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EX-32.2 - Verb Technology Company, Inc.ex32-2.htm
EX-32.1 - Verb Technology Company, Inc.ex32-1.htm
EX-31.2 - Verb Technology Company, Inc.ex31-2.htm
EX-31.1 - Verb Technology Company, Inc.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2020

 

OR

 

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

 

For the transition period from ________ to ________

 

Commission file number: 001-38834

 

Verb Technology Company, Inc.

(Exact name of Registrant as Specified in its Charter)

 

Nevada   90-1118043

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

 

2210 Newport Boulevard, Suite 200

Newport Beach, California

 

 

92663

(Address of principal executive offices)   (Zip Code)

 

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

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered

Common Stock, $0.0001 par value

Common Stock Purchase Warrants

 

VERB

VERBW

  The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC

 

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

 

Yes [X] No [  ]

 

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

 

Yes [X] No [  ]

 

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

 

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

 

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

 

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

 

As of May 5, 2020, there were 29,894,621 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

  

 

 

VERB TECHNOLOGY COMPANY, INC.

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION 3
ITEM 1 - FINANCIAL STATEMENTS 3
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 41
ITEM 4 - CONTROLS AND PROCEDURES 41
PART II - OTHER INFORMATION 41
ITEM 1 - LEGAL PROCEEDINGS 41
ITEM 1A - RISK FACTORS 43
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 54
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 54
ITEM 4 - MINE SAFETY DISCLOSURES 54
ITEM 5 - OTHER INFORMATION 54
ITEM 6 - EXHIBITS 55
SIGNATURES 56

 

2

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS (UNAUDITED)

 

Condensed Consolidated Balance Sheets (unaudited) 4
   
Condensed Consolidated Statements of Operations (unaudited) 5
   
Condensed Consolidated Statements of Stockholders Equity (Deficit) (unaudited) 6
   
Condensed Consolidated Statements of Cash Flows (unaudited) 8
   
Notes to Condensed Consolidated Financial Statements (unaudited) 9-28

 

3

 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31, 2020   December 31, 2019 
   (unaudited)     
ASSETS          
           
Current assets:          
Cash  $1,615,000   $983,000 
Accounts receivable, net of allowance of $280,000 and $230,000, respectively   1,212,000    1,271,000 
Inventory, net of allowance of $0 and $2,000, respectively   74,000    103,000 
Prepaid expenses   249,000    236,000 
Total current assets   3,150,000    2,593,000 
           
Right-of-use assets, net of accumulated amortization of $484,000 and $349,000 respectively   3,140,000    3,275,000 
Property and equipment, net of accumulated depreciation of $202,000 and $164,000, respectively   803,000    720,000 
Intangible assets, net of accumulated amortization of $1,300,000 and $975,000 respectively   5,040,000    5,365,000 
Goodwill   16,337,000    16,337,000 
Other assets   115,000    69,000 
           
Total assets  $28,585,000   $28,359,000 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable and accrued expenses  $4,569,000   $4,338,000 
Accrued officers’ salary   207,000    207,000 
Accrued interest – related parties   107,000    82,000 
Advance on future receipts, net of discount of $137,000 and $274,000, respectively   457,000    732,000 
Notes payable - related party   937,000    112,000 
Operating lease liability, current   505,000    391,000 
Deferred incentive compensation, current   521,000    - 
Deferred revenue and customer deposits   261,000    306,000 
Derivative liability   6,907,000    5,048,000 
           
Total current liabilities   14,471,000    11,216,000 
           
Long Term liabilities:          
Note payable - related party, non-current   240,000    1,065,000 
Deferred incentive compensation to officers, non-current   521,000    1,042,000 
Operating lease liability, non-current   3,432,000    3,591,000 
Total liabilities   18,664,000    16,914,000 
           
Commitments and contingencies          
           
Stockholders’ equity          
Preferred stock, $0.0001 par value, 15,000,000 shares authorized: Series A Convertible Preferred Stock, 6,000 shares authorized; 3,246 and 4,396 issued and outstanding as of March 31, 2020 and December 31, 2019   -    - 
Common stock, $0.0001 par value, 200,000,000 shares authorized, 28,962,589 and 24,496,197 shares issued and outstanding as of March 31, 2020 and December 31, 2019   3,000    2,000 
Additional paid-in capital   68,449,000    68,028,000 
Accumulated deficit   (58,531,000)   (56,585,000)
           
Total stockholders’ equity   9,921,000    11,445,000
           
Total liabilities and stockholders’ equity  $28,585,000   $28,359,000 

 

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

 

4

 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

Three Months Ended

March 31, 2020

  

Three Months Ended

March 31, 2019

 
         
Revenue          
Digital  $1,457,000   $9,000 
Welcome kits and fulfillment   728,000    - 
Shipping   169,000    - 
    2,354,000    9,000 
           
Cost of revenue          
Digital   230,000    30,000 
Welcome kits and fulfillment   676,000    - 
Shipping   157,000    - 
    1,063,000    30,000 
           
Gross margin   1,291,000    (21,000)
           
Operating expenses:          
Research and development   1,274,000    564,000 
Depreciation and amortization   363,000    4,000 
General and administrative   3,514,000    2,185,000 
Total operating expenses   5,151,000    2,753,000 
           
Loss from operations   (3,860,000)   (2,774,000)
           
Other income (expense), net          
Other expense, net   (6,000)   - 
Financing costs   -    (84,000)
Interest expense - amortization of debt discount   (137,000)   (1,054,000)
Change in fair value of derivative liability   2,092,000    944,000 
Interest expense   (35,000)   (40,000)
Total other income (expense), net   1,914,000   (234,000)
           
Net loss  (1,946,000)  (3,008,000)
           

Deemed dividends to Series A stockholders

   

(3,951,000

)   - 
           

Net loss attributed to common stockholders

  $

(5,897,000

)  $

(3,008,000

)
           
Loss per share to common stockholders - basic and diluted  $(0.23)  $(0.25)
Weighted average number of common shares outstanding - basic and diluted   25,992,426    12,239,044 

 

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

 

5

 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE
THREE MONTHS ENDED MARCH 31, 2020

(Unaudited)

 

                   Additional         
   Preferred Stock   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                             
Balance at December 31, 2019   4,396   $     -    24,496,197   $2,000   $68,028,000   $(56,585,000)  $11,445,000 
                                    
Sale of common stock from private placement   -    -    3,392,833    1,000    3,429,000    -    3,430,000 
Fair value of warrants issued to Series A Preferred stockholders   -    -    -    -    (3,951,000)   -    (3,951,000)
Conversion of Series A Preferred to common stock   (1,150)   -    741,933    -    -    -    - 
Fair value of common shares issued for services   -    -    320,601    -    321,000    -    321,000 
Fair value of vested restricted stock awards   -    -    11,025    -    241,000    -    241,000 
Fair value of vested stock options   -    -    -    -    381,000    -    381,000 
Net loss   -    -    -    -    -    (1,946,000)   (1,946,000)
Balance at March 31, 2020   3,246   $-    28,962,589   $3,000   $68,449,000   $(58,531,000)  $9,921,000 

 

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

 

6

 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE
THREE MONTHS ENDED MARCH 31, 2019

(Unaudited)

 

           Additional         
   Preferred Stock   Common Stock  

Paid-in

   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                             
Balance at December 31, 2018   -   $-    12,055,491   $1,000   $35,611,000   $(40,667,000)  $(5,055,000)
                                    
Common shares issued upon exercise of warrants   -    -    148,714    -    -    -    - 
Fair value of common stock upon issuance of convertible debt   -    -    16,667    -    128,000    -    128,000 
Fair value of common shares issued for services   -    -    39,998    -    388,000    -    388,000 
Beneficial holder round up   -    -    83,581    -    -    -    - 
Fair value of vested stock options   -    -    -    -    463,000    -    463,000 
Net loss   -    -    -    -    -    (3,008,000)   (3,008,000)
Balance at March 31, 2019         -   $        -      12,344,451   $1,000   $  36,590,000   $  (43,675,000)  $  (7,084,000)

 

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

 

7

 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Three Months Ended 
   March 31, 2020   March 31, 2019 
         
Operating Activities:          
Net loss  $(1,946,000)  $(3,008,000)
Adjustments to reconcile net loss to net cash used in operating activities:          
Fair value of common shares issued for services and vested stock options and warrants   943,000    851,000 
Financing costs   -    84,000 
Amortization of debt discount   137,000    1,054,000 
Change in fair value of derivative liability   (2,092,000)   (944,000)
Depreciation and amortization   363,000    4,000 
Amortization of right-of-use assets   135,000    - 
Allowance for inventory   (2,000)   - 
Allowance for doubtful account   50,000    - 
Effect of changes in assets and liabilities:          
Accounts receivable   9,000    (6,000)
Prepaid expenses   (12,000)   (129,000)
Inventory   30,000    - 
Other assets   (45,000)   (44,000)
Accounts payable, accrued expenses, and accrued interest   255,000    1,047,000 
Operating lease liability   (47,000)   - 
Deferred revenue and customer deposits   (44,000)   2,000 
Net cash used in operating activities   (2,266,000)   (1,089,000)
           
Investing Activities:          
Purchase of property and equipment   (121,000)   - 
Net cash used by investing activities   (121,000)   - 
           
Financing Activities:          
Proceeds from sale of common stock   3,430,000    - 
Proceeds from notes payable   -    350,000 
Proceeds from convertible note payable   -    432,000 
Payment of related party notes payable   -    58,000 
Payment of advances of future receipts   (411,000)   - 
Deferred offering costs   -    (326,000)
Net cash provided by financing activities   3,019,000    514,000 
           
Net change in cash   632,000    (575,000)
           
Cash - beginning of period   983,000    634,000 
           
Cash - end of period  $1,615,000   $59,000 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $10,000   $32,000 
           
Supplemental disclosure of non-cash investing and financing activities:          
Fair value of derivative liability from issuance of convertible debt, inducement shares and warrant features  $-   $388,000 

Fair value of derivative liability from issuance of warrants to Series A stockholders considered as a deemed dividend

  $3,951,000    - 
Fair value of common shares, warrants and beneficial conversion feature of issued convertible note  $-   $128,000 

 

 

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

 

8

 

 

VERB TECHNOLOGY COMPANY, INC.

Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2020 and 2019
(Unaudited)

 

1. DESCRIPTION OF BUSINESS

 

Organization

 

References in this document to the “Company,” “Verb,” “we,” “us,” or “our” are intended to mean Verb Technology Company, Inc., individually, or as the context requires, collectively with its subsidiary on a consolidated basis.

 

Cutaia Media Group, LLC (“CMG”) was organized as a limited liability company under the laws of the State of Nevada on December 12, 2012. On May 19, 2014, CMG merged into bBooth, Inc. and bBooth, Inc., thereafter, changed its name to bBooth (USA), Inc., effective as of October 16, 2014. The operations of CMG and bBooth (USA), Inc., became known as, and are referred to in this Annual Report 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.

 

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.

 

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. The par value per share of our Common Stock was not affected by the Reverse Stock Split.

 

Nature of Business

 

We are a Software-as-a-Service (“SaaS”) applications platform developer. Our platform is comprised of a suite of sales enablement business software products marketed on a subscription basis. Our applications, available in both mobile and desktop versions, are offered as a fully integrated suite, as well as on a standalone basis, and include verbCRM, our Customer Relationship Management application, verbLEARN, our Learning Management System application, and verbLIVE, our Live Broadcast Video Webinar application.

 

We also provided certain non-digital services to some of our enterprise clients such as printing and fulfillment services. We designed and printed welcome kits and starter kits for their marketing needs and provided fulfillment services, which consisted of managing the preparation, handling and shipping of our client’s custom-branded merchandise they use for marketing purposes at conferences and other events, and product sample packs that verbCRM users order through the app for automated delivery and tracking to their customers and prospects.

 

9

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on May 14, 2020. The condensed consolidated balance sheet as of December 31, 2019 included herein was derived from the audited consolidated financial statements as of that date.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal year-end results.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Verb Technology Company, Inc. and Verb Direct, LLC, its wholly owned subsidiary. Intercompany transactions have been eliminated in the consolidation.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the three months ended March 31, 2020, the Company incurred a net loss of $1,946,000 and used cash in operations of $2,266,000. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial statements being issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2019 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

As of March 31, 2020, we had cash on hand of $1,615,000 and subsequently received $1,014,000 from a private placement offering that closed in March 2020 and $1,218,000 from the Paycheck Protection Program. We believe we have sufficient cash to sustain operations through September 2020. 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.

 

10

 

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. Significant estimates include assumptions made in analysis of reserves for allowance of doubtful accounts, inventory, purchase price allocations, impairment of long-term assets, realization of deferred tax assets, determining fair value of derivative liabilities, and valuation of equity instruments issued for services. Amounts could materially change in the future.

 

Concentration of Credit and Other Risks

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable. Cash is deposited with a limited number of financial institutions. The balances held at any one financial institution at times may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits of up to $250,000.

 

The Company extends limited credit to customers based on an evaluation of their financial condition and other factors. The Company generally does not require collateral or other security to support accounts receivable. The Company performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts and sales credits. The Company believes that any concentration of credit risk in its accounts receivable is substantially mitigated by the Company’s evaluation process, relatively short collection terms and the high level of credit worthiness of its customers.

 

The Company’s concentration of credit risk includes its concentrations from key customers and vendors. As of March 31, 2020, we have one major customer that accounted for 11% of our accounts receivable individually and in aggregate.

 

11

 

 

Revenue Recognition

 

The Company derives its revenue primarily from providing application services through the SaaS application, digital marketing and sales support services, from the sale of customized print products and training materials, branded apparel, and digital tools, as demanded by its customers. The subscription revenue from the application services are recognized over the life of the estimated subscription period. The Company also charges certain customers setup or installation fees for the creation and development of websites and phone application. These fees are accounted as part of deferred revenue and amortized over the estimated life of the agreement. Amounts related to shipping and handling that are billed to customers are reflected as part of revenue, and the related costs are reflected in cost of revenue in the accompanying Statements of Operations.

 

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Pursuant to ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the Company upon shipment or delivery of products or services to our customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the products or services to a customer.

 

The products sold by us are distinctly individual. The products are offered for sale solely as finished goods, and there are no performance obligations required post-shipment for customers to derive the expected value from them. Other than promotional activities, which can vary from time to time but nevertheless are entirely within the Company’s control, contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time.

 

The control of products we sell transfers to our customers upon shipment from our facilities, and our performance obligations are satisfied at that time. Shipping and handling activities are performed before the customer obtains control of the goods and, therefore, represent a fulfillment activity rather than promised goods to the customer. Payment for sales are generally made by check, credit card, or wire transfer. Historically, we have not experienced any significant payment delays from customers.

 

12

 

 

We allow returns within 30 days of purchase from end-users. Our customers may return purchased products to us under certain circumstances.

 

Customers setup or installation fees for the creation and development of websites and phone application are recognized as revenue over the estimated subscription period. Design assets of the websites and phone application are recognized when the work is completed. Licensing revenue is recognized over the estimated subscription period. In addition, certain revenue is recorded based upon stand-alone selling prices and is primarily recognized when the customer uses these services, based on the quantity of services rendered, such as number of customer usage.

 

A description of our principal revenue generating activities is as follows:

 

Digital Sales – We offer cloud-based business software on a subscription basis. Subscriptions are paid in advance of the services or billed 30 days in arrears of the subscription period. The revenue is recognized over the subscription period.

 

Welcome kits – We offer design and printing services to create corporate starter kits that our clients use for their marketing needs. The revenue is recognized upon completion and shipment of the welcome kits.

 

Fulfillment – We offer print on demand and fulfilment services of various custom products our clients use for marketing purposes. The revenue is recognized upon completion and shipment of the products.

 

Shipping – We charge our customers the costs related to the shipping of their welcome kits and fulfillment products. The revenue is recognized when the welcome kits or fulfillment products are shipped.

 

Cost of Revenue

 

Cost of revenue primarily consists of the salaries of certain employees, purchase price of consumer products, digital content costs, packaging supplies, and customer shipping and handling expenses. Shipping costs to receive products from our suppliers are included in our inventory and recognized as cost of sales upon sale of products to our customers.

 

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. Based on Management’s assessment, there were no indicators of impairment at March 31, 2020 or December 31, 2019.

 

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.

 

13

 

 

The Company uses Level 2 inputs for its valuation methodology for the derivative liabilities as their fair values were determined by using a Binomial pricing model. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjusted to fair value of derivatives.

 

Share Based Payments

 

The Company issues stock options and warrants, shares of Common Stock, and equity interests as share-based compensation to employees and non-employees. The Company accounts for its share-based compensation to employees in accordance with the Financial Accounting Standards Board’s (“FASB”) ASC 718, Compensation – Stock Compensation. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period.

 

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 March 31, 2020, and 2019, the Company had total outstanding options of 4,417,108 and 2,457,974, respectively, and warrants of 13,651,050 and 778,446, respectively, and outstanding restricted stock awards of 1,464,304 and 0, which were excluded from the computation of net loss per share because they are anti-dilutive.

 

Goodwill and other Intangibles

 

In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, the Company reviews the recoverability of the carrying value of goodwill and other Intangible assets at least annually or whenever events or circumstances indicate a potential impairment. The Company’s impairment testing will be done annually. Recoverability of goodwill is determined by comparing the fair value of Company’s reporting units to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities.

 

The acquisition of Verb Direct, formerly Sound Concepts, occurred on April 12, 2019. The Company will perform its first impairment test in December 2020.

 

Fair Value of Financial Instruments

 

The Company follows the guidance of FASB ASC 825 for disclosures about fair value of its financial instruments and ASC 820 to measure the fair value of its financial instruments. ASC 820 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, ASC 820 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.

 

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The three (3) levels of fair value hierarchy defined by ASC 820 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.

 

Segments

 

The Company has three revenue channels: (1) digital/SaaS, (2) welcome kits, and (3) fulfillments. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker (the Company’s Chief Executive Officer) reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to (i) their similar customer base and (ii) the Company having a single sales team, marketing department, customer service department, operations department, finance department, and accounting department to support all revenue channels. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying condensed consolidated financial statements.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. As small business filer, the standard will be effective for us for interim and annual reporting periods beginning after December 15, 2022. Management is currently assessing the impact of adopting this standard on the Company’s financial statements and related 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.

 

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3. ACQUISITION OF VERB DIRECT

 

On April 12, 2019, Verb completed its acquisition of Verb Direct on the terms set forth in the Merger Agreement, at the effective time of the merger, each share of Sound Concepts Capital Stock issued and outstanding immediately prior to the effective time, was cancelled in exchange for cash payment by Verb of an aggregate of $15,000,000, and the issuance of an aggregate of 3,327,791 restricted shares of Verb’s Common Stock with a fair value of $7,820,000 at the closing date of the transaction.

 

The acquisition was intended to augment and diversify Verb’s internet and SaaS business. Key factors that contributed to the recorded goodwill and intangible assets in the aggregate of $22,677,000 were the opportunity to consolidate and complement existing operations of Verb, certain software and customer list, and the opportunity to generate future synergies within the internet and SaaS business. The following table summarizes the assets acquired, liabilities assumed and purchase price allocation:

 

 

Assets Acquired:          
Other current assets  $2,004,000      
Property and equipment   58,000      
Other assets   1,302,000   $3,364,000 
Liabilities Assumed:          
Current liabilities   (2,153,000)     
Long-term liabilities   (1,068,000)   (3,221,000)
Intangible assets        6,340,000 
Goodwill        16,337,000 
Purchase Price       $22,820,000 

 

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The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth and is not expected to be deductible for tax purposes. Goodwill is not amortized but will be tested for impairment on an annual basis.

 

The intangible assets, which consist of developed technology of $4,700,000 are being amortized over 5-years, customer relationships of $1,200,000 are being amortized on an accelerated basis over its estimated useful life of 5 years and domain names of $440,000 are determined to have infinite lives but will be tested for impairment on an annual basis.

 

During the period ended March 31, 2020, the Company recorded amortization expense of $325,000. As of March 31, 2020, the remaining unamortized balance of the intangible assets was $5,040,000.

 

The following comparative unaudited statements of operations present the Company’s results of operations after giving effect to the purchase of Verb Direct based on the historical financial statements of the Company and Verb Direct. The unaudited pro forma statements of operations for the periods ended March 31, 2020 and 2019 give effect to the transaction to the merger as if it had occurred on January 1, 2019.

 

  

Three Months Ended

March 31, 2020

  

Three Months Ended

March 31, 2019

 
   (unaudited)   (Proforma,
unaudited)
 
Digital  $1,457,000   $1,059,000 
Welcome kits and fulfilment   728,000    2,265,000 
Shipping   169,000    677,000 
Total Revenue   2,354,000    4,001,000 
           
Cost of revenue   1,063,000    2,248,000 
           
Gross margin   1,291,000    1,753,000 
           
Operating expenses   5,151,000    4,782,000 
           
Other income (expense), net   1,914,000    (251,000)
           
Net loss   (1,946,000)   (3,280,000)
           
Deemed dividends to Series A stockholders   (3,951,000)   - 
           
Net loss attributed to common stockholders  $(5,897,000)  $(3,280,000)
           
Loss per share  $(0.23)  $(0.21)
Weighted average number of common shares outstanding - basic and diluted   25,992,426    15,566,835 

 

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4. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of March 31, 2020 and December 31, 2019.

 

    March 31, 2020     December 31, 2019  
             
Computers   $ 29,000     $ 29,000  
Furniture and fixture     75,000       75,000  
Machinery and equipment     39,000       39,000  
Leasehold improvement     862,000       741,000  
Total property and equipment     1,005,000       884,000  
Accumulated depreciation     (202,000 )     (164,000 )
Total property and equipment, net   $ 803,000     $ 720,000  

 

Depreciation expense amounted to $38,000 and $4,000 for three months ended March 31, 2020 and 2019, respectively.

 

5. RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES

 

The Company has entered into several leases that are accounted for as operating leases in accordance with ASC 842. The Company currently has four office and warehouse leases in American Fork, Utah related to the operation of Verb Direct with an aggregate lease payment of $31,000 per month. Each lease expires in December 2023. The lessor of the office and warehouse area is JMCC Properties, which is an entity owned and controlled by the former shareholders and certain current officers of the Company’s subsidiary, Verb Direct.

 

In addition, the Company leases its corporate headquarters located at 2210 Newport Boulevard, Suite 200, Newport Beach, California 92663 under a lease with a term of 94 months. The average monthly base rent for the first 12 months of the Lease is approximately $7,000 after rent abatement. For the next 82 months of the Lease, the average monthly base rent will be approximately $39,000. As part of the agreement, the landlord provided leasehold incentive of $572,000 for the construction of the leasehold improvements. Pursuant to ASC 842, the lease incentive of $572,000 was recorded as a part of leasehold improvements and a reduction to the right of use assets. The Lease commenced in August 2019.

 

As March 31, 2020 and December 31, 2019, the Company had recorded right of use assets of $3,140,000 and $3,275,000, respectively, net of amortization.  As March 31, 2020 and December 31, 2019, the Company had recorded lease liabilities of $3,937,000 and $3,982,000, respectively, related to these leases.

 

   

Period Ended

March 31, 2020

 
Lease cost        
Operating lease cost (included in general and administration in the Company’s statement of operations)   $ 175,000  
         
Other information        
Cash paid for amounts included in the measurement of lease liabilities   $  
Weighted average remaining lease term – operating leases (in years)     5.11  
Average discount rate – operating leases     4.0 %

 

    March 31, 2020  
Operating leases        
Right-of-use assets, net of amortization of $484,000   $ 3,140,000  
         
Short-term operating lease liabilities   $ 505,000  
Long-term operating lease liabilities     3,432,000  
Total operating lease liabilities   $ 3,937,000  

 

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6. ADVANCE OF FUTURE RECEIPTS

 

The Company has the following advances on future receipts as of March 31, 2020:

 

Note  Issuance Date  Maturity Date  Interest
Rate
  Original Borrowing  Balance at
March 31, 2020
  Balance at
December 31, 2019
                   
Note 1  December 24, 2019  June 30, 2020   10%  $506,000   $297,000   $503,000 
Note 2  December 24, 2019  June 30, 2020   10%   506,000    297,000    503,000 
Total             $1,012,000    594,000    1,006,000 
Debt discount                   (137,000)   (274,000)
Net                  $457,000   $732,000 

 

On December 24, 2019, the Company received two secured advances from an unaffiliated third party totaling $728,000 for the purchase of future receipts/revenues of $1,012,000. Pursuant to the terms of the agreement the unaffiliated third-party will auto withdraw an aggregate of $6,000 from the Company’s operating account each banking day. The term of the agreement extends until the advances are paid in full. The Company may pay off either note for $446,000 if paid within 30 days of funding; for $465,000 if paid between 31 and 60 days of funding; or for $484,000 if paid within 61 to 90 days of funding. These advances are secured by the Company’s tangible and intangible assets.

 

As of December 31, 2019, the balance outstanding was $1,006,000 and the unamortized balance of the debt discount was $274,000.

 

During the period ended March 31, 2020, the Company repaid $411,000 and amortized the debt discount of $137,000. As of March 31, 2020, the outstanding balance of advances amounted to $594,000 and unamortized debt discount of $137,000.

 

7. NOTES PAYABLE – RELATED PARTIES

 

The Company has the following related parties notes payable as of March 31, 2020 and December 31, 2019:

 

Note  Issuance Date  Maturity Date  Interest Rate  Original Borrowing  Balance at
March 31, 2020
  Balance at
December 31, 2019
Note 1 (A)  December 1, 2015  February 8, 2021   12.0%  $1,249,000   $825,000   $825,000 
Note 2 (B)  December 1, 2015  April 1, 2017   12.0%   112,000    112,000    112,000 
Note 3 (C)  April 4, 2016  June 4, 2021   12.0%   343,000    240,000    240,000 
Total notes payable – related parties             1,177,000    1,177,000 
Non-current                   (240,000)   (1,065,000)
Current                  $937,000   $112,000 

 

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  (A) On December 1, 2015, the Company issued a convertible note payable to Mr. Rory J. Cutaia, the Company’s majority stockholder and Chief Executive Officer, to consolidate all loans and advances made by Mr. Cutaia to the Company as of that date. The note bears interest at a rate of 12% per annum, secured by the Company’s assets, and will mature on February 8, 2021, as amended.

 

As of March 31, 2020, and December 31, 2019, the outstanding balance of the note amounted to $825,000, respectively.

 

  (B) On December 1, 2015, the Company issued a note payable to a former member of the Company’s board of directors, in the amount of $112,000, representing unpaid consulting fees as of November 30, 2015. The note is unsecured, bears interest rate of 12% per annum, and matured in April 2017. As of March 31, 2020, and December 31, 2019, the outstanding principal balance of the note was equal to $112,000, respectively. As of March 31, 2020, the note was past due, and remains past due. The Company is currently in negotiations with the noteholder to settle the past due note.
     
  (C)

On April 4, 2016, the Company issued a convertible note to Mr. Cutaia, in the amount of $343,000, to consolidate all advances made by Mr. Cutaia to the Company during the period December 2015 through March 2016. The note bears interest at a rate of 12% per annum, is secured by the Company’s assets, and will mature on June 4, 2021, as amended.

 

As of March 31, 2020, and December 31, 2019, the outstanding balance of the note amounted to $240,000, respectively.

 

Total interest expense for notes payable to related parties was $35,000 for three months ended March 31, 2020 and 2019, respectively. The Company paid $10,000 and $32,000 in interest for the three months ended March 31, 2020 and 2019, respectively.

 

8. DEFERRED INCENTIVE COMPENSATION TO OFFICERS

 

Note  Date  Payment Date  Balance at
March 31, 2020
  Balance at
December 31, 2019
             
Rory Cutaia (A) 

December 23, 2019

  50% on January 10, 2021 and 50% on January 10, 2022  $430,000   $430,000 
Rory Cutaia (B) 

December 23, 2019

  50% on January 10, 2021 and 50% on January 10, 2022   324,000    324,000 
Jeff Clayborne (A) 

December 23, 2019

  50% on January 10, 2021 and 50% on January 10, 2022   125,000    125,000 
Jeff Clayborne (B) 

December 23, 2019

  50% on January 10, 2021 and 50% on January 10, 2022   163,000    163,000 
                 
Total         1,042,000    1,042,000 
Non-current         (521,000)   (1,042,000)
Current        $521,000   $- 

 

(A) On December 23, 2019, the Company awarded Rory Cutaia, Chief Executive Officer and Jeff Clayborne, Chief Financial Officer Annual Incentive Compensation of $430,000 and 125,000, respectively for services rendered. The Company has determined that it is in its best interest and in the best interest of its stockholders to defer payments to the Employees. The Company will pay 50% of the Annual Incentive Compensation on January 10, 2021 and the remaining 50% on January 10, 2022.
   
(B) On December 23, 2019, the Company awarded Rory Cutaia, Chief Executive Officer and Jeff Clayborne, Chief Financial Officer received a bonus for the successful Up-Listing to Nasdaq and Acquisition of Verb Direct during fiscal 2019, totaling $324,000 and $162,000, respectively. The Company has determined that it is in its best interest and in the best interest of its stockholders to defer payments to the Employees. The Company will pay 50% of the Nasdaq Up-Listing Award on January 10, 2021 and the remaining 50% on January 10, 2022.

 

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9. CONVERTIBLE SERIES A PREFERRED STOCK and WARRANT OFFERING

 

On August 14, 2019, we entered into the SPA with the Preferred Purchasers, pursuant to which we agreed to issue and sell to the Preferred Purchasers up to an aggregate of 6,000 shares of Series A Preferred Stock (which, at the initial conversion price, are convertible into an aggregate of up to approximately 3.87 million shares of Common Stock) and the August Warrants to purchase up to an equivalent number of shares of Common Stock. We closed the offering on August 14, 2019, and issued 5,030 shares of Series A Preferred Stock and granted the August Warrants to purchase up to 3,245,162 shares of Common Stock in connection therewith. We received proceeds of $4,688,000, net of direct costs of $342,000.

 

The SPA grants the Preferred Purchasers a right to participate, up to a certain amount, in subsequent financings for a period of 24 months. The SPA also prohibits us from entering into any agreement to issue, or announcing the issuance or proposed issuance, of any shares of Common Stock or Common Stock equivalents for a period of 90 days after the date that the registration statement, registering the shares issuable upon conversion of the Series A Preferred Stock and exercise of the August Warrants, is declared effective. We are also prohibited, until the date that the Preferred Purchasers no longer collectively hold at least 20% of the then-outstanding shares of Series A Preferred Stock issued pursuant to the SPA, from entering into an agreement to effect any issuance by us of Common Stock or Common Stock equivalents involving certain variable rate transactions. We also cannot enter into agreements related to “at-the-market” transactions for a period of 12 months. At the later of (i) the date that the August Warrants are fully exercised, and (ii) 12 months from the date of the SPA, we cannot draw down on any existing or future agreement with respect to “at-the-market” transactions if the sale of the shares in such transactions has a per share purchase price that is less than $3.76 (two times the exercise price of the Warrants

 

Each share of Series A Preferred Stock is convertible, at any time and from time to time from and after the issuance date, at the holder’s option in to that number of shares of Common Stock equal to the stated value per share (or $1,000) divided by the conversion price (initially, $1.55); thus, initially, each share of Series A Preferred Stock is convertible into approximately 645 shares of Common Stock. In certain circumstances, the Series A Preferred Stock is mandatorily convertible into shares of Common Stock after the Company obtains stockholder approval to issue a number of shares of Common Stock in excess of 19.99% and the closing price of the Common Stock is 100% greater than the then-base conversion price on each trading day for any 20 trading days during a consecutive 30-trading-day period.

 

During the period ended March 31, 2020, 1,150 shares of Preferred Stock were converted into 741,933 shares of Common Stock. As of March 31, 2020, 3,246 shares Series A Preferred stock are outstanding.

 

10. DERIVATIVE LIABILITY

 

Under authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments that do not have fixed settlement provisions are deemed to be derivative instruments. The Company granted certain warrants that included a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder.

 

As a result, the warrants are classified as liabilities and are bifurcated from the debt host and accounted for as a derivative liability in accordance with ASC 815 and will be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

The derivative liabilities were valued using a Binomial pricing model with the following average assumptions:

 

    March 31, 2020     Upon Issuance     December 31, 2019  
Stock Price   $ 1.26     $ 1.70     $ 1.55  
Exercise Price   $ 1.66     $ 1.55     $ 1.88  
Expected Life     3.27       5.0       3.53  
Volatility     211 %     212 %     216 %
Dividend Yield     0 %     0 %     0 %
Risk-Free Interest Rate     2.22 %     2.47 %     1.64 %
                         
Fair Value   $ 6,907,000     $ 3,951,000     $ 5,048,000  

 

The expected life of the warrants was based on the remaining contractual term. 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, 2019, the Company had recorded a derivative liability of $5,048,000.

 

During the period ended March 31, 2020, the Company recorded derivative liability of $3,951,000 as a result of the issuance of warrants to Series A Preferred stockholders (see Note 11). The Company also recorded a change in fair value of ($2,092,000) to account for the changes in the fair value of these derivative liabilities during the period ended March 31, 2020. At March 31, 2020, the fair value of the derivative liability amounted to $6,907,000. The details of derivative liability transactions as of and for the periods ended March 31, 2020 and 2019 are as follows:

 

    March 31, 2020     March 31, 2019  
Beginning Balance   $ 5,048,000     $ 2,576,000  
Fair value upon issuance of notes payable and warrants     3,951,000       388,000  
Change in fair value     (2,092,000 )     (944,000 )
Ending Balance   $ 6,907,000     $ 2,020,000  

 

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11. EQUITY TRANSACTIONS

 

The Company’s Common Stock activity for the three months ended March 31, 2020 is as follows:

 

Common Stock

 

Shares Issued as Part of the Company’s Private Placement

 

On February 5, 2020, the Company initiated a private placement, which is for the sale and issuance of up to five million shares of its Common Stock at a per-share price of $1.20, which amount represents a 20% discount to the $1.50 closing price of the Company’s Common Stock on that day, and is memorialized by a subscription agreement.

 

As a result of this private placement, from February 25 through March 31, 2020, a total of 4,237,833 shares of Common Stock were subscribed. Total subscribed shares of 3,392,833 shares of Common Stock were issued with net cash proceeds of $3,430,000 after direct costs received as of March 31, 2020. The remaining subscribed shares of 845,000 shares of Common Stock were issued in April and May 2020 upon receipt of cash proceeds of $1,014,000.

 

The Company’s private placement is exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereof and/or Rule 506 of Regulation D and Regulation S thereunder, each as promulgated by the SEC. The Company’s private placement was managed by the Company; however, in connection with the closings, the Company paid a non-U.S. based consultant (i) as a cash fee, an aggregate amount of $499,000 (or 10% of the gross proceeds of the closings), (ii) as a non-accountable expense allowance, an aggregate of $100,000 (or 2% of the gross proceeds of the closings), (iii) five-year warrants, exercisable for an aggregate of up to 416,199 shares of the Company’s Common stock at a cash-only exercise price of $1.92 per share, and (iv) 100,000 shares of the Company’s Common Stock. The Company made the above-referenced payments only in respect of that portion of the gross proceeds from the closings for investors introduced to the Company by the consultant. In addition, the Company also incurred various expenses totaling $42,000 that are directly related to this private placement.

 

In preparation for this private placement offering, the Company separately negotiated with certain Series A stockholders to waive their rights in order not to ratchet down the conversion price of their Series A preferred shares (see Note 9). In return for the waiver, the Company granted these Series A stockholders warrants to purchase 2,303,861 shares of Common Stock. The warrants are exercisable in August 2020, expire in 5 years and are exercisable at $1.20 per share, as adjusted. The exercise price is subject to certain customary adjustments, including subsequent equity sales and rights offerings. In addition, the warrants also included a fundamental transaction provision that could give rise to an obligation to pay cash to the warrant holder. As a result of this fundamental transaction provision, the warrants were accounted as derivative liability with a fair value upon issuance of $3,951,000 upon issuance. The Company accounted the fair value of $3,951,000 as a deemed dividend since if the down round provision of the Series A preferred shares had occurred, it would have been accounted as a deemed dividend due to it providing additional value to the Series A stockholders.

 

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Shares Issued for Services

 

During the period ended March 31, 2020, the Company issued 220,601 shares of Common Stock to vendors for services rendered with a fair value of $321,000. These shares of Common Stock were valued based on the market value of the Company’s Common Stock price at the issuance date or the date the Company entered into the agreement related to the issuance. As previously discussed, the Company also issued 100,000 shares of common stock to a consultant for services rendered as a result of a private placement offering in February and March 2020.

 

12. RESTRICTED STOCK AWARDS

 

On December 20, 2019, we held the 2019 Annual Meeting of Stockholders (the “Meeting”), at which our stockholders approved and adopted the Verb Technology Company, Inc. 2019 Omnibus Incentive Plan (the “Plan”).

 

A summary of restricted stock award activity for the three months ended March 31, 2020 is presented below.

 

          Weighted-  
          Weighted-  
          Average  
          Grant Date  
    Shares     Fair Value  
             
Non-vested at December 31, 2019     1,486,354     $      1.36  
Granted     -       -  
Vested     (11,025 )     1.36  
Forfeited     -       -  
Non-vested at March 31, 2020     1,475,329     $ 1.36  

  

The total fair value of restricted stock award that vest during the three months ended March 31, 2020 was $241,000 and is included in selling, general and administrative expenses in the accompanying statements of operations. As of March 31, 2020, the amount of unvested compensation related to issuances of restricted stock award was $1,758,000 which will be recognized as an expense in future periods as the shares vest.

 

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13. STOCK OPTIONS

 

Effective October 16, 2014, the Company adopted the 2014 Stock Option Plan (the “Plan”) under the administration of the board of directors to retain the services of valued key employees and consultants of the Company.

 

At its discretion, the Company grants share option awards to certain employees and non-employees under the Plan and accounts for it in accordance with ASC 718, Compensation – Stock Compensation.

 

A summary of option activity for the three months ended March 31, 2020 is presented below.

 

                Weighted-        
          Weighted-     Average        
          Average     Remaining     Aggregate  
          Exercise     Contractual     Intrinsic  
    Options     Price     Life (Years)     Value  
                         
Outstanding at December 31, 2019     4,233,722     $ 1.75       2.54     $ 995,000  
Granted     185,887       1.39       -       -  
Forfeited     (2,501 )     1.36       -       -  
Exercised     -       -       -       -  
Outstanding at March 31, 2020     4,417,108     $ 1.72       2.54     $ 143,000  
                                 
Vested March 31, 2020     1,820,725     $ 1.75             $ 28,000  
                                 
Exercisable at March 31, 2020     1,337,946     $ 2.19             $ 26,000  

 

During the three months ended March 31, 2020 the Company granted stock options to employees to purchase a total of 185,887 shares of Common Stock for services to be rendered. The options have an average exercise price of $1.39 per share, expire in five years, and vests in 4 equal installments during the four years from the grant date. The total fair value of these options at the grant date was approximately $246,000 using the Black-Scholes Option pricing model.

 

The total stock compensation expense recognized relating to vesting of stock options for the three months ended March 31, 2020 amounted to $381,000. As of March 31, 2020, total unrecognized stock-based compensation expense was $4.0 million, which is expected to be recognized as part of operating expense through March 2024.

 

The fair value of share option award is estimated using the Black-Scholes option pricing method based on the following weighted-average assumptions:

 

    Three Months Ended March 31,  
    2020     2019  
Risk-free interest rate     0.39 %     2.75 %
Average expected term     5 years       5 years  
Expected volatility     270.1 %     201.3 %
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.

 

14. WARRANTS

 

The Company has the following warrants outstanding as of March 31, 2020, all of which are exercisable:

 

    Warrants    

Weighted-
Average
Exercise

Price

   

Weighted-
Average

Remaining

Contractual

Life (Years)

   

Aggregate

Intrinsic

Value

 
                         
Outstanding at December 31, 2019     10,930,990     $ 3.07       4.25     $ -  
Granted     2,720,060       1.31       -       -  
Forfeited     -       -       -       -  
Exercised     -       -       -       -  
Outstanding at March 31, 2020, all vested     13,651,050     $ 2.72       4.12     $ -  

 

At March 31, 2020, the intrinsic value of these stock options was $0 as the exercise price of these stock warrants were greater than the market price.

 

During the period ended March 31, 2020, the Company granted 416,199 warrants to a consultant as part of a private placement offering and 2,303,861 warrants to Series A stockholders (see Note 11).

 

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15. COMMITMENTS AND CONTINGENCIES

 

Litigation

 

a.EMA Financial, LLC

 

On April 24, 2018, EMA Financial, LLC (“EMA”), commenced an action against the Company, styled as 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 money damages, injunctive relief, liquidated damages, and declaratory relief related to the Company’s refusal to agree to EMA’s interpretation of a cashless exercise provision in a common stock warrant we granted to EMA in December 2017. The Company interposed several counterclaims, including a claim for reformation of the underlying agreements to reflect the Company’s interpretation of the cashless exercise provision. Both parties moved for summary judgment. On March 16, 2020, the United States District Court entered a decision agreeing with the Company’s position, denying EMA’s motion for declaratory judgement on its interpretation of the cashless exercise formula, and stating, inter alia, that “the Agreements read in their entirety reveal that nFUSZ, Inc.’s position regarding the proper cashless exercise formula is the only sensible one and that the cashless exercise formula must be enforced accordingly.” The court went on to order that in light of this finding, the parties should submit a proposal for future proceedings. Accordingly, the Company has instructed its counsel to prosecute the Company’s claims for reimbursement of all of the costs it incurred in connection with this action, including all attorneys’ fees as well as all damages it incurred as a result of EMA’s conduct.

 

b.Former Employee

 

The Company is currently in a dispute with a former employee of its predecessor bBooth, Inc. who has interposed a breach of contract claim in which he alleges that he is entitled to approximately $300,000 in unpaid bonus compensation from 2015. The Company does not believe his claims have any merit as they are contradicted by documentary evidence, and barred by the applicable statute of limitations, and barred by a release executed by the former employee when the Company purchased all of his shares of stock more than 4 years ago in January 2016. The Company intends to seek dismissal of the former employee’s claims through arbitration.

 

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c.Class Action

 

On July 9, 2019, a purported class action complaint was filed in the United States District Court, Central District of California, styled SCOTT C. HARTMANN, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. VERB TECHNOLOGY COMPANY, INC., and RORY J. CUTAIA, Defendant, Case Number 2:19-CV-05896. The complaint purports to be brought on behalf of a class of persons or entities who purchased or otherwise acquired the Company’s Common Stock between January 3, 2018 and May 2, 2018, and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, arising out of the January 3, 2018, announcement by the Company of its agreement with Oracle America, Inc. The complaint seeks unspecified costs and damages. The Company believes the complaint is without merit and the Company intends to vigorously defend the action.

 

  d. Derivative Action

 

On September 27, 2019, a derivative action was filed in the United States District Court, Central District of California, styled Richard Moore, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. Verb Technology Company, Inc., and Rory J. Cutaia, James P. Geiskopf, and Jeff Clayborne, Defendants, Case Number 2:19-CV-08393-AB-SS. The derivative action also arises out of the January 3, 2018, announcement by the Company of its agreement with Oracle America, Inc. The derivative action alleges claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets due to the costs associated with the defense of the above referenced class action complaint. The derivative complaint seeks a declaration that the individual defendants have breached their duties, unspecified damages, and certain purportedly remedial measures. The Company contends that the class action is without merit and as such, this derivative action, upon which it relies, is likewise without merit and the Company intends to vigorously defend this suit.

 

The Company knows of no other material pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of its assets or properties, or the assets or properties of any of its subsidiaries, are subject and, to the best of its knowledge, no adverse legal activity is anticipated or threatened. In addition, the Company does not know of any such proceedings contemplated by any governmental authorities.

 

The Company knows of no material proceedings in which any of its directors, officers, or affiliates, or any registered or beneficial stockholder is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

 

The Company believes it has adequately reserved for all litigation within its financials.

 

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Board of Directors

 

The Company has committed an aggregate of $450,000 in board fees to its five board members over the term of their appointment for services to be rendered. Board fees are accrued and paid monthly. 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.

 

Total board fees expensed during the period ended March 31, 2020 was $105,000. As of March 31, 2020, total board fees to be recognized in future period amounted to $322,000 and will be recognized once the service has been rendered.

 

The recent outbreak of COVID-19 may have a significant negative impact on our business, sales, results of operations and financial condition.

 

The global outbreak of COVID-19 has led to severe disruptions in general economic activities, as businesses and federal, state, and local governments take increasingly broad actions to mitigate this public health crisis. We have experienced disruption to our business, both in terms of disruption of our operations and the adverse effect on overall economic conditions. These conditions will significantly negatively impact all aspects of our business. Our business is dependent on the continued health and productivity of our employees, including our software engineers, sales staff and corporate management team. Individually and collectively, the consequences of the COVID-19 outbreak could have a material adverse effect on our business, sales, results of operations and financial condition.

 

Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, and meet our financial obligations. Currently, capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required to improve our cash position and capital structure.

 

The extent to which the COVID-19 outbreak ultimately impacts our business, sales, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.

 

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16. SUBSEQUENT EVENTS

 

Issuance of Restricted Stock Awards

 

On April 10, 2020, the board of directors of Verb Technology Company, Inc., a Nevada corporation (the “Company”), approved management’s COVID-19 Full Employment and Cash Preservation Plan (the “Plan”), pursuant to which all directors and senior level management would reduce their cash compensation by 25%, and all other employees and consultants would reduce their cash compensation by 20% (the “Cash Reduction Amount”) for a period of three months from April 16, 2020 through July 15, 2020 for one category of plan participants, and April 26, 2020 through July 18, 2020 for the other category of participants. The Plan was designed to promote the continued growth of the Company and avoid the lay-offs and staff cut-backs experienced by many companies affected by the COVID-19 economic crisis. The Cash Reduction Amount is to be paid in shares of the Company’s common stock (the “Shares”) through an allocation of shares from the Company’s 2019 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) and granted pursuant to stock award agreements entered into effective as of April 10, 2020 (the “Grant Date”) between the Company and each of the Company’s directors, executive officers, employees, and consultants. The stock award agreements provide that the Shares will vest on July 18, 2020 (the “Vesting Date”) as long as the recipient remains in continuous service to the Company during the time from the Grant Date through the Vesting Date. The Shares were valued at $1.198 per share in accordance with the provisions of the Omnibus Incentive Plan, which provides that the value shall be determined based on the volume weighted average price of the Company’s common stock during a period of up to the 30-trading days prior to the Grant Date. Total Common Stock granted as part of the Cash Preservation Plan on April 10, 2020 was 589,099 with a fair value of $866,000. The shares were valued based on the market value of the Company’s stock price on the grant date and will be amortized over the life of the agreements and recorded as stock compensation expense. As of the date of this report the restricted shares have not been issued to the respective employees.

 

Issuance of Common Stock

 

Subsequent to March 31, 2020, the Company issued 87,032 shares of Common Stock to vendors for services rendered with a fair value of $123,000. These shares of Common Stock were valued based on the market value of the Company’s stock price at the issuance date or the date the Company entered into the agreement related to the issuance.

 

Subsequent to March 31, 2020, as part of the Company’ private placement offering, subscribed shares of 845,000 shares of common stock were issued in April and May 2020 upon receipt of cash proceeds of $1,014,000 (see Note 11).

 

Grant of Stock Options

 

Subsequent to March 31, 2020, the Company granted stock options to an employee to purchase a total of 138,000 shares of Common Stock for services rendered. The options have an average exercise price of $1.38 per share, expire in five years, and vest over a period of one to four years from grant date. The total fair value of these options at the grant date was $191,000 using the Black-Scholes option pricing model.

 

Paycheck Protection Program

 

On April 17, 2020, the Company received loan proceeds in the amount of approximately $1,218,000 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.

 

The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot assure you that we will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.

 

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

 

Forward-Looking Statements

 

The following discussion and analysis of the results of operations and financial condition of our company for the three-month period ended March 31, 2020 and 2019, should be read in conjunction with the financial statements and related notes and the other financial information that are included elsewhere this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Forward-looking statements are statements not based on historical fact and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to business decisions, are subject to change. These uncertainties and contingencies can affect actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

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

 

Overview

 

We are a Software-as-a-Service, or SaaS, applications platform developer. Our platform is comprised of a suite of sales enablement business software products marketed on a subscription basis. Our applications, available in both mobile and desktop versions, are offered as a fully integrated suite, as well as on a standalone basis, and include verbCRM, our Customer Relationship Management application; verbLEARN, our Learning Management System application; and verbLIVE, our Live Broadcast Video Webinar application.

 

Our Technology

 

Our suite of applications can be distinguished from other sales enablement applications because our applications utilize our proprietary interactive video technology as the primary means of communication between sales and marketing professionals and their customers and prospects. Moreover, the proprietary data collection and analytics capabilities of our applications inform our users in real time, on their devices, when and for how long their prospects have watched a video, how many times such prospects watched it, and what they clicked-on, which allows our users to focus their time and efforts on ‘hot leads’ or interested prospects rather than on those that have not seen such video or otherwise expressed interest in such content. Users can create their hot lead lists by using familiar, intuitive ‘swipe left/swipe right’ on-screen navigation. Our clients report that these capabilities provide for a much more efficient and effective sales process, resulting in increased sales conversion rates. We developed the proprietary patent-pending interactive video technology, as well as several other patent-issued and patent-pending technologies that serve as the unique foundation for all of our platform applications.

 

Our Products

 

verbCRM combines the capabilities of customer relationship management, or CRM, lead-generation, content management, and in-video e-commerce capabilities in an intuitive, yet powerful tool for both inexperienced as well as highly skilled sales professionals. verbCRM allows users to quickly and easily create, distribute, and post videos to which they can add a choice of on-screen clickable icons, which when clicked, allow viewers to respond to the user’s call-to-action in real-time, in the video, while the video is playing, without leaving or stopping the video. For example, our technology allows a prospect or customer to click on a product they see featured in a video and impulse buy it, or to click on a calendar icon in the video to make an appointment with a salesperson, which are among many novel features and functionalities designed to eliminate or reduce friction from the sales process for our users. The verbCRM app is designed to be easy to use and navigate, and takes little time and training for a user to begin using the app effectively. It usually takes less than four minutes for a novice user to create an interactive video from our app. Users can add interactive icons to pre-existing videos, as well as to newly created videos shot with practically any mobile device. verbCRM interactive videos can be distributed via email, text messaging, chat app, or posted to popular social media directly and easily from our app. No software download is required to view Verb interactive videos on virtually any mobile or desktop device, including smart TVs.

 

verbLEARN is an interactive video-based learning management system that incorporates all of the clickable in-video technology featured in our verbCRM application, however adapted for use by educators for video-based education. verbLEARN is used by enterprises seeking to educate a large sales team or a customer base about new products, or elicit feedback about existing products. It also incorporates Verb’s proprietary data collection and analytics capabilities that inform users in real time, when and for how long the viewers watched the video, how many times they watched it, and what they clicked-on.

 

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verbLIVE builds on popular video-based platforms such as Facebook Live, Zoom, WebEx, and Go2Meeting, among others, by adding Verb’s proprietary interactive in-video ecommerce capabilities – including an in-video Shopify shopping cart integrated for Shopify account holders - to our own live stream video broadcasting application. verbLIVE is a next-generation webinar platform that allows webinar hosts to utilize a variety of novel sales-driving features, including placing interactive icons on-screen that appear on the screens of all viewers, providing in-video click-to-purchase capabilities for products or services featured in the live video broadcast, in real-time, driving friction-free selling. verbLIVE also provides the host with real-time viewer engagement data and interaction analytics. verbLIVE is entirely browser-based, allowing it to function easily and effectively on all devices without requiring the host or the viewers to download software, and is secured through end-to-end encryption. verbLIVE is currently in pre-sales, accepting customer deposits, and is expected to launch commercially in summer 2020.

 

The Verb In-App Eco-System

 

To more effectively and efficiently monetize our current large user base, we have developed and have begun to deploy in-app purchase capabilities for all verbCRM users. This feature is currently being distributed and deployed as an automatic software update to enterprise client users whose monthly subscription fees and use of the application are paid by their corporate employer, sponsor, or principal. The in-app purchase capability will allow these users to pay for subscriptions directly in the app with their own credit card in order to access upgraded or unlocked verbCRM features and additional functionality within the app.

 

In addition, these users will have in-app access to our forthcoming “app store” where users can subscribe for third-party apps that are complimentary to verbCRM user demographics, such as specialized expense tracking applications, tax software, among other third-party apps offered directly to our user base on a revenue share basis with the third-party developers. In addition, we are expecting to introduce during 2020 an “Open API” architecture, allowing third-party developers to create specialized apps with features and functionality that integrate seamlessly into our verbCRM application. These will be offered directly to our user base through our verbCRM app store on a revenue-sharing basis.

 

Verb Partnerships and Integrations

 

We have completed the integration of verbCRM into systems offered by 17 of the most popular direct sales back-office system providers, such as Direct Scale, Exigo, By Design, Thatcher, Multisoft, Xennsoft, and Party Plan. Direct sales back-office systems provide many of the support functions required for direct sales operations, including payroll, customer genealogy management, statistics, rankings, and earnings, among other direct sales financial tracking capabilities. The integration into these back-office providers, facilitated through our own API development, allows single sign-on convenience for users, as well as enhanced data analytics and reporting capabilities for all users. We believe that our integration into these back-end platforms accelerates the adoption of verbCRM by large direct sales enterprises that rely on these systems and as such, we believe this represents a competitive advantage.

 

We are also in various stages of development, testing and deployment for the integration of our latest generation interactive video and enhanced analytics and reporting technology, and more recently, a core package that includes verbLIVE, into popular CRM providers, including Salesforce, Microsoft, Oracle/NetSuite, and Adobe/Marketo, among others with whom we have executed partnership agreements. Each of these agreements provides for revenue share arrangements resulting from sales of our product to their respective clients. The integrations for Salesforce and Microsoft represent new build integrations, while those for Oracle/NetSuite and Adobe/Marketo represent replacement integrations. We have intentionally, though temporarily, delayed further action on and deployment of these integrations in order to allocate design, engineering and development resources to those initiatives that we believe will become revenue producing opportunities sooner, especially those that we believe will likely produce greater market demand due to the current and anticipated continued effects of the COVID-19 pandemic. We expect to resume action on and deployment of these integrations in the summer of 2020.

 

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Non-Digital Products and Services

 

Historically, we have also provided certain non-digital services to some of our enterprise clients such as printing and fulfillment services. We designed and printed welcome kits and starter kits for their marketing needs and provided fulfillment services, which consisted of managing the preparation, handling and shipping of our client’s custom-branded merchandise they use for marketing purposes at conferences and other events. We also managed the fulfillment of our clients’ product sample packs that verbCRM users order through the app for automated delivery and tracking to their customers and prospects.

 

However, on February 28, 2020, we executed a letter of intent with Range Printing, a company in the business of providing enterprise class printing, sample assembly, warehousing, packaging, shipping and fulfillment services. Pursuant to the letter of intent, through an automated process we have established for this purpose, Range will receive orders for samples and merchandise from us as and when we receive them from our clients and users, and print, assemble, store, package and ship such samples and merchandise on our behalf. The Range letter of intent provides for a revenue share arrangement based upon the specific services to be provided by Range that is designed to guarantee net revenue to us, maintain our relationship with our clients by continuing to service their non-digital needs, while eliminating the labor and overhead costs associated with the provision of such services by us.

 

Our Market

 

Our client base consists primarily of multi-national direct sales enterprises to whom we provide white-labeled, client-branded versions of our products. Our clients also include large professional associations, educational institutions, including school districts, auto sales, auto leasing, insurance, real estate, home security, not-for-profits, as well as clients in the health care industry, and the burgeoning CBD industry, among other business sectors. Currently, we provide subscription-based application services to approximately 100 enterprise clients for use in over 60 countries, in over 48 languages, which collectively account for a user base generated through more than 1.3 million downloads of our verbCRM application. Among the new business sectors targeted for this year are pharmaceutical sales, government institutions, and political parties and candidates.

 

Revenue Generation

 

We generate revenue from the following sources:

 

  Recurring subscription fees paid by enterprise users and affiliates;
  Recurring subscription fees paid by non-enterprise, small business, and individual users;
  Recurring subscription fees paid by users who access in-app purchases of various premium services, features, functionality, and upgrades;
  Recurring subscription fees paid by users who access in-app purchases of third-party software provider apps in our forthcoming app store;
 

Recurring subscription fees paid by users of Salesforce, Microsoft, Oracle/NetSuite, and Adobe/Marketo, among others with whom we have executed partnership agreements, for access to our applications that we intend to integrate into these platforms, including recurring subscription fees paid by users who subscribe to bundled service offerings from these partners and/or their respective value-added resellers;

  Recurring subscription fees paid by users for all of the foregoing products and services generated through our recently launched Japan operations;
  Recurring subscription fees paid by users generated through our forthcoming reseller and affiliate distribution programs; and
  Fees paid by enterprise clients for non-digital products and services through our Range Printing venture.

 

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Results of Operations

 

Three Months Ended March 31, 2020 as Compared to the Three Months Ended March 31, 2019

 

The following is a comparison of our results of operations for the three months ended March 31, 2020 and 2019:

 

   Three Months Ended
March 31, 2020
   Three Months Ended
March 31, 2019
   Change 
   (unaudited)   (unaudited)     
Revenue               
Digital  $1,457,000   $9,000   $1,448,000 
Welcome kits and fulfillment   728,000    -    728,000 
Shipping   169,000    -    169,000 
Total revenue   2,354,000    9,000    2,345,000 
                
Cost of revenue               
Digital   230,000    30,000    200,000 
Welcome kits and fulfillment   676,000    -    676,000 
Shipping   157,000    -    157,000 
Total cost of revenue   1,063,000    30,000    1,033,000 
                
Gross margin   1,291,000    (21,000)   1,312,000 
                
Operating expenses:               
Research and development   1,274,000    564,000    710,000 
Depreciation and amortization   363,000    564,000    359,000 
General and administrative   3,514,000    4,000    1,329,000 
Total operating expenses   5,151,000    2,753,000    2,398,000 
                
Loss from operations   (3,860,000)   (2,774,000)   (1,086,000)
                
Other income (expense), net               
Other expense   (6,000)   -    (6,000)
Financing costs   -    (84,000)   84,000 
Interest expense - amortization of debt discount   (137,000)   (1,054,000)   917,000 
Change in fair value of derivative liability   2,092,000    944,000    1,148,000 
Interest expense   (35,000)   (40,000)   5,000 
Total other income (expense), net   1,914,000    (234,000)   2,148,000
                
Net loss  $(1,946,000)  $(3,008,000)   1,062,000

 

Revenue

 

Total revenue for the quarter ended March 31, 2020 was $2.4 million, compared to $9,000 for the quarter ended March 31, 2019. The increase in revenue is attributed to sales of Verb Direct, our wholly-owned subsidiary that we acquired in April 2019. As a result of the acquisition of Verb Direct, we now have three revenue channels: (1) SaaS that is an interactive video CRM application, (2) welcome kits, which consists of “starter kits” for corporations to use for their marketing needs, and (3) fulfillments, which consists of various custom products used for marketing purposes at conferences and other events or sample packs ordered through the digital application. SaaS revenue for the quarter ended March 31, 2020 was $1.4 million, compared to $9,000 for the quarter ended March 31, 2019. Revenue derived from welcome kits, fulfillment, and shipping for the quarter ended March 31, 2019 was $1.0 million, compared to $0 for the quarter ended March 31, 2019.

 

Cost of Revenue

 

Total cost of revenue for the quarter ended March 31, 2020 was $1.1 million, compared to $30,000 for the quarter ended March 31, 2019. The increase in cost of revenue is attributed to costs of Verb Direct. SaaS cost of revenue for the quarter ended March 31, 2020 was $230,000, compared to $30,000 for the quarter ended March 31, 2019. Cost of revenue derived from the welcome kits, fulfillments, and shipping for the quarter ended March 31, 2020 was $0.8 million, compared to $0 for the quarter ended March 31, 2019.

 

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Operating Expenses

 

Research and development expenses were $1.3 million for the quarter ended March 31, 2020, as compared to $564,000 for the quarter ended March 31, 2019. Research and development expenses primarily consisted of fees paid to employees and vendors contracted to perform research projects and develop technology. The increase in research and development is attributed to research and development expenses of Verb Direct and additional product development and testing to support the integration of Verb Direct, development of verbLIVE, plus enhancements to our core platform to facilitate native integrations with Salesforce, Microsoft, Adobe, and other channel partners.

 

Depreciation and amortization expenses were $363,000 for the quarter ended quarter ended March 31, 2020, as compared to $4,000 for the quarter ended March 31, 2019. The increase was associated with $325,000 of amortization related to the intangible asset recorded as part of the acquisition of Verb Direct in April 2019, amortization of leasehold improvements related to the Corporate Headquarters, and other depreciation and amortization attributed to Verb Direct.

 

General and administrative expenses for the quarter ended quarter ended March 31, 2020 were $3.5 million, as compared to $2.2 million for the quarter ended March 31, 2019. The increase in general and administrative expenses is primarily related to general and administration expenses attributed to Verb Direct of $1.0 million, an increase in labor to support growth of $245,000, and an increase in stock compensation expense of $100,000.

 

Other income (expense), net, for the quarter ended quarter ended March 31, 2020 totaled $1.9 million, which was attributed to a change in the fair value of derivative liability of $2.1 million, offset by interest expense for amortization of debt discount of ($137,000), interest expense of ($35,000), and other expense of ($6,000). Other income (expense), net, for the quarter ended March 31, 2019 totaled ($234,000), which was attributed to interest expense for amortization of debt discount of ($1.1) million, financing costs of ($84,000), interest expense of ($40,000), all offset by a change in the fair value of derivative liability of $944,000.

 

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Modified EBITDA

 

In addition to our GAAP results, we present modified EBITDA as a supplemental measure of our performance. However, modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of liquidity. We define modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, financing costs, changes in fair value of derivative liability, and other (income) / expense, net.

 

Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. Readers are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating modified EBITDA, readers should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

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For the

Three Months Ended

 
   March 31, 2020   March 31, 2019 
         
Net loss  $(1,946,000)  $(3,008,000)
           
Adjustments:          
Other expense   6,000    - 
Stock compensation expense   943,000    851,000 
Financing costs   -    84,000 
Amortization of debt discount   137,000    1,054,000 
Change in fair value of derivative liability   (2,092,000)   (944,000)
Interest expense   35,000    40,000 
Depreciation and amortization   363,000    4,000 
Total EBITDA adjustments   (608,000)   1,089,000 
Modified EBITDA  $(2,554,000)  $(1,919,000)

 

The $635,000 decrease in modified EBITDA for the three months ended March 31, 2020 compared to the same period in 2019, resulted from the increase in research & development and labor-related costs to support growth.

 

We present modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use modified EBITDA in developing our internal budgets, forecasts, and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; and in making compensation decisions and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following:

 

  Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
     
  Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
     
  Modified EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and
     
  Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and the Modified EBITDA does not reflect any cash requirements for such replacements.

 

Liquidity and Capital Resources

 

Going Concern

 

We have incurred operating losses and negative cash flows from operations since inception. We incurred a net loss of $2.0 million during the three months ended March 31, 2020. We also utilized cash in operations of $2.3 million during the three months ended March 31, 2020. As a result, our continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash flows from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our operations.

 

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Our consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to meet our obligations and continue our operations for the next twelve months. Our continuation of as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow. In addition, our independent registered public accounting firm, in its report on our December 31, 2019 consolidated financial statements, has raised substantial doubt about our ability to continue as a going concern.

 

There is no assurance that we will ever be profitable or that debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease operations for our business, the results of which would be that our stockholders would lose some or all of their investment. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.

 

Overview

 

As of March 31, 2020, we had cash of $1.6 million. We estimate our operating expenses for the next three months may continue to exceed any revenue we generate, and we may need to raise capital through either debt or equity offerings to continue operations. We are in the early stages of our business. We are required to fund growth from financing activities, and we intend to rely on a combination of equity and debt financings. Due to market conditions and the early stage of our operations, there is considerable risk that we will not be able to raise such financings at all, or on terms that are not dilutive to our existing stockholders. We can offer no assurance that we will be able to raise such funds. If we are unable to raise the funds we require for all of our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer, and we may be forced to reduce or discontinue operations.

 

On February 5, 2020, we initiated our private placement, which is for the sale and issuance of up to five million shares of our common stock at a per-share price of $1.20, which amount represents a 20% discount to the $1.50 closing price of our common stock on that day, and is memorialized by a subscription agreement.

 

On March 31, 2020 we closed our private placement. In total we issued 4,237,833 shares of common stock with net cash proceeds of $4.4 million after fees and expenses, of which, $3,430,000 was received as of March 31, 2020 and the remaining $1,014,000 was received in April and May 2020.

 

On April 17, 2020, we received loan proceeds in the amount of approximately $1,218,000 under the Paycheck Protection Program, or PPP. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.

 

The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. We intend to use the proceeds for purposes consistent with the PPP. While we currently believe that our use of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot assure you that we will not take actions that could cause us to be ineligible for forgiveness of the loan, in whole or in part.

 

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Cash Flows – Operating

 

For the three months ended March 31, 2020, our cash flows used in operating activities amounted to $2.3 million, compared to cash used for the three months ended March 31, 2019 of $1.1 million. The change is attributed to the growth of the business, product development, inclusion of Verb Direct operating expenses, all offset by a change in accounts payable of $800,000 compared to the three months ended March 31, 2019.

 

Cash Flows – Investing

 

For the three months ended March 31, 2020, our cash flows used in investing activities amounted to $121,000. The change is attributed to fixed asset purchases associated with our new corporate headquarters in Newport Beach, California.

 

Cash Flows – Financing

 

Our cash provided by financing activities for the three months ended March 31, 2020 amounted to $3.0 million, which represented $3.4 million of net proceeds from the issuance of shares of our common stock, offset by $411,000 of payments against advance on future receipts. Our cash provided by financing activities for the quarter ended March 31, 2019 amounted to $514,000, which represented $432,000 of proceeds from the issuance of convertible debt, $350,000 proceeds from the issuance of unsecured debt, $58,000 of unsecured related party debt, offset by $326,000 of deferred offering costs.

 

Notes Payable – Related Parties

 

We have the following outstanding notes payable to related parties as of March 31, 2020:

 

Note  Issuance Date   Maturity Date   Interest Rate   Original Borrowing   Balance at
March 31,
2020
 
Note 1 (A)   December 1, 2015    February 8, 2021    12.0%  $1,249,000   $825,000 
Note 2 (B)   December 1, 2015    April 1, 2017    12.0%   112,000    112,000 
Note 3 (C)   April 4, 2016    June 4, 2021    12.0%   343,000    240,000 
                          
Total notes payable – related parties                   1,177,000 
Non-current                       (240,000)
Current                      $937,000 

 

  (A)

On December 1, 2015, we issued a convertible note payable to Rory J. Cutaia, our Chief Executive Officer and then-majority stockholder, to consolidate all loans and advances made by Mr. Cutaia to our company as of that date. The note bears interest at a rate of 12% per annum, is secured by our assets, and will mature on February 8, 2021, as amended.

     
  (B)

On December 1, 2015, we issued a note payable to a former member of our 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 March 31, 2020, the outstanding principal balance of the note was $112,000.

     
  (C)

On April 4, 2016, we issued a convertible note to Mr. Cutaia, in the amount of $343,000, to consolidate all advances made by Mr. Cutaia to our company during the period December 2015 through March 2016. The note, as amended, bears interest at a rate of 12% per annum, is secured by our assets, and will mature on June 4, 2021.

 

Deferred Incentive Compensation

 

Note  Issuance Date   Maturity Date     Balance at
March 31, 2020
 
               
Rory J. Cutaia (A)  December 23, 2019   50% on January 10, 2021 and 50% on January 10, 2022    $430,000 
Rory J. Cutaia (B)  December 23, 2019   50% on January 10, 2021 and 50% on January 10, 2022     324,000 
Jeff Clayborne (A)  December 23, 2019   50% on January 10, 2021 and 50% on January 10, 2022     125,000 
Jeff Clayborne (B)  December 23, 2019   50% on January 10, 2021 and 50% on January 10, 2022     163,000 
               
Total deferred compensation payable – related parties, net     1,042,000 
Non-current            (521,000)
Current           $521,000 

 

(A)

On December 23, 2019, we awarded Rory Cutaia, our Chief Executive Officer and Jeff Clayborne, our Chief Financial Officer annual incentive compensation of $430,000 and 125,000, respectively, for services rendered. We have determined that it is in our best interest and in the best interest of our stockholders to defer payments to Messrs. Cutaia and Clayborne. We will pay 50% of the annual incentive compensation on January 10, 2021 and the remaining 50% on January 10, 2022.

   
(B)

On December 23, 2019, we awarded Rory Cutaia, our Chief Executive Officer and Jeff Clayborne, our Chief Financial Officer a bonus for the successful up-listing to The NASDAQ Capital Market and the acquisition of Verb Direct totaling $324,000 and 162,000, respectively. We have determined that it is in our best interest and in the best interest of our stockholders to defer payments to Messrs. Cutaia and Clayborne. We will pay 50% of these awards on January 10, 2021 and the remaining 50% on January 10, 2022.

 

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Advance on Future Receipts

 

Note  Issuance Date   Maturity Date   Interest
Rate
   Original Borrowing   Balance at
March 31, 2020
 
                     
Note 1 (A)   December 24, 2019