SurgePays(SURG) - 2022 Q2 - Quarterly Report

Part I - Financial Information Consolidated Balance Sheets The Company's consolidated balance sheets show a significant increase in total assets and liabilities from December 31, 2021, to June 30, 2022, primarily driven by growth in current assets like cash, accounts receivable, and inventory, and a substantial increase in current and long-term liabilities, including notes payable. Stockholders' equity decreased due to the net loss for the period | Metric | June 30, 2022 (Unaudited) | December 31, 2021 (Audited) | Change | % Change | | :-------------------------- | :------------------------ | :------------------------ | :------- | :------- | | Cash | $8,704,526 | $6,283,496 | $2,421,030 | 38.53% | | Accounts receivable - net | $8,322,807 | $3,249,889 | $5,072,918 | 156.09% | | Inventory | $5,675,741 | $4,359,296 | $1,316,445 | 30.20% | | Total Current Assets | $22,747,128 | $13,892,681 | $8,854,447 | 63.74% | | Total Assets | $29,490,863 | $19,500,202 | $9,990,661 | 51.23% | | Accounts payable and accrued expenses | $11,292,759 | $6,602,577 | $4,690,182 | 71.04% | | Total Current Liabilities | $21,330,965 | $9,998,194 | $11,332,771 | 113.35% | | Total Liabilities | $27,318,464 | $15,948,881 | $11,369,583 | 71.29% | | Total Stockholders' Equity | $2,172,399 | $3,551,321 | $(1,378,922) | -38.83% | Consolidated Statements of Operations SurgePays experienced substantial revenue growth for both the three and six months ended June 30, 2022, primarily driven by its wireless services. Despite increased costs, the Company significantly reduced its operating loss and net loss compared to the prior year periods | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :---------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenues | $28,005,144 | $11,377,928 | $49,146,515 | $22,366,876 | | 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 | | Loss from operations | $(847,538) | $(1,409,626) | $(1,897,689) | $(3,517,796) | | 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) | - Revenues increased by $16,627,216 (146%) for the three months ended June 30, 2022, and by $26,779,639 (120%) for the six months ended June 30, 2022, primarily due to growth in SurgePhone Wireless and Torch Wireless[315][322] - Loss from operations decreased by $562,088 (40%) for the three months and $1,620,107 (46%) for the six months ended June 30, 2022, mainly due to improved operating income in SurgePhone Wireless and Torch Wireless[315][322] Consolidated Statements of Changes in Stockholders' Equity (Deficit) Stockholders' equity decreased from $3,551,321 at December 31, 2021, to $2,172,399 at June 30, 2022, primarily due to the net loss incurred during the period. Key equity transactions included the recognition of stock-based compensation, issuance of warrants as debt issue costs and interest expense, and stock issued for software acquisition | Metric | December 31, 2021 | June 30, 2022 | | :-------------------------------- | :---------------- | :-------------- | | Series A Preferred Stock (Amount) | $260 | $260 | | Common Stock (Amount) | $12,064 | $12,349 | | Additional Paid-in Capital | $38,662,340 | $39,420,055 | | Accumulated Deficit | $(35,123,343) | $(37,308,714) | | Non-controlling Interest | $- | $48,449 | | Total Stockholders' Equity | $3,551,321 | $2,172,399 | - Equity transactions for the six months ended June 30, 2022, included: - Recognition of stock-based compensation: $18,588 - Warrants issued as debt issue costs: $115,404 - Warrants issued as interest expense: $212,608 - Stock issued to purchase software: $411,400 (85,000 shares at $4.84/share)[13][260][285][288] - The decrease in stockholders' equity was principally due to the net loss for the period[348] Consolidated Statements of Cash Flows For the six months ended June 30, 2022, SurgePays experienced a net increase in cash, primarily driven by significant cash provided by financing activities, which offset cash used in operating and investing activities. This marks a positive shift from the prior year's net decrease in cash | Cash Flow Activity | 6 Months Ended June 30, 2022 | 6 Months Ended 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 increase (decrease) in cash | $2,421,030 | $(99,171) | | Cash - end of period | $8,704,526 | $574,824 | - Key non-cash investing and financing activities for the six months ended June 30, 2022, included $115,404 in debt issue costs recorded with notes payable and $411,400 in stock issued to acquire software[20] - The increase in cash from financing activities in 2022 was largely due to $6,700,000 in proceeds from notes payable[19] Notes to Consolidated Financial Statements The notes provide detailed information on SurgePays' financial position, operations, and cash flows, including significant accounting policies, business acquisitions, debt structures, equity changes, and segment performance. They highlight the company's growth in wireless services, ongoing legal matters, and management's plans to address liquidity and going concern issues Note 1 - Organization and Nature of Operations SurgePays, Inc. is a technology-driven company focused on building a next-generation supply chain software platform and providing subsidized mobile broadband services. The company's financial statements are prepared on a going concern basis, despite accumulated deficits and net cash used in operations, with management outlining strategic plans for growth and liquidity - SurgePays, Inc. is a technology-driven company building a next-generation supply chain software platform and offering wholesale goods and services. Its operating subsidiaries include KSIX Media, Surge Blockchain, Surge Payments, SurgePhone Wireless, SurgePays Fintech, ECS Prepaid, and Torch Wireless (acquired January 1, 2022)[23][24][25] - For the six months ended June 30, 2022, the Company reported a net loss of $2,185,371 and net cash used in operations of $3,148,073, contributing to an accumulated deficit of $37,308,714. These factors raise substantial doubt about the Company's ability to continue as a going concern[38][42] - Management's strategic plans to address going concern include continuing hyper-growth in the Affordable Connectivity Program (ACP) revenue, executing business plans for significant revenue growth, pursuing a line of credit for ACP growth, expanding product/service offerings, exploring partnering opportunities, and identifying short-term positive cash flow market opportunities[43] Note 2 - Summary of Significant Accounting Policies This note details SurgePays' accounting policies, including principles of consolidation, business combinations (notably the acquisition of Torch Wireless and deconsolidation of True Wireless), revenue recognition across its diverse segments, and the treatment of financial instruments and equity. It also covers the impact and adoption of recent accounting standards - Effective January 1, 2022, SurgePays acquired 100% of Torch Wireless, a provider of subsidized mobile broadband services under the ACP, for $800,000, resulting in $800,000 of goodwill. Torch Wireless now allows the Company to offer subsidized mobile broadband in all fifty states[52][53][54] - On May 7, 2021, the Company deconsolidated its subsidiary True Wireless, Inc. (TW), recognizing a gain on deconsolidation of $1,895,871 and retaining $1,097,659 in liabilities[61][65] | Revenue Stream | 6 Months Ended June 30, 2022 | % of Total Revenue (2022) | 6 Months Ended June 30, 2021 | % of Total Revenue (2021) | | :-------------------- | :--------------------------- | :------------------------ | :--------------------------- | :------------------------ | | 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% | Note 3 - Property and Equipment Property and equipment, net, significantly increased to $887,374 at June 30, 2022, from $200,448 at December 31, 2021, primarily due to the acquisition of software valued at $711,400, paid partly in cash and common stock | Type | June 30, 2022 | December 31, 2021 | | :------------------------ | :-------------- | :---------------- | | Computer equipment and software | $1,004,530 | $283,484 | | Furniture and fixtures | $84,507 | $82,752 | | Less: accumulated depreciation | $(201,663) | $(165,788) | | Property and equipment - net | $887,374 | $200,448 | - In June 2022, the Company acquired software for $711,400, paying $300,000 in cash and issuing 85,000 shares of common stock valued at $411,400[181] - Depreciation expense for the six months ended June 30, 2022, was $35,875, compared to $32,736 for the same period in 2021[183] Note 4 - Intangibles Net intangible assets decreased to $3,106,730 at June 30, 2022, from $3,433,484 at December 31, 2021, primarily due to ongoing amortization. The proprietary software, acquired with ECS, remains the largest component | 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 | | Less: accumulated amortization | $(2,646,790) | $(2,320,036) | | | Intangibles - net | $3,106,730 | $3,433,484 | | - Amortization expense for the six months ended June 30, 2022, was $326,754, compared to $365,504 for the same period in 2021[188] - Estimated amortization expense for the remaining six months of 2022 is $326,754, with annual expenses of $653,508 projected for 2023-2026[191] Note 5 - Debt SurgePays' debt structure at June 30, 2022, includes SBA government loans, related party loans, and new notes payable, including a secured revolving debt facility. The company also saw significant PPP loan forgiveness in 2022 and had no outstanding convertible notes by December 31, 2021 | SBA Loan Type | Principal (June 30, 2022) | Principal (December 31, 2021) | Interest Rate | Maturity | | :-------------------- | :------------------------ | :-------------------------- | :------------ | :--------- | | PPP Loan (April 2020) | $115,151 | $126,418 | 1% | October 2021 (extended) | | EIDL (May 2020) | $147,014 | $150,000 | 3.75% | May 2050 | | EIDL (July 2020) | $331,357 | $336,600 | 3.75% | July 2050 | | PPP Loan (March 2021) | $- | $518,167 | 1% | March 2026 | | Total SBA Loans | $593,522 | $1,131,185 | | | - During 2022, the Company received forgiveness on a PPP loan totaling $524,143, including $518,167 for principal[201] | Notes Payable Type | Principal (June 30, 2022) | Principal (December 31, 2021) | Interest Rate | Maturity | | :------------------- | :------------------------ | :-------------------------- | :------------ | :---------------- | | Notes Payable (April/May 2022) | $1,141,247 | $- | 19% | October/November 2022 | | Secured Revolving Note (April/June 2022) | $5,000,000 | $- | 24% | January/February 2023 | | Notes Payable (March 2022) | $480,417 | $- | 19% | September 2022 | | Total Notes Payable | $6,621,664 | $- | | | - A $5,000,000 secured revolving promissory note was executed in April 2022 (increased in June 2022), accruing interest at 2% monthly (24% annualized), secured by all Company assets, with drawdowns based on eligible accounts receivable[212][213] Note 6 - Derivative Liabilities As of June 30, 2022, SurgePays had no derivative liabilities, following the repayment of convertible notes in 2021 which contained embedded conversion options previously bifurcated and accounted for at fair value - During 2021, convertible notes contained embedded conversion options that were bifurcated and treated as derivative liabilities, measured at fair value using a binomial pricing model[219][220] - At December 31, 2021, the derivative liability balance was $0, following a fair value mark-to-market adjustment and a gain on derivative liability upon related debt settlement[220] - For the three and six months ended June 30, 2022, the Company recorded $0 in change in fair value of derivative liabilities and derivative expense, compared to significant amounts in 2021, as these liabilities ceased to exist after debt repayment[221][222][226][227] Note 7 - Fair Value of Financial Instruments The Company's financial instruments, including cash, accounts receivable, and accounts payable, are carried at historical cost, with their carrying amounts approximating fair values due to their short-term nature. No assets or liabilities were measured at fair value on a recurring basis at June 30, 2022, or December 31, 2021 - The Company's financial instruments, such as cash, accounts receivable, and accounts payable, are carried at historical cost, and their carrying amounts approximate fair values due to their short-term nature[78] - As of June 30, 2022, and December 31, 2021, the Company did not have any assets or liabilities measured at fair value on a recurring basis[230] Note 8 - Commitments and Contingencies SurgePays has operating lease commitments for its corporate headquarters and is involved in several legal proceedings, including non-competition disputes and breach of contract claims. Management believes it has strong defenses in these legal matters and has not deemed reserves necessary for certain cases | Lease Metric | June 30, 2022 | December 31, 2021 | | :---------------------------------- | :-------------- | :---------------- | | 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 | | Weighted average remaining lease term | 7.99 years | 6.09 years | | Weighted average discount rate | 5% | 8% | | Future Minimum Lease Payments (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 | - The Company is involved in litigation including: - True Wireless and Surge Holdings - Terracom Litigation: A noncompetition dispute where Terracom alleges violations by former employees. Management believes True Wireless has a strong case - Surge Holdings – Juno Litigation: Breach of Contract claims against Surge by a factoring company. Management believes there is a good defense and no reserve is necessary - SurgePays – Ambess Litigation: Breach of contract claim for approximately $73,000 - True Wireless and Surge Pays - Litigation: Breach of Stock Purchase Agreement and non-competition/non-solicitation allegations. Mediation in July 2022 did not achieve a settlement, and the Company believes it has a strong defense[246][247][249][251] Note 9 - Stockholders' Equity Stockholders' equity details include the impact of a 1-for-50 reverse stock split in November 2021, the conversion of Series C Preferred Stock, and various equity transactions in 2021 and 2022, such as stock issued for software acquisition, direct offering costs, and debt discounts. The company also has outstanding stock options and warrants - On November 2, 2021, the Company effected a 1-for-50 reverse stock split, retroactively restating all share and per share amounts[252] - In October 2021, all Series C Preferred stockholders converted their 721,598 shares into 3,607,980 shares of common stock, with a net effect of $0 on stockholders' equity[257] - Equity transactions for the six months ended June 30, 2022, included: - Issuance of 200,000 common shares for NASDAQ uplisting services - Issuance of 85,000 common shares (fair value $411,400) for software acquisition - Issuance of 51,000 warrants (fair value $115,504) as debt issue costs - Issuance of 90,000 warrants (fair value $212,608) for interest expense related to increased vendor credit[258][260][285][288] | Stock Options (June 30, 2022) | Number of Options | Weighted Average Exercise Price | Weighted Remaining Contractual Term (Years) | | :---------------------------- | :---------------- | :------------------------------ | :---------------------------------------- | | Outstanding | 17,004 | $16.00 | 4.67 | | Vested and Exercisable | 6,801 | $16.00 | 4.67 | | Unvested and non-exercisable | 10,202 | $16.00 | 4.67 | | Warrants (June 30, 2022) | Number of Warrants | Weighted Average Exercise Price | Weighted Remaining Contractual Term (Years) | | :----------------------- | :----------------- | :------------------------------ | :---------------------------------------- | | Outstanding | 6,141,256 | $8.16 | 2.48 | | Vested and Exercisable | 6,141,256 | $8.16 | 2.48 | Note 10 - Segment Information SurgePays manages its business across multiple reportable segments, with SurgePhone Wireless and Torch Wireless showing significant revenue growth and improved operating income in 2022. Other segments like Surge Fintech & ECS and LogicsIQ experienced revenue declines, while Surge Blockchain remained a minor contributor | Segment | 3 Months Ended June 30, 2022 (Revenue) | 3 Months Ended June 30, 2021 (Revenue) | 6 Months Ended June 30, 2022 (Revenue) | 6 Months Ended June 30, 2021 (Revenue) | | :-------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | :------------------------------------- | | 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 | | Total | $28,005,144 | $11,377,928 | $49,146,515 | $22,366,876 | | Segment | 3 Months Ended June 30, 2022 (Operating Income/Loss) | 3 Months Ended June 30, 2021 (Operating Income/Loss) | 6 Months Ended June 30, 2022 (Operating Income/Loss) | 6 Months Ended June 30, 2021 (Operating Income/Loss) | | :-------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | 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 (Corporate) | $(2,268,866) | $(1,420,314) | $(4,887,934) | $(3,654,650) | | Total | $(847,538) | $(1,409,626) | $(1,897,689) | $(3,517,796) | | Segment | June 30, 2022 (Total Assets) | December 31, 2021 (Total Assets) | June 30, 2022 (Total Liabilities) | December 31, 2021 (Total Liabilities) | | :-------------------- | :--------------------------- | :------------------------------- | :-------------------------------- | :------------------------------------ | | SurgePhone Wireless | $6,279,990 | $(107,845) | $2,863,479 | $28,933 | | Torch Wireless | $967,535 | $- | $1,103,179 | $- | | Surge Blockchain | $(614,404) | $(703,014) | $198,197 | $202,045 | | LogicsIQ | $1,750,266 | $1,896,130 | $2,373,351 | $3,181,807 | | Surge Fintech & ECS | $3,254,130 | $4,461,210 | $36,178 | $275,351 | | True Wireless | $- | $(988,169) | $- | $2,430,268 | | SurgePays (Corporate) | $17,853,346 | $14,941,890 | $20,744,080 | $9,830,477 | | Total | $29,490,863 | $19,500,202 | $27,318,464 | $15,948,881 | Note 11 - Subsequent Events Subsequent to June 30, 2022, the Company issued 78,992 shares of common stock in connection with a cashless exercise of 268,750 warrants in July 2022 - In July 2022, the Company issued 78,992 shares of common stock through a cashless exercise of 268,750 warrants[299] ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides an overview of SurgePays' business, a detailed comparison of financial results for the three and six months ended June 30, 2022 and 2021, and an analysis of liquidity, capital resources, and going concern. It highlights significant revenue growth in wireless segments, changes in operating expenses, and management's strategies for future profitability About SurgePays, Inc. SurgePays, Inc. is a financial technology and telecommunications company focused on serving underbanked communities. Its operations include a blockchain fintech platform for retail stores, telecom subsidiaries (SurgePhone Wireless, Torch Wireless, LocoRabbit Wireless) providing mobile broadband, and software development (ShockWave CRM, LogicsIQ). The company also holds an equity interest in Centercom - SurgePays is a financial technology and telecommunications company providing essential services to underbanked communities through a blockchain fintech platform and telecom subsidiaries (SurgePhone Wireless, Torch Wireless, LocoRabbit Wireless)[301][302] - SurgePhone and Torch Wireless are MVNOs licensed by the FCC to provide subsidized mobile broadband services through the Affordable Connectivity Program (ACP) in all fifty states, offering up to $100 reimbursement for devices and $30/month subsidy for services[303] - The Company acquired 'MVNO Cloud Services' software on June 7, 2022, rebranding it as ShockWave CRM, an end-to-end cloud-based SaaS for the telecommunication and broadband industry[307][308] - LogicsIQ, Inc. is a software development company providing marketing business intelligence, lead generation, and case management solutions, primarily to law firms in the mass tort industry. SurgePays confidentially submitted an amended draft registration statement for LogicsIQ's IPO[310][311] Comparison of Three Months Ended June 30, 2022 and 2021 For the three months ended June 30, 2022, SurgePays reported a 146% increase in revenue, primarily from SurgePhone Wireless and Torch Wireless, leading to a 40% reduction in loss from operations. General and administrative expenses increased due to professional services and insurance costs, while interest expense decreased | Metric | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | Change | % Change | | :---------------------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Revenue | $28,005,144 | $11,377,928 | $16,627,216 | 146% | | Cost of revenue | $25,814,153 | $10,051,119 | $15,763,034 | 156.83% | | General and administrative expenses | $3,038,529 | $2,736,435 | $302,094 | 11.04% | | Loss from operations | $(847,538) | $(1,409,626) | $562,088 | -40% | | Total Other (expense) income - net | $(44,405) | $1,195,650 | $(1,240,055) | -103.71% | - Revenue growth was primarily driven by SurgePhone Wireless ($11,021,892 increase) and Torch Wireless ($9,045,610 increase), partially offset by decreases in Surge Fintech/ECS and LogicsIQ[315] - Selling, general and administrative costs increased by $290,815 (11%), with professional services increasing due to legal expenses, and other costs rising due to additional Nasdaq listing requirements and insurance expenses[317][318] - Interest expense decreased due to the repayment of various notes in 2021, and the Company recognized $524,143 in PPP loan forgiveness in 2022[318] Comparison of Six Months Ended June 30, 2022 and 2021 For the six months ended June 30, 2022, SurgePays achieved a 120% revenue increase, significantly reducing its operating loss by 46%. While compensation and other operating expenses rose, advertising and webhosting costs decreased, and interest expense saw a substantial reduction | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | Change | % Change | | :---------------------------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Revenue | $49,146,515 | $22,366,876 | $26,779,639 | 120% | | Cost of revenue | $44,321,894 | $19,908,428 | $24,413,466 | 122.63% | | General and administrative expenses | $6,722,310 | $5,976,244 | $746,066 | 12.48% | | Loss from operations | $(1,897,689) | $(3,517,796) | $1,620,107 | -46% | | Total Other (expense) income - net | $(239,233) | $(1,511,611) | $1,272,378 | -84.17% | - Revenue growth was primarily from SurgePhone Wireless ($22,006,692 increase) and Torch Wireless ($12,107,763 increase), partially offset by declines in Surge Fintech/ECS and LogicsIQ[322] - Selling, general and administrative costs increased by $783,467 (14%), with compensation rising due to one-time bonuses and other costs increasing due to higher insurance expenses related to the Nasdaq uplisting[328] - Interest expense decreased significantly due to the repayment of various notes in 2021, and the Company recorded $524,143 in PPP loan forgiveness in 2022[325] Segment Information (MD&A) The MD&A segment analysis reinforces the significant revenue and operating income growth in SurgePhone Wireless and Torch Wireless due to the ACP program. Conversely, Surge Fintech & ECS and LogicsIQ experienced revenue declines, attributed to COVID-19 impacts and strategic shifts, while Surge Blockchain's revenue also decreased - SurgePhone Wireless revenue for the six months ended June 30, 2022, increased by $22,006,692, and operating income increased to $3,583,394, driven by the EBB and ACP programs[333] - Torch Wireless, acquired January 1, 2022, generated $12,107,763 in new revenue for the six months ended June 30, 2022, from the EBB and ACP programs, resulting in an operating loss of $135,645[334] - Surge Fintech and ECS revenue decreased by 31% for both the three and six months ended June 30, 2022, due to COVID-19 impacts and a strategic shift from independent contractors to employed salespersons[340][341] - LogicsIQ revenue decreased by $2,071,889 for the six months ended June 30, 2022, with both lead generation and retained services declining, leading to a decrease in operating income[338] Liquidity, Capital Resources and Going Concern SurgePays reported a working capital surplus of $1,416,163 at June 30, 2022, but faces ongoing liquidity challenges due to net losses and cash used in operations, raising substantial doubt about its going concern. Management plans to achieve net income in Q3 2022, increase ACP revenue, and may seek a line of credit for growth, while not anticipating further equity raises | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------- | :-------------- | :---------------- | | Current Assets | $22,747,128 | $13,892,681 | | Current Liabilities | $21,330,965 | $9,998,194 | | Working Capital Surplus | $1,416,163 | $3,894,487 | | Total Assets | $29,490,863 | $19,500,202 | | Total Liabilities | $27,318,464 | $15,948,881 | | Total Stockholders' Equity | $2,172,399 | $3,551,321 | - The Company had a net increase in cash of $2,421,030 for the six months ended June 30, 2022, primarily from financing activities, contrasting with a net decrease in cash in the prior year[350] - Management anticipates achieving net income for the three months ended September 30, 2022, and expects continued growth in ACP revenue. The focus will shift to onboarding merchants on the fintech platform to increase revenue across all segments[353] - The Company does not anticipate needing to raise capital through equity plays but may require a line of credit to support the hyper-growth in ACP programs[353] ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section states that quantitative and qualitative disclosures about market risk are not applicable to the Company - Quantitative and qualitative disclosures about market risk are not applicable[355] ITEM 4: CONTROLS AND PROCEDURES As of June 30, 2022, SurgePays' management determined its disclosure controls and procedures to be effective, despite acknowledging a lack of segregation of duties typical for companies of its size - As of June 30, 2022, the Company's management determined that its disclosure controls and procedures are effective[357] - The Company acknowledges a lack of segregation of duties similar to other companies of its size[357] Part II - Other Information ITEM 1: LEGAL PROCEEDINGS SurgePays is involved in several legal proceedings, including non-competition disputes, breach of contract claims, and allegations of tortious interference. Management believes it has strong defenses in these cases and does not anticipate a material adverse effect on its business from the ultimate outcomes - The Company is currently involved in five legal proceedings: - True Wireless and Surge Holdings - Terracom Litigation: Noncompetition dispute, management believes True Wireless has a strong case - Surge Holdings – Juno Litigation: Breach of Contract claims, management believes there is a good defense and no reserve is necessary - Unimax - Litigation: Settlement agreement for $785,000, repaid in April 2021 - SurgePays – Ambess Litigation: Breach of contract claim for approximately $73,000 - True Wireless and Surge Pays - Litigation: Breach of Stock Purchase Agreement and non-competition/non-solicitation allegations, management believes SurgePays has a strong defense[361][362][363][365][366] - Management is not aware of any legal proceedings that would have a material adverse effect on the business, financial condition, or results of operations[359] ITEM 1A: RISK FACTORS This section states that risk factors are not applicable for this quarterly report - Risk factors are not applicable[367] ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the three months ended June 30, 2022, SurgePays issued 85,000 shares of common stock, valued at $411,400, as part of the acquisition of the ShockWave CRM software platform - On June 7, 2022, SurgePays issued 85,000 shares of common stock, with a fair value of $411,400 ($4.84/share), to acquire the 'MVNO Cloud Services' software platform, rebranded as ShockWave CRM[369] ITEM 3: DEFAULTS UPON SENIOR SECURITIES This section indicates that there were no defaults upon senior securities to report - There were no defaults upon senior securities[370] ITEM 4: MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable[370] ITEM 5: OTHER INFORMATION This section details recent financial obligations, including $1.7 million in inventory financing notes with warrants and a $5 million secured revolving credit facility. It also outlines the new five-year employment agreement for the Chief Financial Officer, Anthony Evers, including his base salary, signing bonus, restricted stock awards, and performance-based bonuses - From March to May 2022, the Company borrowed $1.7 million through promissory notes for inventory purchases, issuing 51,000 three-year warrants with an exercise price of $4.73[371][372] - In April 2022, a secured revolving promissory note facility was established, initially for $3 million and increased to $5 million in June 2022, for inventory purchases. It accrues interest at 2% monthly (24% annualized) and is secured by all Company assets[375][376] - On August 8, 2022, the Company entered into a new five-year employment agreement with CFO Anthony Evers, with an annual base salary of $450,000 (plus 6% annual increase if prior year EBITDA is positive) and a $225,000 signing bonus[378][380][381][382] - The CFO's compensation package includes 500,000 restricted vesting shares, 100,000 restricted signing shares, cash bonuses tied to EBITDA or annual target performance, and stock bonuses based on EBITDA, market capitalization, and business metrics growth (up to 825,000 shares for active stores/customers), plus stock options[383][384][385][387] ITEM 6: EXHIBITS This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including forms of promissory notes, warrants, loan and security agreements, the CFO's employment agreement, and various certifications and XBRL documents - Exhibits include forms of promissory notes (4.1, 4.3), warrants (4.2), loan agreement (10.1), security agreement (10.2), and the employment agreement for Anthony Evers (10.3+*)[393] - Certifications pursuant to the Sarbanes-Oxley Act of 2002 (Sections 302 and 906) from the Chief Executive Officer and Chief Financial Officer are also included (31.1, 31.2, 32.1**, 32.2**)[393] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) and the Cover Page Interactive Data File are part of the exhibits[393] SIGNATURES The report is duly signed on behalf of SurgePays, Inc. by Kevin Brian Cox, Chief Executive Officer (Principal Executive Officer), and Anthony Evers, Chief Financial Officer (Principal Financial and Accounting Officer), both dated August 11, 2022 - The report is signed by Kevin Brian Cox, Chief Executive Officer (Principal Executive Officer), and Anthony Evers, Chief Financial Officer (Principal Financial and Accounting Officer)[398] - Both signatures are dated August 11, 2022[398]