contain the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings with respect to the subject matter hereof and thereof other than as expressly contained herein and therein.
12. Governing Law. This Warrant shall be governed by and interpreted in accordance with the laws of the State of Nevada, without giving effect to the principles thereof regarding the conflict of laws. The Company and, by accepting this Warrant, the Holder, each irrevocably (a) consent to and expressly submit to the exclusive personal jurisdiction of any state or federal court sitting in New York in connection with any dispute or proceeding arising out of or relating to this Warrant, (b) agree that all claims in respect of any such dispute or proceeding may only be heard and determined in any such court, (c) expressly submit to the venue of any such court for the purposes hereof, and (d) waive any claim of improper venue and any claim or objection that such courts are an inconvenient forum or any other claim or objection to the bringing of any such proceeding in such jurisdictions or to any claim that such venue of the suit, action or proceeding is improper. The Company and, by accepting this Warrant, the Holder, each hereby irrevocably consent to the service of process of any of the aforementioned courts in any such proceeding by the mailing of copies thereof by reputable overnight courier (e.g., FedEx) or certified mail, postage prepaid, to such party’s address as provided for herein, such service to become effective ten (10) calendar days after such mailing. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS WARRANT OR ANY TRANSACTION CONTEMPLATED HEREBY.
13. Remedies. The remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and, without limiting any other remedies available to the Holder in the Transaction Documents, law or equity, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.
14. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Signature delivered via facsimile or email shall be considered original signatures for purposes hereof.
15. Descriptive Headings. Descriptive headings of the sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
16. Attorney’s Fees. In the event of any litigation or dispute arising from this Warrant, the parties agree that the party who is awarded the most money shall be deemed the prevailing party for all purposes and shall therefore be entitled to an additional award of the full amount of the attorneys’ fees and expenses paid by said prevailing party in connection with the litigation and/or dispute without reduction or apportionment based upon the individual claims or defenses giving rise to the fees and expenses. Nothing herein shall restrict or impair a court’s power to award fees and expenses for frivolous or bad faith pleading.
17. Severability. Whenever possible, each provision of this Warrant shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be invalid or unenforceable in any jurisdiction, such provision shall be modified to achieve the objective of the parties to the fullest extent permitted and such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Warrant or the validity or enforceability of this Warrant in any other jurisdiction.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by an officer thereunto duly authorized.
Dated: March __, 2022
| THE COMPANY: | ||
| SurgePays, Inc. | ||
| By: | ||
| Name: | Tony Evers | |
| Title: | Chief Financial Officer | |
[Signature page to Warrant]
EXHIBIT A
NOTICE OF EXERCISE OF WARRANT
| TO: | (COMPANY) |
| ATTN: _______________ | |
| VIA FAX TO: ( )______________ | |
| VIA EMAIL TO: ( )______________ |
The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant to Purchase Shares of Common Stock dated as of _______1 (the “Warrant”), to purchase shares of the common stock, $0.001 par value (“Common Stock”), of SurgePays, Inc., and tenders herewith payment in accordance with Section 2 of the Warrant, as follows:
| _______ | CASH:$__________________________ | = | (Exercise Price x Warrant Shares) | |
| _______ | Payment is being made by: | |||
| _____ | enclosed check | |||
| _____ | wire transfer | |||
| _____ | other | |||
| _______ | CASHLESS EXERCISE: |
Net number of Warrant Shares to be issued to Holder: ______*
* X = Y (A-B)
A
| Where | X = | the number of Warrant Shares to be issued to Holder. | |
| Y = | the number of Warrant Shares that the Holder elects to purchase under this Warrant (at the date of such calculation). | ||
| A = | the Market Price (at the date of such calculation). | ||
| B = | Exercise Price (as adjusted to the date of such calculation). |
Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Warrant.
1 Insert date of Warrant
It is the intention of the Holder to comply with the provisions of Section 2.2 of the Warrant regarding certain limits on the Holder’s right to exercise thereunder. The Holder believes this exercise complies with the provisions of such Section 2.2. Nonetheless, to the extent that, pursuant to the exercise effected hereby, the Holder would have more shares of Common Stock than permitted under Section 2.2, this notice should be amended and revised, ab initio, to refer to the exercise which would result in the issuance of the maximum number of such shares permitted under such provision. Any exercise above such amount is hereby deemed void and revoked.
As contemplated by the Warrant, this Notice of Exercise is being sent by facsimile or email to the fax number and officer indicated above.
If this Notice of Exercise represents the full exercise of the outstanding balance of the Warrant, the Holder either (1) has previously surrendered the Warrant to the Company or (2) will surrender (or cause to be surrendered) the Warrant to the Company at the address indicated above by express courier within five (5) Trading Days after delivery or email or facsimile transmission of this Notice of Exercise; provided that the Warrant Shares to be delivered pursuant to this Notice of Exercise have been delivered to the Holder as of such date.
To the extent the Warrant Shares are not able to be delivered to the Holder via the DWAC system, please deliver certificates representing the Warrant Shares to the Holder via reputable overnight courier after receipt of this Notice of Exercise (by facsimile transmission or otherwise) to:
_____________________________________
_____________________________________
_____________________________________
| Dated: | |
| ___________________________ | |
| [Name of Holder] | |
| By:________________________ |
EXHIBIT B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of the Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading “Transferees” the right represented by the Warrant to Purchase Shares of Common Stock dated as of ________2 (the “Warrant”) to purchase the percentage and number of shares of common stock, $0.001 par value (“Common Stock”), of SurgePays, Inc. (“COMPANY”) specified under the headings “Percentage Transferred” and “Number Transferred,” respectively, opposite the name(s) of such person(s), and appoints each such person attorney to transfer the undersigned’s respective right on the books of the Company, with full power of substitution in the premises.
| Transferees | Percentage Transferred | Number Transferred |
| Dated:___________, ______ | ||
| ______________________________ | ||
| [Transferor Name must conform to the name of Holder as specified on the face of the Warrant] | ||
| By: ___________________________ | ||
| Name: _________________________ |
| Signed in the presence of: | |
| _________________________ | |
| (Name) | |
| ACCEPTED AND AGREED: | |
| _________________________ | |
| [TRANSFEREE] | |
| By: _______________________ | |
| Name: _____________________ |
2 Insert Date of Warrant
Exhibit 4.2
THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SURGEPAYS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
SurgePays, Inc.
WARRANT TO PURCHASE SHARES OF COMMON STOCK
1. Issuance. In consideration of good and valuable consideration as set forth in the Note, the receipt and sufficiency of which are hereby acknowledged by SurgePays, Inc., a Nevada corporation (the “Company”); [Name of Lender] its successors and/or registered assigns (the “Holder”), is hereby granted the right to purchase at any time on or after the First Exercise Date (as defined below) until May 28, 2025 (the “Expiration Date”), Six Thousand (6,000) fully paid and nonassessable shares (the “Warrant Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), as such number of Warrant Shares may be adjusted from time to time pursuant to the terms and conditions of this Warrant to Purchase Shares of Common Stock (this “Warrant”). This Warrant is being issued pursuant to that certain Promissory Note of the Company issued to the Holder in the principal amount of $200,000.00 on May 27, 2022 (the “Note”).
This Warrant was originally issued to the Holder on May 27, 2022 (the “Issue Date”).
2. Exercise of Warrant.
2.1. General.
(a) This Warrant is exercisable in whole or in part at any time and from time to time commencing on the Issue Date and ending on the Expiration Date. Such exercise shall be effectuated by submitting to the Company (either by delivery to the Company or by email or facsimile transmission) a completed and duly executed Notice of Exercise substantially in the form attached to this Warrant as Exhibit A (the “Notice of Exercise”). The date such Notice of Exercise is either faxed, emailed or delivered to the Company shall be the “Exercise Date,” provided that, if such exercise represents the full exercise of the outstanding balance of the Warrant, the Holder shall tender this Warrant to the Company within five (5) Trading Days thereafter, but only if the Warrant Shares to be delivered pursuant to the Notice of Exercise have been delivered to the Holder as of such date. The Notice of Exercise shall be executed by the Holder and shall indicate (i) the number of Warrant Shares (as defined below) to be issued pursuant to such exercise, and (ii) if applicable (as provided below), whether the exercise is a cashless exercise.
For purposes of this Warrant, the term “Trading Day” means any day during which the principal market on which the Common Stock is traded (the “Principal Market”) shall be open for business.
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(b) To the extent this Warrant is not previously exercised, and in the event that the Warrant Shares are not registered under an effective registration statement of the Company, the Holder may elect to receive Warrant Shares, in lieu of a cash exercise, equal to the value of this Warrant determined in the manner described below (or of any portion thereof remaining unexercised) by surrender of this Warrant and a Notice of Exercise, in which event the Company shall issue to Holder a number of Shares computed using the following formula:
X = Y (A-B)
A
| Where | X = | the number of Warrant Shares to be issued to Holder. | |
| Y = | the number of Warrant Shares that the Holder elects to purchase under this Warrant (at the date of such calculation). | ||
| A = | the Market Price (at the date of such calculation). | ||
| B = | Exercise Price (as adjusted to the date of such calculation). |
For the purposes of this Warrant, the following terms shall have the following meanings:
“Affiliate” shall mean an affiliate as such term is defined in Rule 144 under the Securities Act of 1933, as amended (or a successor rule).
“Closing Price” shall mean the 4:00 P.M. last sale price of the Common Stock on the Principal Market on the relevant Trading Day(s), as reported by Bloomberg LP (or if that service is not then reporting the relevant information regarding the Common Stock, a comparable reporting service of national reputation selected by the Holder and reasonably acceptable to the Company) (“Bloomberg”) for the relevant date.
“DWAC” shall mean the Deposit/Withdrawal at Custodian system.
“DWAC Conditions” shall mean those conditions necessary to permit a person to receive shares electronically via DWAC.
“Exercise Price” shall mean $4.73 per share of Common Stock, subject to adjustments herein.
“First Exercise Date” shall mean the date that is six months after the date upon which the Common Stock was listed for trading on the Nasdaq.
“Market Price” shall mean the Closing Price for the Common Stock on the Trading Day that is two Trading Days prior to the Exercise Date.
(c) If the Notice of Exercise form elects a “cash” exercise (or if the cashless exercise referred to in the immediately preceding subsection (b) is not available in accordance with the terms hereof), the Exercise Price per share of Common Stock for the Warrant Shares shall be payable, at the election of the Holder, in cash or by certified or official bank check or by wire transfer in accordance with instructions provided by the Company at the request of the Holder.
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(d) Upon the appropriate payment to the Company, if any, of the Exercise Price for the Warrant Shares, together with the surrender of this Warrant (if required), the Company shall promptly, but in no case later than the date that is three (3) Trading Days following the date the Exercise Price is paid to the Company (or with respect to a “cashless exercise,” the date that is three (3) Trading Days following the Exercise Date) (the “Delivery Date”), provided that all DWAC Eligible Conditions are then satisfied, deliver or cause the Company’s transfer agent (the “Transfer Agent”) to deliver the applicable Warrant Shares electronically via DWAC to the account designated by the Holder on the Notice of Exercise. If all DWAC Eligible Conditions are not then satisfied, the Company shall instead issue and deliver or cause to be issued and delivered (via reputable overnight courier) to the address as specified in the Notice of Exercise, a certificate, registered in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder shall be entitled. For the avoidance of doubt, the Company has not met its obligation to deliver Warrant Shares by the Delivery Date unless the Transfer Agent has posted the shares for DWAC pickup and the Holder or its broker, as applicable, has been notified of this availability, or if the DWAC Eligible Conditions are not then satisfied, has actually received the certificate representing the applicable Warrant Shares no later than the close of business on the relevant Delivery Date pursuant to the terms set forth above.
(e) The Holder shall be deemed to be the holder of the Warrant Shares issuable to it in accordance with the provisions of this Section 2.1 on the Exercise Date.
2.2. Ownership Limitation. If at any time after the Closing, the Holder shall or would receive shares of Common Stock in payment of interest or principal under Note, upon conversion of Note, under the Warrant, or upon exercise of the Warrant, so that the Buyer would, together with other shares of Common Stock held by it or its Affiliates, own or beneficially own by virtue of such action or receipt of additional shares of Common Stock a number of shares exceeding 9.99% of the number of shares of Common Stock outstanding on such date (the “Maximum Percentage”), the Company shall not be obligated and shall not issue to the Holder and the Holder shall not receive any shares of Common Stock which would exceed the Maximum Percentage, but only until such time as the Maximum Percentage would no longer be exceeded by any such receipt of shares of Common Stock by the Holder. The foregoing limitations are enforceable, unconditional and non-waivable and shall apply to all Affiliates and assigns of the Holder.
3. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver to the Holder a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void.
4. Rights of the Holder. The Holder shall not, by virtue of this Warrant alone, be entitled to any rights of a stockholder in the Company, either at law or in equity, and the rights of the Holder with respect to or arising under this Warrant are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein.
5. Certain Adjustments.
5.1. Capital Adjustments. If the Company shall at any time prior to the expiration of this Warrant subdivide the Common Stock, by split-up or stock split, or otherwise, or combine its Common Stock, or issue additional shares of its Common Stock as a dividend, the number of Warrant Shares issuable upon the exercise of this Warrant shall forthwith be automatically increased proportionately in the case of a subdivision, split or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the Exercise Price, Market Price (in the event of a cashless exercise), and other applicable amounts. Any adjustment under this Section 5.1 shall become effective automatically at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.
| 3 |
5.2. Reclassification, Reorganization and Consolidation. In case of any reclassification, capital reorganization, or change in the capital stock of the Company (other than as a result of a subdivision, combination, or stock dividend provided for in Section 5.1 above), then the Company shall make appropriate provision so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities and property receivable in connection with such reclassification, reorganization, or change by a holder of the same number of shares of Common Stock as were purchasable by the Holder immediately prior to such reclassification, reorganization, or change. In any such case appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities and property deliverable upon exercise hereof, and appropriate adjustments shall be made to the purchase price per Warrant Share payable hereunder, provided the aggregate purchase price shall remain the same.
6. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock issuable on the exercise of this Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder and any Warrant Agent (as defined below) appointed pursuant to Section 8 hereof. Nothing in this Section 6 shall be deemed to limit any other provision contained herein.
7. Transfer to Comply with the Securities Act. This Warrant, and the Warrant Shares, have not been registered under the 1933 Act. This Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant may only be sold, transferred, pledged or hypothecated (other than to an Affiliate) if (a) there exists an effective registration statement under the 1933 Act relating to such security or (b) the Company has received an opinion of counsel reasonably satisfactory to the Company that registration is not required under the 1933 Act. Until such time as registration has occurred under the 1933 Act, each certificate for this Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section 7. Any such transfer shall be accompanied by a transferor assignment substantially in the form attached to this Warrant as Exhibit B (the “Transferor Assignment”), executed by the transferor and the transferee and submitted to the Company. Upon receipt of the duly executed Transferor Assignment, the Company shall register the transferee thereon as the new Holder on the books and records of the Company and such transferee shall be deemed a “registered holder” or “registered assign” for all purposes hereunder, and shall have all the rights of the Holder.
8. Warrant Agent. The Company may, by written notice to the Holder, appoint an agent (a “Warrant Agent”) for the purpose of issuing shares of Common Stock on the exercise of this Warrant pursuant hereto, exchanging this Warrant pursuant hereto, and replacing this Warrant pursuant hereto, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such Warrant Agent.
| 4 |
9. Transfer on the Company’s Books. Until this Warrant is transferred on the books of the Company, the Company may treat the Holder as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.
10. Notices. Any notice required or permitted hereunder shall be given in the manner provided in the subsection titled “Notices” in the Note, the terms of which are incorporated herein by reference.
11. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant, together with the Note, taken together, contain the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings with respect to the subject matter hereof and thereof other than as expressly contained herein and therein.
12. Governing Law. This Warrant shall be governed by and interpreted in accordance with the laws of the State of Nevada, without giving effect to the principles thereof regarding the conflict of laws. The Company and, by accepting this Warrant, the Holder, each irrevocably (a) consent to and expressly submit to the exclusive personal jurisdiction of any state or federal court sitting in New York in connection with any dispute or proceeding arising out of or relating to this Warrant, (b) agree that all claims in respect of any such dispute or proceeding may only be heard and determined in any such court, (c) expressly submit to the venue of any such court for the purposes hereof, and (d) waive any claim of improper venue and any claim or objection that such courts are an inconvenient forum or any other claim or objection to the bringing of any such proceeding in such jurisdictions or to any claim that such venue of the suit, action or proceeding is improper. The Company and, by accepting this Warrant, the Holder, each hereby irrevocably consent to the service of process of any of the aforementioned courts in any such proceeding by the mailing of copies thereof by reputable overnight courier (e.g., FedEx) or certified mail, postage prepaid, to such party’s address as provided for herein, such service to become effective ten (10) calendar days after such mailing. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS WARRANT OR ANY TRANSACTION CONTEMPLATED HEREBY.
13. Remedies. The remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and, without limiting any other remedies available to the Holder in the Transaction Documents, law or equity, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.
14. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Signature delivered via facsimile or email shall be considered original signatures for purposes hereof.
15. Descriptive Headings. Descriptive headings of the sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
16. Attorney’s Fees. In the event of any litigation or dispute arising from this Warrant, the parties agree that the party who is awarded the most money shall be deemed the prevailing party for all purposes and shall therefore be entitled to an additional award of the full amount of the attorneys’ fees and expenses paid by said prevailing party in connection with the litigation and/or dispute without reduction or apportionment based upon the individual claims or defenses giving rise to the fees and expenses. Nothing herein shall restrict or impair a court’s power to award fees and expenses for frivolous or bad faith pleading.
17. Severability. Whenever possible, each provision of this Warrant shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be invalid or unenforceable in any jurisdiction, such provision shall be modified to achieve the objective of the parties to the fullest extent permitted and such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Warrant or the validity or enforceability of this Warrant in any other jurisdiction.
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| 5 |
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by an officer thereunto duly authorized.
| Dated: May 27, 2022 | ||
| THE COMPANY: | ||
| SurgePays, Inc. | ||
| By: | /s/ Tony Evers | |
| Name: | Tony Evers | |
| Title: | Chief Financial Officer | |
[Signature page to Warrant]
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EXHIBIT A
NOTICE OF EXERCISE OF WARRANT
| TO: | (COMPANY) |
| ATTN: _______________ | |
| VIA FAX TO: ( )______________ | |
| VIA EMAIL TO: ( )______________ |
The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant to Purchase Shares of Common Stock dated as of _______1 (the “Warrant”), to purchase shares of the common stock, $0.001 par value (“Common Stock”), of SurgePays, Inc., and tenders herewith payment in accordance with Section 2 of the Warrant, as follows:
| _______ | CASH: $__________________________ = (Exercise Price x Warrant Shares) |
| _______ | Payment is being made by: |
| _____ | enclosed check | |
| _____ | wire transfer | |
| _____ | other |
| _______ | CASHLESS EXERCISE: |
Net number of Warrant Shares to be issued to Holder: ______*
* X = Y (A-B)
A
| Where | X = | the number of Warrant Shares to be issued to Holder. | |
| Y = | the number of Warrant Shares that the Holder elects to purchase under this Warrant (at the date of such calculation). | ||
| A= | the Market Price (at the date of such calculation). | ||
| B = | Exercise Price (as adjusted to the date of such calculation). |
Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Warrant.
It is the intention of the Holder to comply with the provisions of Section 2.2 of the Warrant regarding certain limits on the Holder’s right to exercise thereunder. The Holder believes this exercise complies with the provisions of such Section 2.2. Nonetheless, to the extent that, pursuant to the exercise effected hereby, the Holder would have more shares of Common Stock than permitted under Section 2.2, this notice should be amended and revised, ab initio, to refer to the exercise which would result in the issuance of the maximum number of such shares permitted under such provision. Any exercise above such amount is hereby deemed void and revoked.
1 Insert date of Warrant
As contemplated by the Warrant, this Notice of Exercise is being sent by facsimile or email to the fax number and officer indicated above.
If this Notice of Exercise represents the full exercise of the outstanding balance of the Warrant, the Holder either (1) has previously surrendered the Warrant to the Company or (2) will surrender (or cause to be surrendered) the Warrant to the Company at the address indicated above by express courier within five (5) Trading Days after delivery or email or facsimile transmission of this Notice of Exercise; provided that the Warrant Shares to be delivered pursuant to this Notice of Exercise have been delivered to the Holder as of such date.
To the extent the Warrant Shares are not able to be delivered to the Holder via the DWAC system, please deliver certificates representing the Warrant Shares to the Holder via reputable overnight courier after receipt of this Notice of Exercise (by facsimile transmission or otherwise) to:
_____________________________________
_____________________________________
_____________________________________
Dated: _____________________
___________________________
[Name of Holder]
By:________________________
EXHIBIT B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of the Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading “Transferees” the right represented by the Warrant to Purchase Shares of Common Stock dated as of ________2 (the “Warrant”) to purchase the percentage and number of shares of common stock, $0.001 par value (“Common Stock”), of SurgePays, Inc. (“COMPANY”) specified under the headings “Percentage Transferred” and “Number Transferred,” respectively, opposite the name(s) of such person(s), and appoints each such person attorney to transfer the undersigned’s respective right on the books of the Company, with full power of substitution in the premises.
| Transferees | Percentage Transferred | Number Transferred |
| Dated:___________, ______ | ||
| ________________________________ | ||
| [Transferor Name must conform to the name of Holder as specified on the face of the Warrant] | ||
| By: | ___________________________ | |
| Name: | ___________________________ | |
| Signed in the presence of: | |
| _________________________ | |
| (Name) | |
| ACCEPTED AND AGREED: | |
| _________________________ | |
| [TRANSFEREE] | |
| By: _______________________ | |
| Name: _____________________ |
2 Insert Date of Warrant
Exhibit 4.3
SECURED PROMISSORY NOTE – REVOLVING
| Up to $3,000,000 | San Diego, CA |
| April 8, 2022 |
FOR VALUE RECEIVED, SurgePays, Inc. (the “Borrower”) promises to pay in lawful money of the United States to the order of Lender on or before two hundred seventy (270) calendar days after each Draw Down Date (as defined below), each a “Maturity Date”, an amount not to exceed the principal sum of THREE MILLION DOLLARS ($3,000,000), and to pay interest to the Lender on the outstanding principal amount of this Promissory Note in accordance with the provisions hereof. All requests by Borrower for advances hereunder shall be in writing and submitted to Lender no later than nine months after the date hereof. The Lender in its sole discretion may accept or reject any request by Borrower for advances hereunder.
This Promissory Note is issued pursuant to, and is subject to, that certain Loan Agreement between Borrower and Lender dated as of the date hereof (“Loan Agreement”).
The Borrower’s obligations under this Promissory Note shall be secured by and Borrower hereby grants to lender a perfected security interest against all of the tangible and intangible assets owned by Borrower, and in the Collateral, as defined in that certain Security Agreement, dated on or about the date hereof between the Borrower and the Lender. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Loan Agreement or Security Agreement.
This Promissory Note is subject to the following additional provisions:
Section 1. Draw Down Date; Draw Down Amount.
a. Draw Down Date(s). The Draw Down Dates are the dates that funds are received by the Borrower from the Lender.
b. Draw Down Amount(s). The Draw Down Amounts are the amounts of funds received by the Borrower from the Lender. The total amount of all outstanding Draw Down Amounts will equal the outstanding principal amount under this note.
Section 2. Participation Fee.
a. Participation Fee. None
Section 3. Interest; Prepayment
a. Interest. Interest shall be applied on the outstanding principal amount of this Promissory Note and accrue daily at a monthly rate of two percent (2%). The Borrower shall pay to the Lender any and all accrued but unpaid interest hereunder on the applicable Maturity Date. Interest and/or any other sums due which are not paid when due hereunder shall be compounded monthly and shall bear interest at the Default Rate described in the Loan Agreement.
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b. Prepayment. The Borrower may prepay all or any portion of the principal amount of this Promissory Note, or any accrued and unpaid interest thereon, without penalty at any time. Any payment made pursuant to this Promissory Note shall be credited first to interest then due, the remainder of the payment to principal, and interest shall thereupon cease upon the principal so credited.
c. Mandatory Prepayments. The Borrower shall be required to make mandatory prepayments to Lender upon the following terms:
None
Section 4. Event of Default.
a. “Event of Default” shall have the meaning set forth in the Loan Agreement. Upon the occurrence and during the continuance of an Event of Default, the outstanding principal and all accrued and unpaid interest shall become immediately due and payable and shall bear interest equal to the Default Rate described in the Loan Agreement, and be payable in accordance with the Loan Agreement from the date such Event of Default occurs until the date such Event of Default is cured or waived in writing in accordance herewith.
Section 5. Miscellaneous
a. Waiver. The Borrower expressly waives all notices, demands, presentments, protests, and all other suretyship and similar defenses in connection with the execution, delivery, payment and enforcement of this Promissory Note. No indulgence granted by Lender hereof in any instance shall constitute a waiver or consent to any other indulgence in any other similar or dissimilar, prior or subsequent instance. This Promissory Note may not be amended, modified, or supplemented except by written agreement signed by the Lender and the Borrower. Time is of the essence with respect to all obligations of Borrower under this Promissory Note.
b. Notices. Any and all notices or other communications or deliveries to be provided by the Lender hereunder shall be in writing and delivered personally, by facsimile, by email or sent by a nationally recognized overnight courier service, addressed to the Borrower, at the address set forth below, or such other facsimile number, email or address as the Borrower may specify for such purpose by notice to the Lender delivered in accordance with this Section.
c. Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Promissory Note shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflict of laws thereof. Borrower agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by this Promissory Note or the other agreements (whether brought against Borrower or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of San Diego, County of San Diego (the “San Diego Courts”). Borrower hereby irrevocably submits to the exclusive jurisdiction of the San Diego Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of this Promissory Note), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such San Diego Courts, or such San Diego Courts are improper or inconvenient venue for such proceeding. Borrower hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to Borrower at the address in effect for notices to it under this Promissory Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. If Lender shall commence an action or proceeding to enforce any provisions of this Promissory Note, then Lender shall be reimbursed by Borrower for its attorney’s fees and other costs and expenses reasonably incurred in the investigation, preparation and prosecution of such action or proceeding.
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d. Other. To the fullest extent permitted by law, the Borrower agrees not to insist upon or plead or in any manner whatsoever claim, and shall resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, in force at the time of execution of this Promissory Note or hereafter, in connection with any action that may be brought by the Lender in order to enforce any right or remedy under this Promissory Note. Notwithstanding any provision to the contrary contained herein, it is expressly agreed and provided that the total liability of the Borrower under this Promissory Note for payments in the nature of interest shall not exceed the maximum lawful interest rate authorized under applicable law. If the effective interest rate otherwise applicable under this Promissory Note exceeds such maximum lawful interest rate, then such applicable interest rate shall be reduced so as not to exceed such maximum lawful interest rate.
e. Waiver of Jury Trial. BORROWER, TO THE FULL EXTENT PERMITTED BY LAW, HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, WITH AND UPON THE ADVICE OF COMPETENT COUNSEL, WAIVES, RELINQUISHES AND FOREVER FORGOES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THE LOAN, THE LOAN DOCUMENTS OR ANY CONDUCT, ACT OR OMISSION OF LENDER OR BORROWER, OR ANY OF THEIR DIRECTORS, OFFICERS, PARTNERS, MEMBERS, EMPLOYEES, AGENTS OR ATTORNEYS, OR ANY OTHER PERSONS AFFILIATED WITH LENDER OR BORROWER, IN EACH OR THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.
f. Partial Invalidity. If any section or provision of this Note is declared invalid or unenforceable by any court of competent jurisdiction, said determination shall not affect the validity or enforceability of the remaining terms hereof. No such determination in one jurisdiction shall affect any provision of this Note to the extent it is otherwise enforceable under the laws of any other applicable jurisdiction.
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g. Full Power and Authority. Borrower has the full power and ability to execute and deliver this Note, and this Note constitutes the valid and binding obligation of Borrower, enforceable in accordance with its terms.
h. Business Purpose Declaration. Borrower hereby agrees and acknowledges that the credit to be provided to Borrower by Lender in connection with this loan is to be used wholly or predominantly for business or investment purposes (or for both purposes).
BALLOON PAYMENT NOTICE:
THE OUTSTANDING PRINCIPAL AND ACCRUED INTEREST UNDER THIS NOTE IS PAYABLE IN FULL ON THE APPLICABLE MATURITY DATES. BORROWER MUST REPAY THE ENTIRE PRINCIPAL BALANCE OF THIS NOTE AND ANY ACCRUED AND/OR UNPAID INTEREST AND OTHER CHARGES WHEN DUE. LENDER IS UNDER NO OBLIGATION TO REFINANCE THIS NOTE OR THE UNDERLYING LOAN AT THAT TIME. BORROWER WILL, THEREFORE BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THAT BORROWER MAY OWN, OR BORROWER WILL HAVE TO FIND ANOTHER LENDER WILLING TO LEND YOU THE MONEY. IF YOU REFINANCE THIS LOAN AT MATURITY, YOU MAY HAVE TO PAY SOME OR ALL OF THE CLOSING COSTS, INCLUDING LOAN ORIGINATION FEES, NORMALLY ASSOCIATED WITH A NEW LOAN EVEN IF YOU OBTAIN REFINANCING FROM THE SAME LENDER.
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SurgePays Secured Promissory Note - Revolving
Page 5 of 5
In Witness Whereof, the Borrower has caused this Promissory Note to be duly executed as of the date hereof.
| SurgePays, Inc. | ||
| By: | /s/ Kevin Brian Cox | |
| Name: | Kevin Brain Cox | |
| Title: | CEO | |
| Address: | 3124 Brother Blvd., Suite 104 |
| Bartlett, TN 38133 |
Email:
Phone:
AMENDMENT NO. 1 TO SECURED PROMISSORY NOTE - REVOLVING
This Amendment No. 1 to Secured Promissory Note - Revolving (the “Note”) dated as of April 8, 2022, between SurgePays, Inc., a Nevada corporation (the “Borrower”) and the Lender is dated as of June 2, 2022.
The Note is hereby amended as follows:
1. The principal sum of THREE MILLION DOLLARS ($3,000,000) in the first paragraph is changed to FIVE MILLION DOLLARS ($5,000,000).
Except as expressly modified by this Amendment No. 1 to Secured Promissory Note - Revolving, the Secured Promissory Note - Revolving remains in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the Borrower has caused this Amendment No. 1 to Secured Promissory Note - Revolving to be executed and delivered as of the date hereof.
BORROWER: SurgePays, Inc.
| By: | /s/ Tony Evers | |
| Name: | Tony Evers | |
| Title: | CFO |
Exhibit 10.1
LOAN AGREEMENT
LOAN AGREEMENT, dated as of April 8, 2022, between surgepays, inc., a Nevada corporation, (referred to herein as the “Borrower”), and the Lender.
RECITALS
The Borrower has requested that the Lender extend credit to the Borrower consisting of a term loan or series of loans in an aggregate principal amount not to exceed $3,000,000. The proceeds of the term loans will be used by the Borrower to assist in purchasing inventory and factoring accounts receivables.
In consideration of the premises and the covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS; CERTAIN TERMS
SECTION 1.01. Definitions. As used in this Agreement, the following terms shall have the respective meanings indicated below, such meanings to be applicable equally to both the singular and plural forms of such terms:
“Agreement” means this Loan Agreement, including all amendments, modifications and supplements and any exhibit or schedule to any of the foregoing, and shall refer to the Agreement as the same may be in effect at the time such reference becomes operative.
“Board” means the Board of Governors of the Federal Reserve System of the United States.
“Borrower” has the meaning specified therefor in the preamble hereto.
“Borrower’s Account” means an account designated by the Borrower to the Lender reasonably satisfactory to the Lender.
“Business Day” means any day other than a Saturday, Sunday or legal holiday on which commercial banks are open for business in Encinitas, California.
“Collateral” means the Collateral described in the Security Agreement.
“Default” means any event or condition which upon notice, lapse of time or both would constitute an Event of Default.
SurgePays Loan Agreement
Page 2 of 16
“Default Rate” means the rate per 7-calendar day period (or portion thereof) equal to 1%.
“Effective Date” has the meaning specified therefor in Section 3.01 hereof.
“Eligible Accounts Receivable” means any of the Borrower’s accounts receivable (both billed and unbilled) that have been outstanding for 60 calendar days or less. Borrower shall prepare and submit to Lender monthly a certification showing the Eligible Accounts Receivable.
“Event of Default” means any of the events set forth in Section 6.01 hereof.
“Governmental Authority” means any nation or government, any federal, state, city, town, municipality, county, local or other political subdivision thereof or thereto and any department, commission, board, bureau, instrumentality, agency or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
“Indebtedness” means, with respect to any Person, at any time, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (d) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien or security interest on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, and (f) all obligations, contingent or otherwise, of any Person guaranteeing or having the economic effect of guaranteeing any Indebtedness or monetary obligation of any other Person in any manner, whether directly or indirectly.
“Income Tax Basis” means the income tax basis (modified cash basis) of accounting in effect from time to time in the United States, applied on a consistent basis for federal income tax purposes in accordance with the Internal Revenue Code of 1986, as amended.
“Lender” has the meaning specified therefor in the preamble hereto.
“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing).
SurgePays Loan Agreement
Page 3 of 16
“Loan” means the loan or series of loans made by the Lender to the Borrower pursuant to this Agreement.
“Loan Documents” means this Agreement, the Security Agreement, the Promissory Note, and all other agreements, instruments or other documents executed and delivered by or on behalf of the Borrower pursuant to or in connection with this Agreement.
“Material Adverse Effect” means a material adverse effect on any of (a) the assets, properties or financial condition of the Borrower or (b) the legality, validity or enforceability of this Agreement or any of the other Loan Documents or (c) the aggregate rights and remedies of the Lender under this Agreement or any of the other Loan Documents.
“Maturity Date” means the earliest of (a) the maturity date(s) specified in the Promissory Notes, and (b) such earlier date on which the Loan is due and payable (whether at stated maturity, by acceleration or otherwise) in accordance with the terms of this Agreement.
“Obligations” means (a) the obligation of the Borrower to pay, as and when due and payable (by scheduled maturity or otherwise), all amounts from time to time owing by the Borrower in respect of any Loan Document, whether for principal, interest (including, without limitation, all interest that accrues after the commencement of any case, proceeding or other action relating to the bankruptcy or insolvency of the Borrower), fees, indemnification payments, expense reimbursements or otherwise and (b) the obligation of the Borrower to perform or observe all of the Borrower’s other obligations from time to time existing under any Loan Document.
“Person” means an individual, corporation, partnership, limited liability company or partnership, association, joint-stock company, trust, unincorporated organization, joint venture or governmental authority or other regulatory body.
“Permitted Liens” means all liens, claims and encumbrances permitted under the Loan Documents, including all liens, claims and encumbrances listed on Exhibit B to the Security Agreement.
“Security Agreement” means the Security Agreement, dated as of the date hereof, made by the Borrower in favor of the Lender, substantially in the form of Exhibit A annexed hereto, as amended or otherwise modified from time to time.
SECTION 1.02. Terms Generally; Computation of Time Periods. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Unless otherwise indicated herein, all references to time of day refer to Pacific standard time or Pacific daylight savings time, in effect in California on such day. In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each means “to but excluding”, provided, however, that with respect to a computation of fees or interest payable to the Lender, such period shall in any event consist of at least one full day. Except as otherwise expressly provided herein, any reference in this Agreement to any Loan Document shall mean such document as amended, restated, supplemented or otherwise modified from time to time.
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SECTION 1.03. Accounting and Other Terms. Unless otherwise expressly stated herein, all accounting terms used in this Agreement which are not otherwise defined herein shall be construed in accordance with the Income Tax Basis applied on a basis consistent with that used in preparing the financial statements referred to in Section 4.01(f) hereof. All terms used in this Agreement which are defined in Article 9 of the Uniform Commercial Code in effect in the State of California on the date hereof and which are not otherwise defined herein shall have the same meanings herein as set forth therein.
ARTICLE II
THE LOAN
SECTION 2.01. Making the Loan. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, the Lender agrees to make the Loan to the Borrower on the terms set forth herein and in the Promissory Note (“Promissory Note”) attached hereto as Exhibit B, which shall be issued by Borrower in connection with the Loan. The maximum amount outstanding under the Loan at any time shall be the lesser of $3,000,000 or 80% of Eligible Accounts Receivable.
SECTION 2.02. Interest.
(a) Interest. Interest shall be applied on the outstanding principal amount of the Promissory Note and accrue daily at a monthly rate of two percent (2%). The Borrower shall pay to the Lender any and all accrued but unpaid interest hereunder on the Maturity Date.
(b) Default Interest. Upon the occurrence and during the continuance of an Event of Default, the principal of, and all accrued and unpaid interest on, the Loan, and all fees, indemnities or any other Obligations of the Borrower under this Agreement and the other Loan Documents, shall (i) bear interest, from the date such Event of Default occurs until the date such Event of Default is cured or waived in writing in accordance herewith, equal at all times to the Default Rate, and (ii) be payable in arrears on the first day of each 7-day calendar period after the date such Event of Default occurs until the date such Event of Default is cured or waived in writing in accordance herewith.
(c) Post-Maturity Interest. Any principal of, and all accrued and unpaid interest on, the Loan, and all fees, indemnities or any other Obligations of the Borrower under this Agreement and the other Loan Documents that remains outstanding after the Maturity Date shall (i) bear interest from the Maturity Date until the date such outstanding amount is paid in full, equal at all times to the Default Rate, and (ii) be payable in arrears on the first day of each 30-day calendar period after the Maturity Date until the date such outstanding amount is paid in full.
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SECTION 2.03. Repayment. The entire principal amount of the term loan shall be due and payable on the Maturity Date. Specifically, the Borrower shall repay to the Lender any unpaid principal of, and all accrued and unpaid interest on, the Loan, and all fees, indemnities or any other Obligations of the Borrower under this Agreement and the other Loan Documents on the Maturity Date.
SECTION 2.04. Mandatory Prepayment of Loan. The Borrower shall be required to make mandatory prepayments pursuant to the following terms:
Within the first 4 business days of every calendar month, Borrower will submit its current Eligible Accounts Receivable balance amount to Lender. If such Eligible Accounts Receivable balance amount is less than 80% of the loan amount, then Borrower will immediately make a payment to Lender so that the loan amount is no greater than 80% of the then current Eligible Accounts Receivable balance.
Borrower will also be required to pay the interest that has accrued on the loan for the previous month within the first 4 business days of every subsequent calendar month.
SECTION 2.05. Optional Prepayments. The Borrower may prepay the Loan or any accrued and unpaid interest thereon, in whole or in part, without premium or penalty, upon one (1) Business Day’s irrevocable notice to the Lender, specifying (a) the date of prepayment and (b) the principal or any accrued and unpaid interest amount to be prepaid, provided that any such prepayments shall be in an amount of not less than $25,000. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to such date on the amount prepaid.
SECTION 2.06. Participation Fee. None.
SECTION 2.07. Payments and Computations. The Borrower will make each payment under the Loan Documents not later than 11:00 A.M. (prevailing Pacific Time) on the day when due, in lawful money of the United States of America and in immediately available funds, to the Lender at the Lender’s address referred to in Section 7.01 hereof. All payments shall be made by the Borrower without defense, set-off or counterclaim to the Lender. The Borrower hereby authorizes the Lender to, and the Lender may, charge from time to time against the Borrower’s Account any amount due under any Loan Document to which the Borrower is a party. Whenever any payment to be made under any such Loan Document shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. All computations of interest under this Agreement and any other Loan Document and all fees shall be made by the Lender on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. Each determination by the Lender of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent demonstrable error.
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ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Conditions Precedent to Effectiveness. Subject to Lender’s right in its sole discretion to accept or reject any request by Borrower for advances under the Promissory Note, this Agreement and the Lender’s obligation to make the Loan to the Borrower hereunder shall become effective as of the Business Day when each of the following conditions precedent shall have been satisfied in a manner satisfactory to the Lender (the “Effective Date”):
(a) Payment of Fees, Etc. The Borrower shall have paid or caused to be paid the Participation Fee pursuant to Section 2.06 hereof and all other fees, costs, expenses and taxes payable on the Effective Date by the Borrower pursuant to Section 7.04 hereof.
(b) Representations and Warranties; No Default. The following statements shall be true and correct: (i) the representations and warranties of the Borrower contained in Section 4.01 hereof and in each other Loan Document and certificate or other writing delivered to the Lender on or before the Effective Date are true and correct on and as of the Effective Date; and (ii) on the Effective Date, no Default or Event of Default has occurred and is continuing under this Agreement.
(c) Legality. The obligations of the Lender under this Agreement shall not contravene any law, rule or regulation applicable to the Lender.
(d) Delivery of Documents. The Lender shall have received on or before the Effective Date the agreements, instruments, approvals, opinions and other documents as the Lender may reasonably request.
(e) Proceedings; Receipt of Documents. All proceedings in connection with the transactions contemplated by this Agreement, and all documents incidental thereto, shall be reasonably satisfactory to the Lender, and the Lender shall have received all such information and such counterpart originals or certified or other copies of such documents as the Lender may reasonably request.
(f) Material Adverse Effect. The Lender shall have determined that no Material Adverse Effect shall have occurred relating to the Borrower since December 31, 2019.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows:
(a) Capacity. The Borrower has the legal capacity to execute, deliver and perform this Agreement and each other Loan Document to which the Borrower is a party.
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(b) No Violation. The execution, delivery and performance by the Borrower of each Loan Document to which the Borrower is a party (i) do not and will not contravene any law or any contractual restriction binding on or otherwise affecting the Borrower, or any of the properties of the Borrower, and (ii) do not and will not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of the properties of the Borrower, other than the security interests created by the Loan Documents.
(c) Approvals. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or other regulatory body, and no consent of any other Person, is required for the due execution, delivery and performance by the Borrower of any Loan Document to which the Borrower is or will be a party.
(d) Enforceability of Loan Documents. Each Loan Document to which the Borrower is a party constitutes, and each Loan Document to which the Borrower will be a party, when delivered hereunder, will constitute, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its respective terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.
(e) Litigation. There is no pending or, to the knowledge of the Borrower, threatened action, suit or proceeding affecting the Borrower before any court or other Governmental Authority or any arbitrator, which (i) is reasonably likely to have a Material Adverse Effect or (ii) purports to affect the legality, validity or enforceability of any Loan Document or the consummation of any transaction contemplated hereby.
(f) Financial Condition. The financial statements (including the notes relating thereto) of the Borrower dated December 31, 2020, a copy of which has been previously delivered to the Lender, fairly presents the financial condition of the Borrower as at the date thereof. Since such date no event has occurred which is reasonably likely to have a Material Adverse Effect.
(g) Compliance with Law, Etc. The Borrower is not in violation of any applicable law or any term of any material agreement or instrument binding on or otherwise affecting the Borrower or any of the properties of the Borrower, the violation of which could reasonably be expected to have a Material Adverse Effect.
(h) Taxes, Etc. All Federal, state and local tax returns and other reports required by applicable law to be filed by the Borrower have been filed, and all taxes and assessments imposed upon the Borrower or any property of the Borrower and which have become due and payable on or prior to the date hereof have been paid, except to the extent contested in good faith by proper proceedings which stay the imposition of any penalty or fine or stay the foreclosure of any Lien resulting from the non-payment thereof and with respect to which adequate reserves have been set aside for the payment thereof.
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(i) Regulation T, U or X. No proceeds of the Loan will be used, directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose that entails a violation of, or is inconsistent with, the provisions of any of the regulations of the Board, including Regulation T, U or X.
(j) Full Disclosure. No Loan Document or schedule or exhibit thereto, and no certificate, report, statement or other document or information furnished to the Lender by the Borrower in connection herewith or with the consummation of the transactions contemplated hereby, contains any material misstatement of fact or omits to state a material fact or any fact necessary to make the statements contained herein or therein not misleading in any material respect in light of the circumstances under which they were made. There is no fact known to the Borrower that materially adversely affects the financial condition of the Borrower or the value of the Collateral, or that otherwise is reasonably likely to have a Material Adverse Effect, that has not been disclosed to the Lender in writing prior to the Effective Date.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as any principal of or interest on the Loan or any other Obligations (whether or not due) shall remain unpaid or the Lender shall have any commitment hereunder, the Borrower will, unless the Lender shall otherwise consent in writing:
(a) Reporting Requirements. Furnish to the Lender:
(i) promptly after the commencement thereof but in any event not later than 5 Business Days after service of process with respect thereto on, or the obtaining of knowledge thereof by, the Borrower, notice of each action, suit or proceeding at law, in equity, in arbitration or before any other Governmental Authority or other regulatory body or arbitrator that could reasonably be expected to have a Material Adverse Effect;
(ii) promptly but in any event not more than 5 days after the occurrence thereof, notice of the occurrence of either any Default or Event of Default known by Borrower under this Agreement, which notice shall contain a brief description of the nature of such Default or Event of Default and any action with respect thereto taken or contemplated to be taken by the Borrower;
(iii) promptly but in any event not more than 5 days after the occurrence thereof, notice of the occurrence of either any default or event of default under any agreement, which notice shall contain a brief description of the nature of such default or event of default and any action with respect thereto taken or contemplated to be taken by the Borrower; and
(iv) promptly upon request, such other information concerning the financial condition of the Borrower or information concerning any of the Collateral, in each case, as the Lender from time to time may reasonably request.
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(b) Compliance with Laws, Etc. Comply in all respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, (i) paying before the same become delinquent all taxes, assessments and governmental charges or levies imposed upon the Borrower or upon the Borrower’s income or profits or upon any of the Borrower’s properties and (ii) paying all lawful claims which if unpaid might become a Lien or charge upon any of the Borrower’s properties, except in each case to the extent contested in good faith by proper proceedings which stay the imposition of any penalty or fine or stay the foreclosure of any Lien resulting from the non-payment thereof and with respect to which adequate reserves have been set aside for the payment thereof, unless the failure to so comply could not reasonably be expected to have a Material Adverse Effect.
(c) Further Assurances. Do, execute, acknowledge and deliver, at the sole cost and expense of the Borrower, all such further acts and assurances as the Lender may reasonably require from time to time in order to better assure, convey, grant, assign, transfer and confirm unto the Lender the rights now or hereafter intended to be granted to the Lender under this Agreement, any Loan Document or any other instrument under which any Borrower may be or may hereafter become bound to effect the intention or facilitate the performance of the terms of this Agreement.
(d) Federal Regulations. If requested by the Lender at any time and from time to time, furnish to the Lender a statement, in conformity with the requirements of Federal Reserve Form U-1, to the effect that neither the making of the Loan under this Agreement, nor the use of proceeds thereof, nor any other transactions contemplated hereby or by the other Loan Documents will violate or be inconsistent with the provisions of Regulation T, U or X.
(e) Collateral. Take or cause to be taken all steps necessary or reasonably requested by the Lender to grant to the Lender a perfected, security interest in the Collateral and to enable the Lender to realize upon and transfer or otherwise dispose of the Collateral, in compliance with all applicable laws.
SECTION 5.02. Negative Covenants. So long as any principal of or interest on the Loan or any other Obligations (whether or not due) shall remain unpaid or the Lender shall have any commitment hereunder, the Borrower will not, without the prior written consent of the Lender:
(a) Liens, Pledges, Etc. Create or suffer to exist any Lien or pledge (other than Liens and pledges in favor of the Lender and Permitted Liens), or other type of preferential arrangement upon or with respect to any of the Collateral.
(b) Indebtedness. Create, incur or suffer to exist any Indebtedness, other than:
(i) Indebtedness owing to the Lender;
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(ii) Indebtedness of the Borrower existing on the date hereof, and any extension of maturity, refinancing or other modification of the terms of any such Indebtedness, provided, however, that such extension, refinancing or modification (A) does not accelerate the amortization or maturity of such Indebtedness and (B) after giving effect to the extension, refinancing or modification of such Indebtedness, the amount of such Indebtedness outstanding is not greater than the amount of such Indebtedness outstanding immediately prior to such extension, refinancing or modification;
(iii) Indebtedness permitted by paragraph (c) of this Section 5.02; and
(iv) unsecured Indebtedness.
(c) Intentionally Omitted.
(d) Federal Reserve Regulations. Permit the Loan or the proceeds of the Loan to be used for any purpose that violates or is inconsistent with the provisions of Regulation T, U or X of the Board.
(e) Changes to Agreements. Agree or consent to any amendment, modification, supplement or waiver of any provision of any agreement if such amendment, modification, supplement or waiver could reasonably be expected to have a Material Adverse Effect. Enter into any agreement that in any way restricts or imposes conditions or fees on the sale, assignment, pledge or other disposition of the Collateral.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following Events of Default shall occur and be continuing:
(a) the Borrower shall fail to pay (i) any principal of the Loan when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) or (ii) any interest on the Loan, any fee or any other amount payable hereunder or any other Indebtedness of the Borrower to the Lender within three (3) Business Days after the date such interest, fee, other amount or other Indebtedness is due; or
(b) any representation or warranty made by the Borrower in any Loan Document or in any report, certificate or other document delivered to the Lender pursuant to any Loan Document shall have been incorrect in any material respect when made; or
(c) the Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 5.02 of this Agreement or any term, covenant or agreement contained in the Security Agreement; or
(d) the Borrower shall fail to perform or observe any term, covenant or agreement contained in any Loan Document to be performed or observed by the Borrower and, except as set forth in subsections (a), (b) and (c) of this Section 6.01, such failure, if capable of being remedied, shall remain unremedied for 10 days after written notice thereof shall have been given to the Borrower by the Lender; or
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(e) Intentionally Omitted.
(f) the Borrower shall be generally not paying its debts as they become due, or shall admit in writing its inability to pay such debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower, seeking to adjudicate the Borrower bankrupt or insolvent, or seeking dissolution, liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of the Borrower or the debts of the Borrower under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for the Borrower or for any substantial part of the property of the Borrower, and, in the case of any such proceeding instituted against the Borrower, the petition commencing such proceeding is not dismissed within 60 calendar days of the date of the filing thereof; or the Borrower shall take any action to authorize or effect any of the actions set forth above in this subsection (f); or
(g) any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by the Borrower, or a proceeding shall be commenced by the Borrower or any Governmental Authority or other regulatory body having jurisdiction over the Borrower, seeking to establish the invalidity or unenforceability thereof, or the Borrower shall deny that such Person has any liability or obligation purported to be created under any Loan Document to which such Person is a party; or
(h) one or more judgments or orders for the payment of money exceeding any applicable insurance coverage by more than $25,000 in the aggregate, shall be rendered against the Borrower, and either (i) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of any such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Notices, Etc. Unless otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing and shall be mailed, telecopied, emailed or delivered to the Borrower and the Lender at the addresses set forth below, or at such other addresses as shall be designated by the Borrower or the Lender in a written notice to the other party complying as to delivery with the terms of this Section 7.01.
| Borrower | Lender |
SurgePays, Inc. 3124 Brother Blvd., Suite 104 Bartlett, TN 38133 Attn: Kevin Brian Cox and Tony Evers Telephone: e-mail: |
[Name and Address of Lender] Attn: Telephone: e-mail:
|
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All such notices and other communications shall be effective (a) if mailed, three (3) days after the mailing date, (b) if telecopied or emailed, upon receipt or (c) if delivered, upon delivery.
SECTION 7.02. Amendments, Etc. No amendment of any provision of this Agreement shall be effective unless it is in writing and signed by the Borrower and the Lender, and no waiver of any provision of this Agreement, nor consent to any departure by the Borrower therefrom, shall be effective unless it is in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
SECTION 7.03. No Waiver; Remedies, Etc. No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any Loan Document preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies of the Lender provided herein and in the other Loan Documents are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law. The rights and remedies of the Lender under any Loan Document against any party thereto are not conditional or contingent on any attempt by the Lender to exercise any of its rights and remedies under any other Loan Document against such party or against any other Person.
SECTION 7.04. Fees, Costs, Expenses and Taxes. The Borrower shall pay or cause to be paid on demand (a) legal fees, costs and expenses in connection with (i) the execution and delivery of this Agreement and any other Loan Document up to $4,750 and (ii) the amendment, waiver and administration of this Agreement and any other Loan Document and the other documents to be delivered pursuant to the Loan Documents, including, without limitation, the reasonable fees, expenses and other client charges, (b) all reasonable costs and expenses, if any (including, without limitation, reasonable counsel fees, expenses and other client charges), in connection with the enforcement of (or any “work-out” or restructure with respect to) the Loan Documents and the other documents to be delivered pursuant to the Loan Documents, and (c) the amount of $25 for each wire transfer sent by Lender to fund the Loan and each wire transfer received by Lender as a payment on the Loan. In addition, the Borrower will pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of the Loan Documents and the other documents to be delivered pursuant to the Loan Documents, and will save the Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees.
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SECTION 7.05. Indemnification. The Borrower hereby agrees to indemnify, defend and hold the Lender harmless from and against any and all claims, charges, actions, suits, proceedings, lawsuits, obligations, liabilities, fines, penalties, costs and expenses (including, without limitation, reasonable attorney’s fees, expenses and other client charges) which the Lender shall incur or which shall be claimed against the Lender by any Person in any way relating to or arising out of (a) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto or thereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby or (b) the use of the proceeds of the Loan including any and all reasonable expenses set forth in Section 7.04 hereof which arise as a result of any claims, charges, actions, suits, proceedings or lawsuits described in this Section 7.05. The Borrower shall not have any obligation to the Lender under this Section 7.05 with respect to any claims, charges, suits, proceedings, lawsuits, obligations, liabilities, fines, penalties, costs and expenses that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of the Lender as finally determined by a court of competent jurisdiction. The obligations and provisions of this paragraph shall continue and remain in full force and effect after the Obligations of the Borrower under this Agreement and the other Loan Documents have been paid and discharged in full and this Agreement and such other Loan Documents are otherwise terminated.
SECTION 7.06. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default the Lender may, and is hereby authorized to, at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower) and to the fullest extent permitted by law, set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of the Borrower against any and all obligations of the Borrower now or hereafter existing under any Loan Document, irrespective of whether or not the Lender shall have made any demand hereunder or thereunder and although such obligations may be contingent or unmatured. The Lender agrees promptly to notify the Borrower after any such set-off and application made by the Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section 7.06 are in addition to the other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have.
SECTION 7.07. Severability. Any provision of this Agreement, or of any other Loan Document to which the Borrower is a party, which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction.
SECTION 7.08. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, and in the case of the Borrower, the heirs, executors and legal representatives of the Borrower, except that the Borrower may not assign the rights of the Borrower hereunder or any interest herein without the prior written consent of the Lender and any such assignment without the Lender’s prior written consent shall be null and void. The Lender may assign or grant a participation with respect to all or a portion of its rights and obligations under this Agreement without the consent of the Borrower or any other Person, and the Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, Obligations owing to it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Board.
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SECTION 7.09. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or electronic mail shall be equally as effective as delivery of an original executed counterpart of this Agreement.
SECTION 7.10. Headings. Section headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.
SECTION 7.11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN THE STATE OF CALIFORNIA WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.
SECTION 7.12. Consent to Jurisdiction, Etc. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF CALIFORNIA, IN EACH CASE SITTING IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY IRREVOCABLY ACCEPTS IN RESPECT OF THE PROPERTY OF THE BORROWER, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS AND IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS OF THE BORROWER FOR NOTICES CONTAINED IN SECTION 7.01 HERETO. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH THE BORROWER MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO THE BORROWER OR THE PROPERTY OF THE BORROWER, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF THE OBLIGATIONS OF THE BORROWER UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
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SECTION 7.13. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lender and shall survive the making by the Lender of the Loan, regardless of any investigation made by the Lender or on its behalf, and shall continue in full force and effect so long as the principal of or any accrued interest on the Loan or any fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid or the commitment has not been terminated. The provisions of Section 7.05 hereof shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement or any other Loan Document, the consummation of the transactions contemplated hereby, the repayment of the Loan, the expiration of the commitment, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Lender.
SECTION 7.14. No Third Party Beneficiaries. No Person, other than the parties (and, in the case of the Lender, its successors and assigns hereunder) to this Agreement, has been given or shall be deemed to have been given any rights as a third party beneficiary hereunder or under any of the other Loan Documents or other instruments and documents executed in connection herewith and therewith.
SECTION 7.15. Integration. This Agreement and the other Loan Documents represent the entire agreement of the Borrower and the Lender with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Lender relative to the subject matter thereof not expressly set forth or referred to herein or in the other Loan Documents.
SECTION 7.16. Acknowledgments. The Borrower hereby acknowledges that:
(a) the Borrower has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; and
(b) no joint venture exists between the Lender and the Borrower.
SECTION 7.17. Waiver of Trial by Jury. THE BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written.
| BORROWER: | LENDER: | |||
| SURGEPAYS, INC., a Nevada corporation | ||||
| By: | /s/ Tony Evers | By: | /s/ Name of President & CEO of Lender | |
| Name: | Tony Evers | Name: | ||
| Title: | CFO | Title: | ||
EXHIBITS
| Exhibit A – Security Agreement |
| Exhibit B – Secured Promissory Note |
AMENDMENT NO. 1 TO LOAN AGREEMENT
This Amendment No. 1 to the Loan Agreement dated as of April 8, 2022, between SurgePays, Inc., a Nevada corporation (the “Borrower”) and the Lender is dated as of June 2, 2022.
The Loan Agreement is hereby amended as follows:
1. The $3,000,000 amount in the first paragraph of the Recitals is changed to $5,000,000.
Except as expressly modified by this Amendment No. 1 to Loan Agreement, the Loan Agreement remains in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to Loan Agreement to be executed and delivered as of the date hereof.
| BORROWER: SurgePays, Inc. | ||
| By: | /s/ Tony Evers | |
| Name: | Tony Evers | |
| Title: | CFO | |
| LENDER: | ||
| By: | /s/ Name of President & CEO of Lender | |
| Name: | ||
| Title: | ||
Exhibit 10.2
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of April 8, 2022 (this “Agreement”), is among SurgePays, Inc. (the “Debtor” or the “Company”) and Secured Party as holder of that Promissory Note in the aggregate principal amount not to exceed $3,000,000 (the “Note”) executed and delivered by the Company pursuant to the Loan Agreement between the parties (the “Loan Agreement”).
WITNESSETH:
WHEREAS, pursuant to the Loan Agreement dated as of the date hereof among Debtor and Secured Party (the “Loan Agreement”), the Secured Party has agreed to extend a loan to the Company evidenced by the Note;
WHEREAS, in order to induce the Secured Party to extend the loan evidenced by the Note, the Debtor has agreed to execute and deliver to the Secured Party this Agreement and to grant the Secured Party a security interest in certain property of such Debtor to secure the prompt payment, performance and discharge in full of all of the Debtor’s obligations under the Note and any other present or future indebtedness incurred by the Debtor in favor of the Secured Party.
NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as “account”, “chattel paper”, “commercial tort claim”, “deposit account”, “document”, “equipment”, “fixtures”, “general intangibles”, “goods”, “instruments”, “inventory”, “investment property”, “letter-of-credit rights”, “proceeds” and “supporting obligations”) shall have the respective meanings given such terms in Article 9 of the UCC.
(a) “Collateral” means the collateral in which the Secured Party is granted a security interest by this Agreement and which shall include the following personal property of the Debtor, whether presently owned or existing or hereafter acquired or coming into existence, wherever situated, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith:
(i) All goods, including, without limitation, (A) all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with any Debtor’s businesses and all improvements thereto; and (B) all inventory;
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(ii) All contract rights and other general intangibles, including, without limitation, all partnership interests, membership interests, stock or other securities, rights under any of the Organizational Documents, licenses, distribution and other agreements, computer software (whether “off-the-shelf”, licensed from any third party or developed by any Debtor), computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, and income tax refunds;
(iii) All accounts, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each account, including any right of stoppage in transit;
(iv) All documents, letter-of-credit rights, instruments and chattel paper;
(v) All commercial tort claims;
(vi) All deposit accounts and all cash (whether or not deposited in such deposit accounts);
(vii) All investment property;
(viii) All supporting obligations; and
(ix) All files, records, books of account, business papers, and computer programs; and
(x) the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(ix) above.
Notwithstanding the foregoing, nothing herein shall be deemed to constitute an assignment of any asset which, in the event of an assignment, becomes void by operation of applicable law or the assignment of which is otherwise prohibited by applicable law (in each case to the extent that such applicable law is not overridden by Sections 9-406, 9-407 and/or 9-408 of the UCC or other similar applicable law); provided, however, that to the extent permitted by applicable law, this Agreement shall create a valid security interest in such asset and, to the extent permitted by applicable law, this Agreement shall create a valid security interest in the proceeds of such asset.
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(b) Intellectual Property” means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, (ii) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof, and all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, (iii) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade dress, service marks, logos, domain names and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common law rights related thereto, (iv) all trade secrets arising under the laws of the United States, any other country or any political subdivision thereof, (v) all rights to obtain any reissues, renewals or extensions of the foregoing, (vi) all licenses for any of the foregoing, and (vii) all causes of action for infringement of the foregoing.
(c) “Necessary Endorsement” means undated stock powers endorsed in blank or other proper instruments of assignment duly executed and such other instruments or documents as Secured Party may reasonably request.
(d) “Obligations” means all of the liabilities, indebtedness and obligations (primary, secondary, direct, contingent, sole, joint or several) due or to become due, or that are now or may be hereafter contracted or acquired, or owing to, of the Debtor to the Secured Party, including, without limitation, all obligations under this Agreement, the Note, and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith, or in connection with any other loan, indebtedness, obligation or liability previously or hereafter incurred by Debtor in favor of Secured Party, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from any of the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. Without limiting the generality of the foregoing, the term “Obligations” shall include, without limitation: (i) principal of, and interest on the Note, the loans extended pursuant thereto, or any other promissory note, instrument or other document evidencing indebtedness owed by Debtor to Secured Party; (ii) any and all other fees, indemnities, costs, obligations and liabilities of the Debtor from time to time under or in connection with this Agreement, the Note, and any other instruments, agreements or other documents executed and/or delivered, whether in connection herewith or therewith, or otherwise; and (iii) all amounts (including but not limited to post-petition interest) in respect of the foregoing that would be payable but for the fact that the obligations to pay such amounts are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving any Debtor.
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(e) “Organizational Documents” means with respect to any Debtor, the documents by which such Debtor was organized (such as a certificate of incorporation, certificate of limited partnership or articles of organization, and including, without limitation, any certificates of designation for preferred stock or other forms of preferred equity) and which relate to the internal governance of such Debtor (such as bylaws, a partnership agreement or an operating, limited liability or members agreement).
(f) “Pledged Interests” shall have the meaning ascribed to such term in Section 5(j).
(g) “UCC” means the Uniform Commercial Code of the State of California and or any other applicable law of any state or states which has jurisdiction with respect to all, or any portion of, the Collateral or this Agreement, from time to time. It is the intent of the parties that defined terms in the UCC should be construed in their broadest sense so that the term “Collateral” will be construed in its broadest sense. Accordingly if there are, from time to time, changes to defined terms in the UCC that broaden the definitions, they are incorporated herein and if existing definitions in the UCC are broader than the amended definitions, the existing ones shall be controlling.
2. Grant of Security Interest in Collateral. As an inducement for the Secured Party to extend the loans as evidenced by the Note and any other instrument or agreement evidencing loans extended by Secured Party to Debtor, and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Debtor hereby unconditionally and irrevocably pledges, grants and hypothecates to the Secured Party a security interest in and to, a lien upon and a right of set-off against all of their respective right, title and interest of whatsoever kind and nature in and to, the Collateral (a “Security Interest” and, collectively, the “Security Interests”).
3. Delivery of Certain Collateral. Contemporaneously or prior to the execution of this Agreement, each Debtor shall deliver or cause to be delivered to Secured Party any and all certificates and other instruments or documents representing any of the Collateral together with all Necessary Endorsements.
4. Protection of Security Interest. Debtor shall take any and all steps necessary or required to preserve and protect the priority of the security interest granted herein, and in pursuance of this obligation, Debtor agrees that:
(a) Debtor shall not sell (except as may be expressly permitted pursuant to the provisions of the Loan Documents), mortgage, encumber, transfer, lease or otherwise dispose (except as may be expressly permitted pursuant to the provisions of the Loan Documents) of any of the Collateral or any interest therein, or offer to do so, without the prior written consent of Secured Party, or permit anything to be done that may impair the value of any of the Collateral, except that Debtor shall be entitled to remove any items of Collateral which are replaced with items of Collateral of at least equal suitability and value on the date of their removal;
(b) Debtor shall pay promptly when due any taxes and assessments upon the Collateral or for the use or operation of the Collateral;
(c) Secured Party is authorized to file financing statements under the Uniform Commercial Code, as adopted and enacted in the state in which the Debtor is located or in which the Premises are located, as amended from time to time (the “Uniform Commercial Code”) and any other documents requested by Secured Party to effectively implement the purposes of this Agreement;
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(d) Secured Party may from time to time, at its option, perform any agreement or obligation of Debtor hereunder which Debtor fails to perform, and take any action which Secured Party deems necessary or appropriate for the maintenance or preservation of any of the Collateral or its security interest therein; and
(e) Any amounts incurred by Secured Party for costs and expenses (including without limitation attorney’s fees and expenses) in connection with any action taken by Secured Party to enforce its rights hereunder, shall, at Secured Party’s option, become part of the principal amount due under the Note and part of the Obligations, and on demand by Secured Party, Debtor shall pay any such amount to Secured Party, together with interest thereon at the Default Rate.
5. Representations, Warranties, Covenants and Agreements of the Debtor. Except as set forth under the corresponding section of the disclosure schedules delivered to the Secured Party concurrently herewith (the “Disclosure Schedules”), which Disclosure Schedules shall be deemed a part hereof, each Debtor represents and warrants to, and covenants and agrees with, the Secured Party as follows:
(a) Each Debtor has the requisite corporate, partnership, limited liability company or other power and authority to enter into this Agreement and otherwise to carry out its obligations hereunder. The execution, delivery and performance by each Debtor of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of such Debtor and no further action is required by such Debtor. This Agreement has been duly executed by each Debtor. This Agreement constitutes the legal, valid and binding obligation of each Debtor, enforceable against each Debtor in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization and similar laws of general application relating to or affecting the rights and remedies of creditors and by general principles of equity.
(b) The Debtor has no place of business or offices where their respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on Schedule A attached hereto. Except as specifically set forth on Schedule A, each Debtor is the record owner of the real property where such Collateral is located, and there exist no mortgages or other liens on any such real property except for Permitted Liens (as defined in the Loan Agreement). Except as disclosed on Schedule A, none of such Collateral is in the possession of any consignee, bailee, warehouseman, agent or processor.
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(c) Except for permitted liens and except as set forth on Schedule B attached hereto, the Debtor is the sole owner of the Collateral (except for non-exclusive licenses granted by any Debtor in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and are fully authorized to grant the Security Interests. Except for permitted liens and except as set forth on Schedule C attached hereto, there is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that will be filed in favor of the Secured Party pursuant to this Agreement) covering or affecting any of the Collateral. Except as set forth on Schedule C attached hereto and except pursuant to this Agreement, as long as this Agreement shall be in effect, the Debtor shall not execute and shall not knowingly permit to be on file in any such office or agency any other financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement or the Loan Agreement).
(d) No written claim has been received that any Collateral or any Debtor’s use of any Collateral violates the rights of any third party. There has been no adverse decision to any Debtor’s claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to any Debtor’s right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the best knowledge of any Debtor, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority.
(e) Each Debtor shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on Schedule A attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Party at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements under the UCC and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interests to create in favor of the Secured Party a valid, perfected and continuing perfected first priority lien in the Collateral.
(f) This Agreement creates in favor of the Secured Party a valid security interest in the Collateral, subject only to permitted liens securing the payment and performance of the Obligations. Upon making the filings described in the immediately following paragraph, all security interests created hereunder in any Collateral which may be perfected by filing Uniform Commercial Code financing statements shall have been duly perfected. Except for the filing of the Uniform Commercial Code financing statements referred to in the immediately following paragraph, the execution and delivery of deposit account control agreements satisfying the requirements of Section 9-104(a)(2) of the UCC with respect to each deposit account of the Debtor, and the delivery of the certificates and other instruments provided in Section 3, no action is necessary to create, perfect or protect the security interests created hereunder. Without limiting the generality of the foregoing, except for the filing of said financing statements, and the execution and delivery of said deposit account control agreements, no consent of any third parties and no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for (i) the execution, delivery and performance of this Agreement, (ii) the creation or perfection of the Security Interests created hereunder in the Collateral or (iii) the enforcement of the rights of Secured Party hereunder.
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(g) Each Debtor hereby authorizes Secured Party to file one or more financing statements under the UCC, with respect to the Security Interests, with the proper filing and recording agencies in any jurisdiction deemed proper by it.
(h) The execution, delivery and performance of this Agreement by the Debtor does not (i) violate any of the provisions of any Organizational Documents of any Debtor or any judgment, decree, order or award of any court, governmental body or arbitrator or any applicable law, rule or regulation applicable to any Debtor or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing any Debtor’s debt or otherwise) or other understanding to which any Debtor is a party or by which any property or asset of any Debtor is bound or affected. If any, all required consents (including, without limitation, from stockholders or creditors of any Debtor) necessary for any Debtor to enter into and perform its obligations hereunder have been obtained.
(i) Schedule H hereto contains the name and percentage of ownership of each 10% or more equity owner of Borrower.
(j) The ownership and other equity interests in partnerships and limited liability companies (if any) included in the Collateral (the “Pledged Interests”) by their express terms do not provide that they are securities governed by Article 8 of the UCC and are not held in a securities account or by any financial intermediary.
(k) Except for Permitted Liens (as defined in the Loan Agreement), each Debtor shall at all times maintain the liens and Security Interests provided for hereunder as valid and perfected first priority liens and security interests in the Collateral in favor of the Secured Party until this Agreement and the Security Interest hereunder shall be terminated pursuant to Section 14 hereof. Each Debtor hereby agrees to defend the same against the claims of any and all persons and entities. Each Debtor shall safeguard and protect all Collateral for the account of the Secured Party. At the request of Secured Party, each Debtor will sign and deliver to Secured Party at any time or from time to time one or more financing statements pursuant to the UCC in form reasonably satisfactory to Secured Party and will pay the cost of filing the same in all public offices wherever filing is, or is deemed by Secured Party to be, necessary or desirable to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, each Debtor shall pay all fees, taxes and other amounts necessary to maintain the Collateral and the Security Interests hereunder, and each Debtor shall obtain and furnish to Secured Party from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interests hereunder.
(l) No Debtor will transfer, pledge, hypothecate, encumber, license, sell or otherwise dispose of any of the Collateral (except for non-exclusive licenses granted by a Debtor in its ordinary course of business, sales of inventory by a Debtor in its ordinary course of business, and the use of cash in its ordinary course of business) without the prior written consent of a Majority in Interest.
(m) Each Debtor shall keep and preserve its equipment, inventory and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage.
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(n) Each Debtor shall maintain with financially sound and reputable insurers, insurance with respect to the Collateral, including Collateral hereafter acquired, against loss or damage of the kinds and in the amounts customarily insured against by entities of established reputation having similar properties similarly situated and in such amounts as are customarily carried under similar circumstances by other such entities and otherwise as is prudent for entities engaged in similar businesses but in any event sufficient to cover the full replacement cost thereof. Each Debtor shall cause each insurance policy issued in connection herewith to provide, and the insurer issuing such policy to certify to Secured Party, that (a) Secured Party will be named as lender loss payee and additional insured under each such insurance policy; (b) if such insurance be proposed to be cancelled or materially changed for any reason whatsoever, such insurer will promptly notify Secured Party and such cancellation or change shall not be effective as to Secured Party for at least thirty (30) days after receipt by Secured Party of such notice, unless the effect of such change is to extend or increase coverage under the policy; and (c) Secured Party will have the right (but no obligation) at its election to remedy any default in the payment of premiums within thirty (30) days of notice from the insurer of such default. If no Event of Default (as defined in the Note) exists and if the proceeds arising out of any claim or series of related claims do not exceed $100,000, loss payments in each instance will be applied by the applicable Debtor to the repair and/or replacement of property with respect to which the loss was incurred to the extent reasonably feasible, and any loss payments or the balance thereof remaining, to the extent not so applied, shall be payable to the applicable Debtor; provided, however, that payments received by any Debtor after an Event of Default occurs and is continuing or in excess of $100,000 for any occurrence or series of related occurrences shall be paid to Secured Party and, if received by such Debtor, shall be held in trust for the Secured Party and immediately paid over to Secured Party unless otherwise directed in writing by Secured Party. Copies of such policies or the related certificates, in each case, naming Secured Party as lender loss payee and additional insured shall be delivered to Secured Party at least annually and at the time any new policy of insurance is issued.
(o) Each Debtor shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any material adverse change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party’ security interest, through Secured Party, therein.
(p) Each Debtor shall promptly execute and deliver to Secured Party such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as Secured Party may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce the Secured Party’ security interest in the Collateral.
(q) Each Debtor shall permit Secured Party and its representatives and agents to inspect the Collateral during normal business hours and upon reasonable prior notice and to make copies of records pertaining to the Collateral as may be reasonably requested by Secured Party from time to time.
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(r) Each Debtor shall take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral.
(s) Each Debtor shall promptly notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by such Debtor that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Party hereunder.
(t) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of any Debtor with respect to the Collateral is accurate and complete in all material respects as of the date furnished.
(u) The Debtor shall at all times preserve and keep in full force and effect their respective valid existence and good standing and any rights and franchises material to its business.
(v) No Debtor will change its name, type of organization, jurisdiction of organization, organizational identification number (if it has one), legal or corporate structure, or identity, or add any new fictitious name unless it provides at least 30 days prior written notice to the Secured Party of such change and, at the time of such written notification, such Debtor provides any financing statements or fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.
(w) Except in the ordinary course of business, no Debtor may consign any of its inventory or sell any of its inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale without the consent of Secured Party which shall not be unreasonably withheld.
(x) No Debtor may relocate its chief executive office to a new location without providing 30 days prior written notification thereof to the Secured Party and so long as, at the time of such written notification, such Debtor provides any financing statements or fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.
(y) Each Debtor and its subsidiaries were organized and remains organized solely under the laws of the state set forth next to such Debtor’s or subsidiary’s name in Schedule D attached hereto, which Schedule D sets forth each Debtor’s and its subsidiary’s organizational identification number or, if any Debtor or its subsidiaries does not have one, states that one does not exist.
(z) (i) The actual name of each Debtor is the name set forth in Schedule D attached hereto; (ii) no Debtor has any trade names except as set forth on Schedule E attached hereto; (iii) no Debtor has used any name other than that stated in the preamble hereto or as set forth on Schedule E for the preceding five years; and (iv) no entity has merged into any Debtor or been acquired by any Debtor within the past five years except as set forth on Schedule E.
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(aa) At any time and from time to time that any Collateral consists of instruments, certificated securities or other items that require or permit possession by the secured party to perfect the security interest created hereby, the applicable Debtor shall deliver such Collateral to Secured Party.
(bb) Each Debtor, in its capacity as issuer, hereby agrees to comply with any and all orders and instructions Secured Party regarding the Pledged Interests consistent with the terms of this Agreement without the further consent of any Debtor as contemplated by Section 8-106 (or any successor section) of the UCC. Further, each Debtor agrees that it shall not enter into a similar agreement (or one that would confer “control” within the meaning of Article 8 of the UCC) with any other person or entity.
(cc) Each Debtor shall cause all tangible chattel paper constituting Collateral to be delivered to Secured Party, or, if such delivery is not possible, then to cause such tangible chattel paper to contain a legend noting that it is subject to the security interest created by this Agreement. To the extent that any Collateral consists of electronic chattel paper, the applicable Debtor shall cause the underlying chattel paper to be “marked” within the meaning of Section 9-105 of the UCC (or successor section thereto).
(dd) Upon the occurrence of any Event of Default and at any time thereafter, if there is any investment property or deposit account included as Collateral that can be perfected by “control” through an account control agreement, the applicable Debtor shall, promptly following the request of Secured Party, cause such an account control agreement, in form and substance in each case satisfactory to Secured Party, to be entered into and delivered to Secured Party.
(ee) To the extent that any Collateral consists of letter-of-credit rights, the applicable Debtor shall cause the issuer of each underlying letter of credit to consent to an assignment of the proceeds thereof to the Secured Party.
(ff) To the extent that any Collateral is in the possession of any third party, the applicable Debtor shall join with Secured Party in notifying such third party of the Secured Party’ security interest in such Collateral and shall use its best efforts to obtain an acknowledgement and agreement from such third party with respect to the Collateral, in form and substance reasonably satisfactory to Secured Party.
(gg) If any Debtor shall at any time hold or acquire a commercial tort claim, such Debtor shall promptly notify the Secured Party in a writing signed by such Debtor of the particulars thereof and grant to the Secured Party in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to Secured Party.
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(hh) Each Debtor shall immediately provide written notice to the Secured Party of any and all accounts which arise out of contracts with any governmental authority and, to the extent necessary to perfect or continue the perfected status of the Security Interests in such accounts and proceeds thereof, shall execute and deliver to Secured Party an assignment of claims for such accounts and cooperate with Secured Party in taking any other steps required, in its judgment, under the Federal Assignment of Claims Act or any similar federal, state or local statute or rule to perfect or continue the perfected status of the Security Interests in such accounts and proceeds thereof.
(ii) Without limiting the generality of the other obligations of the Debtor hereunder, each Debtor shall promptly (i) cause to be registered at the United States Copyright Office all of its material copyrights, and (ii) give Secured Party notice whenever it acquires (whether absolutely or by license) or creates any additional material Intellectual Property.
(jj) Each Debtor will from time to time, at the joint and several expense of the Debtor, promptly execute and deliver all such further instruments and documents, and take all such further action as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce their rights and remedies hereunder and with respect to any Collateral or to otherwise carry out the purposes of this Agreement.
(kk) Schedule F attached hereto lists all of the patents, patent applications, trademarks, trademark applications, registered copyrights, and domain names owned by any of the Debtor as of the date hereof. Schedule F lists all material licenses in favor of any Debtor for the use of any patents, trademarks, copyrights and domain names as of the date hereof. All material patents and trademarks of the Debtor have been duly recorded at the United States Patent and Trademark Office and all material copyrights of the Debtor have been duly recorded at the United States Copyright Office.
(ll) Except as set forth on Schedule G attached hereto, none of the account debtors or other persons or entities obligated on any of the Collateral is a governmental authority covered by the Federal Assignment of Claims Act or any similar federal, state or local statute or rule in respect of such Collateral.
(mm) Until the Obligations shall have been paid and performed in full, the Company covenants that it shall promptly direct any direct or indirect subsidiary of the Company formed or acquired after the date hereof to enter into a Subsidiary Guarantee in favor of the Secured Party.
6. Effect of Pledge on Certain Rights. If any of the Collateral subject to this Agreement consists of nonvoting equity or ownership interests (regardless of class, designation, preference or rights) that may be converted into voting equity or ownership interests upon the occurrence of certain events (including, without limitation, upon the transfer of all or any of the other stock or assets of the issuer), it is agreed that the pledge of such equity or ownership interests pursuant to this Agreement or the enforcement of any of Secured Party’s rights hereunder shall not be deemed to be the type of event which would trigger such conversion rights notwithstanding any provisions in the Organizational Documents or agreements to which any Debtor is subject or to which any Debtor is party.
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7. Defaults. The following events shall be “Events of Default”:
(a) The occurrence of an Event of Default (as defined in the Note) under the Note;
(b) Any representation or warranty of any Debtor in this Agreement shall prove to have been incorrect in any material respect when made;
(c) The failure by any Debtor to observe or perform any of its obligations hereunder for five (5) days after delivery to such Debtor of notice of such failure by or on behalf of a Secured Party unless such default is capable of cure but cannot be cured within such time frame and such Debtor is using best efforts to cure same in a timely fashion; or
(d) If any provision of this Agreement shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Debtor, or a proceeding shall be commenced by any Debtor, or by any governmental authority having jurisdiction over any Debtor, seeking to establish the invalidity or unenforceability thereof, or any Debtor shall deny that any Debtor has any liability or obligation purported to be created under this Agreement.
8. Duty To Hold In Trust. Upon the occurrence of any Event of Default and at any time thereafter, each Debtor shall, upon receipt of any revenue, income, dividend, interest or other sums subject to the Security Interests, whether payable pursuant to the Note or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party, pro-rata in proportion to their respective then-currently outstanding principal amount of Note for application to the satisfaction of the Obligations (and if any Debenture is not outstanding, pro-rata in proportion to the initial purchases of the remaining Note).
9. Rights and Remedies Upon Default.
(a) Upon the occurrence of any Event of Default and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder and under the Note, and the Secured Party shall have all the rights and remedies of a secured party under the UCC. Without limitation, the Secured Party shall have the following rights and powers:
(i) The Secured Party shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and each Debtor shall assemble the Collateral and make it available to Secured Party at places which Secured Party shall reasonably select, whether at such Debtor’s premises or elsewhere, and make available to Secured Party, without rent, all of such Debtor’s respective premises and facilities for the purpose of Secured Party taking possession of, removing or putting the Collateral in saleable or disposable form.
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(ii) Upon notice to the Debtor by Secured Party, all rights of each Debtor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise with respect to Collateral and all rights of each Debtor to receive the dividends and interest which it would otherwise be authorized to receive and retain, shall cease. Upon such notice, Secured Party shall have the right to receive, for the benefit of the Secured Party, any interest, cash dividends or other payments on the Collateral and, at the option of Secured Party, to exercise in Secured Party’s discretion all voting rights pertaining thereto. Without limiting the generality of the foregoing, Secured Party shall have the right (but not the obligation) to exercise all rights with respect to the Collateral as it were the sole and absolute owner thereof, including, without limitation, to vote and/or to exchange, at its sole discretion, any or all of the Collateral in connection with a merger, reorganization, consolidation, recapitalization or other readjustment concerning or involving the Collateral or any Debtor or any of its direct or indirect subsidiaries.
(iii) Secured Party shall have the right to operate the business of each Debtor using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to any Debtor or right of redemption of a Debtor, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, Secured Party may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of any Debtor, which are hereby waived and released.
(iv) Secured Party shall have the right (but not the obligation) to notify any account Debtor and any obligors under instruments or accounts to make payments directly to Secured Party, and to enforce the Debtor’ rights against such account Debtor and obligors.
(v) Secured Party may (but is not obligated to) direct any financial intermediary or any other person or entity holding any investment property to transfer the same to Secured Party or its designee.
(vi) Secured Party may (but is not obligated to) transfer any or all Intellectual Property registered in the name of any Debtor at the United States Patent and Trademark Office and/or Copyright Office into the name of the Secured Party or any designee or any purchaser of any Collateral.
(b) Secured Party shall comply with any applicable law in connection with a disposition of Collateral and such compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. Secured Party may sell the Collateral without giving any warranties and may specifically disclaim such warranties. If Secured Party sells any of the Collateral on credit, the Debtor will only be credited with payments actually made by the purchaser. In addition, each Debtor waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of Secured Party’s rights and remedies hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies with respect thereto.
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(c) For the purpose of enabling Secured Party to further exercise rights and remedies under this Section 9 or elsewhere provided by agreement or applicable law, each Debtor hereby grants to Secured Party an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to such Debtor) to use, license or sublicense following an Event of Default, any Intellectual Property now owned or hereafter acquired by such Debtor, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.
10. Applications of Proceeds. In the event of an Event of Default and the subsequent disposition of Collateral by the Secured Party, the proceeds of any such sale, lease or other disposition of the Collateral hereunder or from payments made on account of any insurance policy insuring any portion of the Collateral shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys’ fees and expenses incurred by Secured Party in enforcing the Secured Party’ rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations pro rata among the Secured Party (based on then-outstanding principal amounts of Note at the time of any such determination), and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the applicable Debtor any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, the Debtor will be liable for the deficiency, together with interest thereon, at the Default Rate described in the Loan Agreement (the “Default Rate”), and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, each Debtor waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral, unless due solely to the gross negligence or willful misconduct of the Secured Party as determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction.
11. Costs and Expenses. Each Debtor agrees to pay all reasonable out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements pursuant to the UCC, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by Secured Party. The Debtor shall also pay all other claims and charges which in the reasonable opinion of Secured Party are reasonably likely to prejudice, imperil or otherwise affect the Collateral or the Security Interests therein. The Debtor will also, upon demand, pay to Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which Secured Party may incur in connection with the creation, perfection, protection, satisfaction, foreclosure, collection or enforcement of the Security Interest and the preparation, administration, continuance, amendment or enforcement of this Agreement and pay to Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Note. Until so paid, any fees payable hereunder shall be added to the principal amount of the Note and shall bear interest at the Default Rate.
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12. Responsibility for Collateral. The Debtor assumes all liabilities and responsibility in connection with all Collateral, and the Obligations shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. Without limiting the generality of the foregoing, (a) Secured Party does not (i) have any duty (either before or after an Event of Default) to collect any amounts in respect of the Collateral or to preserve any rights relating to the Collateral, or (ii) have any obligation to clean-up or otherwise prepare the Collateral for sale, and (b) each Debtor shall remain obligated and liable under each contract or agreement included in the Collateral to be observed or performed by such Debtor thereunder. Secured Party shall not have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by Secured Party of any payment relating to any of the Collateral, nor shall Secured Party be obligated in any manner to perform any of the obligations of any Debtor under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by Secured Party in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to Secured Party or to which Secured Party may be entitled at any time or times.
13. Security Interests Absolute. All rights of the Secured Party and all obligations of the Debtor hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Note or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Note or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guarantee, or any other security, for all or any of the Obligations; (d) any action by the Secured Party to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to a Debtor, or a discharge of all or any part of the Security Interests granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. Each Debtor expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Party, then, in any such event, each Debtor’s obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. Each Debtor waives all right to require the Secured Party to proceed against any other person or entity or to apply any Collateral which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy. Each Debtor waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby.
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14. Term of Agreement. This Agreement and the Security Interests shall terminate on the date on which all payments under the Note have been indefeasibly paid in full and all other Obligations have been paid or discharged; provided, however, that all indemnities of the Debtor contained in this Agreement shall survive and remain operative and in full force and effect regardless of the termination of this Agreement.
15. Power of Attorney; Further Assurances.
(a) Each Debtor authorizes Secured Party, and does hereby make, constitute and appoint Secured Party and its officers, agents, successors or assigns with full power of substitution, as such Debtor’s true and lawful attorney-in-fact, with power, in the name of Secured Party or such Debtor, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any note, checks, drafts, money orders or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of Secured Party; (ii) to sign and endorse any financing statement pursuant to the UCC or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against Debtor, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; (v) to transfer any Intellectual Property or provide licenses respecting any Intellectual Property; and (vi) generally, at the option of Secured Party, and at the expense of the Debtor, at any time, or from time to time, to execute and deliver any and all documents and instruments and to do all acts and things which Secured Party deems necessary to protect, preserve and realize upon the Collateral and the Security Interests granted therein in order to effect the intent of this Agreement and the Note all as fully and effectually as the Debtor might or could do; and each Debtor hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding. The designation set forth herein shall be deemed to amend and supersede any inconsistent provision in the Organizational Documents or other documents or agreements to which any Debtor is subject or to which any Debtor is a party. Without limiting the generality of the foregoing, after the occurrence and during the continuance of an Event of Default, each Secured Party is specifically authorized to execute and file any applications for or instruments of transfer and assignment of any patents, trademarks, copyrights or other Intellectual Property with the United States Patent and Trademark Office and the United States Copyright Office.
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(b) On a continuing basis, each Debtor will make, execute, acknowledge, deliver, file and record, as the case may be, with the proper filing and recording agencies in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule C attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by Secured Party, to perfect the Security Interests granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to Secured Party the grant or perfection of a perfected security interest in all the Collateral under the UCC.
(c) Each Debtor hereby irrevocably appoints Secured Party as such Debtor’s attorney-in-fact, with full authority in the place and instead of such Debtor and in the name of such Debtor, from time to time in Secured Party’s discretion, to take any action and to execute any instrument which Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of such Debtor where permitted by law, which financing statements may (but need not) describe the Collateral as “all assets” or “all personal property” or words of like import, and ratifies all such actions taken by Secured Party. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding.
16. Notices. All notices, requests, demands and other communications hereunder shall be subject to the notice provision of the Loan Agreement (as such term is defined in the Note).
17. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party’ rights and remedies hereunder.
18. Miscellaneous.
(a) No course of dealing between the Debtor and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
(b) All of the rights and remedies of the Secured Party with respect to the Collateral, whether established hereby or by the Note or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently.
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(c) This Agreement, together with the exhibits and schedules hereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into this Agreement and the exhibits and schedules hereto. No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Debtor and the Secured Party holding 67% or more of the principal amount of Note then outstanding, or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought.
(d) If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
(e) No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
(f) This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company and the Guarantors, if any, may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Secured Party (other than by merger). Any Secured Party may assign any or all of its rights under this Agreement to any Person (as defined in the Loan Agreement) to whom such Secured Party assigns or transfers any Obligations, provided such transferee agrees in writing to be bound, with respect to the transferred Obligations, by the provisions of this Agreement that apply to the “Secured Party.”
(g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.
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(h) Except to the extent mandatorily governed by the jurisdiction or situs where the Collateral is located, all questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. Except to the extent mandatorily governed by the jurisdiction or situs where the Collateral is located, each Debtor agrees that all proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and the Note (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of San Diego. Except to the extent mandatorily governed by the jurisdiction or situs where the Collateral is located, each Debtor hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of San Diego for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
(i) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
(j) All Debtor shall jointly and severally be liable for the obligations of each Debtor to the Secured Party hereunder.
(k) Each Debtor shall indemnify, reimburse and hold harmless Secured Party and its respective partners, members, shareholders, officers, directors, employees and agents (and any other persons with other titles that have similar functions) (collectively, “Indemnitees”) from and against any and all losses, claims, liabilities, damages, penalties, suits, costs and expenses, of any kind or nature, (including fees relating to the cost of investigating and defending any of the foregoing) imposed on, incurred by or asserted against such Indemnitee in any way related to or arising from or alleged to arise from this Agreement or the Collateral, except any such losses, claims, liabilities, damages, penalties, suits, costs and expenses which result from the gross negligence or willful misconduct of the Indemnitee as determined by a final, nonappealable decision of a court of competent jurisdiction. This indemnification provision is in addition to, and not in limitation of, any other indemnification provision in the Note, the Loan Agreement (as such term is defined in the Note) or any other agreement, instrument or other document executed or delivered in connection herewith or therewith.
(l) Nothing in this Agreement shall be construed to subject Secured Party to liability as a partner in any Debtor or any if its direct or indirect subsidiaries that is a partnership or as a member in any Debtor or any of its direct or indirect subsidiaries that is a limited liability company, nor shall Secured Party be deemed to have assumed any obligations under any partnership agreement or limited liability company agreement, as applicable, of any such Debtor or any of its direct or indirect subsidiaries or otherwise, unless and until any such Secured Party exercises its right to be substituted for such Debtor as a partner or member, as applicable, pursuant hereto.
(m) To the extent that the grant of the security interest in the Collateral and the enforcement of the terms hereof require the consent, approval or action of any partner or member, as applicable, of any Debtor or any direct or indirect subsidiary of any Debtor or compliance with any provisions of any of the Organizational Documents, the Debtor hereby grant such consent and approval and waive any such noncompliance with the terms of said documents.
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IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written.
| DEBTOR: SurgePays, Inc. | ||
| By: | /s/ Kevin Brian Cox | |
| Name: | Kevin Brian Cox | |
| Title: | CEO | |
| SECURED PARTY: | ||
| By: | /s/ Name of President and CEO of Secured Party | |
| Name: | ||
| Title: | ||
Exhibit 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (the “Agreement”) is made and entered into as of August 8, 2022, by and between SurgePays, Inc., a corporation incorporated under the laws of the State of Nevada with a principal place of business at 3124 Brother Blvd., Suite 104, Bartlett, TN 38133 (the “Company”), and Anthony Evers, an individual residing at 1375 E. Woodfield Road, Suite 410, Schaumburg, IL 60173 (“Executive”).
RECITALS
| A. | Executive is knowledgeable with respect to the business of the Company | |
| B. | Company desires to offer employment to Executive and Executive desires to be employed by Company. | |
| C. | Company and Executive agree to enter into an Employment Agreement providing for the term set forth in Article I below, on the terms and conditions herein provided. | |
| D. | The Employment Agreement dated March 1, 2020, fully executed, Board of Directors approved and proper public filing, be superseded with this Agreement. Specifically, the Additional Bonus provision of 1,000,000 shares of common stock, which had a defined value of $2,000,000, to be awarded to the Executive within thirty (30) days of the Value Weighted Average Price (“VWAP”) trading at $2.00 or more for any ninety (90) day trading period is cancelled and replace with the clauses herein depicted. This date was May 19, 2022. |
In consideration of the mutual promises set forth in this Agreement the parties hereto agree as follows:
ARTICLE I
Term of Employment
Subject to the provisions of Article V, and upon the terms and subject to the conditions set forth herein, the Company will employ Executive for the period beginning on the date hereof (the “Commencement Date”) and ending on the five (5) year anniversary of the date hereof (the “Initial Term”). The Initial Term shall be automatically renewed for successive consecutive one (1) year periods (each, a “Renewal Term” and the Initial Term and Renewal Term are collectively referred to as the “term of employment”) thereafter unless either party sends written notice to the other party, not more than 270 days and not less than 90 days before the end of the then-existing term of employment, of such party’s desire to terminate the Agreement at the end of the then-existing term, in which case this Agreement will terminate at the end of the then-existing term. Executive will serve the Company during the term of employment.
ARTICLE II
Duties
2.01 (a) During the term of employment, Executive will:
(i) Promote the interests, within the scope of his duties, of the Company and devote his full working time and efforts to the Company’s business and affairs;
(ii) Serve as the Chief Financial Officer of the Company; and
(iii) Perform the duties and services consistent with the title and function of such office, including without limitation, those set forth in the By-Laws of the Company.
(b) Notwithstanding anything contained in clause 2.01(a)(i) above to the contrary, nothing contained herein or under law shall be construed as preventing Executive from (i) investing Executive’s personal assets in such form or manner as will not require any services on the part of Executive in the operation or the affairs of the companies in which such investments are made and in which his participation is solely that of an investor; (ii) engaging (whether or not during normal business hours) in any other professional, civic, or philanthropic activities, provided that Executive’s engagement does not result in a violation of his covenants under this Section or Article VI hereof; or (iii) accepting appointments to the boards of directors of other companies provided that the Board of Directors of the Company reasonably approves of such appointments and Executive’s performance of his duties on such boards does not result in a violation of his covenants under this Section or Article VI hereof.
ARTICLE III
Base Compensation
3.01 The Company will compensate Executive for the duties performed by him hereunder by payment of a base salary at the rate of Four Hundred Fifty Thousand Dollars ($450,000) per annum (the “Base”), payable in equal semimonthly installments, subject to customary withholding for federal, state, and local taxes and other normal and customary withholding items. Provided that the Company’s EBITDA is positive with respect to the prior calendar year, the Base will be increased on January 1 of each year by six percent (6%) per annum (which figure shall act as a surrogate for the service cost of living increases) over the then-existing Base. All dollar references contained herein shall be references to United States dollars.
3.02a Signing Bonus. The Company shall pay the Executive a one-time signing bonus of Fifty percent (50%) of the base salary identified in 3.01 (equivalent to $225,000) (the “Signing Bonus”) within thirty (30) days following the Commencement Date, less payroll deductions and all required withholdings. If the Executive resigns from employment with the Company without Good Reason or the Company terminates the Executive’s employment for Cause, in each case prior to the first anniversary of the Commencement Date, the Executive must repay to the Company a pro rata portion of the Signing Bonus representing the remainder of the period between the date of termination and the one-year anniversary of the Commencement Date. If any repayment is due to the Company pursuant to this Section, the Executive agrees that the amount of the repayment due is payable in full immediately via personal check or payroll deduction and the Executive agrees to permit the Company to deduct this amount from any monies or benefits due to the Executive including wages, bonuses, reimbursements and/or expenses and any remaining amounts are the Executive’s responsibility, payable via personal check immediately but in no event later than thirty (30) days of the Executive’s last day of employment with the Company.
3.02b Restricted Vesting Shares. In consideration of the agreement of the Employee to the extension effected by this agreement, the Corporation shall grant to the Employee under the yet to be adopted SurgePays Inc.Stock Incentive Plan (the “Plan”) on the date of execution of Agreement (the “Restricted Shares Grant Date”), a restricted stock award for 500,000 shares (the “Restricted Shares”) of common stock of the Corporation under the Plan which Restricted Shares shall be subject to certain restrictions including, without limitation, that the Employee will not sell, transfer, pledge, hypothecate, assign or otherwise dispose of the Restricted Shares except as set forth under the Plan or the restricted stock agreement to be entered into by the Corporation and the Employee concurrently herewith. Vesting of the Restricted Shares shall occur in bi-annual installments over five years commencing on December 31, 2022 on which date 50,000 shares of the Restricted Shares shall vest and continuing to vest thereafter on each of July 1 and December 31, for the years of 2023-2027. Restricted shares shall vest; provided, however, in each case, that the Employee continues to be employed by the Corporation on each such date through December 31, 2027. Notwithstanding the foregoing, the Restricted Shares shall immediately vest, in full, upon the occurrence of any of the following events: (i) the Employee’s death, (ii) the Employee’s Total Disability (as defined in the Employment Agreement) and (iii) a Change of Control (as defined in the Employment Agreement) of the Corporation; provided, however, in each case, that the Employee continues to be employed by the Corporation on the date of the occurrence of such event. The grant shall be evidenced by, and subject to the additional terms and conditions contained in, the Plan and the associated restricted stock agreement.
3.02c Restricted Signing Shares. In consideration of the agreement of the Employee to the extension effected by this agreement, the Corporation shall grant to the Employee 100,000 shares of the Company’s common stock within five (5) business days of stockholder approval of the Plan.
3.03 Cash Bonus. In addition to the Base, for each year during the Initial Term and Renewal Term, the Company shall pay to the Executive a bonus determined by the relationship between the Company’s annual performance and an annual target performance set each year by mutual agreement between the Board of Directors and the Executive (the “Target”) as follows: The greater of the Cash Percentage or:
| % of Target | >150% | 149-120% | 119-100% | 99-80% | 79-60% | Under 60% | ||||||
| % of Base Salary | 45% | 40.5% | 33% | 18% | 9% | 0% |
Such bonus shall be paid no later than March 15 of the next calendar year.
“Cash Percentage” means 10% of the Company’s calendar year EBITDA for amounts of EBITDA between $0 and $1,000,000; 7.5% of the Company’s calendar year EBITDA for amounts of EBITDA between $1,000,001 and $2,000,000; 5% of the Company’s calendar year EBITDA for amounts of EBITDA between $2,000,001 and $3,000,000; and 2.5% of the Company’s calendar year EBITDA for amounts of EBITDA greater than $3,000,000.
3.04 Stock Bonus. The Executive will participate in the Company’s executive equity incentive plan consistent with other C-level officers, once adopted by the Company. In addition, Executive will receive the following stock-based bonuses:
| (A) | EBITDA based issuances. The first time the Company reaches i) positive cash flow EBITDA for a quarter, Executive will receive 150,000 shares of the Company’s common stock, ii) positive cash flow of over $1,000,000 EBITDA for a quarter, Executive will receive 150,000 shares of the Company’s common stock, iii) positive cash flow of over $3,000,000 EBITDA for a quarter, Executive will receive 150,000 shares of the Company’s common stock, and iv) positive cash flow of over $5,000,000 EBITDA for a quarter, Executive will receive 150,000 shares of the Company’s common stock. Such issuance to be issued before the last business day of the following quarter in which such milestone is achieved. | |
| (B) | Market Capitalization Based Issuances. The Executive shall qualify to receive (i) an issuance of 150,000 shares immediately upon the market capitalization of the Company reaching $250,000,000, (ii) an issuance of 150,000 shares immediately upon the market capitalization of the Company reaching $500,000,000, (iii) an issuance of 150,000 shares immediately upon the market capitalization of the Company reaching $1,000,000,000, (iv) an issuance of 150,000 shares immediately upon the market capitalization of the Company reaching $2,000,000,000, (v) an issuance of 150,000 shares immediately upon the market capitalization of the Company reaching $3,000,000,000, (vi) an issuance of 150,000 shares immediately upon the market capitalization of the Company reaching $4,000,000,000, and (vii) an issuance of 150,000 shares immediately upon the market capitalization of the Company reaching $5,000,000,000; in each case such issuance to be issued on the last business day of the quarter in which such milestone is achieved so long as the Executive is employed by the Company on such day, | |
| (C) | Business Metrics Growth Based Issuances. The Executive shall qualify to receive (i) an issuance of 75,000 shares immediately upon 25,000 stores becoming active on SurgePays network, (ii) an issuance of 75,000 shares immediately upon 50,000 stores becoming active on SurgePays network, (iii) an issuance of 75,000 shares immediately upon 100,000 stores becoming active on SurgePays network (iv) an issuance of 150,000 shares immediately upon the total subscribers (Wireless MVNO, Mobile Broadband or digital content customers) of the Company reaching 250,000, (v) an issuance of 150,000 shares immediately upon the total subscribers (Wireless MVNO, Mobile Broadband or digital content customers) of the Company reaching 500,000, (vi) an issuance of 150,000 shares immediately upon the total subscribers (Wireless MVNO, Mobile Broadband or digital content customers) of the Company reaching 750,000, (vii) an issuance of 150,000 shares immediately upon the total subscribers (Wireless MVNO, Mobile Broadband or digital content customers) of the Company reaching 1,000,000, and (vii) additional issuance of 150,000 shares of stock per increment of 500,000 subscribers total subscribers (Wireless MVNO, Mobile Broadband or digital content customers) of the Company; in each case such issuance to be issued on the last business day of the quarter in which such milestone is achieved so long as the Executive is employed by the Company on such day. |
| (D) | Executive Stock Options. Following the adoption of the Plan, the Executive will receive the following stock-based bonuses on January 1 of each calendar year (each a “Grant Date”) at an exercise price equal to the greater of (i) fair market value per share (as quoted on NASDAQ – the closing price) as of the Grant Date and (ii) $4.29: (i) 75,000 options to purchase shares of the Company’s common stock, such options vesting quarterly over the period beginning January 2022 and ending December 2022; (ii) 75,000 options to purchase shares of the Company’s common stock, such options vesting quarterly over the period beginning January 2023 and ending December 2023; (iii) 75,000 options to purchase shares of the Company’s common stock, such options vesting quarterly over the period beginning January 2024 and ending December 2024; (iv) 75,000 options to purchase shares of the Company’s common stock, such options vesting quarterly over the period beginning January 2025 and ending December 2025; and (v) 75,000 options to purchase shares of the Company’s common stock, such options vesting quarterly over the period beginning January 2026 and ending December 2026. | |
| (E) | All of the awards referenced in subparagraphs (A) - (D) of this Section 3.04 shall be made pursuant to the Plan, subject to approval by the Company’s shareholders of a sufficient number of shares available for issuance under the Plan. The Plan and related award agreements shall provide for the acceleration of all vesting requirements referenced in subparagraphs (A) – (D) upon a Change in Control, and for the use of cash, shares or other method of cashless exercise to satisfy all tax withholding requirements which shall be borne by the Executive. If any of the awards referenced in subparagraphs (A) – (D) are earned but cannot be made pursuant to the Plan because the Board has not approved the mailing of either (i) a proxy statement or (ii) a notice and access card regarding the availability of proxy materials to the shareholders to vote to have an increase in the authorized shares under the Plan be approved by the shareholders within 90 days following the date upon which such award is due and owing, the Company shall make a cash payment to Executive in lieu of each such award at the time the award otherwise would have been made in an amount equal to three (3) times the number of shares to be issued to the Executive pursuant to subparagraphs (A) – (D) multiplied by the volume average weighted price (VWAP) of the Company’s common stock during the period commencing on the date of this Agreement and ending on the day prior to the date of payment. In the event that the Board has approved the mailing of either (i) a proxy statement or (ii) a notice and access card regarding the availability of proxy materials to the shareholders, as required pursuant to this Section, and the shareholders do not approve an increase in the authorized shares under the Plan, the Company shall make a cash payment to Executive in lieu of each such award at the time the award otherwise would have been made in an amount equal to one (1) times the number of shares to be issued to the Executive pursuant to subparagraphs (A) – (D) multiplied by the volume average weighted price (VWAP) of the Company’s common stock during the period commencing on the date of this Agreement and ending on the day prior to the date of payment. In the event that the Company does not have the available cash or cannot otherwise afford to pay cash owed pursuant to this Section in the Board’s discretion, the Company shall be able to issue a promissory note to the Executive with terms which are mutually agreeable amongst the Company (as approved by the Board) and the Executive. |
ARTICLE IV
Reimbursement and Employment Benefits
4.01 Health and Other Medical. Executive shall be eligible to participate in all health, medical, dental, and life insurance employee benefits as are available from time to time to other key executive employees (and their families) of the Company, including a Life Insurance Plan, Medical and Dental Insurance Plan, and a Long-Term Disability Plan (the “Insurance Plans”). The Company shall pay all premiums with respect to such Insurance Plans. To the extent that such premiums are deemed to be includable in Executive’s gross income and taxable (the “Reimbursement”), the Company shall pay to the Executive on or before March 15 of the year after the premium payment(s) the quotient of the amount of Reimbursement divided by 0.54, and then subtracting the Reimbursement from this amount (e.g., if the Reimbursement is $1,000.00, then the Company would pay to the Executive the sum of $851.85, which is $1,000.00 divided by 0.54, and subtracting the amount of Reimbursement).
4.02 Vacation. Executive shall be entitled to Four (4) weeks of vacation and five (5) personal days per year, to be taken in such amounts and at such times as shall be mutually convenient for Executive and the Company. Any time not taken by Executive in one year shall be carried forward to subsequent years. If all such vacation and personal time to which Executive is entitled is not taken by Executive before the termination of this Agreement, Executive shall be entitled to be reimbursed upon termination (for any reason) for such lost time in accordance with the Base then in effect.
4.03 Performance-Enhancing Items. Executive shall be entitled to receive from the Company (a) an annual car allowance up to three thousand seven-hundred and fifty dollars ($3,750.00) per annum, and (b) reimbursement by the Company for home office expenses up to five hundred dollars ($500.00) per month, including, without limitation, the purchase and maintenance of a home computer with linkup facilities to the Company, a home facsimile, printer and scanner, interconnection of two telephone or cable connections to the Internet, laptop computer, portable mobile phone, together with any charges for the use thereof. To the extent that any and all such reimbursements or payments by the Company pursuant to this Section 4.03 are includable in Executive’s gross income and taxable (the “Allowances”), then the Company shall, on or before March 15 of the year after the payment is made, pay to the Executive the quotient of the amount of Allowances divided by 0.54, and then subtracting the Allowances from this amount (e.g., if the Allowances are $1,000.00, then the Company would pay to the Executive the sum of $851.85, which is $1,000.00 divided by 0.54, and subtracting the amount of the Allowances).
4.04 Reimbursable Expenses. The Company shall in accordance with its standard policies in effect from time to time reimburse Executive for all reasonable out-of-pocket expenses actually incurred by him in the conduct of the business of the Company including business class air travel for flights, quality hotels and rental cars, entertainment and similar executive expenditures provided that Executive submits all substantiation of such expenses to the Company on a timely basis in accordance with such standard policies.
4.05 Savings Plan. Executive will be eligible to enroll and participate, and be immediately vested in (to the extent legally possible and in accordance with existing Company benefit plans), all Company savings and retirement plans, including any 401(k) plans.
4.06 Life Insurance. The Company shall pay all premiums for Executive to receive on his (a) term life insurance premiums paid by Executive on his own life, provided that the life insurance proceeds do not exceed 300% of Executive’s previous year’s Base and Bonus To the extent that any and all such reimbursements or payments by the Company pursuant to this Section 4.06 are includable in Executive’s gross income and taxable (“Premiums”), then the Company shall, on or before March 15 of the year after the payment is made, pay to the Executive the quotient of the amount of Premiums divided by 0.54, and then subtracting the Premiums from this amount (e.g., if the Premiums are $1,000.00, then the Company would pay to the Executive the sum of $851.85, which is $1,000.00 divided by 0.54, and subtracting the amount of the Premiums).
4.07 Directors and Officers Liability Insurance. The Company will provide liability insurance coverage protecting Executive and his estate, to the extent permitted by law against suits by fellow employees, shareholders and third parties and criminal and regulatory investigations arising out of any alleged act or omission occurring with the course and scope of Executive’s employment with the Company. Such insurance will be in an amount not less than two million dollars ($2,000,000).
ARTICLE V
Termination
5.01 Automatic. This Agreement shall be automatically terminated upon the first to occur of the following (a) the Company’s termination pursuant to section 5.02, (b) the Executive’s termination pursuant to section 5.03 or (c) the Executive’s death.
5.02 By the Company. This Agreement (and Executive’s employment) may be terminated by the Company upon written notice to the Executive upon the first to occur of the following:
(a) Disability. Upon the Executive’s Disability (as defined herein). The term “Disability” shall mean the Executive cannot physically or mentally perform the essential functions of the position with or without reasonable accommodations for a period of six (6) consecutive months or more.
(b) Cause. Upon the Executive’s commission of Cause (as defined herein). The term “Cause” shall mean the following:
(i) Any willful violation by Executive of any material provision of this Agreement (including without limitation Sections 6.01 and 6.02 hereof) causing demonstrable and serious injury to the Company, upon written notice of same by the Company describing in detail the breach asserted and stating that it constitutes notice pursuant to this Section 5.02(b)(i), which breach, if capable of being cured, has not been cured within sixty (60) days after such notice or such longer period of time if Executive proceeds with due diligence not later than ten (10) days after such notice to cure such breach.
(ii) Embezzlement by Executive of funds or property of the Company;
(iii) Fraud or willful misconduct on the part of Executive in the performance of his duties as an employee of the Company, or gross negligence on the part of Executive in the performance of his duties as an employee of the Company causing demonstrable and serious injury to the Company, provided that the Company has given written notice of such breach which notice describes in detail the breach asserted and stating that it constitutes notice pursuant to this Section 5.02(b)(iii), and which breach, if capable of being cured, has not been cured within sixty (60) days after such notice or such longer period of time if Executive proceeds with due diligence not later than ten (10) days after such notice to cure such breach; or
(iv) A felony conviction of Executive under the laws of the United States or any state (except for any conviction based on a vicarious liability theory and not the actual conduct of the Executive).
Upon a termination for Cause, the Company shall pay Executive his Base and benefits including vacation pay through the date of termination of employment; and Executive shall receive no severance under this Agreement.
5.03 By the Executive. This Agreement may be terminated by the Executive upon written notice to the Company upon the first to occur of the following:
(a) Change in Control. Upon the occurrence of a “Change in Control” (as defined herein) of the Company. The term “Change in Control” shall mean any of the following: (i) a replacement of more than one half of the Board of Directors of the Company from that membership of the Board of Directors which exists as of the date hereof, (ii) sale or exchange of all or substantially all of the assets of the Company, (iii) a merger or consolidation involving the Company where the Company is not the survivor in such merger or consolidation, (iv) a liquidation, winding up, or dissolution of the Company, or (v) an assignment for the benefit of creditors, foreclosure sale, voluntary filing of a petition under the Bankruptcy Reform Act of 1978, or an involuntary filing under such act which filing is not stayed or dismissed within 45 days of filing.
(b) Constructive Termination. Upon the occurrence of a “Constructive Termination” (as defined herein) by the Company. The term “Constructive Termination” shall mean any of the following:
(i) Any breach by the Company of any material provision of this Agreement, including, without limitation, the assignment to the Executive of duties inconsistent with his position specified in Section 2.01 hereof or any breach by the Company of such Section,;
(ii) A substantial and continued reduction in the level of support, services, staff, secretarial resources, office space, and accoutrements below that which is reasonably necessary for the performance of Executive’s duties hereunder, consistent with that of other key executive employees;
(iii) a reduction in the Executive’s base salary or target bonus (but not including any diminution related to a broader compensation reduction that is not limited to any particular employee or executive);
(iv) a requirement that the Executive be based anywhere other than within 25 miles of Memphis, Tennessee;
(v) a material diminution in the Executive’s title, duties, or responsibilities from those in effect on the date hereof (it being understood that the Executive’s obligation to report to the Board and the Board’s exercise of its final authority over Company matters shall not give rise to any such claim of diminution);
provided, however, that no event shall constitute Constructive Termination unless the Executive has notified the Company in writing describing the event which constitutes Constructive Termination and then only if the Company fails to cure such event within thirty (30) days after the Company’s receipt of such written notice.
5.04 Consequences of Termination. Upon any termination of Executive’s employment with the Company for any reason, except for a termination for Cause pursuant to Section 5.02(b), the Executive shall be entitled to (a) a payment equal to the greater of (i) two (2) years’ worth of the then-existing Base and the last year’s Bonus and (ii) the Base payable through the remaining Initial Term (the “Severance”), and (b) retain the benefits set forth in Article IV for the remainder of the Initial Term or Renewal Term, as then applicable. The Severance shall be paid in a lump sum upon termination with such payments discounted by the U.S. Treasury rate most closely comparable to the applicable time period left in the Agreement. As a condition to the Company’s obligation to pay said Severance, Executive shall execute a comprehensive release of any and all claims that Executive may have against the Company (excluding any claims for the Company to pay or provide Accrued Obligations and Severance) (Release of Claims) within twenty one (21) days of the effective date of termination of employment, and Executive shall not revoke said release in writing within seven (7) days of execution, provided however that if the twenty one (21) day period spans two calendar years, payment shall be made in the second calendar year.
ARTICLE VI
Covenants
6.01 Executive shall treat as confidential and keep secret the affairs of the Company and shall not at any time during the term of employment or for a period of five years thereafter, without the prior written consent of the Company, divulge, furnish, or make known or accessible to, or use for the benefit of, anyone other than the Company and its subsidiaries and affiliates any information of a confidential nature relating in any way to the business of the Company or its subsidiaries or affiliates or their clients and obtained by him in the course of his employment hereunder. provided, however, that confidential information of the Company shall not include any information known or available generally to the public (other than as a result of unauthorized disclosure by Executive).
6.02 All records, papers, and documents kept or made by Executive relating to the business of the Company or its subsidiaries or affiliates or their clients shall be and remain the property of the Company.
6.03 Following the termination of Executive’s employment hereunder for any reason except for those set forth in section 5.03 in which event this section is inapplicable, Executive shall not for a period of twelve (12) months from such termination, solicit any employee of the Company to leave such employ to enter the employ of Executive or of any person, firm, or Company with which Executive is then associated (except solicitation by general means such as newspapers). During Executive’s employment with the Company and for a period of 12 months after termination of Executive’s employment at any time and for any reason, except for those set forth in Section 5.03 in which event this section is inapplicable, Executive shall not, directly or indirectly, solicit any person who during any portion of the time of Executive’s employment or at the time of termination of Executive’s employment with the Company, was a client, customer, policyholder, vendor, consultant or agent of the Company to discontinue business, in whole or in part, with the Company. Executive further agrees that, during such time, if such a client, customer, policyholder, vendor, or consultant or agent contacts Executive about discontinuing business with the Company or moving that business elsewhere, Executive will inform such client, customer, policyholder, vendor, consultant or agent that he or she cannot discuss the matter further without the consent of the Company
6.04. Executive agrees as follows, except in the event of a termination pursuant to Section 5.03, in which event this section is inapplicable:
(a) Executive agrees that during the term of his employment with the Company, neither he nor any of his Affiliates (Executive’s Affiliates is defined as any legal entity in which Executive directly or indirectly owns at least a 25% interest or any entity or person which is under the control of the Executive) will directly or indirectly compete with the Company in any way in any business in which the Company or its Affiliates is engaged in, and that he will not act as an officer, director, employee, consultant, shareholder, lender, or agent of any entity which is engaged in any business of the same nature as, or in competition with the businesses in which the Company is now engaged or in which the Company becomes engaged during the term of employment; provided, however, that this Section shall not prohibit Executive or any of his Affiliates from purchasing or holding an aggregate equity interest of up to 10% in any publicly traded business in competition with the Company, so long as Executive and his Affiliates combined do not purchase or hold an aggregate equity interest of more than 10%. Furthermore, Executive agrees that during the term of employment, he will not accept any board of director seat or officer role or undertake any planning for the organization of any business activity competitive with the Company (without the approval of the Board of Directors) and Executive will not combine or conspire with any other Executives of the Company for the purpose of the organization of any such competitive business activity.
(b) In order to protect the Company against the unauthorized use or the disclosure of any confidential information of the Company presently known or hereinafter obtained by Executive during his employment under this Agreement, Executive agrees that for a period of twelve (12) months following the termination of this Agreement for any reason, neither Executive nor any of his Affiliates, shall, directly or indirectly, for itself or himself or on behalf of any other corporation, person, firm, partnership, association, or any other entity (whether as an individual, agent, servant, employee, employer, officer, director, shareholder, investor, principal, consultant or in any other capacity):
(i) engage or participate in any business, regardless of where situated, which engages in direct market competition with such businesses being conducted by the Company during the term of employment; or
(ii) assist or finance any person or entity in any manner or in any way inconsistent with the intents and purposes of this Agreement.
6.05. Executive agrees that at no time during his employment by the Company or thereafter, shall he make, or cause or assist any other person to make, any statement or other communication to any third party which impugns or attacks, or is otherwise critical of, the reputation, business or character of the Company or any of its respective directors, officers or Executives. In addition, the Company agrees that its Board of Director and executives will not disparage the Executive so long as the Executive separates from the Company in good standing and abides by all terms of this agreement and signed non-disclosure and non-compete agreements. Nothing contained herein shall be deemed to prevent Executive from performing his duties hereunder, including but not limited to conducting candid, internal discussions. This paragraph shall not prohibit any person from testifying truthfully in response to a lawful subpoena.
6.06 If at the time of enforcement of any provision of this Agreement, a court shall hold that the duration, scope, or area restriction of any provision hereof is unreasonable under circumstances now or then existing, the parties hereto agree that the maximum duration, scope, or area reasonable under the circumstances shall be substituted by the court for the stated duration, scope, or area.
6.07 Executive acknowledges that any breach by him of the provisions of this Article VI of this Agreement shall cause irreparable harm to the Company and that a remedy at law for any breach or attempted breach of Article VI of this Agreement will be inadequate, and agrees that, notwithstanding Article VIII hereof, the Company shall be entitled to exercise all remedies available to it, including specific performance and injunctive and other equitable relief, in the case of any such breach or attempted breach.
6.08 The Company represents and warrants that this Agreement has been duly authorized, executed, and delivered on behalf of the Company and that this Agreement represents the legal, valid, and binding obligation of the Company and does not conflict with any other agreement binding on the Company.
ARTICLE VII
Assignment
7.01 This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company without relieving the Company of its obligations hereunder. Neither this Agreement nor any rights hereunder shall be assignable by Executive and any such purported assignment by him shall be void.
ARTICLE VIII
Entire Agreement
8.01 This Agreement constitutes the entire understanding between the Company and Executive concerning his employment by the Company or subsidiaries and supersedes any and all previous agreements between Executive and the Company or any of its affiliates or subsidiaries concerning such employment, including, without limitation, the Original Employment Agreement. Each party hereto shall pay its own costs and expenses (including legal fees) except as otherwise expressly provided herein incurred in connection with the preparation, negotiation, and execution of this Agreement. This Agreement may not be changed orally, but only in a written instrument signed by both parties hereto.
ARTICLE IX
Applicable Law. Miscellaneous
9.01 This Agreement shall be governed by and construed in accordance with the laws of the State of New York. All actions brought to interpret or enforce this Agreement shall be brought in courts located in the State of New York.
9.02 In addition to all other rights and benefits under this Agreement, each party agrees to reimburse the other for, and indemnify and hold harmless such party against, all costs and expenses (including attorney’s fees) incurred by such party (whether or not during the term of this Agreement or otherwise), if and to the extent that such party prevails on or is otherwise successful on the merits with respect to any action, claim, or dispute relating in any manner to this Agreement or to any termination of this Agreement or in seeking to obtain or enforce any right or benefit provided by or claimed under this Agreement, taking into account the relative fault of each of the parties and any other relevant considerations.
9.03 The Company shall indemnify and hold harmless Executive to the full extent authorized or permitted by law with respect to any claim, liability, action, or proceeding instituted or threatened against or incurred by Executive or his legal representatives and arising in connection with Executive’s conduct or position at any time as a director, officer, employee, or agent of the Company or any subsidiary thereof. The Company shall not change, modify, alter, or in any way limit the existing indemnification and reimbursement provisions relating to and for the benefit of its directors and officers without the prior written consent of the Executive, including any modification or limitation of any directors and officers liability insurance policy.
9.04 No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a continuing waiver or a waiver of any similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party hereto which are not set forth expressly in this Agreement.
9.05 The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
9.06 This Agreement may be executed in several counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument.
9.07 The section headings contained in this Agreement are inserted for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
9.08 This Agreement shall at all times be administered and interpreted in a manner which is consistent with and complies with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and the Department of Treasury regulations and other interpretive guidance issued thereunder, including any guidance or regulations that may be issued after the effective date of the Agreement (“Section 409A”). To the extent necessary to comply with Section 409A, the term “termination of employment” shall mean “separation from service” as defined in Section 409A. Notwithstanding anything in this Agreement to the contrary, if Executive is deemed by the Company at the time of Executive’s “separation from service” to be a “specified employee” for purposes of Section 409A, to the extent delayed commencement of any portion of the benefits to which Executive is entitled under this Agreement is required in order to avoid a prohibited distribution under Section 409A, such portion of Executive’s benefits shall not be provided to Executive prior to the earlier of (i) the expiration of the six-month period measured from the date of Executive’s separation from service with the Company or (ii) the date of Executive’s death. Upon the first business day following the expiration of the applicable Section 409A period, all payments deferred pursuant to the preceding sentence shall be paid in a lump sum to Executive (or Executive’s estate or beneficiaries), and any remaining payments due to Executive under this Agreement shall be paid as otherwise provided herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
| Company: | ||
| Surgepays, Inc | ||
| By: | /s/ Kevin Brian Cox | |
| Name: | Kevin Brian Cox | |
| Title: | Chief Executive Officer | |
| Executive: | ||
| Anthony Evers | ||
| /s/ Anthony Evers | ||
Exhibit 31.1
SURGEPAYS, INC. FORM 10-Q
FOR THE QUARTER ENDED June 30, 2022
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin Brian Cox, Chief Executive Officer, certify that:
| 1. | I have reviewed this report on Form 10-Q of SurgePays, Inc. (the registrant); | ||
| 2. | Based on my knowledge, this 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 report; | ||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 report; | ||
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-a15(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 my supervision, to ensure that material information relating to the registrant, is made known to me by others, particularly during the period in which this 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 my 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; and | ||
| d. | disclosed in this report any change in the registrant’s internal controls over financial reporting that occurred during the registrant’s current fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and; | ||
| 5. | I have disclosed, based on my most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions); | ||
| a. | All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; 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. | ||
| August 11, 2022 | /s/ Kevin Brian Cox |
| Kevin Brian Cox | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
SURGEPAYS, INC. FORM 10-Q
FOR THE QUARTER ENDED June 30, 2022
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony Evers, Chief Financial Officer, certify that:
| 1. | I have reviewed this report on Form 10-Q of SurgePays, Inc. (the registrant); | ||
| 2. | Based on my knowledge, this 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 report; | ||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 report; | ||
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-a15(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 my supervision, to ensure that material information relating to the registrant, is made known to me by others, particularly during the period in which this 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 my 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; and | ||
| d. | disclosed in this report any change in the registrant’s internal controls over financial reporting that occurred during the registrant’s current fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and; | ||
| 5. | I have disclosed, based on my most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions); | ||
| a. | All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; 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. | ||
| August 11, 2022 | /s/ Anthony Evers |
| Anthony Evers | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
Exhibit 32.1
SURGEPAYS, INC. FORM 10-Q
FOR THE QUARTER ENDED June 30, 2022
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin Brian Cox, certify that:
| 1. | I am the Chief Executive Officer of SurgePays, Inc. | |
| 2. | Attached to this certification is Form 10-Q for the quarter ended June 30, 2022, a periodic report (the “periodic report”) filed by the issuer with the Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (the “Exchange Act”), which contains financial statements. | |
| 3. | I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that |
| ● | The periodic report containing the financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and | ||
| ● | The information in the periodic report fairly presents, in all material respects, the consolidated financial condition and results of operations of the issuer for the periods presented. |
| August 11, 2022 | /s/ Kevin Brian Cox |
| Kevin Brian Cox | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 32.2
SURGEPAYS, INC. FORM 10-Q
FOR THE QUARTER ENDED June 30, 2022
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony Evers, certify that
| 1. | I am the Chief Financial Officer of SurgePays, Inc. | |
| 2. | Attached to this certification is Form 10-Q for the quarter ended June 30, 2022, a periodic report (the “periodic report”) filed by the issuer with the Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (the “Exchange Act”), which contains financial statements. | |
| 3. | I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that |
| ● | The periodic report containing the financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act, and | ||
| ● | The information in the periodic report fairly presents, in all material respects, the consolidated financial condition and results of operations of the issuer for the periods presented. |
| August 11, 2022 | /s/ Anthony Evers |
| Anthony Evers | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |