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| Debt | 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:
SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2026 AND 2025
Debt activity by instrument for the six (6) months ended June 30, 2026 is as follows:
SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2026 AND 2025
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:
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.
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.
SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2026 AND 2025
Amortization of debt discount recognized in interest expense was $930,509 for the six (6) months ended June 30, 2026 and $66,887 for the six months ended June 30, 2025.
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 $74 to $731 per month and began twelve (12) months after the date of the respective note. The loans are unsecured, are not convertible, carry no financial covenants, and may be prepaid without penalty. No debt discount was recorded on either loan. Principal repayments of $5,048 were made during the six (6) months ended June 30, 2026, and both loans were contractually current at June 30, 2026 and December 31, 2025.
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 $164,039 over thirty-six (36) months, resulting in total aggregate payments of $5,905,427 inclusive of interest. The consolidation was with the same lender and the terms were not substantially different, so it was accounted for as a modification and not an extinguishment; accordingly, no gain or loss was recognized and the capitalized interest was added to principal.
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 15% default interest rate has not been triggered and interest has continued to accrue at the contractual rate of 10%.
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 $707,200 ($0.884 per share), determined using the quoted closing market price on the issuance date. In connection with the transaction, the Chief Executive Officer forgave an additional $ of principal on the note.
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 ($1,000,000) was applied as a reduction to the outstanding balance of the related party note payable.
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 $6,999,999. Of that amount, $999,999 represented the concurrent repurchase of common stock described below and was not funded in cash. Net cash proceeds were $5,405,000 after $175,000 of legal fees and $420,000 of broker fees paid directly from the proceeds.
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 1.25% per month, or 15% per annum, and is payable monthly either in cash or as payment-in-kind at the Company’s election.
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 $999,999. The shares are held in treasury and are accounted for under the cost method, and the repurchase amount was added to the principal of the note rather than settled in cash. See Note 9.
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 $500,000 of principal and extended the maturity date, to October 12, 2027 under the Second Amendment and to November 12, 2027 under the Third Amendment. The Second Amendment also set the amortization commencement date at June 30, 2026, from which the note amortizes in monthly installments of $500,000 with the remaining balance due at maturity. The Third Amendment further required the Company to obtain shareholder approval by July 17, 2026 to permit issuance of conversion shares in excess of the 19.99% exchange cap under Nasdaq Rule 5635(d). That approval was not obtained, and conversions remain limited to the exchange cap. Advances aggregating $1,000,000 were funded during the six (6) months ended June 30, 2026, of which $500,000 was funded during the three (3) months then ended.
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 $500,000 came due on June 30, 2026 and was not paid, and accrued and unpaid interest of $1,242,916 at June 30, 2026 is included in accounts payable and accrued expenses. The non-payment did not give rise to a cross-default under any other instrument, and the lender has not declared a default. Subsequent to June 30, 2026, the Company and the investor entered into a Fourth Amendment, effective as of June 30, 2026, which deferred the commencement of amortization to November 30, 2026 and extended the maturity date to March 12, 2028.
Warrant Issuance
In connection with the issuance of the note, the Company issued warrants to purchase 700,000 shares of its common stock at an exercise price of $6/share. The warrants were immediately exercisable and expire on May 12, 2030.
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 $1,084,927, which was recorded as a debt discount with a corresponding credit to additional paid-in capital. The warrants are equity classified and are not remeasured.
The assumptions used in the Black-Scholes model were as follows:
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 $1,679,927, consisting of the following:
Debt discount is being amortized to interest expense over the revised contractual term of the note through the amended maturity date of March 12, 2028.
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 $271,880 was recorded as a debt discount with a corresponding credit to additional paid-in capital.
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 $1,463,333, together with accompanying common stock purchase warrants. Each note matures twelve (12) months from issuance and bears a one-time guaranteed interest charge of 8% on the original principal, fully earned at issuance and added to the repayment obligation, with a default interest rate of 22% on Convertible Notes #7, #8 and #18 and 18% on Convertible Notes #21 and #22. Because the guaranteed interest is fully earned at issuance, no stated interest rate accrues over the term. Guaranteed interest of $117,067 was capitalized at issuance, bringing the aggregate repayment obligation to $1,580,400. Each of Convertible Notes #7, #8 and #18 is repayable in five (5) monthly installments, the last of which settles all remaining amounts. Convertible Notes #21 and #22 are each repayable in seven (7) monthly installments, being three (3) payments of $50,000 followed by four (4) payments of $7,050. The notes generated gross cash proceeds of $1,320,000, being the aggregate original principal amount of $1,463,333 less original issue discount of $143,333, and net cash proceeds of $1,294,500 after $25,500 of legal and placement fees.
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 $1.25/share, comprising 150,000 warrants with Convertible Note #7, with Convertible Note #8, with Convertible Note #18, and each with Convertible Notes #21 and #22. The warrants were fully vested and immediately exercisable and expire five (5) years from the respective issuance dates.
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 $294,125, which was recorded as a component of debt discount with a corresponding derivative liability. See Note 6 for the valuation model, the assumptions used and the fair value at June 30, 2026.
Year Ended December 31, 2025
Warrants (equity classified)
Separated Conversion Features
Convertible Notes #21 and #22 carry no fixed conversion price. The only rate at which either note may be converted is 85% of the lowest daily volume weighted average price over the five (5) trading days preceding conversion, so every share settlement under those notes is made at that rate. Each conversion feature is separated from its debt host under ASC 815-15-25-1 and is accounted for as a derivative liability. See Conversion Features below and Note 6.
The separated features were measured at fair value at issuance in the aggregate amount of $176,510, being $88,372 on Convertible Note #21 and $88,138 on Convertible Note #22, which was recorded as a component of debt discount with a corresponding derivative liability. The valuation model and the assumptions used are presented in the accompanying table, and the fair value at June 30, 2026 is presented under Derivative Liabilities below.
* Represents derivative liabilities recognized upon separation on date where discount to market feature was triggered.
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 $756,535, comprising original issue discount of $143,333, capitalized guaranteed interest of $117,067, debt issuance costs of $25,500, the fair value of the warrants of $294,125, and the fair value of the separated conversion features of $176,510. The aggregate discount did not exceed the proceeds received on any of these notes, and accordingly no derivative expense was recognized on their issuance. The components of debt discount recorded on debt issued during the period are presented in the accompanying table.
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 $20,000,000 of convertible secured promissory notes. The notes bear interest at 14.5% per annum payable quarterly in arrears and mature twenty-four (24) months from the respective issuance date. Torch Wireless, a subsidiary, unconditionally guarantees the notes, which are secured by a junior perfected security interest in substantially all of the Company’s assets, subordinated to existing senior indebtedness under an intercreditor agreement. Upon an uncured event of default the outstanding principal, accrued and unpaid interest, and default interest at 18% per annum become immediately due and payable, and the holder may convert the default amount at the applicable tiered conversion price.
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 $54,828. The fair value of the commitment shares was recorded as a component of debt discount against the carrying amount of the related notes and is being amortized to interest expense over the contractual term of the notes. See Note 9.
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
Convertible at any time in five (5) equal tranches of 20% each at tiered fixed prices, with no Market Price rate. The tiered prices are $4/share, $6/share, $8/share, $10/share and $12/share for Convertible Notes #9 through #12, and $2/share, $4/share, $6/share, $8/share and $10/share for Convertible Notes #13 through #17, #19 and #20. Conversions are subject to a 4.99% beneficial ownership limitation, increasable to 9.99% upon sixty-one (61) days’ prior written notice. Six (6) months after issuance the Company may force conversion at the applicable tiered prices, subject to there being no event of default and to minimum volume weighted average price and trading volume thresholds and the shares being freely tradeable.
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.
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 $784,080. Each affected holder was advised in writing that the Company would not make the payment, and the Company obtained a waiver from each affected holder. Accordingly no event of default occurred, the default interest rate of 22% was not triggered, and no cross-default arose under any other instrument. The waivers did not modify the terms of the notes and were evaluated under ASC 470-50; no gain or loss was recognized and the carrying value of the notes was not adjusted.
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 $385,880 of principal and capitalized guaranteed interest and $1,250 of conversion fees, through the issuance of shares of common stock at conversion prices ranging from $0.35870/share to $0.44897/share. Scheduled principal amortization payments of $396,950 on those notes remained unsettled at June 30, 2026.
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 $22,205 in interest expense, and derecognized the converted balance against common stock and additional paid-in capital in accordance with ASC 470-20-40-1.
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 $1,168,511 was recognized in the consolidated statements of operations as derivative expense. Each separated feature was remeasured to fair value immediately before conversion, and the carrying amount attributable to the converted portion, aggregating $208,606, was reclassified to additional paid-in capital. See Note 6.
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 $2/share, and the conversion price of each affected note became reducible at the holder’s option to $/share, being the effective price per share of the securities whose issuance gave rise to the trigger.
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.
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:
SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2026 AND 2025
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 $1,000,000. The note matured March 9, 2026 and remains unpaid. It is presented as in default at June 30, 2026, and interest continues to accrue. The Company has not received a notice of acceleration.
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 $48,418, which was the only component of debt discount recorded on the note and was recognized with a corresponding credit to additional paid-in capital. See Note 9.
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.
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:
Debt Discount
In connection with the issuance of the note, the Company recorded total debt discount of $48,418, consisting of the fair value of the warrants. 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.
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 $1,500,000 accounts receivable financing facility. The facility matures on September 9, 2026 and is secured by a first priority lien on substantially all of the Company’s accounts receivable and related collateral. The facility is a full recourse arrangement under which the Company remains liable for all advances, including amounts related to uncollected or disputed customer receivables.
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 85% of the eligible borrowing base, subject to customary reserves, concentration limits and reporting requirements. The facility does not bear stated interest; the Company’s cost of funds consists of service charges and related finance fees assessed on factored invoice volume, together with a one-time loan origination fee of $5,000 paid at inception. Proceeds are used to provide working capital financing and liquidity support for the Company’s operations.
SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2026 AND 2025
Paragon Bank retains a reserve account equal to 15% of receivables financed to cover charge-backs, customer adjustments and service fees. Amounts held in the reserve are released upon collection of the related underlying receivables, net of any applicable charge-backs and fees. The reserve is maintained in a Company-owned deposit account at Paragon Bank, is subject to a first priority security interest and restrictions on withdrawal, and is presented as restricted cash. At June 30, 2026 and December 31, 2025 the reserve balance was $425,049 and $281,811, respectively.
Service charges and related finance fees were $37,907 and $0 for the three (3) months ended June 30, 2026 and 2025, respectively, and $76,379 and $0 for the six (6) months ended June 30, 2026 and 2025, respectively.
The agreement contains customary affirmative and negative covenants, including:
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 $1,000,000 of debt contractually past its stated maturity date and unpaid. Scheduled principal amortization payments that came contractually due on or before June 30, 2026 and were not settled by cash repayment, conversion or forgiveness were $396,950 and are presented by instrument in the accompanying table. The Small Business Administration loans, the note payable to the Chief Executive Officer and the accounts receivable financing facility had no amount past due.
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:
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.
SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2026 AND 2025
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