Business Context and Reporting Period
This Form 8-K Current Report was filed by SurgePays, Inc. on March 16, 2021, covering events occurring on March 8, 2021. The filing details the entry into a material definitive agreement involving a private placement of debt and equity-linked securities.
Key Financial Metrics and Transaction Details
- Proceeds Raised: $2,000,000 in cash proceeds.
- Debt Instrument: 15% OID Convertible Promissory Note with a principal amount of $2,300,000.
- Interest Rate: 5% per annum.
- Maturity Date: March 8, 2022.
- Conversion Price: $0.16 per share (subject to a 75% discount to VWAP upon an Event of Default).
- Warrant Details: Warrant to purchase up to 13,437,500 shares of common stock at $0.16 per share, exercisable until March 8, 2026.
- Transaction Costs: 8% cash fee to placement agent (Maxim Group, LLC) plus up to $20,000 in legal fee reimbursement.
Material Changes and Terms
The company entered into a Securities Purchase Agreement with Evergreen Capital Management LLC. Key terms include:
- Prepayment Rights: The company may prepay the note at 115% of the outstanding balance before October 8, 2021, or 120% thereafter.
- Qualified Financing: Mandatory prepayment is required upon the occurrence of a Qualified Financing.
- Future Transactions: The investor may elect to apply the note principal and accrued interest as purchase consideration for any single Future Transaction.
- Ownership Caps: Warrant exercise is limited if the investor would beneficially own more than 4.99% (or 9.99% under no circumstances) of outstanding shares post-exercise.
Outlook, Risks, and Contingencies
The filing does not provide specific forward-looking guidance, revenue projections, or management commentary regarding future operational performance. However, the following risks and contingencies are noted:
- Dilution Risk: Significant potential dilution exists due to the low conversion price ($0.16) and the large number of warrant shares (13,437,500).
- Liquidity Contingency: The company is obligated to prepay the note upon a Qualified Financing, which could impact future capital raising strategies.
- Placement Agent Rights: The company granted Maxim Group, LLC a right of first refusal for future equity or debt offerings for 18 months.
- Registration Status: The securities were issued under Section 4(a)(2) and Rule 506 of Regulation D and are not registered under the Securities Act of 1933.
Investor Verification Checklist
- Verify the current market price of SurgePays common stock relative to the $0.16 conversion and warrant exercise price.
- Confirm the company's current cash position and ability to service the 5% interest or prepay the note if a Qualified Financing occurs.
- Review the definition of "Qualified Financing" and "Future Transaction" in the attached Securities Purchase Agreement to understand prepayment triggers.
- Assess the potential dilution impact of the 13,437,500 warrant shares on existing shareholders.
- Check for any subsequent filings regarding the registration of the warrant shares, as cashless exercise is permitted if shares are not registered after six months.