Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

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 March 31, 2026 and 2025 and for the three 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 Annual Report for a description of our Mobile Virtual Network Operators and Comprehensive Platform Services.

COMPARISON OF THREE MONTHS ENDED MARCH 31, 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 March 31, 2026 and 2025, consisted of the following:

		2026				2025
Revenue		$	15,983,983			$	10,577,429
Cost of revenue (exclusive of depreciation and amortization)			(23,681,432	)			(13,519,775	)
General and administrative			(3,501,918	)			(4,637,556	)
Income (Loss) from operations		$	(11,199,367	)		$	(7,579,902	)

Revenue increased overall by $5,406,554 (51.1%) from the three months ended March 31, 2025, to the three months ended March 31, 2026. Segment revenues were as follows:

		For the Three Months Ended March 31,
		2026				2025
Revenues:
Mobile Virtual Network Operator		$	1,803,512			$	2,285,823
Point-of-Sale and Prepaid Services			14,180,471				8,291,606
Other Corporate Overhead			-				-
Total		$	15,983,983			$	10,577,429

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 $482,311 or (21.1%). In 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 $5,888,865 from March 31, 2025 to March 31, 2026, as a result of continued efforts to scale this segment by the VP of Sales, and the continued increasing of our sales force.

Cost of Revenue, Gross Profit and Gross Margin

For the three months ended March 31, 2026, cost of revenue for services primarily consisted of data plan expenses ($622,176), prepaid retail expenses ($22,629,899), marketing ($63,029), advertising ($27,779), and other expenses such as royalties and call-center expenses ($338,549). For the three months ended March 31, 2025, cost of revenue for services primarily consists of data plan expenses ($2,859,283), prepaid retail expenses ($8,330,157), devices ($391,539), marketing ($124,721), advertising ($516,778) and other expenses such as royalties and call-center expenses ($1,297,297).

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 March 31,
		2026				2025
Cost of Revenue (exclusive of depreciation and amortization):
Mobile Virtual Network Operator		$	1,017,528			$	5,189,618
Point-of-Sale and Prepaid Services			22,629,899				8,330,157
Other Corporate Overhead			34,005				-
Total		$	23,681,432			$	13,519,775

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 March 31,
		2026				2025
Gross Profit (Loss) (exclusive of depreciation and amortization):
Mobile Virtual Network Operator		$	785,984			$	(2,903,795	)
Point-of-Sale and Prepaid Services			(8,449,428	)			(38,551	)
Other Corporate Overhead			(34,005	)			-
Total		$	(7,697,449	)		$	(2,942,346	)

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 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 March 31,
		2026				2025
Gross Margin:
Mobile Virtual Network Operator			43.6	%			(127.0	)%
Point-of-Sale and Prepaid Services			(59.6	)			(0.5	)
Other Corporate Overhead			N/A				N/A
Total			(48.2	)%			(27.8	)%

General and administrative during the three months ended March 31, 2026 and 2025, consisted of the following:

		2026				2025
Depreciation and amortization		$	190,291			$	86,122
Selling, general and administration			3,311,627				4,551,434
Total		$	3,501,918			$	4,637,556

Selling, general and administrative expenses during the three months ended March 31, 2026 and 2025, consisted of the following:

		2026				2025
Contractors and consultants		$	384,613			$	845,094
Professional services			160,164				165,813
Compensation			1,801,049				1,730,440
Computer and internet			253,053				259,085
Advertising and marketing			29,922				23,480
Insurance			258,616				283,202
Other			424,209				1,244,321
Total		$	3,311,626			$	4,551,434

Selling, general and administrative costs (S, G & A) decreased by $1,239,807, or (27.2%). The changes are discussed below:

● Contractors and consultants expense decreased by $460,481 or 54.5% from $845,094 in 2025 to $384,613 in 2026. The Company decreased these expenses during the three months ended March 31, 2026, due to the reduction in advisory services specifically in the area of investment relations and the internalization of marketing efforts.

● Professional services remained fairly steady, decreasing by 5,649 or 3.4% in 2026.

● Compensation increased slightly from $1,730,440 in 2025 to $1,801,049 in 2026.

● Computer and internet costs decreased slightly to $253,053 in 2026 from $259,085 in 2025.

● Advertising and marketing costs increased to $29,922 in 2026 from $23,480 in 2025 primarily due to additional marketing of the Clearline platform.

● Insurance expense decreased to $258,616 in 2026 from $283,202 in 2025 primarily as a result of improved premium rates for the renewal of coverage.

● Other costs decreased to $424,209 in 2026 from $1,244,321in 2025 primarily due to the resolution of various taxes associated with the ACP and other company-wide cost-cutting measures.

Other (expense) income during the three months ended March 31, 2026 and 2025, consisted of the following:

		2026				2025
Interest, net		$	(881,908	)		$	(119,434	)
Change in fair value of derivative liability			30,241				-
Interest income			-				56,903
Other income			-				7,140
Total other (expense) income		$	(851,667	)		$	(55,391	)

Interest expense increased to $881,908 in 2026 from $119,434 in 2025 primarily due to additional notes entered into during the latter three quarters of 2025 and first quarter of 2026.

In connection with the issuance of a $6,999,999 convertible promissory note, the Company issued warrants to purchase 700,000 shares of common stock. The Company allocated a portion of the proceeds to the warrants based on their relative fair value, determined using the Black-Scholes option pricing model. The fair value of the warrants was estimated to be $207,640, which was recorded as a component of the total debt discount and is being amortized to interest expense over the term of the note.

In connection with the issuance of convertible promissory notes (Notes #7 and #8), in March 2026, the Company issued 375,000 common stock purchase warrants. These warrants contain certain cash settlement features triggered upon events of default or change of control and therefore do not qualify for equity classification. Accordingly, the warrants are accounted for as derivative liabilities. For the three months ended March 31, 2026 and 2025, the Company recorded a loss (gain) on the change in fair value of derivative liabilities of $30,241 and $0, respectively.

The Company invested excess cash in various instruments during 2025, resulting in interest, dividends, and gains resulting in an aggregate increase of $56,903 compared to $0 in 2026.

Equity Transactions for the Three Months Ended March 31, 2026

Stock Issued for Cash

Underwritten Public Offering

On January 20, 2026, the Company entered into an underwriting agreement with R.F. Lafferty & Co., Inc. for an underwritten public offering of 2,000,000 shares of common stock at a public offering price of $1.25 per share, for gross proceeds of approximately $2,500,000. 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 Company intends to use the net proceeds for expansion of its Lifeline business and for working capital and general corporate purposes.

In connection with the offering, the Company issued warrants to the underwriter to purchase a number of shares equal to 3.0% of the total shares sold (60,000 warrants - see table below), at an exercise price equal to 110% of the public offering price ($1.38/share). 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 in reliance on the exemption provided by Section 4(a)(2).

The offering was made pursuant to the Company's effective registration statement on Form S-3 (File No. 333-273110).

Stock Issued for Cash - At the Market Offering ("ATM")

The Company issued 7,323 shares of common stock for net proceeds of $14,375 ($1.98 - $2.03/share).

Stock Issued for Services

The Company issued 200,000 shares of common stock for services rendered, having a fair value of $334,000 ($1.67/share), based upon the quoted closing trading price.

Recognition of Stock Based Compensation - Restricted Stock Awards - Employees

The Company recognized $7,787 in compensation expense, related to the vesting of these awards.

Debt Discount - Convertible Notes Payable - Common Stock

During the year ended December 31, 2025, the Company issued 31,525 shares of common stock with an aggregate grant-date fair value of $54,828 to lenders as additional consideration in connection with the issuance of convertible notes payable. 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 using the effective interest method. 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 per 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.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2026, and December 31, 2025, our current assets were $8,208,310 and $6,979,766, respectively, and our current liabilities were $30,042,829 and $18,190,236, respectively, which resulted in a working capital deficit of $(21,834,519) 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.

Total assets at March 31, 2026 and December 31, 2025, amounted to $9,501,458 and $8,515,846, respectively, an increase of $985,612 from 2025 to 2026. The increase in total assets is a result of a slight increase in available cash and an increase in accounts receivable. At March 31, 2026, assets consisted of current assets of $8,208,310, net intangible assets of $655,776, and operating lease right of use asset of $260,694, 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 March 31, 2026, our total liabilities were $33,369,426 compared to total liabilities of $23,918,665 at December 31, 2025. This $9,450,761 increase was related to an increase in accounts payable and notes payable.

At March 31, 2026, our total stockholders' deficit was $(23,867,968) as compared to $(15,402,819) at December 31, 2025. The $(9,450,761) 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 three months ended March 31, 2026 and 2025.

		2026				2025
Net cash provided by or (used in) operating activities		$	(4,550,799	)		$	(6,963,484	)
Net cash used in investing activities			-				(18,590	)
Net cash provided by financing activities			4,953,749				(410,545	)
Net change in cash and cash equivalents		$	402,950			$	(7,392,619	)

Net cash used in operating activities for the three months ended March 31, 20256 and 2025, was primarily due to the net loss for the period.

There was no net cash used in investing activities in the three months ended March 31, 2026, and the net cash used in investing activities for the three months ending March 31, 2025 was primarily due to payment for leases.

Net cash received for financing activities for the three months ended March 31, 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 three months ended March 31, 2025 is primarily due to the repayment of debt.

At March 31, 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 July.

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.

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 Annual Report on Form 10-K, 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 three months ended March 31, 2026 and 2025, respectively, include, allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of loss contingencies, 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.

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"), and ASC 842, Leases ("ASC 842"). 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.

Stock Warrants

In connection with certain financing (debt or equity), consulting and collaboration arrangements, the Company may issue warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of warrants issued for compensation using the Black-Scholes option pricing model as of the measurement date. However, for warrants issued that meet the definition of a derivative liability, fair value is determined based upon the use of a binomial pricing model.

Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants (for services) are recorded at fair value and expensed over the requisite service period or at the date of issuance if there is not a service period.

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.