SurgePays, Inc.: Form 10-Q for the period ended Mar 31, 2025

This statement contains forward-looking statements within the meaning of the Securities Act of 1933, as amended (the ‘Securities Act’). Discussions containing such forward-looking statements may be found throughout this statement. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the matters set forth in this statement. The accompanying consolidated financial statements as of March 31, 2025 and 2024 and for the three months then ended includes the accounts of SurgePays, Inc. and its wholly owned subsidiaries during the period owned by SurgePays, Inc.

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. SurgePhone and Torch Wireless provide subsidized mobile broadband to over 80,000 low-income subscribers nationwide. 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 two different business segments through the following subsidiaries: (i) SurgePhone Wireless, LLC, a Nevada limited liability company; (ii) SurgePays Fintech, Inc., a Nevada limited liability company; (iii) ECS Prepaid, LLC, a Missouri limited liability company and (iv) Torch Wireless a Wyoming limited liability company.

Our Business Segments

SurgePays operates through two primary business segments, each strategically designed to meet the diverse needs of our customers. These segments are driven by independent technology platforms that also function synergistically to foster mutual growth:

• MVNO Telecommunications: Providing reliable, affordable prepaid wireless services.
• Comprehensive Platform Services: Offering Point-of-sale (“POS”) transaction and marketing technology.

In addition, in November 2024, the Company entered into a multi-year strategic agreement with AT&T, providing direct access to its nationwide 4G LTE and 5G wireless network. This integration represents a significant advancement in the Company’s infrastructure and capabilities, enabling SurgePays to operate not only as a Mobile Virtual Network Operator (MVNO), but also as a Mobile Virtual Network Enabler (MVNE). As an MVNE, the Company now offers wireless services, including SIM provisioning, billing, and airtime, to other wireless providers that do not have a direct carrier relationship. This expansion creates a new high-margin, scalable revenue channel with minimal incremental cost to the Company, and anticipate this to become another major segment for the Company starting in 2025.

The Company previously also operated a Lead Generation segment; however, this business segment was discontinued in 2024.

MVNO Telecommunications

SurgePays’ Mobile Virtual Network Operator (MVNO) business delivers high-speed, reliable, and affordable wireless services by leveraging agreements with national telecom leaders. Generating $43,450,244 of year ended December 31, 2024 operating revenue, we believe this segment will be central to our growth, offering subsidized and prepaid options to meet diverse financial needs.

Subsidized Services

Our subsidized offerings—through programs like Lifeline —enable us to bridge the digital divide in underserved communities. These federal initiatives empower us to provide essential connectivity, driving social impact while targeting sustainable growth. Even as funding changes, we strategically maintain resilience by utilizing our Lifeline program to keep these critical services accessible, establishing a strong foundation. Brands like SurgePhone Wireless and Torch Wireless embody this mission, reaching customers where they need it most.

The Company previously offered subsidized offerings through the Affordable Connectivity Program (ACP), however funding for this program ended in June 2024. As a transition strategy, we decided to keep the existing base of subscribers from the former ACP enrolled in our network. a built-in subscriber base of 250,000. We chose to keep our subscribers active, absorbing 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 transitioned over 80,000 subscribers to the Lifeline program during 2024.

Prepaid Services

Our prepaid plans deliver flexibility, with contract-free, affordable solutions that provide unlimited talk and text across the USA, Mexico, and Canada—no credit checks or hidden fees. Through LinkUp Mobile, we leverage our purchasing power and established retailer relationships to offer low-cost SIM kits at convenience stores, creating accessible, local service hubs.

Our distribution strategy centers on empowering local community stores as trusted service points, where activations and payments are seamlessly integrated into customers’ routines. We believe this approach will not only drive subscriber growth but builds loyalty, allowing customers to switch from competitors effortlessly. By meeting customers in familiar locations, we strengthen long-term relationships and fuel desired sustainable growth.

Comprehensive Platform Services

Our Comprehensive Platform Services segment is tailored to the needs of retailers, using advanced POS technology to elevate operational efficiency and customer engagement. Through SurgePays Prepaid Wireless Top-ups and ClearLine, we deliver innovative transaction and marketing solutions that aim to transform how thousands of convenience stores operate.

Prepaid Wireless Top-Ups

Our Prepaid Wireless Top-Ups platform empowers convenience store clerks to handle top-ups for all major wireless brands efficiently. Additionally, it supports debit and gift card activations, creating a seamless, all-in-one payment processing solution. This functionality not only drives recurring revenue but also gives us critical feedback on what consumers are looking for in today’s Prepaid Wireless Market, allowing us to offer targeted promotions that increase retention and incremental sales. By presenting customers with a comparable Linkup wireless plan at the point of transaction, we maximize opportunities to upsell higher-margin brands, further enhancing growth.

ClearLine

Our ClearLine technology transforms POS terminals and customer-facing screens into powerful engagement tools. This patent-pending touchscreen application enables in-store marketing campaigns, loyalty program enrollment, and even QR code scanning for streamlined customer interactions. ClearLine replaces traditional posters with smart TVs, displaying interactive QR-code ads and real-time coupon redemptions, creating a measurable impact on store revenue and customer satisfaction.

By capturing detailed analytics, ClearLine offers merchants actionable insights to drive growth and foster customer loyalty. This Software as a Service (SaaS) solution is compatible across various devices, positioning ClearLine as a high-value asset for retailers and an anticipated growing significant revenue driver for SurgePays.

Lead Generation

Effective December 31, 2024, the Company’s management elected to abandon its lead generation segment operations as part of a strategic reassessment of its business lines. This decision followed a review by the Chief Operating Decision Maker (“CODM”, which is our Chief Executive Officer), who had been regularly evaluating the segment’s financial performance and determined that its continued operation was no longer aligned with the Company’s long-term strategic objectives.

Growth Strategies

At SurgePays, our growth strategy is simple yet powerful: leverage our strengths across business segments to drive for sustainable, scalable growth. Each business unit and service is aligned with our mission to create lasting value, enabling us to be strategically positioned for our goal of long-term profitability.

MVNO Communications

Subsidized Services:

• Expand Distribution: Strengthen our footprint in convenience stores, bodegas, and neighborhood retail locations to meet customers where they are, while accelerating growth through online sales channels.
• Simplify Engagement: Make Lifeline enrollments easy by integrating them directly at the point of sale, eliminating friction for eligible customers.
• Drive Growth: Fuel subscriber growth through strategic partnerships and incentives, focusing on expanding our reach and value to customers.

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Prepaid Services:

• Optimize Sales Channels: Amplify the POS platform to maximize every sales opportunity, while seamlessly converting subsidized subscribers to non-subsidized services as their needs evolve.
• Leverage Buying Power: Harness our purchasing power to offer competitively priced plans and affordable SIM kits through our convenience store network, delivering a strong value proposition.
• Expand Rural Reach: Target rural markets where competition is low and demand is high, offering compelling pricing and retaining customers by promoting non-subsidized services in times of funding variability.

Comprehensive Platform Services

SurgePays Prepaid Wireless Top-Ups:

• Enhance Service Delivery: Continuously evolve our prepaid wireless offerings to align with customer needs, creating a seamless experience that keeps customers coming back.
• Strengthen Partnerships: Expand our distributor relationships with innovative POS technology, deepening market penetration and maximizing channel efficiency.
• Leverage Data: Deploy transaction data insights for targeted marketing, tailoring offers that boost customer retention and increase lifetime value.

ClearLine:

• Engage Customers: Transform each payment terminal into a dynamic engagement and SaaS marketing tool, maximizing brand interaction at every transaction.
• Boost Revenues: Drive sales through digital loyalty programs, targeted marketing campaigns, and customer feedback initiatives that enhance satisfaction and retention.
• Leverage Data Insights: Use customer data to create targeted promotions and operational improvements, giving merchants actionable insights that deepen their customer relationships.

Synergy Across Business Units

Our integrated approach means all units work in unison, creating efficiency and value that is hard to replicate. By aligning technology, data, and market expansion strategies, we are building a cohesive platform with a unique value proposition:

• Technology Integration: Our POS platforms unify transactions across prepaid wireless, financial products, and merchant services, delivering a streamlined retail experience.
• Data-Driven Engagement: Data analytics from our ACH banking and fintech transactions platform unlock valuable insights, enhancing customer engagement across all segments.
• Strategic Market Expansion: With a focus on underserved and rural markets, we are capturing untapped potential and fostering lasting customer loyalty.

COMPARISON OF THREE MONTHS ENDED March 31, 2025 AND 2024

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), and Comprehensive Platform Service (Top-up). 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 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 March 31, 2025 and 2024 consisted of the following:

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Revenue decreased overall by $20,851,706 (66.3%) from the three months ended March 31, 2024 to the three months ended March 31, 2025. 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 $26,606,767 (92.1%). 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, and effective June 1, 2024, households no longer receive an ACP discount.

As a transition strategy, we decided to keep the existing base of subscribers from the former ACP enrolled in our network with a built-in subscriber base of 250,000. We chose to keep our subscribers active, absorbing 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 transitioned over 80,000 subscribers to the Lifeline program during 2024.

The Company signed a Master Services Agreement (MSA) with TerraCom, Inc. (“TerraCom”), a wireless service provider and licensed Lifeline provider, effective October 3, 2024, in order to execute the strategy of offering Lifeline to our existing ACP subscriber base. This agreement allows us to offer a government-subsidized program to our previous 250,000 ACP wireless subscribers. We transitioned over 80,000 subscribers to the Lifeline program during 2024. Equally important, this allows us to reignite our sales channels to acquire new Lifeline subscribers who lost their ACP service when their carrier chose to shut them off.

Comprehensive Platform Services revenues increased by $5,761,017 as a result of increasing our sales force and hiring of a new Director of Sales and renewed focus on this segment of the business. The Company expects this segment to continue to grow for the remainder of 2025.

Effective December 31, 2024, the Company’s management elected to abandon its lead generation segment operations as part of a strategic reassessment of its business lines. This decision followed a review by the Chief Operating Decision Maker (“CODM”, which is our Chief Executive Officer), who had been regularly evaluating the segment’s financial performance and determined that its continued operation was no longer aligned with the Company’s long-term strategic objectives. The revenue was $0 and $0 respectively in years ended December 31, 2024 and 2023. Comparison numbers for the lead generation segment are shown in the respective Other Corporate Overhead lines.

Cost of Revenue, Gross Profit and Gross Margin

For the three months ended March 31, 2025, cost of revenue for services primarily consists of data plan expenses ($2,859,283), prepaid retail expenses ($8,330,157), devices ($391,539), marketing ($124,721), advertising ($516,778) and other expenses such as royalties and call-center expenses ($1,297,297). For the three months ended March 31, 2024, cost of revenue for services primarily consists of data plan expenses ($8,979,344), devices ($3,900,413), marketing ($5,799,322), advertising ($2,937,608) and other expenses such as royalties and call-center expenses ($1,849,779).

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

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

For the Three Months Ended March 31,

The Company expects to continue the improvement of gross margin in the Comprehensive Platform Service segment during 2025. As we continue to expand both subsidized and non-subsidized products of the MNVO segment in 2025, we also anticipate gross margins in the MVNO segment will increase with an aim to return to positive results.

General and administrative during the three months ended March 31, 2025 and 2024 consisted of the following:

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Selling, general and administrative expenses during the three months ended March 31, 2025 and 2024 consisted of the following:

Selling, general and administrative costs (S, G & A) decreased by $1,753,358 (28.6%). The changes are discussed below:

• Contractors and consultants expense decreased by $379,785 or 31.0% from $1,224,879 for the three months ended March 31, 2024 to $845,094 for the three months ended March 31, 2025. The Company decreased the spend in the period ending March 31, 2025 by over $500,000 compared to the period ending March 31, 2024, with consultants to provide advisory services specifically in the area of investment relations to identify opportunities to increase our shareholder value.
• Professional services decreased $537,634 or 76.4% from the three months ended March 31, 2024 to the three months ended March 31, 2025 primarily due to a decrease in legal fees of $551,726. Specifically, the legal fees for the Blue Skies Connections, LLC litigation decreased by $391,354 from the three months ended March 31, 2024 to the three months ended March 31, 2025.
• Compensation decreased from $3,188,028 for the three months March 31, 2024 to $1,730,440 for the three months ended March 31, 2025, primarily as a result of change in one-time non-cash component for stock compensation for the CEO and CFO of $1,359,931 for the period ending March 31, 2025 compared to $155,119 for the period ending March 31, 2025.
• Computer and internet costs increased $49,538 or 23.6% from the three months ended March 31, 2024 to the three months ended March 31, 2025. The increase was primarily the result of increased programming and support services related to the maintenance and cloud services.
• Advertising and marketing costs increased to $23,480 for the three months ended March 31, 2025 from $16,806 for the three months ended March 31, 2024, primarily additional marketing of the Clearline platform.
• Insurance expense decreased to $283,202 for the three months ended March 31, 2025 from $283,875 for the three months ended March 31, 2024.
• Other costs increased $566,110 or 110.0 % from the three months ended March 31, 2024 to the three months ended March 31, 2025. Most of the increase was related to sales tax in various states.

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Other (expense) income during the three months ended March 31, 2025 and 2024 consisted of the following:

Interest expense decreased to $119,434 in the three months ended March 31, 2025 from $132,583 in the three months ended March 31, 2024.

The equity investment in Centercom changed by $0 in the three months ended March 31, 2025 compared to an increase of $16,153 in the three months ended March 31, 2024. As of December 31, 2024, The Company determined that it would no longer utilize the Business Process Outsourcing (BPO) services of CenterCom. As of December 31, 2024, the Company assessed its investment in CenterCom and determined there was an impairment. Factors leading to this decision included a change in ownership and large reduction in human capital. As a result, CenterCom was materially impacted and could no longer continue its operations.

Provision for income tax benefit (expense) during the three months ended March 31, 2025 and 2024 consisted of the following:

Equity Transactions for the Three Months Ended March 31, 2025

No transactions.

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 three months ended March 31, 2025 and 2024, are as follows:

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Segment information for the Company’s assets and liabilities at March 31, 2025 and December 31, 2024, are as follows:

All intercompany accounts are separately presented above 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 MVNO revenue for the three months ended March 31, 2025 decreased by $26,606,767 as compared to the three months ended March 31, 2024. Cost of revenues for the three months ended March 31, 2025, decreased by $15,570,581 from the same period ended March 31, 2024, as a result of the 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, and effective June 1, 2024, households no longer receive an ACP discount.

Comprehensive Platform Services

The revenue for the three months ended March 31, 2025 was $8,291,606 compared to $2,530,589 for the same period in 2024. The increase of 227.7% was the result of hiring new salespersons and a renewed focus on the market segment.

Overall

The overall decrease in revenue of $20,851,706 from 2024 to 2025 for the three months ended March 31, can be attributed to the elimination of the ACP during the first half of 2024.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2025 and December 31, 2024, our current assets were $9,850,620 and $17,870,323, respectively, and our current liabilities were $5,740,255 and $6,059,476, respectively, which resulted in a working capital surplus of $4,110,365 and of $11,810,847, respectively.

Total assets at March 31, 2025 and December 31, 2024 amounted to $15,664,039 and $23,976,005, respectively. Total assets decreased by $8,311,966 from December 31, 2024 to March 31, 2025. At March 31, 2025, assets consisted of current assets of $9,850,620, net property and equipment of $523,556, net intangible assets of $1,309,510, goodwill of $3,300,000, note receivable of $176,851 and operating lease right of use asset of $503,502, compared to at December 31, 2024, current assets of $17,870,323, net property and equipment of $591,088, net intangible assets of $1,472,962, goodwill of $3,300,000, note receivable of $176,851, and operating lease right of use asset of $564,781.

At March 31, 2025, our total liabilities were $7,882,600 compared to total liabilities of $8,714,392 at December 31, 2024. This $831,792 decrease was related to the repayment during the three months ended March 31, 2025 of the various notes payable.

At March 31, 2025, our total stockholders’ equity was $7,781,439 as compared to $15,261,613 at December 31, 2024.

The following table sets forth the major sources and uses of cash for the three months ended March 31, 2025 and 2024.

Net cash used in operating activities for the three months ended March 31, 2025, was primarily due to the net loss for the period of $7,635,084.

Net cash used in investing activities for the three months ending March 31, 2025 was primarily due to payment for leases.

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

As a result of net negative cash provided by operating activities and investing activities in 2025, our overall cash decreased in 2025 by $7,392,619, compared to an increase of cash in 2024 primarily driven by net cash provided for by a capital raise and exercise of warrants $28,323,018.

At March 31, 2025, 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 – Due to the end of the ACP program in 2024 and the reduction in total revenues and margins, we may not have sufficient resources to continue to fund operations for the next twelve months without additional funding. We are currently exploring various strategic opportunities; however, we have no commitments at this time and no known timing as to when any transaction may occur. We will only pursue options that we believe are in the best interest of, and on the best terms for, the Company.

The Company kicked of several initiatives in April of 2025. We have begun the launch of LinkUp Mobile SIM (subscriber identity module) cards into the national retail market. LinkUp Mobile has also launched its phone in a box program. Thousands of phones have already been purchased by convenience stores, which we believe is a positive sign for our future capabilities. Torch Wireless, supported by the Lifeline program, is now actively expanding its subscriber base in the state of California. This development is noteworthy for the growth of the Torch offering, as California provides an additional revenue incentive for its subscribers and has a large potential subscriber base. The wholesale MVNE (Mobile Virtual Network Enabler) leveraging technology and industry expertise has allowed us to expand services as a Mobile Network Enabler. Leveraging our direct carrier relationship, we offer billing, provisioning, SIM cards, and services to wireless companies lacking direct carrier access. Two such companies have already embraced this offering, and we anticipate more to join in the near future. We believe the MVNE solution will continue to uniquely position us for additional rapid growth into the subscriber activation channel by enabling other wireless companies who lack a direct carrier relationship. Clear-line has launched a comprehensive code management campaign, providing services to over 1,600 convenience stores. In addition to this new business venture, Shortcode, the ability to dynamic content and features into posts, pages and widgets, has been provisioned with all carriers in preparation for a national campaign scheduled to launch in July.

Known trends and uncertainties – The Company continues to explore potential strategic opportunities to acquire other businesses with similar business operations, or businesses we believe could be potentially symbiotic. While we are currently exploring various strategic opportunities, we have no commitments at this time and no known timing as to when any opportunities may arise. We will only pursue opportunities that we believe are in the best interest of, and on the best terms for, the Company.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which were prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue and expenses. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.

While our significant accounting policies are more fully described in Note 2—Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and which require our most difficult, subjective and complex judgments.

Use of Estimates

Preparing financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates, and those estimates may be material.

Significant estimates during the three months ended March 31, 2025 and 2024, 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 March 31, 2025, the Company’s disclosure controls are effective, but the Company lacks segregation of duties similar to other companies our size.

Changes in Internal Control over Financial Reporting

During the period ended March 31, 2025, 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.