SurgePays, Inc.: Form 10-Q for the period ended Sep 30, 2024

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 September 30, 2024 and 2023 and for the three months and nine months then ended includes the accounts of SurgePays, Inc. and its wholly owned subsidiaries during the period owned by SurgePays, Inc.

SurgePays, Inc (“SurgePays,” “we” the “Company”) was incorporated in Nevada on August 18, 2006, is a technology and telecom company focused on the underbanked and underserved communities. SurgePays fintech platform empowers clerks at thousands of convenience stores to provide a suite of prepaid wireless and financial products to underbanked customers.

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. Prior to the expiration of the Affordable Connectivity Program (the “ACP”) on June 1, 2024, we provided two types of MVNO’s, subsidized and non-subsidized. Our subsidized MVNO’s were 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 ACP. We provided these services by supplying consumers who were 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, until June 1, 2024, the ACP reimbursed us up to a $100 for the cost of each tablet device we distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. Revenue from this portion of our business for the three months ended September 30, 2024 accounted for 2% of our total revenue as compared to 90% for the three months ended September 30, 2023. Revenue from this portion of our business for the nine months ended September 30, 2024 accounted for 80% of our total revenue as compared to 85% for the nine months ended September 30, 2023. However, due to a lack of additional funding from Congress, April 2024 was the last month ACP households received the full ACP discount, as they had received in prior months, with some ACP households receiving a partial ACP discount in May 2024 if their provider elected to participate in the May partial reimbursement month, as we did. Effective June 1, 2024, households will no longer receive an ACP discount, and therefore until new or alternative funding for this program is available, we expect revenue for the remainder of 2024 to substantially decrease as the ACP reimbursement was a substantial portion of the Company’s revenue. Despite the expiration of ACP, we have decided to continue to provide broadband capabilities on our tablets to our previously subsidized customers with the belief that the ACP or a similar government program will be approved in the near future.

As a transition strategy moving forward, we decided to keep the existing base of subscribers from the former ACP enrolled in our network through September 30, 2024 and beyond. We believe it would have been an easy, though short-sighted, decision to de-enroll these subscribers once the ACP funding ran out because we have a built-in subscriber base of 250,000 and a distribution network of thousands of local convenience stores and bodegas where our consumers shop every day. We believe these are huge and valuable assets and to hold on to these valuable assets during this transition period, we chose to keep our subscribers active, absorb the wholesale costs, averaging around $7-10 per subscriber per month, and put our strong balance sheet to work to replace the cash inflow we lost once ACP funding ran out. We believe this plan will allow us to maintain our current customer base if ACP returns or will allow us to utilize Lifeline.

The Company signed a Master Services Agreement (MSA) with TerraCom, Inc. (“TerraCom”), a wireless service provider and licensed Lifeline provider, effective October 3, 2024. We will execute the strategy of offering Lifeline to our existing ACP subscriber base. This agreement allows us to offer a government-subsidized program to our 280,000 ACP wireless subscribers. Equally important, we can now reignite our sales channels to acquire new Lifeline subscribers who lost their ACP service when their carrier chose to shut them off.

Through our subsidiaries we plan to roll-out LinkUp Mobile over the remainder of 2024. This is the non-subsidized portion of our MVNO business, which will attempt to leverage the volume of buying power we have with our previous 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. As highlighted above, we continued to provide the previous ACP benefit to our subscriber base through September 30, 2024 in the hope the ACP program would be re-established. It is our plan to communicate to this base our intention to transition these subscribers to our LinkUp Mobile service line.

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 percentage of year-over-year revenue growth opportunity for 2024 and hired 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 have not received any revenue for the nine months ended September 30, 2024 and plan to make a final decision on whether to maintain or discontinue the Lead Generation segment of its business before the end of the fiscal year ended 2024.

COMPARISON OF THREE MONTHS ENDED September 30, 2024 AND 2023

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations, stockholders’ deficit, or cash flows.

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 three months ended years ended September 30, 2024 and 2023 consisted of the following:

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Revenue decreased overall by $29,391,137 (86.0%) from the three months ended September 30, 2023 to the three months ended September 30, 2024. 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) decreased by $30,638,724 (99.9%). Due to a lack of additional funding from Congress, April 2024 was the last month ACP households received the full ACP discount, as they had received in prior months, with some ACP households receiving a partial ACP discount in May 2024 if their provider elected to participate in the May partial reimbursement month, as we did. The $14.2 billion Congress initially made available for the ACP has run out. As a result, the ACP has ended for now. Effective June 1, 2024, households will no longer receive an ACP discount. As a transition strategy moving forward, we decided to keep the existing base of subscribers from the former ACP enrolled in our network through September 30, 2024 and beyond. We believe it would have been an easy, though short-sighted, decision to de-enroll these subscribers once the ACP funding ran out because we have a built-in subscriber base of 250,000 and a distribution network of thousands of local convenience stores and bodegas where our consumers shop every day. We believe these are huge and valuable assets and to hold on to these valuable assets during this transition period, we chose to keep our subscribers active, absorb the wholesale costs, averaging around $7-10 per subscriber per month, and put our strong balance sheet to work to replace the cash inflow we lost once ACP funding ran out. It is also our plan to communicate to this base our intention to transition these subscribers to our LinkUp Mobile service line. Since the ACP was not funded, we expect revenue for the Company for the remainder of 2024 to substantially decrease because ACP reimbursement was a substantial portion of our revenue. The Company signed a Master Services Agreement (MSA) with TerraCom, Inc. (“TerraCom”), a wireless service provider and licensed Lifeline provider, effective October 3, 2024. We will execute the strategy of offering Lifeline to our existing ACP subscriber base. This agreement allows us to offer a government-subsidized program to our 280,000 ACP wireless subscribers. Equally important, we can now reignite our sales channels to acquire new Lifeline subscribers who lost their ACP service when their carrier chose to shut them off.

Lead Generation services, consisting of LogicsIQ revenues decreased by $684,631 as a result of operational changes by management in late 2023. The Company plans to make a final decision on whether to maintain or discontinue the Lead Generation segment of its business in fiscal year ended 2024.

Comprehensive Platform Services revenues increased by $1,941,450 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 percentage of year-over-year revenue growth opportunity for the remainder of 2024. We hired a new sales director earlier in the year to start a B2B segment within our Platform Services. For the three months ended September 30, 2024, new revenue of over $2.5 million and 19 total clients were created, as compared to zero revenue for the three months ended September 30, 2023.

Cost of Revenue, Gross Profit and Gross Margin

For the three months ended September 30, 2024, cost of revenue for services primarily consists of data plan expenses ($3,567,303), prepaid retail expense ($4,556,418), devices ($175,170), marketing ($3,719,197), advertising ($116,771) and other expenses such as royalties and call-center expenses ($467,197). For the three months ended September 30, 2023, cost of revenue for services primarily consists of data plan expenses ($7,341,183), prepaid retail expense ($2,832,308), devices ($5,463,473), marketing ($4,875,587), advertising ($1,210,713) and other expenses such as royalties and call-center expenses ($1,957,325).

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

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. Our sales force team has increased to five as of September 30, 2024, from one as of September 30, 2023.

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 or decrease based upon our distribution channels. We expect the gross margins to decrease overall as we transition from subsidized subscribers to non-subsidized subscribers through our LinkUp mobile service line.

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 three months ended September 30, 2024 and 2023 consisted of the following:

The increase in depreciation and amortization costs for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 is the result of amortizing internal-use software development costs capitalized in 2023 associated with software enhancements to our various software platforms continuing in 2024. There were no such costs incurred in the third quarter of 2024.

Selling, general and administrative expenses during the three months ended September 30, 2024 and 2023 consisted of the following:

Selling, general and administrative costs (S, G & A) increased by $3,043,345 (97.4%). The changes are discussed below:

• Contractors and consultants expense increased by $783,378 or 126.8% from $617,687 for the three months ended September 30, 2023 to $1,401,065 for the three months ended September 30, 2024. 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 decreased $143,014 or 34.3% from the three months ended September 30, 2023 to the three months ended September 30, 2024 primarily due to the lower legal fees.
• Compensation increased from $918,222 for the three months September 30, 2023 to $3,313,320 for the three months ended September 30, 2024 primarily as a result of one-time non-cash component for stock compensation for the CEO and CFO of $1,758,982 per their employment agreements.
• Computer and internet costs decreased 40,143 or 13.9% from the three months ended September 30, 2023 to the three months ended September 30, 2024. The decrease was primarily the result of decreased programming and support services related to the maintenance and enhancements of the Clearline platform purchased in January of 2024.
• Advertising and marketing costs decreased to $14,351 for the three months ended September 30, 2024 from $89,069 for the three months ended September 30, 2023 primarily as a result of the Company slowing expenditures related to Affordable Connectivity Program (“ACP”) stopped accepting new applications and enrollments effective February 7, 2024.
• Insurance expense decreased to $248,878 for the three months ended September 30, 2024 from $339,780 for the three months ended September 30, 2023 primarily as a result of improved premium rates for the renewal of coverage in 2023/2024.
• Other costs increased $213,646 or 47.2% from the three months ended September 30, 2023 to the three months ended September 30, 2024.

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Other (expense) income during the three months ended September 30, 2024 and 2023 consisted of the following:

Interest expense decreased to $112,814 in the three months ended September 30, 2024 from $130,335 in the three months ended September 30, 2023.

Both long-term leases were terminated resulting in a loss of $194,862.

Interest and other related gains were recorded for $308,455 for the three months ended September 30, 2024.

For the quarter ended September 30, 2024, the Company did not record any adjustments to its investment in CenterCom due to internal delays preventing access to the investee’s financial data. The Company has evaluated its investment under ASC 323, Investments—Equity Method and Joint Ventures, and concluded that any potential adjustment would be immaterial.

Provision for income tax benefit during the three months ended September 30, 2024 and 2023 consisted of the following:

A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate of 21% to income before provision for income taxes for the nine months ended September 30, 2024 and 2023, respectively, is approximately as follows:

COMPARISON OF NINE MONTHS ENDED September 30, 2024 AND 2023

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the consolidated results of operations, stockholders’ deficit, or cash flows.

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 nine months ended September 30, 2024 and 2023 consisted of the following:

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Revenue decreased overall by $53,539,179 (51.1%) from the nine months ended September 30, 2023 to the nine months ended September 30, 2024. 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) decreased by $48,116,841 (53.7%). Due to a lack of additional funding from Congress, April 2024 was the last month ACP households received the full ACP discount, as they had received in prior months, with some ACP households receiving a partial ACP discount in May 2024 if their provider elected to participate in the May partial reimbursement month, as we did. The $14.2 billion Congress initially made available for the ACP has run out. As a result, the ACP has ended for now. Effective June 1, 2024, households will no longer receive an ACP discount. As a transition strategy moving forward, we decided to keep the existing base of subscribers from the former ACP enrolled in our network through September 30, 2024 and beyond. We believe it would have been an easy, though short-sighted, decision to de-enroll these subscribers once the ACP funding ran out because we have a built-in subscriber base of 250,000 and a distribution network of thousands of local convenience stores and bodegas where our consumers shop every day. We believe these are huge and valuable assets and to hold on to these valuable assets during this transition period, we chose to keep our subscribers active, absorb the wholesale costs, averaging around $7-10 per subscriber per month, and put our strong balance sheet to work to replace the cash inflow we lost once ACP funding ran out. It is also our plan to communicate to this base our intention to transition these subscribers to our LinkUp Mobile service line. Since the ACP was not funded, we expect revenue for the Company for the remainder of 2024 to substantially decrease because ACP reimbursement is a substantial portion of our revenue.

Lead Generation services consisting of LogicsIQ revenues decreased by $6,647,061 as a result of operational changes by management in late 2023. The Company plans to make a final decision on whether to maintain or discontinue the Lead Generation segment of its business in fiscal year ending 2024.

Comprehensive Platform Services revenues increased by $1,243,927 as a result of hiring a sales director earlier in 2024 and 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 percentage of year-over-year revenue growth opportunity for the remainder of 2024. We hired a new sales director earlier in the year to start a B2B segment within our Platform Services. For the nine months ended September 30, 2024, new revenue of over $2.7 million and 19 total clients were created, as compared to zero revenue for the nine months ended September 30, 2023.

Cost of Revenue, Gross Profit and Gross Margin

For the nine months ended September 30, 2024, cost of revenue for services primarily consists of data plan expenses ($16,921,923), prepaid expense retail ($9,014,955), devices ($5,001,192), marketing ($15,281,613), advertising ($4,432,173) and other expenses such as royalties and call-center expenses ($3,725,444). For the nine months ended September 30, 2023, cost of revenue for services primarily consists of data plan expenses ($21,614,871), prepaid retail expense ($8,056,869, devices ($19,066,964), marketing ($15,276,830), advertising ($5,723,728) and other expenses such as royalties and call-center expenses ($6,883,650).

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

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. Our sales force team has increased to five as of September 30, 2024, from one as of September 30, 2023.

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 or decrease based upon our distribution channels. We expect the gross margins to decrease overall as we transition from subsidized subscribers to non-subsidized subscribers through our LinkUp mobile service line.

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 nine months ended September 30, 2024 and 2023 consisted of the following:

The increase in depreciation and amortization costs for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 is the result of amortizing internal-use software development costs capitalized in 2023 associated with software enhancements to our various software platforms continuing in 2024. There were no such costs incurred in the first quarter of 2024.

Selling, general and administrative expenses during the nine months ended September 30, 2024 and 2023 consisted of the following:

Selling, general and administrative costs (S, G & A) increased by $10,047,595 (106.8%). The changes are discussed below:

• Contractors and consultants expense increased by $1,850,879 or 107.0% from $1,729,842 for the nine months ended September 30, 2023 to $3,580,721 for the nine months ended September 30, 2024. 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 $321,619 or 25.6% from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 primarily due to the legal settlement of the Consumer Attorney Marketing Group, LLC case.
• Compensation increased from $3,409,495 for the nine months September 30, 2023 to $10,922,462 for the nine months ended September 30, 2024 primarily as a result of one-time non-cash component for stock compensation for the CEO and CFO of $6,237,976 per their employment agreements.
• Computer and internet costs increased $44,935 or 7.0% from the nine months ended September 30, 2023 to the nine months ended September 30, 2024. The increase was primarily the result of increased programming and support services related to the maintenance and enhancements of the Clearline platform purchased in January of 2024.
• Advertising and marketing costs decreased to $95,731 for the nine months ended September 30, 2024 from $137,933 for the nine months ended September 30, 2023 primarily as a result of the Company slowing expenditures related to Affordable Connectivity Program (“ACP”) stopped accepting new applications and enrollments effective February 7, 2024.
• Insurance expense decreased to $821,254 for the nine months ended September 30, 2024 from $991,035 for the nine months ended September 30, 2023 primarily as a result of improved premium rates for the renewal of coverage in 2023/2024.
• Other costs increased $582,707 or 47.0% from the nine months ended September 30, 2023 to the three months ended September 30, 2024.

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Other (expense) income during the nine months ended September 30, 2024 and 2023 consisted of the following:

Interest expense decreased to $362,119 in the nine months ended September 30, 2024 from $478,928 in the nine months ended September 30, 2023.

Both long-term leases were terminated resulting in a loss of $194,862.

Interest and other related gains were recorded for $308,455 for the three months ended September 30, 2024

Other income increased by $637,107, mostly related to one-time reduction in accounts payable to CenterCom for invoices deemed not to be payable.

The equity investment in Centercom increased to $33,864 in the nine months ended September 30, 2024 compared to $95,636 in the nine months ended September 30, 2023. For the quarter ended September 30, 2024, the Company did not record any adjustments to its investment in CenterCom due to internal delays preventing access to the investee’s financial data. The Company has evaluated its investment under ASC 323, Investments—Equity Method and Joint Ventures, and concluded that any potential adjustment would be immaterial.

Provision for income tax benefit during the nine months ended September 30, 2024 and 2023 consisted of the following:

A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate of 21% to income before provision for income taxes for the nine months ended September 30, 2024 and 2023, respectively, is approximately as follows:

Equity Transactions for the Three Months Ended September 30, 2024

Treasury Stock

Effective in July 2024, the Company implemented a share repurchase program. Under the terms of this program, the Company undertook the following:

• Maximum dollar amount authorized for repurchase is $5,000,000,
• The Company will not repurchase more than 20,000 shares per day,
• The Company will not repurchase any shares greater than $5/share,
• Share repurchases will only be made to the extent it does not prevent the Company from paying its debts; and
• The shares may either be returned to the treasury and authorized for reissuance or cancelled and retired.

The Company reacquired 280,770 shares of treasury stock for $485,131, at an average price of $1.73/share.

Effective in October 2024, the Company ceased its share repurchase program. Prior to September 30, 2024, the Company reacquired 81,850 shares of treasury stock for $146,836, at an average price of $1.79/share.

Equity Transactions for the Nine Months Ended September 30, 2024

Stock Issued for Cash - Capital Raise

The Company issued 3,080,356 shares of common stock for gross proceeds of $17,249,994 ($5.60/share).

In connection with the capital raise, the Company paid cash as direct offering costs totaling $1,395,000, resulting in net proceeds of $15,854,994.

This offering was made pursuant to the Company’s registration statement on Form S-3 (File No. 333-273110) previously filed with the Securities and Exchange Commission (the “SEC”) on July 3, 2023, as amended, and declared effective by the SEC on November 3, 2023.

A preliminary and final prospectus supplement were filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933 (the “Securities Act”) on January 17, 2024 and January 19, 2024, respectively. The Offering closed on January 22, 2024.

Exercise of Warrants - Cash

During 2024, the Company issued 1,860,308 shares of common stock in connection with the exercise of 1,860,308 warrants for $8,799,257 ($4.73/share). See warrant table below.

Exercise of Warrants - Cashless

During 2024, the Company issued 40,238 shares of common stock in connection with the cashless exercise of warrants ($0.001/share). The transaction had a net effect of $0 on stockholders’ equity. See warrant table below.

Stock Issued for Services

The Company issued 47,386 shares of common stock for services rendered, having a fair value of $411,740 ($3.85 - $7.34/share), based upon the quoted closing trading price.

See separate discussion below for the issuance and related vesting of common stock granted to the Company’s officers and directors.

Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer.

The Company evaluated the performance of its operating segments based on revenues and operating income (loss). Segment information for the nine months ended September 30, 2024 and 2023, are as follows:

Segment information for the Company’s operations for the nine months ended September 30, 2024 and 2023, are as follows:

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Segment information for the Company’s assets and liabilities at September 30, 2024 and December 31, 2023, are as follows:

All intercompany accounts are separately presented as both a component of the assets and liabilities. These amounts net to $0 in the Company’s consolidated balance sheets.

Mobile Virtual Network Operator

The Affordable Connectivity Program (ACP) revenue for the nine months ended September 30, 2024 decreased by $48,116,841 as compared to the nine months ended September 30, 2023. Cost of revenues for the nine months ended September 30, 2024, decreased by $17,506,627 from the same period ended September 30, 2023, due to a lack of additional funding from Congress, April 2024 was the last month ACP households received the full ACP discount, as they had received in prior months, with some ACP households receiving a partial ACP discount in May 2024 if their provider elected to participate in the May partial reimbursement month, as we did. The $14.2 billion Congress initially made available for the ACP has run out and as a result, the ACP has ended for now. Effective June 1, 2024, households will no longer receive an ACP discount and therefore until new or alternative funding for this program is available, we expect revenue for the remainder of 2024 to substantially decrease as the ACP reimbursement was a substantial portion of the Company’s revenue.

Lead Generation

The revenue for the nine months ended September 30, 2024 decreased by $6,647,061 compared to the nine months ended September 30, 2023. The revenue changed due to the continuing review of the line of business and how it best fits into the overall plans of the Company.

Comprehensive Platform Services

The revenue for the nine months ended September 30, 2024 was $9,853,497 compared to $8,609,570 for the same period in 2023. The increase of 14% was a continuing result of the Company shift from ACP to our prepaid retail line of business. We are committed to re-focusing our attention to this market segment for 2024.

Overall

The overall decrease in revenue of $53,539,179 from 2023 to 2024 for the nine months ended September 30, can be attributable to the lack of additional funding and an end date of June 1, 2024 for ACP. The net operating income decreased by $41,404,089 to an operating loss from nine months ended September 30, 2023 to the nine months ended September 30, 2024.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2024 and December 31, 2023, our current assets were $33,909,878 and $33,366,661, respectively, and our current liabilities were $5,434,250 and $12,705,044, respectively, which resulted in a working capital surplus of $28,475,628 and of $20,661,617, respectively. The increase in current assets is a result of a capital raise on January 15, 2024 which resulted in a net increase in cash of $17,249,994 and the exercise of warrants during the nine months ended September 30, 2024 of $8,799,257.

Total assets at September 30, 2024 and December 31, 2023 amounted to $41,499,493 and $41,925,307, respectively. The decrease in total assets is a result of a capital raise and exercise of warrants, whereby cash increased by $23,812,520 and net loss for the period. Total assets decreased by $425,814 from December 31, 2023 to September 30, 2024. At September 30, 2024, assets consisted of current assets of $33,909,878, construction-in-process of $518,189, net property and equipment of $158,092, net intangible assets of $1,636,339, goodwill of $4,166,782, equity investment in Centercom of $498,273, note receivable of $176,851, internal use software of $372,303, and operating lease right of use asset of $62,786, compared to at December 31, 2023, 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.

At September 30, 2024, our total liabilities were $8,223,506 compared to total liabilities of $13,521,843 at December 31, 2023. This $5,298,337 decrease was related to the repayment during the nine months ended September 30, 2024 of the various notes payable.

At September 30, 2024, our total stockholders’ equity was $33,275,987 as compared to $28,403,464 at December 31, 2023.

As a result of the end of funding to the ACP, we expect to incur a loss for the calendar year 2024 as we transition our focus to the non-subsidized market and LinkUp Mobile. Although the Company expects the loss of revenue from the ACP to have a substantial financial impact on the Company, we believe that the Company’s cash balance and working capital as of September 30, 2024, will be sufficient to fund operations for at least the next twelve months.

The following table sets forth the major sources and uses of cash for the nine months ended September 30, 2024 and 2023.

As a result of net negative cash provided by operating activities, a capital raise and the exercise of warrants through September 30, 2024, the cash decreased in the period ended September 30, 2024 by $970,501, compared to an increase in cash of $5,695,795 in the period ended September 30, 2023.

At September 30, 2024, the Company had the following material commitments and contingencies.

Notes payable – related party - See Note 6 to the Consolidated Financial Statements.

Notes payable and long-term debt - See Note 6 to the Consolidated Financial Statements.

Related party transactions - See Note 2 to the Consolidated Financial Statements for additional discussion.

**Cash requirements and capital expenditures –**At the current level of operations, the Company does not anticipate borrowing funds to meet basic operating costs.

Known trends and uncertainties – The Company is planning to acquire other businesses with similar business operations. The uncertainty of the economy may increase the difficulty of raising funds to support 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 three months and nine months ended September 30, 2024 and 2023, respectively, include, allowance for doubtful accounts and other receivables, inventory reserves and classifications, valuation of loss contingencies, valuation of derivative liabilities, 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 (average cost). 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.

Evaluation of disclosure controls and procedures

Under the PCAOB standards, a control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit the attention by those responsible for oversight of the company’s financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Our management has determined that, as of September 30, 2024, the Company’s disclosure controls are effective, but the Company lacks segregation of duties similar to other companies our size.

The United States Government’s dissolution of the Affordable Connectivity Program (“ACP”) will 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. Effective February 7, 2024, the ACP stopped accepting new applications and enrollments, and the program ceased funding on June 1, 2024. The cease in reimbursement payments from governmental agencies will have a substantial adverse effect on our business, financial condition, and operating results as we transition our focus to the Company’s other lines of business, such as non-subsidized market and LinkUp Mobile, of which there is no guarantee the Company will successfully be able to meet or exceed the revenue that was previously generated through subsidies from the ACP. Additionally, some of our growth plans for the non-ACP business segments of the Company are dependent on the growth of the ACP customers, and 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.

We may require additional capital as we endeavor to replace lost revenue from the ACP, but we do not have any commitments to obtain such capital and we cannot assure you that we will be able to obtain adequate capital as and when required.

Due to the loss of revenue from the expiration of the ACP, we expect to incur a loss for the calendar year ended December 31, 2024. If we fail to replace the lost revenue from the Company’s other business segments, we will not be able to sustain our growth, which will have a substantial adverse effect on the financial condition and operating results of the Company. We will need to adjust operations to control our cash expenses; however, we cannot give assurance that we can increase our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations. Future business demands may lead to cash utilization at levels greater than recently experienced. We may need to raise additional capital in the future. However, we cannot assure that we will be able to raise additional capital on acceptable terms, or at all.