UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from ________________ to ________________
Commission
file number
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| (Address of principal executive offices) | (Zip Code) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
The
(Nasdaq Capital Market) |
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
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| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
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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. ☐
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The number of shares of the registrant’s common stock outstanding as of August 19, 2026 was shares.
SurgePays, Inc. and Subsidiaries
| 2 |
SurgePays, Inc. and Subsidiaries
Consolidated Balance Sheets
| June 30, 2026 | December 31, 2025 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash - accounts receivable factoring facility | ||||||||
| Accounts receivable - net | ||||||||
| Inventory | ||||||||
| Prepaids and other | ||||||||
| Total Current Assets | ||||||||
| Property and equipment - net | ||||||||
| Other Assets | ||||||||
| Long-term accounts receivable - net | ||||||||
| Intangibles - net | ||||||||
| Operating lease - right of use asset - net | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accounts payable and accrued expenses - related party | ||||||||
| Operating lease liability | ||||||||
| Notes payable - SBA government | ||||||||
| Notes payable | ||||||||
| Note payable - related party | ||||||||
| Convertible notes payable - net | ||||||||
| Derivative liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Notes payable - SBA government | ||||||||
| Operating lease liability | ||||||||
| Convertible notes payable - net | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Deficit | ||||||||
| Common stock, $ par value, shares authorized and shares issued and and shares outstanding, at June 30, 2026 and December 31, 2025, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock - at cost ( and shares, respectively) | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Stockholders’ deficit | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 3 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Gain on contract liability settlement | ( | ) | ( | ) | ||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense (including amortization of debt discount) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on present value measurement of long-term accounts receivable | ( | ) | ( | ) | ||||||||||||
| Accretion of discount on accounts receivable | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest income | ||||||||||||||||
| Derivative Expense | ( | ) | ( | ) | ||||||||||||
| Change in fair value of derivative liabilities | ||||||||||||||||
| Total other income (expense) - net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) before provision for income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Provision for income tax benefit (expense) | ||||||||||||||||
| Net loss including non-controlling interest | ( | ) | ( | ) | ( | ) | ||||||||||
| Non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) available to common stockholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Income (loss) per share - attributable to common stockholders | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average number of shares outstanding - attributable to common stockholders | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 4 |
SurgePays, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Deficit For the Three and Six Months Ended June 30, 2026 (Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Treasury Stock | Non-Controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Shares | Amount | Interest | Deficit | |||||||||||||||||||||||||
| December 31, 2025 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Stock issued for cash | - | |||||||||||||||||||||||||||||||
| Cash paid as direct offering costs | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| Stock issued for services | - | |||||||||||||||||||||||||||||||
| Recognition of stock based compensation - employees | - | - | ||||||||||||||||||||||||||||||
| Recognition of stock based compensation - related parties | - | - | ||||||||||||||||||||||||||||||
| Debt discount - convertible notes payable - stock issued | - | |||||||||||||||||||||||||||||||
| Conversion of debt to common stock - related party | - | |||||||||||||||||||||||||||||||
| Debt forgiveness - related party | - | - | ||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| March 31, 2026 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock issued for services | - | |||||||||||||||||||||||||||||||
| Stock issued for services - related party | - | |||||||||||||||||||||||||||||||
| Recognition of stock based compensation - employees | - | - | ||||||||||||||||||||||||||||||
| Recognition of stock based compensation - related parties | - | - | ||||||||||||||||||||||||||||||
| Conversion of debt to common stock | - | |||||||||||||||||||||||||||||||
| Reclassification of derivative liability to additional paid in capital | - | - | ||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||
| June 30, 2026 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 5 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity For the Three and Six Months Ended June 30, 2025 (Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Treasury Stock | Non-Controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Shares | Amount | Interest | Equity | |||||||||||||||||||||||||
| December 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Recognition of stock based compensation - unvested shares - related parties | - | - | ||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| March 31, 2025 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recognition of stock based compensation - unvested shares - related parties | - | - | ||||||||||||||||||||||||||||||
| Debt discount - convertible note payable - warrants issued | - | - | ||||||||||||||||||||||||||||||
| Treasury stock reacquired in connection with convertible debt financing | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Non-controlling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||
| June 30, 2025 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 6 |
SurgePays, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| For the Six Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Operating activities | ||||||||
| Net loss - including non-controlling interest | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operations | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Amortization of debt discount/debt issue costs | ||||||||
| Stock issued for services | ||||||||
| Stock issued for services - related party | ||||||||
| Recognition of stock based compensation - related parties | ||||||||
| Recognition of share based compensation - options | ||||||||
| Recognition of share based compensation - options - related party | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Derivative expense | ||||||||
| Accretion of discount on accounts receivable | ( | ) | ||||||
| Gain on contract liability settlement | ( | ) | ||||||
| Loss on present value measurement of long-term accounts receivable | ||||||||
| Changes in operating assets and liabilities | ||||||||
| (Increase) decrease in | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaids and other | ||||||||
| Increase (decrease) in | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Accounts payable and accrued expenses - related party | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Purchase of leasehold improvements | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Financing activities | ||||||||
| Proceeds from common stock issued for cash | ||||||||
| Cash paid as direct offering costs - common stock | ( | ) | ||||||
| Proceeds from issuance of notes payable | ||||||||
| Repayments of notes payable | ( | ) | ||||||
| Proceeds from issuance of convertible notes payable | ||||||||
| Cash paid as direct offering costs - convertibles note payable | ( | ) | ( | ) | ||||
| Repayments of loans - related party | ( | ) | ||||||
| Repayments on notes payable - SBA government | ( | ) | ( | ) | ||||
| Treasury shares repurchased (share buy-backs) | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash - beginning of period | ||||||||
| Cash, cash equivalents and restricted cash - end of period | $ | $ | ||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash - accounts receivable factoring facility | ||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Conversion of debt to common stock | $ | $ | ||||||
| Conversion of debt to common stock - related party | $ | $ | ||||||
| Debt forgiveness - related party | $ | $ | ||||||
| Debt discount - convertible notes payable - original issue discount | $ | $ | ||||||
| Debt discount - convertible notes payable - issuance of common stock | $ | $ | ||||||
| Debt discount - convertible notes payable - stated interest | $ | $ | ||||||
| Debt discount - convertible note payable - embedded conversion feature (derivative liabilities) | $ | |||||||
| Debt discount - convertible note payable - issuance of warrants (derivative liabilities) | $ | $ | ||||||
| Reclassification of derivative liability to additional paid-in capital | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 7 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Note 1 - Organization and Nature of Operations
Organization and Nature of Operations
SurgePays, Inc. (“SurgePays,” “we,” or the “Company”) is a telecommunications and financial technology company focused on delivering wireless connectivity and point-of-sale solutions to underserved and value-conscious communities across the United States. The Company’s mission is to enhance access to essential digital services where people live, shop, and work.
We operate through three primary business lines: (1) our MVNO wireless brands, (2) our MVNE enablement platform (HERO), and (3) our point-of-sale (POS) and fintech services. These businesses are supported through subsidiaries including SurgePhone Wireless, LLC, SurgePays Fintech, Inc., ECS Prepaid, LLC, and Torch Wireless, LLC, among others.
The Company and its subsidiaries are organized as follows:
| Company Name (Active) | Incorporation Date | State of Incorporation | Segment | |||
All of the following entities have nominal operations.
| Company Name (Inactive) | Incorporation Date | State of Incorporation | ||||
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.
| 8 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
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, 2026 and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2026 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, 2025 filed with the SEC on April 15, 2026.
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.
Nasdaq Continued Listing Compliance
In March 2026, the Company received two notices from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) indicating non-compliance with certain continued listing requirements.
On
March 18, 2026, the Company was notified that it no longer meets the minimum market value of listed securities (“MVLS”) requirement
of $
Under
Nasdaq listing rules, the Company has 180 calendar days to regain compliance with each requirement - until September 14, 2026 for the
MVLS deficiency and September 21, 2026 for the minimum bid price deficiency. Compliance with the MVLS requirement will be regained if
the market value of listed securities closes at or above $
If the Company does not regain compliance with the minimum bid price requirement within the initial 180-day period, it may be eligible for an additional 180-day compliance period, subject to meeting certain other continued listing standards and notifying Nasdaq of its intention to cure the deficiency.
| 9 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
If the Company’s common stock were ultimately delisted from Nasdaq, it could have a material adverse effect on the liquidity and market price of its shares, its ability to raise equity financing, its access to the public capital markets, and its ability to provide equity incentives to employees. The Company is actively monitoring its compliance status and intends to pursue all available options to regain compliance within the applicable cure periods.
Going Concern, Liquidity and Management’s Plans
As reflected in the accompanying consolidated financial statements, for the six months ended June 30, 2026, the Company had:
| ● | Net
loss available to common stockholders of $ | |
| ● | Net
cash used in operations of $ |
Additionally, at June 30, 2026, the Company had:
| ● | Accumulated
deficit of $ | |
| ● | Stockholders’
deficit of $ | |
| ● | Working
capital deficit of $ | |
| ● | Unrestricted
cash on hand of $ |
The Company has historically incurred significant losses and has not achieved profitable operations on a sustained basis. In making this assessment, management performed a comprehensive analysis of the Company’s current circumstances, consisting of its financial position, cash flows, cash usage forecasts for the twelve months following the date these consolidated financial statements are issued, and its current capital structure, including equity-based instruments and outstanding debt obligations. Based on that analysis, management does not believe the Company has sufficient cash resources on hand to meet its obligations as they become due within that period.
These conditions and events, considered in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date these consolidated financial statements are issued.
Management has evaluated the significance of these conditions and has developed plans intended to mitigate the substantial doubt. The Company’s specific strategic and financing plans include the following:
| ● | Enhancing market visibility and customer acquisition for its direct Mobile Virtual Network Operator (“MVNO”) brand, LinkUp Mobile; | |
| ● | Diversifying Lifeline revenue streams by expanding operations into California and additional states; | |
| ● | Pursuing additional equity and debt financing alternatives and strategic partnerships; | |
| ● | Sustaining and growing its HERO Mobile Virtual Network Enabler (“MVNE”) enablement platform to increase baseline recurring revenue; and | |
| ● | Accessing
new capital through the $ |
These plans are subject to successful execution and prevailing market conditions, and there can be no assurance that they will be effectively implemented or that they will generate sufficient liquidity. Accordingly, management has concluded that its plans do not alleviate the substantial doubt about the Company’s ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
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.
Goodwill and Related Impairment - ClearLine Mobile, Inc. and Torch Wireless
The Company tests goodwill for impairment at the reporting unit level annually, or more frequently when events or changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value, in accordance with ASC 350-20, Intangibles - Goodwill and Other.
During
the year ended December 31, 2025, the Company performed its annual goodwill impairment assessment and determined that the fair value
of the ClearLine Mobile, Inc. (“CLMI”) reporting unit was less than its carrying amount. The CLMI reporting unit was unable
to generate revenues or cash flows sufficient to sustain operations. Accordingly, the Company recognized a full goodwill impairment charge
of $
| 10 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The
Company also determined that the fair value of the Torch Wireless reporting unit was less than its carrying amount and recognized a full
goodwill impairment charge of $
Goodwill consisted of the following:
| Balance - December 31, 2024 | $ | |||
| Impairment charge - CLMI | ( | ) | ||
| Impairment charge - Torch | ( | ) | ||
| Balance - December 31, 2025 | $ |
Note Receivable (Sale of Former Subsidiary) and Related Impairment
On
May 7, 2021, the Company disposed of its former subsidiary True Wireless, Inc. In connection with the sale, the Company received an unsecured
promissory note receivable from Blue Skies Connections, LLC in the original principal amount of $
On July 12, 2023, the Company provided Notice of Default to Blue Skies Connections, LLC for failure to make required payments, and accelerated the full outstanding balance in accordance with the terms of the note. The note was placed on non-accrual status upon default in July 2023, and no interest income (including default interest at 10%) has been recognized since that date due to uncertainty of collection.
During
the year ended December 31, 2025, the Company determined that the note was uncollectible and recognized an impairment loss of $
See Note 8 for additional discussion of related legal proceedings.
The Note Receivable was as follows:
| December 31, 2024 | ||||
| Less: impairment loss | ( | ) | ||
| December 31, 2025 | $ |
| 11 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Business Segments and Concentrations
The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. The Company manages its business as multiple reportable segments. See Note 10 regarding segment disclosure.
Revenues
related to the Mobile Virtual Network Operator (SurgePhone and Torch Wireless) business segment are
Revenues related to the Point-of-Sale and Prepaid Services business segment are derived from supplying digital top-ups to a broad base of Independent Sales Organizations (ISOs), direct dealer stores, and convenience retailers, enabling us to sell domestic and international airtime and data replenishments for multiple carriers. Top ups are purchased at a wholesale rate and resold at retail prices, with the Company capturing margin on each transaction.
Accounts
receivable related to these programs made up approximately
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 at June 30, 2026 and December 31, 2025 include the following:
| ● | Allowance for credit losses on accounts receivable and other receivables; | |
| ● | Inventory reserves and classifications; | |
| ● | Fair value of embedded conversion features and freestanding warrants | |
| ● | classified as derivative liabilities, including the expected volatility, risk-free | |
| ● | interest rate and expected term assumptions used in the option pricing models; | |
| ● | Allocation of proceeds to debt discount for warrants, original issue discount, guaranteed interest and debt issuance costs, and the period over which debt discount is amortized; |
| 12 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
| ● | Determination of whether an amendment to the terms of a debt instrument is accounted for as a modification or an extinguishment; | |
| ● | Fair value of convertible notes payable disclosed for fair value disclosure purposes, including the discount rate applied to contractual cash flows; | |
| ● | Impairment assessments of goodwill, intangible assets and long-lived assets, including the projected cash flows and discount rates used; | |
| ● | Valuation of loss contingencies; | |
| ● | Valuation of stock-based compensation; | |
| ● | Estimated useful lives related to property and equipment and intangible assets; | |
| ● | Implicit interest rate in right-of-use operating leases; | |
| ● | Management’s evaluation of the Company’s ability to continue as a going concern, including the cash flow projections underlying management’s plans; | |
| ● | Uncertain tax positions; and | |
| ● | Valuation allowance on deferred tax assets. |
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition and changes in consumer demand. The Company’s operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.
The Company has experienced, and in the future may experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, the following:
| ● | The cyclical nature of the industry; | |
| ● | General economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy; and | |
| ● | 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.
| 13 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Fair Value of Financial Instruments
The Company accounts for financial instruments in accordance with Accounting Standards Codification (ASC) 820, Fair Value Measurements, which defines fair value 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. ASC 820 establishes a three-tier hierarchy that prioritizes observable inputs over unobservable inputs:
| ● | Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. | |
| ● | Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. | |
| ● | Level 3 - Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use, developed using the best information available in the circumstances. |
The Company’s financial instruments include cash, accounts receivable, accounts payable, and accrued expenses, including related-party amounts. As of June 30, 2026 and December 31, 2025, the carrying values of these instruments approximate their fair values due to their short-term nature.
See Note 6 for the Company’s derivative liabilities, which are measured at fair value on a recurring basis using Level 3 inputs.
Cash and Cash Equivalents, Restricted Cash 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.
The
Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent
account balances exceed the amount insured by the FDIC, which is $
At June 30, 2026 and December 31, 2025, respectively, the Company did not experience any losses on cash balances in excess of FDIC insured limits.
Restricted Cash
The
Company classifies as restricted cash any cash balances that are subject to legal or contractual restrictions limiting their availability
for general corporate use. As of June 30, 2026 and December 31, 2025, restricted cash totaled $
| 14 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The following table reconciles cash and restricted cash reported on the consolidated balance sheets to the total cash and restricted cash presented on the consolidated statements of cash flows:
June 30, 2026 | December 31, 2025 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total | $ | $ | ||||||
Accounts Receivable and Amounts Under Regulatory Review
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.
The Company measures an allowance for credit losses in accordance with ASC 326, Financial Instruments - Credit Losses, using the current expected credit loss model. The allowance is measured on a collective basis for receivables that share similar risk characteristics, and individually where a receivable no longer shares those characteristics, and reflects historical loss experience, current conditions and reasonable and supportable forecasts of future conditions over the remaining collection period. Accounts determined to be uncollectible are written off against the allowance when that determination is made. Credit loss expense is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Accounts receivable that are not expected to be collected within twelve months of the balance sheet date are classified as non-current. A non-current receivable that does not bear interest is measured at the present value of the amount management expects to collect, determined using the yield on United States Treasury securities of a maturity comparable to the expected period to collection. The difference between the face amount of the receivable and its present value is recorded as a discount against the receivable, with the corresponding charge recognized in other income (expense) in the period in which the receivable is reclassified. The discount is subsequently accreted to income over the expected collection period using the effective interest method. The expected collection period and the discount rate are reassessed at each reporting date, and the effect of a change in either estimate is recognized prospectively.
| 15 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
At
June 30, 2026 and December 31, 2025, the allowance for credit losses was $
A
subsidiary of the Company derives substantially all of its revenue from programs administered by the Universal Service Administrative
Company under the oversight of the Federal Communications Commission. Reimbursements under those programs are ordinarily received within
approximately thirty (30) days following submission of the monthly reimbursement report. In November 2025, the program administrator
commenced an audit of the subsidiary’s participation in one of those programs, and a related regulatory review was opened in March
2026. Pending completion of those proceedings, reimbursements aggregating $
Management has concluded that the withheld amounts remain collectible in full, and accordingly no allowance for credit losses has been recorded against them. There is no prescribed timetable for completion of the audit and the related review, and neither proceeding had been resolved as of the date these unaudited consolidated financial statements were issued. Because collection is not expected within twelve months of the balance sheet date, the withheld amounts have been reclassified from current accounts receivable to non-current accounts receivable.
The
withheld amounts do not bear interest. The non-current receivable was therefore measured at its present value on initial recognition,
determined by discounting the $
The
discount is accreted to income over the expected collection period using the effective interest method. Accretion of $
| 16 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Accounts receivable consisted of the following:
| June 30, 2026 | December 31, 2025 | |||||||
| Accounts receivable - current | $ | |||||||
| Accounts receivable - under regulatory review - face amount | ||||||||
| Less: discount to present value | ( | ) | ||||||
| Add: accretion of discount on accounts receivable | ||||||||
| Accounts receivable - non-current | ||||||||
| Total accounts receivable | $ | $ | ||||||
The estimated collection period and the discount rate are significant estimates. An extension of the estimated collection period would increase the discount recognized and extend the period over which it is accreted, and a shortening would have the opposite effect. The amounts ultimately collected may differ from management’s current estimate, and the timing of collection is not within the Company’s control.
Accordingly, the entire withheld balance is classified as non-current and is presented separately from current accounts receivable, net of the unamortized discount, within non-current assets in the accompanying consolidated balance sheet at a carrying amount of $3,331,221 at June 30, 2026.
Inventory
Inventory primarily consists of cell phones, store racking, and sim cards. Inventories are stated at the lower of cost or net realizable value using the average cost valuation method.
At
June 30, 2026 and December 31, 2025, the Company had inventory of $
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 ASC 360-10-35-15, Impairment or Disposal of Long-Lived Assets. Factors considered in determining whether a potential impairment exists 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 loss is measured as the amount by which the carrying amount of the assets exceeds their fair value.
| 17 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
There
were
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets.
Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.
Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
There
were
Derivative Liabilities
The Company evaluates financial instruments that contain characteristics of both liabilities and equity in accordance with FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging.
Classification of Freestanding Instruments
Freestanding financial instruments that are indexed to the Company’s own common stock are evaluated under ASC 815-40 to determine whether they qualify for equity classification. An instrument that is not indexed to the Company’s own common stock, or that does not satisfy the additional conditions for equity classification, is classified as a liability and measured at fair value. Common stock purchase warrants issued in connection with certain convertible notes payable contain a provision requiring settlement in cash at the holder’s election upon specified fundamental transactions. Those warrants therefore do not satisfy the conditions for equity classification and are accounted for as derivative liabilities.
| 18 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Embedded Conversion Features
The Company evaluates conversion features embedded in its convertible notes payable under ASC 815-15-25-1 to determine whether a feature must be separated from the host contract. A feature is separated only when each of the following conditions is met:
| ● | The economic characteristics and risks of the feature are not clearly and closely related to those of the host contract; | |
| ● | The hybrid instrument is not itself measured at fair value with changes recognized in earnings; and | |
| ● | A freestanding instrument with the same terms would meet the definition of a derivative, including the net settlement criterion of ASC 815-10-15-83(c). |
Where all three conditions are met, the feature is separated and accounted for as a derivative liability measured at fair value. Where they are not, the note is accounted for as a single instrument. The evaluation is performed at issuance based on the terms of the instrument in effect at that date. Where separation is precluded at issuance solely because a contingency specified in the instrument has not occurred, the conditions are reassessed on the date that contingency occurs, in accordance with ASC 815-15-25-4, and a feature that meets all three conditions on that date is separated on that date and measured at its fair value.
Measurement
Derivative liabilities are measured at fair value on the commitment date and are remeasured at fair value at each subsequent reporting date, with changes in fair value recognized in the consolidated statements of operations as change in fair value of derivative liabilities. The Company estimates fair value using the Black-Scholes-Merton option pricing model. Because the valuation depends on significant unobservable inputs, including expected volatility and expected term, derivative liabilities are classified within Level 3 of the fair value hierarchy under ASC 820.
Initial Recognition and Derivative Expense
When a conversion feature is separated in connection with the issuance of a convertible note payable, the feature is recorded at fair value on the commitment date and a corresponding debt discount is recorded against the host instrument. Debt discount, comprising original issue discount, capitalized guaranteed interest, the fair value of warrants and of commitment shares of common stock, debt issuance costs and the fair value of any separated conversion feature, is limited in the aggregate to the proceeds received. To the extent the initial fair value of the derivative liability, together with other debt discounts, exceeds the proceeds received, the excess is recognized immediately as day one derivative expense in the consolidated statements of operations on the commitment date.
Where a conversion feature is separated after the issuance of the convertible note payable because a contingency specified in the instrument has occurred, the feature is recorded at its fair value on the date of separation. The allocation of proceeds between the host contract and an embedded derivative under ASC 815-15-30-2 is performed at the inception of the hybrid instrument. Because the host instrument is already outstanding on the date of a later separation and no proceeds remain to be allocated, no debt discount arises and the fair value of the separated feature is recognized in the consolidated statements of operations as derivative expense on the date of separation.
| 19 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Conversion and Settlement
When a convertible note payable containing a separated conversion feature is converted into shares of common stock in accordance with the original terms of the instrument, the Company:
| ● | Remeasures the derivative liability to fair value immediately before conversion, with the change recognized in earnings; | |
| ● | Recognizes in interest expense the unamortized debt discount allocated to the converted portion of the note; | |
| ● | Derecognizes the carrying amount of the note and the carrying amount of the derivative liability; and | |
| ● | Credits common stock at par value and additional paid-in capital for the aggregate carrying amount derecognized. |
No gain or loss is recognized on a conversion effected under the original terms of the instrument. The Company applies conversion accounting and recognizes the unamortized debt discount allocated to the converted portion in interest expense on the date of conversion. When a warrant classified as a derivative liability is exercised, the liability is remeasured to fair value immediately before exercise and the resulting carrying amount is reclassified to additional paid-in capital.
Reassessment and Reclassification
The Company reassesses the classification of its equity-linked instruments at each reporting date. An instrument previously classified within stockholders’ equity that no longer satisfies the conditions for equity classification is reclassified to a liability and measured at fair value on the date of reclassification, with the difference between that fair value and the amount previously carried in equity recorded as an adjustment to stockholders’ equity. Changes in fair value after the date of reclassification are recognized in earnings. An instrument previously classified as a liability that subsequently satisfies the conditions for equity classification is remeasured to fair value on the date of reclassification, with the change recognized in earnings, and the resulting fair value is reclassified to stockholders’ equity.
Derivative Liability Balances
As
of June 30, 2026, the Company had derivative liabilities of $
See Notes 5, 6 and 7 for additional information.
Debt Discounts and Debt Issuance Costs
The Company records original issue discount (“OID”), capitalized guaranteed interest, the fair value of warrants and commitment shares of common stock issued to the lender, the fair value of any conversion feature separated from the host instrument, and debt issuance costs as a discount against the carrying amount of the related debt. Proceeds are allocated between the debt and any detachable equity instruments on the basis of relative fair values. Debt issuance costs are presented as a direct deduction from the carrying amount of the related debt.
| 20 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Debt discount is amortized to interest expense over the contractual term using the effective interest method, or on a straight-line basis where the result is not materially different. The aggregate discount recorded at issuance is limited to the proceeds received, and any excess is recognized immediately in the consolidated statements of operations on the commitment date.
Upon conversion in accordance with the original terms of the instrument, the carrying amount of the debt, net of the unamortized discount attributable to the portion converted, is credited to common stock and additional paid-in capital with no gain or loss recognized. Where the conversion feature has been separated as a derivative liability, the unamortized discount attributable to the portion converted is recognized in interest expense as described under Derivative Liabilities above. Upon repayment before scheduled maturity, the unamortized discount attributable to the portion repaid is included in the gain or loss on extinguishment.
Debt is classified as current or long term based on principal contractually due within twelve months of the balance sheet date. Debt that is in default, or that is callable by the lender within twelve months of the balance sheet date as a result of a violation of a provision of the debt agreement, is classified as current regardless of its contractual maturity.
Unamortized debt discount is allocated between current and long term on a note by note basis in proportion to the portion of each note’s remaining contractual term that falls within twelve months of the balance sheet date.
Debt Modifications and Extinguishments
When the terms of a debt instrument are amended, the Company first evaluates whether the amendment constitutes a troubled debt restructuring. A troubled debt restructuring occurs when the Company is experiencing financial difficulties and the lender grants a concession that it would not otherwise have considered. In assessing whether it is experiencing financial difficulty, the Company considers all relevant facts and circumstances, including whether it is in default on its debt obligations, whether substantial doubt exists regarding its ability to continue as a going concern, whether its securities are subject to delisting, whether projected cash flows are sufficient to service the debt in accordance with its existing contractual terms through maturity, and whether, absent the modification, the Company could obtain from sources other than the existing lender at market terms available to a nontroubled borrower.
If the Company is experiencing financial difficulty, it evaluates whether the lender has granted a consession, a lender is deemed to have granted a concession when the effective interest rate of the restructured debt, after giving effect to all terms of the restructuring, is lower than the effective interest rate of the debt immediately before the restructuring. The restructured effective interest rate is determined by projecting the cash flows under the amended terms and solving for the rate that equates the present value of those cash flows with the carrying amount of the debt immediately before the restructuring. When debt has been restructured more than once within a relatively short period, the Company considers the successive restructurings in accordance with the applicable lookback guidance, including comparison of the effective interest rate under the latest terms with the effective interest rate immediately preceding the earlier restructuring.
A troubled debt restructuring effected solely through a modification of terms is not accounted for as an extinguishment. The Company compares the total future cash payments specified by the amended terms, on an undiscounted basis, with the carrying amount of the debt at the restructuring date. Total future cash payments include amounts designated as principal or interest, accrued interest that remains payable, and amounts contingently payable, assuming such contingent amounts will be paid. If the carrying amount exceeds total undiscounted future cash payments, the carrying amount is reduced to the amount of those payments and a gain on restructuring is recognized. If total undiscounted future cash payments are greater than or equal to the carrying amount, no gain is recognized and the carrying amount is not adjusted. In that circumstance, a new effective interest rate is determined that equates the present value of the future cash payments specified by the amended terms, excluding contingently payable amounts, with the carrying amount of the debt, and that effective interest rate is applied and amortized prospectively.
An amendment that is not a troubled debt restructuring is evaluated under the debt modification and extinguishment guidance. For term debt, an amendment is generally accounted for as an extinguishment when the present value of the cash flows under the amended terms is at least 10% different from the present value of the remaining cash flows under the existing terms, with both sets of cash flows evaluated using the effective interest rate of the original debt for accounting purposes. Cash flows under the amended terms include amounts paid by the Company to the lender, less amounts received from the lender as part of the modification. If the debt has been modified or exchanged within the preceding year without being deemed substantially different, the Company considers the terms that existed one year before the current transaction when applying the substantially-different-terms test.
Right-of-Use Assets and Lease Obligations
The Company accounts for leases in accordance with ASC 842, Leases.
Recognition and Measurement
At lease commencement, the Company recognizes a right-of-use (“ROU”) asset and a corresponding lease liability measured at the present value of the lease payments over the lease term. The Company evaluates ROU assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Lease Classification
All of the Company’s leases are classified as operating leases and are presented as right-of-use assets and operating lease liabilities on the consolidated balance sheets. The Company has no finance leases. Operating lease expense is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses in the accompanying consolidated statements of operations.
| 21 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Short-Term Leases
The Company has elected the short-term lease exemption under ASC 842 for leases with an initial term of twelve (12) months or less. These leases are not recorded on the balance sheet, and the related lease payments are expensed on a straight-line basis over the lease term.
Lease Term and Renewal Options
In determining the lease term, the Company evaluates whether renewal options are reasonably certain to be exercised. Factors considered include the useful life of leasehold improvements relative to the lease term, the economic performance of the business at the leased location, the comparative cost of renewal rates versus market rates, and any significant economic penalties for non-renewal. The Company’s operating leases contain renewal options but no residual value guarantees. Management does not currently expect to exercise any renewal options, which are therefore excluded from the measurement of ROU assets and lease liabilities.
Discount Rate
As the implicit rate in the Company’s leases is not readily determinable, the Company uses an incremental borrowing rate (“IBR”) that represents the rate it would incur to borrow on a collateralized basis over a similar term in a similar economic environment.
See Note 8 for additional information regarding the Company’s operating leases.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. Revenue is recognized when control of promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company applies the following five-step model:
| ● | Identify the contract with the customer; | |
| ● | Identify the performance obligations in the contract; | |
| ● | Determine the transaction price; | |
| ● | Allocate the transaction price to performance obligations; and | |
| ● | Recognize revenue when or as each performance obligation is satisfied. |
Contract consideration is fixed and determinable at contract inception, and the Company’s contracts do not contain multiple performance obligations. The Company does not offer returns, refunds, or warranties, and no arrangements are cancellable. Amounts recognized under the federal programs described below are subject to administrative review and, where a review results in a determination that a reimbursement was not properly payable, to recovery by the program administrator. No reduction of revenue has been recorded in respect of any such review. See Note 8.
| 22 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Mobile Virtual Network Operators
Torch Wireless is licensed to provide subsidized mobile broadband services through the Lifeline program to qualifying low-income customers. The Company’s performance obligation is satisfied as mobile broadband services are provided to eligible subscribers.
Revenue is recognized in the month services are provided to Lifeline subscribers who remain active as of the last day of the month.
At month-end, the Company determines the number of eligible active subscribers based on internal usage data and subscriber eligibility status. The Company then submits a report to the Universal Service Administrative Company (“USAC”), which administers the Lifeline reimbursement program on behalf of the federal government. Upon submission of this report, the related accounts receivable is recorded. Payment is typically received by the 28th day of the following month.
Point-of-Sale and Prepaid Services
Revenues are generated through the sale of telecommunication products, including mobile phones, wireless top-up refills, and other mobile-related products through the Company’s online web portal. The performance obligation is satisfied at the point of sale, at which time the web portal initiates an automated clearing house (“ACH”) transaction and revenue is recognized. The Company has determined it is the principal in these arrangements, as it takes control of the products prior to transferring them to the customer, and accordingly records revenue on a gross basis with related costs recorded as cost of revenues.
Contract Liabilities - Deferred Revenue
Contract liabilities represent customer deposits received prior to the satisfaction of the related performance obligation. Upon completion of the performance obligation, the liability is relieved and revenue is recognized.
At
June 30, 2026 and December 31, 2025, deferred revenue was $
| 23 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The following represents the Company’s disaggregation of revenues for the six months ended June 30, 2026 and 2025:
| For the Six Months Ended June 30, | ||||||||||||||||
| 2026 | 2025 | |||||||||||||||
| Revenue | Revenue | % of Revenues | Revenue | % of Revenues | ||||||||||||
| Mobile Virtual Network Operators | $ | % | $ | % | ||||||||||||
| Point-of-Sale and Prepaid Services | $ | % | $ | % | ||||||||||||
| Total Revenues | $ | % | $ | % | ||||||||||||
The above disaggregation of revenues includes the following entities:
Mobile Virtual Network Operators (SPW and TW),
Point-of-Sale and Prepaid Services (Surge Fintech and ECS); and
Other Corporate Overhead (Surge Blockchain and formerly LogicsIQ and Injury Survey)
Cost of Revenues
Cost of revenues consists of tablet purchases, mobile phone purchases, purchased telecom services including data usage and access to wireless networks. Additionally, cost of revenues consists of call center costs, prepaid phone cards, commissions, and advertising costs.
Income Taxes
Accounting Policy
The Company accounts for income taxes using the asset and liability method prescribed by ASC 740, Income Taxes. 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 expected to be in effect in the years in which the differences are expected to reverse. 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 records a valuation allowance against deferred tax assets when, 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.
For interim periods, income tax expense or benefit is determined using an estimated annual effective tax rate applied to year to date pre-tax income or loss, adjusted for items recognized discretely in the period, in accordance with ASC 740-270.
| 24 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Uncertain Tax Positions
The Company follows the provisions of ASC 740 with respect to uncertainty in income taxes. Tax positions are recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the taxing authorities.
At
June 30, 2026 and December 31, 2025, the Company had
The Company’s federal and state income tax returns for the tax years ended December 31, 2022 through December 31, 2025 remain subject to examination by the respective taxing authorities.
Valuation Allowance and Net Operating Loss Carryforwards
The Company has federal and state net operating loss carryforwards. Net operating losses generated in tax years beginning after December 31, 2017 may be carried forward indefinitely but may not offset more than 80% of taxable income in any year. Losses generated in earlier tax years are not subject to that limitation and expire at various dates.
The Company has incurred cumulative losses in recent years, which is significant negative evidence that is objectively verifiable and difficult to overcome. Based on the weight of available evidence, the Company has concluded that it is more likely than not that its deferred tax assets will not be realized, and a full valuation allowance has been recorded against net deferred tax assets at June 30, 2026 and December 31, 2025.
Interim Provision
income tax expense or benefit was recorded for the three and six months ended June 30, 2026 and 2025. The effective tax rate differs
from the federal statutory rate of
Limitation on Utilization of Carryforwards
Utilization of net operating loss carryforwards may be subject to an annual limitation under Section 382 of the Internal Revenue Code upon a cumulative change in ownership of more than 50% over a three-year testing period. The Company has not completed a study to determine whether such an ownership change has occurred. Any resulting limitation would not affect the consolidated financial statements because a full valuation allowance is recorded against the related deferred tax assets.
| 25 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
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 marketing and advertising costs during the three and six months ended June 30, 2026 and 2025, respectively, as follows:
| For the Three Months Ended June 30, | ||||||
| 2026 | 2025 | |||||
| $ | $ | |||||
| For the Six Months Ended June 30, | ||||||
| 2026 | 2025 | |||||
| $ | $ | |||||
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation. Compensation cost is measured at the grant date fair value of the award and recognized on a straight-line basis over the requisite service period. Awards granted to non-employees are accounted for in substantially the same manner as awards granted to employees, with fair value determined on the grant date. All awards outstanding during the periods presented are equity classified.
The fair value of restricted stock awards is measured using the closing price of the Company’s common stock on the grant date.
Fair Value Estimation
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model. The model incorporates the following key assumptions:
| ● | Expected dividend yield - Based on the Company’s anticipated dividend policy over the expected life of the option (generally assumed to be zero, as the Company does not currently pay dividends). | |
| ● | Expected volatility - Based on the historical volatility of the Company’s common stock. | |
| ● | Risk-free interest rate - Based on the yield on U.S. Treasury securities with maturities approximating the expected term of the option. | |
| ● | Expected term - Estimated based on historical exercise behavior, contractual terms, and the simplified method (average of contractual term and vesting period) where appropriate. |
| 26 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Forfeitures and Expense Classification
The Company has elected the practical expedient under ASU 2016-09 to account for forfeitures as they occur rather than estimating them in advance. This election is applied consistently to all stock-based awards. Stock-based compensation expense is classified in the consolidated statements of operations as a component of general and administrative expenses.
Stock Warrants
The Company issues warrants to purchase shares of its common stock in connection with financing transactions, consulting arrangements and strategic partnerships. Each issuance is evaluated under ASC 480 and ASC 815-40 to determine the appropriate balance sheet classification. Warrants meeting the conditions for equity classification are recorded in additional paid-in capital; those that do not are recorded as liabilities at fair value and remeasured at each reporting date, with changes recognized in earnings. See Derivative Liabilities above.
Warrants are recorded as follows, depending on the transaction in which they are issued:
| ● | Issued with a sale of common stock: proceeds are allocated between the shares and the warrants based on relative fair values, with the amount allocated to equity classified warrants recorded in additional paid-in capital; | |
| ● | Issued with debt: proceeds are allocated between the debt and the warrants based on relative fair values in accordance with ASC 470-20-25-2, and the amount allocated to the warrants is recorded as a debt discount and amortized to interest expense over the term of the related debt; and | |
| ● | Issued for services: accounted for under ASC 718 and recognized as expense over the requisite service period, or immediately where there is no service period. |
The fair value of warrants is measured using an appropriate fair value model, taking into consideration the specific terms and features of each instrument.
Computation
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period.
Diluted earnings (loss) per share includes the impact of potentially dilutive securities and is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding plus the weighted-average number of common stock equivalents and other potentially dilutive securities during the period.
| 27 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Treasury Stock
Treasury shares are excluded from the denominator in computing both basic and diluted earnings (loss) per share because they are not considered outstanding.
During
the year ended December 31, 2025, the Company reacquired shares of treasury stock for $
Potentially dilutive common shares consist of the following:
| ● | Common stock issuable upon the exercise of outstanding stock options and warrants, measured using the treasury stock method. Assumed proceeds comprise the exercise price of the award and any unrecognized compensation cost. | |
| ● | Non-vested restricted shares issued to directors, which are contingently issuable shares excluded from the computation of basic earnings (loss) per share and included in the computation of diluted earnings (loss) per share using the treasury stock method. | |
| ● | Common stock issuable upon the conversion of convertible notes payable and the related accrued interest, measured using the if-converted method. That method is applied without regard to whether the conversion price is above or below the market price of the common stock. |
For the three months ended June 30, 2026, all potentially dilutive securities were antidilutive and were excluded from the computation of diluted earnings per share. The interest added back on the convertible notes payable, divided by the shares issuable on their assumed conversion, exceeded basic earnings per share for the period, and the assumed proceeds under the treasury stock method exceeded the average market price of the common stock for each outstanding stock option, warrant and non-vested restricted share.
For the six months ended June 30, 2026, the Company reported a net loss. All potentially dilutive securities were therefore antidilutive and diluted loss per share is equal to basic loss per share.
Each period is evaluated independently. A security that is antidilutive in one period may be dilutive in another, and these securities may be dilutive in future periods.
| 28 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
| June 30, 2026 | June 30, 2025 | |||||||
| Convertible notes payable and related accrued interest | ||||||||
| Warrants | ||||||||
| Stock options | ||||||||
| Non-vested director shares | ||||||||
| Total common stock equivalents | ||||||||
Warrants and stock options included as common stock equivalents represent those that are fully vested and exercisable. Non-vested restricted shares issued to directors are presented separately and are not vested. See Note 9.
Sufficiency of Authorized Shares
As of June 30, 2026 and December 31, 2025, the Company had shares of common stock authorized, which was sufficient to accommodate any potential exercises of common stock equivalents.
Treasury Stock
Accounting Policy
The Company accounts for treasury stock using the cost method in accordance with ASC Topic 505-30, Equity - Treasury Stock. Under this method, treasury stock is recorded at cost on the date of repurchase and presented as a deduction from stockholders’ equity. Purchases, sales, issuances and retirements of treasury stock are transactions in the Company’s own equity and are not reflected in the consolidated statements of operations.
Where shares are reacquired at a price in excess of the fair value of those shares on the date the major terms of the transaction are agreed, the excess is attributed to the other elements of the transaction and is accounted for according to the substance of those elements. The amount recorded as the cost of the treasury shares is limited to the fair value of the shares reacquired.
Reissuance of Treasury Stock
When treasury shares are reissued, they are removed from treasury stock at their original cost. Any excess of the reissuance price over cost is credited to additional paid-in capital. Any deficiency is charged first to additional paid-in capital to the extent of previously recorded credits from treasury stock transactions, with any remaining deficiency charged to accumulated deficit.
Retirement of Treasury Stock
The Company periodically assesses whether to retain treasury shares or retire them. Upon retirement, the shares are removed from issued stock and revert to the status of authorized but unissued shares. The par value of the shares retired is removed from common stock and the excess of the repurchase price over par value is allocated between additional paid-in capital and accumulated deficit. Where the par value of the shares retired exceeds their cost, the excess is credited to additional paid-in capital.
| 29 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Related Parties
The Company identifies and discloses related party relationships and transactions in accordance with ASC 850, “Related Party Disclosures”, and follows guidance set forth by the SEC under Regulation S-X, Rule 4-08(k) regarding related party disclosures.
A party is considered related to the Company if it meets any of the following criteria:
| ● | Directly or indirectly controls, is controlled by, or is under common control with the Company. | |
| ● | Principal owners, including any entity or individual that holds a significant ownership interest in the Company. | |
| ● | Management and key personnel, including officers, directors, and executives. | |
| ● | Immediate family members of principal owners and key management personnel. | |
| ● | Entities with significant influence, where one party can exert control or influence over the management or operating policies of another party to the extent that one of the transacting parties may not be fully pursuing its own separate economic interests. |
The Company follows the SEC’s Regulation S-K, Item 404(a), which requires the disclosure of related party transactions exceeding a materiality threshold and details on the nature of the relationship, transaction terms, and amounts involved.
During the six months ended June 30, 2026 and 2025, respectively, the Company incurred expenses with a related party (annual rental agreement) in the normal course of business as follows:
| Related Party | June 30, 2026 | June 30, 2025 | ||||||
| Carddawg Investments, Inc. | $ | $ | 1 | |||||
1 - represents an affiliate of our Chief Executive Officer (Kevin Brian Cox)
From time to time, the Company may use credit cards to pay corporate expenses, these credit cards are in the names of certain of the Company’s officers and directors. These amounts are insignificant.
See Note 5 for debt transactions with our Chief Executive Officer.
| 30 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Recent Accounting Standards
Recently Adopted Accounting Standards
FASB ASU 2023-07 – Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, which requires disclosure of significant segment expenses regularly provided to the chief operating decision maker (CODM), the title and position of the CODM, and extends certain annual disclosures to interim periods. The guidance also clarifies that an entity with a single reportable segment must apply ASC 280 in its entirety. The guidance was effective for annual periods beginning after December 15, 2023 and interim periods beginning after December 15, 2024, applied retrospectively. The Company adopted ASU 2023-07 effective January 1, 2025. Adoption resulted in expanded segment disclosures and did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
FASB ASU 2023-09 – Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, which requires disaggregation of the effective tax rate reconciliation into standardized categories and disclosure of income taxes paid by jurisdiction. The guidance was effective for annual periods beginning after December 15, 2024 and may be applied prospectively or retrospectively. The Company adopted ASU 2023-09 effective January 1, 2025. The requirements apply to annual periods only. Adoption resulted in expanded income tax disclosures and did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
FASB ASU 2025-05 – Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets
In July 2025, the FASB issued ASU 2025-05, which provides a practical expedient permitting an entity to assume that current economic conditions as of the balance sheet date will remain unchanged over the remaining life of current accounts receivable and current contract assets arising from transactions accounted for under ASC 606. The Company early adopted ASU 2025-05 effective January 1, 2025 and elected the practical expedient, applied prospectively. The practical expedient is not available for accounts receivable classified as non-current, and expected credit losses on those balances are estimated considering forecasts of future conditions over the remaining collection period. Adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
| 31 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
FASB ASU 2024-04 - Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments
In November 2024, the FASB issued ASU 2024-04, which clarifies the requirements for determining whether a settlement of a convertible debt instrument should be accounted for as an induced conversion. The guidance was effective for annual periods beginning after December 15, 2025 and interim periods within those annual periods. The Company adopted ASU 2024-04 effective January 1, 2026 on a prospective basis. The Company evaluated the settlements of convertible notes payable occurring during the six months ended June 30, 2026 and determined that each was effected in accordance with the original conversion terms of the instrument and did not constitute an induced conversion. Adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Standards Not Yet Adopted
FASB ASU 2024-03 / ASU 2025-01 – Income Statement (Topic 220): Reporting Comprehensive Income - Expense Disaggregation Disclosures
In November 2024, the FASB issued ASU 2024-03, which requires public business entities to disclose, in annual and interim periods, disaggregated information about specified income statement expense captions in a tabular format, together with a qualitative reconciliation to the captions presented on the face of the financial statements. In January 2025, the FASB issued ASU 2025-01 to clarify the effective date. The guidance is effective for annual periods beginning after December 15, 2026 and interim periods beginning after December 15, 2027. Early adoption is permitted, and the guidance may be applied prospectively or retrospectively. The Company is assessing the effect of ASU 2024-03 and ASU 2025-01 on its consolidated financial statement disclosures.
ASU 2026-01, Distinguishing Liabilities from Equity (Topic 480): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock
In April 2026, the FASB issued ASU 2026-01, which requires that paid-in-kind dividends on equity-classified preferred stock be measured initially on the basis of the dividend rate stated in the preferred stock agreement. The guidance is effective for annual periods beginning after December 15, 2026 and interim periods within those annual periods, with early adoption permitted. The Company is assessing the effect of ASU 2026-01 on its consolidated financial statements.
FASB ASU 2025-07 - Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract
In September 2025, the FASB issued ASU 2025-07, which adds a scope exception from derivative accounting for contracts with underlyings based on the operations or activities of one of the parties to the contract, and clarifies that ASC 606 applies to share-based noncash consideration received from a customer until the entity’s right to receive or retain that consideration becomes unconditional. The guidance is effective for annual periods beginning after December 15, 2026 and interim periods within those annual periods, with early adoption permitted. The Company does not expect the adoption of ASU 2025-07 to have a material effect on its consolidated financial statements or disclosures.
Other Accounting Standards Updates
The Company has evaluated all other recently issued accounting standards that are not yet effective and does not expect their adoption to have a material effect on its consolidated financial statements or disclosures.
| 32 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no material effect on the consolidated results of operations, stockholders’ equity, or cash flows.
Note 3 – Property and Equipment
Property and equipment consisted of the following:
| Estimated Useful | ||||||||||
| Type | June 30, 2026 | December 31, 2025 | Lives (Years) | |||||||
| Computer equipment and software | $ | $ | ||||||||
| Leasehold improvements | ||||||||||
| Furniture and fixtures | ||||||||||
| Less: accumulated depreciation/amortization | ( | ) | ( | ) | ||||||
| Property and equipment - net | $ | $ | ||||||||
Depreciation and amortization expense for the three and six months ended June 30, 2026 and 2025 was as follows:
| For the Three Months Ended June 30, | ||||||
| 2026 | 2025 | |||||
| $ | $ | |||||
| For the Six Months Ended June 30, | ||||||
| 2026 | 2025 | |||||
| $ | $ | |||||
These amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
| 33 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Note 4 – Intangibles
Intangibles consisted of the following:
| Estimated Useful | ||||||||||
| Type | June 30, 2026 | December 31, 2025 | Lives (Years) | |||||||
| Proprietary Software | $ | $ | ||||||||
| Tradenames/trademarks | ||||||||||
| ECS membership agreement | ||||||||||
| Noncompetition agreement | ||||||||||
| Customer Relationships | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Intangibles - net | $ | $ | ||||||||
Amortization expense for the three and six months ended June 30, 2026 and 2025 was as follows:
| For the Three Months Ended June 30, | ||||||
| 2026 | 2025 | |||||
| $ | $ | |||||
| For the Six Months Ended June 30, | ||||||
| 2026 | 2025 | |||||
| $ | $ | |||||
Estimated amortization expense for each of the succeeding years is as follows:
| For the Years Ended December 31: | ||||
| 2026 (6 months) | ||||
| 2027 | ||||
| Total | $ | |||
| 34 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Note 5 - Debt
The following represents a summary of the Company’s notes payable - Small Business Administration, notes payable - related parties, convertible notes payable and notes payable, key terms, and outstanding balances at June 30, 2026 and December 31, 2025, respectively:
| Note # | Issue Date | Maturity Date | Interest Rate | Default Rate | Collateral | Conversion Structure | In-Default | Scheduled Payments Past Due | Classifcation | June 30, 2026 | December 31, 2025 | |||||||||||||||||||||||
| Notes payable - SBA government | ||||||||||||||||||||||||||||||||||
| Note #1 | % | % | Unsecured | N/A | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Note #2 | % | % | Unsecured | N/A | ||||||||||||||||||||||||||||||
| Total | $ | $ | Gross Carrying Amount | |||||||||||||||||||||||||||||||
| Less: unamortized debt discount | ||||||||||||||||||||||||||||||||||
| Net Carrying Amount | ||||||||||||||||||||||||||||||||||
| Short Term | ||||||||||||||||||||||||||||||||||
| Long Term | $ | $ | ||||||||||||||||||||||||||||||||
| Note # | Issue Date | Maturity Date | Interest Rate | Default Rate | Collateral | Conversion Structure | In-Default | Scheduled Payments Past Due | Classifcation | June 30, 2026 | December 31, 2025 | |||||||||||||||||||||||
| Notes payable - related party (Chief Executive Officer) | ||||||||||||||||||||||||||||||||||
| Note #1 | % | % | Unsecured | N/A | $ | $ | Gross Carrying Amount | $ | ||||||||||||||||||||||||||
| Less: unamortized debt discount | ||||||||||||||||||||||||||||||||||
| Net Carrying Amount | ||||||||||||||||||||||||||||||||||
| Short Term | ||||||||||||||||||||||||||||||||||
| Long Term | $ | $ | ||||||||||||||||||||||||||||||||
| Note # | Issue Date | Maturity Date | Interest Rate | Default Rate | Collateral | Conversion Structure | In-Default | Scheduled Payments Past Due | Classifcation | June 30, 2026 | December 31, 2025 | |||||||||||||||||||||||
| Notes payable | ||||||||||||||||||||||||||||||||||
| Note #1 | % | % | Unsecured | N/A | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Note #2 | % | % | Accounts receivable | N/A | ||||||||||||||||||||||||||||||
| Total | $ | $ | Gross Carrying Amount | |||||||||||||||||||||||||||||||
| Less: unamortized debt discount | ( | ) | ||||||||||||||||||||||||||||||||
| Net Carrying Amount | ||||||||||||||||||||||||||||||||||
| Short Term | ||||||||||||||||||||||||||||||||||
| Long Term | $ | $ | ||||||||||||||||||||||||||||||||
| 35 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
| Note # | Issue Date | Maturity Date | Interest Rate | Default Rate | Collateral | Conversion Structure | In-Default | Scheduled Payments Past Due | Classifcation | June 30, 2026 | December 31, 2025 | |||||||||||||||||||||||
| Convertible Notes payable | ||||||||||||||||||||||||||||||||||
| Note #1 | % | % | All assets | A | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Note #2 | % | % | Unsecured | B-1 | ||||||||||||||||||||||||||||||
| Note #3 | % | % | Unsecured | B-1 | ||||||||||||||||||||||||||||||
| Note #4 | % | % | Unsecured | B-1 | ||||||||||||||||||||||||||||||
| Note #5 | % | % | Unsecured | B-1 | ||||||||||||||||||||||||||||||
| Note #6 | % | % | Unsecured | B-2 | ||||||||||||||||||||||||||||||
| Note #7 | % | % | Unsecured | B-2 | ||||||||||||||||||||||||||||||
| Note #8 | % | % | Unsecured | B-2 | ||||||||||||||||||||||||||||||
| Note #9 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #10 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #11 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #12 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #13 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #14 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #15 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #16 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #17 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #18 | % | % | Unsecured | D | ||||||||||||||||||||||||||||||
| Note #19 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #20 | % | % | Unsecured | C | ||||||||||||||||||||||||||||||
| Note #21 | % | % | Unsecured | E | ||||||||||||||||||||||||||||||
| Note #22 | % | % | Unsecured | E | ||||||||||||||||||||||||||||||
| Total | $ | $ | Gross Carrying Amount | |||||||||||||||||||||||||||||||
| Less: unamortized debt discount | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net Carrying Amount | ||||||||||||||||||||||||||||||||||
| Short Term | ||||||||||||||||||||||||||||||||||
| Long Term | $ | $ | ||||||||||||||||||||||||||||||||
| Issue | Maturity | Interest | Default | Conversion | Scheduled Payments | |||||||||||||||||||||||||||||||||||||
| Note # | Date | Date | Rate | Rate | Collateral | Structure | In-Default | Past Due | Classifcation | June 30, 2026 | December 31, 2025 | |||||||||||||||||||||||||||||||
| Net Carrying Amount All Debt Types | $ | $ | Gross Carrying Amount | $ | $ | |||||||||||||||||||||||||||||||||||||
| Less: unamortized debt discount | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Net Carrying Amount | ||||||||||||||||||||||||||||||||||||||||||
| Short Term | ||||||||||||||||||||||||||||||||||||||||||
| Long Term | $ | $ | ||||||||||||||||||||||||||||||||||||||||
Debt activity by instrument for the six (6) months ended June 30, 2026 is as follows:
| Note # | December 31, 2025 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | June 30, 2026 | |||||||||||||||||||||||||||
| Notes payable - SBA government | ||||||||||||||||||||||||||||||||||||
| Note #1 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
| Note #2 | $ | ( | ) | |||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
| 36 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
| Note # | December 31, 2025 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | June 30, 2026 | |||||||||||||||||||||||||||
| Notes payable - related party (Chief Executive Officer) | ||||||||||||||||||||||||||||||||||||
| Note #1 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Note # | December 31, 2025 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | June 30, 2026 | |||||||||||||||||||||||||||
| Notes payable | ||||||||||||||||||||||||||||||||||||
| Note #1 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Note #2 | ( | ) | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
| Note # | December 31, 2025 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | June 30, 2026 | |||||||||||||||||||||||||||
| Convertible Notes payable | ||||||||||||||||||||||||||||||||||||
| Note #1 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Note #2 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #3 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #4 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #5 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #6 | ||||||||||||||||||||||||||||||||||||
| Note #7 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #8 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #9 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #10 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #11 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #12 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #13 | ||||||||||||||||||||||||||||||||||||
| Note #14 | ||||||||||||||||||||||||||||||||||||
| Note #15 | ||||||||||||||||||||||||||||||||||||
| Note #16 | ||||||||||||||||||||||||||||||||||||
| Note #17 | ||||||||||||||||||||||||||||||||||||
| Note #18 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #19 | ||||||||||||||||||||||||||||||||||||
| Note #20 | ||||||||||||||||||||||||||||||||||||
| Note #21 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #22 | ( | ) | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||
| December 31, 2025 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | June 30, 2026 | ||||||||||||||||||||||||||
| Net Carrying Amount All Debt Types | ||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| 37 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Debt activity by instrument for the year ended December 31, 2025 is presented below:
| Note # | December 31, 2024 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | December 31, 2025 | |||||||||||||||||||||||||||
| Notes payable - SBA government | ||||||||||||||||||||||||||||||||||||
| Note #1 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
| Note #2 | ( | ) | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
| Note # | December 31, 2024 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | December 31, 2025 | |||||||||||||||||||||||||||
| Notes payable - related party (Chief Executive Officer) | ||||||||||||||||||||||||||||||||||||
| Note #1 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
| Note # | December 31, 2024 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | December 31, 2025 | |||||||||||||||||||||||||||
| Notes payable | ||||||||||||||||||||||||||||||||||||
| Note #1 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Note #2 | ( | ) | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Note # | December 31, 2024 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | December 31, 2025 | |||||||||||||||||||||||||||
| Convertible Notes payable | ||||||||||||||||||||||||||||||||||||
| Note #1 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Note #2 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #3 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #4 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #5 | ( | ) | ||||||||||||||||||||||||||||||||||
| Note #6 | ( | ) | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| December 31, 2024 | Face Amount Issued | Guaranteed Interest | Debt Discount | Amortization of Debt Discount | Repayments | Conversions | Forgiveness | December 31, 2025 | ||||||||||||||||||||||||||
| Net Carrying Amount All Debt Types | ||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||
| 38 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The following represents a summary of the Company’s debt discounts for the six months ended June 30, 2026 and the year ended December 31, 2025.
| Year Ended December 31, 2025 | ||||||||||||||||||||||||||||||||
| Legal, Broker, | Commitment | Derivative Liability | Derivative Liability | Equity Based | ||||||||||||||||||||||||||||
| Original Issue | Guaranteed |
Placement Agent | Shares Common | Conversion Feature | Conversion Feature | Conversion Feature | ||||||||||||||||||||||||||
| Note # | Discount | Interest | Fees | Stock | Note | Warrant | Warrant | Total | ||||||||||||||||||||||||
| Convertible Note #1 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Notes payable Note #1 | ||||||||||||||||||||||||||||||||
| Notes payable Note #2 | ||||||||||||||||||||||||||||||||
| Convertible Note #2 | ||||||||||||||||||||||||||||||||
| Convertible Note #3 | ||||||||||||||||||||||||||||||||
| Convertible Note #4 | ||||||||||||||||||||||||||||||||
| Convertible Note #5 | ||||||||||||||||||||||||||||||||
| Convertible Note #6 | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six Months Ended June 30, 2026 | ||||||||||||||||||||||||||||||||
| Convertible Note #2 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Convertible Note #3 | ||||||||||||||||||||||||||||||||
| Convertible Note #4 | ||||||||||||||||||||||||||||||||
| Convertible Note #5 | ||||||||||||||||||||||||||||||||
| Convertible Note #7 | ||||||||||||||||||||||||||||||||
| Convertible Note #8 | ||||||||||||||||||||||||||||||||
| Convertible Note #9 | ||||||||||||||||||||||||||||||||
| Convertible Note #10 | ||||||||||||||||||||||||||||||||
| Convertible Note #11 | ||||||||||||||||||||||||||||||||
| Convertible Note #12 | ||||||||||||||||||||||||||||||||
| Convertible Note #13 | ||||||||||||||||||||||||||||||||
| Convertible Note #14 | ||||||||||||||||||||||||||||||||
| Convertible Note #15 | ||||||||||||||||||||||||||||||||
| Convertible Note #16 | ||||||||||||||||||||||||||||||||
| Convertible Note #17 | ||||||||||||||||||||||||||||||||
| Convertible Note #18 | ||||||||||||||||||||||||||||||||
| Convertible Note #19 | ||||||||||||||||||||||||||||||||
| Convertible Note #20 | ||||||||||||||||||||||||||||||||
| Convertible Note #21 | ||||||||||||||||||||||||||||||||
| Convertible Note #22 | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The warrants issued with Convertible Notes #7, #8, #18, #21 and #22 are classified as derivative liabilities under ASC 815-40-25. See Note 6.
| 39 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Amortization
of debt discount recognized in interest expense was $
Notes Payable - Small Business Administration Government
The
Company holds two (2) Economic Injury Disaster Loans obtained under a United States Small Business Administration program made available
to eligible borrowers in response to the COVID-19 pandemic. Proceeds were used for working capital. Each loan has a term of thirty (30)
years from the date of its promissory note. Installment payments of principal and interest range from $
These loans were previously presented in their entirety as long term. Principal installments contractually due within twelve (12) months of the balance sheet date have been reclassified to current. The reclassification had no effect on total debt, net carrying amount, total assets, total liabilities, stockholders’ deficit, net loss, or cash flows for any period presented, and no restatement of previously issued financial statements is required.
Note Payable – Related Party
The
Company has one (1) unsecured note payable to its Chief Executive Officer, who is also a member of the Board of Directors. In 2024, all
remaining outstanding principal and accrued interest owed to the officer were consolidated into a single note repayable in equal monthly
installments of $
| 40 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Beginning
in July 2025 the monthly installments were temporarily suspended as a result of the Company’s cash flow constraints. The note holder
confirmed that the suspension does not constitute a default under the note terms. Accordingly the
The suspension did not modify the contractual terms and no concession reducing the effective borrowing rate was granted, so it does not constitute a troubled debt restructuring. Management is evaluating options to restructure or resume payments in future periods.
Conversion of Related Party Note Payable to Common Stock
On
March 23, 2026, the Company issued shares of common stock to its Chief Executive Officer in partial conversion of a related party
note payable (see Note 9). The shares were valued at their fair market value of $
The
forgiveness of debt by the Chief Executive Officer, in his capacity as both a principal shareholder and creditor, was accounted for as
a capital contribution and credited to additional paid-in capital. No gain on debt extinguishment was recognized. The aggregate value
of the transaction ($
Convertible Notes Payable
Convertible Note #1 and Related Amendments
On
May 12, 2025 the Company issued a Senior Secured Convertible Note in the original principal amount of $
The
note is secured by a first priority lien on substantially all of the assets of the Company and its subsidiaries pursuant to a Security
and Pledge Agreement and is fully guaranteed by certain subsidiaries. Interest accrues at
| 41 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Concurrent
with issuance the Company repurchased shares of its common stock from the investor at $/share, valued at $
The Company and the investor entered into a Second Amendment
on January 31, 2026 and a Third Amendment on March 26, 2026. Each provided for an additional advance of $
At each restructuring date, the total undiscounted future cash payments specified by the amended terms, including principal and interest, exceeded the carrying amount of the note. Accordingly, no gain on restructuring was recognized and no adjustment was made to the carrying amount of the note at respective restructuring date. Following each restructuring, the Company determined a revised effective interest rate that equated the present value of the future cash payments specified by the amended terms with the carrying amount of the note and applied that revised effective interest rate and amortize prospectively..
No payment of principal or interest has been made on
the note since issuance. The first scheduled amortization payment of $
Warrant Issuance
In
connection with the issuance of the note, the Company issued warrants to purchase
Proceeds
were allocated between the note and the warrants based on their relative fair values, determined using the Black-Scholes-Merton option
pricing model. The fair value of the warrants at issuance was $
The assumptions used in the Black-Scholes model were as follows:
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % |
| 42 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Debt Discount
In
connection with the issuance of the Note, the Company recorded total debt discounts of $
| Fair value - warrants issued | $ | |||
| Legal fees | ||||
| Broker fees | ||||
| Total debt discount | $ |
Debt
discount is being amortized to interest expense over the revised contractual term of the note through the amended maturity date of
Conversion Feature
The note is convertible at the holder’s option at $/share. The conversion option is indexed solely to the Company’s own common stock under ASC 815-40-15 and qualifies for the scope exception in ASC 815-10-15-74(a). Accordingly, the note is accounted for in its entirety as a debt instrument. The Company reassessed the conversion feature following each amendment and concluded that it continues to qualify for the scope exception. The exchange cap limits the number of shares issuable on conversion and does not adjust the conversion price.
Convertible Notes #2 through #6
Between September 2025 and November 2025 the Company issued five (5) one-year unsecured convertible notes to institutional investors. Each note was issued at a discount arising from an original issue discount, guaranteed interest capitalized at issuance and included in the total obligation, the fair value of common shares issued to the investor as additional consideration, and, where applicable, professional fees. Because the guaranteed interest is fully earned at issuance and capitalized into the total obligation, no stated interest rate accrues over the term. Each note is repayable in five (5) equal monthly installments inclusive of the capitalized guaranteed interest, with any unpaid amounts due as part of the fifth and final installment.
In
connection with these issuances the Company issued an aggregate of shares of common stock to the investors as additional consideration.
The shares were measured at the quoted closing price of the Company’s common stock on the respective issuance dates, ranging from
$ - $/share, and the aggregate fair value of $
| 43 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The conversion terms of these notes are described as Structure B-1 under Conversion Features below, and the related accounting analysis is described under Embedded Conversion Features. The Company may effect a mandatory conversion of all or a portion of any of these notes, subject to specified price and volume conditions and to the investor’s prior written consent. Amortization payments came due on Convertible Notes #2 through #5 during the second quarter of 2026 and were settled by conversion, as described under Amortization Payments and the Market Price Rate below.
Convertible Notes #7, #8, #18, #21 and #22
The
Company issued five (5) unsecured convertible promissory notes to institutional investors, in the aggregate original principal amount
of $
Convertible Notes #7 and #8 follow Structure B, Convertible Note #18 follows Structure D, and Convertible Notes #21 and #22 follow Structure E, each described under Conversion Features below.
Warrants
In
connection with these issuances the Company issued warrants to purchase an aggregate
shares of common stock at an exercise price of $
| 44 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Each
warrant provides for settlement in cash at the holder’s election upon specified fundamental transactions and therefore does not
satisfy the conditions for equity classification under ASC 815-40-25. The warrants are accounted for as derivative liabilities. Their
aggregate fair value at issuance was $
Year Ended December 31, 2025
Warrants (equity classified)
| Note # | Grant/Effective Date | Quantity of Warrants | Face Amount Issued | Face Amount Converted | Exercise Price | Expected Term in Years | Expected Volatility | Expected Dividends | Risk Free Interest Rate | Fair Value at Issuance | Fair Value June 30, 2026 | Fair Value December 31, 2025 | |||||||||||||||||||||||||||||||
| Convertible Note #1 warrant | $ | $ | $ | % | % | % | $ | not remeasured | N/A | ||||||||||||||||||||||||||||||||||
| Notes payable Note #1 warrant | $ | % | % | % | not remeasured | N/A | |||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Six Months June 30, 2026 | |||||||||||||||||||||||||||||||||||||||||||
| Warrants (derivative liabilities) | |||||||||||||||||||||||||||||||||||||||||||
| Note #7 warrant | $ | $ | $ | % | % | % | $ | $ | N/A | ||||||||||||||||||||||||||||||||||
| Note #8 warrant | $ | % | % | % | N/A | ||||||||||||||||||||||||||||||||||||||
| Note #18 warrant | $ | % | % | % | N/A | ||||||||||||||||||||||||||||||||||||||
| Note #21 warrant | $ | % | % | % | N/A | ||||||||||||||||||||||||||||||||||||||
| Note #22 warrant | $ | % | % | % | N/A | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Embedded Conversion Features (derivative liabilities) | |||||||||||||||||||||||||||||||||||||||||||
| Convertible Note #2 | $ | $ | * | $ | % | % | % | $ | $ | N/A | |||||||||||||||||||||||||||||||||
| Convertible Note #2 | * | $ | % | % | % | N/A | |||||||||||||||||||||||||||||||||||||
| Convertible Note #3 | * | $ | % | % | % | N/A | |||||||||||||||||||||||||||||||||||||
| Convertible Note #4 | * | $ | % | % | % | N/A | |||||||||||||||||||||||||||||||||||||
| Convertible Note #5 | * | $ | % | % | % | N/A | |||||||||||||||||||||||||||||||||||||
| Convertible Note #21 | $ | % | % | % | N/A | ||||||||||||||||||||||||||||||||||||||
| Convertible Note #22 | $ | % | % | % | N/A | ||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| * |
Separated Conversion Features
Convertible Notes #21 and #22 carry no fixed conversion price. The only rate at which either note may be converted is
The
separated features were measured at fair value at issuance in the aggregate amount of $
* Represents derivative liabilities recognized upon separation on date where discount to market feature was triggered.
| 45 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Debt Discount
The
notes were issued at an aggregate discount of $
See Note 6 for additional information on derivative liabilities.
Convertible Notes Payable Financing – Notes #9 - #17, #19 and #20
On
January 6, 2026 the Board of Directors authorized a private placement of up to $
The notes are convertible at the holder’s option at any time using tiered conversion prices applied to five (5) equal tranches of 20% each, which differ by closing, as described as Structure C under Conversion Features below.
Commitment
shares of common stock were issued to certain holders as additional consideration for the financing. In connection with the issuances
the Company issued an aggregate of commitment shares, recorded at fair value on the respective issuance dates based on closing
market prices ranging from $/share to $/share, for an aggregate fair value of $
| 46 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Conversion Features
The conversion terms of the Company’s convertible notes payable fall into six (6) structures, identified by letter in the accompanying tables. All fixed conversion prices are subject to customary anti-dilution adjustment for stock splits, stock dividends, recapitalizations and similar pro rata equity events, and every conversion is settled solely in shares of common stock. Conversion is at the holder’s option in every structure. Where a structure provides a market-based rate, that rate is 85% of the lowest daily volume weighted average price (“VWAP”) of the common stock during the five (5) trading days immediately preceding the conversion date (the “Market Price rate”).
Structure A - Convertible Note #1
Convertible at $4/share in a single tranche, with no Market Price rate. Structure A is subject to the Nasdaq Rule 5635(d) exchange cap of 19.99% of outstanding common stock until shareholder approval is obtained; the cap limits the number of shares issuable and does not adjust the conversion price.
Structure B-1 - Convertible Notes #2 through #5
Convertible in three (3) tranches, being 25% at $4/share, 25% at $6/share and 50% at $6/share, with the remaining portion convertible at the Market Price rate upon an event of default or the Company’s failure to pay an amortization payment when due. Structure B-1 permits the Company, subject to specified price and volume conditions and the investor’s prior written consent, to effect a mandatory conversion. These notes contain the conversion price reduction provision described below.
Structure B-2 - Convertible Notes #6, #7 and #8
The terms of Structure B-2 are those of Structure B-1, and these notes contain the conversion price reduction provision described below.
Structure C - Convertible Notes #9 through #17, #19 and #20
Structure D - Convertible Note #18
Convertible in two (2) fixed tranches at $2/share and $4/share, with the remaining portion convertible at the Market Price rate upon an event of default or the Company’s failure to pay an amortization payment when due. This note contains the conversion price reduction provision described below.
Structure E - Convertible Notes #21 and #22
Convertible in a single tranche at the Market Price rate. Neither note contains a fixed conversion price, so every conversion is settled at that rate. The rate is exercisable on the Company’s failure to pay a scheduled payment when due, on the written agreement of the Company and the holder, or on an event of default that has occurred and is continuing.
Embedded Conversion Features
The Company evaluated the embedded conversion features under ASC 815-15-25-1. Separation is required only where the feature is not clearly and closely related to the debt host, the hybrid instrument is not remeasured at fair value through earnings, and a freestanding instrument with the same terms would be a derivative. The conditions are evaluated at the inception of each instrument and are reassessed on the date a contingency specified in the instrument occurs, on a modification of an instrument’s terms, and on any change not contemplated by those terms. There were no modifications and no changes not contemplated by the terms of an instrument during either period presented, other than the amendments to Convertible Note #1 described above.
Structures A and C contain fixed conversion prices only. Those prices are indexed solely to the Company’s own common stock, are subject only to customary anti-dilution adjustments, satisfy the fixed-for-fixed criteria under ASC 815-40-15 and qualify for the scope exception in ASC 815-10-15-74(a). No feature is separated from those notes, and each is accounted for as a single liability under ASC 470-20, as amended by Accounting Standards Update 2020-06, with no separation of the conversion feature into an equity component.
Structures B-1, B-2 and D contain a Market Price rate that was not exercisable when the notes were issued. A freestanding instrument with the terms of that feature, including the contingency, would not have met the definition of a derivative at the date of issuance, and no feature was separated from those notes at issuance. The Market Price rate became available on each of Convertible Notes #2, #3, #4 and #5 on the date that note failed to pay an amortization payment when due, and the conversion feature of each of those notes was separated on that date and recorded as a derivative liability. See Amortization Payments and the Contingent Conversion Rate below and Note 6. No amortization payment had come due and no event of default had occurred on Convertible Notes #6, #7, #8 and #18 at June 30, 2026, and each of those notes is accounted for in its entirety as a debt instrument measured at amortized cost.
Structure E contains no fixed conversion price, and every conversion of Convertible Notes #21 and #22 is settled at the Market Price rate. A freestanding instrument on those terms met the definition of a derivative at the date of issuance, and the conversion feature of each note was separated from its debt host at issuance under ASC 815-15-25-1 and recorded as a derivative liability. See Note 6.
No conversion feature was separated from any instrument outstanding at December 31, 2025.
| 47 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Amortization Payments and the Market Price Rate
No amortization payment came contractually due on any note carrying the Market Price rate on or before December 31, 2025, and the rate was not available at that date.
Amortization
payments commenced during the three (3) months ended June 30, 2026 on Convertible Notes #2, #3, #4 and #5 and were not made in cash.
Two scheduled payments came due on each of Convertible Notes #2 and #3 and one came due on each of Convertible Notes #4 and #5, aggregating
$
The
failure to pay those amortization payments when due made the Market Price rate available to the affected holders under the terms of their
notes, independently of whether an event of default had occurred, and each holder elected to convert at that rate rather than demand
payment. Five (5) conversions were completed between May 26, 2026 and June 15, 2026, settling $
Each
conversion was effected under the original terms of the instrument, because the Market Price rate was present in each note at issuance.
The conversions are not induced conversions and no inducement expense arises. The Company allocated unamortized debt discount to the
converted portion, recognized the allocated amount of $
The
conversion feature separated from each of Convertible Notes #2, #3, #4 and #5 was recorded at its fair value on the date of separation.
Because each host note was already outstanding on that date, no debt discount arose and the aggregate fair value of the separated features
of $
Conversion Price Reduction Provision
Convertible
Notes #2 through #8 and #18 permit the holder, at its option, to reduce the conversion price to the effective price per share of any
common stock or convertible security subsequently issued below the then conversion price, with no floor and no weighting. Commitment
shares issued to a holder concurrently with that holder’s note are a component of a single financing transaction and are not a separate
issuance for this purpose. The provision was not triggered during the year ended December 31, 2025. It was first triggered on March 6,
2026 on the issuance of a private placement note convertible in tranches beginning at $
Under ASC 815-40-15-5D a down round feature is excluded when assessing whether an instrument is indexed to an entity’s own stock, and the provision therefore does not cause the conversion features to be separated. The recognition and measurement model in ASC 260-10-25-1 does not apply to convertible debt instruments.
| 48 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
At June 30, 2026, scheduled amortization payments are as follows:
| Convertible | Number of | First Scheduled Payment | Installment | Past | Next | Months | ||||||||||||||||||||||||
| Note # | Payments | Frequency | Date | Amount | Due | 12 months | 13-24 | Total | ||||||||||||||||||||||
| Convertible Notes payable | ||||||||||||||||||||||||||||||
| Note #1 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Note #2 | 1 | |||||||||||||||||||||||||||||
| Note #3 | 2 | |||||||||||||||||||||||||||||
| Note #4 | 3 | |||||||||||||||||||||||||||||
| Note #5 | 4 | |||||||||||||||||||||||||||||
| Note #6 | ||||||||||||||||||||||||||||||
| Note #7 | ||||||||||||||||||||||||||||||
| Note #8 | 5 | |||||||||||||||||||||||||||||
| Note #9 | ||||||||||||||||||||||||||||||
| Note #10 | ||||||||||||||||||||||||||||||
| Note #11 | ||||||||||||||||||||||||||||||
| Note #12 | ||||||||||||||||||||||||||||||
| Note #13 | ||||||||||||||||||||||||||||||
| Note #14 | ||||||||||||||||||||||||||||||
| Note #15 | ||||||||||||||||||||||||||||||
| Note #16 | ||||||||||||||||||||||||||||||
| Note #17 | ||||||||||||||||||||||||||||||
| Note #18 | 6 | |||||||||||||||||||||||||||||
| Note #19 | ||||||||||||||||||||||||||||||
| Note #20 | ||||||||||||||||||||||||||||||
| Note #21 | 7 | |||||||||||||||||||||||||||||
| Note #22 | 8 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||
| 1 |
| 2 |
| 3 |
| 4 |
| 49 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
| 5 |
| 6 |
| 7 |
| 8 |
Also see Note 9 – Stockholders’ Deficit.
Notes Payable
Note #1 - Note Issuance
On
September 9, 2025 the Company issued a six (6) month unsecured note to an individual investor in the original principal amount of $
Warrant Issuance and Debt Discount
In connection with the issuance of the note, the Company issued warrants to purchase shares of its common stock at an exercise price of $/share. The warrants are immediately exercisable and remain outstanding through September 9, 2028.
Proceeds
were allocated between the note and the warrants based on their relative fair values, determined using the Black-Scholes option pricing
model. The fair value of the warrants at issuance was $
The debt discount was fully amortized to interest expense over the contractual term of the note and no unamortized amount remained at June 30, 2026. The warrants are equity classified and are not remeasured.
| 50 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The fair value of the warrants was determined using the Black-Scholes model with the following assumptions:
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % |
Debt Discount
In
connection with the issuance of the note, the Company recorded total debt discount of $
Note #2 - Accounts Receivable Financing Facility
On
September 9, 2025 the Company entered into a one-year Business Loan and Security Agreement with Paragon Bank establishing a $
Because the Company retains substantially all of the risks and rewards of ownership of the receivables transferred under the full recourse terms of the agreement, the transactions do not qualify as sales under ASC 860-10-40. Accordingly, the underlying receivables remain on the consolidated balance sheets as accounts receivable and the related cash advances are reported as a secured borrowing within current liabilities. Service charges and related finance fees are recognized as interest expense as incurred.
Borrowings
are available based on eligible accounts receivable, with maximum advances of up to
| 51 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Paragon
Bank retains a reserve account equal to
Service
charges and related finance fees were $
The agreement contains customary affirmative and negative covenants, including:
| ● | borrowing base reporting and certification requirements; | |
| ● | maintenance of the first priority lien on the pledged receivables and related collateral; | |
| ● | restrictions on additional indebtedness, liens, and recourse sales of accounts receivable to parties other than Paragon Bank; | |
| ● | restrictions on dividends, mergers, dispositions of collateral outside the ordinary course of business, and material changes in the Company’s business operations; and | |
| ● | maintenance of the Company’s corporate existence, required insurance coverage, and periodic financial and tax reporting. |
The agreement also provides that a change in ownership of 25% or more of the Company’s common stock constitutes an event of default. At June 30, 2026 and December 31, 2025 the Company was in compliance with all covenants and other terms of the agreement.
Debt in Default and Scheduled Payments Past Due
No instrument was in contractual default at December 31, 2025 and all scheduled principal amortization payments due on or before that date had been settled by cash repayment or conversion.
At
June 30, 2026 the Company had $
| 52 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The Company obtained a waiver from each holder of a convertible note on which an amortization payment came due and was not paid. No event of default occurred on any convertible note during either period presented, no default interest rate was triggered, and no cross-default arose under any other instrument. The Company has not received a notice of acceleration with respect to any instrument.
Scheduled payments past due and unsettled are amounts that came contractually due on or before the reporting date and were not settled by cash repayment, conversion or forgiveness. The separate column in the amortization schedule showing amounts due on or before the reporting date is a bucket of the payment waterfall and is stated gross, whether or not settled.
Debt Maturities
The following represents the maturities of the Company’s various debt arrangements for each of the five (5) succeeding years and thereafter as follows:
| For the Year Ended December 31, | Note Payable - Related Party | Convertible Notes Payable | Notes Payable | Notes Payable - SBA Government | Total | |||||||||||||||
| 2026 (6 Months) | $ | $ | $ | $ | $ | |||||||||||||||
| 2027 | ||||||||||||||||||||
| 2028 | ||||||||||||||||||||
| 2029 | ||||||||||||||||||||
| 2030 | ||||||||||||||||||||
| Thereafter | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| Less: unamortized debt discount | ||||||||||||||||||||
| Debt - net | $ | $ | $ | $ | $ | |||||||||||||||
Classification
Every note carrying the Market Price rate matures on or before June 29, 2027 and is classified as current on the basis of its contractual maturity. The long term convertible balance comprises the private placement notes maturing in 2028 and the portion of Convertible Note #1 amortizing after June 30, 2027, neither of which carries the Market Price rate.
| 53 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Note 6 - Derivative Liabilities
Warrants
In
connection with the issuance of convertible promissory notes during the six (6) months ended June 30, 2026, the Company issued warrants
to purchase an aggregate shares of common stock at an exercise price of $
The exercise price and the number of shares issuable are fixed and are subject only to customary anti-dilution adjustments, so the warrants are indexed to the Company’s own common stock. However, each warrant provides that upon specified fundamental transactions the holder may require the Company to purchase the warrant for cash in an amount determined using an option pricing model. Because settlement in cash is within the holder’s control and is not limited to circumstances in which all holders of the underlying common stock receive the same form of consideration, the warrants do not meet the conditions for equity classification in ASC 815-40-25-7 through 25-11. The warrants are therefore accounted for as derivative liabilities, measured at fair value at issuance and remeasured at each reporting date, with changes recognized in earnings.
The warrants issued with Convertible Note #1 and with Notes Payable Note #1 during the year ended December 31, 2025 contain no cash settlement provision, are equity classified and are not remeasured. See Note 5.
Separated Conversion Features
The conversion features of Convertible Notes #21 and #22 were separated from their debt hosts at issuance under ASC 815-15-25-1 and are accounted for as derivative liabilities. See Note 5.
The
conversion features of Convertible Notes #2, #3, #4 and #5 were separated from their debt hosts during the three (3) months ended June
30, 2026. The Market Price rate in each of those notes became available to the holder on the Company’s failure to pay an amortization
payment when due, and each feature met the conditions for separation in ASC 815-15-25-1 on that date. The aggregate fair value of those
features on the dates of separation was $
No conversion feature was separated from any other instrument, and no derivative liability existed at December 31, 2025.
Fair Value Measurement
The
derivative liabilities are measured at fair value on a recurring basis using the Black-Scholes-Merton option pricing model. Expected
volatility, derived from the historical volatility of the Company’s common stock, and expected term are significant unobservable inputs,
and an increase in either increases the fair value of the derivative liabilities. The conversion price of each separated conversion feature
is
Valuation Assumptions
The Company used the following key assumptions to estimate the fair value of the derivative liabilities:
| Commitment Date/ Separation Date | Remeasurement Date | |||||||
| Stock Price | $ | - $ | $ | - $ | ||||
| Exercise Price | $ | $ | ||||||
| Expected Term - Years | ||||||||
| Expected Volatility | % | % | ||||||
| Expected Dividends | % | % | ||||||
| Risk free interest rate | % | % | ||||||
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SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Level 3 Fair Value Reconciliation
The following table presents a reconciliation of the beginning and ending balances for the Level 3 derivative liabilities for the six months ended June 30, 2026:
| Derivative Liabilities - December 31, 2025 | $ | |||
| Fair value at commitment date - warrants | ||||
Fair value at commitment date - embedded conversion feature | ||||
| Recognition of derivative liability upon meeting separation criteria | ||||
| Fair value mark to market adjustment - warrants | ( | ) | ||
| Fair value mark to market adjustment - embedded conversion feature | ( | ) | ||
| Reclassification of derivative liability to additional paid-in capital | ( | ) | ||
| Derivative Liabilities - June 30, 2026 | $ |
The
derivative liabilities of $
Effect on the Statement of Operations
The amounts recognized in the consolidated statements of operations are presented in two captions. Derivative expense is the fair value of the conversion features on the dates they were separated and arises from initial recognition.
No day 1 loss (derivative expense) was recognized on the issuance of any instrument during either period presented, because the fair value of the derivative liabilities recognized at each commitment date did not exceed the proceeds received on the related note.
Change in fair value of derivative liabilities is the remeasurement of the derivative liabilities at each conversion date and at the reporting date.
Each separated conversion feature was remeasured to fair value on its conversion date, with the change recognized in earnings, and the resulting carrying amount was reclassified to additional paid-in capital. The reclassification itself had no effect on earnings.
Change in fair value of derivative liabilities for the three and six months ended June 30, 2026 and 2025 was as follows:
| Three Months Ended June 30, | ||||||
| 2026 | 2025 | |||||
| $ | ( | ) | $ | |||
| Six Months Ended June 30, | ||||||
| 2025 | 2025 | |||||
| $ | ( | ) | $ | |||
Derivative expense for the three and six months ended June 30, 2026 and 2025 was as follows:
| Three Months Ended June 30, | ||||||
| 2026 | 2025 | |||||
| $ | $ | |||||
| Six Months Ended June 30, | ||||||
| 2025 | 2024 | |||||
| $ | $ | |||||
Note 7 - Fair Value of Financial Instruments
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis and classifies them within the fair value hierarchy under ASC 820. The Company’s fair value measurement policies, including the three-level hierarchy framework, are described in Note 2.
Recurring Fair Value Measurements
The following table presents the Company’s liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of June 30, 2026 and December 31, 2025:
The derivative liabilities are classified within Level 3 of the fair value hierarchy because they are measured using significant unobservable inputs.
The Company had no other financial assets or liabilities measured at fair value on a recurring basis as of June 30, 2026 or December 31, 2025.
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SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
| June 30, 2026 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2025 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Note 8 – Commitments and Contingencies
Operating Leases
The Company’s accounting policy for leases, including lease classification, the short-term lease exemption, the determination of the lease term and the discount rate applied, is described in Note 2.
Operating Lease
On
October 1, 2024, the Company entered into a
In
accordance with ASC 842, Leases, the Company recognized a right-of-use (“ROU”) asset and a corresponding lease liability
of $
The Company had no financing leases as of June 30, 2026 and December 31, 2025.
| 56 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The tables below present information regarding the Company’s operating lease assets and liabilities at June 30, 2026 and December 31, 2025, respectively:
| June 30, 2026 | December 31, 2025 | |||||||
| Assets | ||||||||
| Operating lease - right-of-use asset - non-current | $ | $ | ||||||
| Liabilities | ||||||||
| Operating lease liability | $ | $ | ||||||
| Weighted-average remaining lease term (years) | ||||||||
| Weighted-average discount rate | % | % | ||||||
The components of lease expense were as follows:
| Six Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Operating lease costs | ||||||||
| Amortization of right-of-use operating lease asset | $ | $ | ||||||
| Lease liability expense in connection with obligation repayment | ||||||||
| Total operating lease costs | $ | $ | ||||||
| Supplemental cash flow information related to operating leases was as follows: | ||||||||
| Operating cash outflows from operating lease (obligation payment) | $ | $ | ||||||
| Right-of-use asset obtained in exchange for new operating lease liability | $ | $ | ||||||
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SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Future minimum lease payments for the years ended December 31:
| Year Ended December 31, | ||||
| 2026 (6 months) | $ | |||
| 2027 | ||||
| Total undiscounted cash flows | ||||
| Less: amount representing interest | ||||
| Present value of operating lease liabilities | ||||
| Less: current portion of operating lease liabilities | ||||
| Long-term operating lease liabilities | $ | |||
Employment Agreements (Chief Executive Officer and Chief Financial Officer)
Chief Executive Officer
In
December 2023, the Company entered into an employment agreement with its Chief Executive Officer through December 31, 2028, as subsequently
amended. The agreement provides for an annual base salary of $
The agreement includes a long-term equity incentive program under the SurgePays, Inc. 2022 Omnibus Securities and Incentive Plan, pursuant to which the Company is required to grant the Chief Executive Officer shares of restricted common stock annually for a minimum of five years. Because each annual grant requires separate Board approval, each grant constitutes a separate award under ASC 718. Compensation cost is measured at the grant-date fair value and recognized over the requisite service period, which in this case is expected to be the grant date itself (as the awards are fully vested upon grant), consistent with ASC 718-10-55-87 through 55-88.
The
initial award of shares was granted in monthly installments during the second half of 2024 and had a total grant-date fair value
of $ ($/share). These shares were fully vested and the related compensation expense was fully recognized in 2024. The second
award of shares was approved by the Board on June 26, 2025, with an original planned grant and vesting date of June 1, 2025.
On December 31, 2025, the Company and the Chief Executive Officer entered into Amendment No. 3 to the Employment Agreement, which deferred
the grant and vesting of this award to April 1, 2026 and also deferred payment of the 2025 annual cash bonus of $
| 58 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The fair value of this award was $ ($/share), based upon the quoted closing market price of the common stock on the grant date of April 1, 2026 (See Note 9).
The
third award of shares of restricted common stock was granted on June 1, 2026 and had a grant date fair value of $
Future awards of shares are scheduled to be granted on or around June 1 of 2027 and 2028, and on each June 1 of any renewal term, with fair values to be determined at their respective grant dates.
The agreement also provides for additional performance-based restricted stock awards upon achievement of specified revenue, earnings before interest, taxes, depreciation and amortization, and market capitalization thresholds, with potential award values ranging from $ to $. No performance thresholds were met during the three and six months ended June 30, 2026 and 2025 or during the year ended December 31, 2025.
All awards vest immediately upon the Chief Executive Officer’s death, total disability, termination without cause, or a change in control, provided the executive remains employed by the Company at such time.
Chief Financial Officer (Former)
In
November 2023, the Company finalized the terms of its employment agreement with its former Chief Financial Officer (CFO), providing for
a base salary of $
In November 2023, the Company granted shares of restricted common stock to its former CFO, having a fair value of $ ($/share), based upon the quoted closing trading price on the grant date. The award was structured in two tranches:
| ● | shares vesting ratably over the period July 2024 through December 2024, representing approximately shares per month; and | |
| ● | shares vesting on December 31, 2025. |
All shares vested in accordance with their original vesting schedules in their respective periods, and all compensation cost associated with this award has been fully recognized in the periods where services were provided.
| 59 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
In
October 2025, the Company provided notice to the former CFO that his employment agreement would not be renewed upon its expiration on
December 31, 2025. Subsequent to December 31, 2025, the Company and the former CFO entered into a separation agreement pursuant to which
the former CFO provided consulting services through June 30, 2026. The Company agreed to pay consulting fees of $
See Note 9 regarding the vesting provisions of these shares.
MVNx Reseller Agreement and Related Amendments
In August 2024, the Company entered into an MVNx Reseller Agreement (the “AT&T Agreement”) with AT&T Mobility LLC (“AT&T”), pursuant to which the Company purchases wholesale wireless network services from AT&T for resale to the Company’s end users under the Company’s own brand. Commercial services under the AT&T Agreement commenced on August 2024 (the “Launch Date”), following completion of the application programming interface (“API”) integration contemplated by the AT&T Agreement. The AT&T Agreement has an initial term of three (3) years commencing on the Launch Date and expiring August 2027. Following the initial term, the AT&T Agreement automatically renews for successive one-year periods unless either party provides written notice of non-renewal at least one hundred twenty (120) days prior to the end of the then-current term. The AT&T Agreement was previously amended by Amendment No. 1 dated December 2024, which added certain purchasing instructions to the AT&T Agreement.
Minimum Spend Commitments Prior to Amendment No. 2
Prior to Amendment No. 2 described below, the Company was subject to minimum annual spend commitments over the initial three-year term, as follows:
| ● | Year
1: $ | |
| ● | Year
2: $ | |
| ● | Year
3: $ |
The
aggregate minimum spend commitment over the initial term was $
| ● | actual usage charges incurred during that month; or | |
| ● |
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SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
During Years 2 and 3, the monthly obligation equaled the greater of actual usage or one-twelfth of the applicable annual minimum commitment. To the extent cumulative invoiced payments in any contract year exceeded the applicable annual minimum commitment, the excess was applied toward the minimum commitment for the following year. Any portion of an annual minimum commitment that remained unsatisfied at the end of the applicable contract year constituted an unconditional payment obligation of the Company.
In
accordance with Accounting Standards Codification (ASC) 440-10-50, the Company evaluated its obligations under the AT&T Agreement
and determined that a material contractual commitment existed. As of December 31, 2025, the Company had a remaining unsatisfied minimum
spend commitment of $
In
accordance with Accounting Standards Codification (ASC) 440-10-50, the Company evaluated its obligations under the AT&T Agreement
and determined that a material contractual commitment existed. As of December 31, 2025, the Company had a remaining unsatisfied minimum
spend commitment of $
Amendment No. 2
On June 29, 2026, the Company and AT&T entered into Amendment No. 2 to the AT&T Agreement. Amendment No. 2 provides that:
| ● | the pricing schedule is superseded and replaced in its entirety with a revised pricing schedule; | |
| ● | all minimum commitments, shortfall obligations and other non-usage-based amounts previously invoiced, accrued or otherwise arising under the prior pricing schedule are deemed fully satisfied and of no further force or effect as of the effective date of the amendment; and | |
| ● | the information security requirements schedule and the definition of Restricted Party are superseded and replaced. |
| 61 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Under
the revised pricing schedule, the Company pays a monthly network connectivity charge of $
Release of Previously Billed Minimum Commitment Charges
In
connection with Amendment No. 2, AT&T released the Company from $
The amounts released, and the periods in which the related charges were originally recognized in the statements of operations, were as follows:
| ● | Charges
originally recognized during the year ended December 31, 2025: $ | |
| ● | Charges
originally recognized during the three months ended March 31, 2026: $ | |
| ● | Total
released and recognized during the three months ended June 30, 2026: $ |
The entire amount was recognized in the three months ended June 30, 2026. Prior period financial statements have not been restated, and no portion of the release has been recorded as a change in accounting estimate, because the release arose from a new agreement entered into on June 29, 2026 and does not represent the correction of an error or the resolution of an uncertainty that existed at an earlier reporting date. As a result, the results of operations for the three and six months ended June 30, 2026 are not comparable with the corresponding prior year periods.
Effect on Comparability of Results
The
release was recognized as a gain on contract liability settlement of $
The Company concluded that Amendment No. 2 with AT&T resulted in the legal extinguishment of previously accrued minimum commitment and shortfall obligations pursuant to ASC 405. Because the extinguished obligations arose from the Company’s primary operating contract, classification as non-operating income was not considered appropriate. The Company further concluded that presentation as a reduction of current-period cost of revenues would not faithfully depict operating performance because the benefit is unrelated to current-period network usage and would materially distort gross profit trends. Accordingly, management determined that separate presentation as "Contract Settlement Gain" within operating income, immediately preceding “Income (Loss) from Operations” is appropriate.
| 62 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Remaining Commitments
As
a result of Amendment No. 2, the Company had no remaining minimum spend commitments under the AT&T Agreement at June 30, 2026. The
Company is obligated to pay the monthly network connectivity charge of $
| ● | Remainder
of the year ending December 31, 2026: $ | |
| ● | Year
ending December 31, 2027: $ | |
| ● | Year
ending December 31, 2028: $ |
Amounts payable for actual usage of wireless network services are variable and are not unconditional purchase obligations. Accordingly, they are excluded from the remaining commitments above.
Contingencies – Legal Matters
In the normal course of business, the Company may be subject to litigation, claims, and legal proceedings. The Company evaluates legal contingencies in accordance with FASB ASC 450-20-50, “Contingencies”, which requires recognition of a liability if an unfavorable outcome is both probable and can be reasonably estimated.
When a legal matter arises, the Company:
| ● | Assesses the merits of the case, including available defenses. | |
| ● | Evaluates its potential exposure and possible legal or settlement strategies. | |
| ● | Determines the likelihood of an unfavorable outcome based on available information. | |
| ● | Establishes an accrual if a loss is both probable and reasonably estimable. |
As of June 30, 2026, based on management’s review and consultation with legal counsel, and other than the matters described below, the Company is not aware of any contingent liabilities that require accrual or disclosure in the consolidated financial statements.
Universal Service Program Audit and Regulatory Review
A
subsidiary of the Company is the subject of an audit commenced by the program administrator in November 2025 and a related regulatory
review opened in March 2026, as described in Note 2. Pending completion of those proceedings, reimbursements aggregating $
| 63 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.
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 (“Defendants”), and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, formerly a True Wireless employee. 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. Blue Skies alleged 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. Defendants filed various dispositive motions with the Court demonstrating Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, and the Court granted these motions, finding the non-solicitation and non-competition clauses in the Stock Purchase Agreement void as a matter of Oklahoma law. Defendants then filed additional dispositive motions on Plaintiffs’ claims in tort and equity, which the Court granted in part based on its prior rulings. Plaintiffs took the position the Court granting Defendants’ dispositive motions on these material issues only leaves partial contract claims that are inextricably intertwined with the remaining claims and defenses. Plaintiffs sought a certified interlocutory appeal of the Court’s orders. On March 10, 2025, the Oklahoma Supreme Court entered an order denying Plaintiffs’ Petition for Certiorari to review the certified interlocutory appeal. In December 2025, Judge Dishman recused himself from the case following a request from the Blue Skies and True Wireless parties and objection by SurgePays’ counsel. Judge Andrews has been assigned to the matter and has set remaining matters for status and briefing schedules on outstanding motions in the trial court. The case will now proceed in the district court on the parties’ remaining claims. On August 2, 2026, the parties appeared before Judge Andrews to argue Plaintiffs’ Motions to Reconsider Summary Judgment. Judge Andrews took the matters under advisement to review the briefs and decide whether to reverse any of Judge Dishman’s prior rulings. Presently, there is no trial date.
In
the Circuit Court of Tennessee for the 30th Judicial District at Memphis, Docket # CT-3219-23. On August 8, 2023, a complaint was filed
by SurgePays for breach of a promissory note by Blue Skies Connections, LLC. The note at issue is dated
| 64 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
SurgePays, Inc. et al. v. Fina et al., Case No. CJ-2022-2782, District Court of Oklahoma County, Oklahoma
Plaintiffs SurgePays, Inc. and Kevin Brian Cox initiated this case against its former officer Mike Fina, his companies Blue Skies Connections, LLC, True Wireless, Inc., Government Consulting Solutions, Inc., Mussell Communications LLC, and others. This case also arises from the June 2021 transaction by which SurgePays sold True Wireless to Blue Skies. During the litigation of CJ-2021-5327 described above, SurgePays learned information that showed Mike Fina breached his duties owed to True Wireless during his employment and consulting work for True Wireless prior to SurgePays’ sale of True Wireless to Blue Skies. SurgePays alleges that Mike Fina conspired with the other defendants to damage True Wireless thereby harming the value of the company and causing its eventual sale at a greatly reduced price. SurgePays asserts claims for (i) breach of contract; (ii) breach of fiduciary duty; (iii) fraud; (iv) tortious interference; and (v) unjust enrichment. At this stage, no defendant has asserted a counterclaim against SurgePays. SurgePays filed a Second Amended Petition on January 27, 2023. Defendants Fina, Blue Skies, True Wireless, and Government Consulting Solutions filed a Motion to Dismiss on March 10, 2023. On June 29, 2023, the Court granted the Motion to Dismiss, ruling the claims asserted are “derivative” and could only be asserted by the True Wireless entity now owed by Blue Skies. The Court rejected SurgePays’ request to certify this ruling for immediate appeal. Defendant Misty Garrett filed a Motion for Summary Judgment seeking the same relief as the Motion to Dismiss, which was granted by the Court. It is SurgePays’ intent to evaluate an additional options in the Court’s dismissal of Fina, Blue Skies, True Wireless, Government Consulting Solutions, and Misty Garrett. At this stage, no attempts at settlement have been made.
All claims against all parties have been adjudicated by the Court. SurgePays filed a Motion for New Trial, which was denied by the Court on February 20, 2025. SurgePays’ has filed an appeal of the Court’s dismissal of Fina, Blue Skies, True Wireless, Government Consulting Solutions, and summary judgment for Misty Garrett.
With regard to the appeal against Misty Garrett and Misty Garrett’s claims against SurgePays, Misty Garrett and SurgePays have entered into a Settlement Agreement and Release dated as of October 16, 2025 in which the parties have agreed to dismiss all matters in the courts and release each other from liability, with an agreement to file such dismissal documents at the in the respective courts.
| 65 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
SSB Communications, Inc., Plaintiff v SurgePays, Inc., and American Broadband & Telecommunications Company, Defendants, Case No. DC-26-07054
District
Court 116th Judicial District, Dallas County, Texas filed April 20, 2026.
Ellenoff Grossman & Schole, LLP and SurgePays
Ellenoff
Grossman & Schole LLP v. SurgePays, Inc., Index No. 651282/2026, Supreme Court of the State of New York, County of New York, filed
March 2, 2026. The action sought recovery of $
Effective
April 7, 2026, the Company entered into a settlement agreement resolving all claims, pursuant to which the Company agreed to pay the
total settlement amount of $
Note 9 – Stockholders’ Deficit
At June 30, 2026 and December 31, 2025, the Company was authorized to issue one class of common stock and two designated series of preferred stock, as follows:
Common Stock
| ● | Authorized: shares |
| ● | Par Value: $per share |
| ● | Issued: shares at June 30, 2026 and shares at December 31, 2025 |
| ● | Outstanding: shares at June 30, 2026 and shares at December 31, 2025, in each case excluding shares held in treasury |
| ● | |
| ● | Dividends: None declared |
| ● | Liquidation Preference: Subordinate to all classes of preferred stock |
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SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Series A, Convertible Preferred Stock
| ● | Authorized: shares |
| ● | Issued and Outstanding: |
| ● | Par Value: $ per share |
| ● | |
| ● | Ranking: Senior to all other classes of preferred stock |
| ● | Dividends: None |
| ● | Liquidation Preference: None |
| ● | Redemption: Not redeemable |
| ● |
Series C, Convertible Preferred Stock
| ● | Authorized: shares |
| ● | Issued and Outstanding: |
| ● | Par Value: $ per share |
| ● | |
| ● | Ranking: Junior to all other classes of preferred stock |
| ● | Dividends: Participating with common stock on an as-converted basis, when and if declared by the Board of Directors |
| ● | Liquidation Preference: Original issue price plus any declared but unpaid dividends |
| ● | Redemption: Not redeemable |
| ● |
2022 Omnibus Securities and Incentive Plan
In March 2023, the Company’s shareholders approved the 2022 Omnibus Securities and Incentive Plan (the “Plan”) initially approved, authorized and adopted by the Board of Directors in August 2022.
The Plan initially provided for the following:
| 1. | shares of common stock |
| 2. | An annual increase on the first day of each calendar year beginning January 1, 2023 and ending on January 1, 2031 equal to the lesser of: |
| a. | ||
| b. | Such smaller amount of common stock as determined by the Board of Directors. |
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SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
| 3. | The shares may be issued as follows to directors, officers, employees, and consultants: |
| a. | Distribution equivalent rights |
| b. | Incentive share options |
| c. | Non-qualified share options |
| d. | Performance unit awards |
| e. | Restricted share awards |
| f. | Restricted share unit awards |
| g. | Share appreciation rights |
| h. | Tandem share appreciation rights |
| i. | Unrestricted share awards |
See the proxy statement filed with the Securities and Exchange Commission (“SEC”) on January 19, 2023 for a complete detail of the Plan.
Effective
January 1, 2025, in accordance with the Plan, the Company increased the available amount of shares by
Effective
January 1, 2026, in accordance with the Plan, we increased the available amount of shares by
Of the total shares authorized for issuance, the Company has reserved shares for its officers, directors and employees for non-vested shares that are expected to vest in accordance with the terms of the related employment agreements and stock options that may be converted into common stock. At June 30, 2026 and December 31, 2025, the Company had sufficient authorized shares to settle any possible awards that vested or stock options eligible for conversion.
Equity Transactions for the Six Months Ended June 30, 2026
Stock Issued for Cash
Underwritten Public Offering
On
January 20, 2026, the Company entered into an underwriting agreement with the representative of the underwriters for an underwritten
public offering of shares of common stock at a public offering price of $/share, for gross proceeds of $
| 68 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
The warrants were determined to be indexed to the Company’s common stock and settleable in the Company’s common stock and are therefore classified within stockholders’ deficit. The grant-date fair value of the warrants was recorded as a cost of the offering with a corresponding credit to additional paid-in capital, resulting in no net effect on total stockholders’ deficit.
Stock Issued for Cash – At the Market Offering (“ATM”)
The
Company issued shares of common stock under its at the market offering program at prices ranging from $/share to $/share,
for gross proceeds of $
Stock Issued for Services
The
Company issued shares of common stock for services rendered, having a fair value of $
Stock Issued for Services - Related Party
On
April 1, 2026, the Company issued its Chief Executive Officer shares of common stock for services rendered under his employment
agreement, having a fair value of $
On
June 1, 2026, the Company issued its Chief Executive Officer an additional shares of common stock for services rendered under
the same agreement, having a fair value of $
An aggregate compensation expense of $ was recognized.
| 69 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Recognition of Stock Based Compensation - Restricted Stock Awards – Employees
On
December 16, 2025, the Company granted restricted shares of common stock to employees, having an aggregate grant-date fair value
of $
Recognition of Stock Based Compensation - Non-Vested Shares - Related Parties
The Company recognized $ and $ in compensation expense during the three and six months ended June 30, 2026, respectively, related to non-vested shares of common stock awarded to members of the board of directors under their respective agreements. See Non-Vested Shares - Related Parties (Officer and Directors) below.
Debt Discount – Convertible Notes Payable – Common Stock
During
the six months ended June 30, 2026, the Company issued shares of common stock with an aggregate grant-date fair value of $
Conversion of Debt to Common Stock – Related Party
On
March 23, 2026, the Company issued shares of common stock to its Chief Executive Officer at a fair value of $
Conversion of Debt to Common Stock
Holders
of convertible notes payable converted an aggregate of $
| 70 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Treasury Stock
At
June 30, 2026 and December 31, 2025, the Company held shares of its common stock in treasury at an aggregate cost of $
Equity Transactions for the Year Ended December 31, 2025
Stock Issued for Cash – At the Market Offering (“ATM”)
In
August 2025, the Company entered into an At the Market Offering Agreement (the “ATM Agreement”) with Titan Partners Group
LLC, a division of American Capital Partners, LLC (“Titan”), pursuant to which the Company may, from time to time, offer
and sell shares of its common stock, $ par value per share, to or through Titan, acting as sales agent and/or principal, in transactions
deemed to be “at-the-market offerings” under Rule 415(a)(4) of the Securities Act of 1933, as amended. Under the Prospectus
Supplement, the Company may offer and sell shares of its common stock having an aggregate offering price of up to $
The
Company issued shares of common stock for gross proceeds of $
Stock Issued for Services
The
Company issued shares of common stock for services rendered, having a fair value of $
Stock Issued to Settle Accounts Payable
The
Company issued shares of common stock to settle outstanding vendor payables, having a fair value of $
Debt Discount – Common Stock
In
connection with the issuance of various convertible notes payable, the Company issued shares of common stock, having a fair value
of $
| 71 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Debt Discount – Warrants
In
connection with the issuance of various convertible notes payable and a note payable, the Company issued warrants to purchase shares
of common stock, having an aggregate fair value of $
Treasury Stock
The
Company repurchased shares of its common stock from a convertible note payable holder for $
Restricted Stock Awards – Employees
On December 16, 2025, the Company granted restricted stock awards (“RSAs”) of its common stock to various employees pursuant to the Company’s 2022 Omnibus Securities and Incentive Plan.
The
RSAs vest in full on the third anniversary of the grant date and have a total grant-date fair value of $
Non-Vested Shares – Related Parties (Officer and Directors) – and related Vesting
Chief Financial Officer (Former)
In
November 2023, the Company granted shares of restricted common stock to its Chief Financial Officer (CFO), having a fair value
of $
| 72 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Board of Directors
2026 Grant
On
June 24, 2026, the Company granted an aggregate of shares of common stock to three members of its Board of Directors, having
an aggregate fair value of $
| ● | The board member no longer serves in that capacity for any reason, except for cause; |
| ● | Occurrence of a change in control; and |
| ● | June 24, 2029. |
No shares were forfeited or cancelled during the three and six months ended June 30, 2026.
2025 Grant
In
May 2025, the Company granted an aggregate of shares of common stock to various members of its Board of Directors, having a fair
value of $
| ● | The board member no longer serves in that capacity for any reason, except for cause; |
| ● | Occurrence of a change in control; and |
| ● | August 2028. |
Effective December 31, 2025, a board member resigned their position. In accordance with the terms of their agreement, all unvested shares vested immediately upon resignation. As a result, shares of common stock vested on December 31, 2025.
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense recognized for all officer and director arrangements for the six months ended June 30, 2026 and 2025:
| June 30, 2026 | June 30, 2025 | |||||||
| Chief Executive Officer | $ | $ | ||||||
| Chief Financial Officer | ||||||||
| Board of Directors | ||||||||
| Total | $ | $ | ||||||
| 73 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
| Weighted Average | ||||||||
| Non-Vested Shares | Number of Shares | Grant Date Fair Value | ||||||
| Balance - December 31, 2024 | $ | |||||||
| Granted | ||||||||
| Vested | ) | |||||||
| Cancelled/Forfeited | - | |||||||
| Balance - December 31, 2025 | ||||||||
| Granted | ||||||||
| Vested | ||||||||
| Cancelled/Forfeited | ||||||||
| Balance - June 30, 2026 | $ | |||||||
| Unrecognized Compensation | $ | |||||||
| Weighted average period (years) | ||||||||
Stock Options
| Weighted | Weighted | |||||||||||||||||||
| Average | Average | |||||||||||||||||||
| Weighted | Remaining | Aggregate | Grant | |||||||||||||||||
| Number of | Average | Contractual | Intrinsic | Date | ||||||||||||||||
| Stock Options | Options | Exercise Price | Term (Years) | Value | Fair Value | |||||||||||||||
| Outstanding - December 31, 2024 | $ | $ | ||||||||||||||||||
| Vested and Exercisable - December 31, 2024 | $ | $ | ||||||||||||||||||
| Granted | $ | $ | ||||||||||||||||||
| Exercised | $ | |||||||||||||||||||
| Cancelled/Forfeited | ( | ) | $ | |||||||||||||||||
| Outstanding - December 31, 2025 | $ | $ | ||||||||||||||||||
| Vested and Exercisable - December 31, 2025 | $ | $ | ||||||||||||||||||
| Granted | $ | $ | ||||||||||||||||||
| Exercised | $ | |||||||||||||||||||
| Cancelled/Forfeited | ( | ) | $ | |||||||||||||||||
| Outstanding - June 30, 2026 | $ | $ | ||||||||||||||||||
| Vested and Exercisable - June 30, 2026 | $ | $ | ||||||||||||||||||
| 74 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Six Months Ended June 30, 2026
Stock Options – Employee Terminations
options expired due to forfeiture, including options held by our former Chief Financial Officer.
Year Ended December 31, 2025
Stock Options – Chief Executive Officer, Chief Financial Officer and Employees
The
Company granted an aggregate of fully vested, seven-year stock options for services rendered, allocated as follows:
to its Chief Executive Officer (CEO), to its Chief Financial Officer (CFO), and to various employees. The aggregate grant-date
fair value was $
| Expected term | years | |||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % |
Stock Options – Employee Terminations
stock options were cancelled in connection with employee terminations.
Stock-based compensation expense related to stock options for the year ended December 31, 2025 was $.
| 75 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Warrants
Warrant activity for the six months ended June 30, 2026 and the year ended December 31, 2025 are summarized as follows:
| Warrants | Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||
| Outstanding - December 31, 2024 | $ | $ | ||||||||||||||
| Vested and Exercisable - December 31, 2024 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | $ | |||||||||||||||
| Cancelled/Forfeited | ( | ) | $ | |||||||||||||
| Outstanding - December 31, 2025 | $ | $ | ||||||||||||||
| Vested and Exercisable - December 31, 2025 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | $ | |||||||||||||||
| Cancelled/Forfeited | $ | |||||||||||||||
| Outstanding - June 30, 2026 | $ | $ | ||||||||||||||
| Vested and Exercisable - June 30, 2026 | $ | 3.57 | $ | |||||||||||||
Six Months Ended June 30, 2026
Warrants Issued with Convertible Debt
The
Company issued
Warrants Issued – Equity Offering
The
Company issued warrants in connection with a capital raise of $
Of
the
| 76 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
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 chief operating decision maker is the Chief Executive Officer, who evaluates the performance of the operating segments and allocates resources among them using segment revenue and segment income (loss) from operations. Segment income (loss) from operations is the measure of segment profit or loss presented below and is the measure most consistent with the amounts reported in the consolidated financial statements. The amounts presented reconcile to the corresponding consolidated amounts.
The significant segment expenses regularly provided to the chief operating decision maker and included in segment income (loss) from operations are cost of revenues and operating expenses, each of which is presented separately below for each reportable segment.
Segment information for the Company’s operations for the three and six months ended June 30, 2026 and 2025, are as follows:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Revenues | ||||||||||||||||
| Mobile Virtual Network Operators | $ | $ | $ | $ | ||||||||||||
| Point-of-Sale and Prepaid Services | ||||||||||||||||
| Other Corporate Overhead | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Mobile Virtual Network Operators | $ | $ | $ | $ | ||||||||||||
| Point-of-Sale and Prepaid Services | ||||||||||||||||
| Other Corporate Overhead | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ||||||||||||||||
| Mobile Virtual Network Operators | $ | $ | $ | $ | ||||||||||||
| Point-of-Sale and Prepaid Services | ( | ) | ( | ) | ||||||||||||
| Other Corporate Overhead | ||||||||||||||||
| Total | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Income (loss) from operations | ||||||||||||||||
| Mobile Virtual Network Operators | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Point-of-Sale and Prepaid Services | ( | ) | ( | ) | ( | ) | ||||||||||
| Other Corporate Overhead | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Segment information for the Company’s assets and liabilities at June 30, 2026 and December 31, 2025, are as follows:
| June 30, 2026 | December 31, 2025 | |||||||
| Total Assets | ||||||||
| Mobile Virtual Network Operators | $ | $ | ||||||
| Point-of-Sale and Prepaid Services | ||||||||
| Other Corporate Overhead | ||||||||
| Total | $ | $ | ||||||
| Total Liabilities | ||||||||
| Mobile Virtual Network Operators | $ | $ | ||||||
| Point-of-Sale and Prepaid Services | ||||||||
| Other Corporate Overhead | ||||||||
| Total | $ | $ | ||||||
| 77 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Note 11 – Subsequent Event
Subsequent to June 30, 2026, the Company had the following transactions:
Convertible Notes Payable
Between July 2, 2026 and July 23, 2026 the Company
issued four (4) convertible notes payable, being Convertible Notes #23 through #26, with an aggregate original principal amount of $
| · | Convertible Note #23, issued July 2, 2026 and maturing |
| · | Convertible Note #24, issued July 6, 2026 and maturing |
| · | Convertible Note #25, issued July 16, 2026 and maturing |
| · | Convertible Note #26, issued July 23, 2026 and maturing |
The Market Price conversion rate on each note becomes exercisable only upon an event of default or the Company’s failure to pay an amortization payment when due. Convertible Notes #23 and #24 contain a price protection provision on the same terms as the convertible notes described in Note 5. None of these instruments existed at June 30, 2026. The embedded conversion feature of each note was evaluated at issuance on the terms then exercisable under ASC 815-15-25-1. No conversion feature was separated, and each will be evaluated again on the date its Market Price rate first becomes exercisable, as described in Note 5.
| 78 |
SURGEPAYS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2026 AND 2025
Conversion of Convertible Notes Payable
Holders of Convertible Notes #2, #3, #4, #5 and #6
converted principal and capitalized guaranteed interest aggregating $
Stock Issued for Cash - At the Market Offering
Between July 13, 2026 and August 19, 2026 the Company
issued shares of common stock under it’s at the market offering program at an average price of $/share, for gross
proceeds of $
Amendment to Employment Agreement – Related Party
On August 10, 2026, the Company amended its employment agreement with its CEO, Kevin Brian Cox, to defer the payment date of Mr. Cox’s bonus until October 1, 2026.
Board of Directors Restricted Stock Agreements
On July 29, 2026, the Company and its three independent directors entered into restricted share award agreements with an effective date of June 24, 2026, pursuant to which the Company granted to each of the directors restricted share awards of shares of common stock vesting on the earlier of June 24, 2029, the date of a change of control, or the date that the director is no longer a director for any reason other than a termination for cause.
Stock Issued for Services
The Company issued shares of common stock
to consultants for services rendered, having a fair value of $
Formation of Redline Wireless Group, LLC
On August 3, 2026, the Company formed Redline Wireless
Group, LLC, a Wyoming limited liability company, with a national wireless master distribution organization, to market, distribute and
support prepaid wireless services through that organization’s independent dealer channel under the Company’s LinkUp Mobile
brand.
The Company’s contributions consist entirely of in-kind assets and services, including a license of the LinkUp Mobile brand and related intellectual property and access to the Company’s platform, billing and provisioning systems, customer service and operations center under a master services agreement priced at documented cost with no markup or management fee. The Company made no cash capital contribution. The Company’s direct carrier relationships and wholesale agreements were not contributed and remain with the Company. Redline had no operations, no assets and no liabilities as of June 30, 2026, and accordingly the formation had no effect on the consolidated financial statements as of and for the periods presented. The Company is evaluating the accounting for the formation and the consolidation of Redline under ASC 810, Consolidation, which evaluation will be completed in the period of formation.
| 79 |
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 of 1933, as amended (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, 2026 and 2025 and for the three and six months then ended includes the accounts of SurgePays, Inc. and its wholly owned subsidiaries during the period owned by SurgePays, Inc.
Business Overview
We were incorporated in Nevada on August 18, 2006, as a pioneering financial technology and telecommunications company with one clear mission: to enhance connectivity and financial access in the places people live, shop, and work.
Our Mobile Virtual Network Operators consisting of SurgePhone Wireless and Torch Wireless provide mobile broadband (internet connectivity) to consumers nationwide. Our Comprehensive Platform Services provides ACH banking relationships and a fintech transactions platform that processes thousands of transactions a day with independently owned convenience stores.
Please see the description in Item 1 of this Quarterly Report for a description of our Mobile Virtual Network Operators and Comprehensive Platform Services.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2026 AND 2025
We measure our performance on a consolidated basis as well as the performance of each segment.
We report our financial performance based on the following segments: Mobile Virtual Network Operators (MVNO), and Point-of-Sale and Prepaid Services (Top-up). The MVNO segment includes subsidized (Lifeline) and non-subsidized components (LinkUp Mobile). The subsidized component or Lifeline is the result of the mobile broadband (phone and internet) services provided by Torch Wireless to eligible consumers. The Point-of-Sale and Prepaid Services segment is comprised of Surge Fintech and ECS as previously shown.
The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. Additional information on our reportable segments is contained in Note 10 – Segment Information of the Notes to Financial Statements.
Revenues and expenses during the three months ended June 30, 2026 and 2025, consisted of the following:
| 2026 | 2025 | |||||||
| Revenue | $ | 16,204,821 | $ | 11,518,166 | ||||
| Cost of revenue (exclusive of depreciation and amortization) | (16,629,992 | ) | (14,172,832 | ) | ||||
| General and administrative | (4,634,054 | ) | (4,155,843 | ) | ||||
| Contract settlement gain | 8,511,672 | - | ||||||
| Income (Loss) from operations | $ | 3,452,447 | $ | (6,810,509 | ) | |||
Revenue increased overall by $4,686,655 or 40.69% from the three months ended June 30, 2025, to the three months ended June 30, 2026. Segment revenues were as follows:
| For the Three Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Revenues: | ||||||||
| Mobile Virtual Network Operator | $ | 1,587,245 | $ | 2,273,706 | ||||
| Point-of-Sale and Prepaid Services | 14,617,576 | 9,244,460 | ||||||
| Other Corporate Overhead | - | - | ||||||
| Total | $ | 16,204,821 | $ | 11,518,166 | ||||
| 80 |
Mobile Virtual Network Operators consisting of SurgePhone Wireless and Torch Wireless revenues (as detailed in Notes 2 and 10 of the financial statements) decreased by $686,461 or (30.19%). In the fourth quarter of 2025, due to an audit delay, our Eligible Telecommunications Carrier paused the intake of new users, leading to a temporary dip in Lifeline revenues in early 2026.
Point-of-Sale and Prepaid Services revenues increased by $5,373,116 from June 30, 2025 to June 30, 2026, as a result of continued efforts to scale this segment by our VP of Sales, and the continued increasing use of our sales force.
Cost of Revenue, Gross Profit and Gross Margin
For the three months ended June 30, 2026, cost of revenue for services primarily consisted of Mobile Virtual Network Operator expenses of ($2,300,917), prepaid retail expenses ($14,229,075), and other expenses such as royalties and call-center expenses ($100,000). For the three months ended June 30, 2025, cost of revenue for services primarily consists of data plan expenses ($1,931,585), prepaid retail expenses ($9,788,814), devices ($481,737), marketing ($368,647), advertising ($331,00) and other expenses such as royalties and call-center expenses ($1,230,802).
We expect that our cost of revenue will increase or decrease to the extent that our revenue increases and decreases.
| For the Three Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Cost of Revenue (exclusive of depreciation and amortization): | ||||||||
| Mobile Virtual Network Operator | $ | 2,300,917 | $ | 4,383,538 | ||||
| Point-of-Sale and Prepaid Services | 14,229,075 | 9,789,295 | ||||||
| Other Corporate Overhead | 100,000 | - | ||||||
| Total | $ | 16,629,992 | $ | 14,172,832 | ||||
Gross profit margin is calculated as revenue less cost of revenue. Gross profit margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods will depend on a variety of factors, including market conditions that may impact our pricing, sales mix among devices, sales mix changes among consumables, excess and obsolete inventories, and the cost of our products from manufacturers. Our gross profit (loss) in future periods will vary based upon our revenue stream mix and may increase or decrease based upon our distribution channels.
| For the Three Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Gross Profit (Loss) (exclusive of depreciation and amortization): | ||||||||
| Mobile Virtual Network Operator | $ | (713,672 | ) | $ | (2,109,831 | ) | ||
| Point-of-Sale and Prepaid Services | 388,501 | (544,835 | ) | |||||
| Other Corporate Overhead | (100,000 | ) | - | |||||
| Total | $ | (425,171 | ) | $ | (2,654,666 | ) | ||
The Company expects to focus on the improvement of gross margin in the Point-of-Sale and Prepaid Services segment during the remainder of 2026. In the fourth quarter of 2025, the Company pivoted its focus for the Clearline platform, significantly reducing expenses within Clearline as the Company continues to focus on future revenue growth. As we continue to expand both subsidized (Lifeline) and non-subsidized products (LinkUp Mobile) in the MNVO segment in 2026, we also anticipate gross margins in the MVNO segment will increase with an aim to return to positive results in late 2026.
| For the Three Months Ended June 30 | ||||||||
| 2026 | 2025 | |||||||
| Gross Margin: | ||||||||
| Mobile Virtual Network Operator | (31.0 | )% | (92.9 | )% | ||||
| Point-of-Sale and Prepaid Services | 2.7 | (5.9 | ) | |||||
| Other Corporate Overhead | (100.0 | ) | - | |||||
| Total | (2.6 | )% | (23.0 | )% | ||||
| 81 |
General and administrative during the three months ended June 30, 2026 and 2025, consisted of the following:
| 2026 | 2025 | |||||||
| Depreciation and amortization | $ | 190,481 | $ | 229,817 | ||||
| Selling, general and administration | 4,443,573 | 3,926,026 | ||||||
| Total | $ | 4,634,054 | $ | 4,155,843 | ||||
Selling, general and administrative expenses during the three months ended June 30, 2026 and 2025, consisted of the following:
| 2026 | 2025 | |||||||
| Contractors and consultants | $ | 1,067,923 | $ | 500,448 | ||||
| Professional services | 183,641 | 309,391 | ||||||
| Compensation | 1,929,704 | 1,814,269 | ||||||
| Computer and internet | 195,360 | 247,771 | ||||||
| Advertising and marketing | 128,880 | 14,143 | ||||||
| Insurance | 494,948 | 283,377 | ||||||
| Other | 443,117 | 756,627 | ||||||
| Total | $ | 4,443,573 | $ 3,926,026, | |||||
Selling, general and administrative costs (S, G & A) increased by $517,547, or 13.2%. The changes are discussed below:
● Contractors and consultants expense increased by $567,475 or 113.4% from $500,448 in the three months ended June 30, 2025, to $1,067,923 in the three months ended June 30, 2026. This increase is primarily due to stock issuances to certain consultants made during the three months ended June 30, 2026.
● Professional services decreased by $125,750 or 40.6% in the three months ended June 30, 2026, as compared to the same period in 2025.
● Compensation increased slightly from $1,929,704 in the three months ended June 30, 2025, to $1,921,917 in the comparable period in 2026, or by 6.4%.
● Computer and internet costs decreased by 21.2% to $195,360 in the three months ended June 30, 2026, from $247,771 in the comparable period in 2025.
● Advertising and marketing costs increased to $128,880 in the three months ended June 30, 2026, from $14,143 in the comparable period in 2025, primarily due to additional marketing of the Clearline platform.
● Insurance expense increased to $494,948 in the three months ended June 30, 2026, from $283,377 in the comparable period in 2025.
● Contract settlement gain expenses increased from $0 in the three months ended June 30, 2025, to $8,511,672 in the comparable period in 2026 as a product of the MVNx Reseller Agreement and Related Amendments. See Note 8 - Commitments and Contingencies for more details on this settlement gain.
● Other costs decreased to $443,117 in the three months ended June 30, 2026, from $756,627 in the comparable period in 2025, primarily due to the resolution of various taxes associated with the ACP and other company-wide cost-cutting measures.
| 82 |
Other (expense) income during the three months ended June 30, 2026 and 2025, consisted of the following:
| 2026 | 2025 | |||||||
| Interest, net | $ | (533,520 | ) | $ | (212,419 | ) | ||
| Amortization of debt discount | (492,821 | ) | (66,887 | ) | ||||
| Loss on present value measurement of long-term accounts receivable | (415,067 | ) | - | |||||
| Accretion of discount on accounts receivable | 132,727 | - | ||||||
| Other income | 20,290 | - | ||||||
| Interest income | - | 7,008 | ||||||
| Change in fair value of derivative liabilities | 292,577 | - | ||||||
| Derivative expense | (1,168,511 | ) | ||||||
| Total other (expense) income | $ | (2,164,325 | ) | $ | (272,298 | ) | ||
Interest expense, including amortization of debt discount, was $1,026,341 for the three months ended June 30, 2026, compared to $279,306 for the three months ended June 30, 2025. Of these amounts, interest expense was $533,520 in the three months ended June 30, 2026, and $212,419 in the comparable period in 2025, and amortization of debt discount recognized in interest expense was $492,821 in the three months ended June 30, 2026, and $66,887 in the comparable period in 2025. The increases were driven primarily by the higher level of convertible notes payable outstanding during the 2026 comparative period, including notes issued during the quarter, together with amortization of the debt discounts established on those notes.
During the three months ended June 30, 2026, the Company advanced an additional $500,000 of principal under its $6,999,999 senior secured convertible note pursuant to the amendment entered into earlier in 2026. The advance was accounted for as a modification of the existing note and did not result in any gain or loss or the issuance of additional warrants.
During the three months ended June 30, 2026, the Company issued Convertible Notes #18, #21 and #22 together with warrants to purchase 285,000 shares of common stock at an exercise price of $1.25 per share. The warrants provide for settlement in cash at the holder’s election upon specified fundamental transactions and therefore do not qualify for equity classification under ASC 815-40-25; their aggregate issuance-date fair value of $78,989 was recorded as a component of debt discount. The conversion features of Convertible Notes #21 and #22, neither of which carries a fixed conversion price, were separated from their debt hosts and recorded as derivative liabilities at an aggregate issuance-date fair value of $176,510, also as a component of debt discount. No derivative expense arose on these issuances, because the debt discount recorded on each note did not exceed the proceeds received.
The Company recognized derivative expense of $1,168,511 for the three months ended June 30, 2026, with no comparable amount in the prior-year period. Scheduled amortization payments came due on Convertible Notes #2, #3, #4 and #5 during the quarter and were not paid in cash, which made a market-based conversion rate available to each holder and required the conversion feature of each note to be separated from its debt host under ASC 815-15-25-1. Because each host note was already outstanding, no proceeds remained to be allocated and no debt discount arose, and the aggregate fair value of the separated features on their separation dates was charged to earnings. The expense reflects the initial recognition of these features and does not represent a cash payment or any change in the principal or interest payable under the notes.
The Company recognized a gain on the change in fair value of derivative liabilities of $292,577 for the three months ended June 30, 2026, with no comparable amount in the prior-year period, reflecting remeasurement at each conversion date during the quarter and at the reporting date, and attributable principally to the decline in the market price of the Company’s common stock and to shorter expected terms. Five conversions at the market-based rate settled $385,880 of principal and capitalized guaranteed interest through the issuance of 935,843 shares of common stock, and $208,606 of the related derivative carrying amount was reclassified to additional paid-in capital with no effect on earnings.
Derivative liabilities were $1,107,421 at June 30, 2026, comprising $127,114 attributable to the warrants and $980,307 attributable to the separated conversion features, compared to none at December 31, 2025. These liabilities are measured using the Black-Scholes-Merton option pricing model, are classified within Level 3 of the fair value hierarchy, and will continue to fluctuate with the market price of the Company’s common stock and the other inputs to the model. Several of the Company’s other convertible notes payable carry the same market-based conversion rate, which becomes available on a failure to pay a scheduled amortization payment when due or on an event of default; either event would require separation of that note’s conversion feature and a further charge to derivative expense. See Note 6.
The Company recognized a loss on present value measurement of long-term accounts receivable of $415,067 during the three months ended June 30, 2026, with no comparable charge in the prior-year period, upon the reclassification of $3,613,561 of reimbursements withheld under programs administered by the Universal Service Administrative Company from current to non-current accounts receivable. Because the withheld amounts do not bear interest and are not expected to be collected within twelve months, the receivable was measured at its present value by discounting the face amount over an estimated collection period of thirty-six (36) months at a discount rate of 4.15%. The discount is accreted to income using the effective interest method, and accretion of $132,727 was recognized during the quarter and is presented as accretion of discount on accounts receivable within other income (expense).
Other income was $20,290 for the three months ended June 30, 2026. The Company invested excess cash in various instruments during 2025, resulting in interest, dividends, and gains resulting in interest income of $7,008 in the three months ended June 30, 2025, compared to $0 in 2026.
Equity Transactions for the Three Months Ended June 30, 2026
Stock Issued for Services
The Company issued 385,000 shares of common stock for services rendered during the three months ended June 30, 2026, having an aggregate fair value of $509,935, based upon the quoted closing trading price on each grant date.
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Stock Issued for Services – Related Party
On April 1, 2026, the Company issued its Chief Executive Officer 500,000 shares of common stock for services rendered under his employment agreement, having a fair value of $360,000, or $0.72 per share. On June 1, 2026, the Company issued its Chief Executive Officer an additional 500,000 shares of common stock for services rendered under the same agreement, having a fair value of $297,900, or $0.5958 per share. An aggregate compensation expense of $657,900 was recognized.
Recognition of Stock Based Compensation – Restricted Stock Awards – Employees
The Company recognized $7,787 in compensation expense during the three months ended June 30, 2026, related to the December 16, 2025, grant of 54,331 restricted shares of common stock to employees, which vest in full on the third anniversary of the grant date, with compensation cost recognized on a straight-line basis over the thirty-six (36) month requisite service period.
Recognition of Stock Based Compensation – Non-Vested Shares – Related Parties
The Company recognized $60,313 in compensation expense during the three months ended June 30, 2026, related to non-vested shares of common stock awarded to members of the Board of Directors under their respective agreements.
Board of Directors Grant
On June 24, 2026, the Company granted an aggregate of 945,537 shares of common stock to three members of its Board of Directors, having an aggregate fair value of $375,000, or $0.3966 per share, based upon the quoted closing trading price on the grant date. Subject to the holder’s continuous service as a director of the Company, the restricted shares become fully vested upon the earliest to occur of: (i) the date on which the holder no longer serves as a director for any reason (including the death of the holder or the occurrence of a disability that renders the holder incapable of providing services to the Company), other than a termination of service for cause; (ii) the occurrence of a change of control (as defined in the Plan); or (iii) June 24, 2029.
Conversion of Debt to Common Stock
During the three months ended June 30, 2026, holders of convertible notes payable converted an aggregate of $385,880 of principal and capitalized guaranteed interest into 935,843 shares of common stock, at effective conversion prices ranging from $0.3587 to $0.4490 per share. The conversions were effected under the original conversion terms of the respective notes, and accordingly the carrying amount of the notes converted, net of the related unamortized debt discount, was credited to common stock and additional paid-in capital, with no gain or loss recognized. See Note 5.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2026 AND 2025
We measure our performance on a consolidated basis as well as the performance of each segment.
We report our financial performance based on the following segments: Mobile Virtual Network Operators (MVNO), and Point-of-Sale and Prepaid Services (Top-up). The MVNO segment includes subsidized (Lifeline) and non-subsidized components (LinkUp Mobile). The subsidized component or Lifeline is the result of the mobile broadband (phone and internet) services provided by Torch Wireless to eligible consumers. The Point-of-Sale and Prepaid Services segment is comprised of Surge Fintech and ECS as previously shown.
The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. Additional information on our reportable segments is contained in Note 10 – Segment Information of the Notes to Financial Statements.
Revenues and expenses during the six months ended June 30, 2026 and 2025, consisted of the following:
| 2026 | 2025 | |||||||
| Revenue | $ | 32,188,804 | $ | 22,095,596 | ||||
| Cost of revenue (exclusive of depreciation and amortization) | (40,311,533 | ) | (27,692,607 | ) | ||||
| General and administrative | (8,137,066 | ) | (8,793,401 | ) | ||||
| Contract settlement gain | 8,511,672 | - | ||||||
| Income (Loss) from operations | $ | (7,748,123 | ) | $ | (14,390,412 | ) | ||
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Revenue increased overall by $10,093,208 (45.7%) from the six months ended June 30, 2025, to the six months ended June 30, 2026. Segment revenues were as follows:
| For the Six Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Revenues: | ||||||||
| Mobile Virtual Network Operator | $ | 3,390,757 | $ | 4,559,530 | ||||
| Point-of-Sale and Prepaid Services | 28,798,046 | 17,536,066 | ||||||
| Other Corporate Overhead | - | - | ||||||
| Total | $ | 32,188,804 | $ | 22,095,596 | ||||
Mobile Virtual Network Operators consisting of SurgePhone Wireless and Torch Wireless revenues (as detailed in Notes 2 and 10 of the financial statements) decreased by $1,168,773 or (25.6%). In the fourth quarter of 2025, due to an audit delay, our Eligible Telecommunications Carrier paused the intake of new users, leading to a temporary dip in Lifeline revenues in early 2026.
Point-of-Sale and Prepaid Services revenues increased by $11,261,980 from June 30, 2025 to June 30, 2026, as a result of continued efforts to scale this segment by our VP of Sales, and the continued increasing use of our sales force.
Cost of Revenue, Gross Profit and Gross Margin
For the six months ended June 30, 2026, cost of revenue for services primarily consisted of mobile virtual network operator expenses ($3,318,445), prepaid retail expenses ($36,859,083), and other expenses such as royalties and call-center expenses ($134,005). For the six months ended June 30, 2025, cost of revenue for services primarily consists of data plan expenses ($4,790,868), prepaid retail expenses ($18,118,971), devices ($873,276), marketing ($493,368), advertising ($847,778) and other expenses such as royalties and call-center expenses ($2,568,346).
We expect that our cost of revenue will increase or decrease to the extent that our revenue increases and decreases.
| For the Six Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Cost of Revenue (exclusive of depreciation and amortization): | ||||||||
| Mobile Virtual Network Operator | $ | 3,318,445 | $ | 9,573,155 | ||||
| Point-of-Sale and Prepaid Services | 36,859,083 | 18,118,976 | ||||||
| Other Corporate Overhead | 134,005 | 481 | ||||||
| Total | $ | 40,311,533 | $ | 27,692,607 | ||||
Gross profit margin is calculated as revenue less cost of revenue. Gross profit margin is gross profit expressed as a percentage of revenue. Our gross profit in future periods will depend on a variety of factors, including market conditions that may impact our pricing, sales mix among devices, sales mix changes among consumables, excess and obsolete inventories, and the cost of our products from manufacturers. Our gross profit (loss) in future periods will vary based upon our revenue stream mix and may increase or decrease based upon our distribution channels.
| For the Six Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Gross Profit (Loss) (exclusive of depreciation and amortization): | ||||||||
| Mobile Virtual Network Operator | $ | 72,312 | $ | (5,013,626 | ) | |||
| Point-of-Sale and Prepaid Services | (8,061,037 | ) | (583,385 | ) | ||||
| Other Corporate Overhead | (134,005 | ) | - | |||||
| Total | $ | (8,122,729 | ) | $ | (5,597,011 | ) | ||
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The Company expects to focus on the improvement of gross margin in the Point-of-Sale and Prepaid Services segment during the remainder of 2026. In the fourth quarter of 2025, the Company pivoted its focus for the Clearline platform, significantly reducing expenses within Clearline as the Company continues to focus on future revenue growth. As we continue to expand both subsidized (Lifeline) and non-subsidized products (LinkUp Mobile) in the MNVO segment in 2026, we also anticipate gross margins in the MVNO segment will increase with an aim to return to positive results in late 2026.
| For the Six Months Ended June 30, | ||||||||
| 2026 | 2025 | |||||||
| Gross Margin: | ||||||||
| Mobile Virtual Network Operator | 2.1 | % | (110.0 | )% | ||||
| Point-of-Sale and Prepaid Services | (28.0 | ) | (3.3 | ) | ||||
| Other Corporate Overhead | - | - | ||||||
| Total | (25.3 | )% | (25.3 | )% | ||||
General and administrative during the six months ended June 30, 2026 and 2025, consisted of the following:
| 2026 | 2025 | |||||||
| Depreciation and amortization | $ | 380,772 | $ | 479,391 | ||||
| Selling, general and administration | 7,756,294 | 8,314,010 | ||||||
| Total | $ | 8,137,066 | $ | 8,793,401 | ||||
Selling, general and administrative expenses during the six months ended June 30, 2026 and 2025, consisted of the following:
| 2026 | 2025 | |||||||
| Contractors and consultants | $ | 1,455,037 | $ | 1,345,542 | ||||
| Professional services | 343,805 | 475,204 | ||||||
| Compensation | 3,730,753 | 3,544,709 | ||||||
| Computer and internet | 448,414 | 506,857 | ||||||
| Advertising and marketing | 158,802 | 37,623 | ||||||
| Insurance | 753,565 | 566,580 | ||||||
| Other | 865,918 | 1,837,495 | ||||||
| Total | $ | 7,756,294 | $ | 8,314,010 | ||||
Selling, general and administrative costs (S, G & A) decreased by $557,716, or (6.7%) across comparative periods. The changes are discussed below:
● Contractors and consultants expense increased by $109,495 or 8.1% from $1,345,542 in the six months ended June 30, 2025, to $1,455,036 in the six months ended June 30, 2026. The Company decreased these expenses during the six months ended June 30, 2026, due to the reduction in advisory services specifically in the area of investment relations and the internalization of marketing efforts.
● Professional services decreased by 131,399 or 27.7% in the six months ended June 30, 2026 as compared to the same period in the prior fiscal year.
● Compensation increased slightly from $3,544,709 in the six months ended June 30, 2025, to $3,730,753 in the comparable period in 2026.
● Computer and internet costs decreased to $448,414 in the six months ended June 30, 2026, from $506,857 in the comparable period in 2025.
● Advertising and marketing costs increased to $158,802 in the six months ended June 30, 2026, from $37,623 in the comparable period in 2025 primarily due to additional marketing of the Clearline platform.
● Insurance expense increased to $753,565 in the six months ended June 30, 2026, from $566,580 in the comparable period in 2025 primarily as a result of improved premium rates for the renewal of coverage.
● Other costs decreased to $865,918 in the six months ended June 30, 2026, from $1,837,495 in the comparable period in 2025 primarily due to the resolution of various taxes associated with the ACP and other company-wide cost-cutting measures.
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Other (expense) income during the six months ended June 30, 2026 and 2025, consisted of the following:
| 2026 | 2025 | |||||||
| Interest expense | $ | (976,749 | ) | $ | (331,853 | ) | ||
| Amortization of debt discount | (930,599 | ) | (66,887 | ) | ||||
| Loss on present value measurement of long-term accounts receivable | (415,067 | ) | - | |||||
| Accretion of discount on accounts receivable | 132,727 | - | ||||||
| Other income | 20,290 | 6,785 | ||||||
| Interest income | - | 64,267 | ||||||
| Change in fair value of derivative liabilities | 323,120 | - | ||||||
| Derivative expense | (1,168,511 | ) | - | |||||
| Total other (expense) income | $ | (3,014,789 | ) | $ | (327,688 | ) | ||
Interest expense, including amortization of debt discount, was $1,907,348 for the six months ended June 30, 2026, compared to $398,740 for the six months ended June 30, 2025. Of these amounts, interest expense was $976,749 in the six months ended June 30, 2026, and $331,853 in the comparable period in 2025, and amortization of debt discount recognized in interest expense was $930,599 in the six months ended June 30, 2026, and $66,887 in the comparable period in 2025. The increases were driven primarily by the higher level of convertible notes payable outstanding during the 2026 comparative period, including notes issued during the period, together with amortization of the debt discounts established on those notes.
During the six months ended June 30, 2026, the Company advanced an additional $1,000,000 of principal under its $6,999,999 senior secured convertible note pursuant to amendments entered into during the period. The advances were accounted for as modifications of the existing note and did not result in any gain or loss or the issuance of additional warrants.
During the six months ended June 30, 2026, the Company issued Convertible Notes #7, #8, #18, #21 and #22 together with warrants to purchase an aggregate of 660,000 shares of common stock at an exercise price of $1.25 per share. The warrants provide for settlement in cash at the holder’s election upon specified fundamental transactions and therefore do not qualify for equity classification under ASC 815-40-25; their aggregate issuance-date fair value of $294,125 was recorded as a component of debt discount. The conversion features of Convertible Notes #21 and #22, neither of which carries a fixed conversion price, were separated from their debt hosts and recorded as derivative liabilities at an aggregate issuance-date fair value of $176,510, also as a component of debt discount. No derivative expense arose on these issuances, because the debt discount recorded on each note did not exceed the proceeds received.
The Company recognized derivative expense of $1,168,511 for the six months ended June 30, 2026, all of which arose during the three months then ended, with no comparable amount in the prior-year period. Scheduled amortization payments came due on Convertible Notes #2, #3, #4 and #5 during the second quarter and were not paid in cash, which made a market-based conversion rate available to each holder and required the conversion feature of each note to be separated from its debt host under ASC 815-15-25-1. Because each host note was already outstanding, no proceeds remained to be allocated and no debt discount arose, and the aggregate fair value of the separated features on their separation dates was charged to earnings. The expense reflects the initial recognition of these features and does not represent a cash payment or any change in the principal or interest payable under the notes.
The Company recognized a gain on the change in fair value of derivative liabilities of $323,120 for the six months ended June 30, 2026, with no comparable amount in the prior-year period, reflecting remeasurement at each conversion date during the period and at the reporting date, and attributable principally to the decline in the market price of the Company’s common stock and to shorter expected terms. Five conversions at the market-based rate settled $385,880 of principal and capitalized guaranteed interest through the issuance of 935,843 shares of common stock, and $208,606 of the related derivative carrying amount was reclassified to additional paid-in capital with no effect on earnings.
Derivative liabilities were $1,107,421 at June 30, 2026, comprising $127,114 attributable to the warrants and $980,307 attributable to the separated conversion features, compared to none at December 31, 2025. These liabilities are measured using the Black-Scholes-Merton option pricing model, are classified within Level 3 of the fair value hierarchy, and will continue to fluctuate with the market price of the Company’s common stock and the other inputs to the model. Several of the Company’s other convertible notes payable carry the same market-based conversion rate, which becomes available on a failure to pay a scheduled amortization payment when due or on an event of default; either event would require separation of that note’s conversion feature and a further charge to derivative expense. See Note 6.
The Company recognized a loss on present value measurement of long-term accounts receivable of $415,067 during the six months ended June 30, 2026, with no comparable charge in the prior-year period, upon the reclassification of $3,613,561 of reimbursements withheld under programs administered by the Universal Service Administrative Company from current to non-current accounts receivable. Because the withheld amounts do not bear interest and are not expected to be collected within twelve months, the receivable was measured at its present value by discounting the face amount over an estimated collection period of thirty-six (36) months at a discount rate of 4.15%. The discount is accreted to income using the effective interest method, and accretion of $132,727 was recognized during the period and is presented as accretion of discount on accounts receivable within other income (expense).
Other income was $20,290 for the six months ended June 30, 2026, compared to $6,785 for the six months ended June 30, 2025. The Company invested excess cash in various instruments during 2025, resulting in interest, dividends, and gains resulting in interest income of $64,267 in the six months ended June 30, 2025, compared to $0 in the comparable period in 2026.
Equity Transactions for the Six Months Ended June 30, 2026
Stock Issued for Cash
Underwritten Public Offering
On January 20, 2026, the Company entered into an underwriting agreement with the representative of the underwriters for an underwritten public offering of 2,000,000 shares of common stock at a public offering price of $1.25/share, for gross proceeds of $2,500,000. In connection with this offering, the Company paid direct offering costs of $375,000, resulting in net proceeds of $2,125,000. The offering closed on January 22, 2026. The underwriter was granted a 45-day option to purchase up to an additional 300,000 shares at the public offering price to cover over-allotments; the option expired unexercised on March 8, 2026. The Company intends to use the net proceeds for expansion of its Lifeline business and for working capital and general corporate purposes.
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In connection with the offering, the Company issued warrants to the underwriter to purchase 60,000 shares of common stock, equal to 3.0% of the total shares sold, at an exercise price of $1.38/share, equal to 110% of the public offering price. The warrants are exercisable commencing six months after the closing date and expire five years after the commencement of sales, and were issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemption provided by Section 4(a)(2) of the Securities Act.
The warrants were determined to be indexed to the Company’s common stock and settleable in the Company’s common stock and are therefore classified within stockholders’ deficit. The grant-date fair value of the warrants was recorded as a cost of the offering with a corresponding credit to additional paid-in capital, resulting in no net effect on total stockholders’ deficit.
Stock Issued for Cash – At the Market Offering (“ATM”)
The Company issued 7,323 shares of common stock under its at the market offering program at prices ranging from $1.98/share to $2.03/share, for gross proceeds of $14,820, less commissions of $445, resulting in net proceeds of $14,375. The shares were sold under the At the Market Offering Agreement described below.
Stock Issued for Services
The Company issued 385,000 shares of common stock for services rendered, having a fair value of $509,935 ($0.551 - $2.04/share), based upon the quoted closing trading price on the grant date.
Stock Issued for Services - Related Party
On April 1, 2026, the Company issued its Chief Executive Officer 500,000 shares of common stock for services rendered under his employment agreement, having a fair value of $360,000, or $0.72/share.
On June 1, 2026, the Company issued its Chief Executive Officer an additional 500,000 shares of common stock for services rendered under the same agreement, having a fair value of $297,900, or $0.5958/share.
An aggregate compensation expense of $657,900 was recognized.
Recognition of Stock Based Compensation - Restricted Stock Awards – Employees
On December 16, 2025, the Company granted 54,331 restricted shares of common stock to employees, having an aggregate grant-date fair value of $93,449, or $1.72/share, which vest in full on the third anniversary of the grant date, with compensation cost recognized on a straight-line basis over the thirty-six (36) month requisite service period. The Company recognized $7,787 and $15,574 in compensation expense related to these awards during the three and six months ended June 30, 2026, respectively
Recognition of Stock Based Compensation - Non-Vested Shares - Related Parties
The Company recognized $60,313 and $110,208 in compensation expense during the three and six months ended June 30, 2026, respectively, related to non-vested shares of common stock awarded to members of the board of directors under their respective agreements. See Non-Vested Shares - Related Parties (Officer and Directors) below.
Debt Discount – Convertible Notes Payable – Common Stock
During the six months ended June 30, 2026, the Company issued 31,525 shares of common stock with an aggregate grant-date fair value of $54,828, based upon the quoted closing price, to four lenders (convertible notes #9, #10, #11 and #12) as additional consideration in connection with the issuance of convertible notes payable, at prices ranging from $0.83/share to $2.04/share. The fair value of the shares was recorded as a debt discount and is being amortized to interest expense over the term of the related notes. See Note 5.
Conversion of Debt to Common Stock – Related Party
On March 23, 2026, the Company issued 800,000 shares of common stock to its Chief Executive Officer at a fair value of $707,200 ($0.884/share) in partial settlement of a related party note payable. The Chief Executive Officer also forgave $292,800 of principal, which was accounted for as a capital contribution from a principal shareholder and credited to additional paid-in capital. The aggregate $1,000,000 was applied as a reduction of the related party note payable, and no gain on extinguishment was recognized. See Note 5.
Conversion of Debt to Common Stock
Holders of convertible notes payable converted an aggregate of $385,880 of principal and capitalized guaranteed interest into 935,843 shares of common stock, at effective conversion prices ranging from $0.3587/share to $0.4490/share. The conversions were effected under the original conversion terms of the respective notes, and accordingly the carrying amount of the notes converted, net of the related unamortized debt discount, was credited to common stock and additional paid-in capital with no gain or loss recognized. See Note 5.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2026, and December 31, 2025, our current assets were $4,858,095 and $6,979,766, respectively, and our current liabilities were $26,161,011 and $18,190,236, respectively, which resulted in a working capital deficit of $(21,302,916) and $(11,210,470), respectively. The increase in current assets is primarily a result of increased accounts receivable, and the increase in current liabilities is primarily a result of increased accounts payable and notes payable.
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Total assets at June 30, 2026 and December 31, 2025, amounted to $9,238,440 and $8,515,846, respectively, an increase of $722,594 from December 31, 2025, to June 30, 2026. The increase in total assets is a result of a slight increase in available cash and an increase in accounts receivable. At June 30, 2026, assets consisted of current assets of $4,858,905, net intangible assets of $492,399, and operating lease right of use asset of $206,891, and at December 31, 2025, assets consisted of current assets of $6,979,766, net intangible assets of $819,153, and operating lease right of use asset of $313,410.
At June 30, 2026, our total liabilities were $29,987,865, compared to total liabilities of $23,918,665 at December 31, 2025. This $6,069,200 increase was related to an increase in accounts payable and notes payable.
At June 30, 2026, our total stockholders’ deficit was $(20,749,425) as compared to $(15,402,819) at December 31, 2025. The $(5,346,606) decrease was primarily due to the net loss for the year, as well as the above discussed increase in liabilities.
The following table sets forth the major sources and uses of cash for six months ended June 30, 2026 and 2025.
| 2026 | 2025 | |||||||
| Net cash provided by or (used in) operating activities | $ | (7,181,032 | ) | $ | (13,082,419 | ) | ||
| Net cash used in investing activities | - | (18,590 | ) | |||||
| Net cash provided by financing activities | 7,547,105 | 4,715,069 | ||||||
| Net change in cash and cash equivalents | $ | 366,073 | $ | (8,385,940 | ) | |||
Net cash used in operating activities for the six months ended June 30, 2026 and 2025, was primarily due to the net loss for the period.
There was no net cash used in investing activities in the six months ended June 30, 2026, and the net cash used in investing activities for the three months ending June 30, 2025, was primarily due to payment for leases.
Net cash received for financing activities for the six months ended June 30, 2026, is primarily due to proceeds from the issuance of notes payable and convertible notes, as well as proceeds from stock issued for cash, offset by the repayment of debt. Net cash used for financing activities for the six months ended June 30, 2025, is primarily due to the repayment of debt.
At June 30, 2026, the Company had the following material commitments and contingencies.
Cash requirements and capital expenditures – Due to reduction in total revenues and margins and increase in operating expenses as we scale, we may not have sufficient resources to continue to fund operations for the next twelve months without additional funding. We are currently exploring various strategic opportunities; however, we have no commitments at this time and no known timing as to when any transaction may occur. We will only pursue options that we believe are in the best interest of, and on the best terms for, the Company.
The Company kicked off several initiatives in April of 2025 that are continuing to scale through 2026. We have begun the launch of LinkUp Mobile SIM (subscriber identity module) cards into the national retail market. LinkUp Mobile has also launched its phone in a box program. Thousands of phones have already been purchased by convenience stores, which we believe is a positive sign for our future capabilities. Torch Wireless, supported by the Lifeline program, is now actively expanding its subscriber base in the state of California. This development is noteworthy for the growth of the Torch offering, as California provides an additional revenue incentive for its subscribers and has a large potential subscriber base. The wholesale MVNE (Mobile Virtual Network Enabler) leveraging technology and industry expertise has allowed us to expand services as a Mobile Network Enabler. Leveraging our direct carrier relationship, we offer billing, provisioning, SIM cards, and services to wireless companies lacking direct carrier access. Two such companies have already embraced this offering, and we anticipate more to join in the near future. We believe the MVNE solution will continue to uniquely position us for additional rapid growth into the subscriber activation channel by enabling other wireless companies who lack a direct carrier relationship. Clear-line has launched a comprehensive code management campaign, providing services to over 1,600 convenience stores. In addition to this new business venture, Shortcode, the ability to dynamic content and features into posts, pages and widgets, has been provisioned with all carriers in preparation for a national campaign scheduled to launch in Q3 of 2026
Known trends and uncertainties – The Company may pursue strategic opportunities, including acquisitions or partnerships, that align with its core business and support long-term growth. There are no definitive agreements in place at this time.
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Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which were prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, and expenses. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.
While our significant accounting policies are more fully described in Note 2—Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and which require our most difficult, subjective and complex judgments.
Use of Estimates
Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.
Significant estimates during the six months ended June 30, 2026 and 2025, respectively, include, allowance for doubtful accounts and other receivables, the expected collection period and discount rate used to measure long-term accounts receivable at present value, inventory reserves and classifications, valuation of loss contingencies, the classification and fair value of derivative liabilities, including the expected volatility and expected term used to measure them, valuation of stock-based compensation, estimated useful lives related to intangible assets, capitalized internal-use software development costs, and property and equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred tax assets.
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
● Level 1 - Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
● Level 2 - Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
● Level 3 - Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
Derivative Liabilities
Our convertible notes payable, and the warrants issued together with them, contain features that require significant judgment both to classify and to measure. Determining whether a warrant qualifies for classification within stockholders’ deficit, and whether a conversion feature embedded in a convertible note must be separated from its debt host and accounted for as a derivative liability, requires us to evaluate the terms of each instrument under ASC 815-40 and ASC 815-15. Where a conversion feature becomes exercisable only upon a contingency, such as an event of default or a failure to pay a scheduled amortization payment when due, we must also determine the date on which that contingency occurs and the conditions for separation are met. Those determinations affect whether an amount is recorded as a derivative liability or remains within the carrying amount of the related debt or within stockholders’ deficit, and the period in which any related charge is recognized in earnings. During the six months ended June 30, 2026, the failure to pay amortization payments when due on four of our convertible notes payable made a market-based conversion rate available to the holders and required the conversion feature of each of those notes to be separated from its debt host, resulting in a charge to derivative expense of $1,168,511.
Once recognized, our derivative liabilities are measured at fair value at each reporting date using the Black-Scholes-Merton option pricing model and are classified within Level 3 of the fair value hierarchy, because the model depends on significant unobservable inputs. The most significant of those inputs are expected volatility, which we derive from the historical volatility of our common stock, and the expected term of the instrument; an increase in either input increases the estimated fair value of the derivative liability. For each separated conversion feature, the conversion price is 85% of the lowest daily volume weighted average price of our common stock during the five trading days preceding the measurement date, and a lower conversion price increases the number of shares issuable on conversion and increases the estimated fair value of the feature. Because these inputs are unobservable, and because our stock price and its volatility can change materially over short periods, the fair value of our derivative liabilities is inherently uncertain and the amounts recognized in earnings in respect of those liabilities may vary significantly from period to period. Had we applied different assumptions, particularly for expected volatility or expected term, the fair value of our derivative liabilities at June 30, 2026 and the related amounts recognized in earnings would have differed, and those differences could be material. See Notes 2, 5, 6 and 7.
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Impairment of Long-lived Assets including Internal Use Capitalized Software Costs
Management evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include but are not limited to significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.
If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Revenue from Contracts with Customers
We account for revenue earned from contracts with customers under ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
●Step 1: Identify the contract with the customer.
●Step 2: Identify the performance obligations in the contract.
●Step 3: Determine the transaction price.
●Step 4: Allocate the transaction price to the performance obligations in the contract.
●Step 5: Recognize revenue when, or as, the company satisfies a performance obligation.
Stock-Based Compensation
The Company accounts for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
The Company uses the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options.
The fair value of stock-based compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
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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 the Black-Scholes option pricing model.
Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants (for services) are recorded at fair value and expensed over the requisite service period or at the date of issuance if there is not a service period.
Recent Accounting Pronouncements
In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements.
ITEM 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). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2026.
Changes in Internal Control over Financial Reporting
During the period ended June 30, 2026, there were no changes in our internal controls over financial reporting, which were identified in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that materially affected, or is reasonably likely to have a material effect, on our internal control over financial reporting.
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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 a summary of threatened, pending, asserted or unasserted claims against us or any of our wholly owned subsidiaries for which there have been material developments:
Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.
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 (“Defendants”), and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, formerly a True Wireless employee. 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. Blue Skies alleged 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. Defendants filed various dispositive motions with the Court demonstrating Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, and the Court granted these motions, finding the non-solicitation and non-competition clauses in the Stock Purchase Agreement void as a matter of Oklahoma law. Defendants then filed additional dispositive motions on Plaintiffs’ claims in tort and equity, which the Court granted in part based on its prior rulings. Plaintiffs took the position the Court granting Defendants’ dispositive motions on these material issues only leaves partial contract claims that are inextricably intertwined with the remaining claims and defenses. Plaintiffs sought a certified interlocutory appeal of the Court’s orders. On March 10, 2025, the Oklahoma Supreme Court entered an order denying Plaintiffs’ Petition for Certiorari to review the certified interlocutory appeal. In December 2025, Judge Dishman recused himself from the case following a request from the Blue Skies and True Wireless parties and objection by SurgePays’ counsel. Judge Andrews has been assigned to the matter and has set remaining matters for status and briefing schedules on outstanding motions in the trial court. The case will now proceed in the district court on the parties’ remaining claims. On August 2, 2026, the parties appeared before Judge Andrews to argue Plaintiffs’ Motions to Reconsider Summary Judgment. Judge Andrews took the matters under advisement to review the briefs and decide whether to reverse any of Judge Dishman’s prior rulings. Presently, there is no trial date.
In the Circuit Court of Tennessee for the 30th Judicial District at Memphis, Docket # CT-3219-23. On August 8, 2023, a complaint was filed by SurgePays for breach of a promissory note by Blue Skies Connections, LLC. The note at issue is dated June 14, 2021, and requires Blue Skies Connections to repay the principal sum of $176,850.56, by monthly payments of $7,461.37 commencing on June 1, 2023. Blue Skies Connections has failed to make any payments due under the terms of the note, and this breach entitles SurgePays to demand payment of the entire amount of the note together with all accrued interest. Blue Skies Connections responded by filing a Motion to Dismiss or, in the alternative, a Motion to Stay, taking the position that, under the prior suit pending doctrine, the subject promissory note is subject to the prior litigation instituted by Blue Skies Connections against SurgePays, styled Skies Connections, LLC and True Wireless, Inc. v. SurgePays, Inc., et al., Case No. CJ-2021-5327, District Court of Oklahoma County, Oklahoma. SurgePays elected to dismiss its complaint without prejudice and is in the process of evaluating re-filing the matter in the District Court of Oklahoma County, Oklahoma.
SurgePays, Inc. et al. v. Fina et al., Case No. CJ-2022-2782, District Court of Oklahoma County, Oklahoma
Plaintiffs SurgePays, Inc. and Kevin Brian Cox initiated this case against its former officer Mike Fina, his companies Blue Skies Connections, LLC, True Wireless, Inc., Government Consulting Solutions, Inc., Mussell Communications LLC, and others. This case also arises from the June 2021 transaction by which SurgePays sold True Wireless to Blue Skies. During the litigation of CJ-2021-5327 described above, SurgePays learned information that showed Mike Fina breached his duties owed to True Wireless during his employment and consulting work for True Wireless prior to SurgePays’ sale of True Wireless to Blue Skies. SurgePays alleges that Mike Fina conspired with the other defendants to damage True Wireless thereby harming the value of the company and causing its eventual sale at a greatly reduced price. SurgePays asserts claims for (i) breach of contract; (ii) breach of fiduciary duty; (iii) fraud; (iv) tortious interference; and (v) unjust enrichment. At this stage, no defendant has asserted a counterclaim against SurgePays. SurgePays filed a Second Amended Petition on January 27, 2023. Defendants Fina, Blue Skies, True Wireless, and Government Consulting Solutions filed a Motion to Dismiss on March 10, 2023. On June 29, 2023, the Court granted the Motion to Dismiss, ruling the claims asserted are “derivative” and could only be asserted by the True Wireless entity now owed by Blue Skies. The Court rejected SurgePays’ request to certify this ruling for immediate appeal. Defendant Misty Garrett filed a Motion for Summary Judgment seeking the same relief as the Motion to Dismiss, which was granted by the Court. It is SurgePays’ intent to evaluate an additional options in the Court’s dismissal of Fina, Blue Skies, True Wireless, Government Consulting Solutions, and Misty Garrett. At this stage, no attempts at settlement have been made.
All claims against all parties have been adjudicated by the Court. SurgePays filed a Motion for New Trial, which was denied by the Court on February 20, 2025. SurgePays’ has filed an appeal of the Court’s dismissal of Fina, Blue Skies, True Wireless, Government Consulting Solutions, and summary judgment for Misty Garrett.
With regard to the appeal against Misty Garrett and Misty Garrett’s claims against SurgePays, Misty Garrett and SurgePays have entered into a Settlement Agreement and Release dated as of October 16, 2025 in which the parties have agreed to dismiss all matters in the courts and release each other from liability, with an agreement to file such dismissal documents at the in the respective courts.
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SSB Communications, Inc., Plaintiff v SurgePays, Inc., and American Broadband & Telecommunications Company, Defendants, Case No. DC-26-07054
District Court 116th Judicial District, Dallas County, Texas filed April 20, 2026. Plaintiff filed this collection suit seeking an amount over $250,000 but less than $1,000,000 for breach of contract for the provision of goods, plus interest, fees and costs. The matter was settled on June 18, 2026 for $376,000.00 payable in four (4) monthly installments, due on the following dates and in the following amounts: (i) One Hundred Thousand U.S. Dollars ($100,000.00) on or before June 15, 2026 or upon the execution of this Agreement (the “First Payment”); (ii) One Hundred Thousand U.S. Dollars ($100,000.00) on or before July 5, 2026; (iii) One Hundred Thousand U.S. Dollars ($100,000.00) on or before August 5, 2026; and (iv) a final installment of Seventy-Six Thousand U.S. Dollars ($76,000.00) on or before September 5, 2026, until the Settlement Amount is fully paid to SSB. The matter is abated before the court until a status hearing on September 30, 2026.
Ellenoff Grossman & Schole, LLP and SurgePays
Ellenoff Grossman & Schole LLP v. SurgePays, Inc., Index No. 651282/2026, Supreme Court of the State of New York, County of New York, filed March 2, 2026. The action sought recovery of $234,151 in unpaid legal fees, plus costs and attorneys’ fees.
Effective April 7, 2026, the Company entered into a settlement agreement resolving all claims, pursuant to which the Company agreed to pay the total settlement amount of $234,151 in eight equal monthly installments of $29,269, commencing April 2026 and ending November 2026. All required installments have been paid to date. The settlement agreement provides for a default interest rate of 9% per annum on any overdue amounts and is secured by an Affidavit of Confession of Judgment held in escrow by the plaintiff, which may be filed upon an uncured payment default. Entry of a judgment against the Company above a specified threshold would constitute an event of default under certain of the Company’s convertible notes payable. See Note 5.
ITEM 1A: RISK FACTORS
Not applicable.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2026, the Company issued 385,000 shares of common stock for services rendered, having a fair value of $509,935 ($0.551 - $2.04/share), based upon the quoted closing trading price on the grant date.
The Company issued the foregoing securities pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder, as the shareholders were accredited and/or financially sophisticated and had adequate access, through business or other relationships, to information about the Company, and the sales did not involve a public offering of securities or any general solicitation.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4: MINE SAFETY DISCLOSURES.
Not applicable
ITEM 5: OTHER INFORMATION.
On or about August 10, 2026, the Company and its CEO, Kevin Brian Cox, entered into Amendment No. 4 to Employment Agreement between the parties, pursuant to which the Company and Mr. Cox agreed to delay payment of Mr. Cox’s bonus for 2025 to October 1, 2026.
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ITEM 6: EXHIBITS
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*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 19, 2026 | ||
| By: | /s/ Kevin Brian Cox | |
| Kevin Brian Cox | ||
Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 19, 2026 | /s/ Chelsea Pullano |
| Chelsea Pullano | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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