Notes
to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2019 and 2018
(Unaudited)
1.
|
DESCRIPTION
OF BUSINESS
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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
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 the health care
industry and the burgeoning CBD industry, among other 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, Modere Inc., Revital U International, LLC, Monat Global, Inc., 4Life Research, 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 60 different countries, in over
48 languages, and currently has approximately 825,000 individual users.
We also provide printing services
to their corporate clients: welcome kits, which consists of “starter kits” for clients to use for their marketing
needs, and fulfillments, which consists of various custom products used for marketing purposes at conferences and other events
or sample packs ordered through the digital application.
2.
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SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
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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 nine months ended September 30, 2019, the Company incurred a net loss of $8,466,000
and used cash in operations of $6,506,000. 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 $18,524,000, after taking into account offering costs, of which $15,000,000 was used to Acquisition
Cash Payment to acquire Sound Concepts, $2,025,000 was applied towards the payment of certain notes payable, and the remaining
balance was used for working capital purposes.
On
August 14, 2019, we entered into a Securities Purchase Agreement (“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 Series A Convertible Preferred Stock (the “Series A
Preferred Stock”), which, at the initial conversion price, are convertible into an aggregate of up to
approximately 3.87 million shares of Common Stock, and warrants (the “August Warrants”) to purchase up to
an equivalent number of shares of Common Stock. 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 August 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 the August Warrants exercisable for up to
3,245,162 shares of Common Stock in connection therewith. We received gross proceeds equal to $5,030,000. Both the
conversion price of the Series A Preferred Stock and the exercise price of the August Warrants are subject to downward price
adjustments in the event of certain future equity sales or rights offerings.
Our
continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash
flows from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our
operations. There is no assurance that we will ever be profitable or that debt or equity financing will be available to us. The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue
as a going concern.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue 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 nine months ended September 30, 2019:
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Nine
Months Ended
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Nine
Months Ended
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September
30, 2019
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September
30, 2018
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(Unaudited)
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(Unaudited)
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Verb’s
largest customers are presented below as a percentage of Verb’s aggregate:
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Accounts
receivable
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3
major customers accounted for 13%, 13%, and 11% of accounts receivable individually, or 37% of accounts receivable
in the aggregate
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None
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Verb’s
largest vendors are presented below as a percentage of Verb’s aggregate:
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Purchases
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One
major vendor accounted for 10% of purchases
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None
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Accounts
payable
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2
major customers accounted for 16% and 12% of accounts payable individually, or 28% of accounts payable in the aggregate
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None
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Leases
We
lease certain corporate office space and office equipment under lease agreements with monthly payments over a period of 36 to
94 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 Accounting Standards Codification (“ASC”) 840, Accounting
for Leases. 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. See Note 5, Right-of-Use Assets and Operating Lease Liabilities, for additional information.
Revenue
Recognition
The
Company derives its revenue primarily from providing application services through the SaaS application, digital marketing and
sales support services, from the sale of customized print products and training materials, branded apparel, and digital tools,
as demanded by its customers. The subscription revenue from the application services are recognized over the life of the estimated
subscription period. The Company also charges certain customers setup or installation fees for the creation and development of
websites and phone application. These fees are accounted as part of deferred revenue 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 revenue, and the
related costs are reflected in cost of revenue in the accompanying Statements of Operations.
The
Company recognizes revenue in accordance with 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 revenue 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.
A
description of our principal revenue generating activities is as follows:
Digital
Sales – We offer cloud-based business software on a subscription basis. Subscriptions are paid in advance of the services
or billed 30 days in arrears of the subscription period. The revenue is recognized over the subscription period.
Welcome
kits – We offer design and printing services to create corporate starter kits that our clients use for their marketing needs.
The revenue is recognized upon completion and shipment of the welcome kits.
Fulfillment
– We offer print on demand and fulfilment services of various custom products our clients use for marketing purposes. The
revenue is recognized upon completion and shipment of the products.
Shipping
– We charge our customers the costs related to the shipping of their welcome kits and fulfillment products through third
parties. The revenue is recognized when the welcome kits or fulfillment products are shipped.
Cost
of Revenue
Cost
of revenue 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 the Financial Accounting
Standards Board’s (“FASB”) ASC 718, Compensation – Stock Compensation. Stock-based compensation cost
is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite
service period.
From
prior periods 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 nine months ended September 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 September 30, 2019 and 2018, the Company had total outstanding options of 2,914,641 and 2,265,641, respectively,
and warrants of 11,132,960 and 1,276,803, 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.
The acquisition of Verb Direct,
formerly Sound Concepts, occurred on April 12, 2019. The Company will perform its first impairment test in fiscal 2020.
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.
The acquisition of Verb Direct,
formerly Sound Concepts, occurred on April 12, 2019. The Company will perform its first impairment test in fiscal 2020.
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:
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Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
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Level
2:
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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.
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Level
3:
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Pricing
inputs that are generally observable inputs and not corroborated by market data.
|
The
carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalents, prepaid expenses,
and accounts payable and accrued expenses approximate their fair value due to their short-term nature. The carrying values financing
obligations approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing
market interest rates. The Company uses Level 3 inputs for its valuation methodology for the derivative liabilities.
Long-Lived
Assets
The
Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value
may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash
flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying
amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available,
or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. No impairment
of long-lived assets was required for the year ended December 31, 2018 and for the period ended September 30, 2019.
Segments
The
Company has three revenue channels: (1) digital/SaaS, (2) welcome kits, and (3) fulfillments. In accordance with the “Segment
Reporting” Topic of the ASC, the Company’s chief operating decision maker (the Company’s Chief Executive Officer)
reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing
guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which
the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment
Reporting” due to (i) their similar customer base and (ii) the Company having a single sales team, marketing department,
customer service department, operations department, finance department, and accounting department to support all revenue
channels. Since the Company operates in one segment, all financial information required by “Segment Reporting” can
be found in the accompanying consolidated financial statements.
Recent
Accounting Pronouncements
Management
does not believe that recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American
Institute of Certified Public Accountants, and the SEC will have a material impact on the Company’s present or future consolidated
financial statements.
3.
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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
on the date of acquisition:
Assets Acquired:
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
2,004,000
|
|
|
|
|
|
Property and equipment
|
|
|
58,000
|
|
|
|
|
|
Other assets
|
|
|
1,302,000
|
|
|
$
|
3,364,000
|
|
Liabilities
Assumed:
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
(2,153,000
|
)
|
|
|
|
|
Long-term
liabilities
|
|
|
(1,068,000
|
)
|
|
|
(3,221,000
|
)
|
Intangible assets (provisional)
|
|
|
|
|
|
|
10,330,000
|
|
Goodwill (provisional)
|
|
|
|
|
|
|
12,347,000
|
|
Purchase Price
|
|
|
|
|
|
$
|
22,820,000
|
|
The intangible assets, which consist
mostly of developed technology, are being amortized over its estimated useful life of five years. During the period ended September
30, 2019, the Company recorded amortization expense of $990,000. As of September 30, 2019, the remaining unamortized balance of
the intangible assets was $9,340,000.
The
following unaudited pro forma statements of operations present the Company’s pro forma results of operations after giving
effect to the purchase of Verb Direct based on the historical financial statements of the Company and Verb Direct. The unaudited
pro forma statements of operations for the three and nine months ended September 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
September
30, 2019
|
|
|
Three
Months Ended
September
30, 2018
|
|
|
Nine
Months Ended
September
30, 2019
|
|
|
Nine
Months Ended
September
30, 2018
|
|
|
|
(Actual)
|
|
|
(Proforma)
|
|
|
(Proforma)
|
|
|
(Proforma)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
|
|
$
|
1,438,000
|
|
|
$
|
1,120,000
|
|
|
$
|
3,951,000
|
|
|
$
|
2,970,000
|
|
Welcome
kits & fulfillment
|
|
|
1,164,000
|
|
|
|
1,868,000
|
|
|
|
5,213,000
|
|
|
|
5,242,000
|
|
Shipping
|
|
|
271,000
|
|
|
|
479,000
|
|
|
|
1,443,000
|
|
|
|
1,128,000
|
|
|
|
|
2,873,000
|
|
|
|
3,467,000
|
|
|
|
10,607,000
|
|
|
|
9,340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
|
|
|
221,000
|
|
|
|
113,000
|
|
|
|
564,000
|
|
|
|
376,000
|
|
Welcome
kits & fulfillment
|
|
|
990,000
|
|
|
|
1,494,000
|
|
|
|
3,850,000
|
|
|
|
3,554,000
|
|
Shipping
|
|
|
280,000
|
|
|
|
493,000
|
|
|
|
1,367,000
|
|
|
|
1,137,000
|
|
|
|
|
1,491,000
|
|
|
|
2,100,000
|
|
|
|
5,781,000
|
|
|
|
5,067,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
1,382,000
|
|
|
|
1,367,000
|
|
|
|
4,826,000
|
|
|
|
4,273,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
& development
|
|
|
1,214,000
|
|
|
|
758,000
|
|
|
|
3,804,000
|
|
|
|
2,005,000
|
|
Depreciation
& amortization
|
|
|
518,000
|
|
|
|
510,000
|
|
|
|
1,530,000
|
|
|
|
1,528,000
|
|
General
& administrative
|
|
|
3,293,000
|
|
|
|
1,055,000
|
|
|
|
9,823,000
|
|
|
|
7,285,000
|
|
Total
operating expenses
|
|
|
5,025,000
|
|
|
|
2,323,000
|
|
|
|
15,157,000
|
|
|
|
10,818,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(3,643,000
|
)
|
|
|
(956,000
|
)
|
|
|
(10,331,000
|
)
|
|
|
(6,545,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
(10,000
|
)
|
|
|
(24,000
|
)
|
|
|
(27,000
|
)
|
|
|
(16,000
|
)
|
Financing
costs
|
|
|
(1,486,000
|
)
|
|
|
-
|
|
|
|
(1,625,000
|
)
|
|
|
(172,000
|
)
|
Interest
expense - amortization of debt discount
|
|
|
(21,000
|
)
|
|
|
-
|
|
|
|
(1,647,000
|
)
|
|
|
(748,000
|
)
|
Change
in fair value of derivative liability
|
|
|
2,802,000
|
|
|
|
341,000
|
|
|
|
3,320,000
|
|
|
|
(840,000
|
)
|
Gain
on extinguishment of debt, net
|
|
|
(691,000
|
)
|
|
|
(1,075,000
|
)
|
|
|
1,536,000
|
|
|
|
(423,000
|
)
|
Interest
expense
|
|
|
(68,000
|
)
|
|
|
(59,000
|
)
|
|
|
(151,000
|
)
|
|
|
(322,000
|
)
|
Total
other income/ (expense), net
|
|
|
526,000
|
|
|
|
(817,000
|
)
|
|
|
1,406,000
|
|
|
|
(2,521,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,117,000
|
)
|
|
$
|
(1,773,000
|
)
|
|
$
|
(8,925,000
|
)
|
|
$
|
(9,066,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.69
|
)
|
Weighted
average number of common shares outstanding - basic and diluted
|
|
|
23,155,801
|
|
|
|
13,549,270
|
|
|
|
20,300,163
|
|
|
|
13,072,089
|
|
Results of operation of Verb Direct
subsequent to the acquisition are as follows:
|
|
Three Months Ended
September 30, 2019
|
|
|
Nine Months
Ended
September 30, 2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,858,000
|
|
|
$
|
10,562,000
|
|
Cost of revenue
|
|
|
1,467,000
|
|
|
|
5,705,000
|
|
Operating expenses
|
|
|
2,157,000
|
|
|
|
6,174,000
|
|
Other expenses
|
|
|
9,000
|
|
|
|
26,000
|
|
Net income / (loss)
|
|
$
|
(775,000
|
)
|
|
$
|
(1,343,000
|
)
|
These amounts were included in the accompanying Consolidated Statement
of Operations.
4.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following as of September 30, 2019 and December 31, 2018.
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Computers
|
|
$
|
29,000
|
|
|
$
|
28,000
|
|
Furniture and fixture
|
|
|
64,000
|
|
|
|
56,000
|
|
Machinery and equipment
|
|
|
51,000
|
|
|
|
24,000
|
|
Leasehold improvement
|
|
|
729,000
|
|
|
|
-
|
|
Total property and
equipment
|
|
|
873,000
|
|
|
|
108,000
|
|
Accumulated depreciation
|
|
|
(132,000
|
)
|
|
|
(97,000
|
)
|
Total
property and equipment, net
|
|
$
|
741,000
|
|
|
$
|
11,000
|
|
Depreciation
expense amounted to $35,000 and $16,000 for nine months ended September 30, 2019 and 2018, respectively.
5.
|
RIGHT-OF-USE
ASSETS AND OPERATING LEASE LIABILITIES
|
Effective
January 1, 2019, the Company adopted the guidance of 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.
On
April 12, 2019, the Company acquired four office and warehouse leases in American Fork, Utah related to the operation of Verb
Direct with an aggregate lease payment of $31,000 per month. Each lease expires in December 2023. In addition, the Company
acquired an office equipment lease with a lease payment of $5,111 per month that will expire in September 2021. As a result, the
Company recorded operating lease right-of-use assets of and lease liabilities for operating lease of $1,282,000 and $1,288,000,
respectively. The lessor of the office and warehouse area is JMCC Properties, which is an entity owned and controlled by the former
shareholders and certain current officers of Verb Direct.
In
February 2019, the Company entered into a lease agreement with respect to 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 addition
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”).
On August 1, 2019, the Company took possession of the office space upon completion of certain leasehold improvements.
The leased office is located at 2210 Newport Boulevard, Suite 200, Newport Beach, California 92663, on the Balboa Peninsula. 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”). 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 for 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. As part of the agreement, the landlord provided leasehold incentive
of $572,000 for the construction of the leasehold improvements. Pursuant to ASC 842, the lease incentive of $572,000 was recorded
as a part of leasehold improvements and a reduction to the right of use assets. As a result, the Company recorded operating lease
right-of-use assets of and lease liabilities for operating lease of $1,856,000 and $2,428,000, respectively.
The
adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets of and lease liabilities for operating
lease in the aggregate of $3,139,000 and $3,716,000, respectively. There was no cumulative-effect adjustment to retained earnings.
|
|
Nine
Months Ended
September
30, 2019
|
|
Lease cost
|
|
|
|
|
Operating lease cost (included
in general and administrative in the Company’s unaudited condensed statement of operations)
|
|
$
|
281,000
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Cash paid for amounts included in the
measurement of lease liabilities
|
|
$
|
—
|
|
Weighted average remaining lease term
– operating leases (in years)
|
|
|
5.44
|
|
Average discount rate – operating
leases
|
|
|
8.5
|
%
|
|
|
At
September 30, 2019
|
|
Operating
leases
|
|
|
|
|
Long-term
right-of-use assets
|
|
$
|
2,986,000
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
311,000
|
|
Long-term operating
lease liabilities
|
|
|
3,296,000
|
|
Total operating
lease liabilities
|
|
$
|
3,607,000
|
|
Year
ending
|
|
Operating
Leases
|
|
2019 (remaining 3 months)
|
|
$
|
85,000
|
|
2020
|
|
|
687,000
|
|
2021
|
|
|
775,000
|
|
2022
|
|
|
750,000
|
|
2023
|
|
|
771,000
|
|
2024 and thereafter
|
|
|
1,653,000
|
|
Total lease payments
|
|
|
4,721,000
|
|
Less:
Imputed interest/present value discount
|
|
|
(1,114,000
|
)
|
Present value
of lease liabilities
|
|
$
|
3,607,000
|
|
During
the period ended September 30, 2018, the Company issued notes payable in the aggregate principal amount of $1,340,000 to various
non-related entities or individuals, in exchange for net proceeds of $1,300,000, representing an original discount of $40,000.
The notes were unsecured and bear interest on the principal amount at an average rate of 5.42% per annum. The notes were due on
demand at any time starting April 10, 2019. As a result of the issuance of the notes, the Company incurred aggregate costs of
$40,000 related to the notes’ original issue discount. The Company recorded these costs as a note discount and was being
amortized to interest over the term of the notes.
The
Company settled these notes payable through a combination of cash payments in the aggregate of $630,000 and the
issuance of 598,286 shares of Common Stock with a fair value of $1,196,000 and warrants to purchase up to 108,196
shares of Common Stock with a fair value of $215,000. As a result, we recorded a loss on debt extinguishment of $691,000
to account for the difference between the face value of the notes payable settled plus accrued interest and the fair value of
the shares of Common Stock and warrants issued. 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.
The fair value of the warrants was determined using a Black Scholes Option pricing model.
As
of September 30, 2019, the outstanding balance of the notes payable was $0. Total interest expense for notes payable was $10,000
and $0 for nine months ended September 30, 2019 and 2018, respectively. The Company paid $1,000 and $0 in interest for the nine
months ended September 30, 2019 and 2018, respectively.
7.
|
NOTES
PAYABLE – RELATED PARTIES
|
The
Company has the following related parties notes payable as of September 30, 2019 and December 31, 2018:
Note
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2019
|
|
|
Balance
at
December 31, 2018
|
|
Note 1 (A)
|
|
December 1, 2015
|
|
February 8, 2021
|
|
|
12.0
|
%
|
|
$
|
1,249,000
|
|
|
$
|
825,000
|
|
|
$
|
825,000
|
|
Note 2 (B)
|
|
December 1, 2015
|
|
April 1, 2017
|
|
|
12.0
|
%
|
|
|
112,000
|
|
|
|
112,000
|
|
|
|
112,000
|
|
Note 3 (C)
|
|
April 4, 2016
|
|
June 4, 2021
|
|
|
12.0
|
%
|
|
|
343,000
|
|
|
|
240,000
|
|
|
|
240,000
|
|
Note 4 (D)
|
|
March 22, 2019
|
|
April 30, 2019
|
|
|
5.0
|
%
|
|
|
58,000
|
|
|
|
-
|
|
|
|
-
|
|
Total notes payable –
related parties
|
|
|
|
|
|
|
|
|
|
|
1,177,000
|
|
|
|
1,177,000
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
(1,065,000
|
)
|
|
|
(1,065,000
|
)
|
Current
|
|
|
|
|
|
|
|
|
|
$
|
112,000
|
|
|
$
|
112,000
|
|
|
(A)
|
On
December 1, 2015, the Company issued a convertible note payable to Mr. Rory J. Cutaia, the Company’s majority stockholder
and Chief Executive Officer, to consolidate all loans and advances made by Mr. Cutaia to the Company as of that date. The
note bears interest at a rate of 12% per annum, secured by the Company’s assets, and will mature on February 8, 2021,
as amended.
|
As
of September 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 September 30, 2019 and December 31, 2018, the outstanding principal balance of
the note was equal to $112,000, respectively. As of September 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,
is secured by the Company’s assets, and will mature on June 4, 2021, as
amended.
As
of September 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. Jeffrey 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 September 30, 2019, the outstanding balance of the note was $0.
|
Total
interest expense for notes payable to related parties was $106,000 and $176,000 for nine months ended September 30, 2019 and 2018,
respectively. The Company paid $96,000 and $237,000 in interest for the nine months ended September 30, 2019 and 2018, respectively.
8.
|
CONVERTIBLE
NOTES PAYABLE
|
The
Company has the following convertible notes payable as of September 30, 2019 and December 31, 2018:
Note
|
|
Note
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
September 30, 2019
|
|
|
Balance
at
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable (A)
|
|
October 19, 2018
|
|
April 19, 2019
|
|
|
10
|
%
|
|
$
|
1,500,000
|
|
|
$
|
-
|
|
|
$
|
1,500,000
|
|
Note payable (B)
|
|
October 30, 2018
|
|
April 29, 2019
|
|
|
5
|
%
|
|
$
|
400,000
|
|
|
|
-
|
|
|
|
400,000
|
|
Note payable
(C)
|
|
February 1, 2019
|
|
August 2, 2019
|
|
|
10
|
%
|
|
$
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
Total notes payable
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
1,900,000
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(1,082,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
818,000
|
|
(A)
|
On
October 19, 2018, the Company issued an unsecured convertible note to Bellridge Capital, LP (“Bellridge”), an
unaffiliated third-party, in the aggregate principal amount of $1,500,000 in exchange for net proceeds of $1,242,000, representing
an original issue discount of $150,000, and paid legal and financing expenses of $109,000. In addition, the Company issued
96,667 shares of its Common Stock with a fair value of $595,000. The note was unsecured and did not bear interest; however,
the implied interest was determined to be 10% since the note was issued at 10% less than its face value. The note matured
in April 2019. The note was also convertible into shares of the Company’s Common Stock only on or after the occurrence
of an uncured “Event of Default.” Primarily, the Company would be in default if it did not repay the principal
amount of the note, as required. The other events of default are standard for the type of transaction represented by the related
securities purchase agreement and the note. In the event of a default, the conversion price in effect on any date on which
some or all of the principal of the note is to be converted would be a price equal to 70% of the lowest VWAP during the ten
trading days immediately preceding the date on which Bellridge provided its notice of conversion. Upon an Event of Default,
the Company would owe Bellridge an amount equivalent to 110% of the then-outstanding principal amount of the note in addition
to of all other amounts, costs, expenses, and liquidated damages that might also be due in respect thereof. The Company agreed
that, on or after the occurrence of an Event of Default, it would reserve and keep available that number of shares of its
Common Stock that equaled 200% of the number of such shares that potentially would be issuable pursuant to the terms of the
securities purchase agreement and the note (assuming conversion in full of the note and on any date of determination). The
Company determined that, because the conversion price is unknown, the Company could not determine if it had enough authorized
shares to fulfill the conversion obligation. As such, pursuant to current accounting guidelines, the Company determined that
the conversion feature of the note created a derivative with a fair value of $1,273,000 at the date of issuance.
|
|
As
a result of the issuance of the note, the Company incurred aggregate costs of $2,126,000
related to the note’s original issue discount, legal and financing expenses, the
fair value of the Common Stock issued and the recognition of the derivative liability.
The Company recorded these costs as a note discount up to the face value of the note
of $1,500,000 and the remaining $626,000 as financing costs in October 2018. The note
discount was being amortized over the six-month term of the note.
|
|
In
April 2019, the Company paid the balance of $1,500,000. Prior to the payoff the Company
recognized a change in fair market value in the derivative liability totaling $670,000.
As part of the payoff, the Company amortized the remaining debt discount of $144,000
and recognized a gain on extinguishment of the derivative liability totaling $1,396,000.
|
|
As
of September 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 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 September 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 of 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 September 30, 2019, the outstanding balance of the note was $0 and unamortized debt discount was $0.
|
Total
interest expense for convertible notes payable was $35,000 and $145,000 for the nine months ended September 30, 2019 and 2018,
respectively.
Under
authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s
own stock, instruments that do not have fixed settlement provisions are deemed to be derivative instruments. The Company has issued
certain convertible notes whose conversion prices contains reset provisions based on a discounted future market price. However,
since the number of shares to be issued is not explicitly limited, the Company is unable to conclude that enough authorized and
unissued shares are available to share settle the conversion option. In addition, the Company also granted certain warrants 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 feature of the notes 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:
|
|
September
30, 2019
|
|
|
Upon
Issuance
|
|
|
December
31, 2018
|
|
Stock
Price
|
|
$
|
1.08
|
|
|
$
|
4.78
|
|
|
$
|
4.80
|
|
Exercise
Price
|
|
$
|
1.88
|
|
|
$
|
3.76
|
|
|
$
|
2.70
|
|
Expected
Life
|
|
|
3.78
|
|
|
|
2.75
|
|
|
|
1.78
|
|
Volatility
|
|
|
219
|
%
|
|
|
192
|
%
|
|
|
184
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-Free
Interest Rate
|
|
|
1.56
|
%
|
|
|
1.99
|
%
|
|
|
2.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
$
|
3,591,000
|
|
|
$
|
6,561,000
|
|
|
$
|
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 nine months ended September 30, 2019, the Company recorded an additional derivative liability totaling $388,000 as a result
of the issuance of a convertible note and $6,173,000 as a result of the issuance of the August Warrants issued as
part of the Company’s Series A Preferred Stock offering, or an aggregate of $6,561,000. The Company also recorded
a change in fair value of $3,320,000 to account for the changes in the fair value of these derivative liabilities
for the nine months ended September 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 settlement of convertible debt during the nine months
ended September 30, 2019. At September 30, 2019, the fair value of the derivative liability amounted to $3,591,000. The details
of derivative liability transactions for the nine months ended September 30, 2019 are as follows:
|
|
September
30, 2019
|
|
Beginning
Balance
|
|
$
|
2,576,000
|
|
Fair
value upon issuance of notes payable and warrants
|
|
|
6,561,000
|
|
Change
in fair value
|
|
|
(3,320,000
|
)
|
Extinguishment
|
|
|
(2,227,000
|
)
|
Ending
Balance
|
|
$
|
3,591,000
|
|
The
Company’s Common Stock activity for the nine months ended September 30, 2019 is as follows:
Common
Stock
Shares
and Warrants Issued as Part of the Company’s Underwritten Public Offering
On
April 4, 2019, we entered into an Underwriting Agreement (the “Underwriter 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 Underwriting Agreement, we also granted the Underwriter 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 $18,524,000, net of underwriting commissions and other offering expenses in the aggregate
of $2,138,000. Included in the offering expenses were $162,000 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.
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 nine months ended September 30, 2019, the Company issued 354,288 shares of Common
Stock to vendors for services rendered with a fair value of $930,000. 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 nine months ended September 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 8, Convertible Notes Payable, for additional information.
Conversion
of Notes Payable – During the nine months ended September 30, 2019, the Company issued 780,619 shares of Common
Stock upon conversion of notes payable and accrued interest of $1,129,000. See Note 6, Notes Payable,
and Note 8, 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.
Preferred
Shares and Warrant Offering
On
August 14, 2019, we entered into the SPA with 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 Series A Preferred Stock (which, at the initial conversion price, are convertible
into an aggregate of up to approximately 3.87 million shares of Common Stock) and the August Warrants to purchase up to
an equivalent number of shares of Common Stock. We closed the offering on August 14, 2019, and issued 5,030 shares of Series A
Preferred Stock and granted the August Warrants to purchase up to 3,245,162 shares of Common Stock in connection
therewith. We received proceeds of $4,688,000, net of direct costs of $342,000. The offering was made in reliance upon an exemption
from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof, and Rule 506
promulgated thereunder, as a transaction by an issuer not involving any public offering.
The
SPA grants the Preferred Purchasers a right to participate, up to a certain amount, in subsequent financings for a period of 24
months. The SPA also prohibits us from entering into any agreement to issue, or announcing the issuance or proposed issuance,
of any shares of Common Stock or Common Stock equivalents for a period of 90 days after the date that the registration statement,
registering the shares issuable upon conversion of the Series A Preferred Stock and exercise of the August Warrants, is
declared effective. We are also prohibited, until the date that the Preferred Purchasers no longer collectively hold at least
20% of the then-outstanding shares of Series A Preferred Stock issued pursuant to the SPA, from entering into an agreement to
effect any issuance by us of Common Stock or Common Stock equivalents involving certain variable rate transactions. We also cannot
enter into agreements related to “at-the-market” transactions for a period of 12 months. At the later of (i) the date
that the August Warrants are fully exercised, and (ii) 12 months from the date of the SPA, we cannot draw down on any existing
or future agreement with respect to “at-the-market” transactions if the sale of the shares in such transactions has
a per share purchase price that is less than $3.76 (two times the exercise price of the Warrants).
On
September 16, 2019, we filed a registration statement on Form S-3 with the SEC to register the shares of Common Stock underlying
the Series A Preferred Stock and the August Warrants. The registration statement was declared effective on September 19, 2019.
We have agreed to keep such registration statement continuously effective for a period of 24 months.
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 in to 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. In certain circumstances, the Series A Preferred Stock is mandatorily convertible into shares of Common Stock after the
Company obtains stockholder approval to issue a number of shares of Common Stock in excess of 19.99% and the closing price of
the Common Stock is 100% greater than the then-base conversion price on each trading day for any 20 trading days during a consecutive
30-trading-day period.
The
holders of the Series A Preferred Stock have no voting rights. However, we cannot, without the affirmative vote of the holders
of a majority of the then-outstanding shares of the Series A Preferred Stock, (a) alter or change adversely the rights, preferences,
or restrictions given to the Series A Preferred Stock or alter or amend the Certificate of Designation, (b) authorize or create
any class of stock ranking as to dividends, redemption, or distribution of assets upon a liquidation senior to, or otherwise pari
passu with, the Series A Preferred Stock, (c) amend our Articles of Incorporation, or other charter documents in any manner that
materially and adversely affects any rights of the holders, (d) increase the number of authorized shares of Series A Preferred
Stock, or (e) enter into any agreement with respect to any of the foregoing.
The
holders of Series A Preferred Stock cannot convert the Series A Preferred Stock if, after giving effect to the conversion, the
number of shares of our Common Stock beneficially held by the holder (together with such holder’s affiliates) would be in
excess of 4.99% (or, upon election by a holder prior to the issuance of any shares, 9.99% of the number of shares of Common Stock
issued and outstanding immediately after giving effect to the issuance of any shares of Common Stock issuance upon conversion
of the Series A Preferred Stock held by the holder). The conversion price of the Series A Preferred Stock is subject to certain
customary adjustments, including upon certain subsequent equity sales and rights offerings.
We
are also prevented from issuing shares of Common Stock upon conversion of the Series A Preferred Stock or exercise of the August
Warrants, which, when aggregated with any shares of Common Stock issued on or after the issuance date and prior to such conversion
date or exercise date, as applicable (i) in connection with any conversion of the Series A Preferred Stock issued pursuant to
the SPA, (ii) in connection with the exercise of any August Warrants issued pursuant to the SPA, and (iii) in connection
with the exercise of any warrants issued to any registered broker-dealer as a fee in connection with the issuance of the securities
pursuant to the SPA, would exceed 4,459,725 shares of Common Stock (the “19.99% Cap”). This prohibition will terminate
upon the approval by our stockholders of a release from such 19.99% Cap.
The
August Warrants have an initial exercise price of $1.88 per share, subject to customary adjustments, are exercisable six
months after the date of issuance, and will expire five years from the date of issuance. The exercise price is subject to certain
customary adjustments, including upon certain subsequent equity sales and rights offerings. In addition, the August Warrants
also included a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder.
As a result, the August Warrants are accounted as derivative liability with a fair value upon issuance of $6,173,000, of
which, $4,688,000 was recorded as a reduction to additional paid in capital while the remaining fair value of $1,485,000 was accounted
for as a financing cost during the period ended September 30, 2019.
Stock
Options
Effective
October 16, 2014, the Company adopted the 2014 Stock Option Plan (the “Plan”) under the administration of the board
of directors to retain the services of valued key employees and consultants of the Company.
At
its discretion, the Company grants share option awards to certain employees and non-employees under the Plan and accounts for
it in accordance with ASC 718, Compensation – Stock Compensation.
A
summary of option activity for the nine months ended September 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
|
|
|
735,667
|
|
|
|
3.97
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(300,000
|
)
|
|
|
5.05
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2019
|
|
|
2,914,641
|
|
|
$
|
5.05
|
|
|
|
2.51
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested September 30, 2019
|
|
|
1,710,067
|
|
|
$
|
4.46
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019
|
|
|
1,147,863
|
|
|
$
|
5.20
|
|
|
|
|
|
|
$
|
-
|
|
At
September 30, 2019, the intrinsic value of these stock options was $0 as the exercise price of these stock options were greater
than the market price.
During
the nine months ended September 30, 2019, the Company granted stock options to employees and consultants to purchase a total of
735,667 shares of Common Stock for services to be rendered. The options have an average exercise price of $3.97 per share, expire
in one or five years, and vests (i) 100% on the grant date, (ii) 50% on the grant date and the remaining 50% on the 12-month anniversary
of the grant date, (iii) in three equal installments during the three years from the grant date, (iv) in 4 equal installments
during the four years from the grant date, or (v) 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 $2,155,000 using the Black-Scholes
Option pricing model.
The
total stock compensation expense recognized relating to vesting of stock options for the nine months ended September 30, 2019
amounted to $1,505,000. As of September 30, 2019, total unrecognized stock-based compensation expense was $4.3 million, which
is expected to be recognized as part of operating expense through August 2023.
The
fair value of share option award is estimated using the Black-Scholes option pricing method based on the following weighted-average
assumptions:
|
|
Nine
Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Risk-free
interest rate
|
|
|
1.55
- 2.75
|
%
|
|
|
2.25
– 3.00
|
%
|
Average
expected term (years)
|
|
|
1
to 5 years
|
|
|
|
5
years
|
|
Expected
volatility
|
|
|
180.0
- 275.3
|
%
|
|
|
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 September 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
|
|
|
10,386,181
|
|
|
|
2.97
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(6,667
|
)
|
|
|
6.00
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(186,969
|
)
|
|
|
1.15
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at
September 30, 2019, all vested
|
|
|
11,132,960
|
|
|
$
|
3.06
|
|
|
|
4.48
|
|
|
$
|
-
|
|
At
September 30, 2019, the intrinsic value of these stock options was $0 as the exercise price of these stock warrants were greater
than the market price.
During
the nine months ended September 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 April 2024.
See Note 10, Equity Transactions, for additional information.
During
the nine months ended September 30, 2019, the Company granted warrants to purchase a total of 3,245,162 shares of Common Stock
as part of a preferred stock offering. The warrants are exercisable at a price of $1.88 per share and will expire in August 2024.
See Note 10, Equity Transactions, for additional information.
During
the nine months ended September 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 April 2024.
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 nine months ended September 30, 2019, the Company granted fully vested warrants to purchase a total of 108,196 shares of Common
Stock as partial consideration for the conversion of notes payable. The warrants are exercisable at an average price of $3.44
per share and will expire in July 2024. The total fair value of these warrants at the grant date was approximately $217,000 using
the Black-Scholes Option pricing model and was expensed upon grant. See Note 6, Notes Payable, for additional
information.
During the nine months ended September
30, 2019, a total of 186,969 warrants were exercised and converted into 173,714 shares of Common Stock at a weighted average
exercise price of $1.15. The Company received $45,000 upon exercise of the warrants.
11.
|
COMMITMENTS
AND CONTINGENCIES
|
Litigation
|
a.
|
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.
|
b.
|
In
August 2014, a former employee and then current stockholder (the “Employee”)
entered into that certain Executive Employment Agreement (the “Employment Contract”)
with bBooth, Inc., our predecessor company. Section 3.1 of the Employment Contract provided,
among other things, that Employee was employed to serve as our President and reported
directly to Rory Cutaia, our Chief Executive Officer. Section 5.2 of Employment Contract
provides, among other things, that Employee was entitled to receive a bonus (the “Bonus”)
from us if certain conditions are met. These specified conditions were never met.
|
On
or about May 15, 2015, Employee ceased employment at the Company. More than eight months later, on or about January 20, 2016,
the parties entered into a certain Stock Repurchase Agreement (the “Repurchase Agreement”) pursuant to which we purchased
all of Employee’s shares of Common Stock for a purchase price of $144,000. The Repurchase Agreement also provided, among
other things, that Employee released us from all claims, causes of action, suits, and demands (the “Release”).
Approximately
two years later, in April 2018, at a time when the Company’s share price was on the rise, Employee notified us by email
that it is Employee’s position that on or about May 15, 2015: (1) Employee was terminated “without cause” pursuant
to Section 6.2 of the Employment Contract; or (2) Employee terminated employment with Company “for good reason” pursuant
to Section 6.3 of the Employment Contract. Employee sought approximately $300,000 in allegedly unpaid bonuses, plus 150,000 options
priced at $0.50 per share, which expired prior to exercise. We responded in or about April 2018 that Employee’s claims lacked
factual and legal merit, including that they are barred by the Release. The lack of response from Employee at that time appeared
to indicate Employee’s tacit acknowledgment and ratification of our rationale underpinning our denial of Employee’s
claims. Approximately eight (8) months later in December 2018, Employee resurfaced, renewing his claims. We responded by reminding
Employee we consider his claims to be without merit, and that, in any event, they are barred by the Release. In our view, the
Release set forth in the Repurchase Agreement coupled with the existing merger or integration clause likely shields the Company
from liability, even assuming, arguendo, that the claims could be supported by credible evidence.
|
c.
|
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. The complaint purports
to be brought on behalf of a class of persons or entities who purchased or otherwise
acquired Verb Common Stock between January 3, 2018 and May 2, 2018. The complaint purports
to allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, arising out of the January 3, 2018 announcement by the Company of its agreement with
Oracle America, Inc. The complaint seeks unspecified costs and damages. The Company believes
the complaint is without merit and intends to vigorously defend the action.
|
|
|
|
|
d.
|
On September 27, 2019, a derivative action was filed in the United States District Court, Central District
of California, styled Richard Moore, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. Verb Technology
Company, Inc., and Rory J. Cutaia, James P. Geiskopf, and Jeff Clayborne, Defendants, Case Number 2:19-CV-08393-AB-SS. The
derivative action also arises out of the January 3, 2018 announcement by the Company of its agreement with Oracle America, Inc.
The derivative action encompasses a time frame of January 3, 2018 through the present, and purports to bring claims for breach
of fiduciary duty, unjust enrichment, and waste of corporate assets. The derivative complaint seeks a declaration that the individual
defendants have breached their duties, unspecified damages, and certain purportedly remedial measures.
|
We know of no other material pending
legal proceedings to which we or any subsidiary is a party or to which any of our assets or properties, or the assets or
properties of any subsidiary, 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.
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 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. Each
director is nominated for re-election at the Company’s annual meeting of stockholders, scheduled to take place in December
2019.
Issuance
of Common Stock
Subsequent
to September 30, 2019, the Company issued 114,804 shares of Common Stock to vendors for services rendered with a fair value
of $112,000. 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 September 30, 2019, the Company granted stock options to an employee to purchase a total of 26,000 shares of Common
Stock for services rendered. The options have an average exercise price of $1.05 per share, expire in five years, and vest over
a period of one to four years from grant date. The total fair value of these options at the grant date was $28,000 using the Black-Scholes
option pricing model.