SurgePays, Inc.: Form 10-K for the period ended Dec 31, 2023

Company Overview and History

About SurgePays, Inc.

SurgePays, Inc. (“SurgePays”, “we”, the “Company”) is a financial technology and telecom company focused on providing these essential services to the underbanked community. We were previously known as North American Energy Resources, Inc. and KSIX Media Holdings, Inc. Prior to April 27, 2015, we operated solely as an independent oil and natural gas company engaged in the acquisition, exploration and development of oil and natural gas properties and the production of oil and natural gas through its wholly owned subsidiary, NAER. On April 27, 2015, NAER entered into a Share Exchange Agreement with KSIX Media whereby KSIX Media became a wholly owned subsidiary of NAER and which resulted in the shareholders of KSIX Media owning approximately 90% of the voting stock of the surviving entity. While we continued the oil and gas operations of NAER following this transaction, on August 4, 2015, we changed its name to KSIX Media Holdings, Inc. On December 21, 2017, we changed its name to Surge Holdings, Inc. to better reflect the diversity of its business operations. We changed our name to SurgePays, Inc. on October 29, 2020.

As described in more detail below, we currently operate in three different business segments through the following subsidiaries: (i) Surge Blockchain, LLC, formerly Blvd. Media Group, LLC, a Nevada limited liability company; (ii) LogicsIQ, Inc., a Nevada corporation; (iii) SurgePhone Wireless, LLC, a Nevada limited liability company; (iv) SurgePays Fintech, Inc., a Nevada limited liability company; (v) ECS Prepaid, LLC, a Missouri limited liability company and (vi) Torch Wireless, LLC a Wyoming limited liability company.

Our Business Segments

Mobile Virtual Network Operators

We provide mobile broadband (internet connectivity), voice and SMS text messaging to both subsidized and direct retail prepaid customers through SurgePhone Wireless, LLC and Torch Wireless, LLC, wholly owned subsidiaries of SurgePays. We consider this the Mobile Virtual Network Operators (MVNO) segment of our business. Further, we provide two types of MVNO’s, subsidized and non-subsidized. Our subsidized MVNO’s are licensed by the Federal Communications Commission (the “FCC”) to provide subsidized access to the internet through mobile broadband services to consumers qualifying under the federal guidelines of the Affordable Connectivity Program (the “ACP”). We provide these services by supplying consumers eligible for the ACP with tablet devices with mobile broadband capabilities for use in their homes. For providing mobile broadband on tablets to these eligible customers, the ACP (the successor program, as of March 1, 2022 to the Emergency Broadband Benefit program) reimburses us up to a $100 for the cost of each tablet device we distribute and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. SurgePhone and Torch combined are licensed to offer subsidized mobile broadband to all fifty states. Revenue from this portion of our business currently accounts for 86% of our total revenue. However, according to the FCC website, on February 7, 2024, the ACP stopped accepting new applications and enrollments and the ACP will cease to be funded after April 2024. The Company hopes that the program will be funded by Congress, however, at this time, we cannot predict any outcome.

Through our subsidiary LinkUp Mobile, we plan to roll-out in the second quarter of 2024 a non-subsidized portion of our MVNO business to leverage the volume of buying power we have with our subsidized subscriber base to build low-cost plans using SIM kits in convenience stores transacting on the SurgePays network. Our market will be to penetrate rural America where there is less competition and higher consumer pricing and offer incentivized family plans to the rapidly growing base of subsidized customer households. The revenue will be generated by subscribers paying a monthly fee for talk, text and data carrier services on a prepaid basis. If the ACP is not funded, we plan to competitively market our non-subsidized MVNO business to our current ACP customers and hope to be able to retain them as customers in this segment.

Comprehensive Platform Services

We provide financial technology and a wireless top-up platform to independently owned convenience stores throughout the country via our subsidiaries SurgePays Fintech, ECS Prepaid, LLC, Electronic Check Services, Inc. and Central States Legal Services, Inc. We consider these services the “Comprehensive Platform Services” segment of our business.

Specifically, our Comprehensive Platform Services provides ACH banking relationships and a fintech transactions platform that processes thousands of transactions a day at independently owned convenience stores. The Comprehensive Platform Service also provides wireless top-up transactions and wireless product aggregation for our nationwide network of convenience stores. By linking together the customer, the carrier plan and the convenience store to allow all parties to have one location to get what they need.

Our revenue is derived from the transaction that takes place when an individual using a prepaid cellular carrier plan needs to add more minutes to their cellular phone. These services are vital to convenience store operations and we believe we can utilize our relationships with convenience stores from our ACP services to expand the network for our Comprehensive Platform Services. The Company expects this segment to be the biggest percent of year-over-year revenue growth opportunity for 2024 and plans to hire a new head of sales for our Comprehensive Platform Service segment to tap into such growth opportunity.

Lead Generation

We refer to LogicsIQ, Inc. as the Lead Generation segment of our business. LogicsIQ is a lead generation and case management solutions company primarily serving law firms in the mass tort industry. Revenues from this segment of our business are earned from our lead generation retained services offerings and call center activities through CenterCom. Lead generation consist of sourcing leads, which requires us to drive traffic to our landing pages for a specific marketing campaign. We also achieve this in certain marketing campaigns by using third-party preferred vendors to meet the needs of our clients. Revenues are recognized at the time the lead is delivered to the client. If payment is received in advance of the delivery of services, it is included in deferred revenue, and subsequently recognized once the performance obligation has been completed. Retained service offerings consist of turning leads into a retained legal case. To provide this service to our customers, we qualify leads through verification of information collected during the lead generation process. Additionally, we further qualify these leads using a client questionnaire which assists in determining the services to be provided. The qualification process is completed using our call center operations.

In 2023, we decided to focus less on this segment of our business and the Company is in the process of determining how best this service fits into the overall plans of SurgePays. The Company still derived revenue from this segment of our business in 2023, however, we plan to make a final decision on whether to maintain or discontinue the Lead Generation segment of its business in the second quarter of fiscal year ended 2024.

Growth Strategies

We have different strategies for each of our current business segments:

Mobile Virtual Network Operators

Assuming the ACP is extended, we plan to do the following for the federally subsidized portion of our MVNO business:

• Prioritize sales channels with lower cost per subscriber acquisition.
• Continue to integrate Shockwave CRM and Clearline Mobile into our Comprehensive Platform Service software to enable ACP enrollments initiated from convenience stores.
• Integrate Shockwave CRM into existing ATM machines and Point of Sale registers to initiate ACP enrollments.
• Partner with existing regional distribution companies already provide consumable goods to convenient stores.
• Analyze attrition/retention data to continually monitor and improve customer experience with the goal of industry best retention.
• Increase the national sales team nationally.

We also plan to do the following for the non-subsidized MVNO portion of our MVNO business:

• Leverage the volume of buying power for wholesale carrier minutes/texts/data to build market low plans to offer customers using SIM kits in convenience stores transacting on the SurgePays network.
• Penetrate rural America where there is less competition and higher consumer pricing.
• Offer incentivized family plans to the rapidly growing base of subsidized customer households.

Comprehensive Platform Services

We plan to do the following for our Comprehensive Platform Services business:

• Build a national sales team of in-house salespeople, Independent Sales Organizations, Chain Retail Stores, and Distributors, all incentivized to add store locations and drive increased sales per store.
• Strategically acquire other companies that offer prepaid products and other complimentary fintech products. Integrating these acquisitions to an existing base of convenience stores allows us to deploy our comprehensive fintech suite to maximize the value of the existing relationships.
• Continue to add value driven products such as payment processing and consumer retail hard goods via our marketplace to differentiate our competitive advantage over single product companies and diversify our revenue streams.
• Create and offer our own MVNO products to all new and existing distribution channels adding further branding and revenue streams for SurgePays.

If the ACP is not funded, we will take the resources dedicated to the subsidized MVNMO business and move into the non-subsidized MVNO quicker than currently planned. We believe there is an opportunity to accomplish both goals, expand subscribers and add stores simultaneously. We also believe there is an opportunity to convert the subsidized subscribers into a non-subsidized plan. Those individuals currently utilizing the ACP may be looking for an alternative.

Lead Generation

We currently have no set plans on how to grow our Lead Generation business as we are making a final decision on whether to maintain or discontinue the Lead Generation segment of its business in the second quarter of fiscal year ended 2024.

Market Opportunity

Mobile Virtual Network Operators

Subsidized

As currently implemented, individuals are eligible for ACP if they are eligible for the following other government subsidized programs: (i) the Supplemental Nutrition Assistance Program (SNAP) in the United States, (ii) Medicaid, (iii) Supplemental Security Income (SSI), (iv) Federal Public Housing Assistance, (v) Women, Infants and Children Assistance and (vi) the Lifeline program. Accordingly, as of February 2024, the government estimated that 51.7 million households were eligible for the ACP. As of this same time, the government estimates that only 23.3 million households have enrolled in ACP to date. If ACP is funded, we believe that we can tap into the estimated 28.4 million households eligible for ACP that are not currently enrolled in the program.

Non-subsidized

If the ACP is not funded, we expect the subsidized market opportunity listed above could become the market opportunity for our non-subsidized prepaid phone and internet services we believe these households will look to continue with an MVNO. In addition to those individuals, as of December 12, 2023, there were approximately 330.8 million cell phone users in the United States. As of the end of 2021, approximately 36% of these cell phone users were using prepaid cell phones. Once we launch our non-subsidized MVNO’s, we hope to be able to entice some of these prepaid cell phone users to our products.

Comprehensive Platform Services

Our market opportunity for our Comprehensive Platform Services continues to be smaller convenience stores, bodegas, mercados and tiendas. As of December 31, 2023, there were 152,396 convenience stores operating across the United States. This represents a 1.5% increase from the store count in the previous year, reversing a four-year decline. We continue to expand our product portfolio to capitalize on market trends, changes in technology and new product releases. Based on available data for our served markets, we estimate that our market share of the convenience store sales business at this time is substantially less than 1% and we plan to utilize a new sales force to expand our customers in this market.

Marketing and Sales

We utilize different marketing methods for each segment of business that we operate. For the federally subsidized portion of our MVNO business, we utilize third parties to help identify potential customers for ACP and additional convenience stores where we can sell our ACP products. Additionally, we have a campaign where we utilize social media platforms to help identify potential customers for ACP and provide knowledge to individuals who are not aware that they are eligible for ACP so they can utilize our ACP services. We currently do not market for the non-subsidized portion of our MVNO business but we plan to move forward by marketing our business to families of those who are ACP eligible. Also, in the event that the ACP is not extended, we plan to utilize a marketing effort to get our current ACP clients to utilize our non-subsidized MVNO’s. For our Comprehensive Platform Services, we plan to hire a new head of sales to market our platform to their existing convenience store connections and create a national strategy to market our platform in rural areas that may not currently have the capabilities our platform can provide. In the past, we have utilized social media platforms to market to specific segment of the population to identify potential plaintiffs for our Lead Generation segment. However, we have stopped these campaigns as we decide the future of our Lead Generation business.

Competition

There are many competitors in the prepaid wireless and mobile broadband industry. We feel what makes SurgePhone different is we are a grassroots company with our products placed in convenience stores where the underbanked shop. We can offer prepaid wireless and financial services, through these stores, at a lower price to customers since we own the transaction software processing the activations and top-ups.

Many of our current and potential competitors are well established and have longer operating histories, significantly greater financial and operational resources, and name recognition than we have. Most traditional convenience store distributors are companies that have been in business for over 50 years and utilize the historical “manufacturing plant to truck to warehouse to truck to store” logistics model. However, we believe that with our diverse product line and better efficiencies, we have the ability to obtain a large market share and continue to generate sales growth and compete in the industry. We believe, in some cases, we will be able to partner with our competition through integration and compensate them for helping us grow due to the uniqueness of the suite of products we offer and the additional revenue stores can unlock. The principal competitive factors in all our product markets are technical features, quality, availability, price, customer support, and distribution coverage. The relative importance of each of these factors varies depending on the region. We believe using our direct store distribution model nationwide will open significant opportunities for growth.

The markets in which we operate can be generally categorized as highly competitive. In order to maximize our competitive advantages, we continue to expand our product portfolio to capitalize on market trends, changes in technology and new product releases. Based on available data for our served markets, we estimate that our market share of the convenience store sales business at this time is substantially less than 1%. A substantial acquisition would be necessary to meaningfully and rapidly change our market share percentage.

Distributors generally do not have a broad set of product and service offerings or capabilities, and no single distributor currently provides all the top selling consumables while offering products and services to enhance the lifestyle of the underbanked such as prepaid wireless, gift cards, bill payment and reloadable debit cards. We believe this creates a significant opportunity for a dynamic paradigm shift to a nationwide wholesale e-commerce platform.

Competitive Edge

Our competitive edge is simple: we have the ability through our software platform, along with our relationships, capacity, efficiency, economies of scale and experience necessary to bring our financial services and prepaid products to the underbanked market in an effective and efficient manner to ensure success. Our sales protocols have been tested and proven transferable from one product offering to another while ultimately improving our target stores with better pricing and more product selection.

Our strategy for increasing revenues is based on developing, maintaining, and expanding our nationwide network of retail stores. Our relationship-driven approach to selling along with providing many of the top selling c-store products at a wholesale discount greater than traditional distributors gives management confidence of continued growth into the foreseeable future.

We have established relationships with distribution companies delivering significant sales per day for our subsidized mobile broadband product.

Additionally, our management team consists of four executives with over 20 years in the wireless, underbanked and convenience store distribution industry while presiding over companies with substantial revenue. Our finance team is led by a CFO with a background in private equity backed and publicly traded companies ranging with substantial revenue.

Research and Development Activities

We conduct research and development on an ongoing basis, including new and existing products to offer and software product development to ensure we are delivering the most efficient, secure, and fast transactions at convenience stores. The SurgePays software platform is housed on the Amazon Web Service Cloud for redundancy, stability, and reliability. Traditionally, convenience stores are high volume and fast paced stores where space at the register is at a premium, thus leaving no room for a computer so wireless top-ups or cell phone activations are done over a Verifone terminal traditionally used for processing credit cards. We believe that our future success will depend in part upon our ability to continue the enhancement of our software platform through integrating with POS terminals, or more commonly referred to as “cash registers” while developing new products that meet or anticipate such changes in our served markets. Many of the stores we serve are now connected to the internet. This has allowed us to innovate our software to be more adaptive to equipment that is more compatible with the space constraints of the register area in a store. We are also closely watching the development of AI tools to see how they could help in support of our merchants and customers.

Seasonality

We experience some seasonality whereby the peak tax season months show a higher level of sales and consumption. However, the structure of our business and range of products in our portfolio mitigate any major fluctuations. Our revenue during the peak tax season months in the spring have historically been approximately 5% greater than the peak other months, and as our product portfolio continues to expand, the level of seasonal peaks we expect to diminish.

Employees, Affiliates and Exclusive Partners

As of March 10, 2024, our human capital resources consist of approximately twenty-two (22) SurgePays employees, providing accounting, finance, human resources, programming, sales and back office departments, a dedicated team of over forty (40) logistics, activation, and fulfilment personnel, and over two hundred (200) sales, customer service and back-office personnel located in El Salvador with our third-party relationship with CenterCom.

We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel and work strategically utilizing exclusive partners and affiliates to maximize cash flow. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees, advisors and consultants. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel through the granting of stock-based and cash-based compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives.

Corporate Information

Our executive offices are located at 3124 Brother Blvd, Suite 410, Bartlett, TN 38133, and our telephone number is (800) 760-9689. Our website is www.surgepays.com (http://www.surgepays.com). Our website and the information contained in, or accessible through, our website will not be deemed to be incorporated by reference into this Annual Report and does not constitute part of this Annual Report.

Investing in our securities involves a great deal of risk. Careful consideration should be made of the following factors as well as other information included in this Annual Report before deciding to purchase our securities. There are many risks that affect our business and results of operations, some of which are beyond our control. Our business, financial condition or operating results could be materially harmed by any of these risks. This could cause the trading price of our securities to decline, and you may lose all or part of your investment. Additional risks that we do not yet know of or that we currently think are immaterial may also affect our business and the results of operations.

Risks Related to Government Regulation and Legal Proceedings

The United States Government’s dissolution or reduction of the Affordable Connectivity Program (“ACP”) could have a substantial adverse effect on our current and planned business operations.

Since the introduction of the ACP, we have derived over 70% of our revenue from reimbursement payments from the federal government under the ACP. According to the Federal Communications Commission (the “FCC”) website, the government entity that oversees the ACP, the ACP is winding down and they have stopped accepting new applications and enrollments as of February 7, 2024. The FCC has also indicated that the last fully funded month of the ACP is April 2024 due to lack of additional funding from Congress. If the ACP is allowed to expire, as indicated that it will on the FCC website, the governmental agencies will reduce or cease reimbursement payments, which will have a substantial adverse effect on our business, financial condition, and operating results.

Furthermore, the percentage of revenue from our ACP business has been growing year over year while revenue from other business segments has been decreasing. If the ACP is not funded and we need to shift our focus to other business segments, there is no guarantee that we will be able to successfully do so, which will have a substantial adverse effect on our business, financial condition, and operating results.

Additionally, some of our growth plans for the non-ACP business segments of the Company are dependent on the growth of the ACP customers. Therefore, if the ACP business is not funded, we may lose the opportunity to expand our other business segments, which will have a substantial adverse effect on our business, financial condition, and operating results.

Changes in the regulatory framework under which we operate could adversely affect our business prospects or results of operations.

Our operations are subject to regulation by the FCC and other federal, state and local agencies. These regulatory regimes frequently restrict or impose conditions on our ability to operate in designated areas and provide specified products or services. We are frequently required to maintain licenses for our operations and conduct our operations in accordance with prescribed standards. We are often involved in regulatory and other governmental proceedings or inquiries related to the application of these requirements. It is impossible to predict with any certainty the outcome of pending federal and state regulatory proceedings relating to our operations, or the reviews by federal or state courts of regulatory rulings. Without relief, existing laws and regulations may inhibit our ability to expand our business and introduce new products and services. Similarly, we cannot guarantee that we will be successful in obtaining the licenses needed to carry out our business plan or in maintaining our existing licenses. For example, the FCC grants wireless licenses for terms generally lasting ten (10) years, subject to renewal. The loss of, or a material limitation on, certain of our licenses could have a material adverse effect on our business, results of operations and financial condition.

New laws or regulations or changes to the existing regulatory framework at the federal, state and local level, such as those described below, could restrict the ways in which we manage our wireline and wireless networks and operate our business, impose additional costs, impair revenue opportunities and potentially impede our ability to provide services in a manner that would be attractive to us and our customers.

• Privacy and data protection - we are subject to federal, state and international laws related to privacy and data protection.
• Regulation of broadband Internet access services - On June 11, 2018, the repeal of the FCC’s “net neutrality” rules took effect and returned to a “light-touch” regulatory framework. The prior rules were designed to ensure that all online content is treated the same by internet service providers and other companies that provide broadband services. Additionally, California and a number of other states are considering or have enacted legislation or executive actions that would regulate the conduct of broadband providers. We cannot predict whether the FCC order or state initiatives will be modified, overturned, or vacated by legal action of the court, federal legislation, or the FCC. With the repeal of net neutrality rules in effect, we could incur greater operating expenses, which could harm our results of operations.
• “Open Access” - we hold certain wireless licenses that require us to comply with so-called “open access” FCC regulations, which generally require licensees of a particular spectrum to allow customers to use devices and applications of their choice. Moreover, certain services could be subject to conflicting regulation by the FCC and/or various state and local authorities, which could significantly increase the cost of implementing and introducing new services.

The further regulation of broadband, wireless and our other activities and any related court decisions could restrict our ability to compete in the marketplace and limit the return we can expect to achieve on past and future investments in our networks.

We could be impacted by unfavorable results of legal proceedings, and may, from time to time, be involved in future litigation in which substantial monetary damages are sought.

We are currently subject to a number of litigations as described under the heading “Legal Proceedings.” In connection with certain of these litigations, we may be required to pay significant monetary damages. Defending against the current litigations is or can be time-consuming, expensive and cause diversion of our management’s attention.

In addition, we may from time to time be involved in future litigation in which substantial monetary damages are sought. Litigation claims may relate to intellectual property, contracts, employment, securities and other matters arising out of the conduct of our current and past business activities. Any claims, whether with or without merit, could be time-consuming, expensive to defend and could divert management’s attention and resources. We may maintain insurance against some, but not all, of these potential claims, and the levels of insurance we do maintain may not be adequate to fully cover any and all losses.

With respect to any litigation, our insurance may not reimburse us, or may not be sufficient to reimburse us, for the expenses or losses we may suffer in contesting and concluding such lawsuit. The results of any future litigation or claims are inherently unpredictable and substantial litigation costs, including the substantial self-insured retention that we are required to satisfy before any insurance applies to a claim, unreimbursed legal fees or an adverse result in any litigation may have a material adverse effect on our results of operations, cash from operating activities or financial condition.

Risks Related to Our Business, Industry and Operations

If we are not able to adapt to changes and disruptions in technology and address changing consumer demand on a timely basis, we may experience a decline in the demand for our services, be unable to implement our business strategy and experience reduced profits.

Our industries are rapidly changing as new technologies are developed that offer consumers an array of choices for their communications needs and allow new entrants into the markets we serve. In order to grow and remain competitive, we will need to adapt to future changes in technology, enhance our existing offerings and introduce new offerings to address our customers’ changing demands. If we are unable to meet future challenges from competing technologies on a timely basis or at an acceptable cost, we could lose customers to our competitors. We may not be able to accurately predict technological trends or the success of new services in the market. In addition, there could be legal or regulatory restraints on our introduction of new services. If our services fail to gain acceptance in the marketplace, or if costs associated with the implementation and introduction of these services materially increase, our ability to retain and attract customers could be adversely affected. Additionally, we must phase out outdated and unprofitable technologies and services. If we are unable to do so on a cost-effective basis, we could experience reduced profits. In addition, there could be legal or regulatory restraints on our ability to phase out current services.

We may expand through investments in, acquisitions of, or the development of new products with assistance from, other companies, any of which may not be successful and may divert our management’s attention.

In the past, we completed several strategic acquisitions. We also may evaluate and enter into discussions regarding an array of potential strategic transactions, including acquiring complementary products, technologies or businesses. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to be employed by us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. Moreover, we cannot assure you that the anticipated benefits of any acquisition, investment or business relationship would be realized timely, if at all, or that we would not be exposed to unknown liabilities. In connection with any such transaction, we may:

• encounter difficulties retaining key employees of the acquired company or integrating diverse business cultures;
• incur large charges or substantial liabilities, including without limitation, liabilities associated with products or technologies accused or found to infringe on third-party intellectual property rights or violate existing or future privacy regulations;
• issue shares of our capital stock as part of the consideration, which may be dilutive to existing stockholders;
• become subject to adverse tax consequences, legal disputes, substantial depreciation or deferred compensation charges;
• use cash that we may otherwise need for ongoing or future operation of our business;
• enter new geographic markets that subject us to different laws and regulations that may have an adverse impact on our business;
• experience difficulties effectively utilizing acquired assets;
• encounter difficulties integrating the information and financial reporting systems of acquired businesses, particularly those that operated under accounting principles other than those generally accepted in the U.S. prior to the acquisition by us; and
• incur debt, which may be on terms unfavorable to us or that we are unable to repay.

We have undertaken in the past, and may in the future undertake, strategic acquisitions. Failure to integrate acquisitions could adversely affect our value.

One of the ways we have grown our business in the past is through strategic acquisitions of other businesses, products, and technologies. We may, from time to time, evaluate additional acquisition opportunities, and may, in the future, strategically make further acquisitions of, and investments in, businesses, products and technologies when we believe the opportunity is advantageous to our prospects, such as the acquisition of Clearline Mobile, Inc (“Clearline”). There can be no assurance that in the future we will be able to find appropriate acquisitions or investments. In connection with these acquisitions or investments, we may:

• issue stock that would dilute our shareholders’ percentage of ownership;
• be obligated to make milestone or other contingent or non-contingent payments;
• incur debt and assume liabilities; and/ or
• incur amortization expenses related to intangible assets or incur large and immediate write-offs.

We also may be unable to find suitable acquisition candidates and may not be able to complete acquisitions on favorable terms, if at all, or obtain adequate financing for such acquisitions. If we do complete an acquisition, such as with Clearline, we may not be able to successfully integrate the acquired business into our preexisting business, and we may not ultimately strengthen our competitive position or ensure that we will not be viewed negatively by customers, financial markets or investors. Further, acquisitions could also pose numerous additional risks to our operations, including:

• problems integrating the purchased business, products or technologies without substantial costs, delays or other problems;
• increases to our expenses;
• the failure to have discovered undisclosed liabilities of the acquired asset or company for which we may not be adequately indemnified;
• diversion of management’s attention from their day-to-day responsibilities and our core business;
• inability to enforce indemnification and non-compete agreements;
• the failure to successfully incorporate acquired products or technologies into our business;
• the failure of the acquired business, products or technologies to perform as well as anticipated;
• the failure to realize expected synergies and cost savings;
• harm to our operating results or financial condition, particularly during the first several reporting periods after the acquisition is completed;
• entrance into markets in which we have limited or no prior experience; and
• potential loss of key employees or customers, particularly those of the acquired entity.

Our business could be adversely affected if we fail to implement and maintain effective disclosure controls and procedures and internal control over financial reporting.

If we are unable to maintain effective disclosure controls and procedures, or if there are identified significant deficiencies or material weaknesses in the future, our ability to produce accurate and timely financial statements and public reports could be impaired, which could adversely affect our business and financial condition. In addition, investors may lose confidence in our reported information and the market price of our Common Stock may decline.

Our success is substantially dependent on the continued service of our senior management.

Our success is substantially dependent on the continued service of our Chief Executive Officer (“CEO”), Kevin Brian Cox and our Chief Financial Officer (“CFO”), Anthony Evers. We do not carry key person life insurance on any of its management, which would leave us uncompensated for the loss of any of its management. The loss of the services of any of our senior management could make it more difficult to successfully operate our business and achieve our business goals. In addition, competition in our industry for senior management and other key personnel is intense. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, either because of competition in our industry for such personnel or because of insufficient financial resources, our product development capabilities and customer and employee relationships growth may be harmed and overall growth may be limited.

We offer competitive compensation packages in order to retain the services of our senior management, and we could be required to pay significant compensation payments in the case we are unable to retain our senior management.

As the continued employment of our executive officers is critical to the Company’s success, we have entered into competitive employment agreements in order to retain the services of our existing officers. In addition to guaranteed base compensation, we have offered our CEO incentive compensation upon the Company’s completion of milestones including achieving certain annual revenue, annual EBITDA, and market capitalization goals, that could require the Company to pay large equity grants for the achievement of each milestone completed.

In the case our CEO were to terminate their employment agreement due to breach of contract, a substantial downturn in the Company’s business or personnel, a reduction in officer’s role, responsibilities, or compensation, or significant change in the Company’s location of business and operations, the Company would be required to pay a severance package that, in combination with the compensation that would need to be paid to a replacement executive, could have a severe strain on the Company’s finances.

We may not have sufficient resources to effectively introduce and market our services and products, which could materially harm our operating results.

Continuation of market acceptance for our existing services and products require substantial marketing efforts and will require our sales account executives and contract partners to make significant expenditures of time and money. In some instances, we will be significantly or totally reliant on the marketing efforts and expenditures of our contract partners, outside sales agents and distributors.

Because we currently have very limited marketing resources and sales capabilities, commercialization of our products, some of which require regulatory clearance prior to market entrance, we must either expand our own marketing and sales capabilities or consider collaborating with additional third parties to perform these functions. We may, in some instances, rely significantly on sales, marketing and distribution arrangements with collaborative partners and other third parties. In these instances, our future revenue will be materially dependent upon the success of the efforts of these third parties.

Should we determine that expanding our own marketing and sales capabilities is required, we may not be able to attract and retain qualified personnel to serve in our sales and marketing organization, to develop an effective distribution network or to otherwise effectively support our commercialization activities. The cost of establishing and maintaining a more comprehensive sales and marketing organization may exceed its cost effectiveness. If we fail to further develop our sales and marketing capabilities, if sales efforts are not effective or if costs of increasing sales and marketing capabilities exceed their cost effectiveness, our business, results of operations and financial condition would be materially adversely affected.

We operate in a highly competitive industry.

We may encounter competition from local, regional or national entities, some of which have superior resources or other competitive advantages in the larger wireless services space. Intense competition may adversely affect our business, financial condition or results of operations. These competitors may be larger and more highly capitalized, with greater name recognition. We will compete with such companies on brand name, quality of services, level of expertise, advertising, product and service innovation and differentiation of product and services. As a result, our ability to secure significant market share may be impeded.

Risks Related to Our Securities

Our CEO and Chair, Kevin Brian Cox, has significant control over shareholder matters and the minority shareholders will have little or no control over our affairs.

Mr. Cox currently owns approximately 28.5% of our outstanding voting equity. Subject to any fiduciary duties owed to our other stockholders under Nevada law, Mr. Cox is able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have some control over our management and policies. Mr. Cox may have interests that are different from yours. For example, Mr. Cox may support proposals and actions with which you may disagree. The concentration of ownership could delay or prevent a change in control of our Company or otherwise discourage a potential acquirer from attempting to obtain control of our Company, which in turn could reduce the price of our stock. In addition, Mr. Cox could use his voting influence to maintain our existing management and directors in office, delay or prevent changes in control of our Company, or support or reject other management and proposals of the Board of Directors (the “Board”) that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.

Sales of a significant number of shares of our Common Stock in the public market or the perception of such possible sales, could depress the market price of our Common Stock.

Sales of a substantial number of shares of our Common Stock in the public markets, which include an offering of our preferred stock or Common Stock could depress the market price of our Common Stock and impair our ability to raise capital through the sale of additional equity or equity-related securities. We cannot predict the effect that future sales of our Common Stock or other equity-related securities would have on the market price of our Common Stock.

Our share price could be volatile and our trading volume may fluctuate substantially.

The price of our Common Stock has been and may in the future continue to be extremely volatile. Many factors could have a significant impact on the future price of our shares of Common Stock, including:

• our inability to raise additional capital to fund our operations, whether through the issuance of equity securities or debt;
• our failure to successfully implement our business objectives;
• compliance with ongoing regulatory requirements;
• market acceptance of our products;
• changes in government regulations;
• the discontinuation of the ACP program;
• actual or anticipated fluctuations in our quarterly financial and operating results; and
• the degree of trading liquidity in our shares of Common Stock.

A decline in the price of our shares of Common Stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.

The decline in the price of our shares of Common Stock, could result in a reduction in the liquidity of our Common Stock and a reduction in our ability to raise capital. Because a significant portion of our operations has been and will continue to be financed through the sale of equity securities, a decline in the price of our shares of Common Stock could be especially detrimental to our liquidity and our operations. Such reductions and declines may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plans and operations, including our ability to continue our current operations. If the price for our shares of Common Stock declines, it may be more difficult to raise additional capital. If we are unable to raise sufficient capital, and we are unable to generate funds from operations sufficient to meet our obligations, we will not have the resources to continue our operations.

The market price for our shares of Common Stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our shares of Common Stock.

We currently do not intend to pay dividends on our Common Stock. As result, your only opportunity to achieve a return on your investment is if the price of our Common Stock appreciates.

We currently do not expect to declare or pay dividends on our Common Stock. In addition, in the future we may enter into agreements that prohibit or restrict our ability to declare or pay dividends on our Common Stock. As a result, your only opportunity to achieve a return on your investment will be if the market price of our Common Stock appreciates and you sell your shares at a profit.

We could issue additional Common Stock, which might dilute the book value of our Common Stock.

The Board has authority, without action or vote of our shareholders, to issue all or a part of our authorized but unissued shares. Such stock issuances could be made at a price that reflects a discount or a premium from the then-current trading price of our Common Stock. In addition, in order to raise capital, we may need to issue securities that are convertible into or exchangeable for our Common Stock. These issuances would dilute the percentage ownership interest, which would have the effect of reducing your influence on matters requiring shareholders vote and might dilute the book value of our Common Stock. You may incur additional dilution if holders of stock warrants or options, whether currently outstanding or subsequently granted, exercise their options, or if warrant holders exercise their warrants to purchase shares of our Common Stock.

Future Issuance of Our Common Stock, Preferred Stock, Options and Warrants Could Dilute the Interests of Existing Stockholders.

We may issue additional shares of our Common Stock, preferred stock, options and warrants in the future. These issuances may include substantial milestone-based issuances of securities to our executive officers as described in Item 11 of this Annual Report under the heading “Employment Agreements.” The issuance of a substantial amount of Common Stock, options and warrants could have the effect of substantially diluting the interests of our current stockholders. In addition, the sale of a substantial amount of Common Stock or preferred stock in the public market, or the exercise of a substantial number of warrants and options either in the initial issuance or in a subsequent resale by the target company in an acquisition which received such Common Stock as consideration or by investors who acquired such Common Stock in a private placement could have an adverse effect on the market price of our Common Stock.

Cybersecurity Risk Management and Strategy

We have developed and maintain a cybersecurity risk management methodology intended to protect the confidentiality, integrity, and availability of our critical systems and information. Our cybersecurity risk management methodology is integrated into our overall enterprise risk management, and shares common methodologies, reporting channels and governance processes that apply across the Company to other legal, compliance, strategic, operational, and financial risk areas. As part of our overall risk management processes and procedures, we have instituted a cybersecurity awareness designed to identify, assess and manage material risks from cybersecurity threats, including by engaging a third-party cybersecurity service provider, which communicates directly with our management and compliance personnel. The cyber risk management methodology involves risk assessments, implementation of security measures and ongoing monitoring of systems and networks, including networks on which we rely. Through our cybersecurity awareness, the current threat landscape is actively monitored in an effort to identify material risks arising from new and evolving cybersecurity threats. We may engage external experts, including cybersecurity assessors, consultants and auditors to evaluate cybersecurity measures and risk management processes as needed. We also depend on and engage various third parties, including suppliers, vendors and service providers in connection with our operations. Our risk management, legal, and compliance personnel oversee and identify, including through a third-party cybersecurity service provider, material risks from cybersecurity threats associated with our use of such entities.

Our cybersecurity risk management methodology includes:

• risk assessments designed to help identify material cybersecurity risks to our critical systems, information, services, and our broader enterprise IT environment;
• individuals, including employees and external third-party service providers, who are responsible for managing our cybersecurity risk assessment processes, our security controls, and our response to cybersecurity incidents;
• the use of external service providers, where appropriate, to assess, test or otherwise assist with aspects of our security controls;
• cybersecurity awareness training of our employees, incident response personnel, and senior management;
• a cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents; and
• a third-party risk management process for service providers, suppliers, and vendors.

We have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected us, including our operations, business strategy, results of operations, or financial condition. We face risks from cybersecurity threats that, if realized, are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition.

Cybersecurity Governance

Our Board provides strategic oversight on cybersecurity matters, including material risks associated with cybersecurity threats. The Board has delegated to the Audit Committee oversight of cybersecurity and other information technology risks. The Audit Committee oversees management’s implementation of our cybersecurity risk management methodology. Our Board and the Audit Committee receives periodic updates from our Chief Financial Officer and more frequently as needed, regarding the overall state of our cybersecurity preparedness, information on the current threat landscape, and material risks from cybersecurity threats and cybersecurity incidents. The Audit Committee and our management team are informed about and monitor the prevention, detection, mitigation, and remediation of cybersecurity incidents, including through the receipt of notifications from third-party service providers and reliance on communications with our risk management, legal, and/or compliance personnel.

The Audit Committee reports to the full Board regarding cybersecurity activities. The full Board also receives briefings from management on cyber risk issues and best practices. Our management team is responsible for assessing and managing our material risks from cybersecurity threats. The team has primary responsibility for developing and maintaining our overall cybersecurity risk methodology and supervises both our internal cybersecurity personnel and our retained external cybersecurity consultants. Our management team supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us; and alerts and reports produced by security tools deployed in the information technology environment.

We presently occupy space at 3 locations: 3124 Brother Blvd, Suite 410, Bartlett, TN 38133 (this building is owned by an entity owned by Mr. Cox, our CEO and Chair), which houses our corporate headquarters along with back office, inventory and marketing departments, 1375 E Woodfield Road, Schaumburg IL 60173, which houses our finance and human resources departments, and 1615 S Ingram Mill, Building B, Springfield, Missouri 65804, which houses our Comprehensive Platform Services technical operations.

See pages F-25 - F-27 for detailed lease information.

We will acquire additional office space as needed.

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The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth in “Part I – Item 1A. Risk Factors.”

Business Overview

We were incorporated in Nevada on August 18, 2006 and a technology and telecommunications company focused on the underbanked and underserved communities.

Our Mobile Virtual Network Operators consisting of SurgePhone Wireless and Torch Wireless provide mobile broadband (internet connectivity) to low-income consumers nationwide. Our Comprehensive Platform Services consisting of SurgePays Fintech, ECS Prepaid, LLC, Electronic Check Services, Inc. and Central States Legal Services, Inc. provides ACH banking relationships and a fintech transactions platform that processes thousands of transactions a day independently owned convenience stores. We are aggressively pursuing the underbanked market directly to the consumer and in the stores they shop.

Please see the description in Item 1 of this Annual Report for a description of our Mobile Virtual Network Operators, Comprehensive Platform Services and Lead Generation business segments.

COMPARISON OF YEAR ENDED DECEMBER 31, 2023 AND 2022

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), Comprehensive Platform Service (Top-up) and Lead Generation. The MVNO segment is further broken down into subsidized and non-subsidized components. The subsidized component or ACP is the result of the mobile broadband (internet connectivity) services provided by SurgePhone Wireless and Torch Wireless to low-income consumers and accounts for the majority of our revenue. The Comprehensive Platform Service segment is comprised of Surge Fintech and ECS as previously shown. The Lead Generation is comprised of LogicsIQ 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 and Geographic Data of the Notes to Financial Statements.

Revenues during the years ended December 31, 2023 and 2022 consisted of the following:

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Revenue increased overall by $15,597,642 (12.8%) from year ended December 31, 2022 to year ended December 31, 2023. The breakout was as follows:

Mobile Virtual Network Operators consisting of SurgePhone Wireless and Torch Wireless revenues (as detailed in Notes 2 and 10 of the financial statements) increased by $30,226,373 (34.2%) relating to the additional revenue stream generated by the increase in subscribers to over 260,000 at the end of 2023 from 200,000 at the end of 2022 since ACP started in August of 2021. According to the FCC website, on February 7, 2024, the ACP stopped accepting new applications and enrollments and the ACP will cease to be funded after April 2024.

Lead Generation services consisting of LogicsIQ revenues decreased by $9,576,373 as a result of operational changes by management in 2023. The Company is still in the process of determining how best this service fits into the overall plans of SurgePays.

Comprehensive Platform Services revenues decreased by $4,977,893 as a result of focusing our efforts on our MVNO segment, specifically the ACP component of the MVNO segment while we strategized on how to enhance our sales and on-boarding approach to adding convenience stores to our platform. The Company expects this segment to be the biggest percent of year-over-year revenue growth opportunity for 2024 and plans to hire a new head of sales for our Comprehensive Platform Service segment to tap into such growth opportunity.

If the ACP is fully funded, we expect revenue to grow overall for the Company in 2024 and we will be focusing our business efforts on the continued growth of our Mobile Virtual Network Operators and rolling out a new sales approach for the Comprehensive Platform Service segments. Specifically, we plan to grow our Comprehensive Platform Service business by increasing our subscriber base and active store counts in 2024 by hiring a new head of sales. Our planned new head of sales has substantial experience and connections with convenience stores that we believe can be added to our platform services. However, if the ACP is not renewed, we expect revenue for the Company in 2024 to substantially decrease because ACP reimbursement we derive a substantial portion of our revenue from the ACP. Additionally, the Company plans to make a final decision on whether to maintain or discontinue the Lead Generation segment of its business in the second quarter of fiscal year ending 2024.

Cost of Revenue, Gross Profit and Gross Margin

For the year of 2023, cost of revenue for services primarily consists of data plan expenses ($28,612,000), devices ($28,476,000), marketing and advertising ($23,227,000), and other expenses such as royalties and call-center expenses ($3,604,000). For the year of 2022, cost of revenue for services primarily consists of data plan expenses ($21,056,000), devices ($35,313,000), marketing and advertising ($17,449,000), and other expenses such as royalties and call-center expenses ($2,312,000).

We expect that our cost of revenue will increase or decrease to the extent that our revenue increases and decreases.

The Company expects to continue the improvement of gross margin in the MVNO segment, assuming the ACP program if fully funded for 2024. The Company expects the overall cost to acquire a new ACP subscriber will decrease in 2024 as we introduce new social media approaches to capture new subscribers. We anticipate the cost of device acquisition will continue to be lower in 2024 as we transition from buying devices to using SIM cards to capture and switch subscribers to our services. As we roll out new approaches to acquire an ACP subscriber, our marketing-related expenses should decrease.

In addition, the Company plans to implement a new sales force for Comprehensive Platform Services to capture what we believe is an untapped underbanked convenience store market.

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 in future periods will vary based upon our revenue stream mix and may increase based upon our distribution channels.

The Company expects to continue the improvement of gross margin in all segments, assuming the ACP program is fully funded for 2024.

For the Years Ended December 31,

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We expect that our gross profit margin for product and service will increase over the long term as our sales and production volumes increase and our cost per unit decreases due to efficiencies of scale.

General and administrative during the years ended December 31, 2023 and 2022 consisted of the following:

The increase in depreciation and amortization costs for 2023 is the result of capitalizing costs associated with software enhancements to our various software platforms in 2023.

Selling, general and administrative expenses during the years ended December 31, 2023 and 2022 consisted of the following:

Selling, general and administrative costs (S, G & A) increased by $3,808,978 (32.0%). The changes are discussed below:

• Contractors and consultants expense increased by $1,048,589 or 62.9% from $1,667,016 in 2022 to $2,715,605 in 2023. The Company engaged several contractors to overhaul the financial platform to allow for the conversion to a tablet-based transaction at the store level from the outdated VeriFone terminal. The Company also engaged with consultants to provide advisory services specifically in the area of investment relations to identify opportunities to increase our shareholder value.
• Professional services increased $745,274 or 61.9% in 2023 primarily due to an increase in legal fees of $599,535. Specifically, the legal fees for the Blue Skies Connections, LLC litigation increased by $199,153 from 2022 to 2023.
• Compensation increased from $4,780,885 in 2022 to $6,342,955 in 2023 primarily as a result of one-time bonuses paid to various management personnel and the implementation of an employee stock program in 2023. There was a non-cash component for $576,625 related to the implementation of a stock option plan for all employees except the executives. The overall cash payment to executives increased by less than 10% year over year. The remaining increase in 2023 was related to additional hires over the course of 2022.
• Computer and internet costs increased to $858,041 in 2023 from $403,583 in 2022. The increase was primarily the result of increased internet support services and database management costs. A significant portion of the increase was related to the continued maintenance and enhancements of the shockwave software platform. In 2022, the expenses for the Shockwave software represented only a 6-month period of time whereas the 2023 activity includes 12 months of similar expenses.
• Advertising and marketing costs decreased to $152,851 in 2023 from $259,393 in 2022 primarily as a result of a shift from marketing-oriented vendors to investor relation type vendors. This also relates to the increase in the overall spending with contractors and consultants to try to obtain new ACP customers through direct marketing efforts to individuals and social media marketing efforts to educate individuals that they may be eligible for ACP.
• Insurance expense decreased to $1,249,556 in 2023 from $1,535,687 in 2022 primarily as a result of improved premium rates for the renewal of coverage in 2023.
• Other costs increased to $2,444,593 in 2023 from $2,061,100 in 2022 primarily due to an increase in the vesting of options for the board of directors and cybersecurity insurance premiums, as well as various administrative expenses such as office, building, travel and bank fees.

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Other (expense) income during the years ended December 31, 2023 and 2022 consisted of the following:

Interest expense decreased to $595,975 in 2023 from $1,843,396 in 2022 primarily due to the payoff of various debt instruments in 2023.

The equity investment in Centercom, an unconsolidated subsidiary of the Company in which we are a minority owner, increased by $110,203 in 2023 compared to a decrease of $89,082 in 2022.

During 2022, the Company received a forgiveness on a PPP loan totaling $524,143, of which $518,167 was for principal and $5,976 for accrued interest. The Company recorded this forgiveness as other income in the accompanying consolidated statements of operations.

Equity Transactions for the Year Ended December 31, 2023

Stock Issued for Services

The Company issued 242,615 shares of common stock for services rendered, having a fair value of $1,290,024 ($4.19 - $9.40/share), based upon the quoted closing trading price. All of these shares are for consultants based upon agreements.

Exercise of Warrants

The Company issued 43,814 shares of common stock in June 2023 upon an exercise of warrants with an exercise price of $4.73 for $207,240.

Non-Vested Shares – Related Parties

Chief Financial Officer

In 2023, the Company granted common stock to its Chief Financial Officer having a fair value of $3,114,000 ($5.19/share), based upon the quoted closing trading price. The vesting schedule is as follows:

For the year ended December 31, 2023, the Company recognized stock compensation expense of $486,242 related to vesting.

Board Directors

In 2023, the Company granted an aggregate 95,000 shares of common stock to various members of the Board of Directors, having a fair value of $519,500 ($5.14 - $5.53/share), based upon the quoted closing trading price.

The shares will vest at the earlier to occur:

• Board Member no longer serves in that capacity for any reason, except for reasons related to cause,
• Occurrence of a change in control; and
• Fifth anniversary of the effective date (2028)

The Company records stock compensation expense over the five (5) year vesting period. All shares are expected to vest in accordance with the terms of the service agreement.

For the year ended December 31, 2023, the Company recognized stock compensation expense of $43,292 related to vesting.

For the year ended December 31, 2023, total related stock compensation expense due to vesting was $529,534.

Equity Transactions for the Year Ended December 31, 2022

Stock Issued as Direct Offering Costs

The Company issued 200,000 shares of common stock for services rendered in connection with the listing of our common stock on the Nasdaq Capital Market 2021. As a result, the Company recorded the par value of the common stock issued with a corresponding charge to additional paid-in capital, resulting in a net effect of $0 to stockholders’ equity.

Stock Issued for Acquisition of Software

The Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash and the Company issued 85,000 shares of common stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.

Exercise of Warrants (Cashless)

The Company issued 147,153 shares of common stock in connection with the cashless exercise of 498,750 warrants. These transactions had a net effect of $0 on stockholders’ equity.

Exercise of Warrants

The Company issued one hundred (100) shares of common stock in connection with an exercise of one hundred (100) warrants at an exercise price of $4.73 per share for proceeds of $473.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2023 and 2022, our current assets were $33,366,661 and $27,563,785, respectively, and our current liabilities were $12,705,044 and $23,464,062, respectively, which resulted in a working capital surplus of $20,661,617 and of $4,099,723, respectively. The increase in current assets is a result of expansion of the Affordable Connectivity Program, whereby cash increased by $7,586,406.

Total assets at December 31, 2023 and 2022 amounted to $41,925,307 and $34,003,506, respectively. The increase in total assets is a result of the expansion of the Affordable Connectivity Program, whereby cash increased by $ 7,586,406 and inventory decreased by $2,139,648. Total assets increased by $7,921,801 from December 31, 2022 to December 31, 2023. At December 31, 2023, assets consisted of current assets of $33,366,661, net property and equipment of $361,841, net intangible assets of $2,126,470, goodwill of $1,666,782, equity investment in Centercom of $464,409, note receivable of $176,851, internal use software of $539,424, operating lease right of use asset of $387,869, and deferred income taxes of $2,835,000 compared to current assets of $27,563,785, net property and equipment of $643,373, net intangible assets of $2,779,977, goodwill of $1,666,782, equity investment in Centercom of $354,206, note receivable of $176,851, internal use software of $387,180, and operating lease right of use asset of $431,352.

At December 31, 2023, our total liabilities were $13,521,843 compared to total liabilities of $28,885,253 at December 31, 2022. This $15,363,410 decrease was related to the repayment during 2023 of the installment sales liability of $13,018,184 at December 31, 2022.

At December 31, 2023, our total stockholders’ surplus was $28,403,464 as compared to $5,118,253 at December 31, 2022.

The Company’s cash position on February 29, 2024 was approximately $40,500,000. This position was due to a capital raise we conducted in mid-January, resulting in net proceeds of approximately $13,700,000 (2,678,571 shares of common stock) and the allotment exercise in mid-February for an additional $2,000,000 (401,785 shares of common stock). Additionally, the Company has seen a steady flow of tradeable warrants being exercised as of the new year. In January 2024, 4,125 warrants were exercised at $4.73 for cash proceeds of $19,511 and in February 2024, 1,773,606 warrants were exercised at $4.73 for cash proceeds of $8,389,156. The outstanding warrant balance as of February 29, 2024 is 3,468,355. As long as the tradeable warrants are in the money, the Company expects to see continued exercise of warrants for the remainder of the year, as these tradeable warrants expire in early November 2024.

Additionally, on March 12, 2024, the Company entered into an amended and restated promissory note (the “Amended Note”) with SMDMM Funding, LLC, a Company owned and controlled by our CEO, with which the Company currently has two outstanding notes, one in the original principal amount of $1,108,150.31 that was due on December 31, 2023 (the “One Year Note”), and another in the original principal amount of $4,026,413.00 due on December 31, 2024 (the “Two Year Note”). The Amended Note consolidated the One Year Note and Two Year Note into one note with outstanding principal of $4,758,088.74 and sets the principal and established interest to be paid over the course of thirty-three equal monthly payments beginning March 31, 2024, and ending December 31, 2026. Assuming we do not take on additional debt, this will effectively eliminate the debt from the balance sheet by the end of 2026. There will remain an SBA long-term note with favorable terms for approximately $460,000.

We also expect the positive operating income results of 2023 to continue into 2024, assuming the ACP program is fully funded for the remainder of 2024. The Company has contingency plans in place if the funding is delayed or not approved. While this event would impact all aspects of the Company, we believe the current cash position would be sufficient to bridge the gap as we continued our efforts to grow other parts of the Company. The gross margins for each segment of the Company are also expected to improve over the course of 2024, assuming the ACP program is fully funded for the remainder of 2024. The Company believes there continues to be operating and logistic savings to be implemented during 2024, directly impact our cost to acquire subscribers and manage the relationship with the convenience store base.

The following table sets forth the major sources and uses of cash for the years ended December 31, 2023 and 2022.

As a result of net positive cash provided by operating activities in 2023, the cash increased in 2023 by $7,586,406, compared to an increase of cash increase provided in operations of $793,272 in 2022.

At December 31, 2022, the Company had the following material commitments and contingencies.

**Cash requirements and capital expenditures –**At the current level of operations, the Company does not anticipate borrowing funds to meet basic operating costs. Based on the current financial position of the Company, even if the ACP program is delayed or not funded in 2024, we have sufficient resources for the next twelve months.

Known trends and uncertainties – The Company is planning to acquire other businesses with similar business operations. The uncertainty of the economy and program funding for the ACP program may delay the planned business expansion.

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 years ended December 31, 2023 and 2022, 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.

Inventory Valuation

Inventory is stated at the lower of cost or net realizable value (first-in, first-out method). For items manufactured by third parties, cost is determined using the weighted average cost method (WAC). We write down inventory when it has been determined that conditions exist that may not allow the inventory to be sold for at the intended price or the inventory is determined to be obsolete based on assumption about future demand and market conditions. The charge related to inventory write-downs is recorded as cost of goods sold. We evaluate inventory at least annually and at other times during the year. We have incurred and may in the future incur charges to write down inventory.

Internal Use Software Development Costs

We capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not meet the qualification for capitalization, as further discussed below, are expensed as incurred and recorded in general and administrative expenses in the consolidated results of operations.

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.

a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2023, our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15. Management identified no material weaknesses in our internal control over financial reporting. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.

b) Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer and chief financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Management conducted an evaluation of the effectiveness of our control over financial reporting based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2023. During the year ended December 31, 2023, management identified no weaknesses.

Pursuant to Regulation S-K Item 308(b), as the Company is not an accelerated filer nor a large accelerated filer, this Annual Report does not include an attestation report of our company’s registered public accounting firm regarding internal control over financial reporting.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.

c) Changes in Internal Control over Financial Reporting

During the year ended December 31, 2023, 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 materially affect, on our internal control over financial reporting.