Filed
Pursuant to Rule 424(b)(4)
Registration
No. 333-226840
PROSPECTUS
6,389,776
Units Each Consisting of:
One
Share of Common Stock and
One
Warrant to Purchase One Share of Common Stock
We
are offering 6,389,776 units, with each unit consisting of one (1) share of common stock, $0.0001 par value (the “Common
Stock”), and one (1) warrant to purchase one (1) share of Common Stock, which equates to 100% warrant coverage on the shares
of our Common Stock purchased in this offering (together with the shares of Common Stock underlying such warrants, the “Units”),
of Verb Technology Company, Inc., a Nevada corporation (the “Company”), in a firm commitment underwritten public offering
at a public offering price of $3.13 per Unit. The warrants will have a per-whole share exercise price of $3.443, or 110% of the
public offering price of our Units. Our Units have no stand-alone rights and will not be certificated or issued as stand-alone
securities. The shares of our Common Stock and the warrants comprising our Units are immediately separable and will be issued
separately in this offering. The warrants are exercisable immediately and will expire five years from the issuance date.
Currently,
our Common Stock is quoted on the OTC Markets Group Inc.’s OTCQB
®
tier Venture Market (the “OTCQB”)
under the symbol “VRRB.” On April 4, 2019, the closing price of our Common Stock was $5.83. The quotation of our Common
Stock on the OTCQB was discontinued at the close of the market on April 4, 2019 and, at the open of the market on April 5, 2019,
our Common Stock and the warrants began trading on The Nasdaq Capital Market (“Nasdaq”) under the symbols “VERB”
and “VERBW,” respectively. To maximize the possibility of success of our listing applications for our Common Stock,
and the warrants, we chose to qualify under the $3.00 closing price alternative listing standard, rather than the $4.00 closing
price listing standard. Prices of our Common Stock as reported on the OTCQB may not be indicative of the prices of our Common
Stock on Nasdaq.
The
actual offering price per Unit was negotiated between A.G.P./Alliance Global Partners Corp. (the “Underwriter”
or “AGP”) and us at the time of pricing and, as is typical, represents a discount to the over-the-counter per-share
market price of our Common Stock as reported by the OTCQB on April 4, 2019. All share and per-share information, as well
as all financial information, contained in this prospectus has been adjusted to give effect to the one-for-fifteen (1-for-15)
reverse stock split (the “Reverse Stock Split”), which was implemented on February 1, 2019 and effective at the commencement
of trading of our Common Stock on February 4, 2019.
This
prospectus contains or incorporates by reference summaries of certain provisions contained in some of the documents described
herein, but reference is made to the actual documents for complete information. All the summaries are qualified in their entirety
by the actual documents. Copies of some of the documents referred to herein have been filed or have been incorporated by reference
as exhibits to the registration statement of which this prospectus forms a part, and you may obtain copies of those documents
as described in this prospectus under the heading “Where You Can Find More Information.”
Investing
in our securities involves a high degree of risk. See “Risk Factors” on page 5 of this prospectus for a discussion
of information that should be considered in connection with an investment in our securities.
Neither
the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus or the accompanying prospectus is truthful or complete. Any representation
to the contrary is a criminal offense.
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Per
Unit
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Total
Without Exercise of Over-Allotment Option
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|
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Total
With Exercise of Over-Allotment Option
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Public offering price
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$
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3.13
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$
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20,000,000
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$
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23,000,000
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Underwriting discounts
and commissions
(1)
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$
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0.2191
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$
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1,400,000
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$
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1,610,000
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Offering proceeds, before expenses,
to us
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$
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2.9109
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$
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18,600,000
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$
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21,390,000
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(1)
See “Underwriting” on page 66 for additional information on the compensation payable to the Underwriter.
We
have granted an over-allotment option to the Underwriter as set forth below. Pursuant to this over-allotment option, the Underwriter
may elect to purchase up to a maximum of 958,466 additional Units, consisting of 958,466 shares of our Common Stock
and 958,466 warrants to purchase up to a maximum of 958,466 shares of our Common Stock, from us at the public offering
price above, less underwriting discounts and commissions, within 45 days of the date of this prospectus to cover over-allotments,
if any. If the Underwriter exercises the over-allotment option in full, the total underwriting discounts and commissions payable
by us will be $1,610,000, and the total proceeds to us, before expenses, will be $21,390,000, based an offering price of $3.13
per Unit and not including any proceeds payable to us upon exercise of the warrants offered in connection with this offering.
The
Underwriter expects to deliver the shares of Common Stock and the warrants to purchasers on or before April 9, 2019.
A.G.P.
The
date of this prospectus is April 5, 2019.
TABLE
OF CONTENTS
The
Underwriter and we have not authorized anyone to provide you any information other than that contained in this prospectus or in
any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and
can provide no assurance as to the reliability of, any other information that others may give you. The Underwriter and we are
not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business,
financial condition, results of operations, and prospects may have changed since that date.
For
investors outside of the United States: the Underwriter has not and we have not done anything that would permit this offering
or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the
United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about,
and observe any restrictions relating to, the offering of our Units and the distribution of this prospectus outside of the United
States.
PROSPECTUS
SUMMARY
This
summary highlights certain information about us, this offering, and selected information contained in this prospectus. This summary
is not complete and does not contain all of the information that you should consider before deciding whether to invest in our
Units. For a more complete understanding of the Company and this offering, we encourage you to read and consider the more detailed
information in this prospectus, including “Risk Factors” and the financial statements and related notes. Unless we
specify otherwise, all references in this prospectus to “Verb,” “we,” “our,” “us,”
and the “Company” refer to Verb Technology Company, Inc. and our subsidiaries.
Company
Overview
Cutaia
Media Group, LLC (“CMG”), was organized on December 12, 2012, as a limited liability company under the laws of the
State of Nevada. On May 19, 2014, bBooth, Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG merged
into bBooth, Inc. and, thereafter, bBooth, Inc. changed its name to bBooth (USA), Inc., effective as of October 16, 2014. The
operations of CMG and bBooth (USA), Inc. became known as, and are referred to in this prospectus as, “bBoothUSA.”
On
October 16, 2014, bBoothUSA was acquired by Global System Designs, Inc. (“GSD”), pursuant to a Share Exchange Agreement
entered into with GSD (the “Share Exchange Agreement”). GSD was incorporated in the State of Nevada on November 27,
2012. The acquisition was accounted for as a reverse merger transaction. In connection with the closing of the transactions contemplated
by the Share Exchange Agreement, GSD’s management was replaced by bBoothUSA’s management, and GSD changed its name
to bBooth, Inc.
Effective
April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary
short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with
and into us. We were the surviving entity. To effectuate the name-change merger, we filed Articles of Merger and a Certificate
of Correction (relative to the effective date of the name-change merger) with the Secretary of State of the State of Nevada on
April 4, 2017 and April 17, 2017, respectively. The name-change merger became effective on April 21, 2017. Our board of directors
approved the name-change merger, which resulted in the name change on that date. In accordance with Section 92A.180 of the Nevada
Revised Statutes (the “NRS”), stockholder approval of the name-change merger was not required.
Effective
February 1, 2019, we changed our corporate name from nFüsz, Inc. to Verb Technology Company, Inc. The name change was effected
through a parent/subsidiary short-form merger of Verb Technology Company, Inc., our wholly-owned Nevada subsidiary, formed solely
for the purpose of the name change, with and into us. We were the surviving entity. To effectuate the name-change merger, we filed
Articles of Merger and a Certificate of Correction (relative to the effective date of the name-change merger) with the Secretary
of State of the State of Nevada on January 31, 2019 and February 22, 2019, respectively. The name-change merger became effective
on February 1, 2019. Our board of directors approved the name-change merger, which resulted in the name change on that date. In
accordance with Section 92A.180 of the NRS, stockholder approval of the name-merger was not required.
On
February 1, 2019, we implemented a 1-for-15 Reverse Stock Split of our Common Stock. The Reverse Stock Split became effective
upon commencement of trading of our Common Stock on February 4, 2019. As a result of the Reverse Stock Split, every 15 shares
of our pre-Reverse Stock Split Common Stock were combined and reclassified into one share of our Common Stock. The number of shares
of Common Stock subject to outstanding options, warrants, and convertible securities were also reduced by a factor of fifteen
as of February 1, 2019. All historical share and per-share amounts reflected throughout our consolidated financial statements
and other financial information in this prospectus have been adjusted to reflect the Reverse Stock Split. The par value per share
of our Common Stock was not affected by the Reverse Stock Split.
Our
Business
We
are an applications services provider, marketing cloud-based business software products under the brand name “Tagg”
on a subscription basis. Our flagship product, TaggCRM, is a Customer Relationship Management (“CRM”) application
that is distinguishable from other CRM programs because it utilizes interactive video as the primary means of communication between
sales and marketing professionals and their clients or prospects. TaggCRM allows our users to create, distribute, and post interactive
videos that contain on-screen clickable “Taggs,” which are interactive icons, buttons, and other on-screen elements,
that, when clicked, allow their prospects and customers to respond to our users’ calls to action in real-time, in the video,
while the video is playing, without leaving or stopping the video. For example, our technology allows a customer or a prospective
customer the ability to click on a product they see featured in a video and buy it, or to click on a calendar icon in the video
to make an appointment with a salesperson, among many other features and functionality. Tagg videos can be distributed via email
or text messaging and can be posted on social media. Our users report increased sales conversion rates compared to traditional,
non-interactive video.
We
developed the proprietary, patent-pending interactive video technology that serves as the basis for all of our cloud-based, Software-as-a-Service
(“SaaS”) Tagg applications. Our Tagg applications are accessible on all mobile and desktop devices and no software
download is required to view the Tagg interactive videos. The Tagg applications also provide detailed analytics in the application
dashboard that reflect when the videos were viewed, by whom, how many times, for how long, and what interactive Taggs were clicked-on
in the video, among other things, all of which assist our users in focusing their sales and marketing efforts by identifying which
clients or prospects have interest in the subject matter of the video. TaggCRM users receive a text message immediately notifying
them that a customer or prospect received their video and additional text messages notifying them when that customer or prospect
watched the video and shared the video so they can follow-up in real-time. Our Tagg application platform can accommodate any size
sales or marketing campaign, and it is enterprise-class scalable to meet the needs of today’s global organizations.
Our
TaggMED application is designed for physicians and other healthcare providers to create more efficient and effective interactive
communications with patients. Patients are able to avoid unnecessary and inconvenient visits to their physicians’ or other
healthcare providers’ offices by viewing and responding to interactive videos through in-video, on-screen clicks that are
designed to assess the patient’s need for an office visit. If the patient’s responses to the interactive video indicate
that an office visit is either necessary or desirable, the patient can schedule the office visit right through the video in real
time. Patients can also download and print prescriptions, care instructions, and other physician distributed documents right from
and through the video. TaggMED is offered on a subscription basis.
Our
TaggEDU application is designed for teachers and school administrators for more effective communications with students, parents,
and faculty. TaggEDU allows teachers to deliver interactive video lessons to students that are both more engaging and more effective.
TaggEDU allows teachers to communicate with students through their mobile devices and computers to deliver lessons and tests/quizzes
on the screen and in the Tagg video. The analytics capabilities of TaggEDU available on the application dashboard of the teacher
or school administrator allow them to track which students watched the lesson, when, for how long, how many times, and track and
report on test/quiz results. TaggEDU is offered on a subscription basis.
Our
TaggLIVE application is also part of our proprietary interactive Tagg video applications portfolio. TaggLIVE is a Facebook application
that works in conjunction with Facebook Live, allowing users of Facebook Live to place clickable Taggs on the screen of everyone
watching their Facebook Live broadcasts in real time. Viewers can click the on-screen Taggs to purchase products and services
placed there and offered by the person utilizing our TaggLIVE Facebook application. TaggLIVE is scheduled for release in the second
quarter of 2019.
Proposed
Acquisition of Sound Concepts
On
November 8, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Sound Concepts,
Inc., a Utah corporation (“Sound Concepts”), NF Merger Sub, Inc., a Utah corporation (“Merger Sub 1”),
NF Acquisition Company, LLC, a Utah limited liability company (“Merger Sub 2”), the shareholders of Sound Concepts
(the “Sound Concepts Shareholders”), the shareholders’ representative (the “Shareholder Representative”),
and us, pursuant to which we will acquire Sound Concepts (the “Sound Concepts Acquisition”) through a two-step merger,
consisting of merging Merger 1 Sub with and into Sound Concepts, with Sound Concepts surviving the “first step” of
the merger as our wholly-owned subsidiary (and the separate corporate existence of Merger Sub 1 will cease) and, immediately thereafter,
merging Sound Concepts with and into Merger Sub 2, with Merger Sub 2 surviving the “second step” of the merger, such
that, upon the conclusion of the “second step” of the merger, the separate corporate existence of Sound Concepts will
cease and Merger Sub 2 will continue its limited liability company existence under Utah law as the surviving entity and as our
wholly-owned subsidiary (collectively, the “Merger”). On the terms and subject to the conditions set forth in the
Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of Sound Concepts’
capital stock issued and outstanding immediately prior to the Effective Time (the “Sound Concepts Capital Stock”)
will be cancelled and converted into the right to receive a proportionate share of $25,000,000 of value (the “Closing Merger
Consideration”), to be payable through a combination of a cash payment by us of $15,000,000 (the “Acquisition Cash
Payment”) and the issuance of shares of our Common Stock with a fair market value of $10,000,000 (the “Acquisition
Stock”). The Closing Merger Consideration is not subject to any closing working capital adjustment or post-closing working
capital adjustment. In addition, we have agreed to pay to AGP certain fees for advisory services provided in connection with the
Sound Concepts Acquisition. We will pay AGP a transaction fee equal to (i) 5% of the first million dollars of the Closing Merger
Consideration, (ii) 4% of the second million dollars of the Closing Merger Consideration, (iii) 3% of the third million dollars
of the Closing Merger Consideration, (iv) 2% of the fourth million dollars of the Closing Merger Consideration, and (v) 1% of
the remaining Closing Merger Consideration. We also agreed to issue to AGP or its designees at the closing of the Sound Concepts
Acquisition, warrants to purchase that number of shares of Common Stock equal to 2.5% of the Units sold in this offering. The
warrants will have a five-year term and will have an exercise price equal to 120% of the valuation of the Acquisition Stock.
We
expect the Sound Concepts Acquisition to close contemporaneously with this offering, subject to the satisfaction or waiver of
certain conditions described in this prospectus under the heading “The Proposed Sound Concepts Acquisition.” However,
we cannot provide any assurance as to the actual timing of completion of the Sound Concepts Acquisition, or whether the Sound
Concepts Acquisition will be completed at all. Furthermore, we currently intend to use a portion the net proceeds from the sale
of our Common Stock under this prospectus to provide funds for all, or a portion of, the Acquisition Cash Payment. If we are unable
to raise sufficient net proceeds from this offering to provide funds for all, or a portion of, the Acquisition Cash Payment, we
will need to obtain alternative sources of financings, which may not be available at terms acceptable to us, or at all, resulting
in us being unable to consummate the Sound Concepts Acquisition. This offering is not conditioned on the consummation of the Sound
Concepts Acquisition or any other transaction; however, the completion of this offering is conditioned on our Common Stock and
the warrants being approved for listing on Nasdaq or another securities exchange. For additional information, please see the heading
“Risk Factors,” for certain risks relating to the Sound Concepts Acquisition and “The Proposed Sound Concepts
Acquisition.”
Sound
Concepts is an established 25-year-old business with approximately 89 employees, based in American Fork, Utah, providing digital
marketing and sales support services, including a video-based sales application, to the direct sales industry. Their sales application,
offered as a SaaS application, is marketed under the brand name Brightools and is offered as a white-labeled application to large
corporate enterprises engaged in the network marketing and affiliate marketing industry. Sound Concepts currently has approximately
93 clients in the network marketing and affiliate marketing sector, which include Young Living Essential Oils, LC, Isagenix International,
LLC, Vasayo, LLC, Nu Skin Enterprises United States, Inc., Nerium International, LLC, Forever Living Products International, LLC,
Seacret Spa, LLC, among many others. The Brightools app is a comprehensive sales, lead generation, and customer relationship management
tool specifically designed to meet the needs of direct sales representatives and others engaged in network marketing and affiliate
marketing sales. The Brightools app also incorporates recruiting tools, sales representative training, and education tools, and
includes instant notification capabilities to notify sales reps on their mobile devices when a prospect has engaged in shared
content. Brightools allows sales reps to share sales and product video content with their prospects via email and text, post content
directly to social media, access corporate sales and product training materials, and receive analytics data and other engagement
information regarding their prospects’ interactions with the digital sales content distributed through the app. Brightools
also tracks customer purchases and allows corporate to monitor field activity to track the effectiveness of campaigns, as well
as compliance. In addition, sales reps can order physical product samples and purchase customizable brochures, invites, thank-you
cards, and more for direct delivery to customers and prospects all through the application. The synergies of the digital and physical
tools provide sales reps with unique solutions to engage their prospects, acquire customers, close sales, and grow their businesses.
Brightools is available on, and compatible with, virtually all mobile devices and is currently in use in over 62 different countries.
As of the date hereof, Sound Concepts has more than 555,000 current users of its Brightools app, representing an increase of more
than 45,000 users since December 2018.
We
believe that Sound Concepts’ business is highly complementary to our own, and the combination of their technology, customer
base, and human capital with our own, including the integration of our interactive video technology into Brightools, among other
synergies and enhancements, will result in increased stockholder value.
Recent
Developments
On
February 1, 2019, we issued an unsecured convertible note to Bellridge Capital, LP (“Bellridge”) in the aggregate
principal amount of $500,000 in exchange for net proceeds of $432,000, after an original issue discount of $25,000 and legal and
financing expenses of $43,000. The financing expenses represent fees paid to AGP as placement agent. In addition, we issued 16,667
shares of our Common Stock in connection with the note issuance. The note is convertible into shares of Common Stock at a conversion
price equal to 70% of the lowest VWAP during the ten (10) trading days immediately preceding the date of the notice of conversion.
On
March 22, 2019, we issued an unsecured promissory note to an unaffiliated third-party in the amount of $300,000. The note bears
an Original Issue Discount of $10,000, which is included in the original principal amount. The note bears interest on the principal
amount then outstanding at a rate of 5% per annum. The note is due on demand at any time after April 10, 2019.
Corporate
Information
We
are a Nevada corporation. Our principal executive/administrative offices are located at 344 South Hauser Boulevard, Suite 414,
Los Angeles, California 90036, and our telephone number is (855) 250-2300. Our website address is https://www.myverb.com. Information
on or accessed through our website is not incorporated into this prospectus and is not a part of this prospectus.
Until
the close of the market on April 4, 2019, our Common Stock was quoted on the OTCQB under the symbol “VRRB.” Our Common
Stock and the warrants offered hereby have been approved for listing on Nasdaq under the symbols “VERB” and “VERBW,”
respectively, and commenced trading on Nasdaq at the open of the market on April 5, 2019. The completion of this offering is conditioned
on our Common Stock and the warrants being approved for listing on Nasdaq, which approval has been received. See “Risk Factors.”
The
Offering
Issuer:
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Verb
Technology Company, Inc.
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Securities offered by us:
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6,389,776
Units, each Unit
consists of one (1) share of our Common Stock and one (1) warrant to purchase one (1) share of our Common Stock (or 7,348,242
Units if the Underwriter exercises its over-allotment option in full). The shares of our Common Stock and the warrants
comprising the Units are immediately separable upon issuance and will be issued separately in this offering.
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Offering Price:
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$3.13 per
Unit
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Common Stock outstanding prior to this offering:
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12,398,241 shares
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Common Stock to be outstanding after this
offering:
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18,788,017
shares, assuming
6,389,776 Units, are issued in this offering (or 19,746,483 shares if the Underwriter exercises its over-allotment
option in full, assuming 7,348,242 Units are issued in this offering).
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Over-allotment option:
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We have granted
the Underwriter a 45-day over-allotment option to purchase up to an additional 958,466 Units at the public offering
price, less estimated underwriting discounts and commissions.
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Underwriter’s warrants:
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We will issue to
the Underwriter, upon closing of this offering compensation warrants entitling the Underwriter or its designees to purchase
up to 5% of the aggregate number of shares of our Common Stock that we issue in this offering (excluding any shares of Common
Stock issued upon exercise of the Underwriter’s over-allotment option). The warrants will be exercisable for a four-year
period, commencing one year following the effective date of this offering at an exercise price per share equal to $3.443,
or 110% of the public offering price of our Units offered hereby. See “Underwriting.”
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Use of proceeds:
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We estimate the
net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses
payable by us, will be approximately $18.2 million ($21.0 million if the Underwriter’s over-allotment option to purchase
additional Units is exercised in full), based on a public offering price of $3.13 per Unit. The offering price per
Unit was determined between the Underwriter and us at the time of pricing, and, as is typical, is at a discount to the over-the-counter
market price of the Common Stock as reported on the OTCQB on April 4, 2019.
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We intend to use
the net proceeds from this offering to pay for all or a portion of the Acquisition Cash Payment, as well as transaction and
integration costs incurred in connection with the Sound Concepts Acquisition. For a more complete description of our intended
use of the net proceeds from this offering, see “Use of Proceeds” and “The Proposed Sound Concepts Acquisition.”
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Risk Factors:
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This investment
involves a high degree of risk. See the section entitled “Risk Factors” beginning on page 5 of this prospectus
for a discussion of factors you should consider carefully before making an investment decision.
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Market and Trading Symbol:
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Until the close
of the market on April 4, 2019, our Common Stock was quoted on the OTCQB under the symbol
“VRRB.” Our Common Stock and the warrants have been approved for listing on Nasdaq
under the symbols “VERB” and “VERBW,” respectively and commenced trading
at the open of the market on April 5, 2019. The completion of this offering is conditioned
on our Common Stock and the warrants being approved for listing on Nasdaq, which approval
has been received. See “Risk Factors.”
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The
number of shares of our Common Stock shown above to be outstanding after this offering is based on 12,398,241 shares of our Common
Stock outstanding as of April 4, 2019, which excludes: (i) 2,457,974 shares of our Common Stock issuable upon exercise of stock
options with a weighted-average exercise price of approximately $5.44 per share; (ii) 168,600 shares of our Common Stock reserved
for issuance under our 2014 Stock Option Plan (the “Plan”); (iii) 753,446 shares of our Common Stock issuable upon
the exercise of all outstanding warrants with a weighted-average exercise price of approximately $4.22 per share; (iv) 940,918
shares of our Common Stock issuable upon the conversion of all outstanding convertible notes; (v) 319,489 shares of our Common
Stock that may be issued upon exercise of the Underwriter’s warrants; (vi) 6,389,776 shares of our Common Stock that may
be issued upon exercise of warrants issued in this offering (or 7,348,242 shares if the Underwriter exercises its over-allotment
option in full); and (vii) 159,744 shares of our Common Stock that may be issued upon exercise of warrants issued to AGP as part
of its compensation for advisory services provided in connection with the Sound Concepts Acquisition (or 183,706 shares if the
Underwriter exercises its over-allotment option in full).
RISK
FACTORS
Investing
in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described below, as
well as other information presented in this prospectus or in any other documents incorporated by reference into this prospectus,
in light of your particular investment objectives and financial circumstances. Moreover, the risks so described are not the only
risks we face. Additional risks not presently known to us or that we currently perceive as immaterial may ultimately prove more
significant than expected and impair our business operations. Any of these risks could adversely affect our business, financial
condition, results of operations, and prospects. The trading price of our securities could decline due to any of these risks and
you may lose all or part of your investment.
Risks
Related to Our Business
We
have incurred significant net losses and cannot assure you that we will achieve or maintain profitable operations.
To
date, we have not generated any significant revenues from our operations and have incurred losses since inception. Our net losses
were $12,127,000 for the year ended December 31, 2018 and $7,266,000 for the year ended December 31, 2017. As of December 31,
2018, we had a stockholders’ deficit of $5,055,000. We may continue to incur significant losses in the future for a number
of reasons, including unforeseen expenses, difficulties, complications, and delays, and other unknown events.
We
anticipate that our operating expenses will increase substantially in the foreseeable future as we undertake increased technology
and production efforts to support our business and increase our marketing and sales efforts to drive an increase in the number
of customers and clients utilizing our services. These increased expenditures may make it more difficult to achieve and maintain
profitability. In addition, our efforts to grow our business may be more expensive than we expect, and we may not be able to generate
sufficient revenue to offset increased operating expenses. If we are forced to reduce our expenses, our growth strategy could
be compromised. To offset these anticipated increased operating expenses, we will need to generate and sustain significant revenue
levels in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase our level
of profitability.
Accordingly,
we cannot assure you that we will achieve sustainable operating profits as we continue to expand our infrastructure, restructure
our balance sheet, further develop our marketing efforts, and otherwise implement our growth initiatives. Any failure to achieve
and maintain profitability would have a materially adverse effect on our ability to implement our business plan, our results and
operations, and our financial condition, and could cause the value of our Common Stock to decline, resulting in a significant
or complete loss of your investment.
Our
independent registered public accounting firm’s reports for the fiscal years ended December 31, 2018 and 2017 have raised
substantial doubt as to our ability to continue as a “going concern.”
Our
independent registered public accounting firm indicated in its reports on our audited consolidated financial statements as of
and for the years ended December 31, 2018 and 2017 that there is substantial doubt about our ability to continue as a going concern.
A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as
a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. Therefore,
you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy
claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation. The presence
of the going concern note to our financial statements may have an adverse impact on the relationships we are developing and plan
to develop with third parties as we continue the commercialization of our products and could make it challenging and difficult
for us to raise additional financing, all of which could have a material adverse impact on our business and prospects and result
in a significant or complete loss of your investment.
Our
ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available
on terms favorable to us.
We
have limited capital resources. To date, we have financed our operations entirely through equity investments by founders and other
investors and the incurrence of debt, and we expect to continue to do so in the foreseeable future. Our ability to continue our
normal and planned operations, to grow our business, and to compete in our industry will depend on the availability of adequate
capital.
We
cannot assure you that we will be able to obtain additional funding from those or other sources when or in the amounts needed,
on acceptable terms, or at all. If we raise capital through the sale of equity, or securities convertible into equity, it would
result in dilution to our then-existing stockholders, which could be significant depending on the price at which we may be able
to sell our securities. If we raise additional capital through the incurrence of additional indebtedness, we would likely become
subject to further covenants restricting our business activities, and holders of debt instruments may have rights and privileges
senior to those of our then-existing stockholders. In addition, servicing the interest and principal repayment obligations under
debt facilities could divert funds that would otherwise be available to support development of new programs and marketing to current
and potential new clients. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay,
reduce, or eliminate development of new programs or future marketing efforts, or reduce or discontinue our operations. Any of
these events could significantly harm our business, financial condition, and prospects.
Our
business depends on customers increasing their use of our services and/or platform, and we may experience loss of customers or
decline in their use of our services and/or platform.
Our
ability to grow and generate revenue depends, in part, on our ability to maintain and grow our relationships with existing customers
and convince them to increase their usage of our platform. If our customers do not increase their use of our platform, then our
revenue may not grow and our results of operations may be harmed. It is difficult to predict customers’ usage levels accurately
and the loss of customers or reductions in their usage levels may have a negative impact on our business, results of operations,
and financial condition. If a significant number of customers cease using, or reduce their usage of, our platform, then we may
be required to spend significantly more on sales and marketing than we currently plan to spend in order to maintain or increase
revenue from customers. These additional expenditures could adversely affect our business, results of operations, and financial
condition. Most of our customers do not have long-term contractual financial commitments to us and, therefore, most of our customers
could reduce or cease their use of our platform at any time without penalty or termination charges.
The
market in which we operate is dominated by large, well established competitors.
The
CRM industry is currently dominated by Salesforce.com, Inc. (“Salesforce.com”), Microsoft Corporation (“Microsoft”),
Oracle America Inc. (“Oracle”), SAP SE, and Adobe Inc. (“Adobe”), which collectively account for approximately
40% of industry sales. The CRM applications offered by these companies, as well as by many others, have numerous differences in
feature sets and functionality, but all share certain basic attributes. Most of them were designed before the advent and proliferation
of mobile phones, social media, and the technology behind the current ubiquity of video over the internet and more recently on
mobile devices. While many of our competitors have attempted to incorporate video capabilities into their respective CRM platforms,
none of them utilizes interactive video technology similar to that of ours. In addition, our Tagg interactive videos are viewable
on both mobile and desktop devices regardless of operating system and without the need to download a proprietary player or program.
The
market in which we operate is intensely competitive and, if we do not compete effectively, our operating results could be harmed.
The
market for CRM applications is intensely competitive and rapidly changing, barriers to entry are relatively low, many of our competitors
are larger and have more resources than we do, and, with the introduction of new technologies and market entrants, we expect competition
to intensify in the future. If we fail to compete effectively, our operating results will be harmed.
Notwithstanding
the competitive edge that we believe our Tagg interactive video capability provides our CRM applications, many of our competitors
enjoy other substantial competitive advantages, such as greater name recognition, longer operating histories, and larger marketing
budgets, as well as substantially greater financial, technical, and other resources. In addition, many of our potential competitors
have established marketing relationships and access to larger customer bases, and have major distribution agreements with consultants,
system integrators, and resellers.
As
a result, our competitors may be able to respond more effectively than we can to new or changing opportunities, technologies,
standards, or customer requirements. Furthermore, because of these advantages, even if our products and services are more effective
than the products and services that our competitors offer, potential customers might accept competitive products and services
in lieu of purchasing our products and services. For all of these reasons, we may not be able to compete successfully against
our current and future competitors.
We
may not be able to increase the number of our partners or grow the revenues received from our current partnership relationships.
The
differences between our Tagg interactive video CRM applications and many of the larger, more established providers of CRM software
may serve to highlight the reasons we have chosen not only to develop our own stand-alone SaaS cloud CRM platform, but also to
incorporate and integrate our interactive video technology into the platforms of many of these large, long-term leaders in the
CRM industry. This allows them to offer Tagg interactive video capabilities to their large enterprise clients and customers as
an upgrade feature to their CRM platform subscriptions. The viability of this strategy is evidenced by the partnerships we currently
enjoy with Oracle NetSuite and Marketo, Inc., an Adobe company (“Adobe Marketo”), as well as new partnerships with
Salesforce.com and Microsoft, among others. There can be no assurance, however, that those relationships will result in material
revenues for us or that we will be able to generate any other meaningful partnerships.
We
may not be able to develop enhancements and new features to our existing service or acceptable new services that keep pace with
technological developments.
Even
though we believe that our Tagg interactive video CRM applications are currently unsurpassed in features and ease of use, technology
invariably advances. If we are unable to develop enhancements to, and new features for, our Tagg interactive video CRM applications
that keep pace with rapid technological developments, our business will be harmed. The success of enhancements, new features,
and services depends on several factors, including the timely completion, introduction, and market acceptance of the feature or
edition. Failure in this regard may significantly impair our revenue growth. We may not be successful in either developing these
modifications and enhancements or in timely bringing them to market at a competitive price or at all. Furthermore, notwithstanding
that our Tagg interactive videos are currently viewable on both mobile and desktop devices regardless of operating system, potential
uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or
technologies, could increase our research and development expenses. Any failure of our service to operate effectively with future
network platforms and technologies could reduce the demand for our service, result in customer dissatisfaction, and harm our business.
Our
ability to deliver our services is dependent on the maintenance of the infrastructure of the Internet by third parties.
The
Internet’s infrastructure is comprised of many different networks and services that, by design, are highly fragmented and
distributed. This infrastructure is run by a series of independent, third-party organizations that work together to provide the
infrastructure and supporting services of the Internet under the governance of the Internet Corporation for Assigned Numbers and
Names (ICANN) and the Internet Assigned Numbers Authority (IANA), which is now related to ICANN.
The
Internet has experienced, and will continue to experience, a variety of outages and other delays due to damages to portions of
its infrastructure, denial-of-service attacks, or related cyber incidents. These scenarios are not under our control and could
reduce the availability of the Internet to us or our customers for delivery of our services. Any resulting interruptions in our
services or the ability of our customers to access our services could result in a loss of potential or existing customers and
harm our business.
Security
breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and
reputation to suffer.
In
the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business
information and that of our customers, and personally identifiable information of our customers and employees. The secure processing,
maintenance, and transmission of this information is critical to our operations and business strategy. Despite our security measures,
our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance,
or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly
disclosed, lost, or stolen. Advanced attacks are multi-staged, unfold over time, and utilize a range of attack vectors with military-grade
cyber weapons and proven techniques, such as spear phishing and social engineering, leaving organizations and users at high risk
of being compromised. The vast majority of data breaches, whether conducted by a cyber attacker from inside or outside of the
organization, involve the misappropriation of digital identities and user credentials. These credentials are used to gain legitimate
access to sensitive systems and high-value personal and corporate data. Many large, well-known organizations have been subject
to cyber-attacks that exploited the identity vector, demonstrating that even organizations with significant resources and security
expertise have challenges securing their identities. Any such access, disclosure, or other loss of information could result in
legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, a disruption
of our operations, damage to our reputation, or a loss of confidence in our business, any of which could adversely affect our
business, revenues, and competitive position.
Organizations
face growing regulatory and compliance requirements.
New
and evolving regulations and compliance standards for cyber security, data protection, privacy, and internal IT controls are often
created in response to the tide of cyber-attacks and will increasingly impact organizations. Existing regulatory standards require
that organizations implement internal controls for user access to applications and data. In addition, data breaches are driving
a new wave of regulation, such as the European Union’s General Data Protection Regulation, with stricter enforcement and
higher penalties. Regulatory and policy-driven obligations require expensive and time-consuming compliance measures. The fear
of non-compliance, failed audits, and material findings has pushed organizations to spend more to ensure they are in compliance,
often resulting in costly, one-off implementations to mitigate potential fines or reputational damage. The high costs associated
with failing to meet regulatory requirements, combined with the risk of fallout from security breaches, has elevated this topic
from the IT organization to the executive and board level.
Our
business is highly competitive and any failure to adapt to changing consumer preferences may adversely affect our business and
financial results.
We
operate in a highly competitive, consumer-driven, and rapidly changing environment. Our success will, to a large extent, be dependent
on our ability to acquire, develop, adopt, upgrade, and exploit new and existing technologies to address consumers’ changing
demands and distinguish our products and services from those of our competitors. We may not be able to accurately predict technological
trends or the success of new products and services. If we choose technologies or equipment that are less effective, cost-efficient,
or attractive to our customers than those chosen by our competitors, or if we offer products or services that fail to appeal to
consumers, are not available at competitive prices, or that do not function as expected, our competitive position could deteriorate,
and our business and financial results could suffer.
The
ability of our competitors to introduce new technologies, products, and services more quickly than we do may adversely affect
our competitive position. Furthermore, advances in technology, decreases in the cost of existing technologies, or changes in competitors’
product and service offerings may require us in the future to increase research and development expenditures or to offer products
and services at no or a reduced additional charge or at a lower price. In addition, the uncertainty of our ability, and the costs,
to obtain intellectual property rights from third parties could impact our ability to respond to technological advances in a timely
and effective manner. If we are unable to compete with existing companies successfully and new entrants to the markets in which
we compete in, our business, results of operations, and financial condition could be adversely affected.
We
expect that the success of our business will be highly correlated to general economic conditions.
We
expect that demand for our products and services will be highly correlated with general economic conditions, as we expect a substantial
portion of our revenue will be derived from discretionary spending by individuals, which typically falls during times of economic
instability. Declines in economic conditions in the United States or in other countries in which we may operate may adversely
impact our financial results. Because such declines in demand are difficult to predict, we or our industry may have increased
excess capacity as a result. An increase in excess capacity may result in declines in prices for our products and services. Our
ability to grow or maintain our business may be adversely affected by sustained economic weakness and uncertainty, including the
effect of wavering consumer confidence, high unemployment, and other factors. The inability to grow or maintain our business would
adversely affect our business, financial conditions, and results of operations, and thereby an investment in our Common Stock.
We
do not currently have any patents to protect our technologies and thus, we may not gain market share from our competitors and
be unable to operate our business profitably.
Our
success depends significantly on our ability to protect our rights to the technologies used in our products and services. We recently
filed a patent application with the U.S. Patent and Trademark Office, or “PTO,” with respect to our interactive video
technology. Currently, we do not have any issued patents and we rely on copyright, trade secrets, and nondisclosure, confidentiality
and other contractual arrangements to protect our technology and intellectual property rights. However, these legal means afford
only limited protection and may not adequately protect our rights or permit us to gain or maintain any competitive advantage.
In addition, we cannot be assured that our pending patent application, or any future patent applications, will result in the issuance
of a patent to us in a timely manner, or at all, or that we will have the financial or operational resources successfully to prosecute
any patents that we may undertake. The PTO may deny or require significant narrowing of claims in our currently pending or any
future patent applications, and patents issued as a result thereof, if any, may not provide us with significant commercial protection
or be issued in a form that is advantageous to us. We could also incur substantial costs in proceedings before the PTO. Our pending
patent application, and any future patent applications, may be challenged, which could reduce our ability to stop competitors
from marketing related technologies. There can also be no assurance that competitors will not be able to design around any patents
that may be issued to us in the future. In addition, we rely on unpatented proprietary technology. We cannot assure you that we
can meaningfully protect all our rights in our unpatented proprietary technology or that others will not independently develop
substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology.
We
seek to protect our know-how and other unpatented proprietary technology with confidentiality agreements and intellectual property
assignment agreements with our employees, our partners, independent distributors, and consultants. However, such agreements may
not be enforceable or may not provide meaningful protection for our proprietary information in the event of unauthorized use or
disclosure or other breaches of the agreements or in the event that our competitors discover or independently develop similar
or identical designs or other proprietary information. We currently do not utilize any registered or common law trademarks to
protect or brand the name of any of our products.
Although
we believe that we have a proprietary platform for our technologies and products, we cannot determine with certainty whether any
existing third-party patents or the issuance of any third-party patents would require us to alter our technology, obtain licenses,
or cease certain activities. We may become subject to claims by third parties that our technology infringes their intellectual
property rights.
We
do not own any patents relating to our Tagg interactive video CRM platform.
We
do not currently own any domestic or foreign patents relating to our Tagg interactive video CRM applications platform; however,
we recently filed a patent application with the PTO with respect to our interactive video technology. We also do not currently
have any licenses to use any third-party intellectual property. As such, if we are not successful in obtaining intellectual property
rights covering our products, or obtaining licenses to use a third-party’s intellectual property on reasonable and acceptable
terms, it could result in lawsuits against us for trademark and/or intellectual property infringement, and we may not be able
to counterclaim with our own infringement allegations. Any such infringement, litigation, or adverse proceeding could result in
substantial costs and diversion of resources and could seriously harm our business operations or results of operations. There
can also be no assurance that competitors will not be able to duplicate our interactive video technology or that our competitors
will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented
proprietary technology.
If
we are unable to protect and enforce our intellectual property rights, we may be unable to compete effectively.
We
believe that our intellectual property rights are important to our success and our competitive position, and we rely on a combination
of copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Although we have
devoted substantial resources to the establishment and protection of our intellectual property rights, the actions taken by us
may be inadequate to prevent imitation or improper use of our products and services by others or to prevent others from claiming
violations of their intellectual property rights by us. We also rely on confidentiality procedures and contractual provisions
with our employees, consultants, and corporate partners to protect our proprietary rights, but we cannot assure the compliance
by such parties with their confidentiality obligations, which could be very time consuming and expensive to enforce.
Legal
challenges to our intellectual property rights could adversely affect our financial results and operations.
We
rely on licenses and other agreements in respect of our intellectual property with our partners and other parties and other intellectual
property rights to conduct our operations. Legal challenges to our intellectual property rights and claims of intellectual property
infringement by third parties could require that we enter into royalty or licensing agreements on unfavorable terms, incur substantial
monetary liability, or be enjoined preliminarily or permanently from further use of the intellectual property in question or from
the continuation of our businesses as currently conducted. We may need to change our business practices if any of these events
occur, which may limit our ability to compete effectively and could have an adverse effect on our results of operations. Even
if we believe any such challenges or claims are without merit, they can be time-consuming and costly to defend and divert management’s
attention and resources away from our business.
Our
success depends, in part, on the capacity, reliability, and security of our information technology hardware and software infrastructure,
as well as our ability to adapt and expand our infrastructure.
The
capacity, reliability, and security of our information technology hardware and software infrastructure are important to the operation
of our current business, which would suffer in the event of system failures. Likewise, our ability to expand and update our information
technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new
service offering initiatives. Our inability to expand or upgrade our technology infrastructure could have adverse consequences,
including the delayed provision of services or implementation of new service offerings, and the diversion of development resources.
We rely on third parties for various aspects of our hardware and software infrastructure. Third parties may experience errors
or disruptions that could adversely impact us and over which we may have limited control. Interruption and/or failure of any of
these systems could disrupt our operations and damage our reputation, thus adversely impacting our ability to provide our products
and services, retain our current users, and attract new users. In addition, our information technology hardware and software infrastructure
may be vulnerable to unauthorized access, misuse, computer viruses, or other events that could have a security impact. If one
or more of such events occur, our customer and other information processed and stored in, and transmitted through, our information
technology hardware and software infrastructure, or otherwise, could be compromised, which could result in significant losses
or reputational damage. We may be required to expend significant additional resources to modify our protective measures or to
investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses, any of
which could substantially harm our business and our results of operations.
We
are dependent on third parties to, among other things, maintain our servers, provide the bandwidth necessary to transmit content,
and utilize the content derived therefrom for the potential generation of revenues.
We
depend on third-party service providers, suppliers, and licensors to supply some of the services, hardware, software, and operational
support necessary to provide some of our products and services. Some of these third parties do not have a long operating history
or may not be able to continue to supply the equipment and services we desire in the future. If demand exceeds these vendors’
capacity, or if these vendors experience operating or financial difficulties or are otherwise unable to provide the equipment
or services we need in a timely manner, at our specifications and at reasonable prices, our ability to provide some products and
services might be materially adversely affected, or the need to procure or develop alternative sources of the affected materials
or services might delay our ability to serve our users. These events could materially and adversely affect our ability to retain
and attract users, and have a material negative impact on our operations, business, financial results, and financial condition.
We
may not be able to find suitable software developers at an acceptable cost.
We
currently rely on certain key suppliers and vendors in the coding and maintenance of our software. We will continue to require
such expertise in the future. Due to the current demand for skilled software developers, we run the risk of not being able to
find or retain suitable and qualified personnel at an acceptable price, or at all. Without these developers, we may not be able
to further develop and maintain our software, which is the most important aspect of our business development
Our
business may be affected by changing consumer preferences or by failure of the public to accept any new product offerings we may
pursue.
The
production and distribution of entertainment content is an inherently risky business because the revenue that may be derived depends
primarily on the content’s acceptance by the public, which is difficult to predict. Consumer and audience tastes change
frequently, and it is a challenge to anticipate what offerings will be successful at a certain point in time. In addition, competing
entertainment content, the availability of alternative forms of entertainment and leisure time activities, general economic conditions,
piracy, and increasing digital and on-demand distribution offerings may also affect the audience for our content. Our expenses
may increase as we invest in new programming ideas, and there is no guarantee that the new programming will be successful or generate
sufficient revenue to recoup the expenditures.
Our
future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.
Our
future success largely depends upon the continued services of our executive officers and management team, especially our Chief
Executive Officer and President, Mr. Rory J. Cutaia. If one or more of our executive officers are unable or unwilling to continue
in their present positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses
to recruit and retain new executive officers. If any of our executive officers joins a competitor or forms a competing company,
we may lose some or all of our customers. Finally, we do not maintain “key person” life insurance on any of our executive
officers. Because of these factors, the loss of the services of any of these key persons could adversely affect our business,
financial condition, and results of operations, and thereby an investment in our Common Stock.
Our
continuing ability to attract and retain highly qualified personnel will also be critical to our success because we will need
to hire and retain additional personnel as our business grows. There can be no assurance that we will be able to attract or retain
highly qualified personnel. We face significant competition for skilled personnel in our industries. This competition may make
it more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors, we may
not be able to effectively manage or grow our business, which could adversely affect our financial condition or business. As a
result, the value of your investment could be significantly reduced or completely lost.
Risks
Related to an Investment in Our Securities
Our
board of directors is authorized to issue additional shares of our Common Stock that would dilute existing stockholders.
We
are authorized to issue up to 200,000,000 shares of Common Stock and 15,000,000 shares of preferred stock, par value $0.0001 per
share, of which 12,398,241 shares of Common Stock and no shares of preferred stock are currently issued and outstanding as of
April 4
, 2019. The number of shares of Common Stock
issued and outstanding as of April 4, 2019 excludes 2,457,974 shares of Common Stock issuable upon exercise of stock options,
168,600 shares of Common Stock reserved for issuance under the Plan, 753,446 shares of Common Stock issuable upon the exercise
of all outstanding warrants, and 940,918 shares of Common Stock issuable upon the conversion of all outstanding convertible
notes. We expect to seek additional financing in order to provide working capital to our business. Our board of directors has
the power to issue any or all of such authorized but unissued shares of our Common Stock at any price and, in respect of the preferred
stock, at any price and with any attributes, our board of directors considers sufficient, without stockholder approval. The issuance
of additional shares of Common Stock in the future will reduce the proportionate ownership and voting power of current stockholders
and may negatively impact the market price of our Common Stock.
Purchasers
in this offering will experience immediate and substantial dilution in the book value of their investment.
Because
the effective price per share of our Common Stock included in our Units or issuable upon exercise of the warrants included as
part of our Units being offered hereby will be substantially higher than the pro forma net tangible book value per share of our
Common Stock outstanding immediately following the completion of this offering, you may experience substantial dilution to the
extent of the difference between the effective offering price per share of our Common Stock you pay in this offering and the pro
forma net tangible book value per share of our Common Stock immediately following the completion of this offering. Therefore,
if you purchase Units in this offering at an effective public offering price of $3.13 per share of Common Stock, you will
experience immediate dilution of $2.41 per share, the difference between the effective price per share you pay for our
Common Stock and its pro forma net tangible book value per share as of December 31, 2018, after giving effect to the issuance
of shares of Common Stock in this offering. This dilution is due in large part to the fact that our earlier investors paid substantially
less than the effective public offering price when they purchased shares of Common Stock.
In
addition, as of April 4, 2019, we have 753,456 shares of Common Stock potentially issuable upon the exercise of all outstanding
warrants, 940,918 shares of Common Stock potentially issuable upon the conversion of all outstanding convertible notes,
and 2,457,974 shares of Common Stock issuable upon the exercise of all outstanding stock options. The exercise or conversion prices
to acquire Common Stock upon the exercise or conversion of warrants, notes, or options, may be at prices significantly
below the public offering price. To the extent outstanding warrants, options, or notes are ultimately exercised or converted,
there will be further dilution to investors purchasing our Common Stock in this offering. In addition, if we issue additional
equity securities, there is a vesting of employee stock grants, or there are any exercises of future stock options, you will experience
additional dilution. Our board of directors has the power to issue any or all of such authorized but unissued shares at any price
they consider sufficient, without stockholder approval. The issuance of additional shares of Common Stock in the future will reduce
the proportionate ownership and voting power of current stockholders, and may negatively impact the market price of our Common
Stock.
We
may issue additional securities with rights superior to those of our Common Stock, which could materially limit the ownership
rights of our stockholders.
We
may offer additional debt or equity securities in private and/or public offerings in order to raise working capital or to refinance
our debt. Our board of directors has the right to determine the terms and rights of any debt securities and preferred stock without
obtaining the approval of our stockholders. It is possible that any debt securities or preferred stock that we sell would have
terms and rights superior to those of our Common Stock and may be convertible into shares of our Common Stock. Any sale of securities
could adversely affect the interests or voting rights of the holders of our Common Stock, result in substantial dilution to existing
stockholders, or adversely affect the market price of our Common Stock.
Trading
on the OTCQB may be volatile and sporadic.
Until
the close of the market on April 4, 2019, our Common Stock was quoted on the OTCQB. Trading in stock quoted on over-the-counter
markets is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do
with our operations or business prospects. This volatility could depress or inflate the market price of our Common Stock for reasons
unrelated to operating performance. Moreover, the OTCQB is not a stock exchange, and trading of securities on this market is often
more sporadic than the trading of securities listed on a national securities exchange, like Nasdaq or the New York Stock Exchange.
Accordingly, the quoted price of our Common Stock as reported by the OTC Markets Group Inc. could widely vary from the market
price of our Common Stock once trading of our Common Stock commences on Nasdaq, which occurred at the open of the market on April
5, 2019, and the quoted price of our Common Stock as reported by the OTC Markets Group Inc. may not reflect a fair or accurate
representation of our Common Stock if it were listed on a national securities exchange. We also cannot predict whether or how
historical investor interest in our Common Stock on the OTCQB might translate to the market price of our Common Stock or the development
of an active trading market on Nasdaq following this offering, or how liquid that market might become.
Furthermore,
the actual public offering per Unit will be as determined between the Underwriter and us at the time of pricing and, as is typical,
may be at a discount to the then-current, over-the-counter per-share market price of our Common Stock.
If
we fail to comply with the applicable continued listing standards of Nasdaq, Nasdaq could delist our Common Stock or the warrants
or both
.
Our
Common Stock and the warrants were recently approved for listing on Nasdaq. In order to maintain that listing, we must satisfy
minimum financial and other continued listing standards, including those regarding director independence and independent committee
requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can
be no assurances that we will be able to comply with such applicable continued listing standards. If we fail to comply with the
continued listing standards, our Common Stock or the warrants, or both, could be delisted. A failure to maintain listing on Nasdaq
could have a material adverse effect on the liquidity and price of our Common Stock.
If
you purchase our Units in this offering, as a holder of the warrants, you will have no rights a stockholder with respect to the
shares of our Common Stock underlying the warrants until you acquire our Common Stock.
If
you purchase Units in this offering, until you exercise of warrants, you will have no rights with respect to the shares of our
Common Stock underlying your warrants. Upon exercise of your warrants, you will be entitled to exercise the rights of a common
stockholder for those underlying shares only as to matters for which the record date for actions to be taken by our common stockholders
occurs after the date on which you exercised your warrants.
The
warrants are speculative in nature.
The
warrants to be issued to investors in this offering do not confer any rights of Common Stock ownership on their holders, such
as voting rights or the right to receive dividends, if any, but rather merely represent the right to purchase additional shares
of our Common Stock at a fixed price for a limited period of time. There can be no assurance that the market price of our Common
Stock will ever equal or exceed the exercise price of the warrants and, consequently, whether it will ever be profitable for holders
of the warrants to exercise the warrants.
The
market price of our Common Stock has been, and may continue to be, subject to substantial volatility.
The
market price of our Common Stock may fluctuate significantly in response to numerous factors, many of which are beyond our control,
including;
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in the trading markets generally and in our particular market segment;
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trading of our Common Stock;
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actual
or anticipated fluctuations in our results of operations;
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the
financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections;
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announcements
regarding our business or the business of our customers or competitors;
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changes
in accounting standards, policies, guidelines, interpretations, or principles;
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actual
or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
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developments
or disputes concerning our intellectual property or our offerings, or third-party proprietary rights;
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announced
or completed acquisitions of businesses or technologies by us or our competitors;
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new
laws or regulations or new interpretations of existing laws or regulations applicable to our business;
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any
major change in our board of directors or management;
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sales
of shares of our Common Stock by us or by our stockholders;
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lawsuits
threatened or filed against us; and
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other
events or factors, including those resulting from war, incidents of terrorism, or responses to these events.
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Statements
of, or changes in, opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the markets
in which we operate or expect to operate could have an adverse effect on the market price of our Common Stock. In addition, the
stock market as a whole, as well as our particular market segment, has from time to time experienced extreme price and volume
fluctuations, which may affect the market price for the securities of many companies, and which often have appeared unrelated
to the operating performance of such companies. Any of these factors could negatively affect our stockholders’ ability to
sell their shares of Common Stock at the time and price they desire.
A
decline in the price of our Common Stock could affect our ability to raise further working capital, which could adversely impact
our ability to continue our operations.
A
prolonged decline in the price of our Common Stock could result in a reduction in the liquidity of our Common Stock and a reduction
in our ability to raise capital. We may attempt to acquire a significant portion of the funds we need in order to conduct our
planned operations through the sale of equity securities; thus, a decline in the price of our Common Stock could be detrimental
to our liquidity and our operations because the decline may adversely affect investors’ desire to invest in our securities.
If we are unable to raise the funds we require for all of our planned operations, we may be forced to reallocate funds from other
planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop
new products or services and continue our current operations. As a result, our business may suffer, and we may be forced to reduce
or discontinue operations. We also might not be able to meet our financial obligations if we cannot raise enough funds through
the sale of our Common Stock and we may be forced to reduce or discontinue operations.
Because
we do not intend to pay any cash dividends on our shares of Common Stock in the near future, our stockholders will not be able
to receive a return on their shares unless and until they sell them.
We
intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any
cash dividends on our Common Stock in the near future. The declaration, payment, and amount of any future dividends will be made
at the discretion of our board of directors, and will depend upon, among other things, the results of operations, cash flows,
and financial condition, operating and capital requirements, and other factors as our board of directors considers relevant. There
is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount
of any such dividend. Unless our board of directors determines to pay dividends, our stockholders will be required to look to
appreciation of our Common Stock to realize a gain on their investment. There can be no assurance that this appreciation will
occur.
If
we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet
our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory
scrutiny and sanction, cause investors to lose confidence in our reported financial information, and have a negative effect on
the market price for shares of our Common Stock.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively to prevent fraud. We maintain a system
of internal controls over financial reporting, which is defined as a process designed by, or under the supervision of, our principal
executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors,
management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”).
As
a public company, we have significant requirements for enhanced financial reporting and internal controls. We are required to
document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting.
The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and
react to changes in our business and economic and regulatory environments, and to expend significant resources to maintain a system
of internal controls that is adequate to satisfy our reporting obligations as a public company.
We
cannot assure you that we will, in the future, identify areas requiring improvement in our internal control over financial reporting.
We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we
will implement and maintain adequate controls over our financial processes and reporting in the future as we continue to grow.
If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet
our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory
scrutiny and sanction, cause investors to lose confidence in our reported financial information, and have a negative effect on
the market price for shares of our Common Stock.
We
lack sufficient internal controls over financial reporting and implementing acceptable internal controls will be difficult with
a limited number of directors and management personnel, which will make it difficult to ensure that information required to be
disclosed in our reports filed and submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
is recorded, processed, summarized, and reported as and when required.
As
of the date of this filing, we currently lack certain internal controls over our financial reporting. While we have recently appointed
two independent directors to our board of directors, one of whom was appointed to chair our audit committee, and have hired a
new Chief Technology Officer, we still have a limited number of directors and management personnel, which may make it difficult
to implement such controls at this time. The lack of such controls makes it difficult to ensure that information required to be
disclosed in our reports filed and submitted under the Exchange Act is recorded, processed, summarized, and reported as and when
required.
The
reasons we believe that our disclosure controls and procedures are not fully effective are because:
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there
is a lack of segregation of duties necessary for a good system of internal control due, to insufficient accounting staff due
to our size;
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the
staffing of our accounting department is weak due to the lack of qualifications and training, and the lack of formal review
process;
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our
control environment is weak due to the lack of an effective risk assessment process, the lack of internal audit function,
and insufficient documentation and communication of the accounting policies; and
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failure
in the operating effectiveness over controls related to recording revenue.
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We
cannot assure you that we will be able to develop and implement the necessary internal controls over financial reporting. The
absence of such internal controls may inhibit investors from purchasing our shares and may make it more difficult for us to raise
debt or equity financing.
Because
our directors and executive officers are among our largest stockholders, they can exert significant control over our business
and affairs and have actual or potential interests that may depart from those of investors.
Certain
of our directors and executive officers own a significant percentage of our outstanding capital stock. We estimate that our executive
officers and directors and their respective affiliates beneficially own approximately 34.0% of our outstanding voting stock, on
a fully-diluted basis, as of April 4, 2019, and, following the completion of this offering, such persons would beneficially
own approximately 22.9% of our outstanding voting stock, on a fully-diluted basis, assuming that we issued 6,389,776
Units in this offering, which does not take into account the shares issuable upon the Underwriter’s exercise of its
over-allotment option, shares issuable upon exercise of the warrants offered hereby, shares issuable upon exercise of the Underwriter’s
warrants, or shares issuable upon exercise of AGP’s warrants, and that the number of shares outstanding as of April 4,
2019 remains unchanged. The holdings of our directors and executive officers may increase further in the future upon vesting or
other maturation of exercise rights under any of the options or warrants they may hold or in the future be granted, or if they
otherwise acquire additional shares of our Common Stock. The interests of such persons may differ from the interests of our other
stockholders. As a result, in addition to their board seats and offices, such persons will have significant influence and control
over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the
following actions:
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to
elect or defeat the election of our directors;
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to
amend or prevent an amendment to our Articles of Incorporation (“Articles of Incorporation”) or Bylaws (“Bylaws”);
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to
effect or prevent a merger, sale of assets, or other corporate transaction; and
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to
control the outcome of any other matter submitted to our stockholders for a vote.
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This
concentration of ownership by itself may have the effect of impeding a merger, consolidation, takeover, or other business consolidation,
or discouraging a potential acquirer from making a tender offer for our Common Stock, which in turn could reduce our stock price
or prevent our stockholders from realizing a premium over our stock price.
Our
Common Stock historically has been categorized as “penny stock,” which may make it more difficult for investors to
sell their shares of Common Stock due to suitability requirements.
Until
February 4, 2019, the effective date of the Reverse Stock Split, our Common Stock was categorized as “penny stock.”
The SEC adopted Rule 15g-9, which generally defines “penny stock” to be any equity security that has a market price
(as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Historically,
the price of our Common Stock has been significantly less than $5.00 per share and we did not qualify for any of the other exceptions;
therefore, prior to the Reverse Stock Split on February 4, 2019, our Common Stock was considered “penny stock.” This
designation imposes additional sales practice requirements on broker-dealers who sell to persons other than established customers
and “accredited investors.” The term “accredited investor” refers generally to institutions with assets
in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
jointly with his or her spouse. The penny stock rules require a broker-dealer buying our securities, prior to a transaction in
a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the
SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the
customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be
given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before
or with the customer’s confirmation. In addition, the penny stock rules require that, prior to a transaction in a penny
stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure
requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject
to these penny stock rules. Consequently, these penny stock rules may affect the ability and/or willingness of broker-dealers
to trade our securities, either directly or on behalf of their clients, may discourage potential investor’s from purchasing
our securities, or may adversely affect the ability of our stockholders to sell their shares.
The
Financial Industry Regulatory Authority, Inc. (“FINRA”), has adopted sales practice requirements that historically
may have limited a stockholder’s ability to buy and sell our Common Stock, which could depress the price of our Common Stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require that, in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other
information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced
securities will not be suitable for at least some customers. Thus, the FINRA requirements historically has made it more difficult
for broker-dealers to recommend that their customers buy our Common Stock, which could limit your ability to buy and sell our
Common Stock, have an adverse effect on the market for our shares, and thereby depress our price per share of Common Stock.
The
elimination of monetary liability against our directors, officers, and employees under Nevada law and the existence of indemnification
rights for our obligations to our directors, officers, and employees may result in substantial expenditures by us and may discourage
lawsuits against our directors, officers, and employees.
Our
Articles of Incorporation and Bylaws contain provisions permitting us to eliminate the personal liability of our directors and
officers to us and our stockholders for damages for the breach of a fiduciary duty as a director or officer to the extent provided
by Nevada law. We may also have contractual indemnification obligations under any future employment agreements with our officers.
The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement
or damage awards against directors and officers, which we may be unable to recoup. These provisions and the resulting costs may
also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly
discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions,
if successful, might otherwise benefit us and our stockholders.
Anti-takeover
effects of certain provisions of Nevada state law hinder a potential takeover of us.
Nevada
has a business combination law that prohibits certain business combinations between Nevada corporations and “interested
stockholders” for three years after an “interested stockholder” first becomes an “interested stockholder,”
unless the corporation’s board of directors approves the combination in advance. For purposes of Nevada law, an “interested
stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting
power of the outstanding voting shares of the corporation or (ii) an affiliate or associate of the corporation and at any time
within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of
the then-outstanding shares of the corporation. The definition of the term “business combination” is sufficiently
broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to
finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.
The
potential effect of Nevada’s business combination law is to discourage parties interested in taking control of us from doing
so if these parties cannot obtain the approval of our board of directors. Both of these provisions could limit the price investors
would be willing to pay in the future for shares of our Common Stock.
Risks
Related to the Proposed Sound Concepts Acquisition
If
we fail to raise sufficient net proceeds from this offering to fund the Acquisition Cash Payment, and cannot obtain alternative
sources of financing, we will be unable to consummate the Sound Concepts Acquisition.
If
we are unable to raise sufficient funds from this offering, we will need to seek alternative sources of financing to fund the
Acquisition Cash Payment. We may not be able to obtain alternative sources of financing sufficient to fund the Acquisition Cash
Payment on terms acceptable to us, if at all. If we are unable to obtain sufficient financing, we will be unable to consummate
the Sound Concepts Acquisition. In such event, we may terminate the Merger Agreement pursuant to its terms. See “The Proposed
Sound Concepts Acquisition,” below.
Cash
expenditures associated with the Sound Concepts Acquisition may create significant liquidity and cash flow risks for us.
We
expect to incur significant transaction costs and some integration costs in connection with the proposed Sound Concepts Acquisition.
While we have assumed that this level of expense will be incurred, there are many factors beyond our control that could affect
the total amount or the timing of the Sound Concepts Acquisition and integration expenses. Moreover, many of the expenses that
will be incurred are, by their nature, difficult to estimate accurately. To the extent these Sound Concepts Acquisition and integration
expenses are higher than anticipated, we may experience liquidity or cash flow issues.
Failure
to complete the proposed Sound Concepts Acquisition could materially and adversely affect our results of operations and the market
price of our Common Stock.
Our
consummation of the proposed Sound Concepts Acquisition is subject to many contingences and conditions, including the preparation
of audited and unaudited financial statements for Sound Concepts, the negotiation, execution, and delivery of the definitive agreements
necessary to consummate the Sound Concepts Acquisition, and raising the financing required to pay the Acquisition Cash Payment.
We cannot assure you that we will be able to successfully consummate the proposed Sound Concepts Acquisition as currently contemplated
or at all. Risks related to the failure of the proposed Sound Concepts Acquisition to be consummated include, but are not limited
to, the following:
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we
would not realize any of the potential benefits of the transaction, which could have a negative effect on our stock price;
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we
expect to incur, and have incurred, significant fees and expenses regardless of whether the proposed Sound Concepts Acquisition
is consummated, including due diligence fees and expenses, accounting fees in connection with the preparation of Sound Concepts’
financial statements, and legal fees and expenses;
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we
may experience negative reactions to the proposed Sound Concepts Acquisition from customers, clients, business partners, lenders,
and employees;
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the
trading price of our Common Stock may decline to the extent that the current market price of our stock reflects a market assumption
that the Sound Concepts Acquisition will be completed; and
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the
attention of our management may be diverted to the Sound Concepts Acquisition rather than to our own operations and the pursuit
of other opportunities that could have been beneficial to us.
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The
occurrence of any of these events individually or in combination could materially and adversely affect our results of operations
and the market price of our Common Stock.
If
the Sound Concepts Acquisition is consummated, the combined company may not perform as we or the market expects, which could have
an adverse effect on the price of our Common Stock.
Even
if the Sound Concepts Acquisition is consummated, the combined company may not perform as we or the market expects. Risks associated
with the combined company following the Sound Concepts Acquisition include:
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integrating
businesses is a difficult, expensive, and time-consuming process, and the failure to integrate successfully our businesses
with the business of Sound Concepts in the expected time frame would adversely affect our financial condition and results
of operation;
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the
Sound Concepts Acquisition will materially increase the size of our operations, and, if we are not able to manage our expanded
operations effectively, our Common Stock price may be adversely affected;
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it
is possible that our key employees or key employees of Sound Concepts might decide not to remain with us after the Sound Concepts
Acquisition is completed, and the loss of such personnel could have a material adverse effect on the financial condition,
results of operations, and growth prospects of the combined company;
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the
success of the combined company will also depend upon relationships with third parties and Sound Concepts’ or our pre-existing
customers, which relationships may be affected by customer preferences or public attitudes about the Sound Concepts Acquisition.
Any adverse changes in these relationships could adversely affect the combined company’s business, financial condition,
and results of operations; and
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if
government agencies or regulatory bodies impose requirements, limitations, costs, divestitures, or restrictions on the consummation
of the Sound Concepts Acquisition, the combined company’s ability to realize the anticipated benefits of the Sound Concepts
Acquisition may be impaired.
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The
obligations and liabilities of Sound Concepts, some of which may be unanticipated or unknown, may be greater than we have anticipated,
which may diminish the value of Sound Concepts to us.
Sound
Concepts’ obligations and liabilities, some of which may not have been disclosed to us or may not be reflected or reserved
for in Sound Concepts’ historical financial statements, may be greater than we have anticipated. The obligations and liabilities
of Sound Concepts could have a material adverse effect on Sound Concepts’ business or Sound Concepts’ value to us
or on our business, financial condition, or results of operations. Even in cases where we are able to obtain indemnification,
we may discover liabilities greater than the contractual limits or the financial resources of the indemnifying party. In the event
that we are responsible for liabilities substantially in excess of any amounts recovered through rights to indemnification or
alternative remedies that might be available to us, or any applicable insurance, we could suffer severe consequences that would
substantially reduce our earnings and cash flows or otherwise materially and adversely affect our business, financial condition,
or results of operations.
You
will not be entitled to protections normally afforded to investors of blank check companies.
Even
though one of the uses of the net proceeds of this offering is to complete the Sound Concepts Acquisition, we are not deemed to
be a “blank check” company under the United States securities laws. Accordingly, we are not subject to Rule 419 promulgated
under the Securities Act. You will not be entitled to protections normally afforded to investors in Rule 419 blank check offerings,
which would, for example, completely restrict the transferability of our securities, require us to complete the Sound Concepts
Acquisition within 18 months from the effective date of this prospectus, and restrict the use of interest earned on the funds
held in a trust account. Because we are not subject to Rule 419, our shares of Common Stock offered by this prospectus will be
immediately tradable, the net proceeds of this offering will not be held in escrow pending consummation of the Sound Concepts
Acquisition, and we will have immediate access to the net proceeds of this offering, whether the Sound Concepts Acquisition is
consummated.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are not
historical facts but rather are plans and predictions based on current expectations, estimates, and projections about our industry,
our beliefs, and assumptions. We use words such as “may,” “will,” “could,” “should,”
“anticipate,” “expect,” “intend,” “project,” “plan,” “believe,”
“seek,” “estimate,” “assume,” and variations of these words and similar expressions to identify
forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties,
and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially
from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in
the section above entitled “Risk Factors.” You should not place undue reliance on these forward-looking statements
because the matters they describe are subject to certain risks, uncertainties, and assumptions that are difficult to predict.
Our forward-looking statements are based on the information currently available to us and speak only as of the date on the front
cover of this prospectus. Over time, our actual results, performance, or achievements may differ from those expressed or implied
by our forward-looking statements, and such difference might be significant and materially adverse to our security holders. Except
as required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information,
future events, or otherwise. We have identified some of the important factors that could cause future events to differ from our
current expectations and they are described in this prospectus under the captions “Risk Factors,” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and as well as in our most recent Annual Report
on Form 10-K and in other documents that we may file with the SEC, all of which you should review carefully. Please consider our
forward-looking statements in light of those risks as you read this prospectus.
USE
OF PROCEEDS
We
estimate that the net proceeds from our issuance and sale of 6,389,776 Units in this offering will be approximately $18.2
million, or approximately $21.0 million if the Underwriter exercises its over-allotment option in full, assuming an offering price
of $3.13 per Unit, after deducting the underwriting discounts and commissions and estimated offering expenses payable by
us. We will not receive any proceeds from the exercise of warrants included as part of our Units offered hereby, unless and until
the warrants are exercised by investors.
We
currently intend to use a portion of the net proceeds from the sale of our Units under this prospectus to provide funds for all,
or a portion of, the Acquisition Cash Payment, as well as to pay transaction expenses and integration costs in connection with
the Sound Concepts Acquisition and related transactions.
We
entered into the Merger Agreement, by and among Sound Concepts, Merger Sub 1, Merger Sub 2, the Sound Concepts Shareholders, the
Shareholder Representative, and us, pursuant to which we will acquire Sound Concepts through a two-step Merger, consisting of
merging Merger 1 Sub with and into Sound Concepts, with Sound Concepts surviving the “first step” of the Merger as
our wholly-owned subsidiary (and the separate corporate existence of Merger Sub 1 will cease) and, immediately thereafter, merging
Sound Concepts with and into Merger Sub 2, with Merger Sub 2 surviving the “second step” of the Merger such that upon
the conclusion of the “second step” of the Merger, the separate corporate existence of Sound Concepts will cease and
Merger Sub 2 will continue its limited liability company existence under Utah law as the surviving entity and as our wholly-owned
subsidiary. We will pay the Closing Merger Consideration of $25,000,000 in a combination of the $15,000,000 Acquisition Cash Payment
and the issuance of the Acquisition Stock with a fair market value of $10,000,000. We intend to use a portion of the net proceeds
from this offering to fund the Acquisition Cash Payment. In addition to customary closing conditions, our obligation to complete
the Sound Concepts Acquisition is conditioned upon the consummation of this offering and receipt by us of offering proceeds that
will be used to pay for all or a portion of the Acquisition Cash Payment (the “Offering Condition”). In the event
that any of the closing conditions, including the Offering Condition, are not met, or it becomes apparent that any of such conditions
will not be fulfilled by February 28, 2019, we may terminate the Merger Agreement. For additional information regarding the proposed
Sound Concepts Acquisition and terms of the Merger Agreement, see “The Proposed Sound Concepts Acquisition” below.
We
intend to fund the Acquisition Cash Payment with a portion of the net proceeds from the offering of our Units under this prospectus.
We do not know at this time how much of the Acquisition Cash Payment will be funded through the net proceeds of this offering.
There are several variables that could affect the amount of net proceeds we will receive from this offering, including the price
at which the Units will be sold under this offering, the number of Units that will be sold, and the anticipated transaction expenses
and integration costs we expect to incur in connection with the Sound Concepts Acquisition. In the event that the net proceeds
from the offering of our Units under this prospectus are insufficient, we will need to seek additional financing from a third-party
lender; however, there is no assurance that such debt financing will be available to us in the amounts, on terms, and at times
deemed acceptable to us, if at all. If we are unable to obtain alternative sources of financing sufficient to pay the Acquisition
Cash Payment, we will be unable to consummate the Sound Concepts Acquisition and will either (i) terminate the Merger Agreement
or (ii) attempt to negotiate with Sound Concepts an amendment to the terms of the Merger Agreement; however, there is no assurance
that we will be successful in such negotiations, or that the terms will be deemed acceptable to us.
In
the event that we have proceeds remaining after payment of the Acquisition Cash Payment and associated transaction expenses and
integration costs, which is currently anticipated, we intend to use the proceeds:
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To
provide additional funding as required for our pre-closing integration activities in connection with the Sound Concepts Acquisition;
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To
repay certain promissory notes issued in favor of Bellridge in the aggregate principal
amount of $2,000,000;
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To
fund the ongoing costs associated with the integration of our software with the Salesforce.com, platform;
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To
fund the ongoing costs associated with the integration of our software with Microsoft Outlook, Microsoft Dynamics, and the
Microsoft Office 365 platform, among other ongoing initiatives with Microsoft;
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To
fund the ongoing costs associated with the integration of our software with the Odoo platform;
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To
fund our ongoing development costs associated with the adaption of our TaggMED product
for certain clinical trial initiatives;
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To
fund our ongoing development costs associated with the development and adaptation of
our TaggLIVE for Facebook Live and Instagram users; and
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To
fund our general corporate working capital needs, including the costs of additional staff to facilitate the foregoing initiatives.
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Our
expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition,
which could change in the future as our plans and business conditions evolve. As of the date of this prospectus, we cannot specify
with certainty all of the particular uses of the proceeds from this offering. Accordingly, we will retain broad discretion over
the use of such proceeds.
MARKET
PRICE AND DIVIDEND INFORMATION
Market
Information
Our
Common Stock was quoted on the OTCQB under the symbol “FUSZ” until and including February 1, 2019. Beginning on February
4, 2019, and for the following 20 trading days, our Common Stock was quoted on the OTCQB under the symbol “FUSZD”
as a result of the Reverse Stock Split. After the 20-trading day period, our Common Stock was quoted on the OTCQB under the symbol
“VRRB.” Our Common Stock and the warrants have been approved for listing by Nasdaq under the symbols “VERB”
and “VERBW,” respectively, and commenced trading on Nasdaq at the open of the market on April 5, 2019.
Set
forth below are the range of high and low closing bid prices for the periods indicated as reported by the OTC Markets Group Inc.
The market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions and may not necessarily represent
actual transactions.
Quarter
Ended
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High
Closing Bid Price Per
Share
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Low
Closing Bid Price Per
Share
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June 30, 2019 (1)
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$
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7.31
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$
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5.83
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March 31, 2019
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$
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17.02
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$
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4.35
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December 31, 2018
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$
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7.65
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$
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2.55
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September 30, 2018
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$
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11.40
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$
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5.61
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June 30, 2018
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$
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40.50
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$
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7.32
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March 31, 2018
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$
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27.30
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$
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1.28
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December 31, 2017
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$
|
1.80
|
|
|
$
|
1.13
|
|
September 30, 2017
|
|
$
|
3.45
|
|
|
$
|
1.08
|
|
June 30, 2017
|
|
$
|
5.55
|
|
|
$
|
1.46
|
|
March 31, 2017
|
|
$
|
2.25
|
|
|
$
|
1.20
|
|
(1)
Through and including April 4, 2019.
On
April 4, 2019, the closing bid price of our Common Stock as reported by the OTC Markets Group Inc. was $5.83 per
share. As of April 4, 2019, there were approximately 81 holders of record of our Common Stock. As of such date, 12,398,241
shares of our Common Stock were issued and outstanding.
Dividends
We
have never declared or paid dividends. We do not intend to pay cash dividends on our Common Stock for the foreseeable future,
but currently intend to retain any future earnings to fund the development and growth of our business. The payment of dividends,
if any, on our Common Stock will rest solely within the discretion of our board of directors and will depend, among other things,
upon our earnings, capital requirements, financial condition, and other relevant factors. The NRS, however, prohibits us from
declaring dividends, where, after giving effect to the distribution of the dividend:
|
●
|
we
would not be able to pay our debts as they become due in the usual course of business; or
|
|
|
|
|
●
|
our
total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights
of stockholders who have preferential rights superior to those receiving the distribution, unless otherwise permitted under
our Articles of Incorporation.
|
CAPITALIZATION
The
following table sets forth our capitalization assumed as of December 31, 2018:
|
●
|
on an actual basis;
|
|
|
|
|
●
|
on an as-adjusted
basis, giving effect to this offering of 6,389,776 Units at a public offering price of $3.13 per Unit, after
deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us; and
|
|
|
|
|
●
|
on a pro forma as-adjusted
basis, after giving effect to the acquisition of Sound Concepts, this offering of 6,389,776 Units at a public
offering price of $3.13 per Unit, after deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us, repayment of notes payable in the aggregate principal amount of $2,000,000, amortization
of the corresponding debt discount and extinguishment of derivative liability.
|
You
should read this information in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Verb,” our audited financial statements and the related notes appearing
elsewhere in this prospectus, and “Unaudited Pro Forma Condensed Combined Financial Statements.” The information below
gives effect to the one-for-fifteen (1-for-15) Reverse Stock Split, which was implemented on February 1, 2019 and was effective
at the commencement of trading on February 4, 2019.
|
|
As
of December 31, 2018
|
|
|
|
Actual
|
|
|
As
Adjusted
|
|
|
Pro
forma
As
Adjusted
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash
|
|
$
|
634,000
|
|
|
$
|
18,860,000
|
|
|
$
|
1,622,000
|
|
Total
Debt
|
|
$
|
1,995,000
|
|
|
$
|
1,995,000
|
|
|
$
|
1,411,000
|
|
Stockholder’s
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, par value $0.0001 per share (200,000,000 shares authorized; 12,055,491 shares issued and outstanding, actual; 18,445,267
shares issued and outstanding, as adjusted; and 21,640,155 shares issued and outstanding, on pro forma as-adjusted
basis)
|
|
$
|
1,000
|
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
Additional
paid-in capital
|
|
$
|
35,611,000
|
|
|
$
|
53,674,000
|
|
|
$
|
63,802,000
|
|
Accumulated
deficit
|
|
$
|
(40,667,000
|
)
|
|
$
|
(40,667,000
|
)
|
|
$
|
(40,745,000
|
)
|
Total
Stockholders’ Equity / (Deficit)
|
|
$
|
(5,055,000
|
)
|
|
$
|
13,009,000
|
|
|
$
|
23,059,000
|
|
Total
Capitalization
|
|
$
|
(3,060,000
|
)
|
|
$
|
15,004,000
|
|
|
$
|
24,470,000
|
|
The
number of shares of our Common Stock outstanding used for existing stockholders is based on 12,055,491 shares of our Common Stock
outstanding as of December 31, 2018 and excludes as of such date: (i) 2,478,974 shares of our Common Stock underlying outstanding
stock options; (ii) 168,600 shares of our Common Stock reserved for issuance under the Plan; (iii) 940,412 shares of our Common
Stock issuable upon the exercise of outstanding warrants and (iv) 1,044,164 shares of our Common Stock potentially issuable upon
the conversion of outstanding convertible notes.
DILUTION
If
you invest in our Units in this offering, your ownership interest will be diluted immediately to the extent of the difference
between the public offering price per Unit and the as-adjusted net tangible book value per share of our Common Stock after this
offering.
Our
historical net tangible book deficit as of December 31, 2018 was ($5,217,000), or approximately ($0.43) per share of our Common
Stock. Historical net tangible book deficit per share represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of our Common Stock outstanding as of December 31, 2018.
After
giving effect to the issuance and sale of 6,389,776 Units in this offering at a public offering price of $3.13 per Unit, and after
deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our as-adjusted net tangible
book value as of December 31, 2018 would have been $13,171,000, or $0.72 per share. This represents an immediate increase in net
tangible book value per share of $1.15 to existing stockholders and immediate dilution of $2.41 per share to new investors in
this offering. Dilution per share to new investors is determined by subtracting (i) the pro forma net tangible book value per
share as of December 31, 2018 after this offering from (ii) the assumed public offering price per Unit paid by new investors.
The following table illustrates this dilution on a per-share basis:
Assumed
public offering price per Unit paid by new investors
|
|
|
|
|
|
$
|
3.13
|
(1)
|
Less
:
|
|
|
|
|
|
|
|
|
Historical
net tangible book deficit per share as of December 31, 2018, before this offering
|
|
$
|
(0.43
|
)
|
|
|
|
|
Increase
in pro forma net tangible book value per share attributable to new investors participating in this offering
|
|
$
|
1.15
|
|
|
|
|
|
Pro
forma net tangible book value per share as of December 31, 2018 after this offering
|
|
|
|
|
|
$
|
0.72
|
|
Dilution
per share to new investors in this offering
|
|
|
|
|
|
$
|
2.41
|
|
|
(1)
|
Upon
closing of the Sound Concepts Acquisition, we will issue to the Sound Concepts Shareholders
shares of our Common Stock with a fair market value of $10,000,000, based on a price
per share equal to the offering price of a Unit in this offering. Based on the public
offering price of $3.13, we have assumed that we will issue 3,194,888 shares
of our Common Stock in connection with the Sound Concepts Acquisition. Accordingly, upon
closing of the Sounds Concept Acquisition, the dilution on a per-share basis to new investors
in this offering is as follows:
|
Assumed public offering price
per Unit paid by new investors
|
|
|
|
|
|
$
|
3.13
|
|
Less:
|
|
|
|
|
|
|
|
|
Historical net tangible book deficit per share
as of December 31, 2018, before this offering
|
|
$
|
(0.43
|
)
|
|
|
|
|
Increase in pro
forma net tangible book value per share attributable to new investors participating in this offering
|
|
$
|
1.01
|
|
|
|
|
|
Pro forma net
tangible book value per share as of December 31, 2018 after this offering
|
|
|
|
|
|
$
|
0.58
|
|
Dilution per share
to new investors in this offering
|
|
|
|
|
|
$
|
2.55
|
|
If
the Underwriter exercises its over-allotment option to purchase additional Units in full, the net tangible book value per share
after this offering would be $0.82 per share, the increase in net tangible book value per share to existing stockholders
would be $1.26 per share, and the dilution to new investors purchasing shares in this offering would be $2.31 per
share.
The
number of shares of our Common Stock shown above to be outstanding after this offering is based on 12,055,491, shares outstanding
as of December 31, 2018 and excludes:
|
●
|
2,478,974 shares
of our Common Stock issuable upon exercise of outstanding stock options as of December 31, 2018, with a weighted-average exercise
price $5.25 per share;
|
|
|
|
|
●
|
168,600 shares of
our Common Stock reserved for issuance under the Plan;
|
|
|
|
|
●
|
940,412 shares of
our Common Stock issuable upon the exercise of warrants outstanding as of December 31, 2018, with a weighted-average exercise
price of $3.60 per share;
|
|
|
|
|
●
|
1,044,164 shares
of our Common Stock potentially issuable upon conversion of outstanding convertible notes;
|
|
|
|
|
●
|
958,466
shares of our Common
Stock issuable upon exercise of the Underwriter’s over-allotment option granted in connection with this offering;
|
|
|
|
|
●
|
6,389,776
shares of our Common
Stock issuable upon exercise of warrants granted in connection with this offering (or 7,348,242 shares if the Underwriter
exercises its over-allotment option in full);
|
|
|
|
|
●
|
319,489
shares of our Common
Stock issuable upon exercise of the Underwriter’s warrants; and
|
|
|
|
|
●
|
159,744 shares of
our Common Stock issuable upon exercise of AGP’s warrants issued as part of its compensation for certain advisory services
provided in connection with the Sound Concepts Acquisition (or 183,706 shares if the Underwriter exercises its over-allotment
option in full).
|
To
the extent that these outstanding options or warrants are exercised, the convertible notes are converted, or we issue additional
shares of our Common Stock in the future, whether pursuant to the Plan or otherwise, there will be further dilution to investors
participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic
considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional
capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution
to our stockholders.
BUSINESS
Overview
CMG
was organized as a limited liability company under the laws of the State of Nevada on December 12, 2012. On May 19, 2014, bBooth,
Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG merged into bBooth, Inc. and bBooth, Inc., thereafter,
changed its name to bBooth (USA), Inc., effective as of October 16, 2014. The operations of CMG and bBooth (USA), Inc., became
known as, and are referred to in this prospectus as, “bBoothUSA.”
On
October 16, 2014, bBoothUSA was acquired by GSD, pursuant to the Share Exchange Agreement entered into with GSD. GSD was incorporated
in the State of Nevada on November 27, 2012. The acquisition was accounted for as a reverse merger transaction. In connection
with the closing of the transactions contemplated by the Share Exchange Agreement, GSD’s management was replaced by bBoothUSA’s
management, and GSD changed its name to bBooth, Inc.
Effective
April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary
short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with
and into us. We were the surviving entity. To effectuate the name-change merger, we filed Articles of Merger and a Certificate
of Correction (relative to the effective date of the name-change merger) with the Secretary of State of the State of Nevada on
April 4, 2017 and April 17, 2017, respectively. The name-change merger became effective on April 21, 2017. Our board of directors
approved the name-change merger, which resulted in the name change on that date. In accordance with Section 92A.180 of the NRS,
stockholder approval of the name-merger was not required.
Effective
February 1, 2019, we changed our corporate name from nFüsz, Inc. to Verb Technology Company, Inc. The name change was effected
through a parent/subsidiary short-form merger of Verb Technology Company, Inc., our wholly-owned Nevada subsidiary, formed solely
for the purpose of the name change, with and into us. We were the surviving entity. To effectuate the name-change merger, we filed
Articles of Merger and a Certificate of Correction (relative to the effective date of the name-change merger) with the Secretary
of State of the State of Nevada on January 31, 2019 and February 22, 2019, respectively. The name-change merger became effective
on February 1, 2019. Our board of directors approved the name-change merger, which resulted in the name change on that date. In
accordance with Section 92A.180 of the NRS, stockholder approval of the name-merger was not required.
On
February 1, 2019, we implemented a 1-for-15 Reverse Stock Split of our Common Stock. The Reverse Stock Split became effective
upon commencement of trading of our Common Stock on February 4, 2019. As a result of the Reverse Stock Split, every 15 shares
of our pre-Reverse Stock Split Common Stock were combined and reclassified into one share of our Common Stock. The number of shares
of Common Stock subject to outstanding options, warrants, and convertible securities were also reduced by a factor of fifteen
as of February 1, 2019. All historical share and per-share amounts reflected throughout our consolidated financial statements
and other financial information in this prospectus have been adjusted to reflect the Reverse Stock Split. The par value per share
of our Common Stock was not affected by the Reverse Stock Split.
Our
Business
We
are an applications services provider, marketing cloud-based business software products under the brand name “Tagg”
on a subscription basis. Our flagship product, TaggCRM, is a CRM application that is distinguishable from other CRM programs because
it utilizes interactive video as the primary means of communication between sales and marketing professionals and their clients
or prospects. TaggCRM allows our users to create, distribute, and post interactive videos that contain on-screen clickable “Taggs,”
which are interactive icons, buttons, and other on-screen elements, that, when clicked, allow their prospects and customers to
respond to our users’ calls to action in real-time, in the video, while the video is playing, without leaving or stopping
the video. For example, our technology allows a customer or a prospective customer the ability to click on a product they see
featured in a video and buy it, or to click on a calendar icon in the video to make an appointment with a salesperson, among many
other features and functionality. Tagg videos can be distributed via email or text messaging and can be posted on social media.
Our users report increased sales conversion rates compared to traditional, non-interactive video.
We
developed the proprietary, patent-pending interactive video technology that serves as the basis for all of our cloud-based, SaaS
Tagg applications. Our Tagg applications are accessible on all mobile and desktop devices and no software download is required
to view the Tagg interactive videos. The Tagg applications also provide detailed analytics in the application dashboard that reflect
when the videos were viewed, by whom, how many times, for how long, and what interactive Taggs were clicked-on in the video, among
other things, all of which assist our users in focusing their sales and marketing efforts by identifying which clients or prospects
have interest in the subject matter of the video. TaggCRM users receive a text message immediately notifying them that a customer
or prospect received their video and additional text messages notifying them when that customer or prospect watched the video
and shared the video so they can follow-up in real-time. Our Tagg application platform can accommodate any size sales or marketing
campaign, and it is enterprise-class scalable to meet the needs of today’s global organizations.
Our
TaggMED application is designed for physicians and other healthcare providers to create more efficient and effective interactive
communications with patients. Patients are able to avoid unnecessary and inconvenient visits to their physicians’ or other
healthcare providers’ offices by viewing and responding to interactive videos through in-video, on-screen clicks that are
designed to assess the patient’s need for an office visit. If the patient’s responses to the interactive video indicate
that an office visit is either necessary or desirable, the patient can schedule the office visit right through the video in real
time. Patients can also download and print prescriptions, care instructions, and other physician distributed documents right from
and through the video. TaggMED is offered on a subscription basis.
Our
TaggEDU application is designed for teachers and school administrators for more effective communications with students, parents,
and faculty. TaggEDU allows teachers to deliver interactive video lessons to students that are both more engaging and more effective.
TaggEDU allows teachers to communicate with students through their mobile devices and computers to deliver lessons and tests/quizzes
on the screen and in the Tagg video. The analytics capabilities of TaggEDU available on the application dashboard of the teacher
or school administrator allow them to track which students watched the lesson, when, for how long, how many times, and track and
report on test/quiz results. TaggEDU is offered on a subscription basis.
Our
TaggLIVE application is also part of our proprietary interactive Tagg video applications portfolio. TaggLIVE is a Facebook application
that works in conjunction with Facebook Live, allowing users of Facebook Live to place clickable Taggs on the screen of everyone
watching their Facebook Live broadcasts in real time. Viewers can click the on-screen Taggs to purchase products and services
placed there and offered by the person utilizing our TaggLIVE Facebook application. TaggLIVE is scheduled for release in the second
quarter of 2019.
Revenue
Generation
We
intend to generate revenue from the following sources:
|
●
|
Recurring
subscription fees paid by enterprise users for access to our stand-alone applications by enterprise employees or affiliates;
|
|
|
|
|
●
|
Recurring
subscription fees paid by non-enterprise individual users for access to our stand-alone applications;
|
|
|
|
|
●
|
In-app
and online purchases by users to access various premium services, features, functionality, and options of the platform (such
as the ability to purchase videos from our soon-to-be-released Video Template Store and Creator Program to which users can
add their own clickable Taggs), among several other add-on features and functionality;
|
|
|
|
|
●
|
Recurring
subscription fees paid by enterprise users for access to our applications integrated into large, third-party CRM providers
such as Oracle NetSuite, Adobe Marketo, Salesforce.com, and Microsoft, among others; and
|
|
|
|
|
●
|
Recurring
subscription fees paid by enterprise users who subscribe to bundled service offerings from our partners and/or their respective
value-added resellers.
|
Our
Market/Industry
Our
market is intentionally broad and includes sales-based organizations, consumer brands, ad agencies, online marketers, advertisers,
sponsors, social media influencers, enterprise users – large and small, religious organizations, health care providers,
network marketing and multi-level marketing companies, media companies, major motion picture studios, social media companies,
schools and training facilities, and virtually any other person or organization that seeks to attract, engage, and communicate
with prospects, customers, consumers, fans, followers, patients, students, friends, and subscribers, among others, online, utilizing
automated, interactive video technology.
Distribution
Methods
Our
distribution methods are:
|
1.
|
Prospective
customers and clients can subscribe to our TaggCRM software service on a monthly or annual contract through a simple, web-based
sign-up form accessible on our website (https://www.myverb.com), as well as through interactive sign-up links that we distribute
via email and text messaging and through social media.
|
|
|
|
|
2.
|
Enterprise
users can subscribe to our TaggCRM software service and then distribute custom-branded sign-up links to their internal and
external staff via email or other electronic means.
|
|
|
|
|
3.
|
We
have entered into partnership agreements with other CRM providers to incorporate our Tagg interactive video technology into
such other CRM providers’ software platforms to be offered to their existing and prospective client base for an additional
monthly recurring fee, which fee is shared with us. In January 2018, we entered into such an agreement with Oracle, to integrate
our Tagg interactive video technology into their NetSuite platform on a revenue-share basis. In February 2018, we entered
into a similar agreement with Adobe Marketo, to integrate our Tagg interactive video technology into their platform on a revenue-share
basis. In January 2019, we entered into an agreement with Microsoft, pursuant to which we will integrate our Tagg interactive
video technology into Microsoft’s product line, beginning with its email platform, Outlook, and then other Microsoft
Office 365 services. In February 2019, we entered into a revenue share partnership agreement with Salesforce.com, pursuant
to which we will integrate our Tagg interactive video technology into the Salesforce.com CRM platform.
|
|
|
|
|
4.
|
We
have entered into license and partnership agreements with digital marketing companies and advertising agencies to resell our
Tagg interactive video technology to their existing and prospective client bases for monthly fees, which fees are shared with
us. In March 2018, we entered into such an agreement with DR2Marketing, LLC, to utilize, as well as to resell, our Tagg applications
to their clients on a revenue-share basis.
|
|
|
|
|
5.
|
We
have entered into partnership agreements with large cloud services providers, who will bundle our application with such providers’
other applications offered to their existing and prospective global customer base in order to obtain more data storage and
bandwidth utilization fees from such customers. In January 2019, we entered into a partnership agreement with Microsoft, pursuant
to which we will integrate our Tagg interactive video technology into Microsoft’s product line, allowing their resellers
to bundle our application for resale to their respective customer bases.
|
|
|
|
|
6.
|
We
employ a direct sales team, as well as outside sales consultants.
|
Marketing
We
utilize our own proprietary interactive video platform as the foundation of our ongoing marketing initiatives. Our initiatives
include daily, broad-based social media engagement by a dedicated team of full-time employees and outside consultants; management
of our interactive video-based website; interactive video-based email campaigns, television commercials, among many other ongoing
initiatives designed to increase awareness of our products and services and drive conversion and adoption rates.
As
part of our partnership agreement with Microsoft, we will have access to their “Go-To-Market Services” and technical
resources to help us market and sell our integrated products to Microsoft customers, as well as other Microsoft partners and systems
integrators in Microsoft’s network all over the world.
On
December 21, 2018, we entered into an agreement with Major Tom Agency Inc., a premier digital marketing agency with offices in
New York, Toronto, and Vancouver, to design, launch, and manage a comprehensive national marketing campaign for us. The campaign
launched in the first quarter of 2019.
Competition
CRM
software generated more than $40.7 billion in sales revenue throughout the world in 2017, and has grown to become the largest
software segment, overtaking data management software, and is expected to reach more than $80 billion in sales revenue by 2025.
We are active in the CRM applications industry. We believe that CRM applications that incorporate our proprietary Tagg interactive
video technology provide significant competitive advantages over the CRM applications offered by the long-term leaders in the
field: Salesforce.com, Microsoft, Oracle, SAP SE, and Adobe, which collectively account for approximately 40% of industry sales.
These companies, as well as many others, have numerous differences in feature sets and functionality, but all share certain basic
attributes. Most of them were designed before the advent and proliferation of mobile phones, social media, and the technology
behind the current ubiquity of video over the internet and more recently on mobile devices. While many of them have attempted
to incorporate video capabilities into their respective CRM platforms, sometimes in “bolt-on” fashion,
it is our opinion that none of them has done so in an effective manner, and certainly none of them utilizes interactive video
technology similar to ours, which places clickable calls to action right in the video, including into users’ pre-existing
sales and product videos. In addition, Tagg interactive videos are viewable on both mobile and desktop devices regardless of operating
system and without the need to download a proprietary player or program.
These
differences serve to highlight the reasons we have chosen not only to develop our own stand-alone SaaS cloud CRM platform, but
also to incorporate and integrate our interactive video technology into the platforms of many of these large, long-term leaders
in the CRM industry. This allows them to offer Tagg interactive video capabilities to their large enterprise clients and customers
as an upgrade feature to their CRM platform subscriptions. The viability of this strategy is evidenced by the partnerships we
currently enjoy with Oracle NetSuite and Adobe Marketo, as well as new partnerships with Salesforce.com and Microsoft, among others.
Nevertheless, the market share, marketing strength, and competitive advantages of our competitors may preclude our obtaining any
material share of this market.
Intellectual
Property
Our
policy is to protect our technology by, among other things, trade secret protection and copyrights. We primarily rely upon trade
secrets and copyrighted proprietary software, code, and know-how to protect our Tagg interactive video technology platform and
associated applications. We have taken security measures to protect our trade secrets and proprietary know-how, to the extent
possible. Our means of protecting our proprietary rights may not prove to be adequate and our competitors may independently develop
technology or products that are similar to ours or that compete with ours. Trade secret and copyright laws afford only limited
protection for our technology and products. The laws of many countries do not protect our proprietary rights to as great an extent
as do the laws of the United States. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to
obtain and use information that we regard as proprietary. Third parties may also design around our proprietary rights, which may
render our protected technology and products less valuable, if the design around is favorably received in the marketplace.
We
recently filed a patent application with the PTO with respect to our interactive video technology. Our patent application may
not result in an issued patent in a timely manner, or at all. Any patents that may be issued in the future may not protect commercially
important aspects of our technology. Furthermore, the validity and enforceability of such patents issued in the future may be
challenged by third parties and could be invalidated or modified by the PTO. Third parties may independently develop technology
that is not covered by our patents, that is similar to, or competes with, our technology. In addition, our intellectual property
may be infringed or misappropriated by third parties, particularly in foreign countries where the laws and governmental authorities
may not protect our proprietary rights as effectively as those in the United States.
In
addition, if any of our products or technology is covered by third-party patents or other intellectual property rights, we could
be subject to various legal actions. We cannot assure you that our technology platform and products do not infringe patents held
by others or that they will not in the future. Litigation may be necessary to enforce our intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement,
invalidity, misappropriation, or other claims.
Research
and Development
We
incurred $980,000 and $375,000 of research and development expenses during the fiscal years ended December 31, 2018 and 2017,
respectively. These funds were primarily used for development of our Tagg interactive video CRM software.
Suppliers
We
currently rely on a full-time, dedicated, external team of experienced professionals for the coding and maintenance of our software.
We believe we have mitigated the associated risks of managing an external team of software development professionals by incorporating
internal management and oversight, as well as appropriate systems, protocols, controls, and procedures and ensuring that we have
access to additional qualified professionals to provide like or complementary services.
Dependence
on Key Customers
Based
on our current business and anticipated future activities as described in this prospectus, we do not have, and do not expect to
have, any significant customer concentration. Accordingly, we do not expect to be dependent on any key customers.
Government
Regulation
Government
regulation is not of significant concern for our business nor is government regulation expected to become an impediment to the
business in the near- or mid-term as management is currently unaware of any planned or anticipated government regulation that
would have a material impact on our business. Our management believes it currently possesses all requisite authority to conduct
our business as described in this prospectus.
Employees
As
of April 4, 2019, we had 13 full-time statutory employees and 17 full-time consultants and contractors. We also employ
consultants and contractors on an as-needed basis to provide specific expertise in areas of software design, development and coding,
content creation, audio and video editing, video production services, and other business functions, including marketing and accounting.
None of our employees or consultants is covered by a collective bargaining agreement. We have had no prior labor-related work
stoppages and believe that our relationship with our employees, consultants, and contractors, both full-time and part-time, is
good.
Properties
Our
corporate headquarters is approximately 2,800 square feet and is located at 344 S. Hauser Blvd., Suite 414, Los Angeles, California
90036. Our headquarters houses our executive and administrative operations. The lease expires on July 29, 2019 and the monthly
base rent is approximately $5,000. We believe that our facility is sufficient to meet our current needs.
We
recently entered into a new lease to move and expand our corporate headquarters. The new lease is for approximately 4,900 square
feet of new construction space, located at 2210 Newport Blvd., Suite 200, Newport Beach, California 92663, on the Balboa Peninsula
(the “Lease”). The Lease is for a term of sixty-five (65) months, with the Company’s option to extend the Lease
for either an additional twelve (12) or twenty-four (24) month term, upon written notice to the landlord. The Lease term will
commence when the tenant improvements, paid for by the landlord, are substantially completed. The landlord is providing a tenant
improvement allowance of $317,000 to build-out the space to our specifications. The average monthly base rent for the first twelve
(12) months of the lease is approximately $12,000 after rent abatement. Thereafter, average monthly base rent will be approximately
$24,000 over the sixty-five (65) months. As part of the lease consideration, signage of our logo “Verb” will be prominently
displayed in three places on top of the two street facing exterior sides of the building.
Legal
Proceedings
On
April 24, 2018, EMA Financial, LLC, a New York limited liability company (“EMA”), commenced an action against us,
styled
EMA Financial, LLC, a New York limited liability company, Plaintiff, against nFUSZ, Inc., Defendant
, United States
District Court, Southern District of New York, case number 1:18-cv-03634-NRB. The Complaint sets forth four causes of action and
seeks relief consisting of: (1) money damages, (2) injunctive relief, (3) liquidated damages, and (4) declaratory relief. All
of the claims stem from our refusal to honor EMA’s exercise notice in connection with a common stock purchase warrant that
we had granted to it. We believe EMA’s allegations are entirely without merit.
The
circumstances giving rise to the dispute are as follows: on or about December 5, 2017, we issued a warrant to EMA as part of the
consideration we were required to provide in connection with a contemporaneous convertible loan EMA made to us. The loan, which
was evidenced by a convertible note, was for a term of one year. Our refusal to honor the warrant exercise notice was due to our
good faith belief that EMA’s interpretation of the cashless exercise provision of the warrant was,
inter alia
, (1)
contrary to our direct conversations and agreements made with EMA prior to, and during the preparation of the loan and warrant
agreements; (2) contradictory to the plain language on the face and body of the warrant agreement drafted by EMA; (3) wholly inconsistent
with industry norms, standards, and practices; (4) was contrary to the cashless exercise method actually adopted by EMA’s
co-lender in the same transaction; and (5) was the result of a single letter mistakenly transposed in the cashless exercise formula
drafted by EMA which if adopted, would result in a gross and unintended windfall in favor of EMA and adverse to us. Moreover,
as set forth in our response to EMA’s allegations, EMA’s interpretation of the cashless exercise provision would have
resulted in it being issued more shares of our Common Stock than it would have received if it exercised the warrant for cash (instead
of less), and more than the amount of shares reflected on the face of the warrant agreement itself. The loan underlying the transaction
was repaid, in full, approximately three months after it was issued, on March 8, 2018, together with all accrued interest, prior
to any conversion or attempted conversion of the note.
On
July 20, 2018, we filed an Answer to the Complaint, along with certain Affirmative Defenses, as well as Counterclaims seeking,
inter alia
, to void the entire transaction for violation of New York’s criminal usury laws and, alternatively, for
reformation of the warrant conversion formula set forth in the Warrant Agreement so as to be consistent with the parties’
intent and custom and practice in the industry.
As
of December 31, 2018, the parties have undergone depositions and exchanged document production. Discovery was scheduled to end
on January 31, 2019. Neither party has requested to extend the discovery period. Notwithstanding the pending action, in December
2018, EMA attempted to exercise the warrant through our transfer agent utilizing the disputed cashless exercise formula. The transfer
agent rejected EMA’s request and notified us. We promptly filed a motion for a preliminary injunction to enjoin EMA from
making any further attempts to exercise the warrant in this manner during the pendency of the action. We are awaiting a decision
from the Court on our preliminary injunction motion. As of the date of this prospectus, the Court has not ruled on our motion.
We intend to vigorously defend the action, as well as vigorously prosecute our counterclaims against EMA. The action is still
pending.
In
August 2014, a former employee and then current stockholder (the “Employee”) entered into that certain Executive Employment
Agreement (“Employment Contract”) with bBooth, Inc., our predecessor company. Section 3.1 of the Employment Contract
provided, among other things, that the Employee was employed to serve as our President and reported directly to Rory Cutaia, our
Chief Executive Officer. Section 5.2 of Employment Contract provides, among other things, that the Employee was entitled to receive
a bonus (the “Bonus”) from us if certain conditions are met. These specified conditions were never met.
On
or about May 15, 2015, the Employee ceased employment at the Company. More than eight months later, on or about January 20, 2016,
the parties entered into a certain Stock Repurchase Agreement (the “Repurchase Agreement”) pursuant to which we purchased
all of the Employee’s shares of Common Stock for a purchase price of $144,000. The Repurchase Agreement also provided, among
other things, that the Employee released us from all claims, causes of action, suits, and demands (the “Release”).
Approximately
two years later, in April 2018, at a time when the Company’s share price was on the rise, the Employee notified us by email
that it is the Employee’s position that on or about May 15, 2015: (1) the Employee was terminated “without cause”
pursuant to Section 6.2 of the Employment Contract; or (2) the Employee terminated employment with Company “for good reason”
pursuant to Section 6.3 of the Employment Contract. The Employee sought approximately $300,000 in allegedly unpaid bonuses, plus
150,000 options priced at $0.50 per share, which expired prior to exercise. We responded in or about April 2018 that the Employee’s
claims lacked factual and legal merit, including that they are barred by the Release. The lack of response from the Employee at
that time appeared to indicate the Employee’s tacit acknowledgment and ratification of our rationale underpinning our denial
of the Employee’s claims. Approximately eight months later in December 2018, the Employee resurfaced, renewing his claims.
We responded by reminding the Employee we consider his claims to be without merit, and that, in any event, they are barred by
the Release. In our view, the Release set forth in the Repurchase Agreement coupled with the existing merger or integration clause
likely shields the Company from liability, even assuming, arguendo, that the claims could be supported by credible evidence.
We
know of no other material pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our assets
or properties, or the assets or properties of any of our subsidiaries, are subject and, to the best of our knowledge, no adverse
legal activity is anticipated or threatened. In addition, we do not know of any such proceedings contemplated by any governmental
authorities.
We
know of no material proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial stockholder
is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries.
THE
PROPOSED SOUND CONCEPTS ACQUISITION
On
November 8, 2018, we entered into the Merger Agreement with Sound Concepts, Merger Sub 1, Merger Sub 2, the Sound Concepts Shareholders,
the Shareholder Representative, and us. Pursuant to the Merger Agreement, we will acquire Sound Concepts through a two-step Merger,
consisting of merging Merger Sub 1 with and into Sound Concepts, with Sound Concepts surviving the “first step” of
the Merger as our wholly-owned subsidiary (and the separate corporate existence of Merger Sub 1 will cease) and, immediately thereafter,
merging Sound Concepts with and into Merger Sub 2, with Merger Sub 2 surviving the “second step” of the Merger such
that upon the conclusion of the “second step” of the Merger, the separate corporate existence of Sound Concepts will
cease and Merger Sub 2 will continue its limited liability company existence under Utah law as the surviving entity and as our
wholly-owned subsidiary.
Consideration
On
the terms and subject to the conditions set forth in the Merger Agreement, at the Effective Time, each share of the Sound Concepts
Capital Stock will be cancelled and converted into the right to receive a proportionate share of the Closing Merger Consideration
having a value of $25,000,000, which will be payable through a combination of the $15,000,000 Acquisition Cash Payment and the
issuance of the Acquisition Stock with a fair market value of $10,000,000. The Closing Merger Consideration is not subject to
any closing working capital adjustment or post-closing working capital adjustment. We intend to fund the Acquisition Cash Payment
with a portion of the net proceeds from the offering of our Units under this prospectus. We do not currently know how much of
the Acquisition Cash Payment will be funded through the net proceeds of this offering. There are several variables that could
affect the amount of net proceeds we will receive from this offering, including the price at which the Units will be sold under
this offering, the number of Units that are likely to be sold, and the anticipated transaction expenses and integration costs
we expect to incur in connection with the Sound Concepts Acquisition. In the event that the net proceeds from the offering of
our Units under this prospectus are insufficient, we will need to seek additional financing from a third-party lender; however,
there is no assurance that such debt financing will be available to us in the amounts, on terms, and at times deemed acceptable
to us, if at all. If we are unable to obtain alternative sources of financing sufficient to pay the Acquisition Cash Payment,
we will be unable to consummate the Sound Concepts Acquisition and will either (i) terminate the Merger Agreement or (ii) attempt
to negotiate with Sound Concepts an amendment to the terms of the Merger Agreement; however, there is no assurance that we will
be successful in such negotiations, or that the terms will be deemed acceptable to us.
In
addition, we have agreed to pay to AGP certain fees for advisory services provided in connection with the Sound Concepts Acquisition.
We will pay AGP a transaction fee equal to (i) 5% of the first million dollars of the Closing Merger Consideration, (ii) 4% of
the second million dollars of the Closing Merger Consideration, (iii) 3% of the third million dollars of the Closing Merger Consideration,
(iv) 2% of the fourth million dollars of the Closing Merger Consideration, and (v) 1% of the remaining Closing Merger Consideration.
We also agreed to issue to AGP or its designees at the closing of the Sound Concepts Acquisition, warrants to purchase that number
of shares of Common Stock equal to 2.5% of the number of Units sold in this offering. The warrants will have a five-year term
and will have an exercise price equal to 120% of the valuation of the Acquisition Stock.
Escrow
Agreement
Pursuant
to the Merger Agreement, at or prior to the closing of the Sound Concepts Acquisition (the “Closing”), Sound Concepts
will deliver to us an executed escrow agreement (the “Escrow Agreement”). In accordance with the Escrow Agreement,
at the Closing, we will deposit that number of shares of our Common Stock obtained by dividing $2,500,000 by the public offering
price of our Common Stock in this offering pursuant to the terms of the Merger Agreement (the “Escrow Shares”) with
the escrow agent for the purpose of partially securing the indemnification obligations of the Sound Concepts Shareholders set
forth in the Merger Agreement.
Representations,
Warranties, and Indemnities
Sound
Concepts, the Sound Concepts Shareholders, Merger Sub 1, Merger Sub 2, and we made customary representations, warranties, and
indemnities subject to, in some cases, exceptions and qualifications as will be set forth in disclosure schedules to the Merger
Agreement (the “Disclosure Schedules”).
Covenants
and Other Agreements
Sound
Concepts, the Sound Concepts Shareholders, Merger Sub 1, Merger Sub 2, and we agreed to certain covenants and other agreements,
including, among others, (i) covenants requiring Sound Concepts and the Sound Concepts Shareholders not to solicit other acquisition
bids or proposals, (ii) covenants regarding non-solicitation and non-competition, and (iii) covenants, satisfied as of the date
of this prospectus, requiring Sound Concepts and the Sound Concepts Shareholders to provide us with annual financial statements
for the years ended December 31, 2017 and 2016 that have been audited by an independent certified public accounting firm that
is registered under the Public Company Accounting Oversight Board and interim financial statements for the six-month periods ended
June 30, 2018 and 2017.
Conditions
to Closing the Sound Concepts Acquisition
Completion
of the Sound Concepts Acquisition is subject to the satisfaction or waiver of certain conditions. In addition to customary closing
conditions, our obligation to complete the Sound Concepts Acquisition is conditioned upon the consummation of this offering and
receipt by us of offering proceeds that will be used to pay for all or a portion of the Acquisition Cash Payment.
Closing
Subject
to the conditions of the Merger Agreement, the closing of the Sound Concepts Acquisition will occur by electronic exchange of
documents no later than three business days after the last of the closing conditions, including, without limitation, the Offering
Condition, has been satisfied or waived. Currently, we anticipate the closing of the Sound Concepts Acquisition to occur promptly
following the closing of this offering; however, there can be no assurance that the Sound Concepts Acquisition will close then,
or at all.
Termination
of the Merger Agreement
The
Merger Agreement may be terminated under certain circumstances, including, but not limited to: (i) the mutual written consent
of Sound Concepts and us; (ii) by us if there has been a breach, inaccuracy in, or failure to perform any representation, warranty,
covenant, or agreement made by Sound Concepts or the Sound Concepts Shareholders pursuant to the Merger Agreement that would give
rise to the failure of any of the closing conditions and such breach, inaccuracy, or failure has not been cured within 10 days
of Sound Concepts’ receipt of written notification of such breach from us; provided, that, none of Merger Sub 1, Merger
Sub 2, or we is then in material breach of any provision of the Merger Agreement; (iii) by us if any of Merger Sub 1’s,
Merger Sub 2’s, and our closing conditions, including the Offering Condition, have not been, or if it becomes apparent that
any of such conditions will not be, fulfilled by January 31, 2019, as extended to February 28, 2019, unless such failure is due
to our failure to perform or comply with any of the covenants, agreements, or conditions required to be performed or complied
with by it prior to the closing of the Sound Concepts Acquisition; (iv) by Sound Concepts if there has been a breach, inaccuracy
in, or failure to perform any representation, warranty, covenant, or agreement made by Merger Sub 1, Merger Sub 2, or us pursuant
to the Merger Agreement that would give rise to the failure of any of the closing conditions and such breach, inaccuracy, or failure
has not been cured within 10 days of our receipt of written notice of such breach from Sound Concepts; providing, that, neither
Sound Concepts or the Sound Concepts Shareholders is then in material breach of any provision of the Merger Agreement; (v) by
Sound Concepts if any of Sound Concepts’ or the Sound Concepts Shareholders’ closing conditions have not been, or
if it becomes apparent that any of such conditions will not be, fulfilled by January 31, 2019, as extended to February 28, 2019,
unless such failure is due to Sound Concepts’, or the Sound Concepts Shareholders’, failure to perform or comply with
any of the covenants, agreements, or conditions hereof to be performed or complied with by it or them prior to the closing of
the Sound Concepts Acquisition; and (vi) by Sound Concepts or us if (1) there is any law that makes consummation of the transactions
contemplated by the Merger Agreement illegal or otherwise prohibited or (2) any governmental authority issued a governmental order
restraining or enjoining the transactions contemplated by the Merger Agreement, and such governmental order has become final and
non-appealable.
Letter
Agreements
Also
on November 8, 2018, Merger Sub 1, Merger Sub 2, Sound Concepts, the Sound Concepts Shareholders, the Shareholders’ Representative,
and we entered into a letter agreement (the “First Letter Agreement”) with the specific intention that the provisions
thereof shall relate to and, until the Closing of the Merger, defer the effectiveness or completion of certain provisions of the
Merger Agreement, which provisions must be completed at or prior to the Closing.
The
parties agreed that (i) the Disclosure Schedules will be finalized and, we anticipate, approved by us prior to the Closing, (ii)
the parties will appoint an escrow agent to hold the Escrow Shares and, in connection therewith, the escrow agent and the parties
will enter into an Escrow Agreement, the form of which will be subsequently agreed to by the parties, prior to the Closing, (iii)
each Sound Concepts Shareholder will execute a “lock-up” agreement, the form of which will be subsequently agreed
to by the parties prior to the Closing, and (iv) the directors and officers of the surviving entity will be determined prior to
Closing. The First Letter Agreement further provides that, if we reject any part of the Disclosure Schedules, then, after reasonable
and good faith negotiations between Sound Concepts and us, either party may terminate the Merger Agreement in accordance with
its terms. Similarly, if the parties are unable to agree as to any material provisions of the Escrow Agreement and “lock-up”
agreements within a reasonable time period, then, and only then, may any Sound Concepts Shareholder or we terminate the Merger
Agreement in accordance with its terms.
On
November 12, 2018, Merger Sub 1, Merger Sub 2, Sound Concepts, the Sound Concepts Shareholders, the Shareholders’ Representative,
and we entered into an additional letter agreement (the “Second Letter Agreement”) with the intention of modifying
Sections 9.01(b)(ii) and 9.01(c)(ii) of the Merger Agreement to change each date referenced therein from January 31, 2019 to February
28, 2019.
Retention
of Certain Sound Concepts Key Employees
The
parties intend that McKinley J. Oswald, Jason Matheny, Colby Allen, and JJ Oswald will be employed by us following the Closing
of the Sound Concepts Acquisition under terms and conditions to be agreed upon and to be memorialized in written employment agreements
entered into with each such person prior to Closing.
BUSINESS
OF SOUND CONCEPTS
Sound
Concepts is an established 25-year-old business with approximately 89 employees, based in American Fork, Utah, providing digital
marketing and sales support services, including a video-based mobile sales application, to the direct sales industry. Their sales
application, offered as a SaaS application, is marketed under the brand name Brightools and is offered as a white-labeled application
to large corporate enterprises engaged in the network marketing and affiliate marketing industry. Sound Concepts currently has
approximately 93 clients in the network marketing and affiliate marketing sector, which include Young Living Essential Oils, LC,
Isagenix International, LLC, Vasayo, LLC, Nu Skin Enterprises United States, Inc., Nerium International, LLC, Forever Living Products
International, LLC, Seacret Spa, LLC, among many others. The Brightools app is a comprehensive sales, lead generation, and customer
relationship management tool specifically designed to meet the needs of direct sales representatives and others engaged in network
marketing and affiliate marketing sales. The Brightools app also incorporates recruiting tools, sales representative training
and education tools, and includes instant notification capabilities to notify sales reps on their mobile devices when a prospect
has engaged in shared content. Brightools allows sales reps to share sales and product video content with their prospects via
email and text, post content directly to social media, access corporate sales and product training materials, and receive analytics
data and other engagement information regarding their prospects’ interactions with the digital sales content distributed
through the app. Brightools also tracks customer purchases and allows corporate to monitor field activity to track the effectiveness
of campaigns, as well as compliance. In addition, sales reps can order physical product samples and purchase customizable brochures,
invites, thank-you cards, and more for direct delivery to customers and prospects all through the application. The synergies of
the digital and physical tools provide sales reps with unique solutions to engage their prospects, acquire customers, close sales,
and grow their business.
Brightools is available on, and compatible
with, virtually all mobile devices and is currently in use in over 62 different countries. As of the date hereof, Sound Concepts
has more than 555,000 current users of its Brightools app, representing an increase of more than 45,000 users since December 2018.
Sound
Concept’s principal executive office is located at 782 South Auto Mall Drive, Suite A, American Fork, Utah 84003. Its telephone
number at that location is (801) 225-9520.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS — VERB
The
following discussion and analysis of the results of operations and financial condition of Verb for the fiscal years ended December
31, 2018 and 2017, should be read in conjunction with the financial statements and related notes and the other financial information
that are included elsewhere in this prospectus. This discussion includes forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Forward-looking statements
are statements not based on historical information and which relate to future operations, strategies, financial results, or other
developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant
business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with
respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and
could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf.
We disclaim any obligation to update forward-looking statements. Actual results and the timing of events could differ materially
from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under
the Risk Factors, Special Note Regarding Forward-Looking Statements, and Business sections in this prospectus. We use words such
as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,”
“expect,” “believe,” “intend,” “may,” “will,” “should,”
“could,” and similar expressions to identify forward-looking statements.
Overview
CMG
was organized as a limited liability company under the laws of the State of Nevada on December 12, 2012. On May 19, 2014, bBooth,
Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG merged into bBooth, Inc. and, thereafter, bBooth,
Inc. changed its name to bBooth (USA), Inc., effective October 16, 2014. The operations of CMG and bBooth (USA), Inc., became
known as, and are referred to in this prospectus as, “bBoothUSA.”
On
October 16, 2014, bBoothUSA was acquired by GSD, pursuant to the Share Exchange Agreement entered into with GSD. GSD was incorporated
in the State of Nevada on November 27, 2012. The acquisition was accounted for as a reverse merger transaction. In connection
with the closing of the transactions contemplated by the Share Exchange Agreement, GSD’s management was replaced by bBoothUSA’s
management, and GSD changed its name to bBooth, Inc.
Effective
April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary
short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with
and into us. We were the surviving entity. To effectuate the name-change merger, we filed Articles of Merger and a Certificate
of Correction (relative to the effective date of the name-change merger) with the Secretary of State of the State of Nevada on
April 4, 2017 and April 17, 2017, respectively. The name-change merger became effective on April 21, 2017. Our board of directors
approved the name-change merger, which resulted in the name change on that date. In accordance with Section 92A.180 of the NRS,
stockholder approval of the name-change merger was not required.
Effective
February 1, 2019, we changed our corporate name from nFüsz, Inc. to Verb Technology Company, Inc. The name change was effected
through a parent/subsidiary short-form merger of Verb Technology Company, Inc., our wholly-owned Nevada subsidiary, formed solely
for the purpose of the name change, with and into us. We were the surviving entity. To effectuate the name-change merger, we filed
Articles of Merger and a Certificate of Correction (relative to the effective date of the name-change merger) with the Secretary
of State of the State of Nevada on January 31, 2019 and February 22, 2019, respectively. The name-change merger became effective
on February 1, 2019. Our board of directors approved the name-change merger, which resulted in the name change on that date. In
accordance with Section 92A.180 of the NRS, stockholder approval of the name-merger was not required.
On
February 1, 2019, we implemented a 1-for-15 Reverse Stock Split of our Common Stock. The Reverse Stock Split became effective
upon commencement of trading of our Common Stock on February 4, 2019. As a result of the Reverse Stock Split, every 15 shares
of our pre-Reverse Stock Split Common Stock were combined and reclassified into one share of our Common Stock. The number of shares
of Common Stock subject to outstanding options, warrants, and convertible securities were also reduced by a factor of fifteen
as of February 1, 2019. All historical share and per-share amounts reflected throughout our consolidated financial statements
and other financial information in this prospectus have been adjusted to reflect the Reverse Stock Split. The par value per share
of our Common Stock was not affected by the Reverse Stock Split.
Results
of Operation
Fiscal
Year Ended December 31, 2018 compared to the Fiscal Year Ended December 31, 2017
The
following is a comparison of the results of our operations for the years ended December 31, 2018 and 2017:
|
|
For
the Year Ended
|
|
|
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
Change
|
|
Net
sales
|
|
$
|
32,000
|
|
|
$
|
6,000
|
|
|
$
|
26,000
|
|
Cost of Revenue
|
|
|
52,000
|
|
|
|
8,000
|
|
|
|
44,000
|
|
Research
and development expense
|
|
|
980,000
|
|
|
|
375,000
|
|
|
|
605,000
|
|
General
and administrative expense
|
|
|
6,792,000
|
|
|
|
4,328,000
|
|
|
|
2,464,000
|
|
Loss
from operations
|
|
|
(7,792,000
|
)
|
|
|
(4,705,000
|
)
|
|
|
3,087,000
|
|
Other
income
|
|
|
-
|
|
|
|
28,000
|
|
|
|
(28,000
|
)
|
Other
expense, net
|
|
|
(4,334,000
|
)
|
|
|
(2,587,000
|
)
|
|
|
(1,747,000
|
)
|
Loss
before income taxes
|
|
|
(12,126,000
|
)
|
|
|
(7,264,000
|
)
|
|
|
(4,862,000
|
)
|
Income
tax provision
|
|
|
1,000
|
|
|
|
2,000
|
|
|
|
(1,000
|
)
|
Net
loss
|
|
$
|
(12,127,000
|
)
|
|
$
|
(7,266,000
|
)
|
|
$
|
(4,861,000
|
)
|
Revenues
Subscription
revenues for the fiscal year ended December 31, 2018 were $32,000 compared to $6,000 for fiscal year ended December 31, 2017.
The increase subscription revenues in fiscal 2018 was attributable to the Company’s SaaS platform that was launched during
the fourth quarter of fiscal 2017.
Operating
Expenses
Cost
of revenue expenses were $52,000 in fiscal 2018, as compared to $8,000 in fiscal 2017. Cost of revenues primarily consisted of
web hosting costs that support the SaaS platform. The $44,000 increase from fiscal 2017 is attributed to the Company’s SaaS
platform that was launched during the fourth quarter of fiscal 2017.
Research
and development expenses were $980,000 in fiscal 2018, as compared to $375,000 in fiscal 2017. Research and development expenses
primarily consisted of fees paid to vendors contracted to perform research projects and develop technology. In fiscal 2018 and
fiscal 2017, our research and development initiatives supported our cloud-based products, or SaaS platform. Our research and development
expenses increased by approximately $605,000 in fiscal 2018, as compared to fiscal 2017, due to additional product development
and testing.
General
and administrative expenses for fiscal 2018 were $6,792,000, an increase of $2,464,000 as compared to fiscal 2017. The increase
in general and administrative expenses was primarily due to an increase in stock-based compensation expense of approximately $881,000,
an increase in professional service fees of $550,000 related to the proposed merger with Sound Concepts, proposed underwritten
public offering, and proposed up-listing to Nasdaq, an increase in labor related costs of $325,000 related to growth in our operations,
an increase in marketing costs of $268,000 to drive awareness, and an increase in travel costs of $187,000 to support awareness
and additional business opportunities.
Other
expense, net, for fiscal 2018 equaled $4,334,000, which represented interest expense for amortization of debt discount of $1,468,000,
the change in the fair value of derivative liability of $1,167,000, financing costs of $798,000 driven by derivative liabilities
associated with convertible debt, a $534,000 net loss from debt extinguishment, and interest expense of $362,000 on outstanding
notes payable. Other expense, net, for fiscal 2017 equaled $2,587,000, which represented $977,000 on loss from debt extinguishment,
$643,000 of financing costs driven by derivative liabilities associated with convertible debt, $555,000 of interest expense on
outstanding notes payable, and $418,000 of interest expense for amortization of debt discount. The amount of other expense, net,
was higher in fiscal 2018 due to the change in the fair value of derivative liability of $1,173,000, higher amortization of debt
discount of $1,050,000, and higher financing costs of $155,000, offset by lower debt extinguishment of $443,000, and lower interest
expense of $193,000 due to less debt.
Other
Income
We
earned no other income during fiscal 2018, compared to $28,000 in other income during fiscal 2017. The decrease in other income
in fiscal 2018 was due to the transition from the rental of interactive booths as the primary business to the SaaS business model.
Modified
EBITDA
In
addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA
is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations,
or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as
a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization,
stock-based compensation, financing costs, and changes in the fair value of derivative liability.
Management
considers our core operating performance to be that which our managers can affect in any particular period through their management
of the resources that affect our underlying revenue and profit generating operations that period. Non-GAAP adjustments to our
results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons
we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future
we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified
EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
|
|
For
the Year Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Net
loss
|
|
$
|
(12,127,000
|
)
|
|
$
|
(7,266,000
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
Other
(income) / expense
|
|
|
5,000
|
|
|
|
(28,000
|
)
|
Stock
compensation expense
|
|
|
3,415,000
|
|
|
|
2,534,000
|
|
Debt
extinguishment, net
|
|
|
534,000
|
|
|
|
977,000
|
|
Financing
costs
|
|
|
798,000
|
|
|
|
643,000
|
|
Interest
expense
|
|
|
362,000
|
|
|
|
555,000
|
|
Amortization
of debt discount
|
|
|
1,468,000
|
|
|
|
418,000
|
|
Depreciation
|
|
|
20,000
|
|
|
|
22,000
|
|
Income
tax provision
|
|
|
1,000
|
|
|
|
2,000
|
|
Change
in fair value of derivative liability
|
|
|
1,167,000
|
|
|
|
(6,000
|
)
|
Total
EBITDA Adjustments
|
|
|
7,770,000
|
|
|
|
5,117,000
|
|
Modified
EBITDA
|
|
$
|
(4,357,000
|
)
|
|
$
|
(2,149,000
|
)
|
The
approximately $2.2 million decrease in Modified EBITDA for the year ended December 31, 2018 compared to the same period in 2017,
resulted from an increase in labor related costs, marketing costs, professional service fees, and travel associated with the growth
of the Company, as well as fees associated with the proposed merger with Sound Concepts, this offering, and the filing of an up-listing
application with Nasdaq.
We
present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods
on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition,
we use Modified EBITDA in developing our internal budgets, forecasts, and strategic plans; in analyzing the effectiveness of our
business strategies in evaluating potential acquisitions; and in making compensation decisions and in communications with our
board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes,
among others, the following:
|
●
|
Modified
EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
|
|
|
|
|
●
|
Modified
EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
|
|
|
|
|
●
|
Modified
EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments
on our debts; and
|
|
|
|
|
●
|
Although
depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced
in the future, and Modified EBITDA does not reflect any cash requirements for such replacements.
|
Liquidity
and Capital Resources
Going
Concern
We
have incurred operating losses since inception and have negative cash flows from operations since inception. As of December 31,
2018, we had a stockholders’ deficit of $5,055,000 and we incurred a net loss of $12,127,000 during the year ended December
31, 2018. We also utilized cash in operations of $4,157,000 during the year ended December 31, 2018. As a result, our continuation
as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash flows from
operations to meet our obligations. We intend to continue to seek additional debt or equity financing, including this underwritten
public offering of our Units under this prospectus, to continue our operations.
Our
consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to meet our obligations
and continue our operations for the next fiscal year. The continuation of our Company as a going concern is dependent upon our
ability to obtain necessary debt or equity financing to continue operations until our Company begins generating positive cash
flow.
There
is no assurance that we will ever be profitable or that debt or equity financing will be available to us in the amounts, on terms,
and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant
dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available,
would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed
acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease
operations for our business, the result of which would be that our stockholders would lose some or all of their investment. The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue
as a going concern.
Liquidity
and Capital Resources Overview
As
of December 31, 2018, we had cash of $634,000. We estimate our operating expenses for the next three months may continue to exceed
any revenues we generate, and we may need to raise capital through either debt or equity offerings to continue operations. We
are in the early stages of our business. We are required to fund growth from financing activities, and we intend to rely on a
combination of equity and debt financings. Due to market conditions and the early stage of our operations, there is considerable
risk that we will not be able to raise such financings at all, or on terms that are not overly dilutive to our existing stockholders.
We can offer no assurance that we will be able to raise such funds. If we are unable to raise the funds we require for all of
our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect
on our business plan and operations, including our ability to develop new products and continue our current operations. As a result,
our business may suffer, and we may be forced to reduce or discontinue operations.
The
following is a summary of our cash flows from operating, investing, and financing activities for the years ended December 31,
2018 and 2017:
|
|
For
the Year Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Cash
used in operating activities
|
|
$
|
(4,157,000
|
)
|
|
$
|
(1,677,000
|
)
|
Cash
used in investing activities
|
|
|
-
|
|
|
|
-
|
|
Cash
provided by financing activities
|
|
|
4,780,000
|
|
|
|
1,671,000
|
|
(Decrease)
/ increase in cash
|
|
$
|
623,000
|
|
|
$
|
(6,000
|
)
|
Cash
Flows — Operating
For
the year ended December 31, 2018, our cash flows used in operating activities amounted to $4,157,000, compared to cash used during
the year ended December 31, 2017 of $1,677,000. The change is due to an increase in business activity, which resulted in additional
consulting expenses, salary, and various operating expenses in fiscal 2018 compared to fiscal 2017.
Cash
Flows — Financing
Our
cash provided by financing activities for the year ended December 31, 2018 amounted to $4,780,000, which represented $2,979,000
of proceeds received from the issuances of shares of our Common Stock, $1,772,000 of proceeds from the issuance of convertible
debt, $1,000,000 of proceeds from the issuance of shares of our Common Stock from the exercise of a put option, $34,000 of proceeds
from the exercise of options, and $22,000 of proceeds from the exercise of warrants, offset by $845,000 of convertible debt payments,
$162,000 of deferred offering costs, and the repurchase of shares of our Common Stock equal to $20,000. Our cash provided by financing
activities for the year ended December 31, 2017 amounted to $1,671,000, which represented $813,000 in proceeds from the issuance
of convertible notes, $796,000 in proceeds from stock subscriptions, $555,000 in proceeds from the issuance of Series A preferred
stock, and $50,000 in proceeds from the issuance of shares of our Common Stock from the exercise of a put option, offset by the
redemption of Series A preferred stock in the amount of $543,000. All other shares of Series A preferred stock have been converted
and we filed a Certificate of Withdrawal with the State of Nevada on August 10, 2018 to formally withdraw the Series A preferred
stock.
Notes
Payable to Related Parties
The
Company has the following outstanding notes payable to related parties at December 31, 2018:
Note
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
1 (A)
|
|
December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
|
$
|
1,249,000
|
|
|
$
|
825,000
|
|
Note 2 (B)
|
|
December 1,
2015
|
|
April 1, 2017
|
|
|
12.0
|
%
|
|
|
112,000
|
|
|
|
112,000
|
|
Note
3 (C)
|
|
April
4, 2016
|
|
June
4, 2021
|
|
|
12.0
|
%
|
|
|
343,000
|
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable – related parties, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,177,000
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,065,000
|
)
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,000
|
|
(A)
|
On
December 1, 2015, the Company issued a convertible note payable to Mr. Rory J. Cutaia,
the Company’s majority stockholder and Chief Executive Officer, to consolidate
all loans and advances made by Mr. Cutaia to the Company as of that date. The note bears
interest at a rate of 12% per annum, is secured by the Company’s assets, and had
an original maturity date of April 1, 2017. Per the terms of the note agreement, at Mr.
Cutaia’s discretion, he may convert up to 30%, or $375,000 of outstanding principal,
plus accrued interest thereon, into shares of Common Stock at a conversion rate of $1.05
per share.
On
May 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note from
April 1, 2017 to August 1, 2018. In consideration, the Company issued Mr. Cutaia a three-year warrant to purchase 117,013
shares of Common Stock at a price of $5.33 per share with a fair value of $517,000. All other terms of the note remain
unchanged.
On
August 8, 2018, we entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note to February
8, 2021. All other terms of the note remain unchanged. In connection with the extension, we granted to Mr. Cutaia a three-year
warrant to purchase up to 163,113 shares of Common Stock at a price of $7.35 per share with a fair value of $1,075,000.
On
September 30, 2018, Mr. Cutaia converted the principal balance that was convertible, or $375,000, into 356,824 shares
of restricted Common Stock at $1.05 per share.
As
of December 31, 2018, the outstanding balance of the note amounted to $825,000.
|
|
|
(B)
|
On
December 1, 2015, the Company issued a note payable to a former member of the Company’s
board of directors, in the amount of $112,000, representing unpaid consulting fees as
of November 30, 2015. The note is unsecured, bears interest at a rate of 12% per annum,
and matured in April 2017.
As
of December 31, 2018, and the date of this prospectus, the note is past due. The Company is currently in negotiations
with the note holder to settle the note payable.
|
(C)
|
On
April 4, 2016, the Company issued a convertible note to Mr. Cutaia, in the amount of
$343,000, to consolidate all advances made by Mr. Cutaia to the Company from December
2015 through March 2016. The note bears interest at a rate of 12% per annum, is secured
by the Company’s assets, and originally matured on August 4, 2017. Pursuant to
the terms of the note, a total of 30% of the note principal, or $103,000, can be converted
into shares of Common Stock at a conversion price of $1.05 per share.
On
August 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note
from August 4, 2017 to December 4, 2018. In consideration for extending the note’s maturity date, the Company issued
Mr. Cutaia warrants to purchase up to 88,610 shares of Common Stock at a price of $2.25 per share with a fair value of
$172,000. All other terms of the note remain unchanged. As of December 31, 2017, the outstanding balance of the note amounted
to $343,000.
On
September 30, 2018, pursuant to the terms of the note, Mr. Cutaia converted 30% of the principal balance, or $103,000,
into 98,093 restricted shares of the Company’s Common Stock at $1.05 per share.
On
December 4, 2018, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note
to June 4, 2021. All other terms of the note remain unchanged. In connection with the extension, the Company granted to
Mr. Cutaia a three-year warrant to purchase up to 23,562 shares of Common Stock at a price of $5.10 per share with a fair
value of $111,000.
As
of December 31, 2018, the outstanding balance of the note amounted to $240,000.
|
During
the year ended December 31, 2018, the Company recorded total interest expense of $211,000 pursuant to the terms of the notes and
paid $269,000 in interest expense.
Convertible
Notes Payable
The
Company has the following outstanding convertible notes payable at December 31, 2018:
Note
|
|
Note
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable (A)
|
|
October
19, 2018
|
|
April
19, 2019
|
|
|
0
|
%
|
|
$
|
1,500,000
|
|
|
|
1,500,000
|
|
Note
payable (B)
|
|
October
30, 2018
|
|
April
29, 2019
|
|
|
5
|
%
|
|
$
|
400,000
|
|
|
|
400,000
|
|
Total
notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,900,000
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,082,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
818,000
|
|
|
(A)
|
On
October 19, 2018, the Company issued an unsecured convertible note to an otherwise unaffiliated third-party entity in the
aggregate principal amount of $1,500,000 in exchange for net proceeds of $1,241,500, after an original issue discount of $150,000
and legal and financing expenses of $109,000. In addition, the Company issued 96,667 shares of its Common Stock. The note
is convertible into shares of the Company’s Common Stock only on or after the occurrence of an uncured “Event
of Default.” Primarily, the Company will be in default if it does not repay the principal amount of the note, as required.
The events of default are customary for the type of transaction represented by the related securities purchase agreement and
the note. The conversion price in effect on any date on which some or all of the principal of the note is to be converted
is equal to 70% of the lowest VWAP during the ten trading days immediately preceding the date on which the third party provided
its notice of conversion. Upon an Event of Default, the Company will owe the third party an amount equivalent to 110% of the
then-outstanding principal amount of the note in addition to all other amounts, costs, expenses, and liquidated damages that
might also be due in respect thereof. The Company has agreed that, on or after the occurrence of an Event of Default, it will
reserve and keep available that number of shares of its Common Stock that is at least equal to 200% of the number of such
shares that
potentially would be issuable pursuant to the terms of the securities purchase
agreement and the note (assuming conversion in full of the note and on any date of determination).
|
|
|
|
|
(B)
|
On
October 30, 2018, the Company issued two unsecured convertible notes to one current investor
and one otherwise unaffiliated third-party in the aggregate principal amount of $400,000
in exchange for net proceeds of $400,000. The notes bear interest at a rate of 5% per
annum and will mature on April 29, 2019. Upon the Company’s consummation of this
contemplated underwritten public offering, all, and not less than all, of (i) the outstanding
principal of the notes and (ii) the accrued interest thereunder shall be converted into
shares of the Company’s Common Stock. The per-share conversion price will be equal
to seventy-five percent (75%) of the offering price of our Units in this contemplated
underwritten public offering. The noteholders will also receive warrants that are equivalent
to the warrants offered hereby, except that the shares underlying such warrants will
not be registered.
|
During
the year ended December 31, 2018, the Company settled outstanding debt of $845,000 through the payment of cash. In addition, the
Company issued 408,867 shares of Common Stock with a fair value of $2,151,000 in settlement of outstanding convertible notes of
$901,000 and accrued interest of $161,000 (or $1,062,000 in the aggregate).
Off
Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
Contractual
Obligations
We
are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information
under this Item.
Critical
Accounting Policies
Our
financial statements have been prepared in accordance with GAAP, which requires that we make certain assumptions and estimates
that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
net revenue and expenses during each reporting period.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reported periods. Significant estimates include valuation of derivative liability, valuation of debt and equity
instruments, share-based compensation arrangements, and long-lived assets. Amounts could materially change in the future.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
The
Company uses Level 2 inputs for its valuation methodology for the derivative liabilities as their fair values were determined
by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative
liabilities are adjusted to reflect the fair value at the end of each reporting period, with any increase or decrease in the fair
value being recorded in the current period’s results of operations as adjusted to the fair value of derivatives.
Share
Based Payment
The
Company issues options exercisable for shares of our Common Stock, warrants exercisable for shares of our Common Stock, shares
of our Common Stock, and equity interests as share-based compensation to employees and non-employees.
The
Company accounts for its share-based compensation to employees in accordance with the provisions of FASB ASC 718 “Compensation
— Stock Compensation.” Stock-based compensation cost is measured at the grant date, based on the estimated fair value
of the award, and is recognized as expense over the requisite service period.
The
Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505-50 “Equity — Based Payments to Non-Employees.” Measurement of share-based payment transactions with
non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received or (b) the
equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion
date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine
the cumulative expense recorded.
The
Company values stock compensation based on the market price on the measurement date. As described above, for employees the measurement
date is the grant date, and for non-employees, this is the date performance is completed.
The
Company values stock options using the Black-Scholes option pricing model. Assumptions used in the Black-Scholes model to value
options issued during the years ended December 31, 2018 and 2017 are as follows:
|
|
Year
Ended
December
31, 2018
|
|
|
Year
Ended
December
31, 2017
|
|
Expected
life in years
|
|
|
5.0
|
|
|
|
2.5
to 5.0
|
|
Stock price
volatility
|
|
|
184.45%
– 190.22
|
%
|
|
|
84.36%
– 173.92
|
%
|
Risk
free interest rate
|
|
|
2.25%
– 3.00
|
%
|
|
|
1.22%
– 2.23
|
%
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Forfeiture
rate
|
|
|
18
|
%
|
|
|
21
|
%
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility
of its Common Stock to estimate the future volatility for its Common Stock. The expected dividend yield was based on the fact
that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.
Concentrations
During
the year ended December 31, 2018, the Company had a single vendor that accounted for 5% of all purchases, and 20.7% of all purchases
in the same period in the prior year.
Recently
Issued Accounting Pronouncements
For
a summary of our recent accounting policies, please refer to Note 2,
Summary of Significant Accounting Policies,
of the
audited consolidated financial statements for the year ended December 31, 2018.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed
to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized,
and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our principal executive officer and our principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure.
We
carried out an evaluation under the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d- 15(e) under the Exchange Act) as of the year ended December 31, 2018. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December
31, 2018.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the year ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – SOUND CONCEPTS
The
following discussion and analysis of the results of operations and financial condition of Sound Concepts for the fiscal years
ended December 31, 2018 and 2017, should be read in conjunction with the financial statements and related notes and the other
financial information that are included elsewhere in this prospectus.
Overview
Sound
Concepts, a privately held corporation, was incorporated in Utah in 1979. Sound Concepts provides digital marketing and sales
support services, including a video-based mobile sales application, to the direct sales industry. Its sales application, offered
as a SaaS application, is marketed under the brand name as Brightools and is offered as a white-labeled application to large corporate
enterprises engaged in the network marketing and affiliate marketing industry. The Brightools app is a comprehensive sales, lead
generation, and customer relationship management tool specifically designed to meet the needs of direct sales representatives
and others engaged in network marketing and affiliate marketing sales. The Brightools app also incorporates recruiting tools,
sales representative training, and education tools, and includes instant notification capabilities to notify users when a prospect
has engaged in shared content. Brightools allows sales reps to share sales and product video content with their prospects via
email and text, post content directly to social media, access corporate sales and product training materials, and receive analytics
data and other engagement information regarding their prospects’ interactions with the digital sales content distributed
through the app. Brightools also tracks customer purchases and allows corporate to monitor field activity to track the effectiveness
of campaigns, as well as compliance. In addition, sales reps can order physical product samples and purchase customizable brochures,
invites, thank-you cards, and more for direct delivery to customers and prospects all through the application. The synergies of
the digital and physical tools provide sales reps with unique solutions to engage their prospects, acquire customers, close sales,
and grow their businesses. Brightools is available on, and compatible with, virtually all mobile devices and is currently in use
in over 62 different countries and currently has more than 555,000 current users of its Brightools app.
Results
of Operations
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
12,734,000
|
|
|
$
|
11,546,000
|
|
Cost
of revenue
|
|
|
7,121,000
|
|
|
|
6,293,000
|
|
Gross
margin
|
|
|
5,613,000
|
|
|
|
5,253,000
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,194,000
|
|
|
|
1,731,000
|
|
General
and administrative
|
|
|
3,029,000
|
|
|
|
3,530,000
|
|
Total
operating expenses
|
|
|
5,223,000
|
|
|
|
5,261,000
|
|
Income
(loss) from operations
|
|
|
390,000
|
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
8,000
|
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
398,000
|
|
|
$
|
(15,000
|
)
|
Fiscal
Year Ended December 31, 2018 as compared to Fiscal Year Ended December 31, 2017
Revenues
Revenue
for the year ended December 31, 2018 increased by approximately $1.2 million, or 10%, to approximately $12.7 million, as compared
to approximately $11.5 million for the year ended December 31, 2017. Historically, Sound Concepts primarily had two lines of business:
(1) corporate kits, which consists of “starter kits” for corporations to use for their marketing needs, and (2) fulfillments,
which consists of various custom products used for marketing purposes at conferences and other events. Recently, Sound Concepts
began moving away from the fulfillment business model to an on-demand business model. The increase in revenues for the year ended
December 31, 2018 was due to a combination of a decrease in corporate kits and fulfillment orders and an increase in digital and
shipping sales. Revenues generated by corporate kit and fulfillment sales decreased by $391,000, or 5%, for the year ended December
31, 2018, as compared to the same period in prior year, primarily related to fewer corporate kits sold to a large customer that
moved its business closer to its corporate headquarters and a temporary slowdown in fulfillment orders as Sound Concepts began
to shift resources from its stock-to-order fulfillment business to a higher margin print on-demand business. However, revenue
generated by digital sales increased by approximately $615,000, or 20%, for the year ended December 31, 2018, as compared to the
same period in the prior year, driven by an expansion of Sound Concepts’ customer base. Shipping revenue also increased
by $964,000, or 119%, for the year ended December 31, 2018, as compared to the prior year period, due to an increased number of
sample pack fulfillments following the introduction of the new sample shipping service.
Cost
of Revenues
Cost
of revenues for the year ended December 31, 2018 increased by approximately $828,000, or 13%, to approximately $7.1 million as
compared to approximately $6.3 million for the fiscal year ended December 31, 2017. The increase in cost of revenues is primarily
attributed to a reduction of inventory costs of corporate kits and fulfillment orders offset by increased headcount costs to drive
growth for digital platform and higher shipping costs associated with sample shipments.
Gross
Profit
Gross
profit for the year ended December 31, 2018 increased by approximately $360,000, or 7%, to approximately $5.6 million as compared
to approximately $5.3 million for the year ended December 31, 2017 as a result of the increase in revenues in 2018. The overall
gross profit percentage was 44% for year ended December 31, 2018, as compared to 45% for the year ended December 31, 2017.
Research
and Development Expenses
Research
and development expenses for the fiscal year ended December 31, 2018 increased by approximately $463,000, or 27%, to approximately
$2.2 million, as compared to approximately $1.7 million for the fiscal year ended December 31, 2017. The increase was primarily
due to increased wages for staff and product development costs related to the development of the digital platform.
General
and Administrative Expenses
General
and administrative expenses for the year ended December 31, 2018 decreased by approximately $501,000, or 14%, to approximately
$3.0 million, as compared to approximately $3.5 million for the year ended December 31, 2017. The decrease was primarily driven
by the shift from the fulfillment model to an on-demand model. The shift towards an on-demand model lowered conference and other
event costs, as well as travel expenses. In addition, Sound Concepts recovered a certain amount of bad debt expense that was previously
written-off through subsequent collection.
Operating
Income
Operating
income for the year ended December 31, 2018 increased by approximately $398,000, to approximately $390,000, as compared to an
operating loss of approximately $8,000 for the year ended December 31, 2017. The increase in operating income was driven by the
increase in gross profit of $360,000 in combination with the decrease in operating expenses of $38,000.
Liquidity
and Capital Resources
As
of December 31, 2018, Sound Concepts’ cash on hand was $84,000. Sound Concepts has historically relied on cash flows provided
by operations to fund operations and operating obligations. Sound Concepts has been growing its revenue, which has contributed
to the growth of its gross profit. Sound Concepts expects to incur increases in operating expenses as it further invests to develop
and roll out its technology.
On
December 27, 2016, Sound Concepts entered into a financing agreement with a financial institution, Zions National First Bank (ZB,
N.A.) (“Zions”), to obtain a line of credit. The financing agreement entered into by and between Sound Concepts and
Zions provided Sound Concepts with a revolving credit facility in an aggregate principal amount not to exceed $500,000 at any
time (the “Revolving Line”). The Revolving Line is secured by Sound Concepts’ assets, bears average interest
at a rate of 4% per annum, matures every anniversary, but automatically renews for additional one-year periods, until terminated
by the parties. The Revolving Line matured on December 27, 2018. In October 2018, Sound Concepts paid the entire outstanding amount
of $78,000. In addition, Sound Concepts has a note payable of $32,000 related to an outstanding car loan for an employee.
Management
believes that Sound Concepts’ cash on hand and cash flows expected to be generated from operations will be sufficient to
fund Sound Concepts’ net cash requirements through January 2020. It is anticipated that Sound Concepts will not need to
rely on any equity or debt financings.
Net
Cash Provided by (Used In) Operating Activities
Net
cash provided by operating activities was approximately $295,000 for the year ended December 31, 2018, compared to approximately
$389,000 used in operations for the year ended December 31, 2017. Cash provided by operating activities for the year ended December
31, 2018 was primarily the result of net income of $398,000 and a decrease in net inventory of $184,000, offset by a decrease
of deferred revenue of $145,000, accrued liabilities and payroll of $97,000, and an increase in pre-paid expenses of $63,000.
Cash used in operating activities for the year ended December 31, 2017 was primarily the result of a decrease of accounts payable
of $512,000, an increase in accounts receivable $240,000, offset by an increase in deferred revenue of $185,000, and a decrease
in net inventory of $178,000.
Net
Cash Used in Investing Activities
Net
cash used in investing activities was approximately $45,000 for the year ended December 31, 2018, compared to approximately $5,000
used in investing activities for the year ended December 31, 2017. The net cash used in investing activities for the year ended
December 31, 2018 and 2017 was principally attributable to the purchases of property and equipment.
Net
Cash Used in Financing Activities
Net
cash used in financing activities was approximately $244,000 for the year ended December 31, 2018, as compared to approximately
$246,000 provided by financing activities for the year ended December 31, 2017. During the year ended December 31, 2018, cash
flows used in financing activities consisted of a decrease in the Revolving Line of $280,000 and a decrease in notes payable of
$10,000, offset a repayment of a related party loan of $46,000. During the year ended December 31, 2017, cash flows provided by
financing activities consisted of an increase in the Revolving Line of $280,000, offset by a decrease in notes payable of $20,000,
and an increase in related party loan of $14,000.
Off-Balance
Sheet Arrangements
None.
Critical
Accounting Policies
Use
of Estimates
Sound
Concepts’ financial statements were prepared in conformity with U.S. GAAP, which requires management to make estimates and
assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results
could differ materially from these estimates. The accounting estimates and assumptions that require management’s most significant,
difficult, and subjective judgment include the collectability of accounts receivable, inventory obsolescence, assessment of useful
lives and recoverability of long-lived assets, and accruals for potential liabilities, among others. Actual results experienced
by Sound Concepts may differ from management’s estimates.
Revenue
Recognition
Sound
Concepts derives its revenue primarily from providing digital marketing and sales support services, from the sale of customized
print products and training materials, to branded apparel and digital tools, as demanded by its customers.
Sound
Concepts also charges certain customers setup or installation fees for the creation and development of websites and phone applications.
These fees are accounted as part of deferred revenues and amortized over the estimated life of the agreement.
Amounts
related to shipping and handling that are billed to customers are reflected as part of revenues, and the related costs
are reflected in cost of revenues in the accompanying Statements of Operations.
Through
December 31, 2017, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee is
fixed or determinable, and collectability of the resulting receivable is reasonably assured. Determining whether and when these
criteria have been satisfied requires Sound Concepts to make assumptions and judgments that could have a significant impact on
the timing and amount of revenue it reports. Sound Concepts recognized revenue when risk of loss transferred to its customers
and collection of the receivable was reasonably assured, which generally occurs when the product is shipped, or the service has
been rendered with regard to the setup or installation fees.
Sound
Concepts adopted ASC 606 starting January 1, 2018. The new standard provides authoritative guidance clarifying the principles
for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle
of the guidance is that an entity should recognize revenue to depict the transfer of promised goods to customers in an amount
that reflects the consideration to which the entity expects to be entitled in the exchange for those goods.
Due
to the nature of the products sold by Sound Concepts, the adoption of the new standard has had no quantitative effect on the financial
statements. However, the guidance requires additional disclosures to help users of financial statements better understand the
nature, amount, timing, and uncertainty of revenue that is recognized.
Under
the new guidance, revenue is recognized when control of promised goods is transferred to their customers, in an amount that reflects
the consideration we expect to be entitled to in exchange for those goods or services. Sound Concepts reviews its sales transactions
to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate
performance obligations, if applicable. Revenue and costs of sales are recognized once products are delivered to the customer’s
control and performance of its obligations is satisfied.
Products
sold by Sound Concepts are distinctly individual. The products are offered for sale solely as finished goods, and there are no
performance obligations required post-shipment for customers to derive the expected value from them. Other than promotional activities,
which can vary from time to time but nevertheless are entirely within Sound Concept’s control, contracts with customers
contain no incentives or discounts that could cause revenue to be allocated or adjusted over time.
Control
of products we sell transfers to customers upon shipment from their facilities, and Sound Concepts performance obligations are
satisfied at that time. Shipping and handling activities are performed before the customer obtains control of the goods and, therefore,
represent a fulfillment activity rather than promised goods to the customer. Payment for sales are generally made by check, credit
card, or wire transfer. Historically, Sound Concepts has not experienced any significant payment delays from customers.
Sound
Concepts allows for returns within 30 days of purchase from end-users. Its customers may return purchased products to Sound Concepts
under certain circumstances.
Customer
setup or installation fees for the creation and development of websites and phone applications are recognized as revenues
over the estimated subscription period. In addition, certain revenue is recorded based upon stand-alone selling prices and is
primarily recognized when the customer uses these services, based on the quantity of services rendered, such as amount of customer
usage.
Revenues
during the years ended December 31, 2018 and 2017 were as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Revenues
|
|
|
Cost
of Goods Sold
|
|
|
Gross
Profit (Loss)
|
|
|
Revenues
|
|
|
Cost
of Goods Sold
|
|
|
Gross
Profit (Loss)
|
|
Digital
|
|
$
|
3,702,000
|
|
|
$
|
505,000
|
|
|
$
|
3,197,000
|
|
|
$
|
3,087,000
|
|
|
$
|
427,000
|
|
|
$
|
2,660,000
|
|
Corporate and Fulfilment
|
|
|
7,258,000
|
|
|
|
4,829,000
|
|
|
|
2,429,000
|
|
|
|
7,649,000
|
|
|
|
5,027,000
|
|
|
|
2,622,000
|
|
Shipping
|
|
|
1,774,000
|
|
|
|
1,787,000
|
|
|
|
(13,000
|
)
|
|
|
810,000
|
|
|
|
839,000
|
|
|
|
(29,000
|
)
|
Total
|
|
$
|
12,734,000
|
|
|
$
|
7,121,000
|
|
|
$
|
5,613,000
|
|
|
$
|
11,546,000
|
|
|
$
|
6,293,000
|
|
|
$
|
5,253,000
|
|
Advertising
Costs
Advertising
costs consists of trade shows and marketing expenses. Agreements do not provide for guaranteed renewal and may be terminated by
the Company without cause. Such advertising costs are charged to expense as incurred and reported as part of general and administrative
expenses in the accompanying statement of operations.
During
the years ended December 31, 2018 and 2017, advertising costs amounted to $2,000 and $24,000, respectively, and were recorded
as part of general and administrative expense in the statements of operations.
Income
Taxes
Sound
Concepts is a limited liability company treated as a partnership for federal and state income tax purposes with all income tax
liabilities and/or benefits of Sound Concepts being passed through to the members. As such, no recognition of federal or state
income taxes for Sound Concepts or its subsidiaries that are organized as limited liability companies has been provided in the
accompanying financial statements. Any uncertain tax position taken by the member is not an uncertain position of Sound Concepts.
There
was no taxable income and, therefore, there were no distributions in the year ended December 31, 2018 and 2017, respectively.
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
following unaudited pro forma condensed combined financial statements and related notes are based on our and Sound Concepts’
historical financial statements after giving effect to the proposed Sound Concepts Acquisition, and the assumptions, reclassifications,
and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. On November
8, 2018, we entered into Merger Agreement, by and among Sound Concepts, Merger Sub 1, Merger Sub 2, the Sound Concepts Shareholders,
the Shareholder Representative, and us, pursuant to which we will acquire Sound Concepts through a two-step Merger, consisting
of merging Merger Sub 1 with and into Sound Concepts, with Sound Concepts surviving the “first step” of the Merger
as our wholly-owned subsidiary (and the separate corporate existence of Merger Sub 1 will cease) and, immediately thereafter,
merging Sound Concepts with and into Merger Sub 2, with Merger Sub 2 surviving the “second step” of the Merger such
that upon the conclusion of the “second step” of the Merger, the separate corporate existence of Sound Concepts will
cease and Merger Sub 2 will continue its limited liability company existence under Utah law as the surviving entity and as our
wholly-owned subsidiary.
In
preparing the unaudited pro forma condensed combined statements of operations for the fiscal year ended December 31, 2018, our
statement of operations for the year ended December 31, 2018 were combined with the statement of operations for the year ended
December 31, 2018 for Sound Concepts. In preparing the unaudited pro forma condensed combined balance sheet as of December 31,
2018, our balance sheet at December 31, 2018 was combined with the balance sheet as of December 31, 2018 for Sound Concepts. The
following unaudited pro forma condensed combined balance sheet as of December 31, 2018 is presented as if the Sounds Concepts
Acquisition had occurred on December 31, 2018. The unaudited pro forma condensed combined statements of operations for the year
ended December 31, 2018 is presented as if the Sound Concepts Acquisition had occurred on January 1, 2018
with
recurring acquisition-related adjustments reflected in such period. The pro forma adjustments to the unaudited pro forma condensed
combined financial statements reflect events that are directly attributable to the proposed Sound Concepts Acquisition. We have
based the pro forma adjustments upon available information and certain assumptions that we believe are reasonable under the circumstances.
We describe in greater detail the assumptions underlying the pro forma adjustments in the accompanying notes, which you should
read in conjunction with these unaudited pro forma condensed combined financial statements. In many cases, we based these assumptions
on preliminary estimates, assumptions, and information. The actual adjustments to our condensed consolidated financial statements
will depend upon a number of factors and additional information that will be available after the closing date of this offering.
Accordingly, the actual adjustments that will appear in our financial statements will differ from these pro forma adjustments,
and those differences may be material.
We
will account for the Sound Concepts Acquisition using the acquisition method of accounting for business combinations. Under the
acquisition method of accounting, the total consideration paid is allocated to an acquired company’s tangible and intangible
assets, liabilities, and any non-controlling interest based on their estimated fair values as of the acquisition date. Once we
complete our final valuation processes for the Sound Concepts Acquisition, we may report changes to the value of the assets acquired,
as well as the amount of goodwill, and those changes could differ materially from what we present here.
The
following unaudited pro forma condensed combined financial statements are prepared for illustrative purposes only and are not
necessarily indicative of or intended to represent the results that would have been achieved had the transaction been consummated
as of the date indicated or that may be achieved in the future. The unaudited pro forma condensed combined financial statements
do not reflect any operating efficiencies and associated cost savings that we may achieve with respect to the combined companies.
You
should read these unaudited pro forma condensed combined financial statements in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Verb,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Sound Concepts,” our historical consolidated financial statements
and accompanying notes included in this prospectus, and Sound Concepts’ historical consolidated financial statements and
accompanying notes included in this prospectus.
VERB
TECHNOLOGY COMPANY, INC.
Unaudited
Pro Forma Condensed Combined Balance Sheet
|
|
Verb
Technology Company, Inc.
|
|
|
Sound
Concepts
|
|
|
Pro
Forma Adjustments
|
|
|
|
Pro
Forma
|
|
|
|
December 31, 2018
|
|
|
December 31, 2018
|
|
|
Offering
|
|
|
Financing
|
|
|
Acquisition
|
|
|
Notes
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
634,000
|
|
|
$
|
84,000
|
|
|
|
18,226,000
|
|
|
|
(1,568,000
|
)
|
|
|
(15,754,000
|
)
|
|
(a)(b)(h)
|
|
$
|
1,622,000
|
|
Accounts Receivable,
net
|
|
|
1,000
|
|
|
|
974,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975,000
|
|
Inventory, net
|
|
|
-
|
|
|
|
123,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,000
|
|
Prepaid
expenses
|
|
|
83,000
|
|
|
|
158,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241,000
|
|
Advance
to related party
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Total current assets
|
|
|
718,000
|
|
|
|
1,339,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,961,000
|
|
Deferred offering costs
|
|
|
162,000
|
|
|
|
-
|
|
|
|
(162,000
|
)
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
-
|
|
Property and equipment, net
|
|
|
11,000
|
|
|
|
112,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,000
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
24,916,000
|
|
|
(c)
|
|
|
24,916,000
|
|
Other assets
|
|
|
7,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
898,000
|
|
|
$
|
1,471,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,027,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and
accrued expenses
|
|
$
|
1,148,000
|
|
|
$
|
730,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,878,000
|
|
Accrued interest (including
$38,000 and $99,000 payable to related parties)
|
|
|
46,000
|
|
|
|
129,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
Accrued officers’
salary
|
|
|
188,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188,000
|
|
Customer deposits
|
|
|
-
|
|
|
|
169,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,000
|
|
Deferred revenue
|
|
|
-
|
|
|
|
327,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327,000
|
|
Credit line payable
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Note Payable
|
|
|
-
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Notes payable - related
party
|
|
|
112,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,000
|
|
Convertible notes
payable, net of discount of $1,082,000
|
|
|
818,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(616,000
|
)
|
|
|
|
|
|
(h)
|
|
|
202,000
|
|
Derivative
liability
|
|
|
2,576,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,756,000
|
)
|
|
|
|
|
|
(h)
|
|
|
820,000
|
|
Total current liabilities
|
|
|
4,888,000
|
|
|
|
1,360,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,876,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
Payable
|
|
|
1,065,000
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,092,000
|
|
Total liabilities
|
|
|
5,953,000
|
|
|
|
1,387,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,968,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Common stock
|
|
|
1,000
|
|
|
|
3,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
(3,000
|
)
|
|
(a)(d)(e)
|
|
|
2,000
|
|
Additional paid-in
capital
|
|
|
35,611,000
|
|
|
|
465,000
|
|
|
|
18,063,000
|
|
|
|
128,000
|
|
|
|
9,535,000
|
|
|
(a)(e)(f)(h)
|
|
|
63,802,000
|
|
Treasury stock
|
|
|
-
|
|
|
|
(445,000
|
)
|
|
|
|
|
|
|
|
|
|
|
445,000
|
|
|
(g)
|
|
|
-
|
|
Retained
Earnings (Accumulated deficit)
|
|
|
(40,667,000
|
)
|
|
|
61,000
|
|
|
|
-
|
|
|
|
676,000
|
|
|
|
(815,000
|
)
|
|
(b)
(d) (h)
|
|
|
(40,745,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’
equity (deficit)
|
|
|
(5,055,000
|
)
|
|
|
84,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,059,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders’ equity (deficit)
|
|
$
|
898,000
|
|
|
$
|
1,471,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,027,000
|
|
VERB
TECHNOLOGY COMPANY, INC.
Unaudited
Pro Forma Condensed Combined Statement of Operations
|
|
For
the Twelve Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
Verb
Technology Company, Inc.
December 31, 2018
|
|
|
Sound
Concepts
December 31, 2018
|
|
|
Pro
Forma
Adjustments
|
|
|
Notes
|
|
|
Pro
Forma
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Net
Sales
|
|
$
|
32,000
|
|
|
$
|
12,734,000
|
|
|
|
|
|
|
|
|
|
$
|
12,766,000
|
|
Cost
of revenue
|
|
|
-
|
|
|
|
7,121,000
|
|
|
|
|
|
|
|
|
|
|
7,121,000
|
|
Gross
margin
|
|
|
32,000
|
|
|
|
5,613,000
|
|
|
|
|
|
|
|
|
|
|
5,645,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenue
|
|
|
52,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
52,000
|
|
Research
and development
|
|
|
980,000
|
|
|
|
2,194,000
|
|
|
|
|
|
|
|
|
|
|
3,174,000
|
|
General
and administrative
|
|
|
6,792,000
|
|
|
|
3,029,000
|
|
|
|
754,000
|
|
|
(b)
|
|
|
|
10,575,000
|
|
Total
operating expenses
|
|
|
(7,824,000
|
)
|
|
|
(5,223,000
|
)
|
|
|
|
|
|
|
|
|
|
(13,801,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
/ (Loss) from operations
|
|
|
(7,792,000
|
)
|
|
|
390,000
|
|
|
|
|
|
|
|
|
|
|
(8,156,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income / (expense)
|
|
|
(5,000
|
)
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Change
in fair value of derivative liability
|
|
|
(1,167,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
(1,167,000
|
)
|
Financing
costs
|
|
|
(798,000
|
)
|
|
|
-
|
|
|
|
(84,000
|
)
|
|
(h)
|
|
|
|
(882,000
|
)
|
Interest
expense (including $211,000 to related parties)
|
|
|
(362,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
(362,000
|
)
|
Interest
expense - amortization of debt discount
|
|
|
(1,468,000
|
)
|
|
|
-
|
|
|
|
(1,384,000
|
)
|
|
(h)
|
|
|
|
(2,852,000
|
)
|
Debt
extinguishment, net
|
|
|
(534,000
|
)
|
|
|
-
|
|
|
|
2,144,000
|
|
|
(h)
|
|
|
|
1,610,000
|
|
Total
other expense
|
|
|
(4,334,000
|
)
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
(3,650,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax provision
|
|
|
(12,126,000
|
)
|
|
|
398,000
|
|
|
|
|
|
|
|
|
|
|
(11,806,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
1,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income / (Loss)
|
|
$
|
(12,127,000
|
)
|
|
$
|
398,000
|
|
|
|
|
|
|
|
|
|
$
|
(11,807,000
|
)
|
Loss
per share
|
|
|
(1.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.61
|
)
|
Weighted
average number of common shares outstanding - basic and diluted
|
|
|
9,870,890
|
|
|
|
|
|
|
|
9,584,664
|
|
|
(a)
|
|
|
|
19,455,554
|
|
VERB
TECHNOLOGY COMPANY, INC.
NOTES
TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1.
BASIS OF PRESENTATION
The
adjustments to the historical financial statements give pro forma effect to events that are (i) directly attributable to each
specific transaction, (ii) factually supportable, and (iii) either expected to have a continuing impact or are nonrecurring. The
financial information included in the unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined
statements of operations is prepared in accordance with accounting principles generally accepted in the United States of America.
The
business combination will be accounted for under the acquisition method of accounting in accordance with ASC Topic 805,
Business
Combinations
. As the acquirer for accounting purposes, we have preliminarily estimated the fair value and useful lives of
the acquired assets and assumed liabilities of Sound Concepts.
The
pro forma condensed combined financial statements do not necessarily reflect what the combined company’s financial condition
or results of operations would have been had the Sound Concepts Acquisition occurred on the dates indicated. They also may not
be useful in predicting the future financial condition and results of operations of the combined company. The actual financial
position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The
combined pro forma financial information does not reflect the realization of any expected cost savings or other synergies from
the Sound Concepts Acquisition.
2.
DESCRIPTION OF ACQUISITION
On
November 8, 2018, we entered into the Merger Agreement, by and among Sound Concepts, Merger Sub 1, Merger Sub 2, the Sound Concepts
Shareholders, the Shareholder Representative, and us, pursuant to which we will acquire Sound Concepts through a two-step Merger,
consisting of merging Merger Sub 1 with and into Sound Concepts, with Sound Concepts surviving the “first step” of
the Merger as our wholly-owned subsidiary (and the separate corporate existence of Merger Sub 1 will cease) and, immediately thereafter,
merging Sound Concepts with and into Merger Sub 2, with Merger Sub 2 surviving the “second step” of the Merger such
that upon the conclusion of the “second step” of the Merger, the separate corporate existence of Sound Concepts will
cease and Merger Sub 2 will continue its limited liability existence under Utah law as the surviving entity and as our wholly-owned
subsidiary. Sound Concepts is a Utah-based digital marketing and sales support service company.
On
the terms and subject to the conditions set forth in the Merger Agreement, at the Effective Time of the Merger, each share of
the Sound Concepts Capital Stock issued and outstanding immediately prior to the Effective Time will be cancelled and converted
into the right to receive a proportionate share of the Closing Merger Consideration of $25,000,000, to be payable through a combination
of the $15,000,000 Acquisition Cash Payment and the issuance of the Acquisition Stock with a fair market value of $10,000,000.
The Closing Merger Consideration is not subject to any closing working capital adjustment or post-closing working capital adjustment.
3.
PRELIMINARY PURCHASE PRICE ALLOCATION
We
are required to allocate the purchase price to acquired tangible assets, identifiable intangible assets, and assumed liabilities
based on their fair values. Management has not yet finalized its valuation analysis and, therefore, the allocation of the purchase
price is based on fair value estimates that are still preliminary and subject to change. There can be no assurances that these
final valuations will not result in material changes to the estimated allocation.
The
following table reflects the allocation of the purchase price to the estimated fair values assigned to the acquired tangible assets,
identifiable intangible assets, and assumed liabilities, with the excess recorded as goodwill.
|
|
As
of December 31, 2018
|
|
|
|
(unaudited)
|
|
|
|
Fair
Value
|
|
Assets
Acquired:
|
|
|
|
|
|
|
|
|
Other
current assets
|
|
$
|
1,339,000
|
|
|
|
|
|
Property
and equipment
|
|
|
112,000
|
|
|
|
|
|
Other
assets
|
|
|
20,000
|
|
|
$
|
1,471,000
|
|
Liabilities
Assumed:
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
(1,360,000
|
)
|
|
|
|
|
Long
term liabilities
|
|
|
(27,000
|
)
|
|
|
(1,387,000
|
)
|
Goodwill
|
|
|
|
|
|
|
24,916,000
|
|
Purchase
Price
|
|
|
|
|
|
$
|
25,000,000
|
|
4.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a)
The Acquisition Cash Payment of the Closing Merger Consideration is $15 million. We intend to fund the Acquisition Cash Payment,
as well as transaction and integration expenses associated with the Sound Concepts Acquisition, with a portion of the net proceeds
from the offering and sale of our Units. Our determination of the number of our Units we will offer and sell in connection with
the Sound Concepts Acquisition is subject to a number of variables that cannot be quantified at this time. These variables include
the actual amount of transaction and integration expenses that we will incur related to the Sound Concepts Acquisition and the
number of shares of, and price at which, our Units will be sold in the offering. For purposes of these Unaudited Pro Forma Condensed
Combined Financial Statements, we have estimated that we will issue 6,389,776 Units, resulting in gross proceeds of $20,000,000.
We will incur transaction expenses of approximately $1,936,000 in connection with the offering, of which approximately $162,000
was deferred as of December 31, 2018, and will use approximately $2,000,000 to settle certain notes outstanding as discussed in
Note 4(h),
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
. Accordingly, we expect net proceeds of
approximately $16,226,000. The number of Units is based on the public offering price of $3.13. The number of Units we will
offer and sell in the offering, the gross proceeds resulting therefrom, and the amount of transaction and integration expenses
we will incur in connection with the Sound Concepts Acquisition may differ materially from these estimates.
(b)
Reflects the Acquisition Cash Payment of $15,000,000. The Closing Merger Consideration is not subject to any closing working capital
adjustment or post-closing working capital adjustment; thus, no provision was made for any working capital adjustments. For purposes
of these Unaudited Pro Forma Condensed Combined Financial Statements, we have estimated that we will incur expenses of approximately
$754,000 in connection with the Sound Concepts Acquisition.
(c)
Reflects the preliminary recognition of $24,916,000 of goodwill attributable to the Sound Concepts Acquisition. See Note 3,
Preliminary
Purchase Price Allocation
.
(d)
Reflects the elimination of historical equity balances of Sound Concepts.
(e)
Reflects the Acquisition Stock portion of the Closing Merger Consideration with a fair market value of $10 million. For purposes
of these Unaudited Pro Forma Condensed Combined Financial Statements, we have estimated that we will issue 3,194,888 shares
of our Common Stock to the Sound Concepts Shareholders as the Acquisition Stock portion of the Closing Merger Consideration. The
estimated number of shares is based on the public offering price of the Units. The number of shares of our Common Stock
we will issue may differ materially from these estimates.
(f)
Reflects the elimination of Sound Concepts’ additional paid-in capital in the amount of $465,000.
(g)
Reflects the elimination of treasury stock of Sound Concepts in the amount of $445,000.
(h)
Reflects the settlement of unsecured notes payable to Bellridge amounting to $2 million. The Company also extinguished the corresponding
derivative liability associated with these notes payables in the aggregate of $2.1 million, amortized the debt discount of $1.4
million, and financing costs of $84,000.
MANAGEMENT
Directors
and Executive Officers
Each
of our directors holds office until the next annual meeting of our stockholders or until his successor has been elected and qualified,
or until his death, resignation, or removal. Our executive officers are appointed by our board of directors and hold office until
their death, resignation, or removal from office.
Our
directors and executive officers, their ages, positions held, and duration of such, are as follows:
Name
|
|
Position
Held with Our Company
|
|
Age
|
|
Date
First Elected or
Appointed
|
Rory
J. Cutaia
|
|
Chairman
of the Board, President, Chief Executive Officer, Secretary, and Treasurer
|
|
63
|
|
October
16, 2014
|
|
|
|
|
|
|
|
Jeffrey
R. Clayborne
|
|
Chief
Financial Officer
|
|
48
|
|
July
15, 2016
|
|
|
|
|
|
|
|
Chad
J. Thomas
|
|
Chief
Technology Officer
|
|
47
|
|
October
12, 2018
|
|
|
|
|
|
|
|
Tal
Golan
|
|
Chief
Strategy Officer
|
|
50
|
|
March
1, 2019
|
|
|
|
|
|
|
|
James
P. Geiskopf
|
|
Director
|
|
59
|
|
October
16, 2014
|
|
|
|
|
|
|
|
Phillip
J. Bond
|
|
Director
|
|
62
|
|
September
10, 2018
|
|
|
|
|
|
|
|
Kenneth
S. Cragun
|
|
Director
|
|
58
|
|
September
10, 2018
|
Business
Experience
The
following is a brief overview of the education and business experience of each of our directors and executive officers during
at least the past five years, including their principal occupations or employment during the period, the name and principal business
of the organization by which they were employed, and certain of their other directorships:
Rory
J. Cutaia, Chairman of the Board, President, Chief Executive Officer, Secretary, and Treasurer
Rory
J. Cutaia has been our Chairman of the Board, Chief Executive Officer, President, Secretary, and Treasurer since the formation
of CMG, in which roles he has continued to serve through our October 2014 acquisition of bBooth USA to current. Mr. Cutaia founded
CMG in 2012 and bBooth, Inc. in 2014. In May 2014, CMG and bBooth, Inc. merged and became known as bBoothUSA, which entity was
acquired in October 2014 by GSD, our predecessor. Prior to that, from October 2006 to August 2011, he was a partner and
Entrepreneur-in-Residence
at Corinthian Capital Group, Inc. (“Corinthian”), a private equity fund based in New York City that invested in
middle-market, U.S. based companies. During his tenure at Corinthian, from June 2008 to October 2011, he was the co-founder and
Executive Chairman of Allied Fiber, Inc., a company engaged in the construction of a nation-wide fiber-optic network, and from
June 2007 to August 2011, Mr. Cutaia was the Chief Executive Officer of GreenFields Coal Company, a company engaged in the deployment
of technology to recycle coal waste and clean-up coal waste sites. Before joining Corinthian, from January 2000 to October 2006,
he founded and was the Chairman and Chief Executive Officer of The Telx Group, Inc. (“Telx”), a company engaged in
the telecom carrier inter-connection, co-location, and data center business, which he sold in 2006. Before founding Telx, he was
a practicing lawyer with Shea & Gould, a prominent New York City law firm. Mr. Cutaia obtained his Juris Doctorate degree
from the Fordham University School of Law in 1985 and his Bachelor of Science,
magna cum laude
, in business management
from the New York Institute of Technology in 1982. We believe that Mr. Cutaia is qualified to serve on our board of directors
because of his knowledge of our current operations, in addition to his education and business experiences described above.
Jeffrey
R. Clayborne, Chief Financial Officer
Jeffrey
R. Clayborne has been our Chief Financial Officer since July 15, 2016. Mr. Clayborne is an experienced finance professional with
an entrepreneurial spirit and proven record of driving growth and profit for both Fortune 50 companies, as well as start-up companies.
Prior to joining the Company, Mr. Clayborne served as Chief Financial Officer and a consultant with Breath Life Healing Center
from August 2015 to July 2016. From September 2014 to August 2015, he served as Vice President of Business Development of Incroud,
Inc. and from May 2012 to September 2014, Mr. Clayborne served as President of Blast Music, LLC. Prior to this, Mr. Clayborne
was employed by Universal Music Group where he served as Vice President, Head of Finance & Business Development for Fontana,
where he managed the financial planning and analysis of the sales and marketing division and led the business development department.
He also served in senior finance positions at The Walt Disney Company, including Senior Finance Manager at Walt Disney International,
where he oversaw financial planning and analysis for the organization in 37 countries. Mr. Clayborne began his career as a CPA
at McGladrey & Pullen LLP (now, RSM US LLP), then at KPMG Peat Marwick LLP (now, KPMG LLP). He brings with him more than 20
years of experience in all aspects of strategy, finance, business development, negotiation, and accounting. Mr. Clayborne earned
his Master of Business Administration degree from the University of Southern California, with high honors.
Chad
J. Thomas, Chief Technology Officer
Chad
J. Thomas was appointed as our Chief Technology Officer on October 12, 2018. Mr. Thomas has extensive engineering, technology,
programming, and software development experience, and a proven track record of innovation and building for scale. From January
2017 to September 2018, he served as the Chief Technology Officer of Swarm Engineering, where he created the technology to allow
edge IoT devices to work in a swarm to solve problems in a traditional cloud-based analytics architecture. From October 2014 to
January 2017, Mr. Thomas co-founded, and served as the Chief Technology Officer of LifeSpeed, Inc., a revolutionary health and
wellness platform that allows families, medical professionals, and caretakers to store and share medical history data safely and
participate in clinical trials. From May 2012 to October 2014, he was a System Architect at English First Shanghai China. Prior
to that Mr. Thomas was employed as an architect, designer, and coder of MySpace, where he built the platform that accommodated
rapid global growth for millions of users. Mr. Thomas began his career as an Airborne Ranger. Mr. Thomas studied electrical engineering
at the University of Nebraska, graduating in 1994, and earned an M.S. in electrical engineering and computer science from Massachusetts
Institute of Technology in 1997.
Tal
Golan, Chief Strategy Officer
Tal
Golan was appointed as our Chief Strategy Officer on March 1, 2019. Prior to joining us, from December 2013 through March 2019,
Mr. Golan held senior executive level positions at Salesforce.com. During the period February 2017 through March 2019, Mr. Golan
was Chief Operating Officer - Success Cloud Product and Innovation at Salesforce.com, where he collaborated with leaders of the
world’s largest enterprises to help them to navigate the complexities of continuous transformational change. As a founder,
entrepreneur, investor, and technology inventor, Mr. Golan has grown businesses from the ground up. As a C-level executive, he
has reinvigorated organizations to achieve new levels of value and sustainable growth. Mr. Golan’s experience in the tech
sector includes software design and engineering, cloud computing, product management, mobility, messaging, cryptology, and large-scale
data storage and security. Mr. Golan is adept at bridging the communication gap that often exists between business and IT organizations
in order to build high-performance teams that deliver exceptional bottom-line results. Mr. Golan holds a B.A. degree from Brandeis
University in Philosophy and Religion, as well as certificates from the University of Southern California for Leadership Development
for Building High Performing Teams; Massachusetts Institute of Technology Independent Study for Introduction to Algorithms; Stanford
University Independent Study for iOS Application Development; and University of California, Berkeley for C++.
James
P. Geiskopf, Director
James
P. Geiskopf has been one of our directors since the formation of bBooth USA, in which role he has continued to serve through our
October 2014 acquisition of bBooth USA by GSD, our predecessor, to current. He also serves as our Lead Director. Mr. Geiskopf
has 32 years of experience leading companies in the services industry. From 1975 to 1986, Mr. Geiskopf served as the Chief Financial
Officer of Budget Rent a Car of Fairfield California and from 1986 to 2007, he served as its President and Chief Executive Officer.
In 2007, he sold the franchise. Mr. Geiskopf served on the Board of Directors of Suisun Valley Bank from 1986 to 1993 and also
served on the Board of Directors of Napa Valley Bancorp from 1991 to 1993, which was sold to a larger institution in 1993. Since
2014, Mr. Geiskopf has served on the board of directors of ICOX Innovations, Inc., a public company quoted on the OTC Markets
Group Inc.’s OTCQB tier. From June 2013 to March 16, 2017, the date of his resignation, Mr. Geiskopf had served as a director
of Electronic Cigarettes International Group, Ltd., a Nevada corporation, whose common stock had been quoted on the over-the-counter
market (“ECIG”). ECIG filed a voluntary petition for relief under the provisions of Chapter 7 of Title 11 of the United
States Code on March 16, 2017.
Mr.
Geiskopf has significant and lengthy business experience including building, operating, and selling companies, serving on the
boards of directors for several banks, and serving as a director and officer of several public companies. In these roles he acquired
substantial business management, strategic, operational, human resource, financial, disclosure, compliance, and corporate governance
skills. These were the primary reasons that we concluded that he should serve as one of our directors.
Phillip
J. Bond, Director
Phillip
J. Bond was appointed as one of our directors effective September 10, 2018. On the same date, he was appointed as Chairman of
the Governance and Nominating Committee and to serve on the Audit, Compensation, and Governance and Nominating Committees. In
2018, Mr. Bond co-founded Potomac International Partners, Inc., a multidisciplinary consulting firm and currently serves as its
President of Government Affairs. In 2009, TechAmerica, a U.S.-based technology trade association, was formed from the merger of
AeA, the Cyber Security Industry Alliance, the Government Electronics & Information Technology Association, and the Information
Technology Association of America. Mr. Bond was appointed as the President of TechAmerica at the date of the merger, and later,
in 2010, was appointed as its Chief Executive Officer. Prior to the merger, Mr. Bond served as the President and Chief Executive
Officer of Information Technology Association of America from 2006 to 2008. From 2001 to 2005, Mr. Bond served as Undersecretary
of Technology in the U.S. Department of Commerce for Technology. From 2002 to 2003, Mr. Bond served concurrently as Chief of Staff
to Commerce Secretary Donald Evans. In his dual role, he worked closely with Secretary Evans to increase market access for U.S.
goods and services and further advance America’s technological leadership at home and abroad. Mr. Bond oversaw the operations
of the National Institute of Standards and Technology (NIST), the Office of Technology Policy, and the National Technical Information
Service. During his tenure, the Technology Administration was the pre-eminent portal between the federal government and the U.S.
technology. Earlier in his career, Mr. Bond served as Senior Vice President of Government Relations for Monster Worldwide, the
world’s largest online career site, and General Manager of Monster Government Solutions. Mr. Bond also served as Director
of Federal Public Policy for the Hewlett-Packard Company; Senior Vice President for Government Affairs and Treasurer of the Information
Technology Industry Council; as Chief of Staff to the late Congresswoman Jennifer Dunn (R-WA); Principal Deputy Assistant Secretary
of Defense for Legislative Affairs; Chief of Staff and Rules Committee Associate for Congressman Bob McEwen (R-OH); and as Special
Assistant to the Secretary of Defense for Legislative Affairs. Mr. Bond is a graduate of Linfield College in Oregon and now serves
on the school’s board of trustees.
Mr.
Bond has extensive experience in Washington D.C., where he is recognized for his leadership roles in the Executive branch of the
government of the United States, at major high technology companies, and as the Chief Executive Officer of TechAmerica, the largest
technology advocacy association in the United States. Mr. Bond’s unique leadership experience and expertise in Government
Relations, were the primary reasons that we concluded that he should serve as one of our directors.
Kenneth
S. Cragun, Director
Kenneth
S. Cragun was appointed as one of our directors effective September 10, 2018. On the same date, he was appointed as Chairman of
the Audit Committee, and to serve on the Compensation and Governance and Nominating Committees. Since October 2018, Mr. Cragun
has served as the Chief Accounting Officer of DPW Holdings, Inc., a diversified holding company, and since January 2019, as the
Chief Financial Officer and Treasurer for Alzamend Neuro, Inc., a biopharma company. Mr. Cragun also serves as a partner of Hardesty,
LLC, a national executive services firm. He has been a partner of its Southern California Practice since October 2016. From January
2018 to September 2018, Mr. Cragun served as the Chief Financial Officer of CorVel Corporation (“CorVel”). CorVel
is an Irvine, California-based national provider of workers’ compensation solutions for employers, third-party administrators,
insurance companies, and government agencies. Mr. Cragun is a two-time finalist for the Orange County Business Journal’s
“CFO of the Year – Public Companies” and has more than 30 years of experience, primarily in the technology industry.
He served as Chief Financial Officer of two Nasdaq-listed companies: Local Corporation (April 2009 to September 2016), formerly
based in Irvine, California, which operated a U.S. top 100 website “Local.com” and, in June 2015, filed a voluntary
petition in the United States Bankruptcy Court for the Central District of California seeking relief under the provisions of Chapter
11 of Title 11 of the United States Code (the “Bankruptcy Code”), and Modtech Holdings, Inc. (June 2006 to March 2009),
formerly based in Perris, California and, in October 2008, filed a voluntary petition in the United States Bankruptcy Court for
the Central District of California seeking relief under the provisions of Chapter 11 of the Bankruptcy Code. Mr. Cragun received
his B.S. in Accounting from Colorado State University-Pueblo.
Mr.
Cragun’s industry experience is vast with extensive experience in fast-growth environments and building teams in more than
20 countries. Mr. Cragun has led multiple financing transactions, including IPOs, PIPEs, convertible debt, term loans, and lines
of credit. For these reasons, we believe that he will provide additional breadth and depth to our board of directors.
Family
Relationships
There
are no family relationships among any of our directors or executive officers.
Significant
Employees
We
do not currently have any significant employees other than our executive officers. However, the Merger Agreement contemplates
that McKinley J. Oswald, Jason Matheny, Colby Allen, and JJ Oswald (each, a “key employee”) will be employed by us
following the Closing of the Sound Concepts Acquisition under terms and conditions to be agreed upon prior to Closing and as set
forth in employment agreements entered into with each key employee. The following is a brief overview of each key employee’s
biographical information.
McKinley
J. Oswald, Chief Executive Officer of Sound Concepts
McKinley
J. Oswald, age 43, has served as the Chief Executive Officer of Sound Concepts since 2014. His full-time contributions at Sound
Concepts began after graduating from the University of Utah in 1998. In 2001, Mr. Oswald and his partners purchased Sound Concepts,
and over the past 17 years have introduced numerous innovations that significantly expanded the company’s offerings and
revenue generation capabilities, including the development of the Brightools platform. Mr. Oswald has been principally responsible
for establishing the culture and direction of Sound Concepts and has helped position Sound Concepts at the forefront of the industry
by securing customer relationships with many of the leading direct sales, network marketing, and affiliate marketing companies,
and partnerships with industry experts.
Jason
Matheny, Chief Technology Officer of Sound Concepts
Jason
R. Matheny, age 48, has served as Sound Concepts’ Chief Technology Officer since 2014. After graduating with a bachelor’s
degree in accounting from the University of Utah, he went on to obtain his MBA from Brigham Young University. Coupling his education
with his versatility has allowed him to take on a variety of responsibilities during his more than 25 years at Sound Concepts.
Since Mr. Matheny and his partners purchased Sound Concepts in 2001, he has served in a variety of roles, including Chief Financial
Officer. Currently, Mr. Matheny oversees all aspects of the company’s technology team, having played an instrumental role
in launching the digital Brightools platform and leading the Brightools team in doubling its growth each of the last two years.
Colby
Allen, Chief Operations Officer of Sound Concepts
Colby
Allen, age 44, has served as the Chief Operating Officer of Sound Concepts since 2014. Previously, Mr. Allen served its Chief
Sales Officer. During the course of his career, Mr. Allen has utilized his skill set to focus on the creation of online and offline
tools that help companies more effectively communicate their value proposition. Mr. Allen has overseen the integration of the
Brightools platform with Sound Concepts’ on-demand marketing and sample delivery tools. His experience has helped improve
virtually every aspect of Sound Concepts’ operations and ensured that Sound Concepts’ digital tools and physical operations
operate synergistically. Mr. Allen earned a Bachelor of Science degree in Business Marketing from the University of Phoenix (magna
cum laude).
JJ
Oswald, Chief Sales Officer of Sound Concepts
JJ
Oswald, age 41, is the Chief Sales Officer of Sound Concepts, a position he has held since 2014. Prior to joining Sound Concepts,
Mr. Oswald owned an event rental company, and assisted in growing revenues by 400% before eventually selling the company. He joined
the Sound Concepts team in 2007 and brought with him a wide array of sales experience with a focus on developing and maintaining
robust and mutually beneficial relationships with clients. Mr. Oswald has played a key role in the design of many of the sales
tools contained within the Brightools platform. These tools have proven instrumental in driving significant revenue increases
and the overall growth and adoption of the Brightools platform.
Involvement
in Certain Legal Proceedings
Other
than the matters listed above with respect to Messrs. Geiskopf and Cragun, none of our directors and executive officers has been
involved in any of the following events during the past ten years:
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(a)
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any
petition under the federal bankruptcy laws or any state insolvency laws filed by or against, or an appointment of a receiver,
fiscal agent, or similar officer by a court for the business or property of such person, or any partnership in which such
person was a general partner at or within two years before the time of such filing, or any corporation or business association
of which such person was an executive officer at or within two years before the time of such filing;
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|
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(b)
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any
conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other
minor offenses);
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(c)
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being
subject to any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining such person from, or otherwise limiting, the following activities: (i) acting as a futures
commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction
merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing,
or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee
of any investment company, bank, savings and loan association, or insurance company, or engaging in or continuing any conduct
or practice in connection with such activity; engaging in any type of business practice; or (ii) engaging in any activity
in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state
securities laws or federal commodities laws;
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(d)
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being
the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority
barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described
in paragraph (c)(i) above, or to be associated with persons engaged in any such activity;
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(e)
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being
found by a court of competent jurisdiction (in a civil action), the SEC to have violated a federal or state securities or
commodities law, and the judgment in such civil action or finding by the SEC has not been reversed, suspended, or vacated;
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(f)
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being
found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated
any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission
has not been subsequently reversed, suspended, or vacated;
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(g)
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being
the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently
reversed, suspended, or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law
or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited
to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent
cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or
fraud in connection with any business entity; or
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(h)
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being
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of
the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority
over its members or persons associated with a member.
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related
Party Transactions
We
follow ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.
When and if we contemplate entering into a transaction in which any executive officer, director, nominee, or any family member
of the foregoing would have a direct or indirect interest, regardless of the amount involved, the terms of such transaction are
to be presented to our full board of directors (other than any interested director) for approval, and documented in the board
minutes.
Other
than as disclosed below, we have had no related party transactions.
Notes
Payable — Related Parties
We
had the following outstanding notes payable during the period specified above:
Note
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Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
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Largest
Aggregate Amount Outstanding Since
January
1, 2018
|
|
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Amount
Outstanding as of April 4, 2019
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Interest
Paid Since January 1, 2019
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Interest
Paid Since January 1, 2018
|
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Note
1
(1)
|
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December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
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$
|
1,249,000
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|
|
$
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1,199,000
|
|
|
$
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825,000
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|
|
$
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24,000
|
|
|
$
|
156,000
|
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Note
2
(2)
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|
December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
|
|
189,000
|
|
|
|
189,000
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|
|
|
-
|
|
|
|
-
|
|
|
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17,000
|
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Note
3
(3)
|
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December
1, 2015
|
|
April
1, 2017
|
|
|
12.0
|
%
|
|
|
112,000
|
|
|
|
112,000
|
|
|
|
112,000
|
|
|
|
-
|
|
|
|
-
|
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Note
4
(4)
|
|
April
4, 2016
|
|
June
4, 2021
|
|
|
12.0
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%
|
|
|
343,000
|
|
|
|
343,000
|
|
|
|
240,000
|
|
|
|
7,000
|
|
|
|
91,000
|
|
Note
5
(5)
|
|
April
4, 2016
|
|
December
4, 2018
|
|
|
12.0
|
%
|
|
|
122,000
|
|
|
|
122,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,000
|
|
Total
notes payable – related parties
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|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,965,000
|
|
|
$
|
1,177,000
|
|
|
$
|
31,000
|
|
|
$
|
300,000
|
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(1)
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On
December 1, 2015, we issued a convertible note payable to Mr. Rory J. Cutaia, the Company’s
majority stockholder and Chief Executive Officer, to consolidate all loans and advances
made by Mr. Cutaia to the Company as of that date. The note bears interest at a rate
of 12% per annum, is secured by the Company’s assets, and had an original maturity
date of April 1, 2017. Per the terms of the note agreement, at Mr. Cutaia’s discretion,
he may convert up to 30%, or $375,000 of outstanding principal, plus accrued interest
thereon, into shares of Common Stock at a conversion rate of $1.05 per share.
On
May 4, 2017, we entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note from April 1, 2017
to August 1, 2018. In consideration, the Company issued Mr. Cutaia a three-year warrant to purchase 117,013 shares of Common Stock
at a price of $5.33 per share with a fair value of $517,000. All other terms of the note remain unchanged.
On
August 8, 2018, we entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note to February 8,
2021. All other terms of the note remain unchanged. In connection with the extension, we granted to Mr. Cutaia a three-year warrant
to purchase up to 163,113 shares of Common Stock at a price of $7.35 per share with a fair value of $1,075,000.
On
September 30, 2018, Mr. Cutaia converted the principal balance that was convertible, or $375,000, into 356,824 shares of restricted
Common Stock at $1.05 per share.
As
of December 31, 2018, the outstanding balance of the note amounted to $825,000.
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(2)
|
On
December 1, 2015, the Company issued a convertible note to Mr. Cutaia in the amount of
$189,000, representing a portion of Mr. Cutaia’s accrued salary for 2015. The note
was unsecured, bore interest at a rate of 12% per annum, and was convertible into shares
of Common Stock at a conversion price of $1.05 per share. The original maturity date
of August 1, 2018, was subsequently extended to February 8, 2021. As of December 31,
2017, outstanding balance of the note amounted to $189,000.
On
September 30, 2018, Mr. Cutaia converted the entire unpaid balance of $189,000 into 180,000 restricted shares of our Common
Stock at $1.05 per share.
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(3)
|
On
December 1, 2015, the Company issued a note payable to a former member of the Company’s
board of directors, in the amount of $112,000, representing unpaid consulting fees as
of November 30, 2015. The note is unsecured, bears interest at a rate of 12% per annum,
and matured in April 2017.
As
of December 31, 2018, and the date of this prospectus, the note is past due. The Company is currently in negotiations
with the note holder to settle the note payable.
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|
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(4)
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On
April 4, 2016, the Company issued a convertible note to Mr. Cutaia, in the amount of
$343,000, to consolidate all advances made by Mr. Cutaia to the Company from December
2015 through March 2016. The note bears interest at a rate of 12% per annum, is secured
by the Company’s assets, and, at one point, originally matured on December 4, 2018.
Pursuant to the terms of the note, a total of 30% of the note principal, or $103,000,
can be converted into shares of Common Stock at a conversion price of $1.05 per share.
As of December 31, 2017, the outstanding balance of the note was $343,000.
On
September 30, 2018, pursuant to the terms of the note, Mr. Cutaia converted 30% of the principal balance, or $103,000,
into 98,093 restricted shares of our Common Stock at $1.05 per share.
On
December 4, 2018, we entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note to June
4, 2021. All other terms of the note remain unchanged. In connection with the extension, we granted to Mr. Cutaia a three-year
warrant to purchase up to 353,000 shares of Common Stock at a price of $5.10 per share with a fair value of $111,000.
As
of December 31, 2018, the outstanding balance of the note amounted to $240,000.
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(5)
|
On
April 4, 2016, the Company issued a convertible note payable to Mr. Cutaia in the amount
of $122,000, representing his unpaid salary from December 2015 through March 2016. The
note was unsecured, bore interest at the rate of 12% per annum, originally matured on
December 4, 2018, and converted into Common Stock at a conversion price of $1.05 per
share. As of December 31, 2017, the outstanding balance of the note amounted to $122,000.
On
September 30, 2018, Mr. Cutaia converted the entire outstanding principal amount of $122,000 into 116,071 shares of restricted
shares of Common Stock. Thus, as of that date, the note was satisfied in full.
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Director
Independence
Our
board of directors is currently composed of four members. Our Common Stock is not currently listed for trading on a national securities
exchange and, as such, we are not subject to any director independence standards. However, we determined that three directors,
James P. Geiskopf, Phillip J. Bond, and Kenneth S. Cragun qualify as independent directors. We determined that Mr. Cutaia, our
Chairman of the Board, President, Chief Executive Officer, Treasurer, and Secretary, is not independent. We evaluated independence
in accordance with the rules of Nasdaq and the SEC. Mr. Geiskopf, Mr. Bond, and Mr. Cragun also serve on our Audit, Compensation,
and Governance and Nominating Committees.
Orientation
and Continuing Education
We
have an informal process to orient and educate new directors to the board regarding their role on the board, our committees and
our directors, as well as the nature and operations of our business. This process provides for an orientation with key members
of the management staff, and further provides access to materials necessary to inform them of the information required to carry
out their responsibilities as a board member. This information includes the most recent board approved budget, the most recent
annual report, copies of the audited financial statements, and copies of the interim quarterly financial statements.
The
board does not provide continuing education for its directors. Each director is responsible to maintain the skills and knowledge
necessary to meet his obligations as a director.
Assessments
The
board intends that individual director assessments be conducted by other directors, taking into account each director’s
contributions at board meetings, service on committees, experience base, and their general ability to contribute to one or more
of our major needs. However, due to our stage of development and our need to deal with other urgent priorities, the board has
not yet implemented such a process of assessment.
Nomination
of Directors
As
of April 4, 2019, we had not effected any material changes to the procedures by which our stockholders may recommend nominees
to our board of directors. Our board of directors does not have a policy with regards to the consideration of any director candidates
recommended by our stockholders. Our board of directors has determined that it is in the best position to evaluate our requirements
as well as the qualifications of each candidate when the board considers a nominee for a position on our board of directors. Accordingly,
we do not currently have any specific or minimum criteria for the election of nominees to our board of directors and we do not
have any specific process or procedure for evaluating such nominees. Our board of directors assesses all candidates, whether submitted
by management or stockholders, and makes recommendations for election or appointment. If stockholders wish to recommend candidates
directly to our board, they may do so by sending communications to our president at the address on the cover page of this prospectus.
Audit
Committee and Audit Committee Financial Expert
On
August 14, 2018, the board of directors amended and restated the audit committee charter (the “Audit Committee Charter”)
to govern the Audit Committee. Currently, Messrs. Geiskopf, Bond, and Cragun (Chairman) serve on the Audit Committee and each
meets the independence requirements of Nasdaq and the SEC. Mr. Cragun qualifies as an “audit committee financial expert.”
The
Audit Committee Charter requires that each member of the Audit Committee meet the independence requirements of Nasdaq and the
SEC and requires the Audit Committee to have at least one member that qualifies as an “audit committee financial expert.”
In addition to the enumerated responsibilities of the Audit Committee in the Audit Committee Charter, the primary function of
the Audit Committee is to assist the board of directors in its general oversight of our accounting and financial reporting processes,
audits of our financial statements, and internal control and audit functions. The Audit Committee Charter can be found online
at https://myverb.com/audit-committe-charter.
Compensation
Committee
On
August 14, 2018, the board of directors approved and adopted a charter (the “Compensation Committee Charter”) to govern
the Compensation Committee. Currently, Messrs. Geiskopf (Chairman), Bond, and Cragun serve as members of the Compensation Committee
and each meets the independence requirements of Nasdaq and the SEC, qualifies as a “non-employee director” within
the meaning of Rule 16b-3 under the Exchange Act, and qualifies as an outside director within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended. In addition to the enumerated responsibilities of the Compensation Committee in
the Compensation Committee Charter, the primary function of the Compensation Committee is to oversee the compensation of our executives,
produce an annual report on executive compensation for inclusion in our proxy statement, if and when required by applicable laws
or regulations, and advise the board of directors on the adoption of policies that govern our compensation programs. The Compensation
Committee Charter may be found online at https://myverb.com/compensation-committee-charter.
Governance
and Nominating Committee
On
August 14, 2018, the board of directors approved and adopted a charter (the “Nominating Committee Charter”) to govern
the Governance and Nominating Committee (the “Nominating Committee”). Currently, Messrs. Geiskopf, Bond (Chairman),
and Cragun serve as members of the Nominating Committee and each meets the independence requirements of Nasdaq and the SEC. The
Nominating Committee Charter requires that each member of the Nominating Committee meets the independence requirements of Nasdaq
and the SEC. In addition to the enumerated responsibilities of the Nominating Committee in the Nominating Committee Charter, the
primary function of the Nominating Committee is to determine the slate of director nominees for election to the board of directors,
to identify and recommend candidates to fill vacancies occurring between annual stockholder meetings, to review our policies and
programs that relate to matters of corporate responsibility, including public issues of significance to us and our stockholders,
and any other related matters required by federal securities laws. The charter of the Nominating Committee may be found online
https://myverb.com/governance-and-nominating-committe-charter.
Other
Board Committees
Other
than our audit committee, compensation committee, and governance and nominating committee, we have no committees of our board
of directors. We do not have any defined policy or procedure requirements for our stockholders to submit recommendations or nominations
for directors.
Code
of Ethics
In
2014, our board of directors approved and adopted a Code of Ethics and Business Conduct for Directors, Senior Officers, and Employees
(the “Code of Ethics”) that applies to all of our directors, officers, and employees, including our principal executive
officer and principal financial officer. The Code of Ethics addresses such individuals’ conduct with respect to, among other
things, conflicts of interests; compliance with applicable laws, rules, and regulations; full, fair, accurate, timely, and understandable
disclosure by us; competition and fair dealing; corporate opportunities; confidentiality; protection and proper use of our assets;
and reporting suspected illegal or unethical behavior. The Code of Ethics is available on our website at https://myverb.com/code-of-ethics.
Compensation
Committee Interlocks and Insider Participation
No
interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other
company, nor has any interlocking relationship existed in the past.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth certain compensation awarded to, earned by, or paid to the following “named executive officers,”
which is defined as follows:
|
(a)
|
all
individuals serving as our principal executive officer during the year ended December 31, 2018; and
|
|
|
|
|
(b)
|
each
of our two other most highly compensated executive officers who were serving as executive officers at the end of the year
ended December 31, 2018.
|
We
did not have any individuals for whom disclosure would have been required but for the fact that the individual was not serving
as an executive officer as of the end of fiscal 2018.
Name
and Position
|
|
Fiscal
Year
|
|
|
Salary
($)
|
|
|
Stock
Awards ($)
(1)
|
|
|
Option
Awards
($)
(2)
|
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
Rory
J. Cutaia
(3)
|
|
|
2018
|
|
|
|
436,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,186,000
|
|
|
|
1,622,000
|
(4)
|
Chairman
of the Board, Chief Executive Officer, President, Secretary, and
Treasurer
|
|
|
2017
|
|
|
|
400,000
|
|
|
|
710,000
|
|
|
|
167,000
|
|
|
|
-
|
|
|
|
690,000
|
|
|
|
1,967,000
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
R. Clayborne
(6)
|
|
|
2018
|
|
|
|
110,000
|
|
|
|
-
|
|
|
|
17,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
127,000
|
|
Chief
Financial Officer
|
|
|
2017
|
|
|
|
96,000
|
|
|
|
325,000
|
|
|
|
313,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
733,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chad
J. Thomas
(7)
|
|
|
2018
|
|
|
|
28,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
965,000
|
|
|
|
-
|
|
|
|
993,000
|
|
Chief
Technology Officer
|
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
For
valuation purposes, the dollar amount shown is calculated based on the market price of our Common Stock on the grant dates.
The number of shares granted, the grant date, and the market price of such shares for each named executive officer is set
forth below.
|
|
|
(2)
|
For
valuation assumptions on stock option awards refer to Note 2 to the audited consolidated financial statements for the year
ended December 31, 2018 included as part of this prospectus. The disclosed amounts reflect the fair value of the stock option
awards that were earned during fiscal years ended December 31, 2018 and 2017 in accordance with FASB ASC Topic 718.
|
|
|
(3)
|
Mr.
Cutaia was appointed as Chairman of the Board, President, Chief Executive Officer, Secretary, and Treasurer on October 16,
2014.
|
|
|
(4)
|
As
of December 31, 2018, Mr. Cutaia had accrued but unpaid compensation equal to $188,000.
|
|
|
(5)
|
As
of December 31, 2017, Mr. Cutaia had accrued but unpaid compensation equal to $400,000.
|
|
|
(6)
|
Mr.
Clayborne was appointed as Chief Financial Officer on July 15, 2016.
|
|
|
(7)
|
Mr.
Thomas was appointed as Chief Technology Officer on October 12, 2018.
|
Narrative
Disclosure to Summary Compensation Table
The
following is a discussion of the material information that we believe is necessary to understand the information disclosed in
the foregoing Summary Compensation Table.
Rory
J. Cutaia
On
November 1, 2014, we entered into an employment agreement with Mr. Cutaia. The employment agreement is for a five-year term, and
can be extended for additional one-year periods. In addition to certain payments due to Mr. Cutaia upon termination of employment,
the employment agreement contains customary non-competition, non-solicitation, and confidentiality provisions. Mr. Cutaia is entitled
to a base salary of $325,000 per year, with annual increases of 10%. Mr. Cutaia is also entitled to a mandatory increase of not
less than $100,000 per annum upon us achieving EBITDA break-even. In addition, Mr. Cutaia is eligible for an annual bonus in an
amount of $325,000 upon the achievement of certain performance targets established by the board of directors, as well as an annual
stock option grant of 16,667 shares of our Common Stock. Finally, Mr. Cutaia is eligible for certain other benefits such as health,
vision, and dental insurance, life insurance, and 401(k) Company matching.
Mr.
Cutaia earned total cash compensation for his services to us in the amount of $436,000 and $400,000 for fiscal years 2018 and
2017, respectively.
On
August 15, 2017, we issued Mr. Cutaia 250,000 shares of our Common Stock. The price per share was $2.25, as reported by the OTCQB.
On
January 10, 2017, we granted Mr. Cutaia a stock option to purchase up to 133,333 shares of our Common Stock at an exercise price
of $1.20 per share. The option is not currently vested, but will vest in full on January 10, 2020, and will expire on January
9, 2022. On December 19, 2017, we granted Mr. Cutaia a stock option to purchase up to 16,667 shares of our Common Stock at an
exercise price of $1.16 per share. The option was vested as to 8,333 shares on the date of grant and vested as to the other 8,333
shares on December 18, 2018. The option expires on December 18, 2022.
On
March 7, 2018, we issued Mr. Cutaia 100,000 shares of our Common Stock for services rendered in 2017. The price per share was
$6.60, as reported on the OTCQB.
Mr.
Cutaia also received $1,186,000 and $690,000 for fiscal years 2018 and 2017, respectively, as “other compensation,”
which represented warrants with 3-year terms to purchase up to 186,675 and 205,623 shares of our Common Stock, respectively.
Jeffrey
R. Clayborne
Mr.
Clayborne earned total cash compensation for his services to us in the amount of $110,000 and $96,000 for fiscal years 2018 and
2017, respectively.
On
May 4, 2017, we issued Mr. Clayborne 33,333 shares of our Common Stock. The price per share was $5.40, as reported on the OTCQB.
On
January 10, 2017, we granted Mr. Clayborne a stock option to purchase 133,333 shares of our Common Stock at an exercise price
of $1.20 per share. All of the shares will vest on January 10, 2020. On May 4, 2017, we granted Mr. Clayborne a stock option to
purchase 33,333 shares of our Common Stock at an exercise price of $1.20 per share. The shares will vest annually in three equal
installments. As of April 4, 2019, 22,222 shares were vested.
On
March 7, 2018, we issued Mr. Clayborne 100,000 shares of our Common Stock for services rendered in 2017. The price per share was
$6.60, as reported on the OTCQB.
On
January 22, 2018, we granted Mr. Clayborne a stock option to purchase 12,876 shares of our Common Stock at an exercise price of
$1.35. The shares vested on grant date.
Chad
J. Thomas
Mr.
Thomas earned total cash compensation for his services to us in the amount of $28,000 for fiscal year 2018.
On
October 12, 2018 we granted Mr. Thomas a stock option to purchase 133,333 shares of our Common Stock at an exercise price of $7.50.
The shares will vest annually in three equal installments. As of April 4, 2019, no shares were vested.
Outstanding
Equity Awards at Fiscal Year-End
We
did not have any stock awards outstanding as of December 31, 2018. The following table sets forth, for each named executive officer,
certain information concerning outstanding option awards as of December 31, 2018:
Name
|
|
Number
of securities underlying unexercised
options
(exercisable)
(#)
|
|
|
Number
of securities underlying unexercised
options
(unexercisable) (#)
|
|
|
Option
exercise
price
($)
|
|
|
Option
expiration
date
|
Rory
J. Cutaia
|
|
|
16,667
|
|
|
|
-
|
|
|
|
1.20
|
|
|
December
18, 2022
(1)
|
|
|
|
-
|
|
|
|
133,333
|
|
|
|
1.20
|
|
|
January
9, 2022
(2)
|
|
|
|
16,667
|
|
|
|
-
|
|
|
|
1.65
|
|
|
October
31, 2012
(3)
|
|
|
|
83,333
|
|
|
|
-
|
|
|
|
1.50
|
|
|
May
11, 2021
(4)
|
|
|
|
16,667
|
|
|
|
-
|
|
|
|
1.20
|
|
|
November
1, 2019
(5)
|
|
|
|
53,333
|
|
|
|
-
|
|
|
|
7.50
|
|
|
May
12, 2019
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
R. Clayborne
|
|
|
11,111
|
|
|
|
22,222
|
|
|
|
5.40
|
|
|
May
3, 2022
(7)
|
|
|
|
-
|
|
|
|
133,333
|
|
|
|
1.20
|
|
|
January
9, 2022
(8)
|
|
|
|
68,889
|
|
|
|
31,178
|
|
|
|
1.65
|
|
|
July
14, 2021
(9)
|
|
|
|
12,876
|
|
|
|
-
|
|
|
|
1.35
|
|
|
January
21, 2023
(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chad
J. Thomas
|
|
|
-
|
|
|
|
133,333
|
|
|
|
7.50
|
|
|
October
11, 2023
(11)
|
(1)
|
All
shares have fully vested.
|
|
|
(2)
|
133,333
shares will vest on January 10, 2020.
|
|
|
(3)
|
All
shares have fully vested.
|
|
|
(4)
|
83,333
shares vested on the grant date.
|
|
|
(5)
|
All
shares have fully vested.
|
(6)
|
All
shares have fully vested.
|
|
|
(7)
|
Shares
will vest annually in three equal installments.
|
|
|
(8)
|
All
133,333 shares will vest on January 10, 2020.
|
|
|
(9)
|
6,667
shares vested on the grant date, and the remaining 93,333 shares will vest annually in three equal installments.
|
|
|
(10)
|
All
shares vested on the grant date.
|
|
|
(11)
|
Shares
will vest annually in three equal installments.
|
Retirement
or Similar Benefit Plans
There
are no arrangements or plans in which we provide retirement or similar benefits for our directors or executive officers.
Resignation,
Retirement, Other Termination, or Change in Control Arrangements
Other
than as disclosed below, we have no contract, agreement, plan, or arrangement, whether written or unwritten, that provides for
payments to our directors or executive officers at, following, or in connection with the resignation, retirement, or other termination
of our directors or executive officers, or a change in control of our company or a change in our directors’ or executive
officers’ responsibilities following a change in control.
Rory
J. Cutaia
Pursuant
to Mr. Cutaia’s employment agreement dated November 1, 2014 (the “Employment Agreement”), Mr. Cutaia is entitled
to the following severance package in the event he is “terminated without cause,” “terminated for good reason,”
or “terminated upon permanent disability:” (i) monthly payments of $27,000 or such sum equal to his monthly base compensation
at the time of the termination, whichever is higher, for a period of thirty-six (36) months from the date of such termination
or to the end of the term of the Employment Agreement, whichever is longer; and (ii) reimbursement for COBRA health insurance
costs for thirty-six (36) months from the date of such termination or to the end of the term of the Employment Agreement, whichever
is longer. In addition, Mr. Cutaia’s unvested equity will immediately vest, without restriction, and any unearned and unpaid
bonus compensation, expense reimbursement, and all accrued vacation, personal, and sick days, etc. shall be deemed earned, vested,
and paid immediately. For purposes of the Employment Agreement, “terminated without cause” means Mr. Cutaia is terminated
for any reason other than a discharge for cause or due to Mr. Cutaia’s death or permanent disability. For purposes of the
Employment Agreement, “terminated for good reason” means the voluntary termination of the Employment Agreement by
Mr. Cutaia if any of the following occurs without his prior written consent, which consent cannot be unreasonably withheld considering
our then current financial condition, and in each case, which continues uncured for 30 days following receipt by us of Mr. Cutaia’s
written notice: (i) there is a material reduction by us in (A) Mr. Cutaia’s annual base salary then in effect or (B) the
annual target bonus, as set forth in the Employment Agreement, or the maximum additional amount up to which Mr. Cutaia is eligible
pursuant to the Employment Agreement; (ii) we reduce Mr. Cutaia’s job title and position such that Mr. Cutaia (A) is no
longer our Chief Executive Officer; (B) is no longer the Chairman of our board of directors; or (C) is involuntarily removed from
our board of directors; or (iii) Mr. Cutaia is required to relocated to an office location outside of Los Angeles, California
or outside of a thirty (30) mile radius of Los Angeles, California. For purposes of the Employment Agreement, “terminated
upon permanent disability” means Mr. Cutaia is terminated because he is unable to perform his duties due to a physical or
mental condition for (i) a period of one hundred twenty (120) consecutive days or (ii) an aggregate of one-hundred eighty (180)
days in any twelve (12)-month period.
Director
Summary Compensation Table
The
table below summarizes the compensation paid to our non-employee directors for the fiscal year ended December 31, 2018:
Name
(1)
|
|
Fees
earned or paid in cash
($)
|
|
|
Stock
awards
($)
|
|
|
Option
awards
($)
|
|
|
Non-equity
incentive plan compensation
($)
|
|
|
Nonqualified
deferred compensation earnings
($)
|
|
|
All
other compensation
($)
|
|
|
Total
($)
|
|
James
P. Geiskopf
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip
J. Bond
|
|
|
-
|
|
|
|
-
|
|
|
|
483,000
|
(2)(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
483,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
S. Cragun
|
|
|
-
|
|
|
|
-
|
|
|
|
483,000
|
(2)(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
483,000
|
|
(1)
|
Rory
J. Cutaia, our Chairman of the board, Chief Executive Officer, President, Secretary, and Treasurer during fiscal 2018, is
not included in this table as he was an employee, and, thus, received no compensation for his services as a director. The
compensation received by Mr. Cutaia as an employee is disclosed in the Summary Compensation Table on page 54.
|
|
|
(2)
|
The
aggregate number of option awards outstanding at the end of fiscal 2018 was 66,667 shares.
|
|
|
(3)
|
Represents
an option award of 66,667 shares of our Common Stock valued at a price per share of approximately $7.50, which was the closing
price as reported on the OTCQB on the grant date.
|
Narrative
Discussion on Director Compensation
We
have no formal plan for compensating our directors for their services in their capacity as directors. Our directors are entitled
to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of
our board of directors. Our board of directors may award special remuneration to any director undertaking any special services
on their behalf other than services ordinarily required of a director.
James
P. Geiskopf
We
did not pay any compensation to Mr. Geiskopf for his services as a director during fiscal 2018.
Phillip
J. Bond
On
August 27, 2018, we granted Mr. Bond a stock option to purchase up to 66,667 shares of our Common Stock at an exercise price of
$7.50 per share. 13,333 of the shares vested on the inception of service, the remaining shares vest annually in four equal installments.
Kenneth
S. Cragun
On
August 27, 2018, we granted Mr. Cragun a stock option to purchase up to 66,667 shares of our Common Stock at an exercise price
of $7.50 per share. 13,333 of the shares vested on the inception of service, the remaining shares vest annually in four equal
installments.
Golden
Parachute Compensation
For
a description of the terms of any agreement or understanding, whether written or unwritten, between any officer or director and
us concerning any type of compensation, whether present, deferred, or contingent, that will be based on or otherwise will relate
to an acquisition, merger, consolidation, sale, or other type of disposition of all or substantially all assets of our company,
see above under the heading “Executive Compensation,” “Director Summary Compensation Table,” and “Narrative
Discussion on Director Compensation.”
Risk
Assessment in Compensation Programs
During
fiscal 2018 and 2017, we paid compensation to our employees, including executive and non-executive officers. Due to the size and
scope of our business, and the amount of compensation, we did not have any employee compensation policies and programs to determine
whether our policies and programs create risks that are reasonably likely to have a material adverse effect on us.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of April 4, 2019, certain information with respect to the beneficial ownership of our Common
Stock by (i) each of our current directors, (ii) each of our named executive officers, (iii) our directors and named
executive officers as a group, and (iv) each stockholder known by us to be the beneficial owner of more than 5% of our
outstanding our Common Stock. For purposes of this table, we have also included a column that relates to the potential
percent owned by each of our directors, named executive officers, and more than 5% beneficial owners following this offering,
assuming that 6,389,776 shares of our Common Stock are issued in connection with the issuance of Units in this offering,
which does not include (v) the 3,194,888 shares of Common Stock issuable in connection with the Sound Concepts Acquisition,
(w) the 958,466 shares of our Common Stock issuable if the Underwriter exercises its over-allotment option in full, (x) the
7,348,242 shares of our Common Stock issuable upon exercise of the warrants granted in connection with this offering
(assuming the Underwriter exercises its over-allotment option in full), (y) the 319,489 shares of our Common Stock issuable
upon exercise of the Underwriter’s warrants, or (z) the 183,706 shares of Common Stock issuable upon exercise of
AGP’s warrants (assuming the Underwriter exercises its over-allotment option in full). We currently do not know how
many Units will be offered and sold in the offering.
Name
and Address
(7)
|
|
Title
of Class
|
|
Amount
and Nature of Beneficial Ownership
(1)
|
|
|
Percent
Owned
(%)
(Pre- Offering)
(2)
|
|
|
Amount
and
Nature
of
Beneficial
Ownership
(1)
(Post-Offering)
|
|
|
Percent
Owned
(%)
(Post-
Offering)
(2)
|
|
Rory J. Cutaia
c/o 344 S. Hauser Drive,
Unit 414
Los Angeles, California 90036
|
|
Common Stock
|
|
|
3,837,203
|
(3)
|
|
|
29.7
|
%
|
|
|
3,837,203
|
(3)
|
|
|
19.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James P. Geiskopf
c/o 344 S. Hauser Drive,
Unit 414
Los Angeles, California 90036
|
|
Common Stock
|
|
|
367,600
|
(4)
|
|
|
2.9
|
%
|
|
|
367,600
|
(4)
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey R. Clayborne
c/o 344 S. Hauser Drive,
Unit 414
Los Angeles, California 90036
|
|
Common Stock
|
|
|
237,321
|
(5)
|
|
|
1.9
|
%
|
|
|
237,321
|
(5)
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip J. Bond
c/o 344 S. Hauser Drive,
Unit 414
Los Angeles, California 90036
|
|
Common Stock
|
|
|
13,333
|
(6)
|
|
|
0.1
|
%
|
|
|
13,333
|
(6)
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth S. Cragun
c/o 344 S. Hauser Drive,
Unit 414
Los Angeles, California 90036
|
|
Common Stock
|
|
|
13,333
|
(7)
|
|
|
0.1
|
%
|
|
|
13,333
|
(7)
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a
group (5 persons)
|
|
Common Stock
|
|
|
4,468,790
|
(8)
|
|
|
34.0
|
%
|
|
|
4,468,790
|
(8)
|
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial owner of more than 5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chakradhar Reddy
110 3rd Avenue, No. 11B
New York, New York 11103
|
|
Common Stock
|
|
|
620,000
|
(9)
|
|
|
5.0
|
%
|
|
|
620,000
|
(9)
|
|
|
3.3
|
%
|
(1)
|
Except
as otherwise indicated, we believe that the beneficial owners of our Common Stock listed above, based on information furnished
by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where
applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment
power with respect to securities. Common Stock subject to options or warrants currently exercisable or exercisable within
60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants,
but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
|
|
|
(2)
|
Percentage
of Common Stock is based on 12,
398,241 shares of our Common
Stock issued and outstanding as of April 4, 2019. Percentage of Common Stock post-offering
assumes that we issue 6,389,776 shares of our Common Stock and that the number
of shares of our Common Stock issued and outstanding as of April 4, 2019 remains
the same.
|
|
|
(3)
|
Consists
of 3,004,269 shares of our Common Stock held directly, 240,240 shares of our Common Stock held by Cutaia Media Group Holdings,
LLC (an entity over which Mr. Cutaia has dispositive and voting authority), and 54,006 shares of our Common Stock held by
Mr. Cutaia’s spouse (as to which shares, he disclaims beneficial ownership). Also includes 195,000 shares of our Common
Stock underlying stock options held directly and 40,000 shares of our Common Stock underlying stock options held by Mr. Cutaia’s
spouse that are exercisable within 60 days of the date of this prospectus (as to which underlying shares, he disclaims beneficial
ownership) but excludes 141,667 shares of our Common Stock underlying stock options held by Mr. Cutaia, as none of such options
is exercisable within 60 days of the date of this prospectus. The total also includes 303,688 shares of our Common Stock underlying
warrants granted to Mr. Cutaia, which warrants are exercisable within 60 days of the date of this prospectus.
|
|
|
(4)
|
Includes
272,267 shares of our Common Stock held directly and 5,333 shares of our Common Stock held by Mr. Geiskopf’s children.
Also includes 90,000 shares of our Common Stock underlying stock options exercisable within 60 days of the date of this prospectus.
Excludes 133,333 shares of our Common Stock underlying stock options not exercisable within 60 days of the date of this prospectus.
|
|
|
(5)
|
Includes
133,333 shares of our Common Stock held directly. Also, includes 103,987 shares of our
Common Stock underlying stock options that are exercisable within 60 days of the date
of this prospectus. Excludes 175,556 shares of our Common Stock underlying stock options
that are not exercisable within 60 days of the date of this prospectus.
|
|
|
(6)
|
Includes
13,333 shares of our Common Stock underlying stock options exercisable within 60 days of the date of this prospectus. Excludes
53,333 shares of our Common Stock underlying stock options not exercisable within 60 days of the date of this prospectus.
|
|
|
(7)
|
Includes
13,333 shares of our Common Stock underlying stock options exercisable within 60 days
of the date of this prospectus. Excludes 53,333 shares of our Common Stock underlying
stock options not exercisable within 60 days of the date of this prospectus.
|
|
|
(8)
|
Includes
all shares, options, and warrants referenced in notes 3 through 7. Chad J. Thomas, our Chief Technology Officer, is not included
because as of the date of this filing, he does not beneficially own any shares of our Common Stock. Tal Golan, our Chief Strategy
Officer, is not included because as of the date of this filing, he does not beneficially own any shares of our Common Stock.
|
|
|
(9)
|
Consists
of 620,000 shares of our Common Stock held directly.
|
Changes
in Control
We
do not know of any arrangements that may, at a subsequent date, result in a change in control.
DESCRIPTION
OF SECURITIES
The
following is a summary of all material characteristics of our capital stock as set forth in our Articles of Incorporation, and
our Bylaws. The summary does not purport to be complete and is qualified in its entirety by reference to our Articles of Incorporation
and our Bylaws, and to the provisions of the NRS. We encourage you to review complete copies of our Articles of Incorporation
and our Bylaws. You can obtain copies of these documents by following the directions outlined in “Where You Can Find More
Information” and “Incorporation of Certain Information by Reference” elsewhere in this prospectus.
General
We
are currently authorized to issue up to 200,000,000 shares of our Common Stock and 15,000,000 shares of our preferred stock, par
value $0.0001 per share.
Units
We
are offering our Units, with each Unit consisting of one (1) share of our Common Stock and one (1) warrant to purchase one (1)
share of our Common Stock, together with the shares of our Common Stock underlying such warrants, at a public offering
price of $3.13 per Unit. Our Units will not be certificated and the shares of our Common Stock and the warrants part of
such Units are immediately separable and will be issued separately in this offering.
Common
Stock
Of
the 200,000,000 shares of our Common Stock authorized by our Articles of Incorporation, 12,398,241 shares of our Common Stock
are issued and outstanding as of April 4, 2019. Each holder of our Common Stock is entitled to one vote per share on all
matters to be voted upon by the stockholders and are not entitled to cumulative voting for the election of directors. Holders
of our Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board
of directors out of funds legally available therefor subject to the rights of preferred stockholders. We have not paid any dividends
and do not intend to pay any cash dividends to the holders of our Common Stock in the foreseeable future. We anticipate reinvesting
our earnings, if any, for use in the development of our business. In the event of liquidation, dissolution, or winding up of the
Company, the holders of our Common Stock are entitled, unless otherwise provided by law or our Articles of Incorporation, including
any certificate of designations for a series of preferred stock, to share ratably in all assets remaining after payment of liabilities
and the preferences of preferred stockholders. Holders of our Common Stock do not have preemptive, conversion, or other subscription
rights. There are no redemption or sinking fund provisions applicable to our Common Stock.
On
January 7, 2019, we filed a Definitive Information Statement on Schedule 14C with the SEC relating to the receipt of written consents
from the holders of a majority of the issued and outstanding shares of our Common Stock (the “Majority Stockholders”)
authorizing one or more reverse stock splits of the Company’s issued and outstanding shares of our Common Stock at an aggregate
ratio of not less than one-for-five and not more than one-for-40, within the discretion of our board of directors, at any time
and from time-to-time prior to September 30, 2019. On February 1, 2019, we implemented a 1-for-15 Reverse Stock Split. The Reverse
Stock Split became effective upon commencement of trading of our Common Stock on February 4, 2019. As a result of the Reverse
Stock Split, every 15 shares of our pre-Reverse Stock Split Common Stock were combined and reclassified into one share of our
Common Stock. The number of shares of our Common Stock subject to outstanding options, warrants, and convertible securities were
also reduced by a factor of 15 as of February 1, 2019. The board of directors’ primary objective in implementing the Reverse
Stock Split was to increase the per-share market price of our Common Stock in order for us to satisfy certain quantitative standards
for listing on Nasdaq. We believe that listing our Common Stock on Nasdaq would provide better support for and maintain the liquidity
of our Common Stock and increase recognition for our Company and our stockholders. Effecting the Reverse Stock Split reduces,
and any additional reverse stock splits in the future would reduce, the then-issued and outstanding number of shares of our Common
Stock, which reduction, our board of directors believes, would increase the price per-share of our Common Stock to a level sufficient
to meet the price per share quantitative standards for listing on Nasdaq.
Nasdaq
approved our Common Stock and the warrants for listing under the symbols “VERB” and “VERBW,” respectively,
and trading commenced at the open of the market on April 5, 2019. We cannot assure you that we will be able to meet the continued
listing standards in the future. If we fail to meet Nasdaq’s continued listing standards in the future, our Common Stock
or the warrants or both could be delisted.
While
there can be no assurance, our board of directors believes that implementing the Reverse Stock Split, and any future reverse stock
splits, is in our best interest and the best interests of our stockholders in order to realize the potential benefits discussed
above. The ultimate effect of the Reverse Stock Split upon the market price of our Common Stock cannot be predicted with any certainty,
and the history of similar stock splits for companies in similar circumstances is varied. The market price of our Common Stock
may vary based on other factors unrelated to the number of shares of our Common Stock outstanding, including our future performance.
However, we believe that the ability to implement one or more reverse stock splits, including the Reverse Stock Split we implemented
on February 1, 2019, and thereby have successive reductions in the number of outstanding shares of our Common Stock, provides
our Board with maximum flexibility to react to prevailing market conditions and future changes to the market price of our Common
Stock in order to realize these potential benefits.
Preferred
Stock
Of
the 15,000,000 shares of preferred stock, par value $0.0001 per share, authorized in our Articles of Incorporation, all of which
are undesignated. The board of directors is authorized, without further approval from our stockholders, to create one or more
series of preferred stock, and to designate the rights, privileges, preferences, restrictions, and limitations of any given series
of preferred stock. Accordingly, the board of directors may, without stockholder approval, issue shares of preferred stock with
dividend, liquidation, conversion, voting, or other rights that could adversely affect the voting power or other rights of the
holders of our Common Stock. The issuance of preferred stock could have the effect of restricting dividends payable to holders
of our Common Stock, diluting the voting power of our Common Stock, impairing the liquidation rights of our Common Stock, or delaying
or preventing a change in control of us, all without further action by our stockholders.
Options
As
of April 4, 2019, we had 2,457,974 shares of our Common Stock underlying outstanding stock options, having a weighted-average
exercise price of approximately $5.44 per share.
Offering
Warrants
The
following summary of certain term and provisions of the warrants offered hereby is not complete and is subject to, and qualified
in its entirety by the provisions of the form of the warrant, which is filed as an exhibit to the registration statement of which
this prospectus is a part. Prospective investors should carefully review the terms and provisions set forth in the form of warrant.
Exercisability.
The warrants are exercisable immediately upon issuance and at any time for the five-year period from the date of issuance.
The warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise
notice accompanied by payment in full for the number of shares of our Common Stock purchased upon such exercise (except in the
case of a cashless exercise as discussed below).
Cashless
Exercise
. In the event that a registration statement covering shares of our Common Stock underlying the warrants is not available
for the resale of such shares of our Common Stock underlying the warrants, the holder may, in its sole discretion, exercise the
warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to us upon such exercise
in payment of the aggregate exercise price, elect instead to receive upon such exercise the net number of shares of our Common
Stock determined according to the formula set forth in the warrant. In no event will we be required to make any cash payments
or net cash settlement to the registered holder in lieu of issuing shares of our Common Stock underlying the warrants.
Exercise
Price
. The initial exercise price per-whole share of our Common Stock purchasable upon exercise of the warrants is $3.443,
or 110% of the effective offering price. The exercise price is subject to appropriate adjustment in the event of certain
stock dividends and distributions, stock splits stock combinations, reclassifications, or similar events affecting our Common
Stock and also upon any distribution of assets, including cash, stock, or other property to our stockholders.
Certain
Adjustments
. The exercise price and the number of shares of Common Stock purchasable upon the exercise of the warrants are
subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, combinations, and reclassifications
of our Common Stock.
Transferability.
Subject to applicable laws, the warrants may be transferred at the option of the holders upon surrender of the warrants together
with the appropriate instruments of transfer.
Exchange
Listing
. The warrants have been approved for listing on Nasdaq under the symbol “VERBW.” Trading commenced at
the open of the market on April 5, 2019. We cannot provide assurances that a trading market for the warrants will develop or be
maintained.
Warrant
Agent
. The warrants will be issued in registered form pursuant to that certain Warrant Agent Agreement dated April 4, 2019,
by and between VStock Transfer, LLC, as warrant agent and us (the “Warrant Agent Agreement”). The warrants will initially
be issued and maintained in the form of a security held in book-entry form and The Depository Trust Company or its nominee will
be the sole registered holder of the Warrants, subject to a holder’s right to receive a warrant in certificated form pursuant
to the terms of the Warrant Agent Agreement.
Fundamental
Transaction
. If, at any time while the warrants are outstanding, (1) we consolidate or merge with or into another corporation
and we are not the surviving corporation, (2) we sell, lease, license, assign, transfer, convey, or otherwise dispose of all or
substantially all of our assets, (3) any purchase offer, tender offer, or exchange offer (whether by us or another individual
or entity) is completed pursuant to which holders of shares of our Common Stock are permitted to sell, tender, or exchange their
shares of our Common Stock for our other securities, cash, or property and has been accepted by the holders of 50% or more of
the outstanding shares of our Common Stock, (4) we effect any reclassification or recapitalization of shares of our Common Stock
or any compulsory share exchange pursuant to which the shares of our Common Stock are converted into or exchanged for other securities,
cash, or property, or (5) we consummate a stock or share purchase agreement or other business combination with another person
or entity whereby such other person or entity acquires more than 50% of the outstanding shares of our Common Stock, each, a “Fundamental
Transaction,” then upon any subsequent exercise of the warrants, the holders thereof will have the right to receive the
same amount and kind of securities, cash, or property as it would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been immediately prior to such Fundamental Transaction, the holder of the number of warrant shares then
issuable upon exercise of the warrant, and any additional consideration payable as part of the Fundamental Transaction.
Rights
as a Stockholder
. Except as otherwise provided in the warrants or by virtue of such holder’s ownership of shares of
our Common Stock, the holder of the warrant does not have the rights or privileges of a holder of our Common Stock, including
any voting rights, until the holder exercises the warrant.
Outstanding
Warrants
As
of April 4, 2019, we had 753,446 shares of our Common Stock underlying outstanding warrants, having a weighted-average
exercise price of approximately $4.22 per share.
Anti-Takeover
Effects of Nevada Law and Our Articles of Incorporation and Bylaws
Some
provisions of Nevada law, our Articles of Incorporation, and our Bylaws contain provisions that could make the following transactions
more difficult: an acquisition of us by means of a tender offer; an acquisition of us by means of a proxy contest or otherwise;
or the removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish
or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including
transactions that provide for payment of a premium over the market price for our shares.
These
provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe
that the benefits of the increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these
proposals could result in an improvement of their terms.
Undesignated
Preferred Stock.
The ability of our board of directors, without action by the stockholders, to issue up to 15,000,000 shares
of preferred stock, which was previously authorized but remain undesignated, with voting or other rights or preferences as designated
by our board of directors could impede the success of any attempt to change control of us. These and other provisions may have
the effect of deferring hostile takeovers or delaying changes in control or management of us.
Stockholder
Meetings.
Our Bylaws provide that a special meeting of stockholders may be called only by our president, by all of the directors
provided that there are no more than three directors, or if more than three, by any three directors, or by the holder of a majority
of our capital stock.
Stockholder
Action by Written Consent.
Our Bylaws allow for any action that may be taken at any annual or special meeting of the stockholders
to be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed
by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Stockholders
Not Entitled to Cumulative Voting.
Our Bylaws do not permit stockholders to cumulate their votes in the election of directors.
Accordingly, the holders of a majority of the outstanding shares of our Common Stock entitled to vote in any election of directors
can elect all of the directors standing for election, if they choose, other than any directors that holders of our preferred stock
may be entitled to elect.
Nevada
Business Combination Statutes
. The “business combination” provisions of Sections 78.411 to 78.444, inclusive,
of the Nevada Revised Statutes, or NRS, generally prohibit a Nevada corporation with at least 200 stockholders from engaging in
various “combination” transactions with any interested stockholder for a period of two years after the date of the
transaction in which the person became an interested stockholder, unless the transaction is approved by the board of directors
prior to the date the interested stockholder obtained such status or the combination is approved by the board of directors and
thereafter is approved at a meeting of the stockholders by the affirmative vote of stockholders representing at least 60% of the
outstanding voting power held by disinterested stockholders, and extends beyond the expiration of the two-year period, unless:
|
●
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the
combination was approved by the board of directors prior to the person becoming an interested stockholder or the transaction
by which the person first became an interested stockholder was approved by the board of directors before the person became
an interested stockholder or the combination is later approved by a majority of the voting power held by disinterested stockholders;
or
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|
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|
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●
|
if
the consideration to be paid by the interested stockholder is at least equal to the highest of: (a) the highest price per
share paid by the interested stockholder within the two years immediately preceding the date of the announcement of the combination
or in the transaction in which it became an interested stockholder, whichever is higher, (b) the market value per share of
common stock on the date of announcement of the combination and the date the interested stockholder acquired the shares, whichever
is higher, or (c) for holders of preferred stock, the highest liquidation value of the preferred stock, if it is higher.
|
A
“combination” is generally defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge,
transfer, or other disposition, in one transaction or a series of transactions, with an “interested stockholder” having:
(a) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (b) an aggregate
market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, (c) 10% or more of
the earning power or net income of the corporation, and (d) certain other transactions with an interested stockholder or an affiliate
or associate of an interested stockholder.
In
general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within two
years, did own) 10% or more of a corporation’s voting stock. The statute could prohibit or delay mergers or other takeover
or change in control attempts and, accordingly, may discourage attempts to acquire us even though such a transaction may offer
our stockholders the opportunity to sell their stock at a price above the prevailing market price.
Nevada
Control Share Acquisition Statutes
. The “control share” provisions of Sections 78.378 to 78.3793, inclusive, of
the NRS apply to “issuing corporations” that are Nevada corporations with at least 200 stockholders, including at
least 100 stockholders of record who are Nevada residents, and that conduct business directly or indirectly in Nevada. The control
share statute prohibits an acquirer, under certain circumstances, from voting its shares of a target corporation’s stock
after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s
disinterested stockholders. The statute specifies three thresholds: one-fifth or more but less than one-third, one-third but less
than a majority, and a majority or more, of the outstanding voting power. Generally, once an acquirer crosses one of the above
thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become “control shares” and
such control shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also
provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all
voting power, all other stockholders who do not vote in favor of authorizing voting rights to the control shares are entitled
to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters’
rights.
A
corporation may elect to not be governed by, or “opt out” of, the control share provisions by making an election in
its articles of incorporation or bylaws, provided that the opt-out election must be in place on the 10th day following the date
an acquiring person has acquired a controlling interest, that is, crossing any of the three thresholds described above. We have
not opted out of the control share statutes, and will be subject to these statutes if we are an “issuing corporation”
as defined in such statutes.
The
effect of the Nevada control share statutes is that the acquiring person, and those acting in association with the acquiring person,
will obtain only such voting rights in the control shares as are conferred by a resolution of the stockholders at an annual or
special meeting. The Nevada control share law, if applicable, could have the effect of discouraging takeovers of us.
Amendment
of Charter Provisions.
The amendment of any of the above provisions would require approval by holders of at least a majority
of the total voting power of all of our outstanding voting stock.
The
provisions of Nevada law, our Articles of Incorporation, and our Bylaws could have the effect of discouraging others from attempting
hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our Common Stock
that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes
in the composition of our board and management. It is possible that these provisions could make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their best interests.
Transfer
Agent and Register
Our
transfer agent and registrar for our Common Stock is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, New York 11598. Its telephone
number is 855-9VSTOCK.
MATERIAL
U.S. FEDERAL INCOME AND
ESTATE
TAX CONSEQUENCES TO NON-U.S. HOLDERS
The
following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of our Common Stock
to Non-U.S. Holders (defined below), but does not purport to be a complete analysis of all the potential tax considerations relating
thereto. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations
promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed
or subject to differing interpretations, possibly with retroactive effect, so as to result in United States federal income tax
consequences different from those set forth below. We have not sought and will not seek any ruling from the Internal Revenue Service,
or the IRS, with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance
that the IRS or a court will agree with such statements and conclusions.
This
summary also does not address the tax considerations arising under the laws of any United States state or local or any non-United
States jurisdiction, the 3.8% Medicare tax on net investment income, or any alternative minimum tax consequences. In addition,
this discussion does not address tax considerations applicable to a Non-U.S. Holder’s particular circumstances or to a Non-U.S.
Holder that may be subject to special tax rules, including, without limitation:
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banks,
insurance companies or other financial institutions;
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tax-exempt
or government organizations;
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brokers
of or dealers in securities or currencies;
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traders
in securities that elect to use a mark-to-market method of accounting for their securities holdings;
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persons
that own, or are deemed to own, more than five percent of our capital stock;
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certain
United States expatriates, citizens or former long-term residents of the United States;
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persons
who hold our Common Stock as a position in a hedging transaction, “straddle,” “conversion transaction,”
synthetic security, other integrated investment, or other risk reduction transaction;
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persons
who do not hold our Common Stock as a capital asset within the meaning of Section 1221 of the Code (generally, for investment
purposes);
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persons
deemed to sell our Common Stock under the constructive sale provisions of the Code;
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real
estate investment trusts or regulated investment companies;
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pension
plans;
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partnerships,
or other entities or arrangements treated as partnerships for United States federal income tax purposes, or investors in any
such entities;
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persons
for whom our stock constitutes “qualified small business stock” within the meaning of Section 1202 of the Code;
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integral
parts or controlled entities of foreign sovereigns;
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tax-qualified
retirement plans;
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controlled
foreign corporations;
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passive
foreign investment companies and corporations that accumulate earnings to avoid United States federal income tax; or
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persons
that acquire our Common Stock as compensation for services.
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In
addition, if a partnership, including any entity or arrangement classified as a partnership for United States federal income tax
purposes, holds our Common Stock, the tax treatment of a partner generally will depend on the status of the partner, the activities
of the partnership, and certain determinations made at the partner level. Accordingly, partnerships that hold our Common Stock,
and partners in such partnerships, should consult their tax advisors regarding the United States federal income tax consequences
to them of the purchase, ownership, and disposition of our Common Stock.
You
are urged to consult your tax advisor with respect to the application of the United States federal income tax laws to your particular
situation, as well as any tax consequences of the purchase, ownership, and disposition of our Common Stock arising under the U.S.
federal estate or gift tax rules or under the laws of any United States state or local or any non-United States or other taxing
jurisdiction or under any applicable tax treaty.
Definition
of a Non-U.S. holder
For
purposes of this summary, a “Non-U.S. Holder” is any beneficial owner of our Common Stock that is not a “U.S.
person,” and is not a partnership, or an entity disregarded from its owner, each for U.S. federal income tax purposes. A
U.S. person is any person that, for United States federal income tax purposes, is or is treated as any of the following:
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an
individual who is a citizen or resident of the United States;
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a
corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the
laws of the United States, any state thereof, or the District of Columbia;
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an
estate, the income of which is subject to United States federal income tax regardless of its source; or
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a
trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons (within the
meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a U.S. person for U.S.
federal income tax purposes.
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Distributions
As
discussed in the section entitled “Market Price and Dividend Information” beginning on page 19 of this prospectus,
we do not anticipate paying any dividends on our capital stock in the foreseeable future. If we make distributions on our Common
Stock, those payments will constitute dividends for United States income tax purposes to the extent we have current or accumulated
earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our
current and our accumulated earnings and profits, they will constitute a return of capital and will first reduce a Non-U.S. Holder’s
basis in our Common Stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below
under the “Gain on Sale or Other Disposition of Common Stock” section. Any such distributions would be subject to
the discussions below regarding back-up withholding and Foreign Account Tax Compliance Act, or FATCA.
Subject
to the discussion below on effectively connected income, any dividend paid to a Non-U.S. Holder generally will be subject to U.S.
withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable
income tax treaty. To receive a reduced treaty rate, a Non-U.S. Holder must provide us or our agent with an IRS Form W-8BEN (generally
including a United States taxpayer identification number), IRS Form W-8-BEN-E or another appropriate version of IRS Form W-8 (or
a successor form), which must be updated periodically, and which, in each case, must certify qualification for the reduced rate.
Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.
Dividends
paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a United States trade or
business within the United States and that are not eligible for relief from United States (net basis) income tax under the business
profits article of an applicable income tax treaty, generally are exempt from the (gross basis) withholding tax described above.
To obtain this exemption from withholding tax, the Non-U.S. Holder must provide the applicable withholding agent with an IRS Form
W-8ECI or successor form or other applicable IRS Form W-8 certifying that the dividends are effectively connected with the Non-U.S.
Holder’s conduct of a trade or business within the United States. Such effectively connected dividends, if not eligible
for relief under the business profits article of a tax treaty, would not be subject to a withholding tax, but would be taxed at
the same graduated rates applicable to U.S. persons, net of certain deductions and credits and if, in addition, the Non-U.S. Holder
is a corporation, may also be subject to a branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable
income tax treaty).
If
you are eligible for a reduced rate of withholding tax pursuant to a tax treaty, you may be able to obtain a refund of any excess
amounts currently withheld if you timely file an appropriate claim for refund with the IRS.
Gain
on Sale or Other Disposition of Our Common Stock
Subject
to the discussion below regarding backup withholding and FATCA, a Non-U.S. Holder generally will not be required to pay United
States federal income tax on any gain realized upon the sale or other disposition of our Common Stock unless:
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the
gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States and
not eligible for relief under the business profits article of an applicable income tax treaty, in which case the Non-U.S.
Holder will be required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates,
and for a Non-U.S. Holder that is a corporation, such Non-U.S. Holder may be subject to the branch profits tax at a 30% rate
(or such lower rate as may be specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted
for certain items;
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the
Non-U.S. Holder is an individual who is present in the United States for a period or periods aggregating 183 days or more
during the calendar year in which the sale or disposition occurs and certain other conditions are met, in which case the Non-U.S.
Holder will be required to pay a flat 30% tax on the gain derived from the sale, which tax may be offset by U.S. source capital
losses (even though the Non-U.S. Holder is not considered a resident of the United States) (subject to applicable income tax
or other treaties); or
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our
Common Stock constitutes a U.S. real property interest by reason of our status as a “U.S. real property holding corporation”
for U.S. federal income tax purposes, or a USRPHC, at any time within the shorter of the five-year period preceding the disposition
or the Non-U.S. Holder’s holding period for our Common Stock. We believe we are not currently and do not anticipate
becoming a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our United
States real property interests relative to the fair market value of our other business assets, there can be no assurance that
we will not become a USRPHC in the future. Even if we become a USRPHC, however, gain arising from the sale or other taxable
disposition by a Non-U.S. Holder of our Common Stock will not be subject to United States federal income tax as long as our
Common Stock is regularly traded on an established securities market and such Non-U.S. Holder does not, actually or constructively,
hold more than five percent of our Common Stock at any time during the applicable period that is specified in the Code. If
the foregoing exception does not apply, then if we are or were to become a USRPHC a purchaser may be required to withhold
15% of the proceeds payable to a Non-U.S. Holder from a sale of our Common Stock and such Non-U.S. Holder generally will be
taxed on its net gain derived from the disposition at the graduated United States federal income tax rates applicable to U.S.
persons (as defined in the Code).
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Backup
Withholding and Information Reporting
Generally,
we must file information returns annually to the IRS in connection with any dividends on our Common Stock paid to a Non-U.S. Holder,
regardless of whether any tax was actually withheld. A similar report will be sent to the Non-U.S. Holder. Pursuant to applicable
income tax treaties or other agreements, the IRS may make these reports available to tax authorities in the Non-U.S. Holder’s
country of residence.
Payments
of dividends or of proceeds on the disposition of stock made to a Non-U.S. Holder may be subject to additional information reporting
and backup withholding at a current rate of 24% unless such Non-U.S. Holder establishes an exemption, for example by properly
certifying its non-U.S. status on an IRS Form W-8BEN, IRS Form W-8BEN-E, IRS Form W-8ECI, or another appropriate version of IRS
Form W-8 (or a successor form). Notwithstanding the foregoing, backup withholding and information reporting may apply if either
we or our paying agent has actual knowledge, or reason to know, that a holder is a U.S. person.
Backup
withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced
by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained
from the IRS, provided that the required information is furnished to the IRS in a timely manner.
Foreign
Account Tax Compliance Act
FATCA
imposes withholding tax on certain types of payments made to foreign financial institutions and certain other non-United States
entities. The legislation imposes a 30% withholding tax on dividends on, or, on or after January 1, 2019, gross proceeds from
the sale or other disposition of, our Common Stock paid to a “foreign financial institution” or to certain “non-financial
foreign entities” (each as defined in the Code), unless (i) the foreign financial institution undertakes certain diligence
and reporting obligations, (ii) the non-financial foreign entity either certifies it does not have any “substantial United
States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner,
or (iii) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules.
If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (i) above, it must
enter into an agreement with the U.S. Treasury requiring, among other things, that it undertake to identify accounts held by “specified
United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report
certain information about such accounts, and withhold 30% on payments to account holders whose actions prevent it from complying
with these reporting and other requirements. If the country in which a payee is resident has entered into an “intergovernmental
agreement” with the United States regarding FATCA, that agreement may permit the payee to report to that country rather
than to the U.S. Department of the Treasury. Prospective investors should consult their own tax advisors regarding the possible
impact of these rules on their investment in our Common Stock, and the possible impact of these rules on the entities through
which they hold our Common Stock, including, without limitation, the process and deadlines for meeting the applicable requirements
to prevent the imposition of this 30% withholding tax under FATCA.
Federal
Estate Tax
Common
Stock owned (or treated as owned) by an individual who is not a citizen or a resident of the United States (as defined for United
States federal estate tax purposes) at the time of death will be included in the individual’s gross estate for United States
federal estate tax purposes unless an applicable estate or other tax treaty provides otherwise, and therefore may be subject to
United States federal estate tax.
The
preceding discussion of United States federal tax considerations is for general information only. It is not tax advice. Each prospective
investor should consult its tax advisor regarding the particular United States federal, state, and local and non-United States
tax consequences of purchasing, holding, and disposing of our Common Stock, including the consequences of any proposed change
in applicable laws.
SHARES
AVAILABLE FOR FUTURE SALES
Future
sales of our Common Stock in the public market, or the availability of such shares for sale in the public market, could adversely
affect market prices prevailing from time to time. As described below, the sale of a portion of our shares will be limited after
this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our Common Stock in the public market
after such restrictions, lapse, or the perception that those sales may occur, could adversely affect the prevailing market price
at such time and our ability to raise equity capital in the future.
Based
on the number of shares of our Common Stock outstanding as of April 4, 2019, upon the completion of this offering, 18,788,017
shares of our Common Stock will be outstanding, assuming 6,389,776 Units are issued in this offering and assuming no
exercise of the Underwriter’s over-allotment option, or 19,746,483 shares of our Common Stock will be outstanding,
assuming 7,348,242 Units are issued in this offering and the Underwriter’s over-allotment option is exercised in
full.
Except
for shares subject to lock-up agreement, substantially all of our outstanding shares will be freely tradable except that any shares
held by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in compliance with the
limitations described below.
Rule
144
In
general, under Rule 144 of the Securities Act, as in effect on the date of this prospectus, any person who is not our affiliate
at any time during the preceding three months, and who has beneficially owned the relevant shares of our Common Stock for at least
six months, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimited
number of shares of our Common Stock into the public markets provided current public information about us is available, and, after
owning such shares for at least one year, including the holding period of any prior owner other than one of our affiliates, would
be entitled to sell an unlimited number of shares of our Common Stock into the public markets without restriction.
A
person who is our affiliate or who was our affiliate at any time during the preceding three months, and who has beneficially owned
restricted securities for at least six months, including the affiliates, is entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
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1%
of the number of shares of our Common Stock then outstanding, which will equal approximately
187,880 shares, or approximately 197,464 shares if the Underwriter exercise
its over-allotment option in full, immediately following this offering, based on the
number of shares of our Common Stock outstanding as of
April
4,
2019; or
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the
average weekly trading volume of our Common Stock during the four calendar weeks preceding the filing of a Form 144 notice
by such person with respect to such sale, if our class of Common Stock is listed on Nasdaq, the New York Stock Exchange, or
the NYSE American.
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Sales
under Rule 144 by our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability
of current public information about us.
Lock-up
Agreements
See
the section entitled “Underwriting” below for a detailed discussion.
UNDERWRITING
The
Underwriter and we intend to enter into an underwriting agreement, pursuant to which we will agree to sell to the Underwriter,
and the Underwriter will agree to purchase from us, as the number of Units indicated in the following table.
Underwriter
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Number
of
Units
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A.G.P./Alliance
Global Partners
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6,389,776
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Total
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6,389,776
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The
underwriting agreement will provide that the obligation of the Underwriter to purchase the Units included in this offering are
subject to approval of legal matters by counsel and to other conditions. The Underwriter will be obligated to purchase all of
the Units (other than those covered by the Underwriter’s over-allotment option to purchase additional Units described below)
if it purchases any of such Units.
Our
Units sold by the Underwriter to the public will initially be offered at the public offering price set forth on the front cover
of this prospectus. Any Units sold by the Underwriter to securities dealers may be sold at a discount from the public offering
price not to exceed $0.21
91
per Unit. If all our Units are not sold at the public
offering price, the Underwriter may change such price and the other selling terms in agreement with the Company.
Underwriting
Discounts and Commissions
The
following table shows the underwriting discounts and commissions that we are to pay to the Underwriter in connection with this
offering, as well as the proceeds to us, before expenses. These amounts are shown assuming both no exercise and full exercise
of the Underwriter’s over-allotment option to purchase additional Units.
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Paid
by the Company
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No
Exercise of Over- allotment option
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Full
Exercise of Over- allotment option
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Per
Unit
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Total
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Per
Unit
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Total
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Public Offering Price
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$
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3.13
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$
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20,000,000
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$
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3.13
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$
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23,000,000
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Underwriting discounts
and commissions paid
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$
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0.2191
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$
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1,400,000
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$
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0.2191
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1,610,000
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Proceeds to us, before
expenses
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$
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2.9109
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$
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18,600,000
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$
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2.9109
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$
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21,390,000
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We
estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately
$698,000.
Over-Allotment
Option to Purchase Additional Units
If
the Underwriter sells more Units than the total number set forth in the table above, we have granted to the Underwriter an over-allotment
option, exercisable for 45 days after the closing of the offering, to purchase up to 958,466 additional Units at the public
offering price less the underwriting discount. To the extent such option is exercised, the Underwriter must purchase the full
amount of the Units subject to the over-allotment option. Any Units issued or sold under such option will be issued and sold on
the same terms and conditions as the other Units that are the subject of this offering.
Underwriter
Warrants
We
have also agreed to issue to the Underwriter or its designees, at the closing of this offering, warrants to purchase that number
of shares of our Common Stock equal to five percent (5%) of the aggregate number of shares of our Common Stock issued in connection
with the Units sold in this offering. The Underwriter’s warrants will be exercisable at any time, and from time to time,
in whole or in part, during the four-year period commencing one year from the effective date of this offering. The Underwriter’s
warrants will be exercisable at a price equal to $3.9125, or 125% of the public offering price of the Units in this
offering. The Underwriter’s warrants and the shares of our Common Stock underlying the warrants have been deemed compensation
by FINRA and are, therefore, subject to a 360-day lock-up pursuant to FINRA Rule 5110(g)(1). The Underwriter (or its permitted
assignees under Rule 5110(g)(1)) shall not sell, transfer, assign, pledge, or hypothecate the Underwriter’s warrants or
the shares of our Common Stock underlying the warrants, nor engage in any hedging, short sale, derivative, put, or call transaction
that would result in the effective economic disposition of the Underwriter’s warrants or the shares of our Common Stock
underlying the warrants, for a period of 360 days from the effective date of the registration statement relating to this offering.
In addition, the Underwriter’s warrants provide for registration rights upon request, in certain cases. The demand registration
right provided will expire five (5) years from the effective date of the registration statement relating to this offering in compliance
with FINRA Rule 5110(f)(2)(G)(iv). The piggyback registration right provided will expire seven years (7) from the effective date
of the registration statement relating to this offering in compliance with FINRA Rule 5110(f)(2)(G)(v). We will bear all fees
and expenses attendant to registering the shares of our Common Stock issuable upon exercise of the Underwriter’s warrants.
The exercise price and number of shares issuable upon exercise of the Underwriter’s warrants may be proportionately adjusted
in the event of a stock split, stock dividend, recapitalization, reorganization, or similar event involving the company in compliance
with FINRA Rule 5110(f)(2)(G)(vi).
Advisory
Fee Warrant
In
connection with the Merger, AGP and we entered into an Amended and Restated M&A Advisory Agreement, dated April 4,
2019, deemed effective June 27, 2018 (the “Advisory Agreement”). The Advisory Agreement provides that we will issue
to AGP a common stock purchase warrant (the “Advisory Fee Warrant”) at the closing of the Merger. Upon such closing,
AGP will receive the Advisory Fee Warrant to purchase that number of shares of our Common Stock equal to 2.5% of the Units sold
in this offering. The Advisory Warrant will be exercisable at a price equal to $3.756, or 120% of the per-Unit public offering
price in this offering. The Advisory Fee Warrant and the shares of our Common Stock underlying the warrant have been deemed compensation
by FINRA and are, therefore, subject to a 360-day lock-up pursuant to FINRA Rule 5110(g)(1). AGP (or its permitted assignees under
Rule 5110(g)(1)) shall not sell, transfer, assign, pledge, or hypothecate the Advisory Fee Warrant or the shares of our Common
Stock underlying the warrant, nor engage in any hedging, short sale, derivative, put, or call transaction that would result in
the effective economic disposition of the Advisory Fee Warrant or the shares of our Common Stock underlying the warrant, for a
period of 360 days from the effective date of the registration statement related to this offering. In addition, the Advisory Fee
Warrant provides for registration rights upon AGP’s request, in certain cases. The piggyback registration right provided
will expire seven (7) years from the effective date of the registration statement relating to this offering in compliance with
FINRA Rule 5110(f)(2)(G)(v). We will bear all fees and expenses attendant to registering the shares of our Common Stock issuable
upon exercise of the Advisory Fee Warrant. The exercise price and the number of shares of our Common Stock issuable upon exercise
of the Advisory Fee Warrant may be proportionately adjusted in the event of a stock split, stock dividend, recapitalization, reorganization,
or similar event involving us in compliance with FINRA Rule 5110(f)(2)(G)(vi).
Indemnification
Pursuant
to the underwriting agreement, we will agree to indemnify the Underwriter against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriter or such other indemnified parties may be required to make because
of any of those liabilities.
Lock-Ups
We,
our officers and directors, and certain of our other stockholders intend to agree that, for a period of three months from the
date of this prospectus, we and they will not, subject to limited exceptions, without the prior written consent of the representative,
dispose of or hedge any shares or any securities convertible into or exchangeable for our Common Stock.
Expenses
and Reimbursements
We
have agreed to pay on the closing date of this offering and any closing date with respect to the exercise of the over-allotment
option, if any, to the extent not paid at the initial closing date of this offering, all expenses incident to the performance
of our obligations under the Underwriting Agreement, including but not limited to (a) all filing fees and communication expenses
relating to the registration of the Units to be sold in this offering with the SEC; (b) all Public Filing System filing fees associated
with the review of this offering by FINRA; (c) all fees and expenses relating to the listing of such shares of our Common Stock
and the Warrants comprising the Units on Nasdaq and on such other stock exchanges as the Underwriter and we together determine;
(d) all fees, expenses, and disbursements relating to the registration or qualification of the Units offered under the “blue
sky” securities laws of such states and other jurisdictions as the Underwriter may reasonably designate (including, without
limitation, all filing and registration fees, and the reasonable fees of “blue sky” counsel); (e) all fees, expenses,
and disbursements relating to the registration, qualification, or exemption of the Units under the securities laws of such foreign
jurisdictions as the Underwriter may reasonably designate; (f) the costs of all mailing and printing of the underwriting documents
(including, without limitation, the Underwriting Agreement, any Blue Sky Surveys, and, if appropriate, any Agreement Among Underwriters,
Selected Dealers’ Agreement, Underwriters’ Questionnaire, and Power of Attorney), registration statements, prospectuses,
and all amendments, supplements, and exhibits thereto and as many preliminary and final prospectuses as the Underwriter may reasonably
deem necessary; (g) the costs and expenses of a public relations firm; (h) the costs of preparing, printing, and delivering
certificates representing the Units to be offered in this offering; (i) fees and expenses of our transfer agent for the Units;
(j) stock transfer and/or stamp taxes, if any, payable upon the transfer of the Units from us to the Underwriter; (k) the costs
associated with the post-closing advertising of this offering in the national editions of the Wall Street Journal and New York
Times; (l) to the extent approved by us in writing (with such approval not to be unreasonable withheld) the costs associated with
bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones (up to $3,000 for tombstones),
each of which we or our designee shall provide within a reasonable time after the closing date in such quantities as the Underwriter
may reasonably request; (m) the fees and expenses of our independent registered public accounting firm; (n) the fees and expenses
of our legal counsel and other agents and representatives; (o) the fees and expenses of the Underwriter’s legal counsel,
not to exceed $85,000; (p) the $25,000 cost associated with the use of Ipreo’s book-building, prospectus tracking, and compliance
software for this offering; (q) up to $5,000 for background check(s); (r) up to $3,000 for tombstones; and (s) up to $7,000 of
the Underwriter’s actual accountable “road show” expenses for this offering. The Underwriter may deduct from
the net proceeds of the offering payable to us on the closing date of this offering and any closing date with respect to the exercise
of the over-allotment option, if any, the expenses set forth herein to be paid by us to the Underwriter;
provided
,
however
,
that, in the event that this offering is terminated, we agree to reimburse the Underwriter pursuant to Section 8.3 of the Underwriting
Agreement. Notwithstanding the foregoing, our obligations to reimburse the Underwriter for any out-of-pocket expenses will not
exceed $125,000 in the aggregate.
Right
of First Refusal
Provided
that the Units are sold in accordance with the terms of the Underwriting Agreement, the Underwriter shall have an irrevocable
right of first refusal (the “Right of First Refusal”), for a period of twelve (12) months after the date that this
offering is completed, to act as joint and exclusive investment bankers, sole and joint book-runners, sole and joint underwriters,
and/or sole and joint placement agents, at the Underwriter’s sole discretion, for each and every future public and private
equity and debt offering, including all equity-linked financings (each, a “Subject Transaction”), during such twelve
(12)-month period, of the Company, or any successor to or subsidiary of the Company, on terms and conditions customary to the
Underwriter for such Subject Transactions. For the avoidance of any doubt, we cannot not retain, engage, or solicit any additional
investment banker, book-runner, underwriter, and/or placement agent in a Subject Transaction without the express written consent
of the Underwriter.
Electronic
Distribution
This
prospectus may be made available in electronic format on websites or through other online services maintained by the Underwriter
or by their affiliates. In those cases, prospective investors may view offering terms online and prospective investors may be
allowed to place orders online. Other than this prospectus in electronic format, the information on the Underwriter’s website
or our website and any information contained in any other websites maintained by the Underwriter or by us is not part of this
prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or
the Underwriter in its capacity as underwriter, and should not be relied upon by investors.
Price
Stabilization, Short Positions, and Penalty Bids
In
connection with the offering, the Underwriter may purchase and sell our securities in the open market. Purchases and sales in
the open market may include short sales, purchases to cover short positions, which may include purchases pursuant to the Underwriter’s
over-allotment option to purchase additional securities, and stabilizing purchases.
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Short
sales involve secondary market sales by the Underwriter of a greater number of our securities
than it is required to purchase in the offering.
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“Covered”
short sales are sales of securities in an amount up to the number of securities represented
by the Underwriter’s over-allotment option to purchase additional securities.
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“Naked”
short sales are sales of our securities in an amount in excess of the number of our securities
represented by the Underwriter’s over-allotment option to purchase additional securities.
|
|
|
|
|
●
|
Covering
transactions involve purchases of our securities either pursuant to the Underwriter’s over-allotment option to purchase
additional securities or in the open market in order to cover short positions.
|
|
|
|
|
●
|
To
close a naked short position, the Underwriter must purchase our securities in the open
market. A naked short position is more likely to be created if the Underwriter is concerned
that there may be downward pressure on the price of our securities in the open market
after pricing that could adversely affect investors who purchase in the offering.
|
|
|
|
|
●
|
To
close a covered short position, the Underwriter must purchase our securities in the open
market or must exercise its over-allotment option to purchase additional securities.
In determining the source of our securities to close the covered short position, the
Underwriter will consider, among other things, the price of our securities available
for purchase in the open market as compared to the price at which it may purchase our
securities through the Underwriter’s over-allotment option to purchase additional
securities.
|
|
|
|
|
●
|
Stabilizing
transactions involve bids to purchase our securities so long as the stabilizing bids
do not exceed a specified maximum.
|
Purchases
to cover short positions and stabilizing purchases, as well as other purchases by the Underwriter for its own account, may have
the effect of preventing or retarding a decline in the market price of our securities. The Underwriter may also cause the price
of the shares of our Common Stock to be higher than the price that would otherwise exist in the open market in the absence of
these transactions. The Underwriter may conduct these transactions on Nasdaq (if our Common Stock is so listed), the OTCQB (if
our Common stock is not listed on Nasdaq), or otherwise. If the Underwriter commences any of these transactions, it may discontinue
them at any time.
Other
Relationships
The
Underwriter is a full-service financial institution engaged in various activities, which may include securities trading, investment
banking, financial advisory, investment management, principal investment, hedging, financing, and brokerage activities. In the
ordinary course of its various business activities, the Underwriter and its affiliates may make or hold a broad array of investments
and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include
bank loans and/or credit default swaps) for its own account and for the accounts of its customers and may at any time hold long
and short positions in such securities and instruments. Such investments and securities activities may involve securities and/or
instruments of ours or our affiliates. The Underwriter and its affiliates may also make investment recommendations and/or publish
or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients
that it acquires, long and/or short positions in such securities and instruments.
Passive
Market Making
In
connection with this offering, the Underwriter may also engage in passive market making transactions in the shares. Passive market
making consists of displaying bids limited by the prices of independent market makers and effecting purchases limited by those
prices in response to order flow. Rule 103 of Regulation M promulgated by the SEC limits the amount of net purchases that each
passive market maker may make and the displayed size of each bid. Passive market making may stabilize the market price of the
shares at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.
Sales
Outside the United States
No
action has been taken in any jurisdiction (except in the United States) that would permit a public offering of our securities,
or the possession, circulation, or distribution of this prospectus or any other material relating to us or our securities in any
jurisdiction where action for that purpose is required. Accordingly, our securities may not be offered or sold, directly or indirectly,
and neither this prospectus nor any other offering material or advertisements in connection with our securities may be distributed
or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such
country or jurisdiction.
The
Underwriter may arrange to sell our securities offered hereby in certain jurisdictions outside the United States, either directly
or through affiliates, where it is permitted to do so.
European
Economic Area
In
relation to each Member State of the European Economic Area that has implemented the Prospectus Directive (each, a “Relevant
Member State”) an offer to the public of our securities may not be made in that Relevant Member State, except that an offer
to the public in that Relevant Member State of our securities may be made at any time under the following exemptions under the
Prospectus Directive:
|
(a)
|
to
any legal entity which is a qualified investor as defined in the Prospectus Directive;
|
|
|
|
|
(b)
|
to
fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), subject to
obtaining the prior consent of the representative for any such offer; or
|
|
|
|
|
(c)
|
in
any other circumstances falling within Article 3(2) of the Prospectus Directive,
|
provided
that no such offer of our securities shall result in a requirement for the publication by us or any underwriter of a prospectus
pursuant to Article 3 of the Prospectus Directive.
For
the purposes of this provision, the expression an “offer to the public” in relation to the shares of our securities
in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the
offer and our securities to be offered so as to enable an investor to decide to purchase our securities, as the same may be varied
in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus
Directive” means Directive 2003/71/EC (as amended), including by Directive 2010/73/EU, and includes any relevant implementing
measure in the Relevant Member State.
This
European Economic Area selling restriction is in addition to any other selling restrictions set out below.
United
Kingdom
The
Underwriter has represented and agreed that:
|
(a)
|
it
has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with
the issue or sale of the shares in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and
|
|
|
|
|
(b)
|
it
has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to
the shares in, from or otherwise involving the United Kingdom.
|
Hong
Kong
Our
securities may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute
an offer to the public within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the
Laws of Hong Kong) (“Companies (Winding Up and Miscellaneous Provisions) Ordinance”) or which do not constitute an
invitation to the public within the meaning of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (“Securities
and Futures Ordinance”), or (ii) to “professional investors” as defined in the Securities and Futures Ordinance
and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus”
as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance, and no advertisement, invitation or document
relating to our securities may be issued or may be in the possession of any person for the purpose of issue (in each case whether
in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in
Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to our securities that
are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” in Hong
Kong as defined in the Securities and Futures Ordinance and any rules made thereunder.
Singapore
This
prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and
any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of our securities
may not be circulated or distributed, nor may our securities be offered or sold, or be made the subject of an invitation for subscription
or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor (as defined under
Section 4A of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA) under Section 274 of the SFA, (ii) to a relevant
person (as defined in Section 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A)
of the SFA, and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance
with the conditions of, any other applicable provision of the SFA, in each case subject to conditions set forth in the SFA.
Where
our securities are subscribed or purchased under Section 275 of the SFA by a relevant person which is a corporation (which is
not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire
share capital of which is owned by one or more individuals, each of whom is an accredited investor, the securities (as defined
in Section 239(1) of the SFA) of that corporation shall not be transferable for 6 months after that corporation has acquired the
shares under Section 275 of the SFA except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person
(as defined in Section 275(2) of the SFA), (2) where such transfer arises from an offer in that corporation’s securities
pursuant to Section 275(1A) of the SFA, (3) where no consideration is or will be given for the transfer, (4) where the transfer
is by operation of law, (5) as specified in Section 276(7) of the SFA, or (6) as specified in Regulation 32 of the Securities
and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore (“Regulation 32”).
Where
our securities are subscribed or purchased under Section 275 of the SFA by a relevant person which is a trust (where the trustee
is not an accredited investor (as defined in Section 4A of the SFA)) whose sole purpose is to hold investments and each beneficiary
of the trust is an accredited investor, the beneficiaries’ rights and interest (howsoever described) in that trust shall
not be transferable for 6 months after that trust has acquired the shares under Section 275 of the SFA except: (1) to an institutional
investor under Section 274 of the SFA or to a relevant person (as defined in Section 275(2) of the SFA), (2) where such transfer
arises from an offer that is made on terms that such rights or interest are acquired at a consideration of not less than $200,000
(or its equivalent in a foreign currency) for each transaction (whether such amount is to be paid for in cash or by exchange of
securities or other assets), (3) where no consideration is or will be given for the transfer, (4) where the transfer is by operation
of law, (5) as specified in Section 276(7) of the SFA, or (6) as specified in Regulation 32.
Japan
Our
securities have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948,
as amended), or the FIEA. The securities may not be offered or sold, directly or indirectly, in Japan or to or for the benefit
of any resident of Japan (including any person resident in Japan or any corporation or other entity organized under the laws of
Japan) or to others for reoffering or resale, directly or indirectly, in Japan or to or for the benefit of any resident of Japan,
except pursuant to an exemption from the registration requirements of the FIEA and otherwise in compliance with any relevant laws
and regulations of Japan.
Canada
Our
securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors,
as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are
permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations.
Any resale of our securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus
requirements of applicable securities laws.
Securities
legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this
offering memorandum (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission
or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s
province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s
province or territory of these rights or consult with a legal advisor.
Pursuant
to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the Underwriter is not required to comply with
the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
LEGAL
MATTERS
The
legality of the securities offered hereby has been passed on for us by Baker & Hostetler LLP, Costa Mesa, California. The
Underwriter is being represented by Robinson Brog Leinwand Greene Genovese & Gluck P.C., New York, New York in connection
with this offering.
EXPERTS
Financial
statements for Verb Technology Company, Inc. as of December 31, 2018 and 2017 and for each of the two years in the period ended
December 31, 2018 included in this prospectus, which constitutes a part of the registration statement, have been so included in
reliance on the report of Weinberg & Company, P.A
.
, an independent registered public accounting firm, appearing elsewhere
herein and in the registration statement, given on the authority of said firm as an expert in auditing and accounting. Weinberg
& Company, P.A.’s report, includes an explanatory paragraph related to Verb Technology Company, Inc.’s ability
to continue as a going concern.
Financial
statements for Sound Concepts, Inc. as of December 31, 2018 and 2017 and for each of the two years in the period ended December
31, 2018 included in this prospectus, which constitutes a part of the registration statement, have been so included in reliance
on the report of Weinberg & Company, P.A., an independent registered public accounting firm, appearing elsewhere herein and
in the registration statement, given on the authority of said firm as an expert in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We
file quarterly and current reports, proxy statements, and other information with the SEC. The SEC maintains a website that contains
these reports, proxy and information statements, and other information we file electronically with the SEC. Our filings are available
free of charge at the SEC’s website at www.sec.gov.
You
can obtain copies of any of the documents incorporated by reference in this prospectus from us, or as described above, through
the SEC’s website. Documents incorporated by reference are available from us, without charge, excluding all exhibits unless
specifically incorporated by reference in the documents. You may obtain documents incorporated by reference in this prospectus
by writing to us at the following address 344 South Hauser Boulevard, Suite 414, Los Angeles, California 90036, Attention: Investor
Relations, by emailing us at info@myverb.com, or by calling us at 855.250.2300. We also maintain a website, https://myverb.com/investor-relations-sec-filings/
through which you can obtain copies of the documents that we have filed with the SEC. We use our website as a channel of distribution
for material company information. Important information, including financial information, analyst presentations, financial news
releases, and other material information about us is routinely posted on and accessible at https://www.myverb.com/. The information
set forth on, or accessible from, our website is not part of this prospectus.
INDEX
TO FINANCIAL STATEMENTS
Consolidated
Financial Statements of Verb Technology Company, Inc.:
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2018 and 2017
|
F-3
|
Consolidated
Statements of Operations for the years ended December 31, 2018 and 2017
|
F-4
|
Consolidated
Statements of Stockholders’ Deficit for the years ended December 31, 2018 and 2017
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2018 and 2017
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
|
Financial
Statements of Sound Concepts, Inc.:
|
|
Report
of Independent Registered Public Accounting Firm
|
F-29
|
Consolidated
Balance Sheets as of December 31, 2018 and 2017
|
F-30
|
Consolidated
Statements of Operations for the years ended December 31, 2018 and 2017
|
F-31
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the year ended December 31, 2018 and 2017
|
F-32
|
Consolidated
Statements of Cash Flows for the year ended December 31, 2018 and 2017
|
F-33
|
Notes
to Consolidated Financial Statements
|
F-34
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and the Board of Directors
Verb
Technology Company, (formerly known as nFüsz, Inc.)
Los
Angeles, California
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Verb Technology Company, Inc. (formerly known as nFüsz, Inc.)
(the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in stockholders’
deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1, the Company has incurred recurring operating losses and used cash in operations since inception and has
a stockholders’ deficit at December 31, 2018. These matters raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial
statements. These consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We
have served as the Company’s auditor since 2017.
/s/
Weinberg & Company, P.A.
Weinberg
& Company, P.A
.
Los
Angeles, CA
February
7, 2019, except Note 15 is dated as of March 29, 2019
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
CONSOLIDATED
BALANCE SHEETS
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
634,000
|
|
|
$
|
11,000
|
|
Prepaid
expenses
|
|
|
83,000
|
|
|
|
41,000
|
|
Accounts
receivable
|
|
|
1,000
|
|
|
|
-
|
|
Total
current assets
|
|
|
718,000
|
|
|
|
52,000
|
|
Deferred
offering costs
|
|
|
162,000
|
|
|
|
-
|
|
Property
and equipment, net
|
|
|
11,000
|
|
|
|
31,000
|
|
Other
assets
|
|
|
7,000
|
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
898,000
|
|
|
$
|
92,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,148,000
|
|
|
$
|
665,000
|
|
Accrued
officers’ salary
|
|
|
188,000
|
|
|
|
607,000
|
|
Accrued
interest (including $41,000 and $99,000 payable to related parties)
|
|
|
46,000
|
|
|
|
248,000
|
|
Note
payable
|
|
|
-
|
|
|
|
125,000
|
|
Notes
payable - related parties
|
|
|
112,000
|
|
|
|
1,965,000
|
|
Convertible
notes payable, net of discount of $1,082,000 and $675,000, respectively
|
|
|
818,000
|
|
|
|
1,020,000
|
|
Derivative
liability
|
|
|
2,576,000
|
|
|
|
1,251,000
|
|
Total
current liabilities
|
|
|
4,888,000
|
|
|
|
5,881,000
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable - related parties
|
|
|
1,065,000
|
|
|
|
-
|
|
Total
long-term liabilities
|
|
|
1,065,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,953,000
|
|
|
|
5,881,000
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 15,000,000 shares authorized, none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.0001 par value, 200,000,000 shares authorized, 12,055,491 and 7,941,234 shares issued and outstanding as of December
31, 2018 and 2017
|
|
|
1,000
|
|
|
|
1,000
|
|
Additional
paid-in capital
|
|
|
35,611,000
|
|
|
|
22,750,000
|
|
Accumulated
deficit
|
|
|
(40,667,000
|
)
|
|
|
(28,540,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ deficit
|
|
|
(5,055,000
|
)
|
|
|
(5,789,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficit
|
|
$
|
898,000
|
|
|
$
|
92,000
|
|
The
accompanying notes are an integral part of these consolidated financial statements
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Year Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
32,000
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
52,000
|
|
|
|
8,000
|
|
Research
and development
|
|
|
980,000
|
|
|
|
375,000
|
|
General
and administrative
|
|
|
6,792,000
|
|
|
|
4,328,000
|
|
Total
operating expenses
|
|
|
(7,824,000
|
)
|
|
|
(4,711,000
|
)
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(7,792,000
|
)
|
|
|
(4,705,000
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Other
Income / (Expense)
|
|
|
(5,000
|
)
|
|
|
28,000
|
|
Financing
costs
|
|
|
(798,000
|
)
|
|
|
(643,000
|
)
|
Interest
expense - amortization of debt discount
|
|
|
(1,468,000
|
)
|
|
|
(418,000
|
)
|
Change
in fair value of derivative liability
|
|
|
(1,167,000
|
)
|
|
|
6,000
|
|
Debt
extinguishment, net
|
|
|
(534,000
|
)
|
|
|
(977,000
|
)
|
Interest
expense (including $211,000 and $236,000 to related parties)
|
|
|
(362,000
|
)
|
|
|
(555,000
|
)
|
Total
other expense
|
|
|
(4,334,000
|
)
|
|
|
(2,559,000
|
)
|
|
|
|
|
|
|
|
|
|
Loss
before income tax provision
|
|
$
|
(12,126,000
|
)
|
|
$
|
(7,264,000
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
1,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(12,127,000
|
)
|
|
$
|
(7,266,000
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per share - basic and diluted
|
|
$
|
(1.23
|
)
|
|
$
|
(1.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding - basic and diluted
|
|
|
9,870,890
|
|
|
|
7,076,540
|
|
The
accompanying notes are an integral part of these consolidated financial statements
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For
the Years Ended December 31, 2018 and 2017
|
|
|
|
|
Additional
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Issuable
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
|
|
6,310,771
|
|
|
$
|
1,000
|
|
|
$
|
17,825,000
|
|
|
$
|
(20,000
|
)
|
|
$
|
(21,274,000
|
)
|
|
|
(3,468,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value vested options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
445,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
445,000
|
|
Proceeds
from sale of common stock
|
|
|
745,476
|
|
|
|
-
|
|
|
|
776,000
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
796,000
|
|
Fair
value of common shares issued for services
|
|
|
552,029
|
|
|
|
-
|
|
|
|
2,088,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,088,000
|
|
Fair
value of common stock issued upon conversion Preferred Series A
|
|
|
190,800
|
|
|
|
-
|
|
|
|
303,000
|
|
|
|
-
|
|
|
|
|
|
|
|
303,000
|
|
Fair
value of common stock issued upon conversion of debt
|
|
|
68,413
|
|
|
|
-
|
|
|
|
182,000
|
|
|
|
-
|
|
|
|
|
|
|
|
182,000
|
|
Common
shares issued upon exercise of put option
|
|
|
43,745
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
|
|
|
|
50,000
|
|
Fair
value of shares of common stock issued to settle accounts payable
|
|
|
26,667
|
|
|
|
-
|
|
|
|
56,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,000
|
|
Fair
value of common shares, warrants and beneficial conversion feature of issued notes
|
|
|
3,333
|
|
|
|
-
|
|
|
|
154,000
|
|
|
|
-
|
|
|
|
|
|
|
|
154,000
|
|
Fair
value of warrants issued to extinguish debt and accounts payable
|
|
|
-
|
|
|
|
-
|
|
|
|
871,000
|
|
|
|
-
|
|
|
|
|
|
|
|
871,000
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,266,000
|
)
|
|
|
(7,266,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
|
7,941,234
|
|
|
|
1,000
|
|
|
|
22,750,000
|
|
|
|
-
|
|
|
|
(28,540,000
|
)
|
|
|
(5,789,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
issued upon exercise of warrants
|
|
|
1,074,921
|
|
|
|
-
|
|
|
|
22,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
Common shares
issued upon exercise of options
|
|
|
32,508
|
|
|
|
-
|
|
|
|
34,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,000
|
|
Proceeds
from sale of common stock
|
|
|
1,163,938
|
|
|
|
-
|
|
|
|
2,979,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,979,000
|
|
Fair
Value of warrants issued for debt extension
|
|
|
-
|
|
|
|
-
|
|
|
|
1,188,000
|
|
|
|
|
|
|
|
|
|
|
|
1,188,000
|
|
Fair
value of common shares issued for services
|
|
|
319,345
|
|
|
|
-
|
|
|
|
1,545,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,545,000
|
|
Fair
value of common stock issued upon conversion of debt
|
|
|
1,243,189
|
|
|
|
-
|
|
|
|
3,066,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,066,000
|
|
Fair
value of common stock upon issuance of convertible debt
|
|
|
96,667
|
|
|
|
-
|
|
|
|
595,000
|
|
|
|
|
|
|
|
|
|
|
|
595,000
|
|
Fair
value of common stock issued upon conversion of accrued officer’s salary
|
|
|
27,148
|
|
|
|
-
|
|
|
|
582,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
582,000
|
|
Common
shares issued upon exercise of put option
|
|
|
203,207
|
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Fair
value of vested stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,870,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,870,000
|
|
Stock
repurchase
|
|
|
(46,666
|
)
|
|
|
-
|
|
|
|
(20,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,000
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,127,000
|
)
|
|
|
(12,127,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
|
|
12,055,491
|
|
|
$
|
1,000
|
|
|
$
|
35,611,000
|
|
|
$
|
-
|
|
|
$
|
(40,667,000
|
)
|
|
$
|
(5,055,000
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Year Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,127,000
|
)
|
|
$
|
(7,266,000
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Fair
value of common shares issued for services and vested stock options
|
|
|
3,415,000
|
|
|
|
2,534,000
|
|
Financing
costs
|
|
|
798,000
|
|
|
|
643,000
|
|
Amortization
of debt discount
|
|
|
1,468,000
|
|
|
|
418,000
|
|
Change
in fair value of derivative liability
|
|
|
1,167,000
|
|
|
|
(6,000
|
)
|
Debt
extinguishment costs, net
|
|
|
534,000
|
|
|
|
977,000
|
|
Depreciation
and amortization
|
|
|
20,000
|
|
|
|
22,000
|
|
Conversion
of Series A
|
|
|
-
|
|
|
|
217,000
|
|
Effect
of changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable, accrued expenses, and accrued interest
|
|
|
609,000
|
|
|
|
799,000
|
|
Other
assets
|
|
|
2,000
|
|
|
|
7,000
|
|
Deferred
revenue
|
|
|
-
|
|
|
|
-
|
|
Accounts
receivable
|
|
|
(1,000
|
)
|
|
|
8,000
|
|
Prepaid
expenses
|
|
|
(42,000
|
)
|
|
|
(30,000
|
)
|
Net
cash used in operating activities
|
|
|
(4,157,000
|
)
|
|
|
(1,677,000
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
2,979,000
|
|
|
|
796,000
|
|
Proceeds
from convertible note payable
|
|
|
1,772,000
|
|
|
|
813,000
|
|
Proceeds
from exercise of put option
|
|
|
1,000,000
|
|
|
|
50,000
|
|
Proceeds
from option exercise
|
|
|
34,000
|
|
|
|
-
|
|
Proceeds
from warrant exercise
|
|
|
22,000
|
|
|
|
-
|
|
Proceeds
from series A preferred stock
|
|
|
-
|
|
|
|
555,000
|
|
Payment
of convertible notes payable
|
|
|
(845,000
|
)
|
|
|
-
|
|
Deferred
offering costs
|
|
|
(162,000
|
)
|
|
|
-
|
|
Repurchase
common stock
|
|
|
(20,000
|
)
|
|
|
-
|
|
Redemption
of series A preferred stock
|
|
|
-
|
|
|
|
(543,000
|
)
|
Net
cash provided by financing activities
|
|
|
4,780,000
|
|
|
|
1,671,000
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
623,000
|
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
- beginning of period
|
|
|
11,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
Cash
- end of period
|
|
$
|
634,000
|
|
|
$
|
11,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
402,000
|
|
|
$
|
326,000
|
|
Cash
paid for income taxes
|
|
$
|
1,000
|
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Conversion
of note payable and accrued interest to common stock
|
|
$
|
3,066,000
|
|
|
$
|
56,000
|
|
Common
stock issued to settle accrued officers salary
|
|
$
|
582,000
|
|
|
$
|
-
|
|
Fair
value of derivative liability from issuance of convertible debt, inducement shares and warrant features
|
|
$
|
1,694,000
|
|
|
$
|
1,256,000
|
|
Fair
value of warrants issued and beneficial conversion feature to extinguish debt
|
|
$
|
-
|
|
|
$
|
861,000
|
|
Fair
value of common shares, warrants and beneficial conversion feature of issued convertible note
|
|
$
|
-
|
|
|
$
|
154,000
|
|
Common
stock issued to settle accounts payable
|
|
$
|
-
|
|
|
$
|
182,000
|
|
Conversion
of series A preferred stock
|
|
|
|
|
|
$
|
304,000
|
|
The
accompanying notes are an integral part of these consolidated financial statements
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
1.
|
DESCRIPTION
OF BUSINESS
|
Organization
Cutaia
Media Group, LLC (“CMG”) was a limited liability company formed on December 12, 2012 under the laws of the State of
Nevada. On May 19, 2014, bBooth, Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG was merged
into bBooth, Inc. and bBooth, Inc. changed its name to bBooth (USA), Inc. The operations of CMG and bBooth (USA), Inc. became
known as “bBoothUSA”.
On
October 16, 2014, bBoothUSA completed a Share Exchange Agreement with Global System Designs, Inc. (“GSD”) which was
accounted for as a reverse merger transaction. In connection with the closing of the Share Exchange Agreement, GSD management
was replaced by bBoothUSA management, and GSD changed its name to bBooth, Inc.
Effective
April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary
short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with
and into us. We were the surviving entity. To effectuate the merger, we filed Articles of Merger with the Secretary of State of
the State of Nevada on April 4, 2017 and a Certificate of Correction with the Secretary of State of the State of Nevada on April
17, 2017. The merger became effective on April 21, 2017. Our board of directors approved the merger, which resulted in the name
change on that date. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the merger was
not required.
Effective
February 1, 2019, we changed our corporate name from nFüsz, Inc. to Verb Technology Company, Inc. The name change was effected
through a parent/subsidiary short-form merger of Verb Technology Company, Inc., our wholly-owned Nevada subsidiary, formed solely
for the purpose of the name change, with and into us. We were the surviving entity. To effectuate the name-change merger, we filed
Articles of Merger with the Secretary of State of the State of Nevada on January 31, 2019. The name-change merger became effective
on February 1, 2019. Our board of directors approved the name-change merger, which resulted in the name change on that date. In
accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the name-merger was not required.
On
February 1, 2019, we implemented a 1-for-15 reverse stock split (the “Reverse Stock Split”) of our Common Stock. The
Reverse Stock Split became effective upon commencement of trading of our common stock, par value $0.0001 per share (the “Common
Stock”) on February 4, 2019. As a result of the Reverse Stock Split, every fifteen (15) shares of our pre-Reverse Stock
Split Common Stock were combined and reclassified into one share of our Common Stock. The number of shares of Common Stock subject
to outstanding options, warrants, and convertible securities were also reduced by a factor of fifteen as of February 1, 2019.
All historical share and per share amounts reflected throughout our consolidated financial statements and other financial information
in this prospectus have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the earliest period presented.
The par value per share of our Common Stock was not affected by the Reverse Stock Split.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Nature
of Business
We
are an applications services provider, marketing cloud-based business software products under the brand name “Tagg”
on a subscription basis. Our flagship product, TaggCRM, is a Customer Relationship Management (“CRM”) application
that is distinguishable from other CRM programs because it utilizes interactive video as the primary means of communication between
sales and marketing professionals and their clients or prospects. TaggCRM allows our users to create, distribute, and post interactive
videos that contain on-screen clickable “Taggs,” which are interactive icons, buttons, and other on-screen elements,
that, when clicked, allow their prospects and customers to respond to our users’ calls to action in real-time, in the video,
while the video is playing, without leaving or stopping the video. For example, our technology allows a customer or a prospective
customer the ability to click on a product they see featured in a video and buy it, or to click on a calendar icon in the video
to make an appointment with a salesperson, among many other features and functionality. Tagg videos can be distributed via email
or text messaging and can be posted on social media. Our users report increased sales conversion rates compared to traditional,
non-interactive video.
We
developed the proprietary, patent-pending interactive video technology that serves as the basis for all of our cloud-based, Software-as-a-Service
(“SaaS”) Tagg applications. Our Tagg applications are accessible on all mobile and desktop devices and no software
download is required to view the Tagg interactive videos. The Tagg applications also provide detailed analytics in the application
dashboard that reflect when the videos were viewed, by whom, how many times, for how long, and what interactive Taggs were clicked-on
in the video, among other things, all of which assist our users in focusing their sales and marketing efforts by identifying which
clients or prospects have interest in the subject matter of the video. TaggCRM users receive a text message immediately notifying
them that a customer or prospect received their video and additional text messages notifying them when that customer or prospect
watched the video and shared the video so they can follow-up in real-time. Our Tagg application platform can accommodate any size
sales or marketing campaign, and it is enterprise-class scalable to meet the needs of today’s global organizations.
Our
TaggMED application is designed for physicians and other healthcare providers to create more efficient and effective interactive
communications with patients. Patients are able to avoid unnecessary and inconvenient visits to their physicians’ or other
healthcare providers’ offices by viewing and responding to interactive videos through in-video, on-screen clicks that are
designed to assess the patient’s need for an office visit. If the patient’s responses to the interactive video indicate
that an office visit is either necessary or desirable, the patient can schedule the office visit right through the video in real
time. Patients can also download and print prescriptions, care instructions, and other physician distributed documents right from
and through the video. TaggMED is offered on a subscription basis.
Our
TaggEDU application is designed for teachers and school administrators for more effective communications with students, parents,
and faculty. TaggEDU allows teachers to deliver interactive video lessons to students that are both more engaging and more effective.
TaggEDU allows teachers to communicate with students through their mobile devices and computers to deliver lessons and tests/quizzes
on the screen and in the Tagg video. The analytics capabilities of TaggEDU available on the application dashboard of the teacher
or school administrator allow them to track which students watched the lesson, when, for how long, how many times, and track and
report on test/quiz results. TaggEDU is offered on a subscription basis.
Our
TaggLIVE application is also part of our proprietary interactive Tagg video applications portfolio. TaggLIVE is a Facebook application
that works in conjunction with Facebook Live, allowing users of Facebook Live to place clickable Taggs on the screen of everyone
watching their Facebook Live broadcasts in real time. Viewers can click the on-screen Taggs to purchase products and services
placed there and offered by the person utilizing our TaggLIVE Facebook application. TaggLIVE is scheduled for release in the second
quarter of 2019.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Going
Concern
The
accompanying 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, during the year ended December 31, 2018, the Company incurred a net loss of $12,127,000, used
cash in operations of $4,157,000 and had a stockholders’ deficit of $5,055,000 as of December 31, 2018. These factors raise
substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial
statements being issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability
to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
Our
continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash
flows from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our
operations. There is no assurance that we will ever be profitable or that debt or equity financing will be available to us. The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue
as a going concern.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of Verb Technology Company, Inc. (formerly nFüsz, Inc. and, before
that, bBooth, Inc.).
Use
of Estimates
The
preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reported periods. Significant estimates include assumptions
made in analysis of impairment of long term assets, realization of deferred tax assets, determining fair value of derivative liabilities,
and value of equity instruments issued for services. Amounts could materially change in the future.
Revenue
Recognition
We
generate substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts.
Subscription service arrangements are generally non-cancelable and do not provide for refunds to customers in the event of cancellations
or any other right of return. We record revenue net of sales or excise taxes.
On
January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers.
The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount
expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms
of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance
obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate
performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Under ASC 606, revenue is recognized
when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery
of products or services to our customers based on written sales terms, which is also when control is transferred. Revenue is measured
as the amount of consideration we expect to receive in exchange for transferring the products or services to a customer.
The
implementation of ASC 606 had no impact on the prior period financial statements and no cumulative effect adjustment was recognized.
Property
and Equipment
Property
and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives of approximately
five years once the individual assets are placed in service.
Long-Lived
Assets
The
Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value
may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash
flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying
amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available,
or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. No impairment
of long-lived assets was required for the years ended December 31, 2018 and 2017.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Income
Taxes
The
Company accounts for income taxes under the Financial Accounting Standards Board’s (“FASB”) ASC 740 “Income
Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax
assets of the Company relate primarily to operating loss carry-forwards for federal income tax purposes. A full valuation allowance
for deferred tax assets has been provided because the Company believes it is not more likely than not that the deferred tax asset
will be realized. Realization of deferred tax assets is dependent on the Company generating sufficient taxable income in future
periods.
The
Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be
sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their
technical merits. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income
tax provision in the accompanying consolidated statements of operations. As of December 31, 2018, and 2017, the Company has not
established a liability for uncertain tax positions.
Deferred
Offering Costs
Deferred
offering costs consist principally of legal, accounting, and underwriters’ fees incurred related to the contemplated underwritten
public offering of the Company’s Common Stock. These deferred offering costs will be charged against the gross proceeds
received or will be charged to expense if the offering is not completed.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
The
Company uses Level 2 inputs for its valuation methodology for the derivative liabilities as their fair values were determined
by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s 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 adjusted to fair value of derivatives.
Share
Based Payment
The
Company issues stock options, Common Stock, and equity interests as share-based compensation to employees and non-employees.
The
Company accounts for its share-based compensation to employees in accordance FASB ASC 718 “Compensation – Stock Compensation.”
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized
as expense over the requisite service period.
The
Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505-50
“
Equity – Based Payments to Non-Employees
.”
Measurement of share-based payment transactions
with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received or
(b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance
completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate
to determine the cumulative expense recorded.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
The
Company values stock compensation based on the market price on the measurement date. As described above, for employees this is
the date of grant, and for non-employees, this is the date of performance completion.
The
Company values stock options using the Black-Scholes option pricing model. Assumptions used in the Black-Scholes model to value
options issued during the years ended December 31, 2018 and 2017 are as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Expected
life in years
|
|
|
5.0
|
|
|
|
2.5
to 5.0
|
|
Stock
price volatility
|
|
|
184.45%
-190.22
|
%
|
|
|
84.36%
- 173.92
|
%
|
Risk
free interest rate
|
|
|
2.25%
- 3.00
|
%
|
|
|
1.22%
- 2.23
|
%
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Forfeiture
rate
|
|
|
18
|
%
|
|
|
21
|
%
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility
of its Common Stock to estimate the future volatility for its Common Stock. The expected dividend yield was based on the fact
that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.
Research
and Development Costs
Research
and development costs consist of expenditures for the research and development of new products and technology. These costs are
primarily expenses to vendors contracted to perform research projects and develop technology for the Company’s cloud-based,
Tagg interactive video CRM SaaS platform.
Net
Loss Per Share
Basic
net loss per share is computed by using the weighted-average number of common shares outstanding during the period. Diluted net
loss per share is computed giving effect to all dilutive potential shares of Common Stock that were outstanding during the period.
Dilutive potential shares of Common Stock consist of incremental shares of Common Stock issuable upon exercise of stock options.
No dilutive potential shares of Common Stock were included in the computation of diluted net loss per share because their impact
was anti-dilutive. As of December 31, 2018, and 2017, the Company had total outstanding options of 2,478,974 and 1,456,064, respectively,
and warrants of 940,412 and 1,895,761, respectively, which were excluded from the computation of net loss per share because they
are anti-dilutive.
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB ASC for disclosures about fair value of its financial instruments and paragraph
820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph
820-10-35-37 establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.
To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
The
three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
|
Level
1:
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
|
Level
2:
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
|
|
Level
3:
|
Pricing
inputs that are generally observable inputs and not corroborated by market data.
|
The
carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalents, prepaid expenses,
and accounts payable and accrued expenses approximate their fair value due to their short-term nature. The carrying values financing
obligations approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing
market interest rates. The Company uses Level 2 inputs for its valuation methodology for the derivative liabilities.
Concentrations
During
the year ended December 31, 2018, the Company had a single vendor that accounted for 5% of all purchases, and 20.7% of all purchases
in the same period in the prior year.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification
of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount,
timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has
not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s financial statement presentation or disclosures.
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part
II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11
allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature)
is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with
down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value
of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding
financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income
available to common stockholders in computing basic earnings per share. For convertible instruments with embedded conversion features
containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be
amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective
approach. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on the Company’s financial statement
presentation or disclosures.
In
June 2018, the FASB issued Accounting Standards Update 2018-07, Compensation – Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718
does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction
with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic
606). ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. Early adoption is permitted. The Company will adopt the provisions of ASU 2018-07 in the quarter beginning January 1, 2019.
The adoption of ASU 2018-07 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
3.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following as of December 31, 2018 and 2017.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
|
$
|
57,000
|
|
|
$
|
57,000
|
|
Office
equipment
|
|
|
51,000
|
|
|
|
51,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,000
|
|
|
|
108,000
|
|
Less:
accumulated depreciation
|
|
|
(97,00
|
)
|
|
|
(77,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,000
|
|
|
$
|
31,000
|
|
Depreciation
expense amounted to $20,000 and $22,000 for the year ended December 31, 2018 and 2017, respectively.
On
March 21, 2015, the Company issued a note payable to a third-party lender for the benefit of DelMorgan Group LLC (“DelMorgan”),
financial consultant. The note was unsecured, bore interest at a rate of 12% per annum, payable monthly, beginning on April 20,
2015, and had an original maturity date of March 20, 2017.
On
March 20, 2017, the Company entered into an extension agreement with the third-party lender to extend the maturity date of the
note to March 20, 2018. All other terms of the note remained unchanged and there was no additional compensation or incentive given.
As of December 31, 2017, the outstanding balance of the note equaled $125,000.
On
January 29, 2018, the Company settled the debt of $125,000 in exchange for 83,333 shares of its Common Stock. There was no gain
or loss recognized as the fair value of the shares of Common Stock issued approximated the note payable settled.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
5.
|
NOTES
PAYABLE – RELATED PARTIES
|
The
Company has the following related parties outstanding notes payable as of December 31, 2018 and 2017:
Note
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
December 31,
2018
|
|
|
Balance
at
December 31,
2017
|
|
Note
1 (A)
|
|
December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
|
$
|
1,249,000
|
|
|
$
|
825,000
|
|
|
$
|
1,199,000
|
|
Note
2 (B)
|
|
December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
|
|
189,000
|
|
|
|
-
|
|
|
|
189,000
|
|
Note
3 (C)
|
|
December
1, 2015
|
|
April
1, 2017
|
|
|
12.0
|
%
|
|
|
112,000
|
|
|
|
112,000
|
|
|
|
112,000
|
|
Note
4 (D)
|
|
April
4, 2016
|
|
June
4, 2021
|
|
|
12.0
|
%
|
|
|
343,000
|
|
|
|
240,000
|
|
|
|
343,000
|
|
Note
5 (E)
|
|
April
4, 2016
|
|
December
4, 2018
|
|
|
12.0
|
%
|
|
|
122,000
|
|
|
|
-
|
|
|
|
122,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable – related parties, net
|
|
|
|
|
|
|
|
|
|
|
1,177,000
|
|
|
|
1,965,000
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,065,000
|
)
|
|
|
-
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,000
|
|
|
$
|
1,965,000
|
|
|
(A)
|
On
December 1, 2015, the Company issued a convertible note payable to Mr. Rory J. Cutaia, the Company’s majority stockholder
and Chief Executive Officer, to consolidate all loans and advances made by Mr. Cutaia to the Company as of that date. The
note bore interest at a rate of 12% per annum, was secured by the Company’s assets, and matured on April 1, 2017. Pursuant
to the terms of the agreement, at Mr. Cutaia’s discretion, he could convert up to 30%, or $375,000, of the outstanding
principal, plus accrued interest thereon, into shares of Common Stock at a conversion rate of $1.05 per share.
|
On
May 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note from April
1, 2017 to August 1, 2018. In consideration, the Company issued Mr. Cutaia a three-year warrant to purchase up to 117,013 shares
of Common Stock at a price of $5.33 per share with a fair value of $517,000. All other terms of the note remain unchanged. The
Company determined that the extension of the note’s maturity resulted in a debt extinguishment for accounting purposes since
the fair value of the warrants granted was more than 10% of the original value of the convertible note. As result, the Company
recorded the fair value of the new note, which approximated the original carrying value $1,199,000 and expensed the fair value
of the warrants granted of $517,000 as debt extinguishment costs. As of December 31, 2017, total outstanding balance of the note
amounted to $1,199,000.
On
August 8, 2018, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note to February
8, 2021. In consideration for extending the note the Company issued Mr. Cutaia warrants exercisable for up to 163,113 shares of
Common Stock with a fair market value of $1,075,000. The Company determined that the extension of the note’s maturity date
resulted in a debt extinguishment for accounting purposes since the fair value of the warrants granted was more than 10% of the
original value of the convertible note. As result, the Company recorded the fair value of the new note, which approximates the
original carrying value $1,199,000 and expensed the entire fair value of the warrants granted, or $1,075,000 as a debt extinguishment
cost.
On
September 30, 2018, Mr. Cutaia converted the convertible principal balance of $375,000 at $1.05 per share into 356,824 shares
of restricted Common Stock.
As
of December 31, 2018, the outstanding balance of the note amounted to $825,000.
|
(B)
|
On
December 1, 2015, the Company issued a convertible note with Mr. Cutaia in the amount of $189,000 representing a portion of
Mr. Cutaia’s accrued salary for 2015. The note was unsecured, bore interest at a rate of 12% per annum, and matured
in April 2017. The note was convertible into shares of Common Stock at a conversion price of $1.05 per share.
|
|
|
|
|
|
On
May 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend
the maturity date of the note from April 1, 2017 to August 1, 2018. All other terms of
the note remain unchanged and there were no additional compensation or incentive given.
As of December 31, 2017, the outstanding balance of the note amounted to $189,000.
On
September 30, 2018, Mr. Cutaia converted the entire outstanding principal amount of $189,000 into 180,000 shares of restricted
Common Stock.
|
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
|
(C)
|
On
December 1, 2015, the Company issued a note payable to a former member of the Company’s board of directors, in the amount
of $112,000 representing unpaid consulting fees as of November 30, 2015. The note is unsecured, bears interest rate of 12%
per annum, and matured in April 2017. As of December 31, 2017 and 2018, the outstanding principal balance of the note was
equal to $112,000. As of December 31, 2018, the note was past due. The Company is currently in negotiations with the noteholder
to settle the past due note.
|
|
|
|
|
(D)
|
On
April 4, 2016, the Company issued a convertible note to Mr. Cutaia, in the amount of
$343,000, to consolidate all advances made by Mr. Cutaia to the Company during the period
December 2015 through March 2016. The note bore interest at a rate of 12% per annum,
was secured by the Company’s assets, and matured on August 4, 2017. Pursuant to
the terms of the note, a total of 30%, or $103,000, of the note principal can be converted
to shares of Common Stock at a conversion price $1.05 per share.
On
August 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note
from August 4, 2017 to December 4, 2018. In consideration for extending the note’s maturity, the Company issued
Mr. Cutaia warrants to purchase up to 88,610 shares of Common Stock at a price of $2.25 per share with a fair value of
$172,000. All other terms of the note remain unchanged. The Company determined that the extension of the note’s
maturity resulted in a debt extinguishment for accounting purposes since the fair value of the warrants granted was more
than 10% of the recorded value of the original convertible note. As a result, the Company recorded the fair value of the
new note, which approximated the original carrying value $343,000, and expensed the entire fair value of the warrants
granted of $172,000 as part of loss on debt extinguishment. As of December 31, 2017, the outstanding balance of the note
amounted to $343,000.
On
September 30, 2018, Mr. Cutaia converted the 30% principal amount of the note, or $103,000, into 98,093 shares of restricted
Common Stock.
On
December 4, 2018, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note
to June 4, 2021. In consideration for extending the note, the Company issued Mr. Cutaia warrants to purchase up to 23,562
shares of Common Stock, with a fair market value of the warrants totaling $111,000. The Company determined that the extension
of the note’s maturity resulted in a debt extinguishment for accounting purposes since the fair value of the warrants
granted was more than 10% of the original value of the convertible note. As result, the Company recorded the fair value
of the new note, which approximates the original carrying value of $240,000 and expensed the entire fair value of the
warrants granted of $111,000 as part of loss on debt extinguishment.
As
of December 31, 2018, the outstanding balance of the note amounted to $240,000.
|
|
|
|
|
(E)
|
On
April 4, 2016, the Company issued a convertible note payable to Mr. Cutaia in the amount
of $122,000, representing his unpaid salary from December 2015 through March 2016. The
note was unsecured, bore interest at a rate of 12% per annum, compounded annually, and
matured on August 4, 2017. The note was also convertible into shares of the Company’s
Common Stock at $1.05 per share.
On
August 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note
from August 4, 2017 to December 4, 2018. All other terms of the note remain unchanged and there were no additional compensation
or incentive given. As of December 31, 2017, the outstanding balance of the note amounted to $122,000.
On
September 30, 2018, Mr. Cutaia converted $122,000 of outstanding principal amount into 116,701 shares of restricted Common
Stock.
|
During
the year ended December 31, 2018, the Company recorded total interest expense totaling $211,000 pursuant to the terms of the notes
and paid $269,000 in interest.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
6.
|
CONVERTIBLE
NOTES PAYABLE
|
The
Company has the following outstanding convertible notes payable as of December 31, 2018 and 2017:
Note
|
|
Note
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
December 31,
2018
|
|
|
Balance
at
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable (a)
|
|
April
3, 2016
|
|
April
4, 2018
|
|
|
12
|
%
|
|
$
|
680,000
|
|
|
$
|
-
|
|
|
$
|
680,000
|
|
Note
payable (b)
|
|
June
and August 2017
|
|
February
and March 2018
|
|
|
5
|
%
|
|
$
|
220,000
|
|
|
|
-
|
|
|
|
220,000
|
|
Note
payable (c)
|
|
Various
|
|
Various
|
|
|
5
|
%
|
|
$
|
320,000
|
|
|
|
-
|
|
|
|
320,000
|
|
Note
payable (d)
|
|
December
8, 2017
|
|
December
8, 2018
|
|
|
8
|
%
|
|
$
|
370,000
|
|
|
|
-
|
|
|
|
370,000
|
|
Note
payable (e)
|
|
December
13, 2017
|
|
September
20, 2018
|
|
|
8
|
%
|
|
$
|
105,000
|
|
|
|
-
|
|
|
|
105,000
|
|
Note
payable (f)
|
|
October
19, 2018
|
|
April
19, 2019
|
|
|
10
|
%
|
|
$
|
1,500,000
|
|
|
|
1,500,000
|
|
|
|
-
|
|
Note
payable (g)
|
|
October
30, 2018
|
|
April
29, 2019
|
|
|
5
|
%
|
|
$
|
400,000
|
|
|
|
400,000
|
|
|
|
-
|
|
Total
notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
1,900,000
|
|
|
|
1,695,000
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,082,000
|
)
|
|
|
(675,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
$
|
818,000
|
|
|
$
|
1,020,000
|
|
(a)
|
On
April 3, 2016, the Company issued a convertible note payable to Oceanside Strategies,
Inc. (“Oceanside”), a third party-lender, in the amount of $680,000 to consolidate
all notes payable and accrued interest due to Oceanside as of that date. This note superseded
and replaced all previous notes and liabilities due to Oceanside from fiscal years 2014
and 2015. The note was unsecured, bore interest at the rate of 12% per annum, compounded
annually, and had an original maturity date of December 30, 2016. Pursuant to the terms
of the note, the Company granted Oceanside the right to convert up to 30% of the principal
amount of such note, or $204,000, into shares of the Company’s Common Stock at
$1.05 per share and granted warrants to purchase up to 161,969 shares of Common Stock
at $1.05 per share until April 4, 2019.
On
December 30, 2016, the Company entered into an extension agreement with Oceanside to extend the maturity date of the note
from December 30, 2016 to August 4, 2017. All other terms of the note remain unchanged. In consideration for Oceanside’s
agreement to extend the maturity date to August 4, 2017, the Company granted Oceanside a warrant to purchase up to 161,969
shares of the Company’s Common Stock, exercisable at $1.20 per share until December 29, 2019, with a fair value
of $159,000.
|
|
|
|
On
August 4, 2017, the Company entered into an extension agreement with Oceanside to extend the maturity date of the note to
from August 4, 2017 to April 4, 2018. All other terms of the note remain unchanged. In consideration for Oceanside’s
agreement to extend the maturity date to August 4, 2018, the Company granted Oceanside a warrant to purchase up to 87,787
shares of the Company’s Common Stock, exercisable at $2.25 per share, until August 3, 2022, with a fair value of $171,000.
The Company determined that the extension of the note’s maturity resulted in a debt extinguishment for accounting purposes
since the fair value of the warrants granted was more than 10% of the recorded value of the original convertible note. As
a result, Company recorded the fair value of the new note which approximates the original carrying value of $680,000 and expensed
the entire fair value of the warrants granted, or $171,000, as part of loss on debt extinguishment. As of December 31, 2017,
the outstanding balance of the note amounted to $680,000.
|
|
|
|
In
March 2018, the entire principal amount due was settled through the issuance of 305,967 shares of Common Stock. As a result
of this conversion, the Company also recorded a loss on debt extinguishment of $1,090,000 to account for the fair value of
the 65,469 shares of Common Stock issued to settle the remaining 70%, or $476,000, of the note principal and accrued interest
that was not initially convertible to shares of Common Stock.
|
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(b)
|
In
June and August of 2017, the Company issued unsecured convertible notes to an unaffiliated
third-party in the amount of $220,000 in exchange for cash of $200,000, representing
an original issue discount of $10,500, and prepaid interest of $10,000. The notes bore
interest at a rate of 5% per annum, matured in February and March 2018, and were convertible
to shares of Common Stock at a conversion price of either $3.755 per share or $1.50 per
share. As part of the issuance, the Company also (i) granted warrants to purchase up
to 22,000 shares of Common Stock at $4.50 per share and (ii) issued 3,333 shares of Common
Stock with a fair value $12,500. As a result, the Company recorded a debt discount of
$175,000 to account for the original issue discount and prepaid interest of $21,000,
the relative fair value of the warrants of $40,000, the fair value of the shares of Common
Stock of $13,000, and the beneficial conversion feature of $102,000. The debt discount
is being amortized to interest expense over the term of the note. As of December 31,
2017, the outstanding balance of the note was $22,000 and unamortized debt discount was
$40,000.
|
|
|
|
In
March 2018, the entire outstanding principal amount of the notes, and all accrued interest thereon, were settled and converted
into 102,900 shares of Common Stock pursuant to the conversion terms of the notes and we expensed the unamortized debt discount.
|
|
|
(c)
|
On
September 26, 2017, we entered into a purchase agreement, dated September 15, 2017, with Kodiak Capital Group, LLC (“Kodiak”).
Under the purchase agreement, the Company was entitled to, from time to time, in the Company’s discretion, sell shares
of its Common Stock to Kodiak for aggregate gross proceeds of up to $2,000,000. Unless terminated earlier, Kodiak’s
purchase commitment automatically terminates on the earlier of the date on which Kodiak has purchased our shares pursuant
to the purchase agreement for an aggregate purchase price of $2,000,000, or September 15, 2019. The Company has no obligation
to sell any shares under the purchase agreement.
|
|
From
September 2017 through November 2017, the Company issued three convertible notes payable totaling $320,000 in exchange for
cash of $200,000, representing an original issue discount of $20,000, and settlement of financing expenses of $100,000 incurred
by Kodiak pursuant to the purchase agreement. The notes were unsecured, had maturity dates starting in March 2018 through
June 2018, and bore interest at a rate of 5% per annum. The notes were also convertible into shares of Common Stock at price
of $3.75 per share or 70% of the 10-day VWAP prior to conversion, whichever is lower. As part of the issuances, the Company
also granted Kodiak a five-year, fully vested, warrant to purchase up to 133,333 shares of Common Stock, exercisable at $2.25
and $3.00 per share.
|
|
|
|
The
Company determined that since there was no minimum conversion price, it could no longer
determine if it had enough authorized shares to fulfill its conversion obligation. As
such, pursuant to current accounting guidelines, the Company determined that the conversion
feature of these three notes created a derivative with a fair value totaling $412,000
at the date of issuances. The Company accounted for the fair value of the derivative
up to the face amount of the notes of $320,000 as a valuation discount to be amortized
over the life of the note, and the excess of $92,000 being recorded as part of financing
cost. See Note 8, Derivative Liability, to these audited consolidated financial statements
for further discussion. In addition, the Company also recorded the notes’ original
issue discount totaling $20,000 and the $100,000 note payable issued to settle financing
expenses related to the agreement with Kodiak as part of financing costs. As of December
31, 2017, the outstanding balance of the note amounted to $320,000 and unamortized debt
discount was $191,000.
In
March 2018, the Company paid Kodiak $226,000 to settle two notes payable totaling $220,000, and all accrued interest thereon,
and amortized the corresponding unamortized debt discount of $114,000 to interest expense. As part of the payment, Kodiak
cancelled one note payable in the outstanding principal amount of $100,000. As a result of the note’s cancellation,
the Company recorded a gain on debt extinguishment of $23,000, to account for the cancellation of the $100,000 note payable,
less the amortization of the corresponding debt discount of $77,000.
|
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
(d)
|
On
December 8, 2017, the Company issued unsecured convertible notes to EMA Financial, LLC
(“EMA”) and Auctus Fund, LLC (“Auctus”) totaling $370,000 in
principal, in exchange for cash of $323,000, representing an original issue discount
of $47,000. The notes bore interest at a rate of 8% per annum and matured on December
8, 2018. The notes were also convertible into shares of Common Stock at a conversion
price equal to the lower of: (i) the closing sale price of the Common Stock as reported
by the principal market (as defined in the notes) on the trading day immediately preceding
the closing date, and (ii) 70% of either the lowest sale price for the Common Stock as
reported by the principal market during the ten (10) consecutive trading days including
and immediately preceding the conversion date, or the closing bid price.
|
|
|
|
The
Company determined that since there was no minimum conversion price, that it could no longer determine if it had enough authorized
shares to fulfill the conversion obligation. As such, pursuant to current accounting guidelines, the Company determined that
the conversion feature of the note created a derivative with a fair value of $565,000 at the date of issuance. The Company
accounted for the fair value of the derivative up to the face amount of the note of $370,000 as a valuation discount to be
amortized over the life of the note, and the excess of $195,000 was recorded as part of financing cost. See Note 8,
Derivative
Liability,
to these audited consolidated financial statements for discussion of derivative liability. In addition, the
Company also recorded the notes’ original issue discount of $47,000 as part of financing costs.
|
As
part of the offering, the Company also granted EMA and Auctus a five-year warrant to acquire up to 160,000 shares of the Company’s
Common Stock with an exercise price of $1.65 per share. Warrants to acquire up to 80,000 shares of Common Stock contained (i)
a full ratchet reset provision in the event the Company engages in a future equity offering and the Company offers equity securities
at a price less than $1.65 per share and (ii) a fundamental transaction provision that could give rise to an obligation to pay
cash to the warrant holder. As such, pursuant to current accounting guidelines, the Company determined that the warrant exercise
price and fundamental transaction provision created a derivative with a fair value of $119,000 at the date of issuance. The Company
accounted for the fair value of the derivative as part of finance cost. See Note 8, Derivative Liability, to these audited consolidated
financial statements for discussion of derivative liability. As of December 31, 2017, the outstanding balance of the notes amounted
to $370,000 and unamortized debt discount was $344,000.
In
January 2018, the Company issued similar convertible notes payable totaling $150,000 in exchange for cash of $130,000. The notes
were secured by the Company’s assets, bore interest of 8% per annum, matured in January 2019, and was convertible into shares
of Common Stock at a conversion price equal to 70% of the Company’s 10-day VWAP. The Company determined that since there
was no minimum conversion price, that it could no longer determine if it had enough authorized shares to fulfill its conversion
obligation. As such, pursuant to current accounting guidelines, the Company determined that the conversion feature of the notes
created a derivative with a fair value of $253,000 at the date of issuance. The Company accounted for the fair value of the derivative
up to the face amount of the note of $150,000 as a valuation discount to be amortized over the life of the note, and the excess
of $103,000 was recorded as a financing cost. See Note 8,
Derivative Liability,
to these audited consolidated financial
statements for discussion of derivative liability. In addition, the Company also recorded the notes’ original issue discount
of $20,000 as a financing cost.
As
part of the convertible note offering, the Company also granted a five-year warrant to acquire up to 66,667 shares of the Company’s
Common Stock with an exercise price of $2.10 per share. Warrants to purchase up to 33,333 shares of Common Stock included (i)
a full ratchet reset provision in the event the Company engaged in a future equity offering at an offering price less than $2.10
per share and (ii) a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder
and a reset of the exercise price. As such, pursuant to current accounting guidelines, the Company determined that the warrant
exercise price and fundamental transaction provision created a derivative with a fair value of $49,000 at the date of issuance.
The Company accounted for the fair value of the derivative as a financing cost. See Note 8,
Derivative Liability,
to these
audited consolidated financial statements for discussion of derivative liability.
In
March 2018, the Company settled the entire outstanding principal amount of the notes in cash and expensed the corresponding debt
discount of $494,000.
(e)
|
On
December 14, 2017, the Company issued an unsecured convertible note to PowerUp Lending Group, Ltd. in the amount of $105,000
in exchange for cash of $90,000, representing an original issue discount of $15,000. The note matured on September 20, 2018
and bore interest at a rate of 8% per annum. The note was convertible into shares of Common Stock at a conversion price equal
to 70% multiplied by the market price, which is equal to the lowest trading price of the Common Stock during the ten (10)
trading day period ending on the latest complete trading day prior to the conversion date.
|
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
|
The
Company determined that since there was no minimum conversion price, it could no longer
determine if it had enough authorized shares to fulfill the conversion obligation. As
such, pursuant to current accounting guidelines, the Company determined that the conversion
feature of the note created a derivative with a fair value of $160,000 at the date of
issuance. The Company accounted for the fair value of the derivative up to the face amount
of the note of $105,000 as a valuation discount to be amortized over the life of the
note, and the excess of $55,000 being recorded as part of financing cost. See Note 8,
Derivative Liability,
to these audited consolidated financial statements for discussion
of derivative liability. In addition, the Company also recorded the note’s original
issue discount of $15,000 as part of financing costs. As of December 31, 2017, the outstanding
principal amount of the note was $105,000, and unamortized debt discount was $100,000.
In
March 2018, the Company settled the principal amount of the note and expensed the corresponding debt discount of $100,000.
|
(f)
|
On
October 19, 2018, the Company issued an unsecured convertible note to Bellridge Capital,
LP (“Bellridge”), an unaffiliated third-party entity, in the aggregate principal
amount of $1,500,000 in exchange for net proceeds of $1,242,000, representing an original
issue discount of $150,000, and paid legal and financing expenses of $109,000. In addition,
the Company issued 96,667 shares of its Common Stock with a fair value of $595,000. The
note is unsecured and does not bear interest; however, the implied interest rate was
determined to be 10% since the note was issued at a 10% less than its face value. The
note matures in April 2019. The note is also convertible into shares of the Company’s
Common Stock only on or after the occurrence of an uncured “Event of Default.”
Primarily, the Company will be in default if it does not repay the principal amount of
the note, as required. The other events of default are standard for the type of transaction
represented by the related securities purchase agreement and the note. The conversion
price in effect on any date on which some or all of the principal of the note is to be
converted shall be a price equal to 70% of the lowest VWAP during the ten trading days
immediately preceding the date on which the third party provided its notice of conversion.
Upon an Event of Default, the Company will owe the third party an amount equivalent to
110% of the then-outstanding principal amount of the note in addition to of all other
amounts, costs, expenses, and liquidated damages that might also be due in respect thereof.
The Company has agreed that, on or after the occurrence of an Event of Default, it will
reserve and keep available that number of shares of its Common Stock that is at least
equal to 200% of the number of such shares that
potentially
would be issuable pursuant to the terms of the securities purchase agreement and the
note (assuming conversion in full of the note and on any date of determination
).
The Company determined that, because the conversion price is unknown, the Company could
not determine if it had enough authorized shares to fulfill the conversion obligation.
As such, pursuant to current accounting guidelines, the Company determined that the conversion
feature of the note created a derivative with a fair value of $1,273,000 at the date
of issuance.
As
a result of the issuance of the note, the Company incurred aggregate costs of $2,126,000 related to the note’s original
issue discount, legal and financing expenses, the fair value of the Common Stock issued and the recognition of the derivative
liability. The Company recorded these costs as a note discount up to the face value of the note of $1,500,000 and the
remaining $626,000 as financing costs. The note discount is being amortized over the six-month term of the note.
As
of December 31, 2018, the outstanding balance of the note amounted to $1,500,000 and unamortized debt discount was $881,000.
|
(g)
|
On
October 30, 2018, the Company issued two unsecured convertible notes to one current investor and one otherwise unaffiliated
third-party in the aggregate principal amount of $400,000. The notes bear interest at a rate of 5% per annum and will mature
on April 29, 2019. Upon the Company’s consummation of the contemplated underwritten public offering of the Company’s
Common Stock, all, and not less than all, of (i) the outstanding principal amount and (ii) the accrued interest thereunder
will be converted into shares of the Company’s Common Stock that shall have been registered therein. The per-share conversion
price will be seventy-five percent (75%) of the offering price of the Common Stock. The Company determined that, because the
conversion price is unknown, that the Company could not determine if it had enough authorized shares to fulfill the conversion
obligation. As such, pursuant to current accounting guidelines, the Company determined that the conversion feature of the
notes created a derivative with a fair value of $302,000 at the date of issuance and was accounted as a debt discount and
is being amortized over the term of the notes payable.
|
As
of December 31, 2018, outstanding principal amount of the note amounted to $400,000 and unamortized debt discount was $201,000.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
7.
|
CONVERTIBLE
SERIES A PREFERRED STOCK
|
On
February 14, 2017, the Company entered into a Securities Purchase Agreement with an unaffiliated, accredited investor for the
sale and issuance of its Series A preferred stock. As part of the agreement, the investor agreed to purchase a total of 1,050,000
shares of Series A preferred stock valued at $1,050,000 in exchange for cash of $1,000,000, or a discount of $50,000, in various
tranches.
The
Series A preferred stock had the following rights and privileges:
|
●
|
25%
redemption premium;
|
|
●
|
Senior
rights in terms preference as to dividends, distributions, and payments upon the liquidation, dissolution, and winding up
of the Company;
|
|
●
|
Accrued
dividends at a rate of 5% per annum;
|
|
●
|
Mandatorily
redeemable at an installment basis starting August 13, 2017 in the amount of $63,000 plus accrued interest. The Company had
the option to redeem the Series A preferred stock shares in cash or in shares of Common Stock based upon the Company’s
5-day Volume Weighted Average Price (“VWAP”).
|
The
Company considered the guidance of ASC 480-10, Distinguishing Liabilities From Equity to determine the appropriate treatment of
the Series A preferred stock shares. Pursuant to ASC 480-10, the Company determined that the Series A preferred stock shares was
an obligation to be settled, at the option of the Company, in cash or in variable number of shares of Common Stock with a fixed
monetary value that should be recorded as a liability under ASC 480-10.
During
the year ended December 31, 2017, the Company issued 630,000 Series A preferred stock shares in exchange for cash of $555,000
and a discount of $75,000. Subsequent to the issuance of the Series A preferred stock shares, the Company redeemed the entire
Series A preferred stock shares totaling $630,000 in exchange for 190,800 shares of Common Stock with a fair value of $304,000
and cash payments totaling $543,000, for a total redemption price of $847,000. As a result of this redemption, the Company recognized
interest expense of $217,000 to account for the 25% redemption premium of $158,000, the excess of the fair value of the Common
Stock shares issued over the Series A preferred stock shares of $46,000 and the 5% interest due of $14,000. In addition, the Company
also amortized the entire $75,000 discount to interest expense. As of December 31, 2017, all of the Series A preferred stock shares
were fully redeemed, and no shares remained outstanding.
Under
authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s
own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company has
issued certain convertible notes whose conversion price contains reset provisions based on a future offering price and/or whose
conversion price is based on a future market price. However, since the number of shares to be issued is not explicitly limited,
the Company is unable to conclude that enough authorized and unissued shares are available to share settle the conversion option.
In addition, the Company also granted certain warrants whose exercise price is subject to reset based on a future market price.
As
a result, the conversion option and warrants are classified as a liability and bifurcated from the debt host and accounted for
as a derivative liability in accordance with ASC 815 and will be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
The
derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following
average assumptions:
|
|
Upon
Issuance
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Stock
Price
|
|
$
|
3.00
|
|
|
$
|
4.80
|
|
|
$
|
1.50
|
|
Exercise
Price
|
|
$
|
2.25
|
|
|
$
|
2.70
|
|
|
$
|
0.90
|
|
Expected
Life
|
|
|
1.60
|
|
|
|
1.78
|
|
|
|
1.26
|
|
Volatility
|
|
|
177
|
%
|
|
|
184
|
%
|
|
|
189
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-Free
Interest Rate
|
|
|
1.70
|
%
|
|
|
2.6
|
%
|
|
|
1.72
|
%
|
The
expected life of the conversion feature of the notes and warrants was based on the remaining contractual term of the notes and
warrants. The Company uses the historical volatility of its Common Stock to estimate the future volatility for its Common Stock.
The expected dividend yield was based on the fact that the Company has not paid dividends in the past and does not expect to pay
dividends in the future. The risk-free interest rate was based on rates established by the Federal Reserve Bank. As of December
31, 2017, the Company had recorded a derivative liability of $1,251,000.
During
the year ended December 31, 2018, the Company recorded an additional derivative liability totaling $1,877,000 as a result of the
issuance of convertible notes and warrants. The Company also extinguished derivative liability of $1,719,000 upon the conversion
and payment of outstanding convertible notes payable, which was recorded as part of gain on extinguishment of debt. In addition,
the Company also recorded a change in fair value of $1,167,000 to account the change in fair value of these derivative liabilities
up to the dates of the extinguishment and at December 31, 2018. At December 31, 2018, the fair value of the derivative liability
amounted to $2,576,000. The details of the derivative liability transactions during the year ended December 31, 2018 and 2017
are as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Beginning
Balance
|
|
$
|
1,251,000
|
|
|
$
|
1,256,000
|
|
Fair
value upon issuance of notes payable and warrants
|
|
|
1,877,000
|
|
|
|
-
|
|
Change
in fair value
|
|
|
1,167,000
|
|
|
|
(5,000
|
)
|
Extinguishment
|
|
|
(1,719,000
|
)
|
|
|
-
|
|
Ending
Balance
|
|
$
|
2,576,000
|
|
|
$
|
1,251,000
|
|
The
following were Common Stock transactions during the year ended December 31, 2018:
Shares
Issued from Stock Subscription
– The Company issued stock subscription to investors. For the year ended December
31, 2018, the Company issued 1,163,938 shares of Common Stock for net proceeds of $2,979,000. The proceeds were used to pay off
debt and for operations.
Shares
Issued for Services
– During the year ended December 31, 2018, the Company issued 319,345 shares of Common Stock
to employees and vendors for services rendered with a fair value of $1,545,000. These shares of Common Stock were valued based
on market value of the Company’s stock price at the date of grant or agreement. Included in these issuances were 300,000
shares of Common Stock with a fair value of $1,539,000 granted to officers and a director of the Company for services rendered.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Shares
Issued from Conversion of Note Payable
– During the year ended December 31, 2018, the Company issued 1,243,189 shares
of Common Stock upon conversion of notes payable and accrued interest. See Notes 4,
Notes Payable
, 5,
Notes Payable
– Related Parties
, and 6, Notes Payable, to these audited consolidated financial statements.
Shares
Issued Upon Issuance of Convertible Note
– In October 2018, the Company granted a note holder 96,667 shares of Common
Stock with a fair value of $595,000 as an inducement for the issuance of a note payable. See Note 6,
Convertible Notes Payable,
to these audited consolidated financial statements.
Shares
Issued for Accrued Officer’s Salary
– On March 28, 2018, the Company converted $582,000 of the Chief Executive
Officer’s accrued salary into 27,148 shares of Common Stock with a fair value of $582,000 at the date of conversion.
Shares
Issued Upon Exercise of Put Option
– In January and February 2018, the Company provided put notices to Kodiak and
issued 203,207 shares of Common Stock in exchange for cash of $1,000,000. See Note 6,
Convertible Notes Payable,
to these
audited consolidated financial statements. As part of the put option agreement, the Company also granted Kodiak the prorated warrants
to purchase up to 133,333 shares of Common Stock at $3.75 per share.
Shares
Repurchased
. For the year ended December 31, 2018, the Company repurchased 46,666 shares of Common Stock from investors
for $20,000.
The
following were Common Stock transactions during the year ended December 31, 2017:
Shares
Issued from Stock Subscription
–For the year ended December 31, 2017, the Company issued 745,476 shares of Common
Stock for net proceeds of $796,000. As part of the offering, the Company granted an investor warrants to purchase 6,667 shares
of Common Stock. The exercise price of the warrants is $6.00 per share, with an expiration date of May 21, 2019, and fully vested
on the grant date.
Shares
Issued for Services
– For the year ended December 31, 2017, the Company issued 552,029 shares of Common Stock to
vendors for services rendered and recorded stock compensation expense of $1,647,000. In addition, the Company granted two of its
officers and its lead director a total of 30,000 shares of Common Stock for services rendered since January 1, 2017 through the
date of grant in March 2018. Approximately $441,000 has been recognized as part of stock compensation expense related to this
award for the year ended December 31, 2017.
Shares
Issued for Preferred Stock
- During the year ended December 31, 2017, the Company redeemed 630,000 shares of Series A
Preferred stock with a value of $630,000 in exchange for 190,800 shares of Common Stock with a fair value of $304,000. See Note
7,
Convertible Series A Preferred Stock
, to these audited consolidated financial statements.
Shares
Issued for Conversion of Debt
- During the year ended December 31, 2017, the Company issued 68,413 shares of Common Stock
with fair value of $182,000, as settlement of a note payable.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Shares
Issued as Part of Put Notice
– In November 2017, the Company issued a put notice to Kodiak and issued 43,745 shares
of Common Stock in exchange for cash of $50,000. In addition, the Company also issued Kodiak the prorated warrants to purchase
up to 6,667 shares of Common Stock at an exercise price of $3.75 per share.
Shares
Issued for Accounts Payable
- The Company amended an agreement with a vendor and issued 26,667 shares of Common Stock
as full and final payment to the vendor on accounts payable owed of $30,000. The fair value of the shares was $56,000 at the date
of issuance, and as such, the Company recorded a loss on debt extinguishment of $26,000.
Shares
Issued with Note Payable
– In June 2017, as part of a note issuance, the Company granted the note holder 3,333 shares
of Common Stock with a fair value of $13,000.
Effective
October 16, 2014, the Company adopted the 2014 Stock Option Plan (the “Plan”) under the administration of the board
of directors to retain the services of valued key employees and consultants of the Company.
A
summary of option activity for the years ended December 31, 2018 and 2017 are presented below.
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2016
|
|
|
702,064
|
|
|
$
|
4.95
|
|
|
|
4.03
|
|
|
$
|
-
|
|
Granted
|
|
|
880,667
|
|
|
|
2.55
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(126,667
|
)
|
|
|
2.40
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2017
|
|
|
1,456,064
|
|
|
$
|
3.90
|
|
|
|
2.09
|
|
|
$
|
-
|
|
Granted
|
|
|
1,400,418
|
|
|
|
6.75
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(345,000
|
)
|
|
|
5.85
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(32,508
|
)
|
|
|
1.05
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2018
|
|
|
2,478,974
|
|
|
$
|
5.25
|
|
|
|
2.93
|
|
|
$
|
2,660,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
December 31, 2018
|
|
|
958,115
|
|
|
$
|
4.35
|
|
|
|
|
|
|
$
|
2,039,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2018
|
|
|
753,654
|
|
|
$
|
5.25
|
|
|
|
|
|
|
$
|
889,000
|
|
The
following were stock options transactions during the year ended December 31, 2018:
During
the year ended December 31, 2018, the Company granted stock options to employees and consultants to purchase a total 1,400,418
shares of Common Stock for services rendered. The options have an average exercise price of $6.75 per share, expire in five years,
and vest on the grant date or over a period of four years from the grant date. The total fair value of these options at grant
date was approximately $9,712,000 using the Black-Scholes Option Pricing model. The total stock compensation expense recognized
relating to the vesting of stock options for the year ended December 31, 2018 amounted to $1,870,000. As of December 31, 2018,
the total unrecognized stock-based compensation expense was $6,591,000, which is expected to be recognized as part of operating
expense through December 2021.
During
the year ended December 31, 2018, options were exercised resulting in the issuance of 32,508 shares of Common Stock. The Company
received cash of $34,000 upon exercise of the options.
The
following were stock options transactions during the year ended December 31, 2017:
During
the year ended December 31, 2017, the Company granted stock options to employees and consultants to purchase a total of 880,667
shares of Common Stock for services rendered. The options have an average exercise price of $2.55 per share, expire in five years,
and vest over a period of three years from the grant date. The total fair value of these options at the grant date was approximately
$1,781,000 using the Black-Scholes option pricing model. The total stock compensation expense recognized relating to vesting of
these stock options for the year ended December 31, 2017 amounted to $418,000.
The
fair value of the share option awards was estimated using the Black-Scholes method based on the following weighted-average assumptions:
|
|
|
Years
Ended December 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Risk-free
interest rate
|
|
|
2.25%-3.00
|
%
|
|
|
1.22%-2.23
|
%
|
Average
expected term (years)
|
|
|
5
years
|
|
|
|
5
years
|
|
Expected
volatility
|
|
|
184.45%-190.22
|
%
|
|
|
84.36%-173.92
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
Common
Stock; and the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect
to pay dividends in the future.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
The
Company has the following warrants as of December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2016
|
|
|
1,230,351
|
|
|
$
|
1.50
|
|
|
|
2.62
|
|
|
$
|
-
|
|
Granted
|
|
|
665,410
|
|
|
|
2.85
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2017
|
|
|
1,895,761
|
|
|
$
|
1.95
|
|
|
|
2.79
|
|
|
$
|
-
|
|
Granted
|
|
|
386,675
|
|
|
|
5.10
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(56,486
|
)
|
|
|
1.05
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(1,285,538
|
)
|
|
|
1.80
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2018, all vested
|
|
|
940,412
|
|
|
$
|
3.60
|
|
|
|
2.32
|
|
|
$
|
1,806,000
|
|
The
following were stock warrant transactions during the year ended December 31, 2018:
During
the year ended December 31, 2018, 1,285,538 warrants were exercised resulting in the issuance of 1,074,921 shares of Common Stock.
The Company received cash of $22,000 upon the exercise of the warrants.
During
the year ended December 31, 2018, the Company granted warrants to note holders to purchase a total of 66,667 shares of Common
Stock. The warrants are exercisable at an average price of $2.10 per share and will expire in January 2023. Warrants exercisable
for an aggregate of 33,333 shares of Common Stock were accounted for as a derivative liability.
On
February 21, 2018, the Company granted warrants exercisable for 133,333 shares of Common Stock as part of the exercise of its
put option with Kodiak. The exercise price of the warrants is $3.75 per share and the warrants expire on February 20, 2023.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
On
August 8, 2018, the Company granted warrants exercisable for 163,113 shares of Common Stock in connection with the extension of
the maturity date of a secured note payable. See Note 5,
Notes Payable-Related Parties,
to these audited consolidated financial
statements.
On
December 4, 2018, the Company granted warrants exercisable for 23,562 shares of Common Stock in connection with the extension
of the maturity date of a secured note payable. See Note 5,
Notes Payable-Related Parties,
to these audited condensed consolidated
financial statements.
The
following were stock warrant transactions during the year ended December 31, 2017:
On
April 1, 2017, the Company granted warrants to a consultant to purchase 25,000 shares of Common Stock at an exercise price of
$1.80 per share. The warrants expire on March 31, 2019 and were fully vested on the grant date. The total share-based compensation
expense recognized relating to these warrants for the year ended December 31, 2017 amounted to $27,000.
On
May 22, 2017, the Company issued warrants to purchase 6,667 shares of Common Stock as part of an equity offering. The exercise
price is $6.00 per share, the warrants expire on May 21, 2019, and were fully vested on grant date.
In
May and August 2017, the Company entered into extension agreements with Mr. Cutaia to extend the maturity date of certain secured
notes. In consideration for Mr. Cutaia’s agreement to extend the maturity dates, the Company granted Mr. Cutaia warrants
to purchase up to 205,623 shares of Common Stock, exercisable at $2.25 per share and $5.40 per share, with expiration dates starting
in May 2020.
In
August 2017, the Company entered into extension agreement with a noteholder to extend the maturity date of note payable. In consideration,
the Company granted the note holder warrants to purchase up to 87,787 shares of Common Stock, exercisable at $2.25 per share,
with expirations dates starting in August 2020.
From
June 2017 through December 2017, the Company issued warrants to note holders to purchase up to 322,000 shares of Common Stock.
The warrants are exercisable at an average price of $2.25 per share and will expire starting in June 2020 through December 2022.
A total of 80,000 shares of Common Stock were accounted as a derivative liability.
On
September 16, 2017, the Company issued warrants to purchase up to 18,333 shares of Common Stock in exchange for full settlement
and release of a disputed, unasserted claim. The exercise price was $1.20 per share and expired on March 15, 2018. The warrants
were fully vested on grant the date with a fair value of $10,000 which was recorded as part of loss on debt extinguishment.
The
total expense recognized relating to the vesting of these stock warrants for the year ended December 31, 2017 amounted to $27,000.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Significant
components of the Company’s deferred tax assets and liabilities are as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Net
operating loss carry-forwards
|
|
$
|
5,300,000
|
|
|
$
|
3,464,000
|
|
Share
based compensation
|
|
|
(524,000
|
)
|
|
|
(704,000
|
)
|
Non-cash
interest and financing expenses
|
|
|
(694,000
|
)
|
|
|
(833,000
|
)
|
Other
temporary differences
|
|
|
(378,000
|
|
|
|
(108,000
|
)
|
Less:
Valuation allowance
|
|
|
(3,704,000
|
)
|
|
|
(1,819,000
|
)
|
Deferred
tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
The
items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes
were as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Statutory
federal income tax rate
|
|
|
(21.0
|
)%
|
|
|
(34.0
|
)%
|
State
taxes, net of federal benefit
|
|
|
(6.0
|
)%
|
|
|
(5.8
|
)%
|
Non-deductible
items
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
Change
in valuation allowance
|
|
|
27.9
|
%
|
|
|
27.9
|
%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
ASC
740 requires that the tax benefit of net operating losses carry forwards be recorded as an asset to the extent that management
assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s
ability to generate sufficient taxable income within the carry forward period. Because of the Company’s recent history of
operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax
benefits is currently not likely to be realized and, accordingly, has provided a 100% valuation allowance against the asset amounts.
Any
uncertain tax positions would be related to tax years that remain open and subject to examination by the relevant tax authorities.
The Company has no liabilities related to uncertain tax positions or unrecognized benefits as of the year end December 31, 2018
or 2017. The Company has not accrued for interest or penalties associated with unrecognized tax liabilities.
On
December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The TCJ Act provides for significant
changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that impact corporate taxation requirements,
such as the reduction of the federal tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions.
The
Company is currently assessing the extensive changes under the TCJ Act and its overall impact on the Company; however, based on
its preliminary assessment of the reduction in the federal corporate tax rate from 35% to 21% to become effective on January 1,
2018, the Company currently expects that its effective tax rate for 2018 will be between 20% and 23%. Such estimated range is
based on management’s current assumptions with respect to, among other things, the Company’s earnings, state income
tax levels and tax deductions. The Company’s actual effective tax rate in 2018 may differ from management’s estimate.
As
of December 31, 2018, the Company had federal and state net operating loss carry forwards of approximately $12.8 million, which
may be available to offset future taxable income for tax purposes. These net operating losses carry forwards begin to expire in
2034. This carry forward may be limited upon the ownership change under IRC Section 382.
IRS
Section 382 places limitations (the “Section 382 Limitation”) on the amount of taxable income which can be offset
by net operating loss carry forwards after a change in control (generally greater than 50% change in ownership) of a loss corporation.
Generally, after a change in control, a loss corporation cannot deduct operating loss carry forwards in excess of the Section
382 Limitation. Due to these “change in ownership” provisions, utilization of the net operating loss may be subject
to an annual limitation regarding their utilization against taxable income in future periods. The Company has not concluded its
analysis of Section 382 through December 31, 2018 but believes the provisions will not limit the availability of losses to offset
future income.
The
Company is subject to income taxes in the U.S. federal jurisdiction and the state of Nevada. The tax regulations within each jurisdiction
are subject to interpretation of related tax laws and regulations and require significant judgment to apply. As of December 31,
2018, tax years 2015 through 2017 remain open for IRS audit. The Company has received no notice of audit from the IRS for any
of the open tax years.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
13.
|
ACCRUED
OFFICERS’ SALARY
|
Accrued
officers’ salary consists of unpaid salaries for the Company’s Chief Executive Officer, who is also the owner of approximately
27% of the Company’s outstanding shares of Common Stock, and the Company’s Chief Financial Officer. As of December
31, 2017, accrued officers’ salary amounted to $607,000.
The
Chief Executive Officer settled accrued payroll of $582,000 in exchange for 27,148 shares of Common Stock with a fair value of
$582,000 during fiscal 2018. There was no loss recognized as the fair value of the shares of Common Stock issued approximated
the accrued payroll settled.
As
of December 31, 2018, accrued officers’ salary amounted to $188,000.
14.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
The
Company leases office space in Los Angeles, California under an operating lease, which provides for monthly rent of $5,000 through
July 29, 2019. The Company had total rent expense for the year ended December 31, 2018 and 2017 of $62,000 and $52,000, respectively,
which is recorded as part of General and Administrative expenses in the Statement of Operations.
Employment
Agreements
On
November 21, 2014, the Company entered into an executive employment agreement effective November 1, 2014 with Rory J. Cutaia,
our president, chief executive officer, secretary, and treasurer. Pursuant to the terms of the employment agreement, we have agreed
to pay Mr. Cutaia an annual salary of $325,000, which will be increased each year by 10%, subject to the annual review and approval
of the board of directors. Notwithstanding the foregoing, a mandatory increase of not less than $100,000 per annum will be implemented
on the Company achieving EBITDA break-even. In addition to the base salary, Mr. Cutaia will be eligible to receive an annual bonus
in an amount up to $325,000, based upon the attainment of performance targets to be established by the board of directors, in
its discretion.
The
initial term of the employment agreement is five years, and, upon expiration of the initial five-year term, it may be extended
for additional one-year periods on ninety days prior notice.
In
the event that: (i) Mr. Cutaia’s employment is terminated without cause, (ii) Mr. Cutaia is unable to perform his duties
due to a physical or mental condition for a period of 120 consecutive days or an aggregate of 180 days in any 12-month period;
or (iii) Mr. Cutaia voluntarily terminates the employment agreement upon the occurrence of a material reduction in his salary
or bonus, a reduction in his job title or position, or the required relocation of Mr. Cutaia to an office outside of a 30 mile
radius of Los Angeles, California, Mr. Cutaia will:
|
(a)
|
receive
monthly payments of $27,000, or such sum as is equal to Mr. Cutaia’s monthly base compensation at the time of such termination,
whichever is higher, and
|
|
|
|
|
(b)
|
be
reimbursed for COBRA health insurance costs, in each case for 36 months from the date of such termination or to the end of
the term of the agreement, whichever is longer.
|
In
addition, Mr. Cutaia will have any and all of his unvested stock options immediately vest, with full registration rights; and
any unearned and unpaid bonus compensation, expense reimbursement, and all accrued vacation, personal sick days, etc., be deemed
earned, vested and paid immediately. As a condition to receiving the foregoing, Mr. Cutaia will be required to execute a release
of claims, and a non-competition and non-solicitation agreement having a term which is the same as the term of the monthly severance
payments described above.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
Litigation
On
April 24, 2018, EMA commenced an action against us, styled
EMA Financial, LLC, a New York limited liability company, Plaintiff,
against nFUSZ, Inc., Defendant
, United States District Court, Southern District of New York, case number 1:18-cv-03634-NRB.
The Complaint sets forth four causes of action and seeks relief consisting of: (1) money damages, (2) injunctive relief, (3) liquidated
damages, and declaratory relief. All of the claims stem from our refusal to honor EMA’s exercise notice in connection with
a common stock purchase warrant that we had granted to it. We believe EMA’s allegations are entirely without merit.
The
circumstances giving rise to the dispute are as follows: on or about December 5, 2017, we issued a warrant to EMA as part of the
consideration we were required to provide in connection with a contemporaneous convertible loan EMA made to us. The loan, which
was evidenced by a convertible note, was for a term of one year. Our refusal to honor the warrant exercise notice was due to our
good faith belief that EMA’s interpretation of the cashless exercise provision of the warrant was,
inter alia
, (1)
contrary to our direct conversations and agreements made with EMA prior to, and during the preparation of the loan and warrant
agreements; (2) contradictory to the plain language on the face and body of the warrant agreement drafted by EMA; (3) wholly inconsistent
with industry norms, standards, and practices; (4) was contrary to the cashless exercise method actually adopted by EMA’s
co-lender in the same transaction; and (5) was the result of a single letter mistakenly transposed in the cashless exercise formula
drafted by EMA which if adopted, would result in a gross and unintended windfall in favor of EMA and adverse to us. Moreover,
as set forth in our response to EMA’s allegations, EMA’s interpretation of the cashless exercise provision would have
resulted in it being issued more shares of our Common Stock than it would have received if it exercised the warrant for cash (instead
of less), and more than the amount of shares reflected on the face of the warrant agreement itself. The loan underlying the transaction
was repaid, in full, approximately three months after it was issued, on March 8, 2018, together with all accrued interest, prior
to any conversion or attempted conversion of the note.
On
July 20, 2018, we filed an Answer to the Complaint, along with certain Affirmative Defenses, as well as Counterclaims seeking,
inter alia
, to void the entire transaction for violation of New York’s criminal usury laws and, alternatively, for
reformation of the warrant conversion formula set forth in the Warrant Agreement so as to be consistent with the parties’
intent and custom and practice in the industry.
As
of December 31, 2018, the parties have undergone depositions and exchanged document production. Discovery was scheduled to end
on January 31, 2019. Neither party has requested to extend the discovery period. Notwithstanding the pending action, in December
2018, EMA attempted to exercise the warrant through the Company’s transfer agent utilizing the disputed cashless exercise
formula. The transfer agent rejected EMA’s request and notified the Company who promptly filed a motion for a preliminary
injunction to enjoin EMA from making any further attempts to exercise the warrant in this manner during the pendency of the action.
The Company is awaiting a decision from the Court on its preliminary injunction motion. The Court has not ruled on the Company’s
motion. We intend to vigorously defend the action, as well as vigorously prosecute our counterclaims against EMA. The action is
still pending.
In
August 2014, a former employee and then current stockholder (“Employee”) entered into that certain Executive Employment
Agreement (“Employment Contract”) with bBooth, Inc., our predecessor company. Section 3.1 of the Employment Contract
provided, among other things, that Employee was employed to serve as our President and reported directly to Rory Cutaia, our Chief
Executive Officer. Section 5.2 of Employment Contract provides, among other things, that Employee was entitled to receive a bonus
(“Bonus”) from us if certain conditions are met. These specified conditions were never met.
On
or about May 15, 2015, Employee ceased employment at the Company. More than eight months later, on or about January 20, 2016,
the parties entered into a certain Stock Repurchase Agreement (the “Repurchase Agreement”) pursuant to which we purchased
all of Employee’s shares of Common Stock for a purchase price of $144,000. The Repurchase Agreement also provided, among
other things, that Employee released us from all claims, causes of action, suits, and demands (the “Release”).
Approximately
two years later, in April 2018, at a time when the Company’s share price was on the rise, Employee notified us by email
that it is Employee’s position that on or about May 15, 2015: (1) Employee was terminated “without cause” pursuant
to Section 6.2 of the Employment Contract; or (2) Employee terminated employment with Company “for good reason” pursuant
to Section 6.3 of the Employment Contract. Employee sought approximately $300,000 in allegedly unpaid bonuses, plus 150,000 options
priced at $0.50 per share, which expired prior to exercise. We responded in or about April 2018 that Employee’s claims lacked
factual and legal merit, including that they are barred by the Release. The lack of response from Employee at that time appeared
to indicate Employee’s tacit acknowledgment and ratification of our rationale underpinning our denial of Employee’s
claims. Approximately eight (8) months later in December 2018, Employee resurfaced, renewing his claims. We responded by reminding
Employee we consider his claims to be without merit, and that, in any event, they are barred by the Release. In our view, the
Release set forth in the Repurchase Agreement coupled with the existing merger or integration clause likely shields the Company
from liability, even assuming, arguendo, that the claims could be supported by credible evidence.
We
know of no other material pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our assets
or properties, or the assets or properties of any of our subsidiaries, are subject and, to the best of our knowledge, no adverse
legal activity is anticipated or threatened. In addition, we do not know of any such proceedings contemplated by any governmental
authorities.
We
know of no material proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial stockholder
is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries.
Board
of Directors
The
Company has committed an aggregate of $270,000 in board fees to its three board members commencing on the date the Company is
listed on the Nasdaq. The members will serve on the board until the annual meeting for the year in which their term expires or
until their successors has been elected and qualified.
VERB
TECHNOLOGY COMPANY, INC.
(formerly
known as nFüsz, Inc.)
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
15.
SUBSEQUENT EVENTS
Merger
Agreement
On
November 8, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Sound Concepts,
Inc., a Utah corporation (“Sound Concepts”), NF Merger Sub, Inc., a Utah corporation (“Merger Sub 1”),
NF Acquisition Company, LLC, a Utah limited liability company (“Merger Sub 2”), the shareholders of Sound Concepts
(the “Sound Concepts Shareholders”), the shareholders’ representative (the “Shareholder Representative”),
and us, pursuant to which we will acquire Sound Concepts (the “Sound Concepts Acquisition”) through a two-step merger,
consisting of merging Merger 1 Sub with and into Sound Concepts, with Sound Concepts surviving the “first step” of
the merger as our wholly-owned subsidiary (and the separate corporate existence of Merger Sub 1 will cease) and, immediately thereafter,
merging Sound Concepts with and into Merger Sub 2, with Merger Sub 2 surviving the “second step” of the merger, such
that, upon the conclusion of the “second step” of the merger, the separate corporate existence of Sound Concepts will
cease and Merger Sub 2 will continue its limited liability company existence under Utah law as the surviving entity and as our
wholly-owned subsidiary (collectively, the “Merger”). On the terms and subject to the conditions set forth in the
Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of Sound Concepts’
capital stock issued and outstanding immediately prior to the Effective Time (the “Sound Concepts Capital Stock”)
will be cancelled and converted into the right to receive a proportionate share of $25,000,000 of value (the “Closing Merger
Consideration”), to be payable through a combination of a cash payment by us of $15,000,000 (the “Acquisition Cash
Payment”) and the issuance of shares of our Common Stock with a fair market value of $10,000,000 (the “Acquisition
Stock”). The Closing Merger Consideration is not subject to any closing working capital adjustment or post-closing working
capital adjustment. We expect the Sound Concepts Acquisition to close in the second quarter of 2019. However, we cannot provide
any assurance as to the actual timing of completion of the Sound Concepts Acquisition, or whether the Sound Concepts Acquisition
will be completed at all.
Issuances
of Stock Options
On
January 8, 2019, the Company granted stock options to an officer to purchase a total of 16,667 shares of Common Stock pursuant
to the officer’s employment agreement. The options have an average exercise price of $4.35 per share, and expire in five
years. The options vested 50% on the grant date and the remaining 50% will vest on the 12-month anniversary of the grant date.
Total fair value of these options at grant date was $70,000 using the Black-Scholes option pricing model.
On
January 28, 2019, the Company granted stock options to a consultant to purchase a total of 1,667 shares of Common Stock for services
to be rendered. The options have an average exercise price of $7.80 per share, expire in five years, and vest in sixty days. The
total fair value of these options at the grant date was $13,000 using the Black-Scholes option pricing model.
On
February 5, 2019, the Company granted stock options to an officer to purchase up to 66,666 shares of Common Stock pursuant to
the officer’s employment agreement. The options have an exercise price of $7.50 per share, have a five-year term and vest
over a period of three years from the grant date. The total fair value of these options at the grant date was approximately $482,000
using the Black-Scholes option pricing model and will be amortized over its vesting term.
On
February 6, 2019, the Company granted stock options to a consultant to purchase up to 66,666 shares of Common Stock for services
to be rendered. The options have an exercise price of $8.05 per share, have a five-year term, and 25% vest on the grant date and
the remaining over a period of three years from the grant date. The total fair value of these options at the grant date was approximately
$521,000 using the Black-Scholes option pricing model and will be amortized over its vesting term.
On
February 28, 2019, the Company granted stock options to employees to purchase up to 9,000 shares of Common Stock for services
to be rendered. The options have an exercise price of $8.10 per share, have a five-year term, and vest equally on the anniversary
dates over three years. The total fair value of these options at the grant date was approximately $69,000 using the Black-Scholes
option pricing model and will be amortized over its vesting term.
Exercise
of Warrants
On
January 15, 2019, a total of 161,969 warrants were exercised on a cashless basis for 148,714 shares of Common Stock at a weighted
average exercise price of $1.05 per share.
On
March 28, 2018, we issued a total of 25,000 shares of our Common Stock in connection with the exercise of warrants at an exercise
price of $1.80 per share. We received $45,000 in proceeds in connection with the exercise of these warrants.
Name-Change
Merger
Effective
February 1, 2019, we changed our corporate name from nFüsz, Inc. to Verb Technology Company, Inc. The name change was effected
through a parent/subsidiary short-form merger of Verb Technology Company, Inc., our wholly-owned Nevada subsidiary, formed solely
for the purpose of the name change, with and into us. We were the surviving entity. To effectuate the name-change merger, we filed
Articles of Merger with the Secretary of State of the State of Nevada on January 31, 2019. The name-change merger became effective
on February 1, 2019. Our board of directors approved the name-change merger, which resulted in the name change on that date. In
accordance with Section 92A.180 of the NRS, stockholder approval of the name-merger was not required.
Reverse
Stock Split
On
February 1, 2019, we implemented a 1-for-15 Reverse Stock Split of our Common Stock. The Reverse Stock Split became effective
upon commencement of trading of our Common Stock on February 4, 2019. As a result of the Reverse Stock Split, every fifteen (15)
shares of our pre-Reverse Stock Split Common Stock were combined and reclassified into one share of our Common Stock. The number
of shares of Common Stock subject to outstanding options, warrants, and convertible securities were also reduced by a factor of
fifteen as of February 1, 2019. All historical share and per share amounts reflected throughout our consolidated financial statements
and other financial information in this Annual Report have been adjusted to reflect the Reverse Stock Split as if the split occurred
as of the earliest period presented. The par value per share of our Common Stock was not affected by the Reverse Stock Split.
The Company issued 139,035 beneficial round-up shares due to the 1-for-15 Reverse Stock Split of our Common Stock.
Issuance
of Convertible Note
On
February 1, 2019, we issued an unsecured convertible note to an existing noteholder, Bellridge, in the aggregate principal amount
of $500,000 in exchange for net proceeds of $432,000, representing an original issue discount of $25,000 and paid legal and financing
expenses of $43,000. In addition, the Company issued 16,667 shares of its Common Stock with an estimated fair value of $128,000.
The note contained a mandatory conversion feature in case of default based upon a discounted VWAP. Furthermore, the note also
contained a provision that will require the Company to pay the noteholder an additional $25,000 and issue 8,606 shares of Common
Stock if the note is not be paid within 60 days after its issuance. The Company is currently in the process of determining the
appropriate accounting for this promissory note. The note matures in August 2019.
Issuance
of Note
On
March 22, 2019, we issued an unsecured promissory note to an unaffiliated third-party in the amount of $300,000. The note bears
an Original Issue Discount of $10,000, which is included in the original principal amount. The note bears interest on the principal
amount then outstanding at a rate of 5% per annum. The note is due on demand at any time after April 10, 2019.
Issuance
of Common Stock
Effective
February 1, 2019, we issued 139,035 shares of Common Stock to existing stockholders as part of the beneficial holder round up
in connection with the Reverse Stock Split.
On
February 4, 2019, the Company issued 13,333 shares of Common Stock to consultants as payment for services to be rendered. The
shares had an aggregate value of $102,000, which was based on the closing price of the Company’s Common Stock as reported
by the OTCQB on the date of issuance, or $7.65 per share. The Company offered and sold the shares in reliance on the exemption
from registration pursuant to Section 4(a)(2) of the Securities Act (in that the shares of the Company’s Common Stock were
issued by the Company in a transaction not involving any public offering).
Lease
Agreement
In
February 2019, the Company entered into a lease agreement for its corporate headquarters to be located in Newport Beach, California.
The lease is for a term of 65 months, with the option to extend the lease. The average monthly base rent for the first 12 months
of the lease is approximately $12,000 after rent abatement. Thereafter, average monthly base rent will be approximately $24,000
over the remaining term. The lease term will commence when tenant improvements to be paid for by the landlord, are substantially
completed.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders of
Sound
Concepts, Inc.
American
Fork, UT
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Sound Concepts, Inc. (the “Company”) as of December 31, 2018 and 2017,
the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations
and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of
America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We are a public accounting firm registered with the Public Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement, whether due to error fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
We have
served as the Company’s auditor since 2018
/s/
Weinberg & Company, P.A.
|
|
Weinberg
& Company, P.A.
|
|
|
|
Los
Angeles, California
|
|
April
1, 2019
|
|
Sound
COncepts, inc.
Balance
Sheets
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
84,000
|
|
|
$
|
78,000
|
|
Accounts receivable,
net
|
|
|
974,000
|
|
|
|
911,000
|
|
Inventory, net
|
|
|
123,000
|
|
|
|
307,000
|
|
Prepaid expenses
|
|
|
158,000
|
|
|
|
95,000
|
|
Advances
to related party
|
|
|
-
|
|
|
|
46,000
|
|
Total current assets
|
|
|
1,339,000
|
|
|
|
1,437,000
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
|
112,000
|
|
|
|
46,000
|
|
Other
assets
|
|
|
20,000
|
|
|
|
11,000
|
|
TOTAL
ASSETS
|
|
$
|
1,471,000
|
|
|
$
|
1,494,000
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
730,000
|
|
|
$
|
679,000
|
|
Accrued expenses,
payroll and other current liabilities
|
|
|
129,000
|
|
|
|
226,000
|
|
Customer deposits
|
|
|
169,000
|
|
|
|
145,000
|
|
Deferred revenue
|
|
|
327,000
|
|
|
|
472,000
|
|
Note payable
|
|
|
5,000
|
|
|
|
6,000
|
|
Credit
line payable
|
|
|
-
|
|
|
|
280,000
|
|
Total current liabilities
|
|
|
1,360,000
|
|
|
|
1,808,000
|
|
|
|
|
|
|
|
|
|
|
Note
payable
|
|
|
27,000
|
|
|
|
-
|
|
TOTAL
LIABILITIES
|
|
|
1,387,000
|
|
|
|
1,808,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Deficit):
|
|
|
|
|
|
|
|
|
Common stock, $.001
par value; 129,000 shares authorized; 122,000 shares issued and outstanding
|
|
|
3,000
|
|
|
|
3,000
|
|
Additional paid-in
capital
|
|
|
465,000
|
|
|
|
465,000
|
|
Treasury stock
|
|
|
(445,000
|
)
|
|
|
(445,000
|
)
|
Retained
earnings (accumulated deficit)
|
|
|
61,000
|
|
|
|
(337,000
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
84,000
|
|
|
|
(314,000
|
)
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
$
|
1,471,000
|
|
|
$
|
1,494,000
|
|
The
accompanying notes are an integral part of these financial statements.
Sound
Concepts, inc.
Statements
of Operations
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
12,734,000
|
|
|
$
|
11,546,000
|
|
Cost
of revenue
|
|
|
7,121,000
|
|
|
|
6,293,000
|
|
Gross
margin
|
|
|
5,613,000
|
|
|
|
5,253,000
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,194,000
|
|
|
|
1,731,000
|
|
General
and administrative
|
|
|
3,029,000
|
|
|
|
3,530,000
|
|
Total
operating expenses
|
|
|
5,223,000
|
|
|
|
5,261,000
|
|
Income
(loss) from operations
|
|
|
390,000
|
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
8,000
|
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
398,000
|
|
|
$
|
(15,000
|
)
|
The
accompanying notes are an integral part of these financial statements.
Sound
Concepts, inc.
Statements
of Stockholders’ Equity (Deficit)
|
|
|
|
|
Additional
|
|
|
|
|
|
Retained
Earnings
|
|
|
Total
Stockholders’
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
(Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit)
|
|
|
(Deficit)
|
|
Balance—December
31, 2016
|
|
|
122,000
|
|
|
$
|
3,000
|
|
|
$
|
465,000
|
|
|
$
|
(445,000
|
)
|
|
$
|
(322,000
|
)
|
|
$
|
(299,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—December
31, 2017
|
|
|
122,000
|
|
|
|
3,000
|
|
|
|
465,000
|
|
|
|
(445,000
|
)
|
|
|
(337,000
|
)
|
|
|
(314,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398,000
|
|
|
|
398,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance—December
31, 2018
|
|
|
122,000
|
|
|
$
|
3,000
|
|
|
$
|
465,000
|
|
|
$
|
(445,000
|
)
|
|
$
|
61,000
|
|
|
$
|
84,000
|
|
The
accompanying notes are an integral part of these financial statements.
Sound
Concepts, Inc.
Statements
of Cash Flows
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
398,000
|
|
|
$
|
(15,000
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used) in operating activities:
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
|
19,000
|
|
|
|
(24,000
|
)
|
Inventory
reserve
|
|
|
(66,000
|
)
|
|
|
(76,000
|
)
|
Gain
from disposal of property and equipment
|
|
|
(20,000
|
)
|
|
|
-
|
|
Depreciation
of property and equipment
|
|
|
35,000
|
|
|
|
59,000
|
|
Amortization
|
|
|
-
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(82,000
|
)
|
|
|
(240,000
|
)
|
Inventory
|
|
|
250,000
|
|
|
|
254,000
|
|
Prepaid
expenses
|
|
|
(63,000
|
)
|
|
|
(11,000
|
)
|
Other
assets
|
|
|
(9,000
|
)
|
|
|
10,000
|
|
Accounts
payable
|
|
|
51,000
|
|
|
|
(512,000
|
)
|
Accrued
liabilities and payroll
|
|
|
(97,000
|
)
|
|
|
60,000
|
|
Customer
deposits
|
|
|
24,000
|
|
|
|
(79,000
|
)
|
Deferred
revenue
|
|
|
(145,000
|
)
|
|
|
185,000
|
|
Net
cash provided by (used in) operating activities
|
|
|
295,000
|
|
|
|
(389,000
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(45,000
|
)
|
|
|
(5,000
|
)
|
Net
cash used in investing activities
|
|
|
(45,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Advances
to related party
|
|
|
46,000
|
|
|
|
(14,000
|
)
|
Credit
line payable
|
|
|
(280,000
|
)
|
|
|
280,000
|
|
Notes
payable
|
|
|
(10,000
|
)
|
|
|
(20,000
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(244,000
|
)
|
|
|
246,000
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE)/INCREASE IN CASH
|
|
|
6,000
|
|
|
|
(148,000
|
)
|
CASH
— BEGINNING OF PERIOD
|
|
|
78,000
|
|
|
|
226,000
|
|
CASH
— END OF PERIOD
|
|
$
|
84,000
|
|
|
$
|
78,000
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
9,000
|
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental
non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Note
payable incurred on acquisition of vehicle
|
|
$
|
36,000
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these financial statements.
sound
concepts, inc.
Notes
to Financial Statements
YearS
ended december 31, 2018 and 2017
Note
1. Description of Business and Basis of Presentation
Nature
of Business
Sound
Concepts, Inc. (the “Company”) provides digital marketing and sales support services, including a video-based sales
application, to the direct sales industry. Currently, we service approximately 80 clients in the network marketing and affiliate
marketing sector, which include Isagenix, Vasayo, Nu Skin, Nerium, Forever Living, Seacret, among many others. Our sales application,
offered as a SaaS application, is known as Brightools and is designed specifically to meet the needs of direct sales representatives.
Brightools provides recruiting tools, sales representative training, and education tools, as well as instant notification capabilities
to notify users when a prospect has engaged in shared content. Brightools also tracks customer purchases and allows corporate
to monitor field activity to track the effectiveness of campaigns as well as compliance. Brightools is currently in use in over
58 different countries and has more than 519,000 current users.
Sound
Concepts was founded in year 1979 and has been a privately held company. Its headquarters is in American Fork, Utah, with 85 employees
as of December 31, 2018.
Note
2. Summary of Significant Accounting Policies
Use
of Estimates
The
Company’s financial statements are prepared in conformity with GAAP, which requires management to make estimates and assumptions
that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ
materially from these estimates. The accounting estimates and assumptions that require management’s most significant, difficult,
and subjective judgment include the collectability of accounts receivable, inventory obsolescence, assessment of useful lives
and recoverability of long-lived assets, and accruals for potential liabilities, among others. Actual results experienced by the
Company may differ from management’s estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase
to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
sound
concepts, inc.
Notes
to Financial Statements
YearS
ended december 31, 2018 and 2017
Note
2. Summary of Significant Accounting Policies, continued
Concentration
of Credit and Other Risks
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable. Cash
is deposited with a limited number of financial institutions. The balances held at any one financial institution may be in excess
of Federal Deposit Insurance Corporation (“FDIC”) insurance limits of up to $250,000.
The
Company extends limited credit to customers based on an evaluation of their financial condition and other factors. The Company
generally does not require collateral or other security to support accounts receivable. The Company performs ongoing credit evaluations
of its customers and maintains an allowance for doubtful accounts and sales credits. The Company believes that any concentration
of credit risk in its accounts receivable is substantially mitigated by the Company’s evaluation process, relatively short
collection terms and the high level of credit worthiness of its customers.
The
Company’s concentration of credit risk includes its concentrations from key customers and vendors. The details of these
significant customers and vendors are presented in the following table for the years ended December 31, 2018 and 2017:
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
December
31, 2018
|
|
December
31, 2017
|
|
|
|
|
|
|
|
Sound
Concept’s largest customers are presented below as a percentage of Sound Concept’s aggregate:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
11%
of revenue from one customer
|
|
17%,
17% and 11% of revenue, or 45% of revenue in the aggregate
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
10%
and 17% of accounts receivable, or 27% of accounts receivable in the aggregate
|
|
24%,
13% and 13% of accounts receivable, or 50% of accounts receivable in the aggregate
|
|
|
|
|
|
|
|
Sound
Concept’s largest vendors are presented below as a percentage of Sound Concept’s aggregate:
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
12%
of purchase from one vendor
|
|
None
over 10%
|
|
|
|
|
|
|
|
Accounts
payable
|
|
16%
and 10% of accounts payable, or 26% of accounts payable in the aggregate
|
|
14%
of accounts payable to one vendor
|
|
sound
concepts, inc.
Notes
to Financial Statements
YearS
ended december 31, 2018 and 2017
Note
2. Summary of Significant Accounting Policies, Continued
Allowance
for Doubtful Accounts
Accounts
receivable are stated at a gross invoice amount less an allowance for doubtful accounts. The Company continually monitors customer
payments and maintains a reserve for estimated losses resulting from its customers’ inability to make required payments.
In determining the reserve, the Company evaluates the collectability of its accounts receivable based upon a variety of factors.
In cases where the Company becomes aware of circumstances that may impair a specific customer’s ability to meet its financial
obligations, the Company records a specific allowance against amounts due. For all other customers, the Company recognizes allowances
for doubtful accounts based on its historical write-off experience in conjunction with the length of time the receivables are
past due, customer creditworthiness, geographic risk and the current business environment. Actual future losses from uncollectible
accounts may differ from the Company’s estimates.
The
allowance for doubtful accounts was $29,000 and $10,000 as of December 31, 2018 and 2017, respectively.
Inventory
Inventory
is recorded at lower of cost or market as determined on a first-in, first-out basis.
The
valuation of inventory requires us to estimate obsolete and excess inventory, as well as inventory that is not of saleable quality.
We compare the estimate of future demand to work in process and finished goods inventory levels to determine the amount, if any,
of obsolete or excess inventory. If our demand forecast for specific products is greater than actual demand and we fail to reduce
manufacturing output accordingly, we could be required to write off inventory.
Inventory
reserves were $31,000 and $97,000 as of December 31, 2018 and 2017, respectively.
Property
and Equipment
Property
and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over
the related assets’ estimated useful lives. The Company amortizes leasehold improvements over the estimated life of these
assets or the term of the lease, whichever is shorter:
Computers
|
|
3
years
|
Furniture
and fixture
|
|
5
years
|
Machinery
and equipment
|
|
5
years
|
Software
|
|
3
years
|
Vehicles
|
|
5
years
|
Leasehold Improvements
|
|
5
years
|
Expenditures
that materially increase asset life are capitalized, while ordinary maintenance and repairs are expensed as incurred. The Company
capitalizes the costs of purchased software licenses and consulting costs to implement the software for internal use. These costs
are included in the caption “property and equipment” in the balance sheets.
Depreciation
expense is included as part of “general and administrative expense” in the accompanying statements of operations.
sound
concepts, inc.
Notes
to Financial Statements
YearS
ended december 31, 2018 and 2017
Note
2. Summary of Significant Accounting Policies, continued
Fair
Value of Financial Instruments
The
Company follows paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of its financial instruments and paragraph 825-10-50-10 of the FASB Accounting Standards Codification for
disclosures about fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value
in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
(3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
|
Level
1
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
Level
2
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
Level
3
|
Pricing
inputs that are generally observable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expense, accounts payable and
accrued payables, approximate their fair values because of the short maturity of these instruments.
Impairment
of long-lived assets
Long-lived
assets primarily include property and equipment. In accordance with the provision of ASC 360, the Company generally conducts its
annual impairment evaluation of its long-lived assets in the fourth quarter of each year, or more frequently if indicators of
impairment exist, such as a significant sustained change in the business climate.
As
of December 31, 2018 and 2017, the Company determined there were no indicators of impairment of its property and equipment.
Revenue
Recognition
The
Company derives its revenue primarily from providing digital marketing and sales support services, from the sale of customized
print products and training materials, branded apparel and digital tools, as demanded by its customers. The Company also charges
certain customers setup or installation fees for the creation and development of websites and phone applications. These fees are
accounted as part of deferred revenues and amortized over the estimated life of the agreement.
Amounts
related to shipping and handling that are billed to customers are reflected as part of revenues, and the related costs are
reflected in cost of revenues in the accompanying Statements of Operations.
Through
December 31, 2017, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee is
fixed or determinable, and collectability of the resulting receivable is reasonably assured. Determining whether and when these
criteria have been satisfied requires the Company to make assumptions and judgments that could have a significant impact on the
timing and amount of revenue it reports. The Company recognized revenue when risk of loss transferred to its customers and collection
of the receivable was reasonably assured, which generally occurs when the product is shipped, or the service has been rendered
with regard to the setup or installation fees.
The
Company adopted ASC 606 starting January 1, 2018. The new standard provides authoritative guidance clarifying the principles for
recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle
of the guidance is that an entity should recognize revenue to depict the transfer of promised goods to customers in an amount
that reflects the consideration to which the entity expects to be entitled in the exchange for those goods.
Due
to the nature of the products sold by the Company, the adoption of the new standard has had no quantitative effect on the financial
statements. However, the guidance requires additional disclosures to help users of financial statements better understand the
nature, amount, timing, and uncertainty of revenue that is recognized.
Under
the new guidance, revenue is recognized when control of promised goods is transferred to its customers, in an amount that reflects
the consideration we expect to be entitled to in exchange for those goods or services. The Company reviews its sales transactions
to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate
performance obligations, if applicable. Revenue and costs of sales are recognized once products are delivered to the customer’s
control and performance obligations are satisfied.
Products
sold by the Company are distinctly individual. The products are offered for sale solely as finished goods, and there are no performance
obligations required post-shipment for customers to derive the expected value from them. Other than promotional activities, which
can vary from time to time but nevertheless are entirely within the Company’s control, contracts with customers contain
no incentives or discounts that could cause revenue to be allocated or adjusted over time.
Control
of products we sell transfers to customers upon shipment from our facilities, and the Company’s performance obligations
are satisfied at that time. Shipping and handling activities are performed before the customer obtains control of the goods and,
therefore, represent a fulfillment activity rather than promised goods to the customer. Payment for sales are generally made by
check, credit card, or wire transfer. Historically, the Company has not experienced any significant payment delays from customers.
The
Company allows for returns within 30 days of purchase from end-users. Its customers may return purchased products to the Company
under certain circumstances.
Customer
setup or installation fees for the creation and development of websites and phone application are recognized as revenues over
the estimated subscription period. In addition, certain revenue is recorded based upon stand-alone selling prices and is primarily
recognized when the customer uses these services, based on the quantity of services rendered, such as amount of customer usage.
Revenues
during the years ended December 31, 2018 and 2017 were as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Revenues
|
|
|
Cost
of Goods Sold
|
|
|
Gross
Profit (Loss)
|
|
|
Revenues
|
|
|
Cost
of Goods Sold
|
|
|
Gross
Profit (Loss)
|
|
Digital
|
|
$
|
3,702,000
|
|
|
$
|
505,000
|
|
|
$
|
3,197,000
|
|
|
$
|
3,087,000
|
|
|
$
|
427,000
|
|
|
$
|
2,660,000
|
|
Corporate and Fulfilment
|
|
|
7,258,000
|
|
|
|
4,829,000
|
|
|
|
2,429,000
|
|
|
|
7,649,000
|
|
|
|
5,027,000
|
|
|
|
2,622,000
|
|
Shipping
|
|
|
1,774,000
|
|
|
|
1,787,000
|
|
|
|
(13,000
|
)
|
|
|
810,000
|
|
|
|
839,000
|
|
|
|
(29,000
|
)
|
Total
|
|
$
|
12,734,000
|
|
|
$
|
7,121,000
|
|
|
$
|
5,613,000
|
|
|
$
|
11,546,000
|
|
|
$
|
6,293,000
|
|
|
$
|
5,253,000
|
|
sound
concepts, inc.
Notes
to Financial Statements
YearS
ended december 31, 2018 and 2017
Note
2. Summary of Significant Accounting Policies, continued
Cost
of Revenues
Cost
of revenues primarily consists of the purchase price of consumer products, digital content costs, packaging supplies, and
customer shipping and handling expenses. Shipping costs to receive products from our suppliers are included in our inventory,
and recognized as cost of sales upon sale of products to our customers.
Research
and Development Costs
Research
and development costs consist primarily of salaries and fees paid to both employees and third parties for the development of Company’s
platform to upgrade its functionality and to provide better service to its customers. We seek to invest efficiently in numerous
areas of technology and content so we may continue to enhance the customer experience and improve our process efficiency through
rapid technology developments, while operating at an ever increasing scale. We expect spending in technology and content to increase
over time as we continue to add employees and technology infrastructure.
Advertising
Costs
Advertising
costs consists of trade shows and marketing expenses. Agreements do not provide for guaranteed renewal and may be terminated by
the Company without cause. Such advertising costs are charged to expense as incurred and reported as part of general and administrative
expenses in the accompanying statement of operations.
During
the years ended December 31, 2018 and 2017, advertising costs amounted to $2,000 and $24,000, respectively, and was recorded as
part of general and administrative expense in the accompanying statements of operations.
Income
Taxes
The
Company is a limited liability company treated as a partnership for federal and state income tax purposes with all income tax
liabilities and/or benefits of the Company being passed through to the member. As such, no recognition of federal or state income
taxes for the Company or its subsidiaries that are organized as limited liability companies have been provided for in the accompanying
financial statements. Any uncertain tax position taken by the member is not an uncertain position of the Company.
sound
concepts, inc.
Notes
to Financial Statements
YearS
ended december 31, 2018 and 2017
Note
2. Summary of Significant Accounting Policies, continued
Recent
Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. It also requires classification of
all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount,
timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company will
evaluate the impact of the adoption of ASU 2016-02 on the Company’s financial statement presentation or disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present
or future financial statements.
Note
3. Accounts Receivable
Accounts
receivable, net consisted of the following:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
1,003,000
|
|
|
$
|
921,000
|
|
Less
allowance for doubtful accounts
|
|
|
(29,000
|
)
|
|
|
(10,000
|
)
|
Total
accounts receivable, net
|
|
$
|
974,000
|
|
|
$
|
911,000
|
|
During
the years ended December 31, 2018 and 2017, the Company recognized bad debt expense of $23,000 and $81,000, respectively, which
was reported as part of Operating Expenses in the accompanying statement of operations.
Note
4. Inventory
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
57,000
|
|
|
$
|
64,000
|
|
Finished
goods
|
|
|
97,000
|
|
|
|
340,000
|
|
Total
inventory
|
|
|
154,000
|
|
|
|
404,000
|
|
Less
inventory reserve
|
|
|
(31,000
|
)
|
|
|
(97,000
|
)
|
Total
inventory, net
|
|
$
|
123,000
|
|
|
$
|
307,000
|
|
sound
concepts, inc.
Notes
to Financial Statements
YearS
ended december 31, 2018 and 2017
Note
5. Property and Equipment
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Computers
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Furniture
and fixture
|
|
|
26,000
|
|
|
|
26,000
|
|
Machinery
and equipment
|
|
|
141,000
|
|
|
|
127,000
|
|
Software
|
|
|
113,000
|
|
|
|
113,000
|
|
Vehicles
|
|
|
122,000
|
|
|
|
110,000
|
|
Leasehold
Improvement
|
|
|
30,000
|
|
|
|
-
|
|
Total
property and equipment
|
|
|
452,000
|
|
|
|
396,000
|
|
Accumulated
Depreciation
|
|
|
(340,000
|
)
|
|
|
(350,000
|
)
|
Total
property and equipment, net
|
|
$
|
112,000
|
|
|
$
|
46,000
|
|
Depreciation
expense for the years ended December 31, 2018 and 2017 amounted to $35,000 and $59,000, respectively.
During
the year ended December 31, 2018, the Company disposed of a fully depreciated vehicle with a cost of $45,000. As a part of the
disposal, the Company received a trade in allowance of $20,000 that was recorded as part of other income (expense) in the accompanying
financial statements.
During
the year ended December 31, 2017, the Company disposed of certain fully depreciated property and equipment with an aggregate cost
of $54,000.
Note
6. Debt
Note
Payable
In
February 2014, the Company entered into a promissory note with Ford Motor Credit in the aggregate of $80,000 for the purchase
of the Company’s vehicles. The notes had a 4-year term that matured in February 2018, bore interest at an average rate of
5% per annum and were secured by the vehicles purchased. As of December 31, 2017, the notes’ obligation outstanding was
$6,000. As of December 31, 2018, the note was fully paid.
On
February 17, 2018, the Company entered into a promissory note with Ally Auto for $36,000 for the purchase of a Company vehicle.
The note has a 75-month term with recurring monthly payments of principal and interest of $400 with a maturity on June 2024, bears
interest at rate of 5.1% per annum and is secured by the vehicle purchased by the Company. As of December 31, 2018, the note obligation
outstanding was $32,000, of which, $5,000 was reported as part of current liabilities and the remaining $27,000 as non-current
liabilities.
Credit
Line Payable
On
December 27, 2016, the Company entered into a financing agreement with a financial institution, Zions National First Bank (ZB,
N.A.), to obtain a line of credit. The Financing Agreement provided the Company with a revolving credit facility in an aggregate
principal amount not to exceed $500,000 at any time outstanding.
The
line of credit was secured by the Company’s assets, bears average interest rate of 5% per annum, matures every anniversary
but is automatically renewed for one year, until terminated by the parties. The line of credit matured on December 27, 2018 and
was not renewed.
As
of December 31, 2017, the line of credit outstanding was $280,000. There was no outstanding balance as of December 31, 2018.
sound
concepts, inc.
Notes
to Financial Statements
YearS
ended december 31, 2018 and 2017
Note
7. Commitments and Contingencies
Operating
Leases
The
Company’s principal executive offices and warehouse are leased from related-parties (see Note 8) and are located in 782
S. Auto Mall Drive, American Fork, Utah, which includes approximately 23,000 square feet The Company extended this lease term
for a period of 5 years from January 1, 2019 to December 31, 2023 with a monthly base rent in the aggregate of $24,000, with an
increase of 3% per annum.
Rent
expense was $274,000 and $256,000 for the years ended December 31, 2018 and 2017, respectively.
The
Company has two other separate operating leases. One of the operating leases was for its copier with Xerox, with monthly payment
of $5,000 starting September 26, 2016 on a 5-year term. The other is for the Amazon software license from Western Digital Equipment,
with monthly payment of $4,000 starting August 16, 2016 for a 3-year term.
The
following is the Company’s operating lease commitments for the next four fiscal years:
Year
Ending
|
|
Lease
|
December
31,
|
|
Obligation
|
2019
|
|
$
|
373,000
|
|
2020
|
|
|
348,000
|
|
2021
|
|
|
340,000
|
|
2022
|
|
|
304,000
|
|
2023
|
|
|
313,000
|
|
Total
|
|
$
|
1,678,000
|
|
Merger
Agreement
On
November 8, 2018, Verb Technology Company, Inc. (formerly nFüsz, Inc.) (“Verb”) entered into an Agreement and
Plan of Merger (the “Merger Agreement”), by and among NF Merger Sub, Inc., a Utah corporation (“Merger Sub 1”),
NF Acquisition Company, LLC, a Utah limited liability company (“Merger Sub 2”), the Company’s shareholders (the
“Sound Concepts Shareholders”), the shareholders’ representative (the “Shareholder Representative”),
and the Company, pursuant to which the Company will be acquired through a two-step merger, consisting of merging Merger 1 Sub
with and into the Company, with the Company surviving the “first step” of the merger as Verb’s wholly-owned
subsidiary (and the separate corporate existence of Merger Sub 1 will cease) and, immediately thereafter, merging the Company
with and into Merger Sub 2, with Merger Sub 2 surviving the “second step” of the merger, such that, upon the conclusion
of the “second step” of the merger, the separate corporate existence of the Company will cease and Merger Sub 2 will
continue its limited liability company existence under Utah law as the surviving entity and as wholly-owned subsidiary (collectively,
the “Merger”). On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time
of the Merger (the “Effective Time”), each share of the Company’s capital stock issued and outstanding immediately
prior to the Effective Time will be cancelled and converted into the right to receive a proportionate share of $25,000,000 of
value (the “Closing Merger Consideration”), to be payable through a combination of a cash payment of $15,000,000 and
the issuance of shares of Verb’s Common Stock with a fair market value of $10,000,000. The Closing Merger Consideration
is not subject to any closing working capital adjustment or post-closing working capital adjustment. The Company expects the Merger
to close in the second quarter of 2019. However, the Company cannot provide any assurance as to the actual timing of completion
of the Merger, or whether the Merger will be completed at all.
Note
8. Related Party
Lease
The
Company’s lessor is JMCC Properties, which is an entity owned and controlled by the same owners and officers of the Company.
During the years ended December 31, 2018 and 2017, the Company has incurred $274,000 and $256,000, respectively, representing
the rental expenses of the office building.
As
of December 31, 2017, the balance due to JMCC Properties was $21,000 and was included as part of accrued expenses in the accompanying
balance sheet. There was no outstanding balance to JMCC Properties as of December 31, 2018.
Advances
The
Company periodically extends advances to officers, employees and related parties of the Company. There are no formal agreements
for these advances, are unsecured and due on demand and accordingly are included as a current asset on the accompanying balance
sheet.
As
December 31, 2017, the balance due from the officer/related party was $46,000. As of December 31, 2018, the advances were fully
settled.
sound
concepts, inc.
Notes
to Financial Statements
YearS
ended december 31, 2018 and 2017
Note
9. Equity
The
Company is authorized to issue 126,000 shares of common stock, $0.001 par value per share, of which 122,000 shares are currently
issued and outstanding as of December 31, 2018 and 2017, respectively.
During
the year ended December 31, 2011, the Company purchased back 6,000 shares of common stock from a prior owner at $74.17 per share
or $445,000.
Note
10 – Subsequent Events
Pursuant
to FASB ASC 855, management has evaluated all events and transactions that occurred from December 31, 2018 through April 1, 2019,
the date of issuance of these financial statements.
Credit
Line Payable
On
February 18, 2019, the Company extended its financing agreement dated December 27, 2016 with a financial institution, Zions National
First Bank (ZB, N.A.). The line of credit matures on May 30, 2020.
6,389,776
Units
Each
Unit Consisting of One (1) Share of Common Stock and
One
Warrant to Purchase One (1) Share of Common Stock
PROSPECTUS
A.G.P.
Through
and including May 6, 2019 (the 25
th
day after the date of this offering), all dealers effecting transactions in these
securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s
obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
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