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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number 001-40992

SURGEPAYS, INC.

(Exact name of registrant as specified in its charter)

Nevada |  | 98-0550352
(State or other jurisdiction of incorporation or organization) |  | (I. R. S. Employer Identification No.)

3124 Brother Blvd, Suite 104 |  |
Bartlett TN |  | 38133
(Address of principal executive offices) |  | (Zip Code)

901-302-9587

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock |  | SURG |  | The Nasdaq Stock Market LLC (Nasdaq Capital Market)
Common Stock Purchase Warrants |  | SURGW |  | The Nasdaq Stock Market LLC (Nasdaq Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ |  | Accelerated filer ☐ |
Non-accelerated filer ☒ |  | Smaller reporting company ☒ |
|  | Emerging growth company ☐ |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of November 10, 2022 was 12,530,928 shares.

SurgePays, Inc. and Subsidiaries

|  | Page(s)
Consolidated Balance Sheets |  | 1
Consolidated Statements of Operations |  | 2
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) |  | 3 - 4
Consolidated Statements of Cash Flows |  | 5
Notes to Consolidated Financial Statements |  | 6 - 56
Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 57
Quantitative and Qualitative Disclosures About Market Risk |  | 65
Controls and Procedures |  | 65
PART II – OTHER INFORMATION |  |
Item 1 Legal Proceedings |  | 66
Item 1A Risk Factors |  | 66
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds |  | 67
Item 3 Defaults Upon Senior Securities |  | 67
Item 4 Mine Safety Disclosures |  | 67
Item 5 Other Information |  | 67
Item 6 Exhibits |  | 68

SurgePays, Inc. and Subsidiaries

Consolidated Balance Sheets

|  | September 30, 2022 |  |  | December 31, 2021 |
|  | (Unaudited) |  |  |  |
Assets |  |  |  |  |  |  |  |
Current Assets |  |  |  |  |  |  |  |
Cash |  | $ | 7,892,050 |  |  | $ | 6,283,496 |
Accounts receivable - net |  |  | 9,467,422 |  |  |  | 3,249,889 |
Inventory |  |  | 9,492,385 |  |  |  | 4,359,296 |
Prepaids |  |  | 131,853 |  |  |  | - |
Total Current Assets |  |  | 26,983,710 |  |  |  | 13,892,681 |
Property and equipment - net |  |  | 747,056 |  |  |  | 200,448 |
Other Assets |  |  |  |  |  |  |  |
Note receivable |  |  | 176,851 |  |  |  | 176,851 |
Intangibles - net |  |  | 2,943,353 |  |  |  | 3,433,484 |
Goodwill |  |  | 1,666,782 |  |  |  | 866,782 |
Investment in Centercom |  |  | 401,190 |  |  |  | 443,288 |
Operating lease - right of use asset - net |  |  | 441,921 |  |  |  | 486,668 |
Total Other Assets |  |  | 5,630,097 |  |  |  | 5,407,073 |
Total Assets |  | $ | 33,360,863 |  |  | $ | 19,500,202 |
Liabilities and Stockholders’ Equity |  |  |  |  |  |  |  |
Current Liabilities |  |  |  |  |  |  |  |
Accounts payable and accrued expenses |  | $ | 13,671,092 |  |  | $ | 6,602,577 |
Accounts payable and accrued expenses - related party |  |  | 3,558,258 |  |  |  | 1,389,798 |
Deferred revenue |  |  | 1,896,510 |  |  |  | 276,250 |
Operating lease liability |  |  | 38,606 |  |  |  | 49,352 |
Loans payable - related parties |  |  | 1,086,413 |  |  |  | 1,553,799 |
Notes payable - SBA government |  |  | - |  |  |  | 126,418 |
Notes payable - net |  |  | 6,679,597 |  |  |  | - |
Total Current Liabilities |  |  | 26,930,476 |  |  |  | 9,998,194 |
Long Term Liabilities |  |  |  |  |  |  |  |
Loans payable - related parties |  |  | 4,974,403 |  |  |  | 4,507,017 |
Notes payable - SBA government |  |  | 582,226 |  |  |  | 1,004,767 |
Operating lease liability |  |  | 409,672 |  |  |  | 438,903 |
Total Long-Term Liabilities |  |  | 5,966,301 |  |  |  | 5,950,687 |
Total Liabilities |  |  | 32,896,777 |  |  |  | 15,948,881 |
Commitments and Contingencies (Note 8) |  |  | - |  |  |  | - |
Stockholders’ Equity |  |  |  |  |  |  |  |
Series A, Convertible Preferred stock, $0.001 par value, 100,000,000 shares authorized, 13,000,000 and 13,000,000 shares issued and outstanding, respectively |  |  | 260 |  |  |  | 260 |
Series C, Convertible Preferred stock, $0.001 par value, 1,000,000 shares authorized, 0 and 0 shares issued and outstanding, respectively |  |  | - |  |  |  | - |
Preferred stock, value |  |  | - |  |  |  | - |
Common stock, $0.001 par value, 500,000,000 shares authorized 12,348,834 and 12,063,834 shares issued and outstanding, respectively |  |  | 12,496 |  |  |  | 12,064 |
Additional paid-in capital |  |  | 39,467,956 |  |  |  | 38,662,340 |
Accumulated deficit |  |  | (38,848,912 | ) |  |  | (35,123,343 | )
Stockholders’ equity |  |  | 631,800 |  |  |  | 3,551,321 |
Non-controlling interest |  |  | (167,714 | ) |  |  | - |
Total Stockholders’ Equity |  |  | 464,086 |  |  |  | 3,551,321 |
Total Liabilities and Stockholders’ Equity |  | $ | 33,360,863 |  |  | $ | 19,500,202 |

1

SurgePays, Inc. and Subsidiaries

Consolidated Statements of Operations

|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  | For the Three Months Ended September 30, |  |  | For the Nine Months Ended September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |
Revenues |  | $ | 36,171,345 |  |  | $ | 14,538,353 |  |  | $ | 85,317,860 |  |  | $ | 36,905,373 |
Costs and expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of revenue |  |  | 34,250,541 |  |  |  | 12,634,871 |  |  |  | 78,572,421 |  |  |  | 32,544,619 |
General and administrative expenses |  |  | 2,933,204 |  |  |  | 2,909,954 |  |  |  | 9,655,529 |  |  |  | 10,262,479 |
Total costs and expenses |  |  | 37,183,745 |  |  |  | 15,544,825 |  |  |  | 88,227,950 |  |  |  | 42,807,098 |
Loss from operations |  |  | (1,012,400 | ) |  |  | (1,006,472 | ) |  |  | (2,910,090 | ) |  |  | (5,901,725 | )
Other income (expense) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense |  |  | (633,593 | ) |  |  | (1,236,778 | ) |  |  | (1,370,236 | ) |  |  | (4,637,236 | )
Derivative expense |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,775,057 | )
Change in fair value of derivative liabilities |  |  | - |  |  |  | (202,784 | ) |  |  | - |  |  |  | 746,896 |
Gain (loss) on investment in Centercom |  |  | (52,435 | ) |  |  | 21,072 |  |  |  | (42,099 | ) |  |  | (3,556 | )
Gain on settlement of liabilities |  |  | - |  |  |  | 136,487 |  |  |  | - |  |  |  | 979,469 |
Gain on deconsolidation of True Wireless |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,895,871 |
Amortization of debt discount |  |  | (57,933 | ) |  |  | 630,580 |  |  |  | (95,001 | ) |  |  | 2,008,036 |
Gain on forgiveness of PPP loan - government |  |  | - |  |  |  | - |  |  |  | 524,143 |  |  |  | - |
Total other income (expense) - net |  |  | (743,961 | ) |  |  | (651,423 | ) |  |  | (983,193 | ) |  |  | (785,577 | )
Net loss including non-controlling interest |  |  | (1,756,361 | ) |  |  | (1,657,895 | ) |  |  | (3,893,283 | ) |  |  | (6,687,302 | )
Non-controlling interest |  |  | (216,163 | ) |  |  | - |  |  |  | (167,714 | ) |  |  | - |
Net loss available to common stockholders |  | $ | (1,540,198 | ) |  | $ | (1,657,895 | ) |  | $ | (3,725,569 | ) |  | $ | (6,687,302 | )
Loss per share - basic and diluted |  | $ | (0.12 | ) |  | $ | (0.51 | ) |  | $ | (0.30 | ) |  | $ | (2.21 | )
Weighted average number of shares - basic and diluted |  |  | 12,443,052 |  |  |  | 3,264,274 |  |  |  | 12,259,907 |  |  |  | 3,024,487 |

2

SurgePays, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

For the Three and Six Months Ended September 30, 2022

(Unaudited)

|  | Series A Preferred Stock |  |  | Series C Preferred Stock |  |  | Common Stock |  |  | Additional Paid-in |  |  | Accumulated |  |  | Non-Controlling |  |  | Total Stockholders’ |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Interest |  |  | Equity |
December 31, 2021 |  |  | 260,000 |  |  | $ | 260 |  |  |  | - |  |  | $ | - |  |  |  | 12,063,834 |  |  | $ | 12,064 |  |  | $ | 38,662,340 |  |  | $ | (35,123,343 | ) |  | $ | - |  |  | $ | 3,551,321 |
Recognition of stock-based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 9,294 |  |  |  | - |  |  |  | - |  |  |  | 9,294 |
Warrants issued as debt issue costs |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 38,953 |  |  |  | - |  |  |  | - |  |  |  | 38,953 |
Non-controlling interest |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (32,645 | ) |  |  | (32,645 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,212,334 | ) |  |  | - |  |  |  | (1,212,334 | )
March 31, 2022 |  |  | 260,000 |  |  |  | 260 |  |  |  | - |  |  |  | - |  |  |  | 12,063,834 |  |  |  | 12,064 |  |  |  | 38,710,587 |  |  |  | (36,335,677 | ) |  |  | (32,645 | ) |  |  | 2,354,589 |
Recognition of stock-based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 9,294 |  |  |  | - |  |  |  | - |  |  |  | 9,294 |
Stock issued as direct offering costs |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 200,000 |  |  |  | 200 |  |  |  | (200 | ) |  |  | - |  |  |  | - |  |  |  | - |
Stock issued to purchase software |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 85,000 |  |  |  | 85 |  |  |  | 411,315 |  |  |  | - |  |  |  | - |  |  |  | 411,400 |
Warrants issued as debt issue costs |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 76,451 |  |  |  | - |  |  |  | - |  |  |  | 76,451 |
Warrants issued as interest expense |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 212,608 |  |  |  | - |  |  |  | - |  |  |  | 212,608 |
Non-controlling interest |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 81,094 |  |  |  | 81,094 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (973,037 | ) |  |  | - |  |  |  | (973,037 | )
June 30, 2022 |  |  | 260,000 |  |  |  | 260 |  |  |  | - |  |  |  | - |  |  |  | 12,348,834 |  |  |  | 12,349 |  |  |  | 39,420,055 |  |  |  | (37,308,714 | ) |  |  | 48,449 |  |  |  | 2,172,399 |
Recognition of stock-based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 9,294 |  |  |  | - |  |  |  | - |  |  |  | 9,294 |
Warrants issued as interest expense |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 38,754 |  |  |  | - |  |  |  | - |  |  |  | 38,754 |
Exercise of warrants (cashless) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 147,153 |  |  |  | 147 |  |  |  | (147 | ) |  |  | - |  |  |  | - |  |  |  | - |
Non-controlling interest |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (216,163 | ) |  |  | (216,163 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,540,198 | ) |  |  | - |  |  |  | (1,540,198 | )
September 30, 2022 |  |  | 260,000 |  |  | $ | 260 |  |  |  | - |  |  | $ | - |  |  |  | 12,495,987 |  |  | $ | 12,496 |  |  | $ | 39,467,956 |  |  | $ | (38,848,912 | ) |  | $ | (167,714 | ) |  | $ | 464,086 |

3

SurgePays, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ (Deficit)

For the Three and Six Months Ended September 30, 2021

(Unaudited)

|  | Series A Preferred Stock |  |  | Series C Preferred Stock |  |  | Common Stock |  |  | Additional Paid-in |  |  | Accumulated |  |  | Total Stockholders’ |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | (Deficit) |
December 31, 2020 |  |  | 260,000 |  |  | $ | 260 |  |  |  | 721,598 |  |  | $ | 722 |  |  |  | 2,542,624 |  |  | $ | 2,543 |  |  | $ | 10,862,708 |  |  | $ | (21,592,199 | ) |  | $ | (10,725,966 | )
Stock issued for services rendered and recognition of share-based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,260 |  |  |  | 1 |  |  |  | 61,570 |  |  |  | - |  |  |  | 61,571 |
Stock issued for cash |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 260,000 |  |  |  | 260 |  |  |  | 1,509,740 |  |  |  | - |  |  |  | 1,510,000 |
Stock and warrants issued with debt recorded as a debt discount |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 18,000 |  |  |  | 18 |  |  |  | 2,038,617 |  |  |  | - |  |  |  | 2,038,635 |
Conversion of debt |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 132,291 |  |  |  | 132 |  |  |  | 858,026 |  |  |  | - |  |  |  | 858,158 |
Stock issued under make-whole arrangement |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15,147 |  |  |  | 15 |  |  |  | 90,386 |  |  |  | - |  |  |  | 90,401 |
Stock issued in connection with debt modification |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 13,916 |  |  |  | 14 |  |  |  | 108,917 |  |  |  | - |  |  |  | 108,931 |
Stock issued in settlement of liabilities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 71,737 |  |  |  | 72 |  |  |  | 464,641 |  |  |  | - |  |  |  | 464,713 |
Stock issued for acquisition of membership interest in ECS |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,000 |  |  |  | 2 |  |  |  | 17,898 |  |  |  | - |  |  |  | 17,900 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4,815,431 | ) |  |  | (4,815,431 | )
March 31, 2021 |  |  | 260,000 |  |  |  | 260 |  |  |  | 721,598 |  |  |  | 722 |  |  |  | 3,056,975 |  |  |  | 3,057 |  |  |  | 16,012,503 |  |  |  | (26,407,630 | ) |  |  | (10,391,088 | )
Stock issued for services rendered and recognition of share-based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,260 |  |  |  | 1 |  |  |  | 10,268 |  |  |  | - |  |  |  | 10,269 |
Recognition of stock option expense and related true up adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (26,741 | ) |  |  | - |  |  |  | (26,741 | )
Stock issued in settlement of liabilities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 171,863 |  |  |  | 172 |  |  |  | 1,290,265 |  |  |  | - |  |  |  | 1,290,437 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (213,976 | ) |  |  | (213,976 | )
June 30, 2021 |  |  | 260,000 |  |  |  | 260 |  |  |  | 721,598 |  |  |  | 722 |  |  |  | 3,230,098 |  |  |  | 3,230 |  |  |  | 17,286,295 |  |  |  | (26,621,606 | ) |  |  | (9,331,099 | )
Beginning balance |  |  | 260,000 |  |  |  | 260 |  |  |  | 721,598 |  |  |  | 722 |  |  |  | 3,230,098 |  |  |  | 3,230 |  |  |  | 17,286,295 |  |  |  | (26,621,606 | ) |  |  | (9,331,099 | )
True up adjustment related to initial acquisition of True Wireless |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 87,596 |  |  |  | (87,596 | ) |  |  | - |
Stock issued for services rendered and recognition of share-based compensation ($5 - $8.05/share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 7,471 |  |  |  | 7 |  |  |  | 56,818 |  |  |  | - |  |  |  | 56,825 |
Recognition of stock option expense and related true up adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (93,483 | ) |  |  | - |  |  |  | (93,483 | )
Stock issued in settlement of liabilities ($5.80 - $6.30/share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 33,100 |  |  |  | 33 |  |  |  | 124,602 |  |  |  | - |  |  |  | 124,635 |
Stock issued in settlement of liabilities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 33,100 |  |  |  | 33 |  |  |  | 124,602 |  |  |  | - |  |  |  | 124,635 |
Exercise of warrants (cashless) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,134 |  |  |  | 2 |  |  |  | (2 | ) |  |  | - |  |  |  | - |
Conversion of debt ($5.75/share) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15,625 |  |  |  | 16 |  |  |  | 89,828 |  |  |  | - |  |  |  | 89,844 |
Conversion of debt |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15,625 |  |  |  | 16 |  |  |  | 89,828 |  |  |  | - |  |  |  | 89,844 |
Warrants issued with debt recorded as a debt discount |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 265,268 |  |  |  | - |  |  |  | 265,268 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,657,895 | ) |  |  | (1,657,895 | )
September 30, 2021 |  |  | 260,000 |  |  | $ | 260 |  |  |  | 721,598 |  |  | $ | 722 |  |  |  | 3,288,428 |  |  | $ | 3,288 |  |  | $ | 17,816,922 |  |  | $ | (28,367,097 | ) |  | $ | (10,545,905 | )
Ending balance |  |  | 260,000 |  |  | $ | 260 |  |  |  | 721,598 |  |  | $ | 722 |  |  |  | 3,288,428 |  |  | $ | 3,288 |  |  | $ | 17,816,922 |  |  | $ | (28,367,097 | ) |  | $ | (10,545,905 | )

4

SurgePays, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

|  | 2022 |  |  | 2021 |
|  | For the Nine Months Ended September 30, |
|  | 2022 |  |  | 2021 |
|  | (Unaudited) |  |  | (Unaudited) |
Operating activities |  |  |  |  |  |  |  |
Net loss - including non-controlling interest |  | $ | (3,893,283 | ) |  | $ | (6,687,302 | )
Adjustments to reconcile net loss to net cash used in operations |  |  |  |  |  |  |  |
Provision for inventory obsolescence |  |  | 51,718 |  |  |  | - |
Depreciation and amortization |  |  | 664,534 |  |  |  | 579,372 |
Amortization of right-of-use assets |  |  | 44,747 |  |  |  | 122,681 |
Amortization of debt discount/debt issue costs |  |  | 95,001 |  |  |  | 2,008,036 |
Recognition of share-based compensation |  |  | 27,882 |  |  |  | 8,411 |
Warrants issued for interest expense |  |  | 251,362 |  |  |  | - |
Change in fair value of derivative liabilities |  |  | - |  |  |  | (746,896 | )
Derivative expense |  |  | - |  |  |  | 1,775,057 |
Gain on settlement of liabilities |  |  | - |  |  |  | (935,375 | )
(Gain) loss on equity method investment - Centercom |  |  | 42,098 |  |  |  | 3,556 |
Gain on forgiveness of PPP loan |  |  | (524,143 | ) |  |  | - |
Gain on deconsolidation of subsidiary (True Wireless) |  |  | - |  |  |  | (1,895,871 | )
Changes in operating assets and liabilities |  |  |  |  |  |  |  |
(Increase) decrease in |  |  |  |  |  |  |  |
Accounts receivable |  |  | (6,217,533 | ) |  |  | (1,487,131 | )
Lifeline revenue - due from USAC |  |  | - |  |  |  | 105,532 |
Inventory |  |  | (5,184,807 | ) |  |  | (398,450 | )
Prepaids |  |  | (131,853 | ) |  |  | 32,062 | )
Increase (decrease) in |  |  |  |  |  |  |  |
Accounts payable and accrued expenses |  |  | 7,074,491 |  |  |  | 166,193 |
Accounts payable and accrued expenses - related party |  |  | 2,168,460 |  |  |  | 540,089 | )
Deferred revenue |  |  | 1,620,260 |  |  |  | (207,800 | )
Operating lease liability |  |  | (39,977 | ) |  |  | (126,533 | )
Net cash used in operating activities |  |  | (3,951,043 | ) |  |  | (7,144,369 | )
Investing activities |  |  |  |  |  |  |  |
Purchase of property and equipment |  |  | (9,611 | ) |  |  | (51,396 | )
Purchase of software |  |  | (300,000 | ) |  |  | - |
Acquisition of Torch Wireless |  |  | (800,000 | ) |  |  | - |
Cash disposed in deconsolidation of subsidiary (True Wireless) |  |  | - |  |  |  | (325,316 | )
Net cash used in investing activities |  |  | (1,109,611 | ) |  |  | (376,712 | )
Financing activities |  |  |  |  |  |  |  |
Proceeds from stock and warrants issued for cash |  |  | - |  |  |  | 1,510,000 |
Proceeds from loans - related party |  |  | - |  |  |  | 3,688,000 |
Repayments of loans - related party |  |  | - |  |  |  | (163,000 | )
Proceeds from notes payable |  |  | 6,700,000 |  |  |  | 853,386 |
Repayments on notes payable |  |  | - |  |  |  | (250,000 | )
Proceeds from SBA notes |  |  | - |  |  |  | 518,167 |
Repayments on SBA notes |  |  | (30,792 | ) |  |  | (3,425 | )
Proceeds from convertible notes |  |  | - |  |  |  | 2,550,000 |
Repayments on convertible notes - net of overpayment |  |  | - |  |  |  | (1,220,515 | )
Net cash provided by financing activities |  |  | 6,669,208 |  |  |  | 7,482,613 |
Net increase (decrease) in cash |  |  | 1,608,554 |  |  |  | (38,468 | )
Cash - beginning of period |  |  | 6,283,496 |  |  |  | 673,995 |
Cash - end of period |  | $ | 7,892,050 |  |  | $ | 635,527 | )
Supplemental disclosure of cash flow information |  |  |  |  |  |  |  |
Cash paid for interest |  | $ | 195,950 |  |  | $ | 117,836 |
Cash paid for income tax |  | $ | - |  |  | $ | - |
Supplemental disclosure of non-cash investing and financing activities |  |  |  |  |  |  |  |
Debt issue costs recorded in connection with notes payable |  | $ | 115,404 |  |  | $ | - |
Stock issued to acquire software |  | $ | 411,400 |  |  | $ | - |
Debt discount/issue costs recorded in connection with debt/derivative liabilities |  | $ | - |  |  | $ | 2,406,097 |
Stock issued in settlement of liabilities |  | $ | - |  |  | $ | 1,879,785 |
Conversion of debt into equity |  | $ | - |  |  | $ | 948,002 |
Right-of-use asset obtained in exchange for new operating lease liability |  | $ | - |  |  | $ | 515,848 |
Termination of ECS ROU lease |  | $ | - |  |  | $ | 228,752 |
Stock issued in connection with debt modification |  | $ | - |  |  | $ | 108,931 |
Stock issued under make-whole arrangement |  | $ | - |  |  | $ | 90,401 |
Stock issued for acquisition of membership interest in ECS |  | $ | - |  |  | $ | 17,900 |
Deconsolidation of subsidiary (True Wireless) |  | $ | - |  |  | $ | 2,434,552 |

5

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Note 1 - Organization and Nature of Operations

Organization and Nature of Operations

SurgePays, Inc. (“SurgePays,” “SP,” “we,” “our” or “the Company”), and its operating subsidiaries, is a technology-driven company building a next generation supply chain software platform that can offer wholesale goods and services more cost efficiently than traditional and existing wholesale distribution models.

The parent (SurgePays, Inc.) and subsidiaries are organized as follows:

Schedule of Subsidiaries

Company Name |  |  | Incorporation Date |  | State of Incorporation
SurgePays, Inc. |  |  | August 18, 2006 |  | Tennessee
KSIX Media, Inc. |  |  | November 5, 2014 |  | Nevada
KSIX, LLC |  |  | September 14, 2011 |  | Nevada
Surge Blockchain, LLC |  |  | January 29, 2009 |  | Nevada
Injury Survey, LLC |  |  | July 28, 2020 |  | Nevada
DigitizeIQ, LLC |  |  | July 23, 2014 |  | Illinois
LogicsIQ, Inc. |  |  | October 2, 2018 |  | Nevada
Surge Payments, LLC |  |  | December 17, 2018 |  | Nevada
SurgePhone Wireless, LLC |  |  | August 29, 2019 |  | Nevada
SurgePays Fintech, Inc. |  |  | August 22, 2019 |  | Nevada
True Wireless, Inc. | * |  | October 29, 2020 |  | Oklahoma
ECS Prepaid, LLC |  |  | June 9, 2009 |  | Missouri
Central States Legal Services, Inc. |  |  | August 1, 2003 |  | Missouri
Electronic Check Services, Inc. |  |  | May 19, 1999 |  | Missouri
Torch Wireless | ** |  | January 29, 2019 |  | Wyoming

* |  | Entity was disposed of on May 7, 2021.

** |  | Effective January 1, 2022, the Company acquired Torch Wireless

6

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Impact of COVID-19

The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The COVID-19 pandemic has the potential to significantly impact the Company’s supply chain, distribution centers, or logistics and other service providers.

In addition, a severe prolonged economic downturn could result in a variety of risks to the business, including weakened demand for products and services and a decreased ability to raise additional capital when needed on acceptable terms, if at all. As the situation continues to evolve, the Company will continue to closely monitor market conditions and respond accordingly.

We have implemented adjustments to our operations designed to keep employees safe and comply with international, federal, state, and local guidelines, including those regarding social distancing. The extent to which COVID-19 may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence. In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic.

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations.

Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition, and results of operations.

7

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2022 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2022 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 24, 2022.

Management acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the consolidated results of its operations for the periods presented.

Liquidity, Going Concern and Management’s Plans

These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

As reflected in the accompanying consolidated financial statements, for the nine months ended September 30, 2022, the Company had:

● | Net loss available to common stockholders of $3,725,569; and
● | Net cash used in operations was $3,951,043

Additionally, at September 30, 2022, the Company had:

● | Accumulated deficit of $38,848,912
● | Stockholders’ equity of $464,086; and
● | Working capital of $53,234

We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company has cash on hand of $7,892,050 at September 30, 2022.

The Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from the sales of its products and services to achieve profitable operations. There can be no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a continuing basis. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months that will end on September 30, 2023, and our current capital structure including equity-based instruments and our obligations and debts.

These factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve-month period subsequent to the date that these consolidated financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

Management’s strategic plans include the following:

● | Continue the hyper growth of the Affordable Connectivity Program revenue stream;
● | Execution of business plan and significant revenue growth from prior period;
● | Pursuing a line of credit to achieve the hyper growth of the Affordable Connectivity Program,;
● | Expand product and services offerings to a larger surrounding geographic area;
● | Continuing to explore and execute prospective partnering or distribution opportunities; and
● | Identifying unique market opportunities that represent potential positive short-term cash flow.

8

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation and Non-Controlling Interest

These consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.

For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than the Company. The aggregate of the income or loss and corresponding equity that is not owned by us is included in Non-controlling Interests in the consolidated financial statements.

Business Combinations

The Company accounts for business acquisitions using the acquisition method of accounting, in accordance with which assets acquired and liabilities assumed are recorded at their respective fair values at the acquisition date.

The fair value of the consideration paid, including contingent consideration, is assigned to the assets acquired and liabilities assumed based on their respective fair values. Goodwill represents the excess of the purchase price over the estimated fair values of the assets acquired and liabilities assumed.

Significant judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first. Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within the Company’s operating results.

9

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Effective January 1, 2022, the Company executed a management agreement with Torch Wireless (“Torch”). Generally, the Company was engaged to handle the following services:

| ● | Oversee management of the business being conducted by Torch;
| ● | Involved in the performance of Torch’s obligations under contracts regarding its business operations and maintenance of Torch’s customer relationships;
| ● | Assist Torch with regulatory compliance;
| ● | Manage all billing and collection functions, including the right to collect revenues related to Torch’s business operations, as part of the agreement, Torch may not participate in this function; and
| ● | Manage all payment functions related to the business, including the right to disburse funds, as part of the agreement, Torch may not participate in this function.

Torch is a provider of subsidized mobile broadband services to consumers qualifying under the federal guidelines of the U.S. Federal Communication Commission’s Affordable Connectivity Program (“ACP”). The ACP provides the Company up to a $100 reimbursement for the cost of each tablet device distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. With the purchase of Torch, the Company now has approval to offer subsidized mobile broadband in all fifty states.

During June 2022, it was determined that the Company had acquired 100% of Torch, effective January 1, 2022, resulting in Torch becoming a wholly-owned subsidiary, in a transaction accounted for as a business combination. Pursuant to ASC 805-10-25-7, the Company determined that the acquisition date preceded the closing date as it was managing Torch and in full control of all operational decision making. At this time, the Company had obtained control of Torch through its management contract.

At the time of acquisition, Torch had no significant assets or liabilities. The Company paid $800,000. As a result of the acquisition, the Company recorded goodwill of $800,000. With the purchase of Torch, the Company now has approval to offer subsidized mobile broadband in all fifty states.

At the time of acquisition, Torch had nominal revenues and losses. As a result, and given the immaterial nature of this acquisition, the Company has elected not to present any pro-forma financial information.

In addition, the Company will pay the Sellers monthly residual payments for customers enrolled by the Company through December 31, 2022 of either $2 or $3 per customer (depending on the category of customer).

For the three and nine months ended September 30, 2022, the Company incurred expenses of $584,038 and $905,281, respectively, related to the residual payments. All expenses are included as a component of cost of goods sold.

10

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

This transaction does not involve the purchase of a “significant amount of assets” as defined in the Instructions to Item 2.01 of Form 8-K. Additionally, the acquisition of Torch was not deemed to be significant at any level under SEC Regulation S-X 3.05 and does not require the presentation of any additional historical audits.

At September 30, 2022, Torch has been consolidated with the Company’s consolidated statements of financial position, results of operations, and cash flows.

At September 30, 2022 and December 31, 2021 goodwill was $1,666,782 and $866,782, respectively. There were no impairment losses for the three and nine months ended September 30, 2022 or 2021, respectively.

Deconsolidation of Subsidiary

In accordance with ASC Topic 810-10-40, a parent company must deconsolidate a subsidiary as of the date the parent ceases to have a controlling interest in that subsidiary and recognize a gain or loss in net income at that time.

On May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc. (“TW”), however we retained $1,097,659 in liabilities which consisted of $1,077,659 in accounts payable and accrued expenses as well as $20,000 in related party loans. During 2021, the $20,000 was forgiven. In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%, with a default interest rate of 10%. The Company will receive twenty-five (25) payments of principal and accrued interest totaling $7,461 commencing in June 2023. Payments are scheduled as follows:

Scheduled of Receivables

For the Year Ended December 31, 2022: |  |  |
2023 |  | $ | 52,227 |
2024 |  |  | 89,532 |
2025 |  |  | 44,766 |
|  |  | 186,525 |
Less: amount representing interest |  |  | (9,674 | )
Total |  | $ | 176,851 |

11

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

As a result of the sale, we deconsolidated our entire ownership interest in TW from our consolidated financial statements on May 7, 2021, the effective date of the sale agreement, and recognized a gain on deconsolidation of $1,895,871 as follows:

Scheduled of Deconsolidated Ownership

Consideration |  |  |
Note receivable |  | $ | 176,851 |
Fair value of consideration received |  |  | 176,851 |
Recognized amounts of identifiable assets sold and liabilities assumed by buyer: |  |  |  |
Cash |  |  | 325,316 |
Lifeline revenue due from USAC |  |  | 74,650 |
Inventory |  |  | 107,089 |
Property and equipment - net |  |  | 20,645 |
Operating lease - right of use asset - net |  |  | 10,981 |
Total assets sold |  |  | 538,681 |
Accounts payable and accrued expenses |  |  | 1,183,850 |
Line of credit |  |  | 912,870 |
Note payable - SBA government |  |  | 150,000 |
Operating lease liability |  |  | 10,981 |
Total liabilities assumed by buyer |  |  | 2,257,701 |
Total net liabilities assumed by buyer |  |  | 1,719,020 |
Gain on deconsolidation of True Wireless |  |  | 1,895,871 |

Business Segments and Concentrations

The Company uses the “management approach” to identify its reportable segments. The management approach requires companies to report segment financial information consistent with information used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. The Company manages its business as multiple reportable segments.

Customers in the United States accounted for 100% of our revenues. We do not have any property or equipment outside of the United States.

See Note 10 regarding segment disclosure.

12

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

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 nine months ended September 30, 2022 and the year ended December 31, 2021, 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 and property and equipment, implicit interest rate in right-of-use operating leases, uncertain tax positions, and the valuation allowance on deferred tax assets.

Risks and Uncertainties

The Company operates in an industry that is subject to intense competition and change in consumer demand. The Company’s operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.

The Company has experienced, and in the future expects to continue to experience, variability in sales and earnings. The factors expected to contribute to this variability include, among others, (i) the cyclical nature of the industry, (ii) general economic conditions in the various local markets in which the Company competes, including a potential general downturn in the economy, and (iii) the volatility of prices in connection with the Company’s distribution of the product. These factors, among others, make it difficult to project the Company’s operating results on a consistent basis.

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.

13

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

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.

Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.

The Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, and accounts payable and accrued expenses – related party, are carried at historical cost. At September 30, 2022 and December 31, 2021, respectively, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.

ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding financial instruments.

14

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Cash and Cash Equivalents and Concentration of Credit Risk

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.

At September 30, 2022 and December 31, 2021, respectively, the Company did not have any cash equivalents.

The Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent account balances exceed the amount insured by the FDIC, which is $250,000. At September 30, 2022 and December 31, 2021, the Company did not experience any losses on cash balances in excess of FDIC insured limits.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding customer balances. Credit is extended to customers based on an evaluation of their financial condition and other factors. Interest is not accrued on overdue accounts receivable. The Company does not require collateral.

Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. Accounts determined to be uncollectible are charged to operations when that determination is made.

Allowance for doubtful accounts was $137,218 for the periods ended September 30, 2022 and December 31, 2021, respectively.

There was no bad debt expense for the three and nine months ended September 30, 2022 and 2021, respectively.

Bad debt expense (recovery) is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.

15

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Inventory

Inventory primarily consists of tablets and sim cards. Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) valuation method.

During the three and nine months ended September 30, 2022, the Company recorded a provision for inventory obsolescence of $51,718, respectively.

During the three and nine months ended September 30, 2021, the Company recorded a provision for inventory obsolescence of $0, respectively.

At September 30, 2022 and December 31, 2021, the Company had inventory of $9,492,385 and $4,359,296, respectively.

Impairment of Long-lived Assets

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.

There were no impairment losses for the three and nine months ended September 30, 2022 and 2021, respectively.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets.

Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations.

Management reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Management has revised the capitalization policy to capitalize any property and equipment over $7,500. This impact was immaterial to the periods presented.

There were no impairment losses for the three and nine months ended September 30, 2022 and 2021, respectively.

16

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Right of Use Assets and Lease Obligations

The Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments over the lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.

Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the performance of the business remains strong. Therefore, the Right of Use Asset and Lease Liability may include an assumption on renewal options that have not yet been exercised by the Company. The Company’s operating leases contained renewal options that expire at various dates with no residual value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities.

As the rate implicit in leases are not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. See Note 8.

Derivative Liabilities

The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, (“ASC 480”), “Distinguishing Liabilities from Equity” and FASB ASC Topic No. 815, (“ASC 815”) “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The Company uses a binomial model to determine fair value.

17

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Upon conversion of a note for shares of common stock where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares at fair value, relieves all related notes, derivatives, and debt discounts, and recognizes a net gain or loss on debt extinguishment. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.

Debt Issue Cost

Debt issuance cost paid to lenders, or third parties are amortized to interest expense in the consolidated statements of operations, over the life of the underlying debt instrument.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely with the delivery of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:

Identify the contract with a customer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

18

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.

Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts as of September 30, 2022 and December 31, 2021, respectively, contained a significant financing component.

Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

19

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.

The following reflects additional discussion regarding our revenue recognition policies for each of our material revenue streams. For each revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration is fixed and determinable at the initiation of the contract. Performance obligations for Torch, TW and LogicsIQ are satisfied when services are performed. Performance obligations for ECS and SB are satisfied at point of sale.

For each revenue stream we only have a single performance obligation.

Surge Phone Wireless (SPW) and Torch Wireless

SPW and Torch Wireless are separately licensed to provide subsidized mobile broadband services through the FCC’s Affordable Connectivity Program (ACP) to qualifying low-income customers, covering all fifty states. Revenues are recognized when an ACP application is completed and accepted. Each month we reconcile subscriber usage to ensure the service was utilized. A monthly file is submitted to the Universal Service Administrative Company for review and approval, at which time we have completed our performance obligation and recognize accounts receivable and revenue. Revenues are recorded in the month when services were rendered, with payment typically received on the 28th of the following month.

Surge Blockchain

Revenues are generated through the sale of various products such as energy drinks, CBD products, and other top selling products in convenience store and bodega nationwide. At the time in which our products are sold at the store our performance obligation is considered complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.

20

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

LogicsIQ

LogicsIQ is an enterprise software development company providing marketing business intelligence (“BI”), plaintiff generation and case load management solutions for law firms representing plaintiffs in Mass Tort legal cases. Revenues are earned from our lead generation and retained services offerings.

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.

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. At the time of delivery of leads and the creation of retained cases (customers are qualified at this point), our performance obligation has been completed and revenues are recognized. Arrangements with customers do not provide the customer with the right to take possession of our software or platform at any time. Once the advertising is delivered, it is non-refundable.

Surge Fintech and ECS

Revenues are generated through the sale of telecommunication products such as mobile phones, wireless top-up refills, and other mobile related products. At the time in which our products are sold through our online web portal (point of sale), our performance obligation is considered complete. At point of sale, our web portal platform initiates an automated clearing house transaction (ACH) resulting in the recording revenue.

True Wireless (TW) (Former Subsidiary)

TW was licensed to provide wireless services to qualifying low-income customers in five states. Revenues were recognized when a lifeline application was completed and accepted. Each month we reconciled subscriber usage to ensure the service was utilized. A monthly file was submitted to the Universal Service Administrative Company for review and approval, at which time we completed our performance obligation and recognized accounts receivable and revenue. Revenues were recorded in the month when services were rendered, with payment typically received on the 15th of the following month. If the subscriber did not utilize the Lifeline service during the month, we had 15-days to cure usage. If not cured, the subscriber was de-enrolled from the lifeline program at day 45. This process to verify usage and de-enrollment had been temporarily suspended due to the COVID-19 pandemic. Historically, we had had an insignificant amount of subscribers de-enrolled.

TW was sold in May 2021 and has been deconsolidated as of the disposal date.

Contract Liabilities (Deferred Revenue)

Contract liabilities represent deposits made by customers before the satisfaction of performance obligation and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer based on the terms of the contract, the liability for the customer deposit is relieved and revenue is recognized.

At September 30, 2022 and December 31, 2021, the Company had deferred revenue of $1,896,510 and $276,250, respectively.

21

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

The following represents the Company’s disaggregation of revenues for the nine months ended September 30, 2022 and 2021:

Schedule of Disaggregation of Revenue from Contracts with Customers

|  | Nine Months Ended September 30, |
|  | 2022 |  |  | 2021 |
Revenue |  | Revenue |  |  | % of Revenues |  |  | Revenue |  |  | % of Revenues |
Surge Phone and Torch Wireless |  | $ | 61,462,327 |  |  |  | 72.04 | % |  | $ | 1,253,035 |  |  |  | 3.40 | %
Surge Blockchain, LLC |  |  | 102,378 |  |  |  | 0.12 | % |  |  | 110,547 |  |  |  | 0.30 | %
LogicsIQ, Inc. |  |  | 10,689,006 |  |  |  | 12.53 | % |  |  | 15,449,941 |  |  |  | 41.86 | %
Surge Fintech & ECS |  |  | 13,064,149 |  |  |  | 15.31 | % |  |  | 18,933,869 |  |  |  | 51.30 | %
True Wireless |  |  | - |  |  |  | 0.00 | % |  |  | 1,157,981 |  |  |  | 3.14 | %
Total Revenues |  | $ | 85,317,860 |  |  |  | 100 | % |  | $ | 36,905,373 |  |  |  | 100 | %

Cost of Revenues

Cost of revenues consists of the cost of purchased tablets and SIM cards, commissions, and purchased telecom services including data usage and access to wireless networks. Additionally, prepaid phone cards and advertising costs.

Income Taxes

The Company accounts for income tax using the asset and liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of September 30, 2022 and December 31, 2021, respectively, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

22

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

The Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the nine months ended September 30, 2022 and 2021, respectively.

Investment – Former Related Party

On January 17, 2019, we announced the completion of an agreement to acquire a 40% equity ownership of CenterCom Global, S.A. de C.V. (“CenterCom”). CenterCom is a dynamic operations center currently providing sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Our CenterCom team is based in El Salvador. CenterCom also provides call center support for various third-party clients.

Anthony N. Nuzzo, a director and officer and the holder of approximately 10% of our voting equity had a controlling interest in CenterCom Global. During 2022, Mr. Nuzzo passed away. See Form 8-K filed on March 24, 2022.

The strategic partnership with CenterCom as a bilingual operations hub has powered our growth and revenue. CenterCom has been built to support the infrastructure required to rapidly scale in synergy and efficiency to support our sales growth, customer service and development.

We account for this investment under the equity method. Investments accounted for under the equity method are recorded based upon the amount of our investment and adjusted each period for our share of the investee’s income or loss. All investments are reviewed for changes in circumstance or the occurrence of events that suggest an other than temporary event where our investment may not be recoverable.

At September 30, 2022 and December 31, 2021, our investment in CenterCom was $401,190 and $443,288, respectively.

During the three months ended September 30, 2022 and 2021, we recognized a loss of $52,435 and gain of $21,072, respectively.

During the nine months ended September 30, 2022 and 2021, we recognized a loss of $42,099 and a loss of $3,556, respectively.

During 2021, CenterCom forgave $429,010 of accounts payable owed by SurgePays to CenterCom. As this debt forgiveness occurred with a related party there was no gain recorded and the Company increased additional paid in capital.

23

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs are included as a component of general and administrative expense in the consolidated statements of operations.

The Company recognized $34,708 and $76,413 in marketing and advertising costs during the three months ended September 30, 2022 and 2021, respectively.

The Company recognized $170,714 and $638,706 in marketing and advertising costs during the nine months ended September 30, 2022 and 2021, respectively.

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 it 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.

When determining fair value of stock-based compensation, the Company considers the following assumptions in the Black-Scholes model:

● | Exercise price,
● | Expected dividends,
● | Expected volatility,
● | Risk-free interest rate; and
● | Expected life of option

24

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

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.

Basic and Diluted Earnings (Loss) per Share and Reverse Stock Split

Pursuant to ASC 260-10-45, basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the periods presented.

Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares may consist of common stock issuable for stock options and warrants (using the treasury stock method), convertible notes and common stock issuable. These common stock equivalents may be dilutive in the future. In the event of a net loss, diluted loss per share is the same as basic loss per share since the effect of the potential common stock equivalents upon conversion would be anti-dilutive.

25

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

The following potentially dilutive equity securities outstanding as of September 30, 2022 and 2021 were as follows:

Schedule of Diluted Net Income (Loss) Per Share

|  | September 30, 2022 |  |  | September 30, 2021 |
Convertible notes payable and related accrued interest (1) |  |  | - |  |  |  | 540,206 |
Warrants (2) |  |  | 5,648,563 |  |  |  | 473,609 |
Stock options (3) |  |  | 6,801 |  |  |  | 3,401 |
Series A, convertible preferred stock (4) |  |  | 26,000 |  |  |  | 26,000 |
Series C, convertible preferred stock (5) |  |  | - |  |  |  | 3,607,990 |
Total common stock equivalents |  |  | 5,681,364 |  |  |  | 4,651,206 |

1 | - conversion prices variable

2 | - exercise prices variable

3 | - weighted average exercise price - $16/share and $16/share, respectively

4 | - each share converts to 1/10 of a share of common stock

5 |  | - each share converts to 250 shares of common stock

The convertible notes contained exercise prices that had a discount to market ranging from 70% - 75% of the 10 or 20 days (See Note 5). As a result, the amount computed for common stock equivalents could have changed given the quoted closing trading price at each reporting period.

Warrants and stock options included as commons stock equivalents represent those that are vested and exercisable. See Note 9.

Based on the potential common stock equivalents noted above at September 30, 2022 and December 31, 2021, respectively, the Company has sufficient authorized shares of common stock (500,000,000) to settle any potential exercises of common stock equivalents.

Related Parties

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

The Company uses certain credit cards to pay expenses, these credit cards are in the names of certain officers and directors of the Company

26

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

During the three and nine months ended September 30, 2022, the Company incurred expenses with related parties in the normal course of business totaling $6,914,425 and $14,320,854, respectively.

Schedule of Related Party Expenses

|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  | For the Three Months Ended September 30, |  |  | For the Nine Months Ended September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Related party expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
321 Communications, Inc |  | $ | 5,685,359 |  |  | $ | 362 |  |  | $ | 11,554,803 |  |  | $ | 362 |
Axia Management, LLC |  |  | - |  |  |  | 1,300 |  |  |  | - |  |  |  | 95,415 |
Carddawg Investments, Inc. |  |  | 94,023 |  |  |  | 15,732 |  |  |  | 124,767 |  |  |  | 41,116 |
CenterCom USA, Inc |  |  | 393,990 |  |  |  | 338,595 |  |  |  | 1,713,920 |  |  |  | 908,550 |
Galaxy |  |  | - |  |  |  | 67,950 |  |  |  | - |  |  |  | 67,950 |
National Relief Telecom |  |  | 741,053 |  |  |  | - |  |  |  | 927,364 |  |  |  | - |
Total |  | $ | 6,914,425 |  |  | $ | 423,940 |  |  | $ | 14,320,854 |  |  | $ | 1,113,393 |
Total related party expenses |  | $ | 6,914,425 |  |  | $ | 423,940 |  |  | $ | 14,320,854 |  |  | $ | 1,113,393 |

The increase in the expense is directly related to the Company’s expansion into the Affordable Connectivity program. The vendors supplying data plans for the program are 321 Communications and National Relief Telecom.

Recent Accounting Standards

Changes to accounting principles are established by the FASB in the form of Accounting Standards Updates (“ASU’s”) to the FASB’s Codification. We consider the applicability and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ equity, cash flows, or presentation thereof. Management has evaluated all recent accounting pronouncements issued through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the consolidated financial statements of the Company.

In June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

For SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

27

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates certain exceptions to existing guidance related to the approach for intra period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted.

We adopted this pronouncement on January 1, 2021; however, the adoption of this standard did not have a material effect on the Company’s consolidation financial statements.

In August 2020, FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity; Own Equity (“ASU 2020-06”), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year.

We adopted this pronouncement on January 1, 2022; however, the adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

Reclassifications

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

28

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Note 3 – Property and Equipment

Management has revised the capitalization policy to capitalize any property and equipment over $7,500. This impact was immaterial to the periods presented.

Property and equipment consisted of the following:

Schedule of Property and Equipment

|  |  |  |  |  |  |  | Estimated Useful
Type |  | September 30, 2022 |  |  | December 31, 2021 |  |  | Lives (Years)
Computer equipment and software |  | $ | 1,005,946 |  |  | $ | 283,484 |  |  | 3 - 5
Furniture and fixtures |  |  | 83,092 |  |  |  | 82,752 |  |  | 5 - 7
|  |  | 1,089,038 |  |  |  | 366,236 |  |  |
Less: accumulated depreciation |  |  | (341,982 | ) |  |  | (165,788 | ) |  |
Property and equipment - net |  | $ | 747,056 |  |  | $ | 200,448 |  |  |

In June 2022, the Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash, of which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued 85,000 shares of common stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.

Depreciation and amortization expense for the three months ended September 30, 2022 and 2021 was $140,318 and $17,756, respectively.

Depreciation and amortization expense for the nine months ended September 30, 2022 and 2021 was $174,403 and $50,491, respectively.

These amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.

29

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Note 4 – Intangibles

Intangibles consisted of the following:

Schedule of Intangible Assets

|  |  |  |  |  |  |  | Estimated Useful
Type |  | September 30, 2022 |  |  | December 31, 2021 |  |  | Lives (Years)
Proprietary Software |  | $ | 4,286,402 |  |  | $ | 4,286,402 |  |  | 7
Tradenames/trademarks |  |  | 617,474 |  |  |  | 617,474 |  |  | 15
ECS membership agreement |  |  | 465,000 |  |  |  | 465,000 |  |  | 1
Noncompetition agreement |  |  | 201,389 |  |  |  | 201,389 |  |  | 2
Customer Relationships |  |  | 183,255 |  |  |  | 183,255 |  |  | 5
|  |  | 5,753,520 |  |  |  | 5,753,520 |  |  |
Less: accumulated amortization |  |  | (2,810,167 | ) |  |  | (2,320,036 | ) |  |
Intangibles - net |  | $ | 2,943,353 |  |  | $ | 3,433,484 |  |  |

ECS has been a financial technology and wireless top-up platform for over 15 years. On October 1, 2019, we acquired ECS primarily for the favorable ACH banking relationships and a fintech transactions platform (proprietary software) processing over 20,000 transactions a day at approximately 8,000 independently owned retail stores. The platform serves as a proven backbone for wireless top-up transactions and wireless product aggregation. The majority of the purchase price was allocated to the “Proprietary Software” category being amortized on a straight-line basis over seven years.

Amortization expense for the three months ended September 30, 2022 and 2021 was $163,377 and $163,377, respectively.

Amortization expense for the nine months ended September 30, 2022 and 2021 was $490,131 and $528,881, respectively.

30

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Estimated amortization expense for each of the five (5) succeeding years is as follows:

Schedule of Estimated Amortization Expenses

For the Year Ended December 31, 2022: |  |  |
2022 (3 months) |  | $ | 163,377 |
2023 |  |  | 653,508 |
2024 |  |  | 653,508 |
2025 |  |  | 653,508 |
2026 |  |  | 653,508 |
2027 |  |  | 165,944 |
Total |  | $ | 2,943,353 |

Note 5 – Debt

The following represents a summary of the Company’s notes payable – SBA government, loans payable – related parties, notes payable and convertible notes, key terms, and outstanding balances at September 30, 2022 and December 31, 2021, respectively:

Notes Payable – SBA government

(1) Paycheck Protection Program - PPP Loan

Pertaining to the Company’s eighteen (18) month loan and in accordance with the Paycheck Protection Program (“PPP”) and Conditional Loan Forgiveness, the promissory note evidencing the loan contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or filing suit and obtaining judgment against the Company.

Under the terms of the PPP loan program, all or a portion of this Loan may be forgiven upon request from Borrower to Lender, provided the Loan proceeds are used in accordance with the terms of the Coronavirus Aid, Relief and Economic Security Act (the “Act” or “CARES”), Borrower is not in default under the Loan or any of the Loan Documents, and Borrower has provided documentation to Lender supporting such request for forgiveness that includes verifiable information on Borrower’s use of the Loan proceeds, to Lender’s satisfaction, in its sole and absolute discretion.

(2) Economic Injury Disaster Loan (“EIDL”)

This program was made available to eligible borrowers in light of the impact of the COVID-19 pandemic and the negative economic impact on the Company’s business. Proceeds from the EIDL are to be used for working capital purposes.

Installment payments, including principal and interest, are due monthly (beginning twelve (12) months from the date of the promissory note) in amounts ranging from $109 - $751/month. The balance of principal and interest is payable over the next thirty (30) years from the date of the promissory note. There are no penalties for prepayment. Based upon guidance issued by the SBA on June19, 2020, the EIDL Loan is not required to be refinanced by the PPP loan.

31

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Schedule of Notes Payable

|  | PPP |  |  | EIDL |  |  | EIDL |  |  | PPP |  |  |  |
Terms |  | SBA |  |  | SBA |  |  | SBA |  |  | SBA |  |  | Total |
Issuance dates of SBA loans |  |  | April 2020 |  |  |  | May 2020 |  |  |  | July 2020 |  |  |  | March 2021 |  |  |  |  |
Term |  |  | 18 months |  |  |  | 30 Years |  |  |  | 30 Years |  |  |  | 5 Years |  |  |  |  |
Maturity date |  |  | October 2021 |  |  |  | May 2050 |  |  |  | July 2050 |  |  |  | March 2026 |  |  |  |  |
Interest rate |  |  | 1 | % |  |  | 3.75 | % |  |  | 3.75 | % |  |  | 1 | % |  |  |  |
Collateral |  |  | Unsecured |  |  |  | Unsecured |  |  |  | Unsecured |  |  |  | Unsecured |  |  |  |  |
Conversion price |  |  | N/A |  |  |  | N/A |  |  |  | N/A |  |  |  | N/A |  |  |  |  |
Principal |  | $ | 498,082 |  |  | $ | 150,000 |  |  | $ | 486,600 |  |  | $ | 518,167 |  |  | $ | 1,652,849 |
Balance - December 31, 2020 |  | $ | 498,082 |  |  | $ | 150,000 |  |  | $ | 486,600 |  |  | $ | - |  |  | $ | 1,134,682 |
Gross proceeds |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 518,167 |  |  |  | 518,167 |
Forgiveness of loan |  |  | (371,664 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (371,664 | )1
Deconsolidation of subsidiary (“TW”) |  |  | - |  |  |  | - |  |  |  | (150,000 | ) |  |  | - |  |  |  | (150,000 | )2
Balance - December 31, 2021 |  |  | 126,418 |  |  |  | 150,000 |  |  |  | 336,600 |  |  |  | 518,167 |  |  |  | 1,131,185 |
Forgiveness of loan |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (518,167 | ) |  |  | (518,167 | )3
Repayments |  |  | (20,807 | ) |  |  | (3,530 | ) |  |  | (6,455 | ) |  |  | - |  |  |  | (30,792 | )
Balance - September 30, 2022 |  | $ | 105,611 |  |  | $ | 146,470 |  |  | $ | 330,145 |  |  | $ | - |  |  | $ | 582,226 |

1 | During 2021, the Company received a partial forgiveness on a PPP loan totaling $377,743, of which $371,664 was for principal and $6,079 for accrued interest. The Company recorded this forgiveness as other income in the accompanying consolidated statements of operations.

2 | In connection with the deconsolidation of TW in 2021, $150,000 of debt was assumed by the TW’s buyer.

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

32

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Notes Payable – Related Parties

Schedule of Notes Payable

|  | 1 |  |  | 2 |  |  | 3 |  |  |  |
|  | Loan Payable |  |  | Loan Payable |  |  | Loan Payable |  |  |  |
Terms |  | Related Party |  |  | Related Party |  |  | Related Party |  |  | Total |
Issuance dates of notes |  | Various |  |  | May 2020/January 2021 |  |  | August 2021 |  |  |  |
Maturity date |  | January 1, 2023/January 1, 2024 |  |  | March 2021 |  |  | August 2031 |  |  |  |
Interest rate |  |  | 10% |  |  |  | 15% |  |  |  | 10% |  |  |  |  |
Collateral |  |  | Unsecured |  |  |  | Unsecured |  |  |  | Unsecured |  |  |  |  |
Conversion price |  |  | N/A |  |  |  | N/A |  |  |  | N/A |  |  |  |  |
Balance - December 31, 2020 |  | $ | 3,341,940 |  |  | $ | 147,500 |  |  | $ | - |  |  | $ | 3,489,440 |
Gross proceeds |  |  | 3,825,000 |  |  |  | 63,000 |  |  |  | 467,385 |  |  |  | 4,355,385 |
Accrued interest included in note balance |  |  | 692,458 |  |  |  | - |  |  |  | - |  |  |  | 692,458 |
Conversion of debt into common stock |  |  | (2,265,967 | ) |  |  | - |  |  |  | - |  |  |  | (2,265,967 | )
Repayments |  |  | - |  |  |  | (210,500 | ) |  |  | - |  |  |  | (210,500 | )
Balance - December 31, 2021 |  |  | 5,593,431 |  |  |  | - |  |  |  | 467,385 |  |  |  | 6,060,816 |
No activity - 2022 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Balance - September 30, 2022 |  | $ | 5,593,431 |  |  | $ | - |  |  | $ | 467,385 |  |  | $ | 6,060,816 |

1 | Activity is with the Company’s Chief Executive Officer and Board Member (Kevin Brian Cox). Prior to September 30, 2021, these notes were either due on demand or had a specific due date. Additionally, these advances had interest rates from 6% - 15%. On September 30, 2021, all notes and related accrued interest were combined into two (2) new notes.

| The new notes had due dates of June 30, 2022 or January 1, 2023. In April 2022, the notes were extended to January 1, 2023 and January 1, 2024, respectively. All notes bear interest at 10%. At September 30, 2021, the Company included $692,458 of accrued interest in the new note balance. In 2021, the Company issued 561,758 shares of common stock at $4.30/share to settle $2,415,560 of debt including principal of $2,265,967 and accrued interest of $149,593. As a result of the debt conversion with a related party, gains/losses were recognized, however, the Company increased additional paid-in capital for $2,415,560.

2 | Activity is with the Company’s former President, Chief Operating Officer and Board Member (Anthony Nuzzo). Mr. Nuzzo passed away in March 2022.

3 | Activity is with David May, who is a Board Member.

33

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Notes Payable

Schedule of Notes Payable

|  |  | 1 |  |  |  | 2 |  |  |  | 3 |  |  |  |  |  |  |  | 4 |  |  |  |  |  |  |  |  |
Terms |  |  | Notes Payable |  |  |  | Notes Payable |  |  |  | Notes Payable |  |  |  | Note Payable |  |  |  | Notes Payable |  |  |  | Total |  |  |  | In-Default |
Issuance dates of notes |  |  | April/May 2022 |  |  |  | April/June 2022 |  |  |  | March 2022 |  |  |  | 2019 |  |  |  | 2021 |  |  |  |  |  |  |  |  |
Maturity date |  |  | October/November 2022 |  |  |  | January/February 2023 |  |  |  | March 2023 |  |  |  | 2020 |  |  |  | 2022 |  |  |  |  |  |  |  |  |
Interest rate |  |  | 19% |  |  |  | 24% |  |  |  | 19% |  |  |  | 18% |  |  |  | 10% |  |  |  |  |  |  |  |  |
Default interest rate |  |  | 26% |  |  |  | N/A |  |  |  | 26% |  |  |  | 0% |  |  |  | 0% |  |  |  |  |  |  |  |  |
Collateral |  |  | Unsecured |  |  |  | All assets |  |  |  | Unsecured |  |  |  | Unsecured |  |  |  | Unsecured |  |  |  |  |  |  |  |  |
Warrants issued as discount/issue costs |  |  | 36,000 |  |  |  | N/A |  |  |  | 15,000 |  |  |  | N/A |  |  |  | 2,406,250 |  |  |  |  |  |  |  |  |
Principal |  | $ | 1,200,000 |  |  | $ | 5,000,000 |  |  | $ | 500,000 |  |  | $ | 250,000 |  |  | $ | 1,101,000 |  |  | $ | 8,051,000 |  |  |  |  |
Balance - December 31, 2020 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 250,000 |  |  |  | - |  |  |  | 250,000 |  |  | $ | 250,000 |
Gross proceeds |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,101,000 |  |  |  | 1,101,000 |  |  |  |  |
Debt discount |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (672,254 | ) |  |  | (672,254 | ) |  |  |  |
Amortization of debt discount |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 698,511 |  |  |  | 698,511 |  |  |  |  |
Repayments |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (250,000 | ) |  |  | (1,127,257 | ) |  |  | (1,377,257 | ) |  |  |  |
Balance - December 31, 2021 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Gross proceeds |  |  | 1,200,000 |  |  |  | 5,000,000 |  |  |  | 500,000 |  |  |  | - |  |  |  | - |  |  |  | 6,700,000 |  |  |  |  |
Debt issue costs |  |  | (76,451 | ) |  |  | - |  |  |  | (38,953 | ) |  |  | - |  |  |  | - |  |  |  | (115,404 | ) |  |  |  |
Amortization of debt issue costs |  |  | 56,048 |  |  |  | - |  |  |  | 38,953 |  |  |  | - |  |  |  | - |  |  |  | 95,001 |  |  |  |  |
Balance - September 30, 2022 |  | $ | 1,179,597 |  |  | $ | 5,000,000 |  |  | $ | 500,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 6,679,597 |  |  | $ | - |

1 | - | These notes were issued with 36,000, three (3) year warrants, which have been reflected as debt issue costs and are amortized over the life of the debt.

2 | - | The Company executed a $5,000,000, secured, revolving promissory note with a third party. The Company may draw down on the note at 80% of eligible accounts receivable. See below.

3 | - | These notes were issued with 15,000, three (3) year warrants, which have been reflected as debt issue costs and were amortized over the life of the debt. Additionally, in September 2022, the Company issued an additional 12,000, three (3) year warrants, which have been treated as interest expense in connection with extending the maturity date for notes totaling $400,000 to March 2023. In October 2022, the Company repaid $100,000.

4 | - | In the event of default, these notes were convertible at 75% of the market price based upon the VWAP in preceding 10 days. There were defaults. Debt discount on notes totaling $1,101,000 in principal included original issue discounts of $101,000 and debt discounts associated with warrants totaling $229,268. Additionally, the Company computed a beneficial conversion feature of $341,986.

Secured Revolving Debt

In April 2022, a maximum of $3,000,000 was made available to the Company, issued pursuant to a series of 270-day (9 months) revolving notes for purposes of purchasing inventory. In June 2022, this amount was increased to $5,000,000.

The notes will accrue interest a monthly rate of 2% (24% annualized). The Company may take drawdowns based upon eligible accounts receivable. In the event that eligible accounts receivable is less than 80% of the loan amount, within four (4) business days, the Company will be required to make a payment to the lender so that the loan amount is no greater than 80% of the then current eligible accounts receivable. The maximum amount outstanding under the loan is the lesser of $5,000,000 or 80% of eligible accounts receivable. Additionally, any related accrued interest associated with this mandatory payment will also be due. These advances are secured by all assets of the Company.

At September 30, 2022 and December 31, 2021, the Company had a balance due of $5,000,000 and $0, respectively. See table above.

34

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Convertible Notes Payable – Net

Schedule of Notes Payable

|  | Convertible |  |  | Convertible |  |  | Convertible |  |  |  |
Terms |  | Notes Payable |  |  | Notes Payable |  |  | Notes Payable |  |  | Total |
Issuance dates of notes |  |  | 2019 and Prior |  |  |  | February 2020 - December 2020 |  |  |  | January 2021 - March 2021 |  |  |  |  |
Maturity date |  |  | 2020 |  |  |  | February 2021 - September 2021 |  |  |  | May 2021 - March 2022 |  |  |  |  |
Interest rate |  |  | 14% |  |  |  | 10% - 14% |  |  |  | 5% - 12% |  |  |  |  |
Collateral |  |  | Unsecured |  |  |  | Unsecured |  |  |  | Unsecured |  |  |  |  |
Conversion price |  |  | A |  |  |  | A |  |  |  | B |  |  |  |  |
Principal |  | $ | - |  |  | $ | 2,347,000 |  |  | $ | 2,550,000 |  |  | $ | 4,897,000 |
Balance - December 31, 2020 |  | $ | - |  |  | $ | 1,516,170 |  |  | $ | - |  |  | $ | 1,516,170 |
Gross proceeds |  |  | - |  |  |  | - |  |  |  | 2,550,000 |  |  |  | 2,550,000 |
Debt discount |  |  | - |  |  |  | - |  |  |  | (2,460,829 | ) |  |  | (2,460,829 | )
Amortization of debt discount |  |  | - |  |  |  | 517,781 |  |  |  | 2,460,829 |  |  |  | 2,978,610 |
Repayments - cash |  |  | - |  |  |  | - |  |  |  | (2,550,000 | )D |  |  | (2,550,000 | )
Conversion to equity/debt modification |  |  | - |  |  |  | (2,110,898 | ) |  |  | - |  |  |  | (2,110,898 | )
Reclassified to receivable |  |  | - |  |  |  | 76,947 | C |  |  | - |  |  |  | 76,947 |
Balance - December 31, 2021 |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |

A | – | Convertible at 65% multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock during the ten (10) trading days prior to conversion.

B | – | Convertible at 70% - 75% multiplied by the lowest one (1) day volume weighted average price (“VWAP”) of the Company’s common stock during the ten (10) trading days prior to conversion.

C | - | During 2021, the Company overpaid a note holder by $76,947 when settling the outstanding balance. This overpayment had been recorded as a receivable and was repaid in full in April 2021.

D | - | During 2021, the Company repaid the $2,550,000 of convertible notes in full, however, one of the notes, having a principal of $2,300,000 was prepaid early. As a result, the Company paid an additional prepayment penalty equal to 120% of the outstanding amount due at the time of prepayment, resulting in additional interest expense of $465,239. Also, at the time of repayment, the embedded derivative liability ceased to exist.

35

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Line of Credit

The Company had a $1,000,000 line of credit with a bank, bearing interest at 6%, which was due in April 2021. The line of credit was secured by all of the Company’s assets and was personally guaranteed by the owner of the majority of the Company’s voting shares. The balance at December 31, 2021 was $0. In connection with the deconsolidation of TW in May 2021, the buyer assumed the line of credit.

Note 6 – Derivative Liabilities

During 2021, the above convertible notes contained embedded conversion options with a conversion price that could result in issuing an undeterminable amount of future common stock to settle the host contract. Accordingly, the embedded conversion option is required to be bifurcated from the host instrument (convertible note) and treated as a liability, which is calculated at fair value, and marked to market at each reporting period.

The Company used the binomial pricing model to estimate the fair value of its embedded conversion option liabilities with the following inputs:

Schedule of Weighted Average Assumptions

|  | December 31, 2021
Expected term (years) |  |  | 0.20 - 1 year
Expected volatility |  |  | 143% - 291%
Expected dividends |  |  | 0%
Risk free interest rate |  |  | 0.03% - 0.09%

A reconciliation of the beginning and ending balances for the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows at December 31, 2021:

Summary of Changes in Fair Value

Derivative liability - December 31, 2020 |  | $ | 1,357,528 |
Fair value at commitment date |  |  | 1,877,250 |
Fair value mark to market adjustment |  |  | (1,806,763 | )
Gain on derivative liability upon related debt settled |  |  | (1,428,015 | )
Derivative liability - December 31, 2021 |  | $ | - |

36

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Changes in fair value of derivative liabilities are included in other income (expense) in the accompanying consolidated statements of operations.

During the three months ended September 30, 2022 and 2021, the Company recorded a change in fair of derivative liabilities of $0 and $202,784, respectively. These amounts reflect a mark to market adjustment recorded to the accompanying consolidated statements of operations.

During the nine months ended September 30, 2022 and 2021, the Company recorded a change in fair of derivative liabilities of $0 and $746,896, respectively. These amounts reflect a mark to market adjustment recorded to the accompanying consolidated statements of operations.

In connection with bifurcating the embedded conversion option and accounting for this instrument at fair value, the Company computed a fair value on the commitment date, and upon the initial valuation of this instrument, determined that the fair value of the liability exceeded the proceeds of the debt host instrument. As a result, the Company recorded a debt discount at the maximum amount allowed (the face amount of the debt), which required the overage to be recorded as a derivative expense.

For the three months years ended September 30, 2022 and 2021, the Company recorded a derivative expense of $0 and $0, respectively.

For the nine months years ended September 30, 2022 and 2021, the Company recorded a derivative expense of $0 and $1,775,057, respectively.

During the year ended December 31, 2021, in connection with the repayment of convertible notes which contained embedded conversion features, the related derivative liabilities ceased to exist.

During the three months ended September 30, 2022 and 2021, the Company recorded a gain of $0 and $136,487, respectively, related to the settlement of convertible debt which contained an embedded conversion feature and was separately bifurcated and classified as a derivative liability. The Company has recorded these gains in the accompanying consolidated statements of operations as a component of gain on settlement of liabilities.

During the nine months ended September 30, 2022 and 2021, the Company recorded a gain of $0 and $979,469, respectively.

37

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Note 7 – Fair Value of Financial Instruments

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made.

The Company did not have any assets or liabilities measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021, respectively

Note 8 – Commitments and Contingencies

Operating Lease

We have entered into various operating lease agreements, including our corporate headquarters. We account for leases in accordance with ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. In addition, a lessor is required to classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating. We determine if an arrangement is a lease, or contains a lease, at inception and record the lease in our financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at commencement to determine the present value of lease payments except when an implicit interest rate is readily determinable. We determine our incremental borrowing rate based on market sources including relevant industry data.

38

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

We have lease agreements with lease and non-lease components and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective with the exception of direct sales-type leases and production equipment classes embedded in supply agreements. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.

We have elected not to present short-term leases on the balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.

Our leases, where we are the lessee, do not include an option to extend the lease term. Our lease also includes an option to terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease term would include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.

Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, included as a component of general and administrative expenses, in the accompanying consolidated statements of operations.

Certain operating leases provide for annual increases to lease payments based on an index or rate, our lease has no stated increase, payments were fixed at lease inception. We calculate the present value of future lease payments based on the index or rate at the lease commencement date. Differences between the calculated lease payment and actual payment are expensed as incurred.

At September 30, 2022 and December 31, 2021, respectively, the Company has no financing leases as defined in ASC 842, “Leases.”

39

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

The tables below present information regarding the Company’s operating lease assets and liabilities at September 30, 2022 and December 31, 2021, respectively:

Schedule of Lease Expense

|  | For the Nine Months Ended |  |  | For the Nine Months Ended |
|  | September 30, 2022 |  |  | September 30, 2021 |
Operating Leases |  | $ | 44,747 |  |  | $ | 140,464 |
Interest on lease liabilities |  |  | 17,216 |  |  |  | 31,898 |
Total net lease cost |  | $ | 61,963 |  |  | $ | 172,362 |

Supplemental balance sheet information related to leases was as follows:

Schedule of Supplemental Information Related to Leases

|  | September 30, 2022 |  |  | December 31, 2021 |
Operating leases |  |  |  |  |  |  |  |
Operating lease ROU assets - net |  | $ | 441,921 |  |  | $ | 486,668 |
Operating lease liabilities - current |  |  | 38,606 |  |  |  | 49,352 |
Operating lease liabilities - non-current |  |  | 409,672 |  |  |  | 438,903 |
Total operating lease liabilities |  | $ | 448,278 |  |  | $ | 488,255 |

Supplemental cash flow and other information related to leases was as follows:

Schedule of Supplemental Cash Flow and Other Information Related to Leases

|  | For the Nine Months Ended |  |  | For the Nine Months Ended |
|  | September 30, 2022 |  |  | September 30, 2021 |
Cash paid for amounts included in measurement of lease liabilities |  |  |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | 39,977 |  |  | $ | 117,357 |
Cash paid for amounts included in measurement of lease liabilities Operating cash flows from operating leases |  | $ | 39,977 |  |  | $ | 117,357 |
ROU assets obtained in exchange for lease liabilities |  |  |  |  |  |  |  |
Operating leases |  | $ | - |  |  | $ | 515,848 |
ROU assets obtained in exchange for lease liabilities Operating leases |  | $ | - |  |  | $ | 515,848 |
Weighted average remaining lease term (in years) |  |  |  |  |  |  |  |
Operating leases |  |  | 7.74 |  |  |  | 8.19 |
Weighted average discount rate |  |  |  |  |  |  |  |
Operating leases |  |  | 5 | % |  |  | 5 | %

40

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Future minimum lease payments at September 30, 2022

Schedule of Future Minimum Payments

2022 (3 months) |  | $ | 14,878 |
2023 |  |  | 60,294 |
2024 |  |  | 61,876 |
2025 |  |  | 63,460 |
Thereafter |  |  | 351,356 |
Total lease payments |  |  | 551,864 |
Less: amount representing interest |  |  | (103,586 | )
Total lease obligations |  | $ | 448,278 |

In May 2021, the Company and its landlord mutually agreed to terminate the outstanding lease for ECS. The Company had an outstanding ROU liability of $228,752 at the date of termination. There was no gain or loss on lease termination.

Contingencies – Legal Matters

True Wireless and Surge Holdings - Terracom Litigation

Global Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom believes Mr. Coffman and Mr. Carroll are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as such we believe True Wireless has a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc., but not in wireless sales. The complaint requests general damages plus fees and costs for tortious interference with a business relationship in their prayer for relief. They have made no written demand for damages at this point in time. The Company believes this matter is simply an anti-competitive attempt by Terracom to cause distress to True Wireless.

41

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Surge Holdings – Juno Litigation

Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary.

Unimax - Litigation

On July 9, 2020, the Company entered into a settlement and release agreement with Unimax Communications, LLC (“Unimax”). The settlement is related to a complaint filed by Unimax alleging the Company is indebted pursuant to a purchase order and additional financing terms. The Company agreed to pay Unimax the total sum of $785,000 over a 24-month period. The settlement amount is included accounts payable and accrued expenses on the consolidated balance sheets. The balance was repaid in April 2021.

Glen Eagles Litigation

SurgePays, Inc., formerly named as Surge Holdings, Inc., a Nevada corporation, Plaintiff, vs. Glen Eagles Acquisition LP, a Delaware limited partnership, Defendant; District Court Clark County, Nevada; Case No.: A-21-831204-B

ALTCORP TRADING, LLC, a Costa Rica limited liability company; et al, Plaintiffs, vs. Surge Holdings, Inc., a Nevada corporation; VSTOCK Transfer, LLC, a California limited liability company, et al; District Court Clark County, Nevada; Case No.: A-20-823039-B

These two lawsuits involved AltCorp Trading, LLC, Stanley Hills, LLC, and Glen Eagles Acquisition LP (the “AltCorp Parties.”). Each of these lawsuits were ultimately disputes relating to the total consideration the Company paid to GBT Technologies, Inc. (“GBT”) to acquire all of the assets of the entities that comprise the ECS Business (prior to the Company’s January 2020 acquisition of the entities themselves).

On October 18, 2021, the AltCorp Parties, GBT, and the Company entered into a non-binding Memorandum of Understanding (the “MOU”) to set up a framework for an attempt to settle the two lawsuits.

42

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

On December 22, 2021 (the “Effective Date”), pursuant to the framework in the MOU, the AltCorp Parties, Igor 1 Corp. (an entity related to the AltCorp Parties), the Company, ECS Prepaid LLC (“ECS LLC), and, in his individual capacity, Kevin Brian Cox (the Company’s Chief Executive Officer), entered into a Resolution of Purchase, Mutual Release, and Settlement Agreement (the “Settlement Agreement”) to settle the two lawsuits and resolve all disputes related to the consideration paid by the Company to GBT.

This Settlement Agreement was entered into pursuant to a resolution of the Board authorizing the negotiation of and entry into of such agreement.

As part of this agreement, the Company has acquired GBT’s rights to a certain Master Distribution and Service Agreement between Interactive Communications International, Inc. and W.L. Petrey Wholesale Company, Inc., d/b/a UGO-HUB dated August 29, 2016 (the “MDA”), as amended. The MDA contains sales channel access to a variety of unique wholesale prepaid products with approximately $1,500,000 to $2,500,000 in monthly revenue. The MDA is the subject of a lawsuit between GBT and Robert Warren Jackson, RWJ Advanced Marketing LLC, and Gregory Bauer int federal district court in Nevada (the “GBT Lawsuit”).

If the result of the GBT Lawsuit is an assignment of the MDA to GBT or that GBT or an affiliate of GBT is the legal owner of the MDA, GBT or such affiliate will assign the MDA to Surge and GBT shall be entitled to receive the Escrow Amount. If the result of the GBT Lawsuit is a monetary judgment without the assignment or legal decree of ownership of the MDA, GBT shall be entitled to receive the Escrow Amount and shall assign and timely pay to the Company the first one million dollars ($1,000,000) GBT recovers from the defendants in the GBT Lawsuit. In the event that GBT does not prevail in the GBT Lawsuit then it shall be entitled to release of the Escrow Amount but shall be responsible for any fees and costs obligation sought by the defendants in the GBT Lawsuit.

The Company agreed to make total payments of four million two hundred thousand dollars ($4,200,000) to Stanley Hills, LLC on or prior to January 7, 2022. This $4.2 million amount consists of a total of four hundred fifty thousand dollars ($450,000) paid by the Company in November and December 2021, one hundred thousand dollars ($100,000) to be paid on or about January 4, 2022, and three million six hundred fifty thousand dollars ($3,650,000) to be paid on or prior to January 7, 2022 of which three hundred seventy-five thousand dollars ($375,000) will be held in escrow (the “Escrow Amount”). At December 31, 2021, the Company had accrued $3,750,000 as a settlement expense, which was paid on January 7, 2022.

43

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

In addition, Igor 1 Corp. as of the Effective Date, held one hundred ten thousand (110,000) shares of the Company’s common stock that has a restrictive legend (the “Igor Shares”). The owner of Igor 1 Corp. will be responsible for and shall pay for attempting to have the restrictive legend from the Igor Shares removed (with the Company agreeing to pay seven hundred fifty dollars ($750) to help pay for the legal opinion required). If Igor 1 Corp. is unable to have the legend removed prior to January 30, 2022, the Company will pay Igor 1 Corp. five hundred thousand dollars ($500,000) within five (5) trading days to purchase the Igor Shares back and then cancel them. As of February 4, 2022 (five trading days after January 30th), the Company was not asked to pay Igor 1 Corp. any funds related to this possible share cancellation.

Glen Eagles and a related entity as of the Effective Date, held three thousand (3,000) shares of the Company’s common stock (the “Glen Eagles Shares”). The Glen Eagles shares shall be sold on the open market within thirty (30) days following the Effective Date. If for any reason the consideration for the Glen Eagles shares is less than fifteen thousand dollars ($15,000), the Company will have the obligation to compensate Glen Eagles for the difference between the actual amount received and $15,000. Such difference shall be paid within five (5) days of Glen Eagles providing written proof of the proceeds of the sale of the Glen Eagles Shares. Glen Eagles was paid $8,552.25 on February 16, 2022 for full settlement.

The Settlement Agreement replaces all prior agreements between the parties. In addition, within three (3) trading days of the last payment related to the $4.2 million payment to Stanley Hills being made, the parties shall make filings with the state District Court in Clark County, Nevada to dismiss both lawsuits, including, regarding the lawsuit filed by AltCorp Trading, LLC, the dismissal of the lawsuit as to VStock Transfer, LLC, to which the Company owed certain indemnification obligations. The parties agreed to a full mutual release of any disputes or claims between the parties. All matters were dismissed by stipulation of the parties on January 12, 2022.

Crystal Chapman, on behalf of herself and others similarly situated, Plaintiff versus SurgePays, Inc., Defendant; U.S. District Court for the Northern District of Illinois, Case No.: 1:21-cv-04272. On August 11, 2021, the plaintiffs filed a lawsuit alleging violations of the Telephone Consumer Protection Act as a putative class action. The plaintiffs are seeking unspecified damages and an order enjoining the Company or their agents from making autodialed calls. The case alleges contact to consumer(s) whose telephone numbers are on the Federal Do Not Call list, without their consent. There are no other counts under the TCPA or any other statute or tort. The Company vigorously disputes the allegations in this complaint as the Company only contacts consumers who have provided express written consent to be contacted. The Company believes it uses the leading software in the industry for lead verification and believes it can prove consent for all called parties. This matter was settled in the quarter ended December 31, 2021.

44

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

SurgePays – Ambess Litigation

On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of contract and prays for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion practice and discovery process.

True Wireless and SurgePays - Litigation

Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox.

Note 9 – Stockholders’ Equity

Reverse Stock Split

On November 2, 2021, the Company effected a 1 for 50 reverse stock split of all classes of its stock. All share and per share amounts have been retroactively restated to the earliest period presented.

At September 30, 2022, the Company had three (3) classes of stock:

Common Stock

| - | 500,000,000 shares authorized
| - | Par value - $0.001
| - | Voting at 1 vote per share

45

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Series A, Convertible Preferred Stock

| - | 13,000,000 shares authorized
| - | 260,000 issued and outstanding
| - | Par value - $0.001
| - | Voting at 10 votes per share (2,600,000 votes)
| - | Ranks senior to any other class of preferred stock
| - | Dividends - none
| - | Liquidation preference – none
| - | Rights of redemption - none
| - | Conversion into 1/10 of a share of common stock for each share held (26,000 common stock equivalents)

Series C, Convertible Preferred Stock

| - | 1,000,000 shares authorized
| - | None issued and outstanding
| - | Par value - $0.001
| - | Voting at 250 votes per share
| - | Ranks junior to any other class of preferred stock
| - | Dividends – equal to the per share amount (as converted basis) as the common stockholders should the Board of Directors declare a dividend
| - | Liquidation preference – original issue price plus any declared yet unpaid accrued dividends
| - | Rights of redemption - none
| - | Conversion into 250 shares of common stock for each share held

In October 2021, all Series C, Preferred stockholders, representing 721,598 shares issued and outstanding, agreed to convert their holdings into 3,607,980 shares of common stock. The transaction had a net effect of $0 on stockholders’ equity.

46

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Equity Transactions for the Nine Months Ended September 30, 2022

Stock Issued as Direct Offering Costs

In April 2022, the Company issued 200,000 shares of common stock for services rendered in connection with the Company’s NASDAQ uplisting in 2021. As a result, the Company recorded the par value of the common stock issued with a corresponding charge to additional paid-in capital, resulting in a net effect of $0 to stockholders’ equity.

Stock Issued for Acquisition of Software

In June 2022, the Company acquired software having a fair value of $711,400. Payment for the software consisted of $300,000 in cash, of which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued 85,000 shares of common stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.

Exercise of Warrants

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

Equity Transactions for the Year Ended December 31, 2021

NASDAQ Listing

On November 2, 2021, the Company was approved to be uplisted to NASDAQ. The common stock and warrants are traded on the Nasdaq Capital Market under the symbols SURG and SURGW, respectively.

Stock Issued for Services

The Company issued 13,411 shares of common stock for services rendered, having a fair value of $99,436 ($5 - $14.05/share), based upon the quoted closing trading price.

47

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Stock and Warrants Issued for Cash and Related Direct Offering Costs

The Company issued an aggregate 4,862,247 shares of common stock for $21,294,800 ($4.30 -$8/share). In connection with raising these funds, the Company paid $2,222,952 in direct offering costs, resulting in net proceeds of $19,076,710.

Of the 4,862,247 shares issued in 2021, 4,600,000 shares and 690,000 were sold in connection with the Company’s uplist to NASDAQ as follows:

On November 4, 2021, the Company issued 4,600,000 units consisting of one share of common stock and one warrant and 690,000 over-allotment warrants. The units were sold at $4.30 per unit for gross proceeds of $19,786,900 ($19,780,000 from the sale of 4,600,000 units at $4.30 and $6,900 from the sale of 690,000 over-allotment warrants at $0.01). The warrants are exercisable immediately at $4.73/share and expire three (3) years from the issuance date.

In connection with the Company’s sale of common stock, the Company incurred direct offering costs of $2,222,952 which were charged to additional paid-in capital. Net proceeds were $19,076,710.

On November 4, 2021, the Company issued 230,000 five (5) year warrants to the underwriters. These warrants are exercisable beginning May 1, 2022 until November 1, 2026. The exercise price is $4.73/share. The fair value of these warrants was $647,897 based upon the following assumptions:

Schedule of Fair Value of Warrants

Expected term (years) |  | 5
Expected volatility |  | 118%
Expected dividends |  | 0%
Risk free interest rate |  | 0.53%

Since these warrants were issued as direct offering costs associated with the offering, the Company has accounted for these warrants as both a charge and increase to additional paid-in capital, resulting in a net effect on stockholders’ equity of $0.

These 230,000 warrants were exchanged for 68,161 shares of common stock in July 2022 in a cashless exchange. The net effect on stockholders’ equity was $0.

48

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Exercise of Warrants

The Company issued 2,133 shares of common stock in connection with a cashless exercise of warrants. The transaction had a net effect of $0 on stockholders’ equity.

Stock and Warrants Issued as Debt Discount

During 2021, the Company issued stock and warrants in connection with the issuance of debt and derivative liabilities totaling $3,562,829, which were recorded as debt discounts to be amortized over the life of the debt. The Company issued 18,000 shares of common stock along with 137,500 three (3) year warrants, having an exercise price of $8/share. The aggregate discount recorded was $2,645,890 for the stock and warrants which are reflected in the accompanying consolidated statements of stockholders’ equity. An additional discount of $102,194 was recorded in connection with the commitment date fair value of derivative liabilities for an aggregate discount of $2,748,084.

Fair value of the warrants was determined using a Black-Scholes option pricing model with the following inputs:

Schedule of Fair Value of Warrants

Expected term (years) |  | 3
Expected volatility |  | 118%
Expected dividends |  | 0%
Risk free interest rate |  | 0.53%

Conversion of Debt

The Company issued 709,674 shares of common stock in connection with the conversion of convertible debt, having a fair value of $3,363,561 ($0.05 - $10.38/share), based upon the quoted closing trading price.

Make-whole Arrangement

The Company issued 15,147 shares of common stock to debt holders that were entitled to shares upon the settlement of debt and related accrued interest. The shares had a fair value of $90,401 ($5.60 - $6/share), based upon the quoted closing trading price.

Stock Issued for Debt Modification

The Company issued 13,916 shares of common stock in connection with the modification of debt arrangements. The shares had a fair value of $108,931 ($5.60 - $8/share), based upon the quoted closing trading price.

49

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Stock Issued in Settlement of Liabilities

The Company issued 276,702 shares of common stock to various vendors and debt holders to settle accounts payable, debt and derivative liabilities. The shares had a fair value of $1,997,977 ($4.50 - $15.99/share), based upon the quoted closing trading price. In connection with these debt settlements, the Company recorded a gain of $1,469,641.

Stock Issued in Acquisition of Membership Interest in ECS

On January 30, 2020, the Company entered into a Membership Interest Purchase Agreement and Stock Purchase Agreement with ECS Prepaid, ECS, CSLS and the Winfrey’s. Pursuant to the agreements, the Company acquired all of the membership interests of ECS Prepaid and all of the issued and outstanding stock of each ECS and CSLS. The agreements provide that the consideration is to be paid by the Company through the issuance of 10,000 shares of the Company’s Common Stock. In addition, the agreements called for 500 shares of Common Stock to be issued to the Winfrey’s on a monthly basis over a 12-month period. During 2021, the Company issued 2,000 shares of common stock in full settlement of the agreements. The shares had a fair value of $17,900 ($8.95/share), based upon the quoted closing trading price. During 2020, the Company issued 5,500 shares.

50

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Stock Options

Stock option transactions under the Company’s Plan for the nine months ended September 30, 2022 and the year ended December 31, 2021 are summarized as follows:

Schedule of Stock Option Transactions

Stock Options |  | Number of Options |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Contractual Term (Years) |  |  | Aggregate Intrinsic Value |  |  | Weighted Average Grant Date Fair Value |
Outstanding - December 31, 2020 |  |  | 17,004 |  |  | $ | 16.00 |  |  |  | 6.16 |  |  | $ | - |  |  | $ | - |
Vested and Exercisable - December 31, 2020 |  |  | - |  |  | $ | - |  |  |  | - |  |  | $ | - |  |  | $ | - |
Unvested and non-exercisable - December 31, 2020 |  |  | 17,004 |  |  | $ | 16.00 |  |  |  | 6.16 |  |  | $ | - |  |  | $ | - |
Granted |  |  | - |  |  |  | - |  |  |  |  |  |  |  |  |  |  | $ | - |
Exercised |  |  | - |  |  |  | - |  |  |  |  |  |  |  |  |  |  |  |  |
Cancelled/Forfeited |  |  | - |  |  |  | - |  |  |  |  |  |  |  |  |  |  |  |  |
Outstanding - December 31, 2021 |  |  | 17,004 |  |  | $ | 16.00 |  |  |  | 5.16 |  |  | $ | - |  |  | $ | - |
Vested and Exercisable - December 31, 2021 |  |  | 3,401 |  |  | $ | 16.00 |  |  |  | 5.16 |  |  | $ | - |  |  | $ | - |
Unvested and non-exercisable - December 31, 2021 |  |  | 13,603 |  |  | $ | 16.00 |  |  |  | 5.16 |  |  | $ | - |  |  | $ | - |
Granted |  |  | - |  |  |  | - |  |  |  |  |  |  |  |  |  |  | $ | - |
Exercised |  |  | - |  |  |  | - |  |  |  |  |  |  |  |  |  |  |  |  |
Cancelled/Forfeited |  |  | - |  |  |  | - |  |  |  |  |  |  |  |  |  |  |  |  |
Outstanding - September 30, 2022 |  |  | 17,004 |  |  | $ | 16.00 |  |  |  | 4.42 |  |  | $ | - |  |  | $ | - |
Vested and Exercisable - September 30, 2022 |  |  | 6,801 |  |  | $ | 16.00 |  |  |  | 4.42 |  |  | $ | - |  |  | $ | - |
Unvested and non-exercisable - September 30, 2022 |  |  | 10,202 |  |  | $ | 16.00 |  |  |  | 4.42 |  |  | $ | - |  |  | $ | - |

During 2022 and 2021, 3,400 stock options vested (6,801 in total), which were held by the Company’s Chief Financial Officer.

Compensation expense recorded for stock-based compensation is as follows for the three months ended September 30, 2022 and 2021, was $9,294 and $9,294, respectively.

Compensation expense recorded for stock-based compensation is as follows for the nine months ended September 30, 2022 and 2021, was $27,882 and $27,882, respectively.

As of September 30, 2022, compensation cost related to the unvested options not yet recognized was $52,663.

Weighted average period in which compensation will vest (years) 1.42 years. The unvested stock option expense is expected to be recognized through March 2024.

51

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Warrants

Warrant activity for the nine months ended September 30, 2022 and the year ended December 31, 2021 are summarized as follows:

Schedule of Warrants Activity

|  |  |  |  |  |  |  |  | Weighted |  |  |  |
|  |  |  |  |  |  |  |  | Average |  |  |  |
|  |  |  |  |  | Weighted |  |  | Remaining |  |  | Aggregate |
|  |  | Number of |  |  | Average |  |  | Contractual |  |  | Intrinsic |
Warrants |  |  | Warrants |  |  | Exercise Price |  |  | Term (Years) |  |  | Value |
Outstanding - December 31, 2020 |  |  |  | 194,317 |  |  | $ | 32.50 |  |  |  | 1.52 |  |  | $ | - |
Vested and Exercisable - December 31, 2020 |  |  |  | 194,317 |  |  | $ | 32.50 |  |  |  | 1.52 |  |  | $ | - |
Granted |  |  |  | 5,935,450 |  |  | $ | 8.01 |  |  |  | - |  |  |  | - |
Exercised |  |  |  | (2,133 | ) |  | $ | 12.50 |  |  |  | - |  |  |  | - |
Cancelled/Forfeited |  |  |  | (44,650 | ) |  | $ | 23.49 |  |  |  | - |  |  |  | - |
Outstanding - December 31, 2021 |  |  |  | 6,082,984 |  |  | $ | 8.68 |  |  |  | 2.93 |  |  | $ | - |
Vested and Exercisable - December 31, 2021 |  |  |  | 5,852,984 |  |  | $ | 8.70 |  |  |  | 2.85 |  |  | $ | - |
Unvested - December 31, 2021 |  |  |  | 230,000 |  |  | $ | 8.00 |  |  |  | 4.85 |  |  | $ | - |
Granted |  |  |  | 153,000 |  |  | $ | 4.73 |  |  |  | - |  |  |  |  |
Exercised |  |  |  | (498,750 | ) |  | $ | 8.00 |  |  |  | - |  |  |  |  |
Cancelled/Forfeited |  |  |  | (88,671 | ) |  | $ | 40.04 |  |  |  | - |  |  |  |  |
Outstanding - September 30, 2022 |  |  |  | 5,648,563 |  |  | $ | 8.14 |  |  |  | 2.10 |  |  | $ | - |
Vested and Exercisable - September 30, 2022 |  |  |  | 5,648,563 |  |  | $ | 8.14 |  |  |  | 2.10 |  |  | $ | - |
Unvested and non-exercisable - September 30, 2022 |  |  |  | - |  |  | $ | - |  |  |  | 0.00 |  |  | $ | - |

Warrant Transactions for the Nine Months Ended September 30, 2022

Debt Issue Costs

In connection with $1,700,000 in notes issued in March, April and May 2022 (See Note 5), the Company issued 51,000 warrants, which are accounted for as debt issue costs, having a fair value of $115,404.

The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:

Schedule of Fair Value of Warrants

Expected term (years) |  |  | 3 years |
Expected volatility |  |  | 119% - 120 | %
Expected dividends |  |  | 0 | %
Risk free interest rate |  |  | 2.45% - 2.80 | %

52

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Interest Expense

In May 2022, a vendor increased the amount of credit the Company had for making purchases. In consideration for the increase, the Company issued 90,000 warrants, which are accounted for as interest expense, having a fair value of $212,608.

The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:

Schedule of Fair Value of Warrants

Expected term (years) |  |  | 3 years |
Expected volatility |  |  | 120 | %
Expected dividends |  |  | 0 | %
Risk free interest rate |  |  | 2.71 | %

In September 2022, the Company extended the due dates of certain notes payable totaling $400,000 for an additional 6 months. In consideration for the extension of the maturity date, the Company issued 12,000 warrants, which are accounted for as interest expense, having a fair value of $38,754.

The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:

Schedule of Fair Value of Warrants

Expected term (years) |  |  | 3 years |
Expected volatility |  |  | 119 | %
Expected dividends |  |  | 0 | %
Risk free interest rate |  |  | 4.25 | %

Warrant Exercise

In July 2022, the Company issued 78,992 shares of common stock in connection with a cashless exercise of 268,750 warrants.

53

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Warrant Transactions for the Year Ended December 31, 2021

During 2021, the Company granted 277,950 warrants to convertible note holders and additional 137,500 warrants to note holders. These warrants were exercisable upon the grant date, had expiration dates ranging from 3 – 5 years, and exercise prices of $8 - $12/share.

Additionally, in connection with the NASDAQ uplisting, 5,290,000 warrants were sold for cash and an additional 230,000 warrants were issued as an underwriters’ discount. The 230,000 warrants are exercisable six (6) months from the grant date in May 2022. See above for additional discussion, including the cashless exercise of these warrants for 68,161 shares of common stock.

In connection with the Company’s NASDAQ uplisting, 433,017 warrants were repriced at a lower exercise price to better reflect the current market offering. No other terms had been modified. As a result, for the year ended December 31, 2021, the Company recorded a warrant modification expense of $74,476 in the accompanying consolidated statements of operations with an offsetting increase to additional paid in capital.

The fair value of these warrants was determined using a Black-Scholes option pricing model with the following inputs:

Schedule of Fair Value of Warrants

Expected term (years) |  | 3 - 5
Expected volatility |  | 119% - 146%
Expected dividends |  | 0%
Risk free interest rate |  | 0.07% - 1.15%

54

SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Note 10 – 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 performance of its operating segments based on revenue and operating loss. All data below is prior to intercompany eliminations.

Segment information for the three and nine months ended September 30, 2022 and 2021, are as follows:

Schedule of Operating Segments

|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  | Three Months Ended September 30, 2022 |  |  | Nine Months Ended September 30, 2022 |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Revenues |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 27,345,641 |  |  | $ | 1,250,804 |  |  | $ | 61,462,327 |  |  | $ | 1,253,035 |
Surge Blockchain, LLC |  |  | 54,707 |  |  |  | 32,629 |  |  |  | 102,378 |  |  |  | 110,547 |
LogicsIQ, Inc. |  |  | 4,763,990 |  |  |  | 7,453,036 |  |  |  | 10,689,006 |  |  |  | 15,449,941 |
Surge Fintech & ECS |  |  | 4,007,007 |  |  |  | 5,801,884 |  |  |  | 13,064,149 |  |  |  | 18,933,869 |
True Wireless |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,157,981 |
SurgePays, Inc. |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total |  | $ | 36,171,345 |  |  | $ | 14,538,353 |  |  | $ | 85,317,860 |  |  | $ | 36,905,373 |
Cost of revenues |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 24,298,074 |  |  | $ | 1,179,212 |  |  | $ | 54,836,122 |  |  | $ | 1,186,881 |
Surge Blockchain, LLC |  |  | 957 |  |  |  | (588 | ) |  |  | 2,457 |  |  |  | 1,377 |
LogicsIQ, Inc. |  |  | 5,693,500 |  |  |  | 5,851,931 |  |  |  | 10,457,462 |  |  |  | 12,628,769 |
Surge Fintech & ECS |  |  | 4,258,010 |  |  |  | 5,604,316 |  |  |  | 13,276,380 |  |  |  | 18,421,530 |
True Wireless |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 306,062 |
SurgePays, Inc. |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total |  | $ | 34,250,541 |  |  | $ | 12,634,871 |  |  | $ | 78,572,421 |  |  | $ | 32,544,619 |
Operating expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 84,775 |  |  | $ | 11,496 |  |  | $ | 215,664 |  |  | $ | 35,409 |
Surge Blockchain, LLC |  |  | 300 |  |  |  | (918 | ) |  |  | 53,271 |  |  |  | 11,725 |
LogicsIQ, Inc. |  |  | 446,292 |  |  |  | 646,128 |  |  |  | 1,454,111 |  |  |  | 1,604,261 |
Surge Fintech & ECS |  |  | 370,599 |  |  |  | 288,966 |  |  |  | 1,013,518 |  |  |  | 1,062,315 |
True Wireless |  |  | - |  |  |  | 61,458 |  |  |  | - |  |  |  | 615,013 |
SurgePays, Inc. |  |  | 2,031,238 |  |  |  | 1,902,824 |  |  |  | 6,918,965 |  |  |  | 6,933,756 |
Total |  | $ | 2,933,204 |  |  | $ | 2,909,954 |  |  | $ | 9,655,529 |  |  | $ | 10,262,479 |
Income (loss) from operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 2,962,792 |  |  | $ | 60,096 |  |  | $ | 6,410,541 |  |  | $ | 30,745 |
Surge Blockchain, LLC |  |  | 53,450 |  |  |  | 34,135 |  |  |  | 46,650 |  |  |  | 97,445 |
LogicsIQ, Inc. |  |  | (1,375,802 | ) |  |  | 954,977 |  |  |  | (1,222,567 | ) |  |  | 1,216,911 |
Surge Fintech & ECS |  |  | (621,602 | ) |  |  | (91,398 | ) |  |  | (1,225,749 | ) |  |  | (549,976 | )
True Wireless |  |  | - |  |  |  | (61,458 | ) |  |  | - |  |  |  | 236,906 |
SurgePays, Inc. |  |  | (2,031,238 | ) |  |  | (1,902,824 | ) |  |  | (6,918,965 | ) |  |  | (6,933,756 | )
Total |  | $ | (1,012,400 | ) |  | $ | (1,006,472 | ) |  | $ | (2,910,090 | ) |  | $ | (5,901,725 | )

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SURGEPAYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(UNAUDITED)

Segment information for the Company’s assets and liabilities at September 30, 2022 and December 31, 2021, are as follows:

|  | September 30, 2022 |  |  | December 31, 2021 |
Total Assets |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 17,772,528 |  |  | $ | (161,110 | )
Surge Blockchain, LLC |  |  | (560,954 | ) |  |  | (608,188 | )
LogicsIQ, Inc. |  |  | 2,392,232 |  |  |  | 1,284,562 |
Surge Fintech & ECS |  |  | 2,656,342 |  |  |  | 3,870,409 |
True Wireless |  |  | - |  |  |  | - |
SurgePays, Inc. |  |  | 11,100,715 |  |  |  | 15,114,529 |
Total |  | $ | 33,360,863 |  |  | $ | 19,500,202 |
Total Liabilities |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 11,527,879 |  |  | $ | 5,773 |
Surge Blockchain, LLC |  |  | 198,197 |  |  |  | 197,614 |
LogicsIQ, Inc. |  |  | 4,392,510 |  |  |  | 2,056,886 |
Surge Fintech & ECS |  |  | 60,029 |  |  |  | 48,346 |
True Wireless |  |  | - |  |  |  | - |
SurgePays, Inc. |  |  | 16,718,162 |  |  |  | 13,640,262 |
Total |  | $ | 32,896,777 |  |  | $ | 15,948,881 |

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This statement contains forward-looking statements within the meaning of the Securities Act. 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, 2022 and 2021 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 telecommunications company focused on the underbanked and underserved communities. SurgePays blockchain fintech platform utilizes a suite of financial and prepaid products to convert corner stores and bodegas into tech-hubs for underbanked neighborhoods. SurgePays telecom subsidiaries SurgePhone Wireless and Torch Wireless provide mobile broadband to low-income consumers nationwide.

About SurgePays, Inc.

SurgePays, Inc. is a financial technology and telecommunications company focused on providing essential services to the underbanked community. The Company’s blockchain fintech platform utilizes a suite of financial and prepaid products to convert corner stores into tech-hubs for underbanked neighborhoods. The Company’s telecom subsidiaries provide mobile broadband, voice and SMS text messaging to both subsidized and direct retail prepaid customers.

SurgePhone Wireless, Torch Wireless and LocoRabbit Wireless

SurgePhone and Torch, wholly owned subsidiaries of SurgePays, are a mobile virtual network operator (MVNO) company with 2 branded channels of business. SurgePhone and Torch are licensed by the Federal Communications Commission (the “FCC”) to provide subsidized access to quality internet through mobile broadband services to consumers qualifying under the federal guidelines of the Affordable Connectivity Program (the “ACP”). The ACP (the successor program, as of March 1, 2022 to the Emergency Broadband Benefit program) provides SurgePhone and Torch up to a $100 reimbursement for the cost of each tablet device distributed and a $30 per customer, per month subsidy for mobile broadband (internet connectivity) services. SurgePhone and Torch combined are licensed to offer subsidized mobile broadband to all fifty states.

LocoRabbit is the retail pure prepaid wireless offering with talk, text, and 4G LTE data at prices that are lower than other well-known prepaid competitors. Available nationwide, LocoRabbit is sold online direct to consumers through the nationwide network of convenience stores, gas stations, mini-marts, bodegas and tiendas connected to the SurgePays software platform. The SIM kits usually hang from a peg hook on the SurgePays gift card rack. Due to owning the payment platform, SurgePays is able to exclusively offer an industry high commission to the retailer for top-ups paid monthly at the client’s store.

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Surge Fintech (ECS Business)

We refer to the collective operations of ECS Prepaid, LLC, a Missouri limited liability company, Electronic Check Services, Inc., a Missouri corporation, and Central States Legal Services, Inc., a Missouri corporation, as “Surge Fintech.” This was previously referred to as the “ECS Business.”

Surge Fintech has been a financial technology tech and wireless top-up platform for over 15 years. Through a series of transactions between October 2019 and January 2020, we acquired the ECS Business primarily for the favorable ACH banking relationship; a fintech transactions platform processing over 20,000 transactions a day at approximately 8,000 independently owned retail stores. The platform serves as the proven backbone for wireless top-up transactions and wireless product aggregation for the SurgePays nationwide network.

ShockWave CRM™

SurgePays acquired the Software as a Service (SaaS) Customer Relationship Management (CRM) and Billing System software platform “MVNO Cloud Services” on June 7, 2022. SurgePays is rebranding the software as ShockWave CRM. Payment for the software consisted of $300,000 in cash, of which $100,000 was paid in June 2022, and the remaining $200,000 in July 2022. Additionally, the Company issued 85,000 shares of common stock having a fair value of $411,400 ($4.84/share), based upon the quoted closing trading price.

ShockWave is an end-to-end cloud-based SaaS offering an Omnichannel CRM, Billing system and carrier integrations specific to the telecommunication and broadband industry. Some of these services include sales agent management, device and SIM inventory management, order processing and provisioning, retail POS activations and payments, customer service management, retention tools, billing, and payments.

Surge Blockchain

SurgePays Blockchain Software is a back-office marketplace platform offering wholesale consumable goods direct to convenience stores, bodegas, minimarts, tiendas and other corner stores who are transacting on the SurgePays Fintech platform. The wholesale e-commerce platform is easily accessed through the secure app interface – similar to a website. We believe what makes this sales platform unique is that it also offers the merchant the ability to order wholesale consumable goods at a significant discount from traditional distributors with one touch ease. We are able to sell products at a significant discount by using on demand Direct Store Delivery (DSD.) Our platform is connected directly to manufacturers, who ship products direct to the store while cutting out the middleman. The goal of the SurgePays Portal is to leverage the competitive advantage and efficiencies of e-commerce to provide as many commonly sold consumable products as possible to convenience stores, corner markets, bodegas, and supermarkets while increasing profit margins for these stores. These products include herbal stimulants, energy pills and shot drinks, dry foods, communication accessories, novelties, PPP products, bagged snacks, processed meats, automotive parts and many more goods, all in one convenient wholesale e-commerce platform.

LogicsIQ, Inc.

LogicsIQ, Inc. is a software development company providing marketing business intelligence (“BI”), lead generation, and case management solutions primarily to law firms in the mass tort industry. The company’s CRM “Intake Logics” facilitates the entire life cycle of converting a potential lead into a signed retainer client integrated into the law firms case management software. Our proven strategy of delivering cost-effective retained cases to our attorney and law firm clients means those clients are better able to manage their media and advertising budgets and reach targeted audiences more quickly and effectively when utilizing our proprietary data driven analytics dashboards. Our ability to deliver transparent results has bolstered our reputation as an industry leader and solidified a solid client base.

Centercom

Since 2019, we have owned a 40% equity interest in Centercom Global, S.A. de C.V. (“Centercom”). Centercom is a bilingual operations center providing the Company with sales support, customer service, IT infrastructure design, graphic media, database programming, software development, revenue assurance, lead generation, and other various operational support services. Centercom is based in El Salvador.

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

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.

At September 30, 2022 and December 31, 2021, respectively, on the consolidated balance sheets, the Company separated its various types of debt into more distinct categories. Certain accounts payable were reclassified from non-current to current.

For the three months and nine months ended September 30, 2022 and 2021, respectively, on the consolidated statements of operations, the Company reclassified certain expenses amongst general and administrative and cost of revenues.

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Revenues during the three months ended September 30, 2022 and 2021 consisted of the following:

|  | 2022 |  |  | 2021 |
|  | (unaudited) |  |  | (unaudited) |
Revenue |  | $ | 36,171,345 |  |  | $ | 14,538,353 |
Cost of revenue (exclusive of depreciation and amortization) |  |  | 34,250,541 |  |  |  | 12,634,871 |
General and administrative expenses |  |  | 2,933,204 |  |  |  | 2,909,954 |
Loss from operations |  | $ | (1,012,400 | ) |  | $ | (1,006,472 | )

Revenue increased $21,632,992 (149%) primarily as a result of an increase in revenue for: SurgePhone Wireless and Torch Wireless of $26,094,837 offset by a decrease in Surge Fintech/ECS of $1,794,878 and LogicsIQ of $2,689,046. Loss from operations increased by $5,928 (1%).

General and administrative expenses during the three months ended September 30, 2022 and 2021 consisted of the following:

|  | 2022 |  |  | 2021 |
|  | (unaudited) |  |  | (unaudited) |
Depreciation and amortization |  | $ | 303,695 |  |  | $ | 181,133 |
Selling, general and administration |  |  | 2,629,509 |  |  |  | 2,728,821 |
Total |  | $ | 2,933,204 |  |  | $ | 2,909,954 |

Depreciation and amortization increased $122,562 primarily as a result of purchased software during the fiscal year of 2022.

Selling, general and administrative expenses during the three months ended September 30, 2022 and 2021 consisted of the following:

|  | 2022 |  |  | 2021 |
|  | (unaudited) |  |  | (unaudited) |
Contractors and consultants |  | $ | 472,366 |  |  | $ | 492,245 |
Professional services |  |  | 281,185 |  |  |  | 224,907 |
Compensation |  |  | 822,411 |  |  |  | 939,334 |
Webhosting/internet |  |  | 128,958 |  |  |  | 80,029 |
Advertising and marketing |  |  | 34,708 |  |  |  | 76,413 |
Other |  |  | 1,193,576 |  |  |  | 1,097,026 |
Total |  | $ | 2,933,204 |  |  | $ | 2,909,954 |

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Selling, general and administrative costs (S, G & A) increased by $23,250 (1%). The detail changes are discussed below:

* | Contractors and consultants decreased to $472,366 in 2022 from $492,245 in 2021 primarily due to reclassing of the call center expenses to cost of goods sold in 2022.
* | Professional services increased from $224,907 in 2021 to $281,185 in 2022 primarily as a result of legal expenses related to various legal proceedings.
* | Compensation decreased from $939,334 in 2021 to $822,411 in 2022 primarily as a result of elimination of the President position after the passing of Anthony Nuzzo, Jr.
* | Webhosting/internet costs increased to $128,958 in 2022 from $80,029 in 2021.
* | Advertising and marketing costs decreased to $34,708 in 2022 from $76,413 in 2021 primarily due to a normalization of advertising costs in 2022. The Company implemented new advertising and marketing campaigns in the first three-quarters of 2021.
* | Other costs decreased to $1,193,576 in 2022 from $1,097,026 in 2021 primarily due to the following changes period over period:

| ● | Building expenses increased by $126,465;
| ● | insurance expense increased by $219,688 as a result of additional coverages required as part of uplisting to Nasdaq in the fourth quarter of 2021;
| ● | Office expenses increased by $33,546; and
| ● | other operating expense decreased by $95,550, as a result of reclassifying amortization of debt discount in the quarter ending September 30, 2021.

Other (expense) income during the three months ended September 30, 2022 and 2021 consisted of the following:

|  | 2022 |  |  | 2021 |
|  | (unaudited) |  |  | (unaudited) |
Interest, net |  | $ | (633,593 | ) |  | $ | (1,236,778 | )
Change in fair value of derivative liability |  |  | - |  |  |  | (202,784 | )
Amortization of debt discount |  |  | (57,933 | ) |  |  | 630,580 |
Gain on equity investment in Centercom |  |  | (52,435 | ) |  |  | 21,072 |
Gain (loss) on settlement of liabilities |  |  | - |  |  |  | 136,487 |
Total Other (expense) income - net |  | $ | (743,961 | ) |  | $ | (651,423 | )

Interest expense decreased due to the repayment of various notes during 2021.

The loss on equity investment in Centercom of $52,435 in 2022 compared to an equity gain of $21,072 in 2021.

COMPARISON OF NINE MONTHS ENDED September 30, 2022 AND 2021

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.

At September 30, 2022 and December 31, 2021, respectively, on the consolidated balance sheets, the Company separated its various types of debt into more distinct categories. Certain accounts payable were reclassified from non-current to current.

For the three months and nine months ended September 30, 2022 and 2021, respectively, on the consolidated statements of operations, the Company reclassified certain expenses amongst general and administrative and cost of revenues.

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Revenues during the nine months ended September 30, 2022 and 2021 consisted of the following:

|  | 2022 |  |  | 2021 |
|  | (unaudited) |  |  | (unaudited) |
Revenue |  | $ | 85,317,860 |  |  | $ | 36,905,373 |
Cost of revenue (exclusive of depreciation and amortization) |  |  | 78,572,421 |  |  |  | 32,544,619 |
General and administrative expenses |  |  | 9,655,529 |  |  |  | 10,262,479 |
Loss from operations |  | $ | (2,910,090 | ) |  | $ | (5,901,725 | )

Revenue increased $48,412,487 (131%) primarily as a result of an increases in revenue for: SurgePhone Wireless and Torch Wireless of $60,209,292 offset by a decrease in Surge Fintech/ECS of $5,869,720 and LogicsIQ of $4,760,936. Loss from operations decreased by $2,991,635 (51%) primarily as a result of an increase in operating income in SurgePhone Wireless and Torch Wireless.

General and administrative expenses during the nine months ended September 30, 2022 and 2021 consisted of the following:

|  | 2022 |  |  | 2021 |
|  | (unaudited) |  |  | (unaudited) |
Depreciation and amortization |  | $ | 664,533 |  |  | $ | 579,384 |
Selling, general and administration |  |  | 8,990,996 |  |  |  | 9,683,095 |
Total |  | $ | 9,655,529 |  |  | $ | 10,262,479 |

Depreciation and amortization increased $85,49 primarily as a result of purchased software during the fiscal year of 2022.

Selling, general and administrative expenses during the nine months ended September 30, 2022 and 2021 consisted of the following:

|  | 2022 |  |  | 2021 |
|  | (unaudited) |  |  | (unaudited) |
Contractors and consultants |  | $ | 1,443,516 |  |  | $ | 1,582,562 |
Professional services |  |  | 947,722 |  |  |  | 954,026 |
Compensation |  |  | 3,404,852 |  |  |  | 2,866,427 |
Webhosting/internet |  |  | 286,536 |  |  |  | 445,907 |
Advertising and marketing |  |  | 170,714 |  |  |  | 638,706 |
Other |  |  | 2,737,656 |  |  |  | 3,195,467 |
Total |  | $ | 8,990,996 |  |  | $ | 9,683,095 |

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Selling, general and administrative costs (S, G & A) decreased by $692,099 (7%). The detail changes are discussed below:

* | Contractors and consultants decreased to $1,443,516 in 2022 from $1,582,562 in 2021 primarily due to reclassing of the call center expenses to cost of goods sold in 2022.
* | Professional services decreased from $954,026 in 2021 to $947,722 in 2022.
* | Compensation increased from $2,866,427 in 2021 to $3,404,852 in 2022 primarily as a result of one-time bonuses paid to various management personnel.
* | Webhosting/internet costs decreased to $286,536 in 2022 from $445,907 in 2021.
* | Advertising and marketing costs decreased to $170,714 in 2022 from $638,706 in 2021 primarily due to a normalization of advertising costs in 2022. The Company implemented new advertising and marketing campaigns in the first three-quarters of 2021.
* | Other costs decreased to $457,811 in 2022 from $3,195,467 in 2021 primarily due to the following changes period over period:

| ● | Building expenses increased by $89,288;
| ● | insurance expense increased by $929,436 as a result of additional coverages required as part of uplisting to Nasdaq in the fourth quarter of 2021;
| ● | Office expenses increased by $69,401; and
| ● | other operating expense increased by $1,736,211 as a result of reclassifying amortization of debt discount in the quarter ending September 30, 2021.

Other (expense) income during the six months ended September 30, 2022 and 2021 consisted of the following:

|  | 2022 |  |  | 2021 |
|  | (unaudited) |  |  | (unaudited) |
Interest, net |  | $ | (1,370,236 | ) |  | $ | (4,637,236 | )
Change in fair value of derivative liability |  |  | - |  |  |  | 746,896 |
PPP loan forgiveness |  |  | 524,143 |  |  |  | - |
Derivative expense |  |  | - |  |  |  | (1,775,057 | )
Amortization of debt discount |  |  | (95,001 | ) |  |  | 2,008,036 |
Gain on equity investment in Centercom |  |  | (42,099 | ) |  |  | (3,556 | )
Gain on deconsolidation |  |  | - |  |  |  | 1,895,871 |
Gain (loss) on settlement of liabilities |  |  | - |  |  |  | 979,469 |
Total Other (expense) income - net |  | $ | (983,193 | ) |  | $ | (785,577 | )

Interest expense decreased due to the repayment of various notes during 2021.

The loss on equity investment in Centercom of $42,099 in 2022 compared to an equity loss of $3,556 in 2021.

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.

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The Company evaluated performance of its operating segments based on revenue and operating loss. Segment information for the three and nine months ended September 30, 2022 and 2021, are as follows:

|  | Three Months Ended September 30, 2022 |  |  | Nine Months Ended September 30, 2022 |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Revenues |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 27,345,641 |  |  | $ | 1,250,804 |  |  | $ | 61,462,327 |  |  | $ | 1,253,035 |
Surge Blockchain, LLC |  |  | 54,707 |  |  |  | 32,629 |  |  |  | 102,378 |  |  |  | 110,547 |
LogicsIQ, Inc. |  |  | 4,763,990 |  |  |  | 7,453,036 |  |  |  | 10,689,006 |  |  |  | 15,449,941 |
Surge Fintech & ECS |  |  | 4,007,007 |  |  |  | 5,801,884 |  |  |  | 13,064,149 |  |  |  | 18,933,869 |
True Wireless |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,157,981 |
SurgePays, Inc. |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total |  | $ | 36,171,345 |  |  | $ | 14,538,353 |  |  | $ | 85,317,860 |  |  | $ | 36,905,373 |
Cost of revenues |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 24,298,074 |  |  | $ | 1,179,212 |  |  | $ | 54,836,122 |  |  | $ | 1,186,881 |
Surge Blockchain, LLC |  |  | 957 |  |  |  | (588 | ) |  |  | 2,457 |  |  |  | 1,377 |
LogicsIQ, Inc. |  |  | 5,693,500 |  |  |  | 5,851,931 |  |  |  | 10,457,462 |  |  |  | 12,628,769 |
Surge Fintech & ECS |  |  | 4,258,010 |  |  |  | 5,604,316 |  |  |  | 13,276,380 |  |  |  | 18,421,530 |
True Wireless |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 306,062 |
SurgePays, Inc. |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total |  | $ | 34,250,541 |  |  | $ | 12,634,871 |  |  | $ | 78,572,421 |  |  | $ | 32,544,619 |
Operating expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 84,775 |  |  | $ | 11,496 |  |  | $ | 215,664 |  |  | $ | 35,409 |
Surge Blockchain, LLC |  |  | 300 |  |  |  | (918 | ) |  |  | 53,271 |  |  |  | 11,725 |
LogicsIQ, Inc. |  |  | 446,292 |  |  |  | 646,128 |  |  |  | 1,454,111 |  |  |  | 1,604,261 |
Surge Fintech & ECS |  |  | 370,599 |  |  |  | 288,966 |  |  |  | 1,013,518 |  |  |  | 1,062,315 |
True Wireless |  |  | - |  |  |  | 61,458 |  |  |  | - |  |  |  | 615,013 |
SurgePays, Inc. |  |  | 2,031,238 |  |  |  | 1,902,824 |  |  |  | 6,918,965 |  |  |  | 6,933,756 |
Total |  | $ | 2,933,204 |  |  | $ | 2,909,954 |  |  | $ | 9,655,529 |  |  | $ | 10,262,479 |
Income (loss) from operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 2,962,792 |  |  | $ | 60,096 |  |  | $ | 6,410,541 |  |  | $ | 30,745 |
Surge Blockchain, LLC |  |  | 53,450 |  |  |  | 34,135 |  |  |  | 46,650 |  |  |  | 97,445 |
LogicsIQ, Inc. |  |  | (1,375,802 | ) |  |  | 954,977 |  |  |  | (1,222,567 | ) |  |  | 1,216,911 |
Surge Fintech & ECS |  |  | (621,602 | ) |  |  | (91,398 | ) |  |  | (1,225,749 | ) |  |  | (549,976 | )
True Wireless |  |  | - |  |  |  | (61,458 | ) |  |  | - |  |  |  | 236,906 |
SurgePays, Inc. |  |  | (2,031,238 | ) |  |  | (1,902,824 | ) |  |  | (6,918,965 | ) |  |  | (6,933,756 | )
Total |  | $ | (1,012,400 | ) |  | $ | (1,006,472 | ) |  | $ | (2,910,090 | ) |  | $ | (5,901,725 | )

Segment information for the Company’s assets and liabilities at September 30, 2022 and December 31, 2021, are as follows:

|  | September 30, 2022 |  |  | December 31, 2021 |
Total Assets |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 17,772,528 |  |  | $ | (161,110 | )
Surge Blockchain, LLC |  |  | (560,954 | ) |  |  | (608,188 | )
LogicsIQ, Inc. |  |  | 2,392,232 |  |  |  | 1,284,562 |
Surge Fintech & ECS |  |  | 2,656,342 |  |  |  | 3,870,409 |
True Wireless |  |  | - |  |  |  | - |
SurgePays, Inc. |  |  | 11,100,715 |  |  |  | 15,114,529 |
Total |  | $ | 33,360,863 |  |  | $ | 19,500,202 |
Total Liabilities |  |  |  |  |  |  |  |
Surge Phone and Torch Wireless |  | $ | 11,527,879 |  |  | $ | 5,773 |
Surge Blockchain, LLC |  |  | 198,197 |  |  |  | 197,614 |
LogicsIQ, Inc. |  |  | 4,392,510 |  |  |  | 2,056,886 |
Surge Fintech & ECS |  |  | 60,029 |  |  |  | 48,346 |
True Wireless |  |  | - |  |  |  | - |
SurgePays, Inc. |  |  | 16,718,162 |  |  |  | 13,640,262 |
Total |  | $ | 32,896,777 |  |  | $ | 15,948,881 |

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SurgePhone Wireless and Torch Wireless

The Affordable Connectivity Program (ACP) revenue for the three months ended September 30,2022 increased by $26,094,837 as compared to the three months ended September 30, 2021. The increase was a result of being newly licensed to provide the Emergency Broadband Benefit (“EBB”) program and Affordable Connectivity Program (“ACP”). Cost of revenues for the three months ended September 30, 2022, increased by $23,118,862 from the same period ended September 30, 2021, as a result of the purchases of devices ($9,515,474), data usage expenses ($7,014,116) and commission paid ($5,386,626) for the ACP program. The operating income increased from an operating income of $60,096 as of the three months ended September 30, 2021, to operating income of $2,902,696 as of three months ended September 30, 2022.

The Affordable Connectivity Program (ACP)revenue for the nine months ended September 30,2022 increased by $60,209,292 as compared to the nine months ended September 30, 2021. The increase was a result of being newly licensed to provide the Emergency Broadband Benefit (“EBB”) program and Affordable Connectivity Program (“ACP”). Cost of revenues for the nine months ended September 30, 2022, increased by $ 53,649,241 from the same period ended September 30, 2021, as a result of the purchases of devices ($25,590,039), data usage expenses ($13,024,793) and commission paid ($13,176,925) for the ACP program. The operating income increased from an operating income of $30,745 as of the nine months ended September 30, 2021, to operating income of $6,379,797 as of nine months ended September 30, 2022.

Surge Blockchain

The revenue for the three months ended September 30, 2022 increased by $22,079 compared to the three months ended September 30, 2021. The operating income for the three months ended September 30, 2022 increased by $19,315 compared to the same period in 2021.

The revenue for the nine months ended September 30, 2022 decreased by $8,168 compared to the nine months ended September 30, 2021. The operating income for the nine months ended September 30, 2022 decreased by $50,795 compared to the same period in 2021.

LogicsIQ

The revenue for the three months ended September 30, 2022 decreased by $2,689,046 compared to the three months ended September 30, 2021. The revenue decreased due to the maturity curve of the various litigation cases as older cases are slowed and newer cases are set up. Operating income decreased by $2,330,780 for comparable periods of 2022 to 2021. LogicsIQ ended with an operating loss of $1,375,802 for the three months ended September 30, 2022 compared to an operating income of $954,978 for the same period in 2021.

The revenue for the nine months ended September 30, 2022 decreased by $4,760,936 compared to the nine months ended September 30, 2021. The revenue decreased due to the maturity curve of the various litigation cases as older cases are slowed and newer cases are set up. Operating income decreased by $2,439,479 for comparable periods of 2022 to 2021. LogicsIQ ended with an operating loss of $1,222,568 for the nine months ended September 30, 2022 compared to an operating gain of $1,216,912 for the same period in 2021.

Surge Fintech and ECS

The revenue for the three months ended September 30, 2022 was $4,007,007 compared to $5,801,884 for the same period in 2021. The decrease of 31% was a continuing result of the impact of COVID-19 and our strategic plan to move our salesforce from independent contractors to employed salespersons.

The revenue for the nine months ended September 30, 2022 was $13,064,149 compared to $18,933,869 for the same period in 2021. The decrease of 31% was a continuing result of the impact of COVID-19 and our strategic plan to move our salesforce from independent contractors to employed salespersons.

True Wireless (TW)

On May 7, 2021, the Company disposed of its subsidiary True Wireless, Inc. (“TW”), however we retained $1,097,659 in liabilities which consisted of $1,077,659 in accounts payable and accrued expenses as well as $20,000 in related party loans. In connection with the sale, the Company received an unsecured note receivable for $176,851, bearing interest at 0.6%, with a default interest rate of 10%. The Company will receive 25 payments of principal and accrued interest totaling $7,461 commencing in September 2023.

Overall

Each segment was impacted by COVID-19 in varying degrees, however, the overall increase in revenue of $21,632,992 from 2021 to 2022 for the three months ended September 30, can be attributable to opening of some markets and the new revenue stream of the EBB program. The net operating loss improved by $41,532 from three months ended September 30, 2021 to the three months ended September 30, 2022.

The overall increase in revenue of $48,412,487 from 2021 to 2022 for the nine months ended September 30, can be attributable to opening of some markets and the new revenue stream of the EBB program. The net operating loss improved by $2,990,646 from nine months ended September 30, 2021 to the nine months ended September 30, 2022.

LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN

At September 30, 2022 and December 31, 2021, our current assets were $26,983,710 and $13,892,681 respectively, and our current liabilities were $26,930,476 and $9,998,194, respectively, which resulted in a working capital surplus of $52,244 on September 30, 2022 and a working capital surplus of $3,894,487 on December 31, 2021.

Total assets at September 30, 2022 and December 31, 2021 amounted to $33,360,863 and $19,500,202, respectively. At September 30, 2022, assets consisted of current assets of $26,983,710, net property and equipment of $747,056, net intangible assets of $2,943,353, goodwill of $1,666,782, equity investment in Centercom (related party) of $401,190, note receivable of $176,851 and net operating lease right of use asset of $441,921, as compared to current assets of $13,892,681, net property and equipment of $200,448, net intangible assets of $3,433,484, goodwill of $866,782, equity investment in Centercom (related party) of $443,288, notes receivable of $176,851 and net operating lease right of use asset of $486,668 at December 31, 2021.

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At September 30, 2022, our total liabilities of $32,896,777 increased by $16,947,896 from $15,948,881 at December 31, 2021.

At September 30, 2022, our total stockholders’ equity was $464,086 as compared to $3,551,321 at December 31, 2021. The principal reason for the decrease in stockholders’ equity was the impact of the net loss for the period.

The following table sets forth the major sources and uses of cash for the nine months ended September 30, 2022 and 2021.

|  | September 30, 2022 |  |  | September 30, 2021 |
Net cash used in operating activities |  | $ | (3,951,043 | ) |  | $ | (7,144,369 | )
Net cash used in investing activities |  |  | (1,109,611 | ) |  |  | (376,712 | )
Net cash provided by financing activities |  |  | 6,669,208 |  |  |  | 7,482,613 |
Net change in cash and cash equivalents |  | $ | 1,608,554 |  |  | $ | (38,468 | )

The net cash used in operating activities was mostly comprised of changes in the following items:

● | net loss by $3,893,283;
● | accounts receivable increase of $6,217,533;
● | inventory increase of $5,184,807;
● | accounts payable and accrued expenses and accounts payable and accrued expenses – related parties increase of $9,253,951; and
● | Deferred revenue increase of $1,620,260.

The net cash used in investing activities was mostly comprised of changes in the following items:

● | acquisition of Torch Wireless of $800,000; and
● | Purchase of software for $300,000.

The net cash provided by financing activities was mostly comprised of changes in the following item:

● | Proceeds from notes payable of $6,700,000.

At December 31, 2021, the Company had the following material commitments and contingencies.

Debt See Note 5 to the Consolidated Financial Statements.

Related party transactions - See Notes 2, 5 and 8 to the Consolidated Financial Statements.

Cash requirements and capital expenditures – At the current level of operations, the Company has to borrow 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.

We expect the ACP revenue stream to increase month over month for the remainder of 2022. Our attention will shift quickly from our hyper growth in the broadband sector to the emphasis of on-boarding merchants and stores on our fintech platform. This will allow us to fully implement our sales strategy, resulting in increased revenue in all segments of our business. At this point in time, the Company does not anticipate the need to raise capital through any equity plays. We may need from time to time a line of credit to enhance the hyper growth in the ACP programs.

On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and included a provision for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”). The PPP provides small businesses with funds to pay up to eight (8) weeks of payroll costs, including benefits. Funds received under the PPP may also be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or a portion of the loans may be forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from the date of issuance, and all payments are deferred for the first nine (6) months of the loan. Any unforgiven balance of loan principal and accrued interest at the end of the nine (6) month loan deferral period is amortized in equal monthly installments over the remaining 18-months of the loan term. On January 25, 2022, the Company was notified of $371,665 in forgiveness of the $498,082 SBA guaranteed PPP loan with Bank3. The outstanding balance of $126,418 is a 30-year, 1% annual interest rate. In addition, the Company received $636,600 in several Economic Injury Disaster Loans with the Small Business Administration. These loans all carry a 3.75% interest rate payable over 30 years. First payment due 12 months from date of note.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

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, 2022, the Company’s disclosure controls are effective, but the Company lacks segregation of duties similar to other companies our size.

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PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

From time to time, we may be engaged in various lawsuits and legal proceedings in the ordinary course of our business. Except as described below, we are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse effect on our business, financial condition or results of operations.

The following is summary of threatened, pending, asserted or un-asserted claims against us or any of our wholly owned subsidiaries for which there have been material developments since December 31, 2021.

| (1) | True Wireless and Surge Holdings - Terracom Litigation

Global Reconnect, LLC and Terracom, Inc. v. Jonathan Coffman, Jerry Carroll, True Wireless, & Surge Holdings: In the Chancery Court of Hamilton County, TN, Docket # 20-00058, Filed Jan 21, 2020. On January 21, 2020, a complaint was filed related to a noncompetition dispute. Terracom believes Mr. Coffman and Mr. Carroll are in violation of their non-compete agreements by working for us and True Wireless, Inc. Oklahoma and Tennessee state law does not recognize non-compete agreements and are not usually enforced in the state courts of these states, as such we believe True Wireless has a strong case against Terracom. The matter is entering the discovery process. Both Mr. Carroll and Mr. Coffman are no longer working for True Wireless in sales. Mr. Carroll is off the payroll and Mr. Coffman works for SurgePays, Inc., but not in wireless sales. The complaint requests general damages plus fees and costs for tortious interference with a business relationship in their prayer for relief. They have made no written demand for damages at this point in time. The Company believes this matter is simply an anti-competitive attempt by Terracom to cause distress to True Wireless.

| (2) | Surge Holdings – Juno Litigation

Juno Financial v. AATAC and Surge Holdings Inc. AND Surge Holdings Inc. v. AATAC; Circuit Court of Hillsborough County, Florida, Case # 20-CA-2712 DIV A: Breach of Contract, Account Stated and Open Account claims against Surge by a factoring company. Surge has filed a cross-complaint against defendant AATAC for Breach of Contract, Account Stated, Open Account and Common Law Indemnity. Case is in discovery. Following analysis by our litigation counsel stating that there is a good defense, management has decided that a reserve is not necessary.

| (3) | SurgePays – Ambess Litigation

On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleges breach of contract and prays for damages of approximately $73,000.00, plus fees, costs and interest. Litigation counsel is managing the motion practice and discovery process.

| (4) | True Wireless and Surge Pays - Litigation

Blue Skies Connections, LLC, and True Wireless, Inc. v. SurgePays, Inc., et. al.: In the District Court of Oklahoma County, OK, CJ-2021-5327, filed on December 13, 2021. Plaintiffs’ petition alleges breach of a Stock Purchase Agreement by SurgePays, SurgePhone Wireless, LLC, and Kevin Brian Cox, and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, a True Wireless employee. Blue Skies believes the Defendants are in violation of their non-competition and non-solicitation agreements related to the sale of True Wireless from SurgePays to Blue Skies. Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, as such we believe SurgePays, SurgePhone, and Cox have a strong defense against the claims asserted by Blue Skies and True Wireless. The matter continues in the discovery process. Mr. Coffman is no longer working for True Wireless. An attempt at mediation in July, 2022 did not achieve a settlement. The petition requests injunctive relief, general damages, punitive damages, attorney fees and costs for alleged breach of contract, tortious interference with a business relationship, and fraud. Plaintiffs have made a written demand for damages and the parties continue to discuss a potential resolution. This matter is an anti-competitive attempt by Blue Skies and True Wireless to damage SurgePays, SurgePhone, and Cox.

ITEM 1A: RISK FACTORS

Not applicable.

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ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three-month period ended September 30, 2022, the Company did not issue any shares not previously reported in Current Report on Form 8-K or a quarterly report on Form 10-Q except as follows:

The Company issued 147,153 shares of common stock in connection with a cashless exercise of 498,750 warrants. These shares were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof for the sale of securities not involving a public offering.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4: MINE SAFETY DISCLOSURES.

Not applicable

ITEM 5: OTHER INFORMATION.

None.

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ITEM 6: EXHIBITS

Exhibit |  |
Number |  | Exhibit Description
10.1+ |  | Employment Agreement between SurgePays, Inc. and Anthony Evers, dated August 8, 2022 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on August 11, 2022)
31.1* |  | Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer
31.2* |  | Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer
32.1** |  | Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer
32.2** |  | Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer
101.INS* |  | Inline XBRL Instance Document
101.SCH* |  | Inline XBRL Taxonomy Extension Schema Document
101.CAL* |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* |  | Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* |  | Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document
104* |  | Cover Page Interactive Data File (embedded within the Inline XBRL document)

+ Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.

*Filed herewith.

** Furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

| SURGEPAYS, INC.
Date: November 14, 2022 |  |
| By: | /s/ Kevin Brian Cox
|  | Kevin Brian Cox
|  | Chief Executive Officer (Principal Executive Officer)

Date: November 14, 2022 |  | /s/ Anthony Evers
|  | Anthony Evers
|  | Chief Financial Officer
|  | (Principal Financial and Accounting Officer)

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