Quarterly Report (10-q)

Date : 08/14/2019 @ 9:37PM
Source : Edgar (US Regulatory)
Stock : Verb Technology Company Inc (VERB)
Quote : 1.08  0.0 (0.00%) @ 12:59AM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2019

 

OR

 

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

 

For the transition period from ________ to ________

 

Commission file number: 001-38834

 

Verb Technology Company, Inc.

(Exact name of Registrant as Specified in its Charter)

 

Nevada   90-1118043

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

2210 Newport Boulevard

Suite 200

Newport Beach, California 92663

(Address of Principal Executive Offices including Zip Code)

 

Registrant’s telephone number, including area code: (855) 250-2300

 

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

 

Title of Each Class   Name of each Exchange on which registered
Common Stock, par value of $0.0001 per share   The Nasdaq Stock Market LLC

Common Stock Purchase Warrants

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes [X] No [  ]

  

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

 

Large accelerated filer [  ] Accelerated filer [  ]
       
Non-accelerated filer [X] Smaller reporting company [X]
       
  Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark with the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes [X] No

 

As of August 14, 2019, there were 23,263,187 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

     

 

 

VERB TECHNOLOGY COMPANY, INC.

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION 3
ITEM 1 - FINANCIAL STATEMENTS 3
ITEM 1A - RISK FACTORS 27
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 38
ITEM 4 - CONTROLS AND PROCEDURES 38
PART II - OTHER INFORMATION 38
ITEM 1 - LEGAL PROCEEDINGS 38
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 40
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 40
ITEM 4 - MINE SAFETY DISCLOSURES 40
ITEM 5 - OTHER INFORMATION 40
ITEM 6 - EXHIBITS 41
SIGNATURES 46

 

2
 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidated Balance Sheets (unaudited) 4
   
Condensed Consolidated Statements of Operations (unaudited) 5
   
Condensed Consolidated Statements of Stockholders Equity (Deficit) (unaudited) 6
   
Condensed Consolidated Statements of Cash Flows (unaudited) 7
   
Notes to Condensed Consolidated Financial Statements (unaudited) 8-26

 

3
 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

 

    June 30, 2019     December 31, 2018  
    (Unaudited)        
ASSETS                
                 
Current assets:                
Cash   $ 412,000     $ 634,000  
Accounts receivable, net     1,255,000       1,000  
Inventory, net     165,000       -  
Prepaid expenses     320,000       83,000  
Total current assets     2,152,000       718,000  
               
Right-of-use assets     1,219,000       -  
Deferred offering costs     -       162,000  
Property and equipment, net     56,000       11,000  
Intangible assets, net (provisional)     9,835,000       -  
Goodwill (provisional)     12,347,000       -  
Other assets     71,000       7,000  
                 
Total assets   $ 25,680,000     $ 898,000  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
                 
Current liabilities:                
Accounts payable and accrued expenses   $ 3,126,000     $ 1,148,000  
Accrued officers’ salary     159,000       188,000  
Accrued interest (including $48,000 and $41,000 payable to related parties)     55,000       46,000  
Note payable, net of discount of $1,000 and $0, respectively     709,000       -  
Notes payable - related party     112,000       112,000  
Convertible notes payable, net of discount of $0 and $1,082,000, respectively     -       818,000  
Operating lease liability, current     227,000       -  
Deferred revenue     237,000       -  
Derivative liability     219,000       2,576,000  
Customer deposits     167,000       -  
Total current liabilities     5,011,000       4,888,000  
                 
Long Term liabilities:                
Note payable - related party     1,065,000       1,065,000  
Operating lease liability, non-current     1,003,000       -  
Total liabilities     7,079,000       5,953,000  
                 
Commitments and contingencies                
                 
Stockholders’ equity (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, 22,655,185 and 12,055,491 shares issued and outstanding as of June 30, 2019 and December 31, 2018     2,000       1,000  
Additional paid-in capital     64,617,000       35,611,000  
Accumulated Deficit     (46,018,000 )     (40,667,000 )
                 
Total stockholders’ equity (deficit)     18,601,000       (5,055,000 )
                 
Total liabilities and stockholders’ equity (deficit)   $ 25,680,000     $ 898,000  

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

4
 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    Statement of Operations  
   

Three Months
Ended

June 30, 2019

   

Three Months
Ended

June 30, 2018

   

Six Months
Ended

June 30, 2019

   

Six Months
Ended

June 30, 2018

 
                         
Revenue, net   $ 3,733,000     $ 8,000     $ 3,742,000     $ 16,000  
Cost of revenue     2,042,000       7,000       2,072,000       8,000  
                                 
Gross margin     1,691,000       1,000       1,670,000       8,000  
                                 
Operating Expenses:                                
Research and development     1,335,000       105,000       1,899,000       236,000  
Depreciation and amortization     567,000       5,000       570,000       10,000  
General and administrative     3,262,000       (495,000 )     5,448,000       4,769,000  
Total operating expenses     5,164,000       (385,000 )     7,917,000       5,015,000  
                                 
Income / (Loss) from operations     (3,473,000 )     386,000       (6,247,000 )     (5,007,000 )
                                 
Other income (expense)                                
Other income / (expense)     (1,000 )     1,000       (1,000 )     (4,000 )
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 )
Debt extinguishment, 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       1,386,000       896,000       (1,716,000 )
                                 
Net Income / (Loss)   $ (2,343,000 )   $ 1,772,000     $ (5,351,000 )   $ (6,723,000 )
Income (Loss) per share - basic and diluted   $ (0.11 )   $ 0.17     $ (0.32 )   $ (0.71 )
Weighted average number of common shares outstanding - basic and diluted     21,624,240       10,169,332       16,946,065       9,489,017  

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

5
 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

 

                Additional              
    Common Stock     Paid-in     Accumulated        
    Shares     Amount     Capital     Deficit     Total  
                               
Balance at December 31, 2018     12,055,491     $ 1,000     $  35,611,000     $   (40,667,000 )   $ (5,055,000 )
                                         
Sale of common stock from Public Offering     6,549,596       1,000       18,452,000       -       18,453,000  
Fair value of common stock issued for acquisition     3,327,791       -       7,820,000       -       7,820,000  
Fair value of common stock issued to settle accounts payable     4,142       -       10,000       -       10,000  
Conversion of convertible debt     182,333       -       410,000       -       410,000  
Common shares issued upon exercise of warrants     173,714       -       45,000       -       45,000  
Common stock upon issuance of convertible debt     25,272       -       182,000       -       182,000  
Fair value of common shares issued for services     197,810       -       728,000       -       728,000  
Issuance of fractional shares due to reverse split     139,036       -       -       -       -  
Fair value of vested stock options and warrants     -       -       1,359,000       -       1,359,000  
Net loss     -       -       -       (5,351,000 )     (5,351,000 )
Balance at June 30, 2019     22,655,185     $ 2,000     $ 64,617,000     $ (46,018,000 )   $   18,601,000  

 

                Additional              
    Common Stock     Paid-in     Accumulated        
    Shares     Amount     Capital     Deficit     Total  
                               
Balance at December 31, 2017     7,941,235     $ 12,000     $  22,739,000     $   (28,540,000 )   $ (5,789,000 )
                                         
Common shares issued upon exercise of warrants     113,621       -       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       2,000       2,977,000       -       2,979,000  
Fair value of common shares issued for services     319,346       -       2,627,000       -       2,627,000  
Fair value of common stock issued upon conversion of debt     492,201       1,000       2,277,000       -       2,278,000  
Fair value of common stock issued upon conversion of accrued expenses     27,149       -       582,000       -       582,000  
Common shares issued upon exercise of put option     203,206       -       1,000,000       -       1,000,000  
Fair value of vested stock options     -       -       829,000       -       829,000  
Stock repurchase     (46,667 )     -       (20,000 )     -       (20,000 )
Net loss             -       -       (6,723,000 )     (6,723,000 )
Balance at June 30, 2018     10,246,537     $ 15,000     $ 33,067,000     $ (35,263,000 )   $ (2,181,000 )

 

                Additional              
    Common Stock     Paid-in     Accumulated        
    Shares     Amount     Capital     Deficit     Total  
                               
Balance at March 31, 2019     12,344,451     $ 1,000     $  36,590,000     $ (43,675,000 )   $ (7,084,000 )
                                         
Sale of common stock from Public Offering     6,549,596       1,000       18,452,000       -       18,453,000  
Fair value of common stock issue for acquisition     3,327,791       -       7,820,000       -       7,820,000  
Fair value of common stock issued to settle accounts payable     4,142       -       10,000       -       10,000  
Fair value of common stock upon issuance of convertible debt     16,667       -       (128,000 )     -       (128,000 )
Conversion of convertible debt     165,666       -       410,000       -       410,000  
Common shares issued upon exercise of warrants     25,000       -       45,000       -       45,000  
Common stock upon issuance of convertible debt     8,605       -       182,000       -       182,000  
Fair value of common shares issued for services     157,812       -       340,000       -       340,000  
Issuance of fractional shares due to reverse split     55,455       -       -       -       -  
Fair value of vested stock options and warrants             -       896,000       -       896,000  
Net loss     -       -       -       (2,343,000 )     (2,343,000 )
Balance at June 30, 2019     22,655,185     $ 2,000     $ 64,617,000     $  (46,018,000 )   $  18,601,000  

 

          Additional              
    Common Stock     Paid-in     Accumulated        
    Shares     Amount     Capital     Deficit     Total  
                               
Balance at March 31, 2018     10,141,753     $ 15,000     $  34,230,000     $   (37,035,000 )   $ (2,790,000 )
                                         
Common shares issued upon exercise of warrants     46,165       -       -       -       -  
Common shares issued upon exercise of options     32,508       -       34,000       -       34,000  
Derivative liability extinguished upon exercise of warrants     -       -       (723,000 )     -       (723,000 )
Proceeds from sale of common stock     70,000       -       700,000       -       700,000  

Fair value of common shares issued services

   

2,778

     

-

     

(642,000

)

   

-

      (642,000

)

Fair value of vested stock options     -       -       (512,000 )     -       (512,000 )
Stock repurchase     (46,667 )     -       (20,000 )     -       (20,000 )
Net Income     -       -       -       1,772,000       1,772,000  
Balance at June 30, 2018     10,246,537     $ 15,000     $ 33,067,000     $ (35,263,000 )   $ (2,181,000 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

6
 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    For the Six Months Ended  
    June 30, 2019     June 30, 2018  
             
Operating Activities:                
Net loss   $ (5,351,000 )   $ (6,723,000 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Fair value of common shares issued for services and vested stock options and warrants     2,087,000       3,457,000  
Financing costs     164,000       172,000  
Amortization of debt discount     1,601,000       748,000  
Change in fair value of derivative liability     (518,000 )     1,181,000  
Debt extinguishment, net     (2,227,000 )     (652,000 )
Depreciation and amortization     13,000       10,000  
Amortization of right-of-use assets     62,000       -  
Amortization of intangible assets     495,000       -  
Inventory reserve     7,000       -  
Allowance for doubtful accounts     (15,000 )     -  
Effect of changes in assets and liabilities:              
Accounts receivable     (150,000 )     -  
Inventory     44,000       -  
Prepaid expenses     (95,000 )     (7,000 )
Other assets     (43,000 )     (8,000 )
Accounts payable, accrued expenses, and accrued interest     829,000       (68,000 )
Operating lease liability     (58,000 )     -  
Deferred revenue     (84,000 )     -  
Customer deposits     (296,000 )     -  
Net cash used in operating activities     (3,535,000 )     (1,890,000 )
                 
Investing Activities:                
Acquisition of subsidiary     (15,000,000 )     -  
Cash acquired upon acquisition of subsidiary     557,000       -  
Net cash used in investing activities     (14,443,000 )     -  
                 
Financing Activities:                
Proceeds / (payment) on convertible note payable     432,000       (845,000 )
Proceeds from notes payable     1,000,000       -  
Proceeds from related party note payable     58,000       -  
Proceeds from sale of common stock     18,614,000       2,979,000  
Proceeds from exercise of put option     -       1,000,000  
Proceeds from option exercise     -       34,000  
Proceeds from warrant exercise     45,000       22,000  
Payment of convertible notes payable     (2,025,000 )     130,000  
Payment of notes payable     (310,000 )     -  
Payment of related party notes payable     (58,000 )     -  
Repurchase common stock     -       (20,000 )
Net cash provided by financing activities     17,756,000       3,300,000  
                 
Net change in cash     (222,000 )     1,410,000  
                 
Cash - beginning of period     634,000       11,000  
                 
Cash - end of period   $ 412,000     $ 1,421,000  
      -       -  
Supplemental disclosures of cash flow information:                
Cash paid for interest   $ 64,000     $ 314,000  
Cash paid for income taxes     -       800  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Fair value of common stock issued upon acquisition of subsidiary   $ 7,820,000     $ -  
Conversion of note payable and accrued interest to common stock   $ 410,000     $ 2,277,000  
Fair value of derivative liability from issuance of convertible debt, inducement shares and warrant features   $ 388,000     $ 302,000  
Fair value of warrants issued and beneficial conversion feature to extinguish debt   $ -     $ 723,000  
Fair value of common shares, warrants and beneficial conversion feature of issued convertible note   $ 182,000     $ -  
Common stock issued to settle accounts payable   $ 10,000     $ 582,000  
Derecognition of deferred offering costs   $ 161,000     $ -  

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

7
 

 

VERB TECHNOLOGY COMPANY, INC.

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.

 

8
 

 

2. 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.

 

9
 

 

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:

 

    Six Months Ended   Six Months Ended   Year Ended
    June 30, 2019   June 30, 2018   December 31, 2018
    Unaudited   Unaudited    
Verb’s largest customers are presented below as a percentage of Verb’s aggregate:            
             
Revenue   2 major customers account for 11% and 10% of revenue individually, or 21% of revenue in the aggregate   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   Not applicable   Not applicable
             
Verb’s largest vendors are presented below as a
percentage of Verb’s aggregate:
           
             
Purchase   3 major vendors account for 11%, 14% and 19% of purchases individually, or 44% of purchases in the aggregate   Not applicable   Not applicable
             
Accounts payable   18% of accounts payable to one vendor   Not applicable   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.

 

10
 

 

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:

 

    Three Months Ended June 30, 2019 (Unaudited)     Three Months Ended June 30, 2018 (Unaudited)  
    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  

 

11
 

 

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.

 

12
 

 

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.

 

13
 

 

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.

 

14
 

 

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  

 

15
 

 

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  

 

4. ACCOUNTS RECEIVABLE

 

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  

 

16
 

 

5. INVENTORY

 

    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.

 

17
 

 

   

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.

 

8. NOTE PAYABLE

 

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     $ -  

 

18
 

 

  (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  

 

19
 

 

  (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.

 

20
 

 

 

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.

 

21
 

 

11. DERIVATIVE LIABILITY

 

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  

 

22
 

 

12. EQUITY TRANSACTIONS

 

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.

 

23
 

 

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.

 

24
 

 

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”).

 

25
 

 

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.

 

14. SUBSEQUENT EVENTS

 

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.

 

26
 

 

ITEM 1A – RISK FACTORS

 

Not applicable to smaller reporting companies.

 

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

 

Forward-Looking Statements

 

The following discussion and analysis of the results of operations and financial condition of Verb for the three and six-month periods ended June 30, 2019 and 2018, should be read in conjunction with the financial statements and related notes and the other financial information that are included elsewhere this Quarterly Report on Form 10-Q. 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 fact 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 business decisions, are subject to change. These uncertainties and contingencies can affect 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. 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.

 

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” and “Verb” refer to Verb Technology Company, Inc., a Nevada corporation, individually, or as the context requires, collectively with its subsidiary, Verb Direct, on a consolidated basis, unless otherwise specified.

 

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 Quarterly Report 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.

 

27
 

 

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 (15) 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. 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 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 then having 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. As a result of the merger, Merger Sub 2’s corporate name changed to “Verb Direct, LLC.” On the terms and subject to the conditions set forth in the Merger Agreement, at the Effective Time, each share of Sound Concepts Capital Stock issued and outstanding immediately prior to the effective time, was cancelled in exchange for cash payment by us of an aggregate of $15,000,000, and the issuance of an aggregate of 3,327,791 restricted shares of our Common Stock, with an agreed value of $10,000,000 on the pricing date, which was at or about the date on which we priced our Public Offering. The Acquisition Cash Payment was paid using a portion of the net proceeds we received as a result of our recent Public Offering of Units that closed on April 9, 2019. Pursuant to the requirements of current accounting guidance, we valued the acquisition shares at $7,820,000 on the closing date of the transaction.

 

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 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 haven’t 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, that when clicked, allow their prospects and customers to respond to a users’ 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 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. 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, SaaS Verb applications.

 

Our client base consists primarily of enterprise customers in the $200 billion global direct sales industry 1 , though we 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, Isagenix International, Vasayo, Nerium International, Forever Living Products International, Seacret Spa, 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.

 

28
 

 

Results of Operations

 

Three Months Ended June 30, 2019 as Compared to the Three Months Ended June 30, 2018

 

The following is a comparison of our results of operations for the three months ended June 30, 2019 and 2018:

 

   

Three Months Ended

June 30, 2019

   

Three Months Ended

June 30, 2018

    Change  
                   
Revenue, net   $ 3,733,000     $ 8,000     $ 3,725,000  
Cost of revenue     2,042,000       7,000       2,035,000  
                         
Gross margin     1,691,000       1,000       1,690,000  
                         
Operating Expenses:                        
Research and development     1,335,000       105,000       1,230,000  
Depreciation and amortization     567,000       5,000       495,000  
General and administrative     3,262,000       (495,000 )     3,824,000  
Total operating expenses     5,164,000       (385,000 )     5,549,000  
                         
Income / (Loss) from operations     (3,473,000 )     386,000       (3,859,000 )
                         
Other income (expense)                        
Other income / (expense)     (1,000 )     1,000       (2,000 )
Financing costs     (55,000 )     -       (55,000 )
Interest expense - amortization of debt discount     (572,000 )     -       (572,000 )
Change in fair value of derivative liability     (426,000 )     1,444,000       (1,870,000 )
Gain on extinguishment of derivative liability, net     2,227,000       -       2,227,000  
Interest expense     (43,000 )     (59,000 )     16,000  
Total other income / (expense)     1,130,000       1,386,000       (256,000 )
                         
Net Income / (Loss)   $ (2,343,000 )   $ 1,772,000     $ (4,115,000 )

 

Revenues

 

Total revenues for the quarter ended June 30, 2019 were $3.7 million compared to $8,000 for the quarter ended June 30, 2018. The increase in revenues is attributed to sales of Verb Direct, our wholly-owned subsidiary that we acquired in April 2019. As a result of the acquisition of Verb Direct, Verb now has three revenue channels: (1) SaaS that is an interactive video CRM application, (2) welcome kits, which consists of “starter kits” for corporations to use for their marketing needs, and (3) fulfillments, which consists of various custom products used for marketing purposes at conferences and other events or sample packs ordered through the digital application. SaaS revenue for the quarter ended June 30, 2019 was $1.5 million compared to $8,000 for the quarter ended June 30, 2018. Revenue derived from welcome kits, fulfillment, and shipping for the quarter ended June 30, 2019 was $2.2 million compared to $0 for the quarter ended June 30, 2018.

 

Cost of Revenue

 

Total cost of revenue for the quarter ended June 30, 2019 was $2.0 million compared to $7,000 for the quarter ended June 30, 2018. The increase in cost of revenue is attributed to costs of Verb Direct. SaaS cost of revenue for the quarter ended June 30, 2019 was $176,000 compared to $7,000 for the quarter ended June 30, 2018. Cost of revenue derived from the welcome kits, fulfillments, and shipping for the quarter ended June 30, 2019 was $1.9 million compared to $0 for the quarter ended June 30, 2018.

 

29
 

 

Operating Expenses

 

Research and development expenses were $1.3 million for the quarter ended June 30, 2019, as compared to $105,000 for the quarter ended June 30, 2018. Research and development expenses primarily consisted of fees paid to employees and vendors contracted to perform research projects and develop technology. The increase in research and development is attributed to research and development expenses of Verb Direct and additional product development and testing to support the integration of Verb Direct plus enhancements to our core platform to facilitate native integrations with Salesforce.com, Inc. (“Salesforce.com”), Microsoft Corporation (“Microsoft”), Adobe Inc. (“Adobe”), and other channel partners.

 

Depreciation and amortization expense was $567,000 for the quarter ended June 30, 2019, as compared to $5,000 for the quarter ended June 30, 2018. The increase was associated with the $495,000 of amortization related to the intangible asset recorded as part of the acquisition of Verb Direct in April 2019 plus other depreciation and amortization attributed to Verb Direct.

 

General and administrative expenses for the quarter ended June 30, 2019 were $3.3 million as compared to ($495,000) for the quarter ended June 30, 2018. The increase to general and administrative expenses is related to an increase in stock compensation expense of $2.4 million, general and administration expenses attributed to Verb Direct of $1.0 million, an increase in labor to support growth of $323,000, and an increase in recruiting expense of $70,000. General and administrative expenses for the quarter ended June 30, 2018 were primarily attributed to a contra expense in stock-based compensation expense of $1.2 million. The credit in stock-based compensation was attributed to the prior year revaluation of our consultants’ unvested restricted stock and stock options.

 

Other income / (expense), net, for the quarter ended June 30, 2019 equaled $1.1 million, which represented a gain on extinguishment of derivative liability of $2.2 million, offset by interest expense for amortization of debt discount of ($572,000), a change in the fair value of derivative liability of ($426,000), financing costs of ($55,000), interest expense of ($43,000), and other expense of ($1,000). Other income, net, for the quarter ended June 30, 2018 equaled $1.4 million, which represented a change in the fair value of derivative liability of $1.4 million plus other income of $1,000, offset by interest expense of ($59,000).

 

30
 

 

Six Months Ended June 30, 2019 as Compared to the Six Months Ended June 30, 2018

 

The following is a comparison of our results of operations for the six months ended June 30, 2019 and 2018:

 

   

Six Months Ended

June 30, 2019

   

Six Months Ended

June 30, 2018

    Change  
                   
Revenue, net   $ 3,742,000     $ 16,000     $ 3,726,000  
Cost of revenue     2,072,000       8,000       2,064,000  
Gross margin     1,670,000       8,000       1,662,000  
                         
Operating Expenses:                        
Research and development     1,899,000       236,000       1,663,000  
Depreciation and amortization     570,000       10,000       560,000  
General and administrative     5,448,000       4,769,000       679,000  
Total operating expenses     7,917,000       5,015,000       2,902,000  
                         
Income / (Loss) from operations     (6,247,000 )     (5,007,000 )     (1,240,000 )
                         
Other income (expense)                        
Other income / (expense)     (1,000 )     (4,000 )     3,000  
Financing costs     (139,000 )     (172,000 )     33,000  
Interest expense - amortization of debt discount     (1,626,000 )     (748,000 )     (878,000 )
Change in fair value of derivative liability     518,000       (1,181,000 )     1,699,000  
Gain on extinguishment of derivative liability, net     2,227,000       652,000       1,575,000  
Interest expense     (83,000 )     (263,000 )     180,000  
Total other income / (expense)     896,000       (1,716,000 )     2,612,000  
                         
Net Income / (Loss)   $ (5,351,000 )   $ (6,723,000 )   $ 1,372,000  

 

Revenues

 

Total revenues for the six months ended June 30, 2019 were $3.7 million compared to $16,000 for the six months ended June 30, 2019. The increase in revenues is attributed to revenues generated by Verb Direct, our wholly-owned subsidiary that we acquired in April 2019. As a result of the acquisition, Verb now has three revenue channels: (1) SaaS that is an interactive video CRM application; (2) welcome kits, which consists of “starter kits” for corporations to use for their marketing needs; and (3) fulfillments, which consists of various custom products used for marketing purposes at conferences and other events or sample packs ordered through the digital application. SaaS revenue for the six months ended June 30, 2019 was $1.5 million compared to $16,000 for the six months ended June 30, 2018. Revenue derived from welcome kits, fulfillments, and shipping for the six months ended June 30, 2019 was $2.2 million compared to $0 for the six months ended June 30, 2018.

 

Cost of Revenue

 

Total cost of revenue for the six months ended June 30, 2019 was $2.1 million compared to $16,000 for the six months ended June 30, 2018. The increase in cost of revenue is attributed to cost of revenues of Verb Direct. SaaS cost of revenue for the six months ended June 30, 2019 was $206,000 compared to $8,000 for the six months ended June 30, 2018. Cost of revenue for the welcome kits, Fulfillment, and shipping for the quarter ended June 30, 2019 was $1.9 million compared to $0 for the six months ended June 30, 2018.

 

31
 

 

Operating Expenses

 

Research and development expenses were $1.9 million for the six months ended June 30, 2019, as compared to $236,000 for the six months ended June 30, 2018. Research and development expenses primarily consisted of fees paid to employees and vendors contracted to perform research projects and develop technology. The increase in research and development is attributed to research and development expenses of Verb Direct and additional product development and testing to support the integration of Verb Direct plus enhancements to our core platform to facilitate native integrations with Salesforce, Microsoft, Adobe, and other channel partners.

 

Depreciation and amortization expense was $570,000 for the six months ended June 30, 2019, as compared to $10,000 for the six months ended June 30, 2018. The increase was associated with the $495,000 of amortization related the intangible asset recorded as part of the acquisition of Verb Direct, in addition to depreciation and amortization for Verb Direct for the six months ended June 30, 2019.

 

General and administrative expenses for the six months ended June 30, 2019 were $5.4 million as compared to $4.8 million for the six months ended June 30, 2018. The increase to general and administrative expenses is related to the inclusion of general and administration expenses of Verb Direct, which totaled $1.0 million, an increase in professional services of $673,000 related to the up-listing of our Common Stock and warrants to Nasdaq, the acquisition of Verb Direct, and an increase in labor to support growth of $494,000, all offset by a decrease in stock compensation expense of $1.4 million.

 

Other income / (expense), net, for the six months ended June 30, 2019 equaled $896,000, which represented a gain on extinguishment of derivative liability of $2.2 million and a change in the fair value of derivative liability of $518,000, offset by interest expense for amortization of debt discount of ($1.6 million), financing costs of ($139,000), and interest expense of ($83,000) and other expense of ($1,000). Other income / (expense), net, for the six months ended June 30, 2018 equaled $1.7 million, which represented a change in the fair value of derivative liability of ($1.2 million), interest expense for amortization of debt discount of ($748,000), interest expense of ($263,000), financing costs of ($172,000), other expense of ($4,000), offset by a gain on extinguishment of derivative liability of $652,000.

 

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 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. Readers are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating modified EBITDA, readers 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.

 

32
 

 

    For the Three Months Ended     For the Six Months Ended  
    June 30, 2019     June 30, 2018     June 30, 2019     June 30, 2018  
                         
Net loss   $ (2,343,000 )   $ 1,772,000       (5,351,000 )   $ (6,723,000 )
                                 
Adjustments:                                
Other (income) / expense     1,000       (1,000 )     1,000     (4,000 )
Stock compensation expense     1,236,000       (1,154,000 )     2,087,000       3,457,000  
Financing costs     55,000       -       139,000       172,000  
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  
Debt extinguishment, net     (2,227,000 )     -       (2,227,000 )     (652,000 )
Interest expense     43,000       59,000       83,000       263,000  
Depreciation     7,000       5,000       13,000       10,000  
Amortization of intangible assets     495,000       -       495,000       -  
Total EBITDA adjustments     608,000       (2,535,000 )     1,699,000       5,175,000  
Modified EBITDA   $ (1,735,000 )   $ (763,000 )     (3,652,000 )   $ (1,548,000 )

 

The $972,000 decrease in modified EBITDA for the three months ended June 30, 2019 compared to the same period in 2018, resulted from the increase in labor-related costs and professional services associated with our growth and the acquisition of Verb Direct.

 

The $2.1 million decrease in modified EBITDA for the six months ended June 30, 2019 compared to the same period in 2018, resulted from the increase in professional services and business-related expenses related to the up-listing our Common Stock and the warrants to Nasdaq, the acquisition of Verb Direct, and an increase in labor-related costs.

 

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 plan; 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 the Modified EBITDA does not reflect any cash requirements for such replacements.

 

Liquidity and Capital Resources

 

Going Concern

 

We have incurred operating losses and negative cash flows from operations since inception. We incurred a net loss of $5.4 million during the six months ended June 30, 2019. We also utilized cash in operations of $3.5 million during the six months ended June 30, 2019. 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 to continue our operations.

 

33
 

 

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 results 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.

 

Overview

 

As of June 30, 2019, we had cash of $412,000. 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 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.

 

In April 2019, we closed our Public Offering that provided the Company with gross proceeds of approximately $20,500,000 before deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company. The proceeds were used to pay the Acquisition Cash Payment of $15,000,000 in connection with the acquisition of Sound Concepts (now, Verb Direct), pay principal and interest amounts outstanding under convertible debt in the amount of $2,025,000, pay commissions and other offering expenses related to the Public Offering in the amount of $2,100,000, and pay other operating expenses.

 

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. We received gross proceeds equal to $5,030,000.

 

Subsequent to June 30, 2019, the Company closed unsecured debt financing totaling $300,000. The proceeds were used for working capital.

 

34
 

 

Cash Flows – Operating

 

For the six months ended June 30, 2019, our cash flows used in operating activities amounted to $3.5 million, compared to cash used for the six months ended June 30, 2018 of $1.9 million. The change is due to costs associated with the up-listing of our Common Stock and the listing of our warrants to Nasdaq, the acquisition of Verb Direct, and the growth of the business, which resulted in additional professional services, salary, and various operating expenses totaling $1.6 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018. The increase in business activity was offset by an increase in accounts payable of $829,000.

 

Cash Flows – Investing

 

For the six months ended June 30, 2019, our cash flows used in investing activities amounted to $14.4 million, compared to cash provided in investing activities for the six months ended June 30, 2018 of $0. The change is attributed to the Acquisition Cash Payment of $15 million paid for Verb Direct offset by Verb Direct’s cash on hand at the time of acquisition of $557,000.

 

Cash Flows – Financing

 

Our cash provided by financing activities for the six months ended June 30, 2019 amounted to $17.8 million, which represented $18.6 million of net proceeds from the issuance of shares of our Common Stock, $1.0 million of proceeds from notes payable, $432,000 of proceeds from the issuance of convertible debt, $58,000 of unsecured related party debt, $45,000 of proceeds from warrant exercises, partially offset by $2.0 million paid in connection with convertible notes outstanding, $311,000 paid in connection with notes outstanding, and $58,000 paid in connection with related party notes outstanding. Our cash provided by financing activities for the six months ended June 30, 2018 amounted to $3.3 million, which represented $3.0 million of proceeds received from the issuances of shares of our Common Stock, $1.0 million of proceeds from the issuance of shares of our Common Stock from the exercise of a put option, $130,000 of proceeds from the issuance of convertible debt, and $22,000 of proceeds from the exercise of warrants, partially offset by $845,000 paid in connection with convertible notes outstanding.

 

Notes Payable – Related Parties

 

The Company has the following outstanding notes payable to related parties at June 30, 2019 that are due in the current year:

 

Note   Issuance Date   Maturity Date   Interest Rate     Original Borrowing     Balance at
June 30,
2019
 
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       170,000