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Commitments and Contingencies | 9 Months Ended
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Sep. 30, 2024
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingencies | Note 8 – Commitments and Contingencies Operating Leases 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. SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2024 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. 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. In 2024, in connection with our purchase of CLMI, we acquired a right-of-use operating lease and related lease liability for a building having a fair value of $98,638. Lease Termination and Loss on Right-of-Use Asset Effective August 31, 2024, the Company entered into an agreement to terminate two (2) of its operating leases prior to the expiration of the lease term. The early termination resulted in the derecognition of these Right-of-Use (ROU) assets and the corresponding lease liabilities associated with these leases. In connection with the termination, the Company made a buyout payment of $212,175 to the lessor to settle all remaining lease obligations. SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2024 The carrying amounts of the lease liability and ROU asset as of the termination date were as follows:
| ● | Right-of-Use Asset (ROU) carrying amount: $309,826
| ● | Lease Liability: $327,139
As a result of the termination, the Company recognized a loss of $194,862 which is reported in the Company’s consolidated statements of operations under the line item “Other expenses” for the three and nine months ended September 30, 2024. The loss was calculated as follows: Schedule of Loss
ROU Asset |  |  | 309,826 |
Cash paid to execute lease termination |  |  | 212,175 |
ROU Liability |  |  | (327,139 | )
Loss on lease termination |  |  | 194,862 |
The termination of these leases resulted in the complete derecognition of these ROU assets and the corresponding lease liabilities. The Company does not expect any future obligations or payments related to these lease agreements following the settlement. At September 30, 2024 and December 31, 2023, respectively, the Company had no financing leases as defined in ASC 842, “Leases.” SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2024 The tables below present information regarding the Company’s operating lease assets and liabilities at September 30, 2024 and December 31, 2023, respectively: Schedule of Operating Lease Assets and Liabilities
|  | September 30, 2024 |  |  | December 31, 2023 |
Assets |  |  |  |  |  |  |  |
Operating lease - right-of-use asset - non-current |  | $ | 62,786 |  |  | $ | 387,869 |
Liabilities |  |  |  |  |  |  |  |
Operating lease liability |  | $ | 63,547 |  |  | $ | 399,413 |
Weighted-average remaining lease term (years) |  |  | 1.25 |  |  |  | 6.50 |
Weighted-average discount rate |  |  | 5 | % |  |  | 5 | %
The components of lease expense were as follows: Schedule of Lease Expense
|  | Nine Months Ended |  |  | Nine Months Ended |
|  | September 30, 2024 |  |  | September 30, 2023 |
Operating lease costs |  |  |  |  |  |  |  |
Amortization of right-of-use operating lease asset |  | $ | 70,857 |  |  | $ | 32,426 |
Lease liability expense in connection with obligation repayment |  |  | 15,748 |  |  |  | 15,789 |
Total operating lease costs |  | $ | 86,605 |  |  | $ | 48,215 |
Supplemental cash flow information related to operating leases was as follows: |  |  |  |  |  |  |  |
Operating cash outflows from operating lease (obligation payment) |  | $ | 84,257 |  |  | $ | 29,230 |
Right-of-use asset obtained in exchange for new operating lease liability |  | $ | 98,638 |  |  | $ | - |
SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2024 Future minimum lease payments for the years ended December 31: Schedule of Future Minimum Payments
Year Ended December 31, |  |  |
2024 (3 months) |  | $ | 12,681 |
2025 |  |  | 52,754 |
Total undiscounted cash flows |  |  | 65,435 |
Less: amount representing interest |  |  | 1,888 |
Present value of operating lease liabilities |  |  | 63,547 |
Less: current portion of operating lease liabilities |  |  | 50,415 |
Long-term operating lease liabilities |  | $ | 13,132 |
Employment Agreements (Chief Executive Officer and Chief Financial Officer) Chief Financial Officer In November 2023, the Company finalized the terms of its employment agreement with its Chief Financial Officer as follows:
| 1. | Base salary
| a. | For the year ended December 31, 2023 - $475,000,
| b. | For the year ended December 31, 2024 - $489,250; and
| c. | For the year ended December 31, 2025 - $503,928
| 2. | Annual cash bonus
| a. | For the year ended December 31, 2023 - $510,000,
| b. | For the year ended December 31, 2024 – at least $510,000; and
| c. | For the year ended December 31, 2025 - subject to Board approval
| 3. | Restricted Stock Awards
| a. | Effective November 10, 2023, an award of 600,000 shares of common stock. The fair value of this grant was $3,114,000, based upon the quoted closing price of $5.19/share.
| b. | The shares will vest as follows (see below for table on non-vested shares):
| i. | 400,000 shares ratably over the period July 2024 – December 2024 (66,667 shares per month over a six-month period); and
| ii. | 200,000 on December 31, 2025,
| iii. | Shares shall immediately vest if any of the following occur and the Chief Financial Officer is employed by the Company at the time of:
| 1. | Death,
| 2. | Total disability,
| 3. | Termination without cause; and
| 4. | Change in control
SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2024
| 4. | Other
| a. | Vacation,
| b. | Car allowance of $500 per month; and
| c. | Home office expense reimbursement of $667 per month,
| d. | 401(K) plan participation,
| e. | Life insurance; and
| f. | Liability insurance
See Note 9 regarding the vesting provisions of these shares. Chief Executive Officer In December 2023, the Company finalized the terms of its employment agreement with its Chief Executive Officer as follows:
| 1. | Term – through December 31, 2028
| 2. | Base salary
| a. | For the year ended December 31, 2023 - $750,000,
| b. | For each year thereafter an increase of three percent.
| 3. | Annual cash bonus
| a. | For the year ended December 31, 2023, and all other years throughout the term of the employment agreement - $870,000.
| 4. | Restricted Stock Awards
| a. | Effective March 1, 2024, future stock awards totaling 2,500,000 shares of common stock.
| b. | The shares will be issued and vest as follows:
| i. | 500,000 shares ratably over the period July 2024 – December 2024 (83,333 shares per month over a six-month period). The fair value of this grant was $3,800,000, based upon the quoted closing price of $7.60/share, 500,000 on June 1, of each subsequent year (2025, 2026, 2027 and 2028), at which time these shares will have their fair value determined. These shares have no stated performance or service requirements, other than to be remain as the Chief Executive Officer, and the expense will be recorded on the grant date; and
| ii. | Shares shall immediately vest if any of the following occur and the Chief Executive Officer is employed by the Company at the time of:
| 1. | Death,
| 2. | Total disability,
| 3. | Termination without cause; and
| 4. | Change in control
SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2024
| 5. | Annual Revenue Goals (only one (1) award per goal may be earned until next threshold is achieved
| a. | $250,000,000 – value of restricted stock award will be $6,250,000,
| b. | $500,000,000 – value of restricted stock award will be $25,000,000,
| c. | $1,000,000,000 – value of restricted stock award will be $50,000,000,
| d. | $2,000,000,000 – value of restricted tock award will be $100,000,000; and
| e. | Each additional $1,000,000,000 – value of restricted tock award will be $50,000,000,
| 6. | Annual EBITDA Goals (only one (1) award per goal may be earned until next threshold is achieved
| a. | $50,000,000 - value of restricted stock award will be $2,500,000,
| b. | $100,000,000 - value of restricted stock award will be $5,000,000; and
| c. | Each additional $50,000,000 - value of restricted stock award will be $2,500,000
| 7. | Market Capitalization Goals (only one (1) award per goal may be earned until next threshold is achieved
| a. | $250,000,000 - value of restricted stock award will be $25,000,000,
| b. | $500,000,000 - value of restricted stock award will be $50,000,000,
| c. | $1,000,000,000 - value of restricted stock award will be $100,000,000,
| d. | $2,000,000,000 - value of restricted stock award will be $200,000,000; and
| e. | Each additional $1,000,000,000 - value of restricted stock award will be $100,000,000
| 8. | Other
| a. | Vacation,
| b. | Car allowance of $500 per month; and
| c. | Home office expense reimbursement of $667 per month,
| d. | 401(K) plan participation,
| e. | Life insurance; and
| f. | Liability insurance
See Note 9 regarding the vesting provisions of these shares. Contingencies – Legal Matters During the normal course of business, the Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with Financial Accounting Standards Board (“FASB”) ASC 450-20-50, “Contingencies”. The Company evaluates its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals. SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2024 As of September 30, 2024, for all matters listed below, the Company is not aware of any contingent liabilities that should be reflected in the consolidated financial statements. 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. The Court dismissed the case with the agreement of the parties at a case management conference on September 12, 2024. 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 (“Defendants”), and makes other allegations related to SurgePays’ consulting work with Jonathan Coffman, formerly a True Wireless employee. Blue Skies alleged 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. Defendants filed various motions with the Court demonstrating Oklahoma state law does not recognize non-compete agreements and non-solicitation agreements in the manner alleged by Plaintiffs, and the Court granted these motions, finding the non-solicitation and non-competition clauses in the Stock Purchase Agreement void as a matter of Oklahoma law. The matter continues in the discovery process with other dispositive motions pending. 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. Written discovery is winding down and depositions began in the third quarter of 2023 and are expected to continue in 2024. The case is currently set for trial in January 2025. In the Circuit Court of Tennessee for the 30th Judicial District at Memphis, Docket # CT-3219-23. On August 8, 2023, a complaint was filed by SurgePays for breach of a promissory note by Blue Skies Connections, LLC. The note at issue is dated June 14, 2021, and requires Blue Skies Connections to repay the principal sum of $176,850.56, by monthly payments of $7,461.37 commencing on June 1, 2023. Blue Skies Connections has failed to make any payments due under the terms of the note, and this breach entitles SurgePays to demand payment of the entire amount of the note together with all accrued interest. Blue Skies Connections has responded by filing a Motion to Dismiss or, in the alternative, a Motion to Stay, taking the position that, under the prior suit pending doctrine, the subject promissory note is subject to the prior litigation instituted by Blue Skies Connections against SurgePays, styled Skies Connections, LLC and True Wireless, Inc. v. SurgePays, Inc., et al., Case No. CJ-2021-5327, District Court of Oklahoma County, Oklahoma. Counsel for Blue Skies Connections has requested that Surge Pays either voluntarily dismiss the subject action or agree to stay the subject action until conclusion of the Oklahoma litigation. Surge Pays is presently reviewing and considering its options. SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2024 Mike Fina litigation SurgePays, Inc. et al. v. Fina et al., Case No. CJ-2022-2782, District Court of Oklahoma County, Oklahoma. Plaintiffs SurgePays, Inc. and Kevin Brian Cox initiated this case against its former officer Mike Fina, his companies Blue Skies Connections, LLC, True Wireless, Inc., Government Consulting Solutions, Inc., Mussell Communications LLC, and others. This case also arises from the June 2021 transaction by which SurgePays sold True Wireless to Blue Skies. During the litigation of CJ-2021-5327 described above, SurgePays learned information that showed Mike Fina breached his duties owed to True Wireless during his employment and consulting work for True Wireless prior to SurgePays’ sale of True Wireless to Blue Skies. SurgePays alleges that Mike Fina conspired with the other defendants to damage True Wireless thereby harming the value of the company and causing its eventual sale at a greatly reduced price. SurgePays asserts claims for (i) breach of contract; (ii) breach of fiduciary duty; (iii) fraud; (iv) tortious interference; and (v) unjust enrichment. At this stage, no defendant has asserted a counterclaim against SurgePays. SurgePays filed a Second Amended Petition on January 27, 2023. Defendants Fina, Blue Skies, True Wireless, and Government Consulting Solutions filed a Motion to Dismiss on March 10, 2023. On June 29, 2023, the Court granted the Motion to Dismiss, ruling the claims asserted are “derivative” and could only be asserted by the True Wireless entity now owed by Blue Skies. The Court rejected SurgePays’ request to certify this ruling for immediate appeal. Defendant Misty Garrett filed a Motion for Summary Judgment seeking the same relief as the Motion to Dismiss, which was granted by the Court. It is SurgePays’ intent to appeal the Court’s dismissal of Fina, Blue Skies, True Wireless, Government Consulting Solutions, and Misty Garrett. At this stage, no attempts at settlement have been made. Aliotta and Vasquesz v SurgePays – Litigation Robert Aliotta and Steve Vasquesz, on behalf of themselves and others similarly situated v. SurgePays, Inc. d/b/a Surge Logics, filed January 4, 2023, in the U.S. District Court for the Northern District of Illinois, Case No. 1:23-cv-00042. Plaintiffs allege violations of the Telephone Consumer Protection Act (TCPA), and the Florida Telephone Solicitations Act (FTSA) based on telephone solicitations allegedly made by or on behalf of SurgePays, Inc. Plaintiffs seek damages for themselves and seek certification of a class action on behalf of others similarly situated. Defendants intend to vigorously defend the action however most similar cases are eventually resolved by an out-of-court settlement. A Confidential Settlement Agreement and Release of Claims has been entered into in April 2024 and a Dismissal Order was entered by the Court on April 30, 2024. SURGEPAYS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2024 Consumer Attorney Marketing Group, LLC v. LogicsIQ, Inc. and SurgePays, Inc. Consumer Attorney Marketing Group, LLC v. LogicsIQ, Inc. and SurgePays, Inc. On February 13, 2024, in the Superior Court of California, Los Angeles County, Case No. 24 ST CV 03653, Consumer Attorney Marketing Group, LLC (“CAMG”) filed a complaint naming SurgePays, Inc. (the “Company”) a defendant and alleging claims for breach of contract, declaratory judgment and express and implied indemnity. The complaint demands that defendants indemnify CAMG for any damages or losses that CAMG may incur in the case Robert Aliotta, et al. v. SurgePays, Inc. d/b/a SurgeLogics, Case No. 23 C 00042, pending in the U.S. District Court for the Northern District of Illinois. CAMG’s claims against the Company are solely based upon theories of participatory and vicarious liability. A Confidential Settlement Agreement and Release of Claims has been entered into in April 2024 and the parties await a Dismissal Order to be entered by the Court. SurgePays – Ambess Litigation On December 17, 2021, Ambess Enterprises, Inc. v SurgePays, Inc., Blair County Pa. case number 2021 GN 3222. Plaintiff alleged breach of contract and prays for damages of approximately $73,000, plus fees, costs, and interest. The case was settled and dismissed in 2023 for $60,000, which has been recorded as a component of general and administrative expenses.

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