Notes
to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2019 and 2018
(Unaudited)
1.
|
DESCRIPTION
OF BUSINESS
|
Organization
References
in this document to the “Company,” “Verb,” “we,” “us,” or “our” are
intended to mean Verb Technology Company, Inc., individually, or as the context requires, collectively with its subsidiary
on a consolidated basis
.
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.
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. The operations of CMG and bBooth (USA), Inc. became known as, and are referred to herein, as “bBoothUSA.”
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 (the “Reverse Stock Split”) of our common stock, $0.0001
par value per share (the “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 Quarterly Report on Form 10-Q 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.
On
April 12, 2019, we completed our acquisition of Sound Concepts Inc. (“Sound Concepts”) pursuant to
the Agreement and Plan of Merger (the “Merger Agreement), by and among 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 “Shareholders’), the Shareholders’ representative, and us. Pursuant to the
Merger Agreement, we acquired 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 ceased) 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 ceased and Merger Sub 2 continued its limited liability company
existence under Utah law as the surviving entity and as our wholly-owned subsidiary under the name “Verb Direct,
LLC.” (“Verb Direct”). On the terms and subject to the conditions set forth in the Merger Agreement,
at the effective time of the closing, each share of Sound Concepts’ capital stock issued and outstanding immediately
prior to the effective time (the “Sound Concepts Capital Stock”), was cancelled and converted into the right
to receive a proportionate share of (i) a cash payment by us of an aggregate of $15,000,000 (the “Acquisition
Cash Payment”), and (ii) 3,327,791 restricted shares of our Common Stock. The Acquisition Cash Payment was paid
using a portion of the net proceeds we received as a result of our public offering that closed on April 9, 2019. The
fair market value of the 3,327,791 restricted shares on April 12, 2019 was $7,820,000.
Nature
of Business
Verb
Technology Company
We are an applications services provider, offering cloud-based business software products under the brand
name “Verb” on a subscription basis. Our flagship product, Verb Go, is a Customer Relationship Management (“CRM”)
application that is distinguishable from other CRM programs because it utilizes our proprietary interactive video technology as
the primary means of communication between sales and marketing professionals and their customers or prospects. The data collection
and analytics capabilities of our application inform our users right on their device how long the prospects watched the video,
how many times they watched it, and what they clicked-on. It then displays information within the application to immediately separate
hot leads or interested customers from those that have not seen the video or otherwise expressed interest in the content. These
capabilities provide for a much more efficient and effective sales process, resulting in increased sales conversion rates.
Through Verb Go, users can quickly, simply, and easily create, distribute, and post videos on social media
to which they can add a choice of on-screen clickable “tags,” which are interactive icons, buttons, and other on-screen
elements. When clicked, these clickable “tags” allow a user’s prospects and customers to respond to its call
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 prospect or customer 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. Verb Go interactive videos can
be distributed via email or text messaging or posted directly to social media, and no software download is required to view the
Verb interactive videos. Verb Go is available by subscription for individual and enterprise users. We developed the proprietary
patent-pending interactive video technology that serves as the basis for all of our cloud, Software-as-a-Service (“SaaS”)
Verb applications.
Our client base consists
primarily of enterprise customers in the global direct sales industry. We also have begun to provide our application services
on a SaaS basis to clients in other business sectors, including large professional associations such as the National
Association of Health Underwriters; educational institutions, such as the Sachem School District in New York; auto leasing,
such as D & M Auto Leasing, the largest auto leasing business in the country; as well as to clients in health care, and
the burgeoning CBD industry, among others business sectors. Currently, we provide services to approximately 100 clients in
the direct sales industry, which include Young Living Essential Oils, LC, Isagenix International, LLC, Vasayo, LLC, Nerium
International, LLC, Forever Living Products International, LLC, Seacret Spa, LLC, among many others. For the direct sales
industry, our application provides recruiting tools, sales representative training, and education tools, as well as instant
notification capabilities to notify users when a prospect has watched an interactive video or other content shared through
our application. The application also tracks customer purchases and provides tools for corporate management to monitor field
activity for tracking the effectiveness of campaigns, as well as compliance. Our application is currently in use in over 59
different countries, in 48 languages, and currently has approximately 700,000 individual users.
2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial
reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC. The condensed consolidated
balance sheet as of December 31, 2018 included herein was derived from the audited consolidated financial statements as of that
date.
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary
to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as
noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented
herein are not necessarily indicative of fiscal year-end results.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Verb Technology Company, Inc. and Verb Direct, LLC, its wholly owned
subsidiary. Intercompany transactions have been eliminated in the consolidation.
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 six months ended June 30, 2019, the Company incurred a net loss of $5,351,000 and
used cash in operations of $3,535,000. 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.
In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December
31, 2018 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going
concern.
In
April 2019, the Company completed an underwritten public offering of units, which offering was made pursuant to the Company’s
Registration Statement on Form S-1, as amended (File No. 333-226840) (the “Registration Statement”). The Company
raised net proceeds of approximately $18,614,000, after taking into account offering costs, of which $15,000,000
was used to pay the cash portion of the purchase price to acquire Sound Concepts, Inc. (“Sound Concepts”), $2,025,000
was applied towards the payment of certain notes payable, and the remaining balance was used for working capital
purposes.
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.
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 assumptions made in analysis of reserves for allowance
of doubtful accounts, inventory, purchase price allocations, impairment of long-term assets, realization of deferred tax assets,
determining fair value of derivative liabilities, and valuation of equity instruments issued for services. Amounts could materially
change in the future.
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 at times 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 six months ended June 30, 2019:
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Six
Months Ended
|
|
Six
Months Ended
|
|
Year
Ended
|
|
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June
30, 2019
|
|
June
30, 2018
|
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December
31, 2018
|
|
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Unaudited
|
|
Unaudited
|
|
|
Verb’s
largest customers are presented below as a percentage of Verb’s aggregate:
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|
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|
|
|
|
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Revenue
|
|
2
major customers account for 11% and 10% of revenue individually, or 21% of revenue in the aggregate
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Not
applicable
|
|
Not
applicable
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
3
major customers account for 11%, 12% and 17% of accounts receivable individually, or 40% of accounts receivable in
the aggregate
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Not
applicable
|
|
Not
applicable
|
|
|
|
|
|
|
|
Verb’s
largest vendors are presented below as a
percentage of Verb’s aggregate:
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|
|
|
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|
|
|
|
|
|
|
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Purchase
|
|
3
major vendors account for 11%, 14% and 19% of purchases individually, or 44% of purchases in the aggregate
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Not
applicable
|
|
Not
applicable
|
|
|
|
|
|
|
|
Accounts
payable
|
|
18%
of accounts payable to one vendor
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Not
applicable
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|
Not
applicable
|
Leases
We
lease certain corporate office space and office equipment under lease agreements with monthly payments over a period of 36 to
84 months. We determine if an arrangement is a lease at inception. Lease assets are presented as operating lease right-of-use
assets and the related liabilities are presented as lease liabilities in our consolidated balance sheets.
Prior
to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective January 1, 2019, the Company
adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for
virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial
information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue
to be reported under the accounting standards in effect for those periods. See Note 7, Right-of-Use Assets and Operating Lease Liabilities, for additional information.
Revenue
Recognition
The Company derives its
revenue primarily from providing application services through the SaaS application, 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 subscription revenue from the application services are recognized over the life of the estimated subscription period. The
Company also charges certain customers setup or installation fees for the creation and development of websites and phone application.
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.
The
Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts
with Customers (“ASC 606”). 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. Pursuant to 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
products
sold by us 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.
The
control
of products we sell transfers to our customers
upon shipment from our facilities, and our 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,
we have not experienced any significant payment delays from customers.
We allow returns within
30 days of purchase from end-users. Our customers may return purchased products to us under certain circumstances.
Customers
setup or installation fees for the creation and development of websites and phone application are recognized as revenues over
the estimated subscription period. Design assets of the websites and phone application are recognized when the work is completed.
Licensing revenue is recognized 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 number of customer usage.
Revenues
for the three months ended June 30, 2019 and 2018 were as follows:
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|
Three Months Ended June 30, 2019 (Unaudited)
|
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|
Three Months Ended June 30, 2018 (Unaudited)
|
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|
|
Revenue
|
|
|
Cost of Revenues
|
|
|
Gross Margin
|
|
|
Revenue
|
|
|
Cost of Revenues
|
|
|
Gross Margin
|
|
Digital
|
|
$
|
1,454,000
|
|
|
$
|
176,000
|
|
|
$
|
1,278,000
|
|
|
$
|
8,000
|
|
|
$
|
7,000
|
|
|
$
|
1,000
|
|
Welcome Kits & Fulfillment
|
|
|
1,784,000
|
|
|
|
1,385,000
|
|
|
|
399,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shipping
|
|
|
495,000
|
|
|
|
481,000
|
|
|
|
14,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,733,000
|
|
|
$
|
2,042,000
|
|
|
$
|
1,691,000
|
|
|
$
|
8,000
|
|
|
$
|
7,000
|
|
|
$
|
1,000
|
|
Revenues
for the six months ended June 30, 2019 and 2018 were as follows:
|
|
Six Months Ended June 30, 2019 (Unaudited)
|
|
|
Six Months Ended June 30, 2018 (Unaudited)
|
|
|
|
Revenue
|
|
|
Cost of Revenues
|
|
|
Gross Margin
|
|
|
Revenue
|
|
|
Cost of Revenues
|
|
|
Gross Margin
|
|
Digital
|
|
$
|
1,463,000
|
|
|
$
|
206,000
|
|
|
$
|
1,257,000
|
|
|
$
|
16,000
|
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
Welcome Kits & Fulfillment
|
|
|
1,784,000
|
|
|
|
1,385,000
|
|
|
|
399,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shipping
|
|
|
495,000
|
|
|
|
481,000
|
|
|
|
14,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,742,000
|
|
|
$
|
2,072,000
|
|
|
$
|
1,670,000
|
|
|
$
|
16,000
|
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
Cost
of Revenues
Cost
of revenues primarily consists of the salaries of certain employees, 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.
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 3 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 Payments
The
Company issues stock options and warrants, shares of 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 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.
From
January 1, 2018 until December 31, 2018, the Company accounted 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.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting (“ASU 2018-07”). The guidance was issued to simplify the accounting for share-based transactions
by expanding the scope of ASU 2018-07 from only being applicable to share-based payments to employees to also include share-based
payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will
be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability
of satisfying performance conditions. We adopted ASU 2018-07 on January 1, 2019. The adoption of the standard did not have a material
impact on our financial statements for the six months ended June 30, 2019 or the previously reported financial statements.
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 June 30, 2019, and 2018, the Company had total outstanding options of 2,832,807 and 1,456,374, respectively,
and warrants of 7,779,602 and 1,535,397, respectively, which were excluded from the computation of net loss per share because
they are anti-dilutive.
Acquisitions
and Business Combinations
The
Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and separately
identified intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration
over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management
to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing
certain intangible assets include, but are not limited to, future expected cash flows from, acquired technology, trade-marks and
trade names, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed
to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
During the measurement period, which is the period needed to gather all information necessary to make the purchase price allocation,
not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with
the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to
earnings.
Goodwill
In
accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, the Company reviews the recoverability of the carrying value of goodwill at least
annually or whenever events or circumstances indicate a potential impairment. The Company’s impairment testing will be done
annually at December 31 (its fiscal year end). Recoverability of goodwill is determined by comparing the fair value of Company’s
reporting units to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit
is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized
to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the
fair value of its other assets and liabilities.
Intangible
Assets with Finite Useful Lives
We
have certain finite lived intangible assets that were initially recorded at their fair value at the time of acquisition. These
intangible assets consist of developed technology. Intangible assets with finite useful lives are amortized using the straight-line
method over their estimated useful life of five years.
We
review all finite lived intangible assets for impairment when circumstances indicate that their carrying values may not be recoverable.
If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess carrying value over
the fair value in our consolidated statements of operations.
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB ASC for disclosures about the 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.
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 3 inputs for its valuation methodology for the derivative liabilities.
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 year ended December 31, 2018 and for the period ended June 30, 2019.
Segments
The
Company has three revenue channels: (1) SaaS, (2) welcome kits, (3) fulfillments. In accordance
with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker (the Company’s
Chief Executive Officer) reviews operating results to make decisions about allocating resources and assessing performance
for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements
to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify
for aggregation under “Segment Reporting” due to (i) their similar customer base and (ii) the Company
having a single sales team, marketing department, customer service department, operations department, finance department
and accounting department to support all revenue channels. Since the Company operates in one segment, all financial information
required by “Segment Reporting” can be found in the accompanying consolidated financial statements.
Recent
Accounting Pronouncements
Management
does not believe that recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American
Institute of Certified Public Accountants, and the SEC will have a material impact on the Company’s present or future consolidated
financial statements.
3.
|
ACQUISITION OF VERB DIRECT
|
On
April 12, 2019, Verb completed its previously announced acquisition of Verb Direct 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 a wholly-owned subsidiary of Verb (and the separate corporate existence of Merger Sub 1 then having ceased) and,
immediately thereafter, merging Sound Concepts (as of the closing of the first step, then known as Verb Direct, Inc.) 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 Verb Direct, Inc. (formerly
Sound Concepts) then having ceased and Merger Sub 2 continued its limited liability company existence under Utah law
as the surviving entity and as a wholly-owned subsidiary of Verb, then known as Verb Direct. On the terms and subject to the
conditions set forth in the Merger Agreement, at the effective time of the merger, each share of Sound Concepts Capital
Stock issued and outstanding immediately prior to the effective time, was cancelled in exchange for cash payment by Verb
of an aggregate of $15,000,000, and the issuance of an aggregate of 3,327,791 restricted shares of Verb’s Common
Stock. The Acquisition Cash Payment was paid using a portion of the net proceeds Verb received as a result of the public
offering of the units.
Pursuant to the requirements of current accounting guidance, Verb valued the
acquisition shares at $7,820,000, the fair value of the shares at the closing date of the transaction.
The
acquisition was intended to augment and diversify Verb’s internet and SaaS business. Key factors that contributed
to the recorded provisional goodwill and intangible assets in the aggregate of $22,677,000 were the opportunity to consolidate
and complement existing operations of Verb, certain software and customer list, and the opportunity to generate future synergies
within the internet and SaaS business.
Verb
is required to allocate the purchase price to the acquired tangible assets, identifiable intangible assets, and assumed liabilities
based on their fair values. At the date of the acquisition and of this Quarterly Report on Form 10-Q, management has not
yet finalized its valuation analysis. The fair values of the assets acquired, as set forth below, are considered provisional and
subject to adjustment as additional information is obtained through the purchase price measurement period (a period of up to one
year from the closing date). Any prospective adjustments would change the fair value allocation as of the acquisition date. The
Company is still in the process of reviewing underlying models, assumptions and discount rates used in the valuation of provisional
goodwill and intangible assets. The following table summarizes the provisional fair value of the assets assumed and liabilities
acquired in the acquisition:
|
|
As of March 31, 2019
|
|
|
|
Fair Value
|
|
Assets Acquired:
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
2,004,000
|
|
|
|
|
|
Property and equipment
|
|
|
58,000
|
|
|
|
|
|
Other assets
|
|
|
1,302,000
|
|
|
$
|
3,364,000
|
|
Liabilities Assumed:
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
(2,153,000
|
)
|
|
|
|
|
Long term liabilities
|
|
|
(1,068,000
|
)
|
|
|
(3,221,000
|
)
|
Intangible assets (provisional)
|
|
|
|
|
|
|
10,330,000
|
|
Goodwill (provisional)
|
|
|
|
|
|
|
12,347,000
|
|
Purchase Price
|
|
|
|
|
|
$
|
22,820,000
|
|
The
following unaudited pro forma statements of operations present the Company’s pro forma results of operations after giving
effect to the purchase of Verb Direct based on the historical financial statements of the Company and Verb Direct. The unaudited
pro forma statements of operations for the three and six months ended June 30, 2019 and 2018 give effect to the transaction to
the merger as if it had occurred on January 1, 2018.
|
|
Statement of Operations
(Unaudited)
|
|
|
|
Three
Months Ended
June 30, 2019
|
|
|
Three
Months Ended
June 30, 2018
|
|
|
Six
Months Ended
June 30, 2019
|
|
|
Six
Months Ended
June 30, 2018
|
|
|
|
|
|
|
(Proforma)
|
|
|
(Proforma)
|
|
|
(Proforma)
|
|
Digital
|
|
$
|
1,454,000
|
|
|
$
|
928,000
|
|
|
$
|
2,513,000
|
|
|
$
|
1,850,000
|
|
Welcome Kits & Fulfillment
|
|
|
1,784,000
|
|
|
|
1,814,000
|
|
|
|
4,049,000
|
|
|
|
3,373,000
|
|
Shipping
|
|
|
495,000
|
|
|
|
367,000
|
|
|
|
1,172,000
|
|
|
|
649,000
|
|
Revenue
|
|
|
3,733,000
|
|
|
|
3,109,000
|
|
|
|
7,734,000
|
|
|
|
5,872,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Cost of Revenue
|
|
|
176,000
|
|
|
|
160,000
|
|
|
|
343,000
|
|
|
|
263,000
|
|
Welcome Kits & Fulfillment
Cost of Revenue
|
|
|
1,385,000
|
|
|
|
995,000
|
|
|
|
2,860,000
|
|
|
|
2,060,000
|
|
Shipping
cost of Revenue
|
|
|
481,000
|
|
|
|
351,000
|
|
|
|
1,087,000
|
|
|
|
644,000
|
|
Cost of revenue
|
|
|
2,042,000
|
|
|
|
1,506,000
|
|
|
|
4,290,000
|
|
|
|
2,967,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital Gross Margin
|
|
|
1,278,000
|
|
|
|
768,000
|
|
|
|
2,170,000
|
|
|
|
1,587,000
|
|
Welcome Kits & Fulfillment
Gross Margin
|
|
|
399,000
|
|
|
|
819,000
|
|
|
|
1,189,000
|
|
|
|
1,313,000
|
|
Shipping
Gross Margin
|
|
|
14,000
|
|
|
|
16,000
|
|
|
|
85,000
|
|
|
|
5,000
|
|
Gross margin
|
|
|
1,691,000
|
|
|
|
1,603,000
|
|
|
|
3,444,000
|
|
|
|
2,905,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
1,335,000
|
|
|
|
605,000
|
|
|
|
2,590,000
|
|
|
|
1,247,000
|
|
Depreciation and amortization
|
|
|
567,000
|
|
|
|
508,000
|
|
|
|
1,003,000
|
|
|
|
1,018,000
|
|
General
and administrative
|
|
|
3,262,000
|
|
|
|
281,000
|
|
|
|
6,525,000
|
|
|
|
6,230,000
|
|
Total operating expenses
|
|
|
5,164,000
|
|
|
|
1,394,000
|
|
|
|
10,118,000
|
|
|
|
8,495,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income / (Loss) from operations
|
|
|
(3,473,000
|
)
|
|
|
209,000
|
|
|
|
(6,674,000
|
)
|
|
|
(5,590,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income / (expense)
|
|
|
(1,000
|
)
|
|
|
19,000
|
|
|
|
(17,000
|
)
|
|
|
8,000
|
|
Financing costs
|
|
|
(55,000
|
)
|
|
|
-
|
|
|
|
(139,000
|
)
|
|
|
(172,000
|
)
|
Interest expense - amortization
of debt discount
|
|
|
(572,000
|
)
|
|
|
-
|
|
|
|
(1,626,000
|
)
|
|
|
(748,000
|
)
|
Change in fair value of derivative
liability
|
|
|
(426,000
|
)
|
|
|
1,444,000
|
|
|
|
518,000
|
|
|
|
(1,181,000
|
)
|
Gain on extinguishment of derivative
liability, net
|
|
|
2,227,000
|
|
|
|
-
|
|
|
|
2,227,000
|
|
|
|
652,000
|
|
Interest
expense
|
|
|
(43,000
|
)
|
|
|
(59,000
|
)
|
|
|
(83,000
|
)
|
|
|
(263,000
|
)
|
Total other income (expense)
|
|
|
1,130,000
|
|
|
|
1,404,000
|
|
|
|
880,000
|
|
|
|
(1,704,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income / (Loss)
|
|
$
|
(2,343,000
|
)
|
|
$
|
1,613,000
|
|
|
$
|
(5,794,000
|
)
|
|
$
|
(7,294,000
|
)
|
Income per share
|
|
|
(0.11
|
)
|
|
|
0.12
|
|
|
|
(0.34
|
)
|
|
|
(0.57
|
)
|
Weighted average number of common shares outstanding
- basic and diluted
|
|
|
21,624,240
|
|
|
|
13,497,123
|
|
|
|
16,946,065
|
|
|
|
12,816,808
|
|
Accounts
receivable, net consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,271,000
|
|
|
$
|
1,000
|
|
Less allowance for doubtful accounts
|
|
|
(16,000
|
)
|
|
|
-
|
|
Total accounts receivable, net
|
|
$
|
1,255,000
|
|
|
$
|
1,000
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
(Unaudited
)
|
|
|
|
|
|
Raw materials
|
|
$
|
64,000
|
|
|
$
|
-
|
|
Finished goods
|
|
|
124,000
|
|
|
|
-
|
|
Total inventory
|
|
|
188,000
|
|
|
|
-
|
|
Less inventory reserve
|
|
|
(23,000
|
)
|
|
|
-
|
|
Total inventory, net
|
|
$
|
165,000
|
|
|
$
|
-
|
|
6.
|
PROPERTY AND EQUIPMENT
|
Property
and equipment consisted of the following as of June 30, 2019 and December 31, 2018.
|
|
June
30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
(
Unaudited)
|
|
|
|
|
|
Computers
|
|
$
|
47,000
|
|
|
$
|
28,000
|
|
Furniture and fixture
|
|
|
83,000
|
|
|
|
56,000
|
|
Machinery and equipment
|
|
|
165,000
|
|
|
|
24,000
|
|
Software
|
|
|
113,000
|
|
|
|
-
|
|
Vehicles
|
|
|
17,000
|
|
|
|
-
|
|
Leasehold improvement
|
|
|
30,000
|
|
|
|
-
|
|
Total property and equipment
|
|
|
455,000
|
|
|
|
108,000
|
|
Accumulated Depreciation
|
|
|
(399,000
|
)
|
|
|
(97,000
|
)
|
Total property and equipment, net
|
|
$
|
56,000
|
|
|
$
|
11,000
|
|
Depreciation
expense amounted to $13,000 and $10,000 for six months ended June 30, 2019 and 2018, respectively.
7.
|
RIGHT-OF-USE
ASSETS AND OPERATING LEASE LIABILITIES
|
Effective
January 1, 2019, the Company adopted the guidance of ASC 842,
Leases
(“ASC 842”), which requires an
entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified
retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior
to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods.
The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease right-of-use assets of and lease
liabilities for operating lease of $1,219,000 and $1,230,000, respectively. There was no cumulative-effect adjustment to retained
earnings.
|
|
Three Months Ended
June
30, 2019
|
|
Lease Cost
|
|
|
|
|
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations)
|
|
$
|
170,000
|
|
|
|
|
|
|
Other Information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the second quarter 2019
|
|
$
|
—
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
4.05
|
|
Average discount rate – operating leases
|
|
|
8.5
|
%
|
|
|
At June 30, 2019
|
|
Operating leases
|
|
|
|
|
Long-term right-of-use assets
|
|
$
|
1,219,000
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
227,000
|
|
Long-term operating lease liabilities
|
|
|
1,003,000
|
|
Total operating lease liabilities
|
|
$
|
1,230,000
|
|
Year Ending
|
|
Operating Leases
|
|
2019 (remaining 6 months)
|
|
$
|
170,000
|
|
2020
|
|
|
348,000
|
|
2021
|
|
|
341,000
|
|
2022
|
|
|
304,000
|
|
2023
|
|
|
313,000
|
|
Total lease payments
|
|
|
1,476,000
|
|
Less: Imputed interest/present value discount
|
|
|
(246,000
|
)
|
Present value of lease liabilities
|
|
$
|
1,230,000
|
|
In
February 2019, the Company entered into a new lease agreement to move and expand the Company’s corporate headquarters
(the “Original Lease”). In March 2019, the Company elected to exercise its right to extend the term of the Original
Lease by an additional 24 months, for a total of 89 months (the “Extension”). In July 2019, the Company amended the
Original Lease (the “Amended Lease”; and, together with the Original Lease and the Extension, the “Lease”).
The Lease is for approximately 6,700 square feet of new construction space, comprised of approximately 4,880 square feet
(the “Initial Premises”) and approximately 1,850 square feet (the “Must-Take Space”) located at 2210
Newport Boulevard, Suite 200, Newport Beach, California 92663, on the Balboa Peninsula. The Lease has a term of 89 months, beginning on the date that the Company occupies the Must-Take Space.
The
Lease commenced in August 2019 with respect to the Initial Premises and the Company anticipates that it will take control
of the Must-Take Space in January 2020. Thus, the Company believes that the total term of the Lease will be 94 months.
The average monthly base rent for the first 12 months of the Lease is approximately $13,000 after rent abatement. For
the next 82 months of the Lease, the average monthly base rent will be approximately $39,000. Pursuant to ASU 2016-02, the
Company expects to record approximately $2.4 million as a right-of-use asset and corresponding liability once the Company
takes possession and control of the leased premises.
The
Company has four leases in American Fork, Utah related to the operation of Verb Direct with an aggregate lease payment
of $31,000 per month. The lessor is JMCC Properties, which is an entity owned and controlled by the former shareholders
and certain current officers of Verb Direct.
Note
|
|
Issuance Date
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Original Borrowing
|
|
|
Balance at
June 30, 2019
|
|
|
Balance at
December 31, 2018
|
|
Note 1 (A)
|
|
March 22, 2019
|
|
April 10, 2019
|
|
|
5.0
|
%
|
|
$
|
310,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 2 (B)
|
|
March 29, 2019
|
|
July 10, 2019
|
|
|
5.0
|
%
|
|
|
53,000
|
|
|
|
53,000
|
|
|
|
-
|
|
Note 3 (C)
|
|
April 2, 2019
|
|
July 10, 2019
|
|
|
5.0
|
%
|
|
|
53,000
|
|
|
|
157,000
|
|
|
|
|
|
Note 4 (D)
|
|
April 30, 2019
|
|
April 29, 2020
|
|
|
5.0
|
%
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable – related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
710,000
|
|
|
|
-
|
|
Debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
-
|
|
Total notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
709,000
|
|
|
$
|
-
|
|
|
(A)
|
On
March 22, 2019, we issued an unsecured promissory note to an unaffiliated third-party in the aggregate principal amount
of $310,000, in exchange for net proceeds of $300,000, representing an original issue discount of $10,000, which is included
in the original principal amount. The note is unsecured and bears interest on the principal amount at a rate of 5% per
annum. The note was due on demand at any time after April 10, 2019.
As
a result of the issuance of the note, the Company incurred aggregate costs of $10,000 related to the note’s original
issue discount. The Company recorded these costs as a note discount and is being amortized over the term of the note.
In
April 2019, the Company paid off the balance of $310,000 and accrued interest totaling $1,000. As part of the payment,
the Company amortized the remaining debt discount of $10,000.
As
of June 30, 2019, the outstanding balance of the note was $0.
|
|
(B)
|
On
March 29, 2019, we issued an unsecured promissory note to an unaffiliated third-party in the aggregate principal amount
of $53,000, in exchange for net proceeds of $50,000, representing an original issue discount of $3,000, which is included
in the original principal amount. The note is unsecured and bears interest on the principal amount at a rate of 5% per
annum. The note is due on demand at any time after July 10, 2019.
As
a result of the issuance of the note, the Company incurred aggregate costs of $3,000 related to the note’s original
issue discount. The Company recorded these costs as a note discount and is being amortized over the term of the note.
As
of June 30, 2019, the outstanding balance of the note amounted to $53,000. On July 10, 2019, we amended the note, pursuant
to which, on July 10, 2019, the aggregate outstanding principal and all accrued and unpaid interest
converted into 27,018 shares of our Common Stock, and a warrant to purchase up to 27,018 shares of our Common
Stock at an exercise price of $3.44 per share.
|
|
|
|
|
(C)
|
On
April 2, 2019, we issued an unsecured promissory note to an unaffiliated third-party
in the aggregate principal amount of $157,000, in exchange for net proceeds of $150,000,
representing an original issue discount of $7,000, which is included in the original
principal amount. The note is unsecured and bore interest on the principal amount
at a rate of 5% per annum. The note was due demand at any time after July 10,
2019.
As
a result of the issuance of the note, the Company incurred aggregate costs of $7,000 related to the note’s original
issue discount. The Company recorded these costs as a note discount and is being amortized over the term of the note.
As
of June 30, 2019, the outstanding balance of the note amounted to $157,000. On July 10, 2019, we amended the note,
pursuant to which, on July 10, 2019, the aggregate outstanding principal and all accrued and unpaid
interest converted into 81,178 shares of our Common Stock, and a warrant to purchase up to 81,178 shares of
our Common Stock at an exercise price of $3.44 per share.
|
|
|
|
|
(D)
|
On
April 30, 2019, we issued an unsecured promissory note to an unaffiliated third-party
in the aggregate principal amount of $500,000, in exchange for net proceeds of $500,000.
The note was unsecured and bore interest on the principal amount at a rate
of 5% per annum. The note was due on April 29, 2020.
As
of June 30, 2019, the outstanding balance of the note amounted to $500,000. On July 10, 2019, we amended the note,
pursuant to which, on July 29, 2019, the aggregate outstanding principal and all accrued and
unpaid interest converted into 490,090 shares of our Common Stock.
|
Total
interest expense for notes payable was $7,000 and $0 for six months ended June 30, 2019 and 2018, respectively. The Company paid
$1,000 and $0 in interest for the six months ended June 30, 2019 and 2018, respectively.
9.
|
NOTES PAYABLE – RELATED PARTIES
|
The
Company has the following related parties notes payable as of June 30, 2019 and December 31, 2018:
Note
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
June 30, 2019
|
|
|
Balance
at
December 31, 2018
|
|
Note
1 (A)
|
|
December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
|
$
|
1,249,000
|
|
|
$
|
825,000
|
|
|
$
|
825,000
|
|
Note
2 (B)
|
|
December
1, 2015
|
|
April
1, 2017
|
|
|
12.0
|
%
|
|
|
112,000
|
|
|
|
112,000
|
|
|
|
112,000
|
|
Note
3 (C)
|
|
April
4, 2016
|
|
June
4, 2021
|
|
|
12.0
|
%
|
|
|
343,000
|
|
|
|
240,000
|
|
|
|
240,000
|
|
Note
4 (D)
|
|
March
22, 2019
|
|
April
30, 2019
|
|
|
5.0
|
%
|
|
|
58,000
|
|
|
|
-
|
|
|
|
-
|
|
Total
notes payable – related parties
|
|
|
|
|
|
|
|
|
|
|
1,177,000
|
|
|
|
1,177,000
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,065,000
|
)
|
|
|
(1,065,000
|
)
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,000
|
|
|
$
|
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, secured by the Company’s assets, and will mature on February 8, 2021,
as amended.
|
As
of June 30, 2019, and December 31, 2018, the outstanding balance of the note amounted to $825,000, respectively.
|
(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 rate
of 12% per annum, and matured in April 2017. As of June 30, 2019, and December 31, 2018, the outstanding principal balance
of the note was equal to $112,000, respectively. As of June 30, 2019, the note was past due, and remains past due. The Company
is currently in negotiations with the noteholder to settle the past due note.
|
|
|
|
|
(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 during the period December 2015 through March 2016. The note bears interest at a rate
of 12% per annum, secured by the Company’s assets, and will mature on June 4, 2021, as amended.
As
of June 30, 2019, and December 31, 2018, the outstanding balance of the note amounted to $240,000, respectively.
|
|
|
|
|
(D)
|
On
March 22, 2019, the Company issued a note payable to Mr. Jeff Clayborne, the Company’s
Chief Financial Officer, in the amount of $58,000. The note was unsecured, bore
interest at a rate of 5% per annum, and matured on April 30, 2019.
On
April 11, 2019, the Company paid off the balance of $58,000.
As
of June 30, 2019, the outstanding balance of the note was $0.
|
Total
interest expense for notes payable to related parties was $70,000 and $117,000 for six months ended June 30, 2019 and 2018, respectively.
The Company paid $63,000 and $182,000 in interest for the six months ended June 30, 2019 and 2018, respectively.
10.
|
CONVERTIBLE NOTES PAYABLE
|
The
Company has the following convertible notes payable as of June 30, 2019 and December 31, 2018:
Note
|
|
Note Date
|
|
Maturity Date
|
|
Interest Rate
|
|
|
Original Borrowing
|
|
|
Balance at
June 30, 2019
|
|
|
Balance at
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable (A)
|
|
October 19, 2018
|
|
April 19, 2019
|
|
|
10
|
%
|
|
$
|
1,500,000
|
|
|
$
|
-
|
|
|
$
|
1,500,000
|
|
Note payable (B)
|
|
October 30, 2018
|
|
April 29, 2019
|
|
|
5
|
%
|
|
$
|
400,000
|
|
|
|
-
|
|
|
|
400,000
|
|
Note payable (C)
|
|
February 1, 2019
|
|
August 2, 2019
|
|
|
10
|
%
|
|
$
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
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 Bellridge Capital, LP (“Bellridge”), an
unaffiliated third-party, 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 was unsecured and did not bear interest; however,
the implied interest was determined to be 10% since the note was issued at 10% less than its face value. The note matured
in April 2019. The note was 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 would be in default if it did 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. In the event of a default, the conversion price in effect on any date on which
some or all of the principal of the note is to be converted would be a price equal to 70% of the lowest VWAP during the ten
trading days immediately preceding the date on which Bellridge provided its notice of conversion. Upon an Event of Default,
the Company would owe Bellridge 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 agreed
that, on or after the occurrence of an Event of Default, it would reserve and keep available that number of shares of its
Common Stock that equaled 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 in October 2018. The note discount was being amortized over the six-month term of
the note.
|
|
In
April 2019, the Company paid the balance of $1,500,000. Prior to the payoff the Company recognized a change in fair
market value in the derivative liability totaling $670,000. As part of the payoff the Company amortized the remaining
debt discount of $144,000 and recognized a gain on extinguishment of the derivative liability totaling $1,396,000.
|
|
As
of June 30, 2019, the outstanding balance of the note was $0 and unamortized debt discount was $0.
|
(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. The notes bore interest at a rate of 5% per annum and matured on
April 29, 2019. Upon the Company’s consummation of its underwritten public offering of the Company’s units, all,
and not less than all, of (i) the outstanding principal amount and (ii) the accrued interest thereunder were to be
converted into shares of the Company’s Common Stock. The per-share conversion price equaled seventy-five percent (75%)
of the effective offering price of the Common Stock in the Company’s recent underwritten public offering. The Company
determined that, because the conversion price was 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 was being amortized over the term of the notes payable.
|
On
April 5, 2019, the Company converted the outstanding principal amount and accrued interest of $410,000 into
182,333 shares of Common Stock. Prior to the conversion, the Company recognized a change in fair market value in the derivative
liability totaling $21,000. In addition, the Company amortized the remaining debt discount of $48,000 and recognized a gain on
extinguishment of the derivative liability totaling $187,000.
As
of June 30, 2019, the outstanding balance of the note was $0 and unamortized debt discount was $0.
(C)
|
On
February 1, 2019, the Company issued an unsecured convertible note to Bellridge, an unaffiliated
third-party, 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 a fair value of $128,000. The note was unsecured and did not bear
interest; however, the implied interest was determined to be 10% since the note was issued
at 10% less than its face value. The note matured in August 2019. The note was
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
would have been in default if it did not repay the principal amount of the
note, as required. The other events of default were 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 would
have been converted would be a price equal to 70% of the lowest VWAP during
the ten trading days immediately preceding the date on which Bellridge provides its notice
of conversion. Upon an Event of Default, the Company would have owed Bellridge
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 would
have been due in respect thereof. The Company agreed that, on or after the occurrence
of an Event of Default, it would 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 was 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 $388,000 at the date of
issuance.
As
a result of the issuance of the note, the Company incurred aggregate costs of $584,000 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 $500,000 and the remaining
$84,000 as financing costs. The note discount was being amortized over the six-month term of the note.
On
April 2, 2019, the Company increased the outstanding principal amount of the note by $25,000 to an aggregate
of $525,000 and issued 8,606 shares of Common Stock with a fair value of $55,000. The Company accounted for
the increase in principal and the fair value of the shares of Common Stock in the aggregate of $80,000 as part
its financing costs.
In
April 2019, the Company paid off the outstanding principal balance of $525,000. Prior to the payoff, the
Company recognized a change in fair market value in the derivative liability totaling $260,000. In addition, the Company
amortized the remaining debt discount of $366,000 and recognized a gain on extinguishment of the derivative liability
totaling $644,000.
As
of June 30, 2019, the outstanding balance of the note was $0 and unamortized debt discount was $0.
|
Total
interest expense for convertible notes payable was $5,000 and $145,000 for the six months ended June 30, 2019 and 2018, respectively.
Under
authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s
own stock, instruments that do not have fixed settlement provisions are deemed to be derivative instruments. The Company has issued
certain convertible notes whose conversion prices contains reset provisions based on a future offering price and/or whose conversion
prices are based on future market prices. 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 that included a fundamental transaction provision that could give rise to an obligation
to pay cash to the warrant holder.
As
a result, the conversion option and warrants are classified as liabilities and are 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.
The
derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following
average assumptions:
|
|
June
30, 2019
|
|
|
Upon
Issuance
|
|
|
December
31, 2018
|
|
Stock Price
|
|
$
|
2.00
|
|
|
$
|
7.65
|
|
|
$
|
4.80
|
|
Exercise Price
|
|
$
|
1.88
|
|
|
$
|
5.63
|
|
|
$
|
2.70
|
|
Expected Life
|
|
|
3.48
|
|
|
|
0.50
|
|
|
|
1.78
|
|
Volatility
|
|
|
195
|
%
|
|
|
164
|
%
|
|
|
184
|
%
|
Dividend Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-Free Interest Rate
|
|
|
2.43
|
%
|
|
|
2.46
|
%
|
|
|
2.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
219,000
|
|
|
$
|
388,000
|
|
|
$
|
2,576,000
|
|
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, 2018, the Company had recorded a derivative liability of $2,576,000.
During
the six months ended June 30, 2019, the Company recorded an additional derivative liability totaling $388,000 as a result of the
issuance of a convertible note. The Company also recorded a change in fair value of $518,000 to account the changes in fair value
of these derivative liabilities for the six months ended June 30, 2019. In addition, the Company also recorded a gain on
extinguishment of $2,227,000 to account for the extinguishment of derivative liabilities associated with the payoff of convertible
debt for the six months ended June 30, 2019. At June 30, 2019, the fair value of the derivative liability amounted to $219,000.
The details of derivative liability transactions for the six months ended June 30, 2019 and 2018 are as follows:
|
|
June
30, 2019
|
|
Beginning Balance
|
|
$
|
2,576,000
|
|
Fair value upon issuance of notes payable and warrants
|
|
|
388,000
|
|
Change in fair value
|
|
|
(518,000
|
)
|
Extinguishment
|
|
|
(2,227,000
|
)
|
Ending Balance
|
|
$
|
219,000
|
|
The
Company’s Common Stock activity for the six months ended June 30, 2019 is as follows:
Units
– Common Stock and Warrants
Shares
and Warrants Issued as Part of the Company’s Underwritten Public Offering
On
April 4, 2019, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with A.G.P./Alliance Global
Partners, as representative of the several underwriters named therein (the “Underwriter” or “AGP”), relating
to a firm commitment public offering (the “Public Offering”) of 6,389,776 units (the “Units”) consisting
of an aggregate of (i) 6,389,776 shares (the “Firm Shares”) of Common Stock, and (ii) warrants to purchase up to 6,389,776
shares of Common Stock (the “Firm Warrants”; and the shares of Common Stock issuable from time to time upon exercise
of the Firm Warrants, the “Firm Warrant Shares”), at a public offering price of $3.13 per Unit. Pursuant to the terms
of the Underwriting Agreement, we also granted the Underwriters an option, exercisable for 45 days, to purchase up to 958,466
additional Units, consisting of an aggregate of (x) 958,466 shares of Common Stock (the “Option Shares”; and, together
with the Firm Shares, the “Shares”) and (y) warrants to purchase up to 958,466 shares of Common Stock (the “Option
Warrants”; and, together, with the Firm Warrants, the “Warrants”; and the shares of Common Stock issuable from
time to time upon exercise of the Option Warrants, the “Option Warrant Shares”; and, together with the Firm Warrant
Shares, the “Warrant Shares”). The Warrants have an initial per share exercise price of $3.443, subject to customary
adjustments, are exercisable immediately, and will expire five years from the date of issuance, or April 9, 2024.
On
April 9, 2019, we closed the Public Offering and issued 6,389,776 Units, consisting of an aggregate of 6,389,776 Firm Shares
and Firm Warrants to purchase up to an aggregate of 6,389,776 Firm Warrant Shares. In connection with the closing, the
Underwriter partially exercised its over-allotment option and purchased an additional 159,820 Units, consisting of an
aggregate of 159,820 Option Shares and Option Warrants to purchase up to an aggregate of 159,820 Option Warrant Shares. We
received net proceeds of approximately $18,614,000, net of underwriting commissions and other offering expenses in the
aggregate of $2,047,000.
Included in the offering expenses were $161,000 in various legal and professional expenses
that were incurred and paid in fiscal 2018 and accounted for as a deferred offering costs as of December 31, 2018. This
amount was derecognized upon close of the public offering in April 2019 and was recorded as a reduction to paid in
capital.
In
connection with the Public Offering, we also issued the Underwriter warrants to purchase up to 319,488 shares of our Common Stock
(the “Underwriter Warrants”), at an exercise price of $3.913. The Underwriter Warrants are 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 the Registration
Statement.
Common
Stock
Shares
Issued for the Acquisition of Verb Direct –
In April 2019, we issued 3,327,791 shares of Common
Stock with a fair value of $7,820,000 as part of our acquisition of Verb Direct. See Note 3,
Acquisition
of Verb Direct
, for additional information.
Shares
Issued for Services
– During the six months ended June 30, 2019, the Company issued 197,810 shares of Common Stock
to vendors for services rendered with a fair value of $728,000. These shares of Common Stock were valued based on the market value
of the Company’s Common Stock price at the issuance date or the date the Company entered into the agreement
related to the issuance.
Shares
Issued Upon Issuance of Convertible Note
– During the six months ended June 30, 2019, the Company issued
to a note holder 25,272 shares of Common Stock with a fair value of $182,000 as an inducement for the issuance of a note payable. See Note 10,
Convertible Notes Payable,
for additional information.
Conversion
of Notes Payable –
During the six months ended June 30, 2019, the Company issued 182,333 shares of Common Stock
upon conversion of notes payable and accrued interest of $410,000. See Note 10,
Convertible Notes Payable
,
for additional information.
Conversion
of Accounts Payable –
On April 30, 2019, the Company converted accounts payable in the amount
of $10,000 into 4,142 shares of Common Stock with a fair value of $10,000 at the date of conversion.
Stock
Options
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.
At
its discretion, the Company grants share option awards to certain employees and non-employees under the Plan and accounts for
it in accordance with ASC 718, Compensation – Stock Compensation.
A
summary of option activity for the six months ended June 30, 2019 is presented below.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
2,478,974
|
|
|
$
|
5.25
|
|
|
|
2.93
|
|
|
$
|
2,660,000
|
|
Granted
|
|
|
590,500
|
|
|
|
4.41
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(236,667
|
)
|
|
|
5.57
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2019
|
|
|
2,832,807
|
|
|
$
|
5.10
|
|
|
|
2.80
|
|
|
$
|
480,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested June 30, 2019
|
|
|
1,424,608
|
|
|
$
|
4.51
|
|
|
|
|
|
|
$
|
427,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
802,307
|
|
|
$
|
5.12
|
|
|
|
|
|
|
$
|
153,000
|
|
During
the six months ended June 3, 2019, the Company granted stock options to employees and consultants to purchase a total of 590,500
shares of Common Stock for services to be rendered. The options have an average exercise price of $4.41 per share, expire in five
years, and vests (i) 50% on the grant date and the remaining 50% on the 12-month anniversary of the grant date,
(ii) in three equal installments during the three years from the grant date, (iii) in 4 equal installments during the four
years from the grant date, or (iv) in 12 equal installments based on achieving performance targets during the three
years from the grant date. The total fair value of these options at the grant date was approximately $1,991,000 using the Black-Scholes
Option pricing model.
The
total stock compensation expense recognized relating to vesting of stock options for the six months ended June 30, 2019 amounted
to $920,000. As of June 30, 2019, total unrecognized stock-based compensation expense was $4.4 million, which is expected to be
recognized as part of operating expense through June 2023.
The
fair value of share option award is estimated using the Black-Scholes option pricing method based on the following weighted-average
assumptions:
|
|
Six
Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Risk-free
interest rate
|
|
|
1.91
- 2.75
|
%
|
|
|
2.25
– 2.85
|
%
|
Average
expected term (years)
|
|
|
5
years
|
|
|
|
5
years
|
|
Expected
volatility
|
|
|
201.3
-241.7
|
%
|
|
|
184.5
– 190.2
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the
expected term of the share option award; the expected term represents the weighted-average period of time that share option awards
granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior;
the expected volatility is based upon historical volatility of the Company’s 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.
Warrants
The
Company has the following warrants outstanding as of June 30, 2019, all of which are exercisable:
|
|
Warrants
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-Average
Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2018
|
|
|
940,412
|
|
|
$
|
3.60
|
|
|
|
2.32
|
|
|
$
|
1,974,000
|
|
Granted
|
|
|
7,032,823
|
|
|
|
3.47
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(6,667)
|
|
|
|
6.00
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(186,969
|
)
|
|
|
1.15
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at June 30, 2019, all vested
|
|
|
7,779,602
|
|
|
$
|
3.54
|
|
|
|
4.61
|
|
|
$
|
158,000
|
|
During
the six months ended June 30, 2019, the Company granted warrants to purchase a total of 6,869,084 shares of Common Stock as part
of a public offering. The warrants are exercisable at an average price of $3.46 per share and will expire in January 2023 (see
Note 12). See Note 12,
Equity Transactions
, for additional information.
During
the six months ended June 30, 2019, the Company granted fully vested warrants to purchase a total of 163,739 shares of Common
Stock for services rendered. The warrants are exercisable at an average price of $3.76 per share and will expire in January 2023.
The total fair value of these warrants at the grant date was approximately $439,000 using the Black-Scholes Option pricing model
and was expensed upon grant.
During
the six months ended June 30, 2019, a total of 186,969 warrants were exercised and converted into 173,714 common shares at a weighted
average exercise price of $1.15. The Company received $45,000 upon exercise of the warrants.
13.
|
COMMITMENTS AND CONTINGENCIES
|
Litigation
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.
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. As of the date of this Quarterly Report on the Form 10-Q, 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 (the “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
(the “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.
On
July 9, 2019, a purported class action complaint was filed in the United States District Court, Central District of California,
styled
SCOTT C. HARTMANN, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. VERB TECHNOLOGY COMPANY,
INC., and RORY J. CUTAIA, Defendant, Case Number 2:19-CV-05896
. As of the date of this Quarterly Report on Form 10-Q, the
plaintiff has not served either defendant. The complaint purports to be a “class action complaint for
violations of the Federal Securities Laws.” The allegations relate to a January 3, 2018, announcement by the Company of
its agreement with Oracle America, Inc., and the purchases of and sales of securities by the named plaintiff (and, purportedly,
all of the members of the yet to be established class through and including approximately May 2, 2018). The Company and Mr. Cutaia
deny all allegations contained in the Complaint and, if and when served, intends to defend vigorously.
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 annual compensation to its three independent board members commencing on the
date the Company became listed on the Nasdaq Stock Market, LLC (“Nasdaq”). The members will serve on the board of
directors until the annual meeting for the year in which their term expires or until their successors have been elected and
qualified.
Issuance
of Common Stock
Subsequent
to June 30, 2019, the Company issued 9,716 shares of Common Stock to vendors for services rendered with a fair value of $15,000.
These shares of Common Stock were valued based on the market value of the Company’s stock price at the issuance date
or the date the Company entered into the agreement related to the issuance.
Grant
of Stock Options
Subsequent
to June 30, 2019, the Company granted stock options to an employee to purchase a total 45,167 shares of Common Stock for services
rendered. The options have an exercise price of $3.13 per share, expire in five years, and vest on grant date or over a
period of four years from grant date. The total fair value of these options at the grant date was $91,000 using the Black-Scholes
option pricing model.
Conversion
of Notes Payable
Subsequent
to June 30, 2019, the Company issued 598,286, shares of restricted Common Stock and warrants to purchase up to 108,196 shares
of Common Stock, with an exercise price of $3.44, upon the conversion of the aggregate principal amount notes
outstanding and accrued interest thereunder of $719,000. For additional information, please see Note 8,
Notes
Payable
, to these unaudited consolidated financial statements.
Issuance
of Notes Payable
Subsequent
to June 30, 2019, we issued unsecured promissory notes to an unaffiliated third-party in the aggregate principal amount of $320,000,
in exchange for net proceeds of $300,000, representing an original issue discount of $20,000, which is included in the original
principal amount. The note is unsecured. The note is due three business days following an equity or debt offering (or combination)
in excess of One Million Dollars ($1,000,000) by the Company.
Preferred Stock and
Warrant Offering
On August 14, 2019, we
entered into a Securities Purchase Agreement (the “SPA”) with certain purchasers named therein (collectively, the
“Preferred Purchasers”), pursuant to which we agreed to issue and sell to the Preferred Purchasers up to an
aggregate of 6,000 shares of our Series A Convertible Preferred Stock (the “Series A Preferred Stock”) and
warrants (the “Warrants”) to purchase an aggregate of up to 3.87 million shares of Common Stock (an amount
equivalent to the number of shares of Common Stock into which the Series A Preferred Stock is initially convertible). Each
share of Series A Preferred Stock is convertible, at any time and from time to time from and after the issuance date, at the
holder’s option into that number of shares of Common Stock equal to the stated value per share (or $1,000) divided by
the conversion price (initially, $1.55); thus, initially, each share of Series A Preferred Stock is convertible into
approximately 645 shares of Common Stock. The Warrants have an initial exercise price of $1.88 per share, subject to
customary adjustments, are exercisable from and after six months after the date of issuance, and will expire five years from
the date of issuance. We closed the offering on August 14, 2019, and issued 5,030 shares of Series A Preferred Stock and
granted warrants to issue up to 3,245,162 shares of Common Stock in connection therewith resulting in aggregate proceeds of $5,030,000. Both the conversion price of the Series A Preferred Stock
and the exercise price of the Warrants are subject to downward price adjustments in the event of certain future equity sales or
rights offerings.