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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   -    - 
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)
                                              
                                              
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 
                                              
Exercise of warrants (cashless)   -    -    -    -    2,134    2    (2)   -    - 
                                              
Conversion of debt ($5.75/share)   -    -    -    -    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)

 

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:

 

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:

 

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 

 

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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:

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.

 

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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 g