NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
1.
|
DESCRIPTION
OF BUSINESS
|
Organization
Cutaia
Media Group, LLC (“CMG”) was organized on December 12, 2012, as a limited liability company under the laws of the
State of Nevada. On May 19, 2014, bBooth, Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG merged
into bBooth, Inc. and, thereafter, bBooth, Inc. changed its name to bBooth (USA), Inc., effective as of October 16, 2014. The
operations of CMG and bBooth (USA), Inc. became known as, and are referred to herein, as “bBoothUSA.”
On
October 16, 2014, bBoothUSA was acquired by Global System Designs, Inc. (“GSD”), pursuant to a Share Exchange Agreement
entered into with GSD (the “Share Exchange Agreement”). GSD was incorporated in the State of Nevada on November 27,
2012. The acquisition was accounted for as a reverse merger transaction. In connection with the closing of the transactions contemplated
by the Share Exchange Agreement, GSD’s management was replaced by bBoothUSA’s management, and GSD changed its name
to bBooth, Inc.
Effective
April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary
short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with
and into us. We were the surviving entity. To effectuate the name-change merger, we filed Articles of Merger and a Certificate
of Correction (relative to the effective date of the name-change merger) with the Secretary of State of the State of Nevada on
April 4, 2017 and April 17, 2017, respectively. The name-change merger became effective on April 21, 2017. Our board of directors
approved the name-change merger, which resulted in the name change on that date. In accordance with Section 92A.180 of the Nevada
Revised Statutes (the “NRS”), stockholder approval of the name-change merger was not required.
Effective
February 1, 2019, we changed our corporate name from nFüsz, Inc. to Verb Technology Company, Inc. The name change was effected
through a parent/subsidiary short-form merger of Verb Technology Company, Inc., our wholly-owned Nevada subsidiary, formed solely
for the purpose of the name change, with and into us. We were the surviving entity. To effectuate the name-change merger, we filed
Articles of Merger with the Secretary of State of the State of Nevada on January 31, 2019. The name-change merger became
effective on February 1, 2019. Our board of directors approved the name-change merger, which resulted in the name change on that
date. In accordance with Section 92A.180 of the NRS, stockholder approval of the name-merger was not required.
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 Annual Report have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the
earliest period presented. The par value per share of our Common Stock was not affected by the Reverse Stock Split.
Nature
of Business
We
are an applications services provider marketing cloud-based business software products under the brand name
“Tagg” on a subscription basis. Our flagship product, TaggCRM, is a Customer Relationship Management
(“CRM”) application that is distinguishable from other CRM programs because it utilizes interactive video as the
primary means of communication between sales and marketing professionals and their clients or prospects. TaggCRM allows our
users to create, distribute, and post interactive videos that contain on-screen clickable “Taggs” which are
interactive icons, buttons, and other on-screen elements, that when clicked, allow their prospects and customers to respond
to our users’ 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 prospective customer or a prospect the ability to click on a product they see
featured in a video and buy it, or to click on a calendar icon in the video to make an appointment with a salesperson, among
many other features and functionality. Tagg videos can be distributed via email or text messaging and can be posted on social
media. Our users report increased sales conversion rates compared to traditional, non-interactive video.
We
developed the proprietary patent-pending interactive video technology that serves as the basis for all of our cloud, Software-as-a-Service
(“SaaS”) Tagg applications. Our Tagg applications are accessible on all mobile and desktop devices and no software
download is required to view the Tagg interactive videos. The Tagg applications also provide detailed analytics in the application
dashboard that reflect when the videos were viewed, by whom, how many times, for how long, and what interactive Taggs were clicked-on
in the video, among other things, all of which assist our users in focusing their sales and marketing efforts by identifying which
clients or prospects have interest in the subject matter of the video. TaggCRM users receive a text message immediately notifying
them that a customer prospect received their video and additional text messages notifying them when that customer or prospect
watched the video and shared the video so they can follow-up in real-time.
Our
Tagg application platform can accommodate any size sales or marketing campaign, and it is enterprise-class scalable to meet the
needs of today’s global organizations.
Our
TaggMED application is designed for physicians and other healthcare providers to create more efficient and effective interactive
communications with patients. Patients are able to avoid unnecessary and inconvenient visits to their physicians’ or other
healthcare providers’ offices by viewing and responding to interactive videos through in-video, on-screen clicks that are
designed to assess the patient’s need for an office visit. If the patient’s responses to the interactive video indicate
that an office visit is either necessary or desirable, the patient can schedule the office visit right in through video in real
time. Patients can also download and print prescriptions, care instructions, and other physician distributed documents right from
and through the video. TaggMED is offered on a subscription basis.
Our
TaggEDU application is designed for teachers and school administrators for more effective communications with students, parents,
and faculty. TaggEDU allows teachers to deliver interactive video lessons to students that are both more engaging and more effective.
TaggEDU allows teachers to communicate with students through their mobile devices and computers to deliver lessons and tests/quizzes
on the screen and in the Tagg video. The analytics capabilities of TaggEDU available on the application dashboard of the teacher
or school administrator allow them to track which students watched the lesson, when, for how long, how many times, and track and
report on test/quiz results. TaggEDU is offered on a subscription basis.
Our
TaggLIVE application is also part of our proprietary interactive Tagg video applications portfolio. TaggLIVE is a Facebook application
that works in conjunction with Facebook Live, allowing users of Facebook Live to place clickable Taggs on the screens of everyone
watching their Facebook Live broadcasts in real time. Viewers can click the on-screen Taggs to purchase products and services
placed there and offered by the person utilizing our TaggLIVE Facebook application. Tagg LIVE is scheduled for release in the
first quarter of 2019.
Going
Concern
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying
consolidated financial statements, during the year ended December 31, 2018, the Company incurred a net loss of $12,127,000, used
cash in operations of $4,157,000 and had a stockholders’ deficit of $5,055,000 as of December 31, 2018. These factors raise
substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial
statements being issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability
to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
Our
continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash
flows from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our
operations. There is no assurance that we will ever be profitable or that debt or equity financing will be available to us. The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue
as a going concern.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of Verb Technology Company, Inc. (formerly nFüsz, Inc. and, before
that, bBooth, Inc.)
Use
of Estimates
The
preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reported periods. Significant estimates include assumptions
made in analysis of impairment of long term assets, realization of deferred tax assets, determining fair value of derivative liabilities,
and value of equity instruments issued for services. Amounts could materially change in the future.
Revenue
Recognition
We
generate substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts.
Subscription service arrangements are generally non-cancelable and do not provide for refunds to customers in the event of cancellations
or any other right of return. We record revenue net of sales or excise taxes.
On
January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers.
The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount
expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms
of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance
obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate
performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Under ASC 606, revenue is recognized
when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery
of products or services to our customers based on written sales terms, which is also when control is transferred. Revenue is measured
as the amount of consideration we expect to receive in exchange for transferring the products or services to a customer.
The
implementation of ASC 606 had no impact on the prior period financial statements and no cumulative effect adjustment was recognized.
Property
and Equipment
Property
and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives of approximately
five years once the individual assets are placed in service.
Long-Lived
Assets
The
Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value
may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash
flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying
amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available,
or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. No impairment
of long-lived assets was required for the years ended December 31, 2018 and 2017.
Income
Taxes
The
Company accounts for income taxes under Financial Accounting Standards Board’s (“FASB”) ASC 740 “Income
Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax
assets of the Company relate primarily to operating loss carry-forwards for federal income tax purposes. A full valuation allowance
for deferred tax assets has been provided because the Company believes it is not more likely than not that the deferred tax asset
will be realized. Realization of deferred tax assets is dependent on the Company generating sufficient taxable income in future
periods.
The
Company periodically evaluates its tax positions to determine whether it is more likely than not that such positions would be
sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their
technical merits. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income
tax provision in the accompanying consolidated statements of operations. As of December 31, 2018, and 2017, the Company has not
established a liability for uncertain tax positions.
Deferred
Offering Costs
Deferred
offering costs consist principally of legal, accounting, and underwriters’ fees incurred related to the contemplated underwritten
public offering of the Company’s Common Stock. These deferred offering costs will be charged against the gross proceeds
received or will be charged to expense if the offering is not completed.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
The
Company uses Level 2 inputs for its valuation methodology for the derivative liabilities as their fair values were determined
by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative
liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded
in results of operations as adjusted to fair value of derivatives.
Share
Based Payment
The
Company issues stock options, Common Stock, and equity interests as share-based compensation to employees and non-employees.
The
Company accounts for its share-based compensation to employees in accordance FASB ASC 718 “Compensation – Stock Compensation.”
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized
as expense over the requisite service period.
The
Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505-50
“
Equity – Based Payments to Non-Employees
.”
Measurement of share-based payment transactions
with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received or
(b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance
completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate
to determine the cumulative expense recorded.
The
Company values stock compensation based on the market price on the measurement date. As described above, for employees this is
the date of grant, and for non-employees, this is the date of performance completion.
The
Company values stock options using the Black-Scholes option pricing model. Assumptions used in the Black-Scholes model to value
options issued during the years ended December 31, 2018 and 2017 are as follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Expected
life in years
|
|
|
5.0
|
|
|
|
2.5
to 5.0
|
|
Stock price
volatility
|
|
|
184.45%
-190.22
|
%
|
|
|
84.36%
- 173.92
|
%
|
Risk
free interest rate
|
|
|
2.25%
- 3.00
|
%
|
|
|
1.22%
- 2.23
|
%
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Forfeiture
rate
|
|
|
18
|
%
|
|
|
21
|
%
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility
of its Common Stock to estimate the future volatility for its Common Stock. The expected dividend yield was based on the fact
that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.
Research
and Development Costs
Research
and development costs consist of expenditures for the research and development of new products and technology. These costs are
primarily expenses to vendors contracted to perform research projects and develop technology for the Company’s cloud-based, Tagg interactive video CRM SaaS platform.
Net
Loss Per Share
Basic
net loss per share is computed by using the weighted-average number of common shares outstanding during the period. Diluted net
loss per share is computed giving effect to all dilutive potential shares of Common Stock that were outstanding during the period.
Dilutive potential shares of Common Stock consist of incremental shares of Common Stock issuable upon exercise of stock options.
No dilutive potential shares of Common Stock were included in the computation of diluted net loss per share because their impact
was anti-dilutive. As of December 31, 2018, and 2017, the Company had total outstanding options of 2,478,974 and 1,456,064, respectively,
and warrants of 940,412 and 1,895,761, respectively, which were excluded from the computation of net loss per share because they
are anti-dilutive.
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB ASC for disclosures about fair value of its financial instruments and paragraph
820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph
820-10-35-37 establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.
To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs.
The
three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
|
Level
1:
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
Level
2:
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
Level
3:
|
Pricing
inputs that are generally observable inputs and not corroborated by market data.
|
The
carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalents, prepaid expenses,
and accounts payable and accrued expenses approximate their fair value due to their short-term nature. The carrying values financing
obligations approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing
market interest rates. The Company uses Level 2 inputs for its valuation methodology for the derivative liabilities.
Concentrations
During
the year ended December 31, 2018, the Company had a single vendor that accounted for 5% of all purchases, and 20.7% of all purchases
in the same period in the prior year.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification
of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount,
timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has
not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s financial statement presentation or disclosures.
In
July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part
II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11
allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature)
is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with
down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value
of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding
financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income
available to Common Stock holders in computing basic earnings per share. For convertible instruments with embedded conversion
features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount
to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective
approach. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on the Company’s financial statement
presentation or disclosures.
In
June 2018, the FASB issued Accounting Standards Update 2018-07, Compensation – Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718
does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction
with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic
606). ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. Early adoption is permitted. The Company will adopt the provisions of ASU 2018-07 in the quarter beginning January 1, 2019.
The adoption of ASU 2018-07 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
3.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following as of December 31, 2018 and 2017.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
|
$
|
57,000
|
|
|
$
|
57,000
|
|
Office
equipment
|
|
|
51,000
|
|
|
|
51,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,000
|
|
|
|
108,000
|
|
Less:
accumulated depreciation
|
|
|
(97,000
|
)
|
|
|
(77,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,000
|
|
|
$
|
31,000
|
|
Depreciation
expense amounted to $20,000 and $22,000 for the year ended December 31, 2018 and 2017, respectively.
On
March 21, 2015, the Company issued a note payable to a third-party lender for the benefit of DelMorgan Group LLC (“DelMorgan”),
financial consultant. The note was unsecured, bore interest at a rate of 12% per annum, payable monthly beginning on April 20,
2015, and had an original maturity date of March 20, 2017.
On
March 20, 2017, the Company entered into an extension agreement with the third-party lender to extend the maturity date of the
note to March 20, 2018. All other terms of the note remained unchanged and there was no additional compensation or incentive given.
As of December 31, 2017, the outstanding balance of the note amounted to $125,000.
On
January 29, 2018, the Company settled the debt of $125,000 in exchange for 83,333 shares of its Common Stock. There was no gain
or loss recognized as the fair value of the shares of Common Stock issued approximated the note payable settled.
5.
|
NOTES
PAYABLE – RELATED PARTIES
|
The
Company has the following related parties outstanding notes payable as of December 31, 2018 and 2017:
Note
|
|
Issuance
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
December 31,
2018
|
|
|
Balance
at
December 31,
2017
|
|
Note
1 (A)
|
|
December
1, 2015
|
|
February
8, 2021
|
|
|
12.0
|
%
|
|
$
|
1,249,000
|
|
|
$
|
825
,000
|
|
|
$
|
1,199,000
|
|
Note 2 (B)
|
|
December 1,
2015
|
|
February 8,
2021
|
|
|
12.0
|
%
|
|
|
189,000
|
|
|
|
-
|
|
|
|
189,000
|
|
Note 3 (C)
|
|
December 1,
2015
|
|
April 1, 2017
|
|
|
12.0
|
%
|
|
|
112,000
|
|
|
|
112,000
|
|
|
|
112,000
|
|
Note 4 (D)
|
|
April 4, 2016
|
|
June 4, 2021
|
|
|
12.0
|
%
|
|
|
343,000
|
|
|
|
240,000
|
|
|
|
343,000
|
|
Note
5 (E)
|
|
April
4, 2016
|
|
December
4, 2018
|
|
|
12.0
|
%
|
|
|
122,000
|
|
|
|
-
|
|
|
|
122,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable – related parties
|
|
|
|
|
|
|
|
|
|
|
1,177,000
|
|
|
|
1,965,000
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,065,000
|
)
|
|
|
-
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,000
|
|
|
$
|
1,965,000
|
|
|
(A)
|
On
December 1, 2015, the Company issued a convertible note payable to Mr. Rory J. Cutaia, the Company’s majority stockholder
and Chief Executive Officer, to consolidate all loans and advances made by Mr. Cutaia to the Company as of that date. The
note bore interest at a rate of 12% per annum, was secured by the Company’s assets, and matured on April 1, 2017. Pursuant
to the terms of the agreement, at Mr. Cutaia’s discretion, he could convert up to 30%, or $375,000, of the outstanding
principal, plus accrued interest thereon, into shares of Common Stock at a conversion rate of $1.05 per share.
|
On
May 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note from April
1, 2017 to August 1, 2018. In consideration, the Company issued Mr. Cutaia a three-year warrant to purchase up to 117,013 shares
of Common Stock at a price of $5.33 per share with a fair value of $517,000. All other terms of the note remain unchanged. The
Company determined that the extension of the note’s maturity resulted in a debt extinguishment for accounting purposes since
the fair value of the warrants granted was more than 10% of the original value of the convertible note. As result, the Company
recorded the fair value of the new note, which approximated the original carrying value $1,199,000 and expensed the fair value
of the warrants granted of $517,000 as debt extinguishment costs. As of December 31, 2017, total outstanding balance of the note
amounted to $1,199,000.
On
August 8, 2018, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note to February
8, 2021. In consideration for extending the note the Company issued Mr. Cutaia warrants exercisable for up to 163,113 shares of
Common Stock with a fair market value of $1,075,000. The Company determined that the extension of the note’s maturity date
resulted in a debt extinguishment for accounting purposes since the fair value of the warrants granted was more than 10% of the
original value of the convertible note. As result, the Company recorded the fair value of the new note which approximates the
original carrying value $1,199,000 and expensed the entire fair value of the warrants granted, or $1,075,000 as a debt extinguishment
cost.
On
September 30, 2018, Mr. Cutaia converted the convertible principal balance of $375,000 at $1.05 per share into 356,824 shares
of restricted Common Stock.
As
of December 31, 2018, the outstanding balance of the note amounted to $825,000.
|
(B)
|
On
December 1, 2015, the Company issued a convertible note with Mr. Cutaia in the amount of $189,000 representing a portion of
Mr. Cutaia’s accrued salary for 2015. The note was unsecured, bore interest at a rate of 12% per annum, and matured
in April 2017. The note was convertible into shares of Common Stock at a conversion price of $1.05 per share.
|
|
|
|
|
|
On
May 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend
the maturity date of the note from April 1, 2017 to August 1, 2018. All other terms of
the note remain unchanged and there were no additional compensation or incentive given.
As of December 31, 2017, the outstanding balance of the note amounted to $189,000.
On
September 30, 2018, Mr. Cutaia converted the entire outstanding principal amount of $189,000 into 180,000 shares of restricted
Common Stock.
|
|
(C)
|
On
December 1, 2015, the Company issued a note payable to a former member of the Company’s board of directors, in the amount
of $112,000 representing unpaid consulting fees as of November 30, 2015. The note is unsecured, bears interest rate of 12%
per annum, and matured in April 2017. As of December 31, 2017, and 2018, the outstanding principal balance of the note was
equal to $112,000. As of December 31, 2018, the note was past due, and remains past due. The Company is currently in negotiations
with the noteholder to settle the past due note.
|
|
|
|
|
(D)
|
On
April 4, 2016, the Company issued a convertible note to Mr. Cutaia, in the amount of
$343,000, to consolidate all advances made by Mr. Cutaia to the Company during the period
December 2015 through March 2016. The note bore interest at a rate of 12% per annum,
was secured by the Company’s assets, and matured on August 4, 2017. Pursuant to
the terms of the note, a total of 30%, or $103,000, of the note principal can be converted
to shares of Common Stock at a conversion price $1.05 per share.
On
August 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note
from August 4, 2017 to December 4, 2018. In consideration for extending the note’s maturity, the Company issued
Mr. Cutaia warrants to purchase up to 88,610 shares of Common Stock at a price of $2.25 per share with a fair value of
$172,000. All other terms of the note remain unchanged. The Company determined that the extension of the note’s
maturity resulted in a debt extinguishment for accounting purposes since the fair value of the warrants granted was more
than 10% of the recorded value of the original convertible note. As a result, the Company recorded the fair value of the
new note, which approximated the original carrying value $343,000 and expensed the entire fair value of the warrants granted
of $172,000 as part of loss on debt extinguishment. As of December 31, 2017, the outstanding balance of the note was $343,000.
On
September 30, 2018, Mr. Cutaia converted the 30% principal amount of the note, or $103,000 of into 98,093 shares of restricted
Common Stock.
On
December 4, 2018, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note
to June 4, 2021. In consideration for extending the note, the Company issued Mr. Cutaia warrants to purchase up to 23,562
shares of Common Stock, with a fair market value of the warrants totaling $111,000. The Company determined that the extension
of the note’s maturity resulted in a debt extinguishment for accounting purposes since the fair value of the warrants
granted was more than 10% of the original value of the convertible note. As result, the Company recorded the fair value
of the new note, which approximates the original carrying value of $240,000 and expensed the entire fair value
of the warrants granted of $111,000 as part of loss on debt extinguishment.
As
of December 31, 2018, the outstanding balance of the note amounted to $240,000.
|
|
|
|
|
(E)
|
On
April 4, 2016, the Company issued a convertible note payable to Mr. Cutaia in the amount
of $122,000, representing his unpaid salary from December 2015 through March 2016. The
note was unsecured, bore interest at a rate of 12% per annum, compounded annually, and
matured on August 4, 2017. The note was also convertible into shares of the Company’s
Common Stock at $1.05 per share.
On
August 4, 2017, the Company entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note
from August 4, 2017 to December 4, 2018. All other terms of the note remain unchanged and there were no additional compensation
or incentive given. As of December 31, 2017, the outstanding balance of the note amounted to $122,000.
On
September 30, 2018, Mr. Cutaia converted $122,000 of outstanding principal amount into 116,701 shares of restricted Common
Stock.
|
During
the year ended December 31, 2018, the Company recorded total interest expense totaling $211,000 pursuant to the terms of the notes
and paid $269,000 in interest.
6.
|
CONVERTIBLE
NOTES PAYABLE
|
The
Company has the following outstanding convertible notes payable as of December 31, 2018 and 2017:
Note
|
|
Note
Date
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Original
Borrowing
|
|
|
Balance
at
December 31,
2018
|
|
|
Balance
at
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable (a)
|
|
April
3, 2016
|
|
April
4, 2018
|
|
|
12
|
%
|
|
$
|
680,000
|
|
|
$
|
-
|
|
|
$
|
680,000
|
|
Note
payable (b)
|
|
June and August
2017
|
|
February and
March 2018
|
|
|
5
|
%
|
|
$
|
220,000
|
|
|
|
-
|
|
|
|
220,000
|
|
Note
payable (c)
|
|
Various
|
|
Various
|
|
|
5
|
%
|
|
$
|
320,000
|
|
|
|
-
|
|
|
|
320,000
|
|
Note
payable (d)
|
|
December 8,
2017
|
|
December 8,
2018
|
|
|
8
|
%
|
|
$
|
370,000
|
|
|
|
-
|
|
|
|
370,000
|
|
Note
payable (e)
|
|
December 13,
2017
|
|
September
20, 2018
|
|
|
8
|
%
|
|
$
|
105,000
|
|
|
|
-
|
|
|
|
105,000
|
|
Note
payable (f)
|
|
October 19,
2018
|
|
April 19,
2019
|
|
|
10
|
%
|
|
$
|
1,500,000
|
|
|
|
1,500,000
|
|
|
|
-
|
|
Note
payable (g)
|
|
October
30, 2018
|
|
April
29, 2019
|
|
|
5
|
%
|
|
$
|
400,000
|
|
|
|
400,000
|
|
|
|
-
|
|
Total
notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
1,900,000
|
|
|
|
1,695,000
|
|
Debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,082,000
|
)
|
|
|
(675,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable, net of debt discount
|
|
|
|
|
|
|
|
|
$
|
818,000
|
|
|
$
|
1,020,000
|
|
(a)
|
On
April 3, 2016, the Company issued a convertible note payable to Oceanside Strategies,
Inc. (“Oceanside”), a third party-lender, in the amount of $680,000 to consolidate
all notes payable and accrued interest due to Oceanside as of that date. This note superseded
and replaced all previous notes and liabilities due to Oceanside from fiscal years 2014
and 2015. The note was unsecured, bore interest at the rate of 12% per annum, compounded
annually, and had an original maturity date of December 30, 2016. Pursuant to the terms
of the note, the Company granted Oceanside the right to convert up to 30% of the principal
amount of such note, or $204,000, into shares of common stock at a conversion price $1.05
per share and granted warrants to purchase up to 161,969 shares of Common Stock at $1.05
per share until April 4, 2019.
On
December 30, 2016, the Company entered into an extension agreement with Oceanside to extend the maturity date of the note
from December 30, 2016 to August 4, 2017. All other terms of the note remain unchanged. In consideration for Oceanside’s
agreement to extend the maturity date to August 4, 2017, the Company granted Oceanside a warrant to purchase up to 161,969
shares of the Company’s Common Stock, exercisable at $1.20 per share until December 29, 2019, with a fair value
of $159,000.
|
|
|
|
On
August 4, 2017, the Company entered into an extension agreement with Oceanside to extend the maturity date of the note from
August 4, 2017 to April 4, 2018. All other terms of the note remain unchanged. In consideration for Oceanside’s agreement
to extend the maturity date to August 4, 2018, the Company granted Oceanside a warrant to purchase up to 87,787 shares of
the Company’s Common Stock, exercisable at $2.25 per share until August 3, 2022 with a fair value of $171,000. The Company
determined that the extension of the note’s maturity resulted in a debt extinguishment for accounting purposes since
the fair value of the warrants granted was more than 10% of the recorded value of the original convertible note. As a result,
Company recorded the fair value of the new note, which approximated the original carrying value of $680,000, and expensed
the entire fair value of the warrants granted of $171,000 as part of loss on debt extinguishment. As of December 31, 2017,
the outstanding balance of the note amounted to $680,000.
|
|
|
|
In
March 2018, the entire principal amount due was settled through the issuance of 305,967 shares of Common Stock. As a result
of this conversion, the Company also recorded a loss on debt extinguishment of $1,090,000 to account for the fair value
of the 65,469 shares of Common Stock issued to settle the remaining 70%, or $476,000, of the note principal and accrued interest
that was not initially convertible to shares of Common Stock.
|
(b)
|
In
June and August of 2017, the Company issued unsecured convertible notes to an unaffiliated third-party in the amount of $220,000
in exchange for cash of $200,000, representing an original issue discount of $10,500, and prepaid interest of $10,000. The
notes bore interest at a rate of 5% per annum, matured in February and March 2018, and were convertible to shares of Common
Stock at a conversion price of either $3.75 per share or $1.50 per share. As part of the issuance, the Company also (i) granted
warrants to purchase up to 22,000 shares of Common Stock at $4.50 per share and (ii) issued 3,333 shares of Common Stock with
a fair value $12,500. As a result, the Company recorded a debt discount of $175,000 to account for the original issue discount
and prepaid interest of $21,000, the relative fair value of the warrants of $40,000, the fair value of the shares of Common
Stock of $13,000 and the beneficial conversion feature of $102,000. The debt discount is being amortized to interest expense
over the term of the note. As of December 31, 2017, the outstanding balance of the note was $220,000 and unamortized debt
discount of $40,000.
|
|
|
|
In
March 2018, the entire outstanding principal amount of the notes, and all accrued interest thereon, were settled and converted
into 102,900 shares of Common Stock pursuant to the conversion terms of the notes and we expensed the unamortized debt discount.
|
|
|
(c)
|
On
September 26, 2017, we entered into a purchase agreement, dated September 15, 2017, with Kodiak Capital Group, LLC (“Kodiak”).
Under the purchase agreement, the Company was entitled to, from time to time, in the Company’s discretion, sell shares
of its Common Stock to Kodiak for aggregate gross proceeds of up to $2,000,000. Unless terminated earlier, Kodiak’s
purchase commitment automatically terminates on the earlier of the date on which Kodiak has purchased our shares pursuant
to the purchase agreement for an aggregate purchase price of $2,000,000, or September 15, 2019. The Company has no obligation
to sell any shares under the purchase agreement.
|
|
From
September 2017 through November 2017, the Company issued three convertible notes payable totaling $320,000 in exchange for
cash of $200,000, representing an original issue discount of $20,000, and settlement of financing expenses of $100,000 incurred
by Kodiak pursuant to the purchase agreement. The notes were unsecured, had maturity dates starting in March 2018 through
June 2018, and bore interest at a rate of 5% per annum. The notes were also convertible into shares of Common Stock at price
of $3.75 per share or 70% of the 10-day VWAP prior to conversion, whichever is lower. As part of the issuances, the Company
also granted Kodiak a five-year, fully vested, warrant to purchase up to 133,333 shares of Common Stock, exercisable at $2.25
and $3.00 per share.
|
|
|
|
The
Company determined that since there was no minimum conversion price, it could no longer
determine if it had enough authorized shares to fulfill its conversion obligation. As
such, pursuant to current accounting guidelines, the Company determined that the conversion
feature of these three notes created a derivative with a fair value totaling $412,000
at the date of issuances. The Company accounted for the fair value of the derivative
up to the face amount of the notes of $320,000 as a valuation discount to be amortized
over the life of the note, and the excess of $92,000 being recorded as part of financing
cost. See Note 8,
Derivative Liability,
to these audited consolidated financial
statements for further discussion. In addition, the Company also recorded the notes’
original issue discount totaling $20,000 and the $100,000 note payable issued to settle
financing expenses related to the agreement with Kodiak as part of financing costs. As
of December 31, 2017, the outstanding balance of the note was equal to $320,000 and unamortized
debt discount was $191,000.
In
March 2018, the Company paid Kodiak $226,000 to settle two notes payable totaling $220,000, and all accrued interest thereon,
and amortized the corresponding unamortized debt discount of $114,000 to interest expense. As part of the payment, Kodiak
cancelled one note payable in the outstanding principal amount of $100,000. As a result of the note’s cancellation,
the Company recorded a gain on debt extinguishment of $23,000, to account for the cancellation of the $100,000 note payable,
less the amortization of the corresponding debt discount of $77,000.
|
(d)
|
On
December 8, 2017, the Company issued unsecured convertible notes to EMA Financial, LLC (“EMA”) and Auctus Fund,
LLC (“Auctus”) totaling $370,000 in principal, in exchange for cash of $323,000, representing an original issue
discount of $47,000. The notes bore interest at a rate of 8% per annum and matured on December 8, 2018. The notes were also
convertible into shares of Common Stock at a conversion price equal to the lower of: (i) the closing sale price of the Common
Stock on the principal market (as defined in the notes) on the trading day immediately preceding the closing date, and (ii)
70% of either the lowest sale price for the Common Stock on the principal market during the ten (10) consecutive trading days
including and immediately preceding the conversion date, or the closing bid price.
|
|
|
|
The
Company determined that since there was no minimum conversion price, that it could no longer determine if it had enough authorized
shares to fulfill the conversion obligation. As such, pursuant to current accounting guidelines, the Company determined that
the conversion feature of the note created a derivative with a fair value of $565,000 at the date of issuance. The Company
accounted for the fair value of the derivative up to the face amount of the note of $370,000 as a valuation discount to be
amortized over the life of the note, and the excess of $195,000 was recorded as part of financing cost. See Note 8,
Derivative
Liability,
to these audited consolidated financial statements for discussion of derivative liability. In addition, the
Company also recorded the notes’ original issue discount of $47,000 as part of financing costs.
|
As
part of the offering, the Company also granted EMA and Auctus a five-year warrant to acquire up to 160,000 shares of the Company’s
Common Stock with an exercise price of $1.65 per share. Warrants to acquire up to 80,000 shares of Common Stock contained (i)
a full ratchet reset provision in the event the Company engages in a future equity offering and the Company offers equity securities
at a price less than $1.65 per share and (ii) a fundamental transaction provision that could give rise to an obligation to pay
cash to the warrant holder. As such, pursuant to current accounting guidelines, the Company determined that the warrant exercise
price and fundamental transaction provision created a derivative with a fair value of $119,000 at the date of issuance. The Company
accounted for the fair value of the derivative as part of finance cost. See Note 8,
Derivative Liability,
to these audited
consolidated financial statements for discussion of derivative liability. As of December 31, 2017, outstanding balance of the
notes amounted to $370,000 and unamortized debt discount was $344,000.
In
January 2018, the Company issued similar convertible notes payable totaling $150,000 in exchange for cash of $130,000. The notes
were secured by the Company’s assets, bore interest of 8% per annum, matured in January 2019, and was convertible into shares
of Common Stock at a conversion price equal to 70% of the Company’s 10-day VWAP. The Company determined that since there
was no minimum conversion price, that it could no longer determine if it had enough authorized shares to fulfill its conversion
obligation. As such, pursuant to current accounting guidelines, the Company determined that the conversion feature of the notes
created a derivative with a fair value of $253,000 at the date of issuance. The Company accounted for the fair value of the derivative
up to the face amount of the note of $150,000 as a valuation discount to be amortized over the life of the note, and the excess
of $103,000 was recorded as a financing cost. See Note 8,
Derivative Liability,
to these audited consolidated financial
statements for discussion of derivative liability. In addition, the Company also recorded the notes’ original issue discount
of $20,000 as a financing cost.
As
part of the convertible note offering, the Company also granted a five-year warrant to acquire up to 66,667 shares of the Company’s
Common Stock with an exercise price of $2.10 per share. Warrants to purchase up to 33,333 shares of Common Stock included (i)
a full ratchet reset provision in the event the Company engaged in a future equity offering at an offering price less than $2.10
per share and (ii) a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder
and a reset of the exercise price. As such, pursuant to current accounting guidelines, the Company determined that the warrant
exercise price and fundamental transaction provision created a derivative with a fair value of $49,000 at the date of issuance.
The Company accounted for the fair value of the derivative as a financing cost. See Note 8,
Derivative Liability,
to these
audited consolidated financial statements for discussion of derivative liability.
In
March 2018, the Company settled the entire outstanding principal amount of the notes in cash and expensed the corresponding debt
discount of $494,000.
(e)
|
On
December 14, 2017, the Company issued an unsecured convertible note to PowerUp Lending Group, Ltd. in the amount of $105,000
in exchange for cash of $90,000, representing an original issue discount of $15,000. The note matured on September 20, 2018
and bore interest at a rate of 8% per annum. The note was convertible into shares of Common Stock at a conversion price equal
to 70% multiplied by the market price, which is equal to the lowest trading price of the Common Stock during the ten (10)
trading day period ending on the latest complete trading day prior to the conversion date.
|
|
The
Company determined that since there was no minimum conversion price, it could no longer
determine if it had enough authorized shares to fulfill the conversion obligation. As
such, pursuant to current accounting guidelines, the Company determined that the conversion
feature of the note created a derivative with a fair value of $160,000 at the date of
issuance. The Company accounted for the fair value of the derivative up to the face amount
of the note of $105,000 as a valuation discount to be amortized over the life of the
note, and the excess of $55,000 being recorded as part of financing cost. See Note 8,
Derivative Liability,
to these audited consolidated financial statements for discussion
of derivative liability. In addition, the Company also recorded the note’s original
issue discount of $15,000 as part of financing costs. As of December 31, 2017, the outstanding
principal amount of the note was $105,000 and unamortized debt discount was $100,000.
In
March 2018, the Company settled the principal amount of the note and expensed the corresponding debt discount of $100,000.
|
(f)
|
On October 19, 2018, the Company issued an
unsecured convertible note to Bellridge Capital, LP (“Bellridge”), an unaffiliated third-party entity, in the
aggregate principal amount of $1,500,000 in exchange for net proceeds of $1,242,000, representing an original issue discount of
$150,000, and paid legal and financing expenses of $109,000. In addition, the Company issued 96,667 shares of its Common Stock
with a fair value of $595,000. The note is unsecured and does not bear interest; however, the implied interest was determined
to be 10% since the note was issued at 10% less than its face value. The note matures in April 2019. The note is also convertible
into shares of the Company’s Common Stock only on or after the occurrence of an uncured “Event of Default.”
Primarily, the Company will be in default if it does not repay the principal amount of the note, as required. The other events
of default are standard for the type of transaction represented by the related securities purchase agreement and the note. The
conversion price in effect on any date on which some or all of the principal of the note is to be converted shall be a price equal
to 70% of the lowest VWAP during the ten trading days immediately preceding the date on which the third party provided its notice
of conversion. Upon an Event of Default, the Company will owe the third party an amount equivalent to 110% of the then-outstanding
principal amount of the note in addition to of all other amounts, costs, expenses, and liquidated damages that might also be due
in respect thereof. The Company has agreed that, on or after the occurrence of an Event of Default, it will reserve and keep available
that number of shares of its Common Stock that is at least equal to 200% of the number of such shares that
potentially
would be issuable pursuant to the terms of the securities purchase agreement and the note (assuming conversion in full of the
note and on any date of determination
). The Company determined that, because the conversion price is unknown, the Company
could not determine if it had enough authorized shares to fulfill the conversion obligation. As such, pursuant to current accounting
guidelines, the Company determined that the conversion feature of the note created a derivative with a fair value of $1,273,000
at the date of issuance.
As
a result of the issuance of the note, the Company incurred aggregate costs of $2,126,000 related to the note’s original
issue discount, legal and financing expenses, the fair value of the Common Stock issued and the recognition of the derivative
liability. The Company recorded these costs as a note discount up to the face value of the note of $1,500,000 and the
remaining $626,000 as financing costs. The note discount is being amortized over the six-month term of the note.
As
of December 31, 2018, the outstanding balance of the note amounted to $1,500,000 and unamortized debt discount of $881,000.
|
(g)
|
On
October 30, 2018, the Company issued two unsecured convertible notes to one current investor and one otherwise unaffiliated
third-party in the aggregate principal amount of $400,000. The notes bear interest at a rate of 5% per annum and will mature
on April 29, 2019. Upon the Company’s consummation of the contemplated underwritten public offering of the Company’s
Common Stock, all, and not less than all, of (i) the outstanding principal amount and (ii) the accrued interest thereunder
will be converted into shares of the Company’s Common Stock that shall have been registered therein. The per-share conversion
price will be seventy-five percent (75%) of the offering price of the Common Stock. The Company determined that, because the
conversion price is unknown, that the Company could not determine if it had enough authorized shares to fulfill the conversion
obligation. As such, pursuant to current accounting guidelines, the Company determined that the conversion feature of the
notes created a derivative with a fair value of $302,000 at the date of issuance and was accounted as a debt discount and
is being amortized over the term of the notes payable.
|
As
of December 31, 2018, outstanding balance of the note amounted to $400,000 and unamortized debt discount was $201,000.
7.
|
CONVERTIBLE
SERIES A PREFERRED STOCK
|
On
February 14, 2017, the Company entered into a Securities Purchase Agreement with an unaffiliated, accredited investor for the
sale and issuance of its Series A preferred stock. As part of the agreement, the investor agreed to purchase a total of 1,050,000
shares of Series A Preferred Stock valued at $1,050,000 in exchange for cash of $1,000,000, or a discount of $50,000, in various
tranches.
The
Series A preferred stock had the following rights and privileges:
|
●
|
25%
redemption premium;
|
|
●
|
Senior
rights in terms preference as to dividends, distributions and payments upon the liquidation, dissolution, and winding up of
the Company;
|
|
●
|
Accrued
dividends at a rate of 5% per annum;
|
|
●
|
Mandatorily
redeemable at an installment basis starting August 13, 2017 in the amount of $63,000 plus accrued interest. The Company had
the option to redeem the Series A preferred stock shares in cash or in shares of Common Stock based upon the Company’s
5-day Volume Weighted Average Price (“VWAP”).
|
The
Company considered the guidance of ASC 480-10, Distinguishing Liabilities From Equity to determine the appropriate treatment of
the Series A preferred stock shares. Pursuant to ASC 480-10, the Company determined that the Series A preferred stock shares was
an obligation to be settled, at the option of the Company, in cash or in variable number of shares of Common Stock with a fixed
monetary value that should be recorded as a liability under ASC 480-10.
During
the year ended December 31, 2017, the Company issued 630,000 Series A preferred stock shares in exchange for cash of $555,000
and a discount of $75,000. Subsequent to the issuance of the Series A preferred stock shares, the Company redeemed the entire
Series A preferred stock shares totaling $630,000 in exchange for 190,800 shares of Common Stock with a fair value of $304,000
and cash payments totaling $543,000 for a total redemption price of $847,000. As a result of this redemption, the Company recognized
interest expense of $217,000 to account for the 25% redemption premium of $158,0000, the excess of the fair value of the Common
Stock shares issued over the Series A preferred stock shares of $46,000 and the 5% interest due of $14,000. In addition, the Company
also amortized the entire $75,000 discount to interest expense. As of December 31, 2017, all of the Series A preferred stock shares
were fully redeemed, and no shares remained outstanding.
Under
authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s
own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company has
issued certain convertible notes whose conversion price contains reset provisions based on a future offering price and/or whose
conversion price is based on a future market price. However, since the number of shares to be issued is not explicitly limited,
the Company is unable to conclude that enough authorized and unissued shares are available to share settle the conversion option.
In addition, the Company also granted certain warrants whose exercise price is subject to reset based on a future market price.
As
a result, the conversion option and warrants are classified as a liability and bifurcated from the debt host and accounted for
as a derivative liability in accordance with ASC 815 and will be re-measured at the end of every reporting period with the change
in value reported in the statement of operations.
The
derivative liabilities were valued using a probability weighted average Black-Scholes-Merton pricing model with the following
average assumptions:
|
|
Upon
Issuance
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Stock
Price
|
|
$
|
3.00
|
|
|
$
|
4.80
|
|
|
$
|
1.50
|
|
Exercise
Price
|
|
$
|
2.25
|
|
|
$
|
2.70
|
|
|
$
|
0.90
|
|
Expected
Life
|
|
|
1.60
|
|
|
|
1.78
|
|
|
|
1.26
|
|
Volatility
|
|
|
177
|
%
|
|
|
184
|
%
|
|
|
189
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-Free
Interest Rate
|
|
|
1.70
|
%
|
|
|
2.6
|
%
|
|
|
1.72
|
%
|
The
expected life of the conversion feature of the notes and warrants was based on the remaining contractual term of the notes and
warrants. The Company uses the historical volatility of its Common Stock to estimate the future volatility for its Common Stock.
The expected dividend yield was based on the fact that the Company has not paid dividends in the past and does not expect to pay
dividends in the future. The risk-free interest rate was based on rates established by the Federal Reserve Bank. As of December
31, 2017, the Company had recorded a derivative liability of $1,251,000.
During
the year ended December 31, 2018, the Company recorded an additional derivative liability totaling $1,877,000 as a result of the
issuance of convertible notes and warrants. The Company also extinguished derivative liability of $1,719,000 upon the conversion
and payment of outstanding convertible notes payable, which was recorded as part of gain on extinguishment of debt. In addition,
the Company also recorded a change in fair value of $1,167,000 to account the change in fair value of these derivative liabilities
up to the dates of the extinguishment and at December 31, 2018. At December 31, 2018, the fair value of the derivative liability
amounted to $2,576,000. The details of derivative liability transactions during the years ended December 31, 2018 and 2017 are
as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Beginning
Balance
|
|
$
|
1,251,000
|
|
|
$
|
1,256,000
|
|
Fair
value upon issuance of notes payable and warrants
|
|
|
1,877,000
|
|
|
|
-
|
|
Change
in fair value
|
|
|
1,167,000
|
|
|
|
(5,000
|
)
|
Extinguishment
|
|
|
(1,719,000
|
)
|
|
|
-
|
|
Ending
Balance
|
|
$
|
2,576,000
|
|
|
$
|
1,251,000
|
|
The
following were Common Stock transactions during the year ended December 31, 2018:
Shares
Issued from Stock Subscription
– The Company issued stock subscription to investors. For the year ended December
31, 2018, the Company issued 1,163,938 shares of Common Stock for net proceeds of $2,979,000. The proceeds were used to pay off
debt and for operations.
Shares
Issued for Services
– During the year ended December 31, 2018, the Company issued 319,345 shares of Common Stock
to employees and vendors for services rendered with a fair value of $1,545,000. These shares of Common Stock were valued based
on market value of the Company’s stock price at the date of grant or agreement. Included in these issuances were 300,000
shares of Common Stock with a fair value of $1,539,000 granted to officers and a director of the Company for services rendered.
Shares
Issued from Conversion of Note Payable
– During the year ended December 31, 2018, the Company issued 1,243,189 shares
of Common Stock upon conversion of notes payable and accrued interest. See Notes 4,
Notes Payable
, 5,
Notes Payable
– Related Parties
, and 6,
Convertible Notes Payable,
to these audited consolidated financial statements.
Shares
Issued Upon Issuance of Convertible Note
– In October 2018, the Company granted a note holder 96,667 shares of Common
Stock with a fair value of $595,000 as an inducement for the issuance of a note payable. See Note 6,
Convertible Notes Payable,
to these audited consolidated financial statements.
Shares
Issued for Accrued Officer’s Salary
– On March 28, 2018, the Company converted $582,000 of the Chief Executive
Officer’s accrued salary into 27,148 shares of Common Stock with a fair value of $582,000 at the date of conversion.
Shares
Issued Upon Exercise of Put Option
– In January and February 2018, the Company provided put notices to Kodiak and
issued 203,207 shares of Common Stock in exchange for cash of $1,000,000. See Note 6,
Convertible Notes Payable,
to these
audited consolidated financial statements. As part of the put option agreement, the Company also granted Kodiak the prorated warrants
to purchase up to 133,333 shares of Common Stock at $3.75 per share.
Shares
Repurchased
. For the year ended December 31, 2018, the Company repurchased 46,666 shares of Common Stock from investors
for $20,000.
The
following were Common Stock transactions during the year ended December 31, 2017:
Shares
Issued from Stock Subscription
–For the year ended December 31, 2017, the Company issued 745,476 shares of Common
Stock for net proceeds of $796,000. As part of the offering, the Company granted an investor warrants to purchase 6,667 shares
of Common Stock. The exercise price of the warrants is $6.00 per share, with an expiration date of May 21, 2019, and fully vested
on the grant date.
Shares
Issued for Services
– For the year ended December 31, 2017, the Company issued 552,029 shares of Common Stock to
vendors for services rendered and recorded stock compensation expense of $1,647,000. In addition, the Company granted two of its
officers and its lead director a total of 300,000 shares of Common Stock for services rendered since January 1, 2017 through the
date of grant in March 2018. Approximately $441,000 has been recognized as part of stock compensation expense related to this
award for the year ended December 31, 2017.
Shares
Issued for Preferred Stock
- During the year ended December 31, 2017, the Company redeemed 630,000 shares of Series A
Preferred stock with a value of $630,000 in exchange for 190,800 shares of Common Stock with a fair value of $304,000. See Note
7,
Convertible Series A Preferred Stock
, to these audited consolidated financial statements.
Shares
Issued for Conversion of Debt
- During the year ended December 31, 2017, the Company issued 68,413 shares of Common Stock
with fair value of $182,000, as settlement of a note payable.
Shares
Issued as Part of Put Notice
– In November 2017, the Company issued a put notice to Kodiak and issued 43,745 shares
of Common Stock in exchange for cash of $50,000. In addition, the Company also issued Kodiak the prorated warrants to purchase
up to 6,667 shares of Common Stock at an exercise price of $3.75 per share.
Shares
Issued for Accounts Payable
- The Company amended an agreement with a vendor and issued 26,667 shares of Common Stock
as full and final payment to the vendor on accounts payable owed of $30,000. The fair value of the shares was $56,000 at the date
of issuance, and as such, the Company recorded a loss on debt extinguishment of $26,000.
Shares
Issued with Note Payable
– In June 2017, as part of a note issuance, the Company granted the note holder 3,333 shares
of Common Stock with a fair value of $13,000.
Effective
October 16, 2014, the Company adopted the 2014 Stock Option Plan (the “Plan”) under the administration of the board
of directors to retain the services of valued key employees and consultants of the Company.
A
summary of option activity for the years ended December 31, 2018 and 2017 are presented below.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2016
|
|
|
702,064
|
|
|
$
|
4.95
|
|
|
|
4.03
|
|
|
$
|
-
|
|
Granted
|
|
|
880,667
|
|
|
|
2.55
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(126,667
|
)
|
|
|
2.40
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2017
|
|
|
1,456,064
|
|
|
$
|
3.90
|
|
|
|
2.09
|
|
|
$
|
-
|
|
Granted
|
|
|
1,400,418
|
|
|
|
6.75
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(345,000
|
)
|
|
|
5.85
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(32,508
|
)
|
|
|
1.05
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2018
|
|
|
2,478,974
|
|
|
$
|
5.25
|
|
|
|
2.93
|
|
|
$
|
2,660,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested December
31, 2018
|
|
|
958,115
|
|
|
$
|
4.35
|
|
|
|
|
|
|
$
|
2,039,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2018
|
|
|
753,654
|
|
|
$
|
5.25
|
|
|
|
|
|
|
$
|
889,000
|
|
The
following were stock options transactions during the year ended December 31, 2018:
During
the year ended December 31, 2018, the Company granted stock options to employees and consultants to purchase a total 1,400,418
shares of Common Stock for services rendered. The options have an average exercise price of $6.75 per share, expire in five years,
and vest on the grant date or over a period of four years from the grant date. The total fair value of these options at grant
date was approximately $9,712,000 using the Black-Scholes Option Pricing model. The total stock compensation expense recognized
relating to the vesting of stock options for the year ended December 31, 2018 amounted to $1,870,000. As of December 31, 2018,
the total unrecognized stock-based compensation expense was $6,591,000, which is expected to be recognized as part of operating
expense through December 2021.
During
the year ended December 31, 2018, options were exercised resulting in the issuance of 32,508 shares of Common Stock. The Company
received cash of $34,000 upon exercise of the options.
The
following were stock options transactions during the year ended December 31, 2017:
During
the year ended December 31, 2017, the Company granted stock options to employees and consultants to purchase a total of 880,667
shares of Common Stock for services rendered. The options have an average exercise price of $2.55 per share, expire in five years,
and vest over a period of three years from the grant date. The total fair value of these options at the grant date was approximately
$1,781,000 using the Black-Scholes Option Pricing model. The total stock compensation expense recognized relating to vesting of
these stock options for the year ended December 31, 2017 amounted to $418,000.
The
fair value of the share option awards was estimated using the Black-Scholes method based on the following weighted-average assumptions:
|
|
|
Years
Ended December 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Risk-free
interest rate
|
|
|
2.25%-3.00
|
%
|
|
|
1.22%-2.23
|
%
|
Average
expected term (years)
|
|
|
5
years
|
|
|
|
5
years
|
|
Expected
volatility
|
|
|
184.45%-190.22
|
%
|
|
|
84.36%-173.92
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
|
-
|
|
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.
The
Company has the following warrants as of December 31, 2018 and 2017 are presented below:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2016
|
|
|
1,230,351
|
|
|
$
|
1.50
|
|
|
|
2.62
|
|
|
$
|
-
|
|
Granted
|
|
|
665,410
|
|
|
|
2.85
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2017
|
|
|
1,895,761
|
|
|
$
|
1.95
|
|
|
|
2.79
|
|
|
$
|
-
|
|
Granted
|
|
|
386,675
|
|
|
|
5.10
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(56,486
|
)
|
|
|
1.05
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(1,285,538
|
)
|
|
|
1.80
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2018, all vested
|
|
|
940,412
|
|
|
$
|
3.60
|
|
|
|
2.32
|
|
|
$
|
1,806,000
|
|
The
following were stock warrant transactions during the year ended December 31, 2018:
During
the year ended December 31, 2018, 1,285,538 warrants were exercised resulting in the issuance of 1,074,921 shares of Common Stock.
The Company received cash of $22,000 upon the exercise of the warrants.
During
the year ended December 31, 2018, the Company granted warrants to note holders to purchase a total of 66,667 shares of Common
Stock. The warrants are exercisable at an average price of $2.10 per share and will expire in January 2023. Warrants exercisable
for an aggregate of 33,333 shares of Common Stock were accounted for as a derivative liability.
On
February 21, 2018, the Company granted warrants exercisable for 133,333 shares of Common Stock as part of the exercise of its
put option with Kodiak. The exercise price of the warrants is $3.75 per share and the warrants expire on February 20, 2023.
On
August 8, 2018, the Company granted warrants exercisable for 163,113 shares of Common Stock in connection with the extension of
the maturity date of a secured note payable. See Note 5,
Notes Payable-Related Parties,
to these audited consolidated financial
statements.
On
December 4, 2018, the Company granted warrants exercisable for 23,562 shares of Common Stock in connection with the extension
of the maturity date of a secured note payable. See Note 5,
Notes Payable-Related Parties,
to these audited consolidated
financial statements.
The
following were stock warrant transactions during the year ended December 31, 2017:
On
April 1, 2017, the Company granted warrants to a consultant to purchase 25,000 shares of Common Stock at an exercise price of
$1.80 per share. The warrants expire on March 31, 2019 and were fully vested on the grant date. The total share-based compensation
expense recognized relating to these warrants for the year ended December 31, 2017 amounted to $27,000.
On
May 22, 2017, the Company issued warrants to purchase 6,667 shares of Common Stock as part of an equity offering. The exercise
price is $6.00 per share, the warrants expire on May 21, 2019, and were fully vested on grant date.
In
May and August 2017, the Company entered into extension agreements with Mr. Cutaia to extend the maturity date of certain secured
notes. In consideration for Mr. Cutaia’s agreement to extend the maturity dates, the Company granted Mr. Cutaia warrants
to purchase up to 205,623 shares of Common Stock, exercisable at $2.25 per share and $5.40 per share, with expiration dates starting
in May 2020.
In
August 2017, the Company entered into extension agreement with a noteholder to extend the maturity date of note payable. In consideration,
the Company granted the note holder warrants to purchase up to 87,787 shares of Common Stock, exercisable at $2.25 per share,
with expirations dates starting in August 2020.
From
June 2017 through December 2017, the Company issued warrants to note holders to purchase up to 322,000 shares of Common Stock.
The warrants are exercisable at an average price of $2.25 per share and will expire starting in June 2020 through December 2022.
A total of 80,000 of these warrants were accounted as a derivative liability.
On
September 16, 2017, the Company issued warrants to purchase up to 18,333 shares of Common Stock in exchange for full settlement
and release of a disputed, unasserted claim. The exercise price was $1.20 per share and expired on March 15, 2018. The warrants
were fully vested on grant the date with a fair value of $10,000 which was recorded as part of loss on debt extinguishment.
The
total expense recognized relating to the vesting of these stock warrants for the year ended December 31, 2017 amounted to $27,000.
Significant
components of the Company’s deferred tax assets and liabilities are as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Net
operating loss carry-forwards
|
|
$
|
5,300,000
|
|
|
$
|
3,464,000
|
|
Share based
compensation
|
|
|
(524,000
|
)
|
|
|
(704,000
|
)
|
Non-cash
interest and financing expenses
|
|
|
(694,000
|
)
|
|
|
(833,000
|
)
|
Other
temporary differences
|
|
|
(378,000
|
|
|
|
(108,000
|
)
|
Less:
Valuation allowance
|
|
|
(3,704,000
|
)
|
|
|
(1,819,000
|
)
|
Deferred
tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
The
items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes
were as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Statutory
federal income tax rate
|
|
|
(21.0
|
)%
|
|
|
(34.0
|
)%
|
State
taxes, net of federal benefit
|
|
|
(6.0
|
)%
|
|
|
(5.8
|
)%
|
Non-deductible
items
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
Change
in valuation allowance
|
|
|
27.9
|
%
|
|
|
27.9
|
%
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
ASC
740 requires that the tax benefit of net operating losses carry forwards be recorded as an asset to the extent that management
assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s
ability to generate sufficient taxable income within the carry forward period. Because of the Company’s recent history of
operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax
benefits is currently not likely to be realized and, accordingly, has provided a 100% valuation allowance against the asset amounts.
Any
uncertain tax positions would be related to tax years that remain open and subject to examination by the relevant tax authorities.
The Company has no liabilities related to uncertain tax positions or unrecognized benefits as of the year end December 31, 2018
or 2017. The Company has not accrued for interest or penalties associated with unrecognized tax liabilities.
On
December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The TCJ Act provides for significant
changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that impact corporate taxation requirements,
such as the reduction of the federal tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions.
The
Company is currently assessing the extensive changes under the TCJ Act and its overall impact on the Company; however, based on
its preliminary assessment of the reduction in the federal corporate tax rate from 35% to 21% to become effective on January 1,
2018, the Company currently expects that its effective tax rate for 2018 will be between 20% and 23%. Such estimated range is
based on management’s current assumptions with respect to, among other things, the Company’s earnings, state income
tax levels and tax deductions. The Company’s actual effective tax rate in 2018 may differ from management’s estimate.
As
of December 31, 2018, the Company had federal and state net operating loss carry forwards of approximately $12.8 million, which
may be available to offset future taxable income for tax purposes. These net operating losses carry forwards begin to expire in
2034. This carry forward may be limited upon the ownership change under IRC Section 382.
IRS
Section 382 places limitations (the “Section 382 Limitation”) on the amount of taxable income which can be offset
by net operating loss carry forwards after a change in control (generally greater than 50% change in ownership) of a loss corporation.
Generally, after a change in control, a loss corporation cannot deduct operating loss carry forwards in excess of the Section
382 Limitation. Due to these “change in ownership” provisions, utilization of the net operating loss may be subject
to an annual limitation regarding their utilization against taxable income in future periods. The Company has not concluded its
analysis of Section 382 through December 31, 2018 but believes the provisions will not limit the availability of losses to offset
future income.
The
Company is subject to income taxes in the U.S. federal jurisdiction and the state of Nevada. The tax regulations within each jurisdiction
are subject to interpretation of related tax laws and regulations and require significant judgment to apply. As of December 31,
2018, tax years 2015 through 2017 remain open for IRS audit. The Company has received no notice of audit from the IRS for any
of the open tax years.
13.
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ACCRUED
OFFICERS’ SALARY
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Accrued officers’ salary
consists of unpaid salaries for the Company’s Chief Executive Officer, who is also the owner of approximately 27%
of the Company’s outstanding shares of Common Stock, and the Company’s Chief Financial Officer. As of December 31,
2017, accrued officers’ salary amounted to $607,000.
The Chief Executive Officer settled accrued payroll of $582,000 in exchange for 27,148 shares of Common Stock
with a fair value of $582,000. There was no loss recognized as the fair value of the shares of Common Stock issued approximated
the accrued payroll settled.
As
of December 31, 2018, accrued officers’ salary amounted to $188,000.
14.
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COMMITMENTS
AND CONTINGENCIES
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Operating
Leases
The
Company leases office space in Los Angeles, California under an operating lease, which provides for monthly rent of $5,000 through
July 29, 2019. The Company had total rent expense for the year ended December 31, 2018 and 2017 of $62,000 and $52,000, respectively,
which is recorded as part of General and Administrative expenses in the Statement of Operations.
Employment
Agreements
On
November 21, 2014, the Company entered into an executive employment agreement effective November 1, 2014 with Rory J. Cutaia,
our president, chief executive officer, secretary and treasurer. Pursuant to the terms of the employment agreement, we have agreed
to pay Mr. Cutaia an annual salary of $325,000, which will be increased each year by 10%, subject to the annual review and approval
of the board of directors. Notwithstanding the foregoing, a mandatory increase of not less than $100,000 per annum will be implemented
on the Company achieving EBITDA break-even. In addition to the base salary, Mr. Cutaia will be eligible to receive an annual bonus
in an amount up to $325,000, based upon the attainment of performance targets to be established by the board of directors, in
its discretion.
The
initial term of the employment agreement is five years, and, upon expiration of the initial five-year term, it may be extended
for additional one-year periods on ninety days prior notice.
In
the event that: (i) Mr. Cutaia’s employment is terminated without cause, (ii) Mr. Cutaia is unable to perform his duties
due to a physical or mental condition for a period of 120 consecutive days or an aggregate of 180 days in any 12 month period;
or (iii) Mr. Cutaia voluntarily terminates the employment agreement upon the occurrence of a material reduction in his salary
or bonus, a reduction in his job title or position, or the required relocation of Mr. Cutaia to an office outside of a 30 mile
radius of Los Angeles, California, Mr. Cutaia will:
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(a)
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receive
monthly payments of $27,000, or such sum as is equal to Mr. Cutaia’s monthly base compensation at the time of such termination,
whichever is higher, and
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(b)
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be
reimbursed for COBRA health insurance costs, in each case for 36 months from the date of such termination or to the end of
the term of the agreement, whichever is longer.
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In
addition, Mr. Cutaia will have any and all of his unvested stock options immediately vest, with full registration rights; and
any unearned and unpaid bonus compensation, expense reimbursement, and all accrued vacation, personal sick days, etc., be deemed
earned, vested and paid immediately. As a condition to receiving the foregoing, Mr. Cutaia will be required to execute a release
of claims, and a non-competition and non-solicitation agreement having a term which is the same as the term of the monthly severance
payments described above.
Litigation
On
April 24, 2018, EMA, commenced an action against us, styled
EMA Financial, LLC, a New York limited liability company, Plaintiff,
against nFUSZ, Inc., Defendant
, United States District Court, Southern District of New York, case number 1:18-cv-03634-NRB.
The Complaint sets forth four causes of action and seeks relief consisting of: (1) money damages, (2) injunctive relief, (3) liquidated
damages, and (4) declaratory relief. All of the claims stem from our refusal to honor EMA’s exercise notice in connection
with a common stock purchase warrant that we had granted to it. We believe EMA’s allegations are entirely without merit.
The
circumstances giving rise to the dispute are as follows: on or about December 5, 2017, we issued a warrant to EMA as part of the
consideration we were required to provide in connection with a contemporaneous convertible loan EMA made to us. The loan, which
was evidenced by a convertible note, was for a term of one year. Our refusal to honor the warrant exercise notice was due to our
good faith belief that EMA’s interpretation of the cashless exercise provision of the warrant was,
inter alia
, (1)
contrary to our direct conversations and agreements made with EMA prior to, and during the preparation of the loan and warrant
agreements; (2) contradictory to the plain language on the face and body of the warrant agreement drafted by EMA; (3) wholly inconsistent
with industry norms, standards, and practices; (4) was contrary to the cashless exercise method actually adopted by EMA’s
co-lender in the same transaction; and (5) was the result of a single letter mistakenly transposed in the cashless exercise formula
drafted by EMA which if adopted, would result in a gross and unintended windfall in favor of EMA and adverse to us. Moreover,
as set forth in our response to EMA’s allegations, EMA’s interpretation of the cashless exercise provision would have
resulted in it being issued more shares of our Common Stock than it would have received if it exercised the warrant for cash (instead
of less), and more than the amount of shares reflected on the face of the warrant agreement itself. The loan underlying the transaction
was repaid, in full, approximately three months after it was issued, on March 8, 2018, together with all accrued interest, prior
to any conversion or attempted conversion of the note.
On
July 20, 2018, we filed an Answer to the Complaint, along with certain Affirmative Defenses, as well as Counterclaims seeking,
inter alia
, to void the entire transaction for violation of New York’s criminal usury laws and, alternatively, for
reformation of the warrant conversion formula set forth in the Warrant Agreement so as to be consistent with the parties’
intent and custom and practice in the industry.
As
of December 31, 2018, the parties have undergone depositions and exchanged document production. Discovery was scheduled to end
on January 31, 2019. Neither party has requested to extend the discovery period. Notwithstanding the pending action, in
December 2018, EMA attempted to exercise the warrant through 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 Annual Report,
the Court has not ruled on our motion. We intend to vigorously defend the action, as well as vigorously prosecute our counterclaims
against EMA. The action is still pending.
In August 2014, a
former employee and then current stockholder (the “Employee”) entered into that certain Executive Employment
Agreement (the “Employment Contract”) with bBooth, Inc., our predecessor company. Section 3.1 of the Employment
Contract provided, among other things, that Employee was employed to serve as our President and reported directly to Rory
Cutaia, our Chief Executive Officer. Section 5.2 of Employment Contract provides, among other things, that Employee was
entitled to receive a bonus (the “Bonus”) from us if certain conditions are met. These specified conditions were
never met.
On or about May 15, 2015, Employee
ceased employment at the Company. More than eight months later, on or about January 20, 2016, the parties entered into a
certain Stock Repurchase Agreement (the “Repurchase Agreement”) pursuant to which we purchased all of Employee’s
shares of Common Stock for a purchase price of $144,000. The Repurchase Agreement also provided, among other things, that
Employee released us from all claims, causes of action, suits, and demands (the “Release”).
Approximately two years later
,
in April 2018, at a time when the Company’s share price was on the rise, Employee notified us by email that it is Employee’s
position that on or about May 15, 2015: (1) Employee was terminated “without cause” pursuant to Section 6.2 of the
Employment Contract; or (2) Employee terminated employment with Company “for good reason” pursuant to Section 6.3
of the Employment Contract. Employee sought approximately $300,000 in allegedly unpaid bonuses, plus 150,000 options priced at
$0.50 per share, which expired prior to exercise. We responded in or about April 2018 that Employee’s claims lacked
factual and legal merit, including that they are barred by the Release. The lack of response from Employee at that time
appeared to indicate Employee’s tacit acknowledgment and ratification of our rationale underpinning our denial of Employee’s
claims. Approximately eight (8) months later in December 2018, Employee resurfaced, renewing his claims. We responded by
reminding Employee we consider his claims to be without merit, and that, in any event, they are barred by the Release. In our
view, the Release set forth in the Repurchase Agreement coupled with the existing merger or integration clause likely shields
the Company from liability, even assuming, arguendo, that the claims could be supported by credible evidence.
We
know of no other material pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our assets
or properties, or the assets or properties of any of our subsidiaries, are subject and, to the best of our knowledge, no adverse
legal activity is anticipated or threatened. In addition, we do not know of any such proceedings contemplated by any governmental
authorities.
We
know of no material proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial stockholder
is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries.
Board
of Directors
The
Company has committed an aggregate of $270,000 in board fees to its three board members commencing on the date the Company is
listed on the NASDAQ. The members will serve on the board until the annual meeting for the year in which their term expires or
until their successors has been elected and qualified.
15.
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SUBSEQUENT
EVENTS
Merger
Agreement
On
November 8, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Sound
Concepts, Inc., a Utah corporation (“Sound Concepts”), NF Merger Sub, Inc., a Utah corporation (“Merger
Sub 1”), NF Acquisition Company, LLC, a Utah limited liability company (“Merger Sub 2”), the shareholders
of Sound Concepts (the “Sound Concepts Shareholders”), the shareholders’ representative (the “Shareholder
Representative”), and us, pursuant to which we will acquire Sound Concepts (the “Sound Concepts Acquisition”)
through a two-step merger, consisting of merging Merger 1 Sub with and into Sound Concepts, with Sound Concepts surviving
the “first step” of the merger as our wholly-owned subsidiary (and the separate corporate existence of Merger
Sub 1 will cease) and, immediately thereafter, merging Sound Concepts with and into Merger Sub 2, with Merger Sub 2 surviving
the “second step” of the merger, such that, upon the conclusion of the “second step” of the merger,
the separate corporate existence of Sound Concepts will cease and Merger Sub 2 will continue its limited liability company
existence under Utah law as the surviving entity and as our wholly-owned subsidiary (collectively, the “Merger”).
On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the
“Effective Time”), each share of Sound Concepts’ capital stock issued and outstanding immediately prior
to the Effective Time (the “Sound Concepts Capital Stock”) will be cancelled and converted into the right
to receive a proportionate share of $25,000,000 of value (the “Closing Merger Consideration”), to be payable
through a combination of a cash payment by us of $15,000,000 (the “Acquisition Cash Payment”) and the issuance
of shares of our Common Stock with a fair market value of $10,000,000 (the “Acquisition Stock”). The Closing
Merger Consideration is not subject to any closing working capital adjustment or post-closing working capital adjustment.
We expect the Sound Concepts Acquisition to close in the first quarter of 2019. However, we cannot provide any assurance
as to the actual timing of completion of the Sound Concepts Acquisition, or whether the Sound Concepts Acquisition will
be completed at all.
Issuances
of Stock Options
On
January 8, 2019, the Company granted stock options to an officer to purchase a total of 16,667 shares of Common Stock
pursuant to the officer’s employment agreement. The options have an exercise price of $4.35 per share, and
expire in five years. The options vested 50% on the grant date and the remaining 50% will vest on the 12-month anniversary
of the grant date. Total fair value of these options at grant date was $70,000 using the Black-Scholes option pricing
model.
On
January 28, 2019, the Company granted stock options to consultants to purchase a total of 1,667 shares of Common
Stock for services to be rendered. The options have an average exercise price of $7.80 per share, expire in five years
and vest in sixty days. The total fair value of these options at the grant date was $13,000 using the Black-Scholes option
pricing model.
Exercise
of Warrants
On
January 25, 2019, a total of 161,969 warrants were exercised on a cashless basis for 141,512 shares of Common Stock
at a weighted average exercise price of $1.05 per share.
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Name-Change
Merger
Effective
February 1, 2019, we changed our corporate name from nFüsz, Inc. to Verb Technology Company, Inc. The name change was effected
through a parent/subsidiary short-form merger of Verb Technology Company, Inc., our wholly-owned Nevada subsidiary, formed solely
for the purpose of the name change, with and into us. We were the surviving entity. To effectuate the name-change merger, we filed
Articles of Merger with the Secretary of State of the State of Nevada on January 31, 2019. The name-change merger became
effective on February 1, 2019. Our board of directors approved the name-change merger, which resulted in the name change on that
date. In accordance with Section 92A.180 of the NRS, stockholder approval of the name-merger was not required.
Reverse
Stock Split
On February 1, 2019, we implemented
a 1-for-15 Reverse Stock Split of our Common Stock. The Reverse Stock Split became effective upon commencement of trading of our
Common Stock on February 4, 2019. As a result of the Reverse Stock Split, every fifteen (15) shares of our pre-Reverse
Stock Split Common Stock were combined and reclassified into one share of our Common Stock. The number of shares of Common Stock
subject to outstanding options, warrants, and convertible securities were also reduced by a factor of fifteen as of February 1,
2019. All historical share and per share amounts reflected throughout our consolidated financial statements and other financial
information in this Annual Report have been adjusted to reflect the Reverse Stock Split as if the split occurred as of the
earliest period presented. The par value per share of our Common Stock was not affected by the Reverse Stock Split.
Issuance
of Convertible Note
On February 1, 2019, the
Company issued an unsecured convertible note to Bellridge, an unaffiliated third-party entity, in the aggregate principal amount
of $500,000 in exchange for net proceeds of $432,000, representing an original issue discount of $25,000 and paid legal and financing
expenses of $43,000. In addition, the Company issued 16,667 shares of its Common Stock with an estimated fair value of $128,000.
The note contained a mandatory conversion feature in case of default based upon a discounted VWAP. Furthermore, the note also
contained a provision that will require the Company to pay the noteholder an additional $25,000 and issue 8,600 shares of Common
Stock if the note is not be paid within 60 days after its issuance. The Company is currently in the process determining the appropriate
accounting for this promissory note. The note matures in August 2019.