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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 September 30, 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)

 

782 S. Auto Mall Drive

American Fork, Utah

 

 

84003

(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 November 10, 2020, there were 46,693,790 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 32
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 47
ITEM 4 - CONTROLS AND PROCEDURES 47
PART II - OTHER INFORMATION 47
ITEM 1 - LEGAL PROCEEDINGS 47
ITEM 1A - RISK FACTORS 49
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 60
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES 60
ITEM 4 - MINE SAFETY DISCLOSURES 60
ITEM 5 - OTHER INFORMATION 60
ITEM 6 - EXHIBITS 61
SIGNATURES 62

 

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 (unaudited) 6
   
Condensed Consolidated Statements of Cash Flows (unaudited) 8
   
Notes to Condensed Consolidated Financial Statements (unaudited) 9-31

 

3
 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,
2020
   December 31,
2019
 
    (unaudited)      
ASSETS          
           
Current assets:          
Cash  $10,722,000   $983,000 
Accounts receivable, net of allowance of $216,000 and $230,000, respectively   1,353,000    1,271,000 
Inventory, net of allowance of $30,000 and $2,000, respectively   12,000    103,000 
Prepaid expenses   675,000    236,000 
Total current assets   12,762,000    2,593,000 
           
Right-of-use assets, net of accumulated amortization of $756,000 and $349,000 respectively   2,868,000    3,275,000 
Property and equipment, net of accumulated depreciation of $294,000 and $164,000, respectively   907,000    720,000 
Intangible assets, net of accumulated amortization of $1,953,000 and $975,000 respectively   6,270,000    5,365,000 
Goodwill (including provisional goodwill of $3,362,000 at September 30, 2020)   19,699,000    16,337,000 
Other assets   69,000    69,000 
           
Total assets  $42,575,000   $28,359,000 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable and accrued expenses  $5,346,000   $4,338,000 
Accrued officers’ salary   207,000    207,000 
Accrued interest (including $87,000 and $82,000 payable to related parties)   95,000    82,000 
Advance on future receipts, net of discount of $176,000 and $274,000, respectively   418,000    732,000 
Notes Payable   1,885,000    - 
Notes payable - related party   1,177,000    112,000 
Operating lease liability, current   595,000    391,000 
Deferred incentive compensation to officers, current   521,000    - 
Contract liabilities and customer deposits   685,000    306,000 
Derivative liability   4,545,000    5,048,000 
           
Total current liabilities   15,474,000    11,216,000 
           
Long Term liabilities:          
Notes payable, non-current   1,458,000    - 
Note payable - related party, non-current   -    1,065,000 
Deferred incentive compensation to officers, non-current   521,000    1,042,000 
Deferred payroll taxes   247,000    - 
Operating lease liability, non-current   3,101,000    3,591,000 
Total liabilities   20,801,000    16,914,000 
           
Commitments and contingencies          
           
Stockholders’ equity          

Class A units, 100 shares authorized, 100 issued and outstanding as of September 30, 2020

   -    - 

Class B units, 2,642,159 shares authorized, 2,642,159 issued and outstanding as of September 30, 2020

   3,065,000    - 
Preferred stock, $0.0001 par value, 15,000,000 shares authorized: Series A Convertible Preferred Stock, 6,000 shares authorized; 2,406 and 4,396 issued and outstanding as of September 30, 2020 and December 31, 2019   -    - 
Common stock, $0.0001 par value, 200,000,000 shares authorized, 46,663,790 and 24,496,197 shares issued and outstanding as of September 30, 2020 and December 31, 2019   5,000    2,000 
Additional paid-in capital   87,979,000    68,028,000 
Accumulated deficit   (69,275,000)   (56,585,000)
           
Total stockholders’ equity   21,774,000    11,445,000 
           
Total liabilities and stockholders’ equity  $42,575,000   $28,359,000 

 

The accompanying notes to the condensed consolidated financial statements

 

4
 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Statement of Operations 
  

Three Months

Ended

September 30,
2020

  

Three Months

Ended

September 30,
2019

  

Nine Months

Ended

September 30,
2020

  

Nine Months

Ended

September 30,
2019

 
                 
Revenue                    
SaaS recurring subscription revenue  $1,478,000   $953,000   $3,809,000   $1,820,000 
Other Digital   360,000    485,000    1,166,000    1,081,000 
Welcome kits and fulfillment   836,000    1,164,000    2,277,000    2,948,000 
Shipping   186,000    271,000    614,000    766,000 
Total revenue   2,860,000    2,873,000    7,866,000    6,615,000 
                     
Cost of revenue                    
SaaS and other digital   349,000    221,000    843,000    427,000 
Welcome kits and fulfillment   768,000    990,000    2,106,000    2,375,000 
Shipping   188,000    280,000    554,000    761,000 
Total cost of revenue   1,305,000    1,491,000    3,503,000    3,563,000 
                     
Gross margin   1,555,000    1,382,000    4,363,000    3,052,000 
                     
Operating Expenses:                    
Research and development   2,407,000    1,214,000    5,308,000    3,113,000 
Depreciation and amortization   388,000    518,000    1,108,000    1,025,000 
General and administrative   6,655,000    3,292,000    14,187,000    8,803,000 
Total operating expenses   9,450,000    5,024,000    20,603,000    12,941,000 
                     
Loss from operations   (7,895,000)   (3,642,000)   (16,240,000)   (9,889,000)
                     
Other income (expense), net                    
Other income (expense), net   (2,000)   (9,000)   1,000    (10,000)
Financing costs   (248,000)   (1,486,000)   (248,000)   (1,625,000)
Interest expense - amortization of debt discount   (110,000)   (21,000)   (384,000)   (1,647,000)
Change in fair value of derivative liability   975,000    2,802,000    4,295,000    3,320,000 
Debt extinguishment, net   -    (691,000)   -    1,536,000 
Interest expense   (40,000)   (68,000)   (114,000)   (151,000)
Total other income, net   575,000    527,000    3,550,000    1,423,000 
                     
Net loss   (7,320,000)   (3,115,000)   (12,690,000)   (8,466,000)
                     
Deemed dividends to Series A stockholders   -    -    (3,951,000)   - 
                     
Net loss to common stockholders  $(7,320,000)  $(3,115,000)  $(16,641,000)  $(8,466,000)
                     
Net loss per share to common stockholders - basic and diluted  $(0.18)  $(0.13)  $(0.51)  $(0.44)
Weighted average number of common shares outstanding - basic and diluted   41,216,642    23,155,801    32,375,054    19,038,802 

 

The accompanying notes to the condensed consolidated financial statements

 

5
 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

 

   Class A Units   Class B Units   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated     
   Shares   Amount   Shares   Amount   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   -    -    -    -    -    -    4,237,833    1,000    4,443,000    -    4,444,000 
Sale of common stock from public offering   -    -    -    -    -    -    12,545,453    2,000    12,335,000    -    12,337,000 
Issuance of common stock from warrant exercise   -    -    -    -    -    -    1,965,594    -    2,165,000    -    2,165,000 
Fair value of warrants issued to Series A Preferred stockholders   -    -    -    -    -    -    -    -    (3,951,000)   -    (3,951,000)
Conversion of Series A Preferred to common stock   -    -    -    -    (1,990)   -    1,405,274    -    -    -    - 
Fair value of common shares issued for services   -    -    -    -    -    -    962,583    -    1,126,000    -    1,126,000 
Fair value of vested restricted stock awards   -    -    -    -    -    -    1,050,856    -    2,211,000    -    2,211,000 
Fair value of vested stock options and warrants   -    -    -    -    -    -    -    -    1,463,000    -    1,463,000 

Extinguishment

of derivative liability
   -    -    -    -    -    -    -    -    159,000    -    159,000 
Class A units issued upon incorporation of Verb Acquisition Co.   100    -    -    -    -    -    -    -    -    -    - 
Fair value of Class B units issued for the acquisition of Ascend Certification   -    -    2,642,159    3,065,000    -    -    -    -    -    -    3,065,000 
Net loss   -    -    -    -    -    -    -    -    -    (12,690,000)   (12,690,000)
Balance at September 30, 2020   100   $-    2,642,159   $3,065,000    2,406   $-   46,663,790   $5,000   $87,979,000   $(69,275,000)  $21,774,000 

 

  

Class A Units

   Class B Units   Preferred Stock   Common Stock   Additional
Paid-in
   Accumulated     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                                             
Balance at June 30, 2020   

-

   $

-

    -   $-    3,246   $      -   30,267,063   $3,000   $71,399,000   $(61,955,000)  $9,447,000 
Sale of common stock from public offering   -    -    -    -    -    -    12,545,453    2,000    12,335,000    -    12,337,000 
Issuance of common stock from warrant exercise   -    -    -    -    -    -    1,965,594    -    2,165,000    -    2,165,000 
Conversion of Series A Preferred to common stock   -    -    -    -    (840)   -    663,341    -    -    -    - 
Fair value of common shares issued for services   -    -    -    -    -    -    193,533    -    230,000    -    230,000 
                                                        
Fair value of vested restricted stock awards   -    -    -    -    -    -    1,028,806    -    1,002,000    -    1,002,000 
Fair value of vested stock options and warrants   -    -    -    -    -    -    -    -    689,000    -    689,000 
Extinguishment of derivative liability   -    -                                  159,000    -    159,000 
Class A units issued upon incorporation of Verb Acquisition Co.   100    -    -    -    -    -    -    -    -    -    - 
Fair value of Class B Units issued for the acquisition of Ascend Certification   -    -    2,642,159    3,065,000    -    -    -    -    -    -    3,065,000 
Net loss   -    -    -    -    -    -    -    -    -    (7,320,000)   (7,320,000)
Balance at September 30, 2020   100   $-    2,642,159   $3,065,000    2,406   $-   46,663,790   $5,000   $87,979,000   $(69,275,000)  $21,774,000 

 

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

 

6
 

 

   Preferred Stock   Common Stock       Additional
Paid-in
   Accumulated     
   Shares   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)
                                         
Sale of common stock from public offering   -    -    -    6,549,596    1,000    18,362,000    -    18,363,000 
Fair value of common stock issued for acquisition   -    -    -    3,327,791    -    7,820,000    -    7,820,000 
Fair value of common stock issued to settle accounts payable   -    -    -    4,142    -    10,000    -    10,000 
Fair value of common stock and warrants issued to settle notes payable   -    -    -    598,286    -    1,410,000    -    1,410,000 
Fair value of common stock upon conversion of convertible debt   -    -    -    182,333    -    410,000    -    410,000 
Common shares issued upon of warrants   -    -    -    173,714    -    45,000    -    45,000 
Common stock upon issuance on convertible debt   -    -    -    25,272    -    182,000    -    182,000 
Fair value of vested stock options   -    -    -    -    -    1,950,000    -    1,950,000 
Issuance of Series A convertible preferred stock   -    5,030    -    -    -    4,688,000    -    4,688,000 
Fair value of warrants issues with Series A convertible preferred stock   -    -    -    -    -    (4,688,000)   -    (4,688,000)
Fair value of common shares issued for services        -    -    354,288    -    930,000    -    930,000 
Issuance of fractional shares   -    -    -    139,036    -    -    -    - 
Net loss   -    -    -    -    -    -    (8,466,000)   (8,466,000)
Balance at September 30, 2019   -    5,030   $-    23,409,949   $2,000    66,730,000   $(49,133,000)  $17,599,000

 

                       Additional         
   Preferred Stock   Common Stock       Paid-in   Accumulated     
   Shares   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                                 
Balance at June 30, 2019   -    -   $-    22,655,185   $2,000   $64,617,000   $(46,018,000)  $18,601,000 
                                         
Sale of common stock from public offering   -    -    -    -    -    (90,000)   -    (90,000)
Fair value of common stock issued to settle accounts payable   -    -    -    598,286    -    1,410,000    -    1,410,000 
Fair value of vested stock options and warrants        -    -    -    -    591,000    -    591,000 
Fair value of common shares issued for services   -    -    -    156,478    -    202,000    -    202,000 
Issuance Series A convertible preferred stock   -    5,030    -    -    -    4,688,000    -    4,688,000 
Fair value warrants issued with Series A convertible preferred stock   -    -    -    -    -    (4,688,000)   -    (4,688,000)
Net loss   -    -    -    -    -    -    (3,115,000)   (3,115,000)
Balance at September 30, 2019   -    5,030   $-    23,409,949   $2,000   $66,730,000   $(49,133,000)  $17,599,000 

 

The accompanying notes to the condensed consolidated financial statements

 

7
 

 

VERB TECHNOLOGY COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

   For the Nine months ended 
   September 30,
2020
   September 30,
2019
 
         
Operating Activities:          
Net loss  $(12,690,000)  $(8,466,000)
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   4,796,000    2,880,000 
Financing costs   248,000    1,625,000 
Amortization of debt discount   384,000    1,647,000 
Change in fair value of derivative liability   (4,295,000)   (3,320,000)
Debt extinguishment, net   -    (1,536,000)
Depreciation and amortization   1,108,000    1,025,000 
Amortization of right-of-use assets   407,000    150,000 
Allowance for inventory   28,000    5,000 
Allowance for doubtful accounts   (14,000)   31,000 
Effect of changes in assets and liabilities:          
Accounts receivable   152,000    (278,000)
Prepaid expenses   (175,000)   37,000 
Inventory   63,000    90,000 
Other assets   -    (41,000)
Accounts payable, accrued expenses, and accrued interest   646,000    280,000 
Operating lease liability   (286,000)   (109,000)
Deferred revenue and customer deposits   (162,000)   (526,000)
Net cash used in operating activities   (9,790,000)   (6,506,000)
           
Investing Activities:          
Cash paid upon acquisition of subsidiary   -    (15,000,000)
Cash acquired upon acquisition of subsidiary   229,000    557,000 
Purchase of property and equipment   (317,000)   (134,000)
Net cash used by investing activities   (88,000)   (14,577,000)
           
Financing Activities:          
Proceeds from sale of common stock   16,781,000    18,524,000 
Proceeds from sale of preferred stock   -    4,688,000 
Proceeds from issuance of notes payable   1,367,000    1,300,000 
Advances on future receipts   728,000    - 
Proceeds from convertible note payable   -    432,000 
Proceeds from related party notes payable   -    58,000 
Proceeds from warrant exercise   2,165,000    45,000 
Payment of convertible notes payable   -    (2,025,000)
Payment of notes payable   -    (630,000)
Payment of related party notes payable   -    (58,000)
Payment of advances of future receipts   (1,424,000)   - 
Net cash provided by financing activities   19,617,000    22,334,000 
           
Net change in cash   9,739,000    1,251,000 
           
Cash - beginning of period   983,000    634,000 
           
Cash - end of period  $10,722,000   $1,885,000 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $100,000   $146,000 
           
Supplemental disclosure of non-cash investing and financing activities:          
Issuance of note payable upon acquisition of subsidiary  $1,885,000   $- 
Fair value of common stock issued for subscription agreement  $340,000   $- 
Fair value of restricted awards returned  $485,000   $- 
Fair value of class B units issued upon acquisition of subsidiary  $3,065,000   $- 
Fair value of common stock issued upon acquisition of subsidiary  $-   $7,820,000 
Conversion of note payable and accrued interest to common stock  $-   $1,184,000 
Fair value of derivative liability from issuance of convertible debt, inducement shares and warrant features  $3,951,000   $6,561,000 
Fair value of warrants issued and beneficial conversion feature to extinguish debt  $-   $719,000 
Fair value of common shares, warrants and beneficial conversion feature of issued convertible note  $-   $592,000 
Offset of deferred offering costs to proceeds received  $-   $162,000 
Common stock issued to settle accounts payable  $-   $10,000 
Lease assets and liabilities recorded upon adoption of ASC 842  $-   $1,856,000 
Assets acquired from the acquisition of subsidiary  $449,000   $3,364,000 
Liabilities assumed from the acquisition of subsidiary  $743,000   $3,221,000 

 

The accompanying notes to the condensed consolidated financial statements

 

8
 

 

VERB TECHNOLOGY COMPANY, INC.

Notes to Condensed Consolidated Financial Statements

For the Nine months ended September 30, 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.

 

On 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.

 

On 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. The par value per share of our Common Stock was not affected by the Reverse Stock Split. All shares and per share amounts have been retroactively restated as if the reverse split occurred at the beginning of the earliest period presented.

 

Nature of Business

 

We are a Software-as-a-Service (“SaaS”) applications platform developer. Our platform is comprised of a suite of interactive video-based 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 Stream eCommerce 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. We use the term “client” and “customer” interchangeably.

 

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/A for the fiscal year ended December 31, 2019 filed with the SEC on June 4, 2020. The 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., Verb Direct, LLC, its wholly owned subsidiary, and Verb Acquisition Co, LLC, its wholly owned subsidiary. Intercompany transactions have been eliminated in the consolidation.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the nine months ended September 30, 2020, the Company incurred a net loss of $12,690,000 and used cash in operations of $9,790,000. 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 September 30, 2020, we had cash on hand of $10,772,000. We believe we have sufficient cash to sustain operations through September 2021. 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 September 30, 2020, we had no customers that accounted for 10% of our accounts receivable individually. As of December 31, 2019, we had one customer that accounted for 10% of our accounts receivable individually and in aggregate. As of September 30, 2020 and 2019, we had no customers who accounted for 10% or more of our revenues.

 

As of September 30, 2020, we had two vendors that accounted for 10% or more of our accounts payable individually and 38% in aggregate. As of December 31, 2019, we had one vendor that accounted for 10% or more of our accounts payable individually and in aggregate. As of September 30, 2020 and 2019, we had one vendor that accounted 10% or more of our purchases.

 

11
 

 

Reclassifications

 

Certain revenue amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications consist of reclassification of digital revenue between SaaS recurring subscription revenue and other digital revenue to provide additional clarity. These reclassifications had no effect to the previously reported net loss.

 

Revenue Recognition

 

The Company derives its revenue primarily from subscriptions to its digital SaaS application services, though it also derives revenue from certain non-digital services, such as printing and fulfillment services, the Company provides to some of its larger enterprise clients. The subscription revenue from the application services are recognized over the life of the subscription contracts and any extensions thereto. While the Company has been offering subscription services for a limited period of time, to date, the Company estimates the life of the subscription period to be approximately 36 months. The Company also charges customers setup, design, and installation fees for the development of websites among other associated and complimentary services. 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 non-digital revenue, and the related costs are reflected in cost of non-digital 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 the digital delivery of access to our applications, and our performance obligations are satisfied at that time. Shipping and handling activities for our non-digital services 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.

 

Design assets of the websites and applications are recognized when the work is completed. Licensing revenue is recognized over the estimated subscription period.

 

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

 

SaaS recurring subscription revenue – represents digital subscription-based SaaS recurring revenue associated with verbCRM, verbLEARN, and verbLIVE. The revenue is recognized over the subscription period.

 

Other Digital – represents digital non-subscription-based revenue consisting of product sample revenue as well as design fees generated through or in connection with our applications. The revenue for samples is recognized upon completion and shipment, while the design fees are recognized when the service has been rendered and the app is delivered to the customer.

 

Welcome kits and fulfilment – We offer design and printing services to certain of our larger clients who request corporate starter kits for their new sales reps, and fulfillment of various customer products that our clients use for their marketing needs. The revenue is recognized upon completion and shipment of the starter kits or fulfillment products to the customer.

 

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

 

Contract Liabilities

 

Contract liabilities represents consideration received from customers under a revenue contract but the Company has not yet delivered or completed its performance obligation to the customer.

 

Cost of Revenue

 

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

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

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. As of September 30, 2020, and 2019, the Company had total outstanding options of 5,099,038 and 2,914,641, respectively, and warrants of 13,351,245 and 11,132,960, respectively, outstanding restricted stock awards of 2,908,530 and 0, and 2,642,159 shares common shares potentially issuable from our Class B Units that were issued in August 2020, were excluded from the computation of net loss per share because they are anti-dilutive.

 

Goodwill and Intangible Assets

 

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.

 

The acquisition of Verb Acquisition Co formerly Ascend Certification, occurred on September 4, 2020. The Company will perform its first impairment test in fiscal 2021.

 

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 September 30, 2020 or December 31, 2019.

 

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.

 

14
 

 

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 various revenue channels. 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.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective July 1, 2024, for the Company. Early adoption is permitted, but no earlier than July 1, 2021, including interim periods within that year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but currently does not believe ASU 2020-06 will have a significant impact on the Company.

 

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.

 

15
 

 

3. ACQUISITIONS

 

a.ACQUISITION OF VERB DIRECT

 

On April 12, 2019, Verb completed its acquisition of Verb Direct (formerly known as Sound Concepts, Inc.) 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 a 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 for a total purchase price of $22,820,000.

 

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 

 

16
 

 

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 nine months ended September 30, 2020, the Company recorded amortization expense of $945,000. As of September 30, 2020, the remaining unamortized balance of the intangible assets was $4,420,000.

 

Subsequent to its acquisition, Verb Direct recognized revenues in the aggregate of $7.7 million and $6.6 million during the nine months ended September 30, 2020 and 2019, respectively and $2.8 million and $2.9 million during the three months ended September 30, 2020 and 2019, respectively.

 

17
 

 

b. ACQUISITION OF ASCEND CERTIFICATION

 

On September 4, 2020, Verb Acquisition Co., LLC (“Verb Acquisition”), a subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Ascend Certification, LLC, dba SoloFire (“SoloFire”), the sellers party thereto (collectively, the “Sellers”), and Steve Deverall, solely in his capacity as the seller representative, under which Sellers agreed to sell their entire interest in SoloFire, representing all of the outstanding limited liability company membership interests of SoloFire, to Verb Acquisition for a base purchase price of $5,700,000, subject to certain post-closing adjustments totaling $750,000 for an adjusted purchase price of $4,950,000. As a result, Verb Acquisition issued to the Sellers an amended promissory note of $1,885,000 and 2,642,159 Class B Units of Verb Acquisition which are exchangeable for 2,642,159 shares of Verb’s Common Stock with an estimated fair value of $3,065,000 (see Note 16) for a total purchase price of $4,950,000. The promissory note is unsecured, bears interest at a rate of 0.14% per annum and will mature in October 2020. The amended promissory note was paid in full on October 1, 2020.

 

The acquisition was intended to augment and diversify Verb’s SaaS business. Key factors that contributed to the recorded provisional goodwill and intangible assets in the aggregate of $5,245,000 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 SaaS business.

 

Verb is required to allocate the purchase price to the acquired tangible assets, identifiable intangible assets, and assumed liabilities based on their fair values. At the date of the acquisition and of this Quarterly Report on Form 10-Q, management has not yet finalized its valuation analysis. The fair values of the assets acquired, as set forth below, are considered provisional and subject to adjustment as additional information is obtained through the purchase price measurement period (a period of up to one year from the closing date). Any prospective adjustments would change the fair value allocation as of the acquisition date. The Company is still in the process of reviewing underlying models, assumptions and discount rates used in the valuation of provisional goodwill and intangible assets. The following table summarizes the provisional fair value of the assets assumed and liabilities acquired and the provisional purchase price allocation on the date of acquisition:

 

Assets Acquired:        
Cash  $229,000      
Accounts receivable   219,000   $448,000 
Liabilities Assumed:          
Current liabilities   (653,000)     
Long-term liabilities   (90,000)   (743,000)
Intangible assets (provisional)        1,883,000 
Goodwill (provisional)        3,362,000 
Purchase Price       $4,950,000 

 

The provisional 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 provisional intangible assets, which consist of developed technology of $1,700,000 are being amortized over 5-years, customer relationships of $120,000 are being amortized over 3 years, non-competition clause of $60,000 is being amortized over 3 years, and domain names of $3,000 are determined to have infinite lives but will be tested for impairment on an annual basis.

 

During the nine months ended September 30, 2020, the Company recorded amortization expense of $33,000. As of September 30, 2020, the remaining unamortized balance of the intangible assets was $1,850,000.

 

The following comparative unaudited statements of operations present the Company’s results of operations after giving effect to the purchase of Verb Direct and SoloFire based on the historical financial statements of the Company and Verb Direct and SoloFire. The unaudited pro forma statements of operations for the nine and three months ended September 30, 2020 and 2019 give effect to the transaction to the merger as if it had occurred on January 1, 2019.

 

  

Three months

ended

September 30, 2020

  

Three months

ended

September 30, 2019

  

Nine months
ended

September 30,
2020

  

Nine months
ended

September 30,
2019

 
   (Proforma unaudited)   (Proforma unaudited)   (Proforma unaudited)   (Proforma,
unaudited)
 
SaaS recurring subscription revenue  $1,661,000   $1,201,000   $4,511,000   $3,383,000 
Other digital revenue   360,000    485,000    1,166,000    1,354,000 
Welcome kits and fulfilment   836,000    1,164,000    2,277,000    5,213,000 
Shipping   186,000    271,000    614,000    1,443,000 
Total Revenue   3,043,000    3,121,000    8,568,000    11,393,000 
                     
Cost of revenue   1,344,000    1,548,000    3,661,000    5,951,000 
                     
Gross margin   1,699,000    1,573,000    4,907,000    5,442,000 
                     
Operating expenses   (9,771,000)   (5,353,000)   (21,615,000)   (16,100,000)
                     
Other income, net   574,000    526,000    3,550,000    1,406,000 
                     
Net loss  $(7,498,000)  $(3,254,000)  $(13,158,000)  $(9,252,000)

 

18
 

 

4. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of September 30, 2020 and December 31, 2019.

 

   September 30, 2020
(unaudited)
   December 31, 2019 
         
Computers  $29,000   $29,000 
Furniture and fixture   75,000    75,000 
Machinery and equipment   40,000    39,000 
Leasehold improvement   1,057,000    741,000 
Total property and equipment   1,201,000    884,000 
Accumulated depreciation   (294,000)   (164,000)
Total property and equipment, net  $907,000   $720,000 

 

Depreciation expense amounted to $130,000 and $35,000 for nine months ended September 30, 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 offices located in Newport Beach, California 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 September 30, 2020 and December 31, 2019, the Company had recorded right of use assets of $2,868,000 and $3,275,000, respectively, net of amortization. As September 30, 2020 and December 31, 2019, the Company had recorded lease liabilities of $3,696,000 and $3,982,000, respectively, related to these leases.

 

  

Period Ended

September 30, 2020
(unaudited)

  

Period Ended

September 30, 2019
(unaudited)

 
Lease cost          
Operating lease cost (included in general and administration in the Company’s statement of operations)  $524,000   $281,000 
           
Other information          
           
Cash paid for amounts included in the measurement of lease liabilities  $383.000   $281,000 
Weighted average remaining lease term – operating leases (in years)   4.70    5.44 
Average discount rate – operating leases   4.0%   4.0%

 

   September 30, 2020
(unaudited)
   December 31, 2019 
Operating leases          
Right-of-use assets, net of amortization of $756,000 and $349,000, respectively  $2,868,000   $3,275,000 
           
Short-term operating lease liabilities  $595,000   $391,000 
Long-term operating lease liabilities   3,101,000    3,591,000 
Total operating lease liabilities  $3,696,000   $3,982,000 

 

19
 

 

6. ADVANCE OF FUTURE RECEIPTS

 

The Company has the following advances on future receipts as of September 30, 2020:

 

Note  Issuance Date  Maturity Date  Interest
Rate
   Original Borrowing   Balance at
September 30, 2020
   Balance at
December 31, 2019
 
                       
Note 1  December 24, 2019  June 30, 2020   10%  $506,000   $-   $503,000 
Note 2  December 24, 2019  June 30, 2020   10%   506,000    -    503,000 
Note 3  June 30, 2020  February 25, 2021   10%   506,000    297,000    - 
Note 4  June 30, 2020  February 25, 2021   10%   506,000    297,000    - 
Total             $1,012,000    594,000    1,006,000 
Debt discount                   (176,000)   (274,000)
Net                  $418,000   $732,000 

 

Note 1 and 2

 

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 auto withdrew an aggregate of $6,000 from the Company’s operating account each banking day. The term of the agreement extended until the advances are paid in full. The notes did not bear any interest, however, the interest was imputed at a rate of 28% based on the face value of the note. These advances were secured by the Company’s tangible and intangible assets.

 

The Company accounted these advances on future receipts as a liability pursuant to current accounting guidelines. As a result, the Company recorded a liability of $1,012,000 to account for the future receipts sold and a debt discount of $285,000 to account for the difference between the future receipts sold and the cash received. The debt discount was being amortized over the term of the agreement. As of December 31, 2019, outstanding balance of the advances amounted to $1,006,000 and the unamortized debt discount of $274,000.

 

During the period ended September 30, 2020, the Company paid the entire amount due of $1,006,000 and amortized the corresponding debt discount for $274,000.

 

Note 3 and 4

 

On June 30, 2020, the Company received two secured advances from the same 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 a result, the Company recorded a liability of $1,012,000 to account for the future receipts sold and a debt discount of $284,000 to account for the difference between the future receipts sold and the cash received. The debt discount is being amortized over the term of the agreement.

 

During the period ended September 30, 2020, the Company paid $418,000 the balance outstanding and amortized $108,000 of the debt discount. As of September 30, 2020 outstanding balance of the notes amounted to $594,000 and the unamortized balance of the debt discount was $176,000.

 

7. NOTES PAYABLE – RELATED PARTIES

 

The Company has the following related parties notes payable as of September 30, 2020 and December 31, 2019:

 

Note  Issuance Date  Maturity Date  Interest Rate   Original Borrowing   Balance at
September 30, 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                   -    (1,065,000)
Current                  $1,177,000   $112,000 

 

20
 

 

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

 

As of September 30, 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 September 30, 2020, and December 31, 2019, the outstanding principal balance of the note amounted to $112,000, respectively. As of September 30, 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 September 30, 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 $106,000 for nine months ended September 30, 2020 and 2019, respectively. The Company paid $100,000 and $96,000 in interest for the nine months ended September 30, 2020 and 2019, respectively.

 

8. NOTES PAYABLE

 

The Company has the following notes payable as of September 30, 2020:

 

Note  Issuance Date  Maturity Date  Interest
Rate
   Original Borrowing   Balance at
September 30, 2020
 
Note A  April 17, 2020  April 17, 2022   1.00%  $1,218,000   $1,218,000 
Note B  May 15, 2020  May 15, 2050   3.75%   150,000    150,000 
Note C  May 1, 2020  May 1, 2022   3.75%   90,000    90,000 
Note D  September 4, 2020  October 1, 2020   0.14%   1,982,000    1,885,000 
Total notes payable              3,440,000    3,343,000 
Non-current              1,458,000    1,458,000 
Current             $1,982,000   $1,885,000 

 

  (A)

On April 17, 2020, the Company received loan proceeds in the amount of $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 the earlier of (i) 24 weeks after the loan disbursement date and (ii) December 31, 2020 as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.

 

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. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of September 30, 2020.

 

21
 

 

  (B)

On May 15, 2020, the Company executed an unsecured loan with the U.S. Small Business Administration (SBA) under the Economic Injury Disaster Loan program in the amount of $150,000. The loan is secured by all tangible and intangible assets of the Company and payable over 30 years at an interest rate of 3.75% per annum. Installment payments, including principal and interest, will begin on May 15, 2021.

 

As part of the loan, the Company also received an advance of $10,000 from the SBA. While the SBA refers to this program as an advance, it was written into law as a grant. This means that the amount given through this program does not need to be repaid. As a result, the Company accounted this $10,000 as part of “Other Income” in the accompanying Statement of Operations.

     
  (C)

On May 1, 2020, SoloFire received loan proceeds in the amount of $90,000 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 the earlier of (i) 24 weeks after the loan disbursement date and (ii) December 31, 2020 as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.

 

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. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of September 30, 2020.

     
  (D)

  On September 4, 2020, Verb Acquisition issued a note payable to the owners of SoloFire, in the amount of $1,982,000, as part of the consideration related to the acquisition of SoloFire. The note bears interest at a rate of 0.14% per annum, with a maturity date of October 1, 2020.

 

Effective September 30, 2020, the note was amended to $1,885,000 to account for contractual working capital adjustments. All other terms remain the same. On October 1, 2020, Verb Acquisition paid off the note in full.

 

9. DEFERRED INCENTIVE COMPENSATION TO OFFICERS

 

Note  Date   Payment Date  Balance at
September 30, 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 these 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 a bonus for the successful up-listing to Nasdaq and the 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 these Employees. The Company will pay 50% of the Nasdaq up-listing award on January 10, 2021 and the remaining 50% on January 10, 2022.

 

22
 

 

10. CONVERTIBLE SERIES A PREFERRED STOCK AND WARRANT OFFERING

 

On August 14, 2019, we entered into a Securities Purchase Agreement (the “SPA”) with certain accredited investors (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 warrants (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 three months ended September 30, 2020, 1,990 shares of Preferred Stock were converted into 1,405,274 shares of Common Stock. As of September 30, 2020, 2,406 shares Series A Preferred stock are outstanding and potentially convertible into approximately 2.2 million shares of Common Stock.

 

11. DERIVATIVE LIABILITY

 

Under authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock, instruments that do not have fixed settlement provisions are deemed to be derivative instruments. The Company 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. As of December 31, 2019, the Company had recorded a derivative liability of $5,048,000.

 

During the period ended September 30, 2020, the Company recorded a derivative liability of $3,951,000 as a result of the issuance of 2,303,861 warrants to acquire common stock to Series A Preferred stockholders (see Note 12). The Company also recorded a change in fair value of ($4,295,000) to account for the changes in the fair value of these derivative liabilities during the nine months ended September 30, 2020. In addition, 95,000 shares of the Series A warrants that were accounted as derivative liability were exercised. As result, the Company computed the fair value of the corresponding derivate liability one last time which amounted to $159,000 and the pursuant to current accounting guidelines, the extinguishment was accounted as part of equity.

 

At September 30, 2020, the fair value of the derivative liability amounted to $4,545,000. The details of derivative liability transactions as of and for the periods ended September 30, 2020 and 2019 are as follows:

 

   September 30, 2020   September 30, 2019 
Beginning Balance  $5,048,000   $2,576,000 
Fair value upon issuance of notes payable and warrants   3,951,000    6,561,000 
Change in fair value   (4,295,000)   (3,320,000)
Extinguishment   (159,000)    (2,227,000)
Ending Balance  $4,545,000   $3,591,000 

 

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

 

   September 30, 2020  

Upon

Issuance

   December 31, 2019 
Stock Price  $1.08   $1.70   $1.55 
Exercise Price  $1.62   $1.55   $1.88 
Expected Life   2.78    5.0    3.53 
Volatility   107%   212%   216%
Dividend Yield   0%   0%   0%
Risk-Free Interest Rate   0.14%   2.47%   1.64%
                
Fair Value  $4,545,000   $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.

 

23
 

 

12. EQUITY TRANSACTIONS

 

The Company’s Common Stock activity for the nine months ended September 30, 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.

 

The Company’s private placement is exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the “Securities Act”), 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.

 

As a result of this private placement, from February through April 2020, a total of 4,237,833 shares of Common Stock were sold in exchange for cash proceeds of $4,444,000, net of direct fees and expenses in the aggregate of $641,000.

 

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.

 

Shares Issued as Part of the Company’s Public Offering

 

On July 24, 2020, the Company concluded its public offering pursuant to a registration statement on Form S-1 (File No. 333-239055) and issued and sold 12,545,453 shares of Common Stock (which included 1,636,363 shares of Common Stock sold pursuant to the exercise by the underwriters of an overallotment option). The net proceeds to the Company, after deducting the underwriting discounts and commissions and direct offering expenses was $12,337,000.

 

24
 

 

Shares Issued for Services

 

During the nine months ended September 30, 2020, the Company issued 962,583 shares of Common Stock to vendors for services rendered and to be rendered with a fair value of $1,126,000. 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.

 

13. RESTRICTED STOCK AWARDS

 

Pursuant to the Company’s December 2019 Omnibus Incentive Plan, a summary of restricted stock award activity for the nine months ended September 30, 2020 is presented below.

 

           Weighted-
Average Grant Date
 
   Shares   Fair Value   Fair Value 
             
Non-vested at December 31, 2019   1,486,354   $2,021,000   $1.36 
Granted   2,871,471    3,379,000    1.18 
Vested/deemed vested   (1,050,856)   (2,696,000)   1.26 
Returned   

(336,533

)   

485,000

    

1.31

 
Forfeited   (61,906)   (91,000)   1.47 
Non-vested at September 30, 2020   2,908,530   $3,544,000   $1.22 

 

On April 10, 2020, the board of directors of 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 number of Shares issued were determined 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 589,098 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 its vesting term.

 

During the period ended September 30, 2020, the Company granted an additional 2,871,471 shares of its restricted stock to employees and members of Board of Directors. The Restricted Stock Awards vest in various dates, starting on grant date up to July 2024. These Restricted Stock Awards were valued based on market value of the Company’s stock price at the respective date of grant and had aggregate fair value of $3,379,000, which is being amortized as stock compensation expense over its vesting term.

 

During the period ended September 30, 2020 336,533 shares granted to various employees that vested were returned to the Company in exchange for the Company paying the corresponding income and payroll taxes of these employees amounting $485,000. Pursuant to current accounting guidelines, the Company accounted the return of the 336,533 shares and the payment of $485,000 for income and payroll taxes paid on behalf the employees as a reduction in additional paid in capital.

 

The total fair value of restricted stock award that vested or deemed vested during the nine months ended September 30, 2020 was $2,696,000 and is included in selling, general and administrative expenses in the accompanying statements of operations. As of September 30, 2020, the amount of unvested compensation related to issuances of restricted stock award was $3,544,000 which will be recognized as an expense in future periods as the shares vest.

 

25
 

 

14. STOCK OPTIONS

 

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

 

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

 

A summary of option activity for the nine months ended September 30, 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   $1.73    2.54   $995,000 
Granted   1,035,637    1.37    -    - 
Forfeited   (170,321)   3.53    -    - 
Exercised   -    -    -    - 
Outstanding at September 30, 2020   5,099,038   $1.59    2.54   $- 
                     
Vested September 30, 2020   2,563,321   $1.89        $- 
                     
Exercisable at September 30, 2020   1,644,015   $2.16        $- 

 

At September 30, 2020, there was no intrinsic value as the exercise price of these stock options were greater than the market price.

 

During the nine months ended September 30, 2020 the Company granted stock options to employees to purchase a total of 1,035,637 shares of Common Stock for services to be rendered. The options have an average exercise price of $1.37 per share, expire in five years, and cliff vest over a period of 0.4 to 4 years from the grant date. The total fair value of these options at the grant date was approximately $1,242,000 using the Black-Scholes Option pricing model.

 

The total stock compensation expense recognized relating to vesting of stock options for the nine months ended September 30, 2020 amounted to $1,215,000. As of September 30, 2020, total unrecognized stock-based compensation expense was $3.8 million, which is expected to be recognized as part of operating expense through August 2024.

 

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

 

      Nine months ended September 30,  
      2020       2019  
Risk-free interest rate     0.17% - 0.39 %     1.55% - 2.75 %
Average expected term     1 to 5 years       3.6 to 5 years  
Expected volatility     270.10 - 270.57 %     180 – 275.29 %
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.

 

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15. WARRANTS

 

The Company has the following warrants outstanding as of September 30, 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   10,930,991   $3.07    4.25   $    - 
Granted   4,630,654    1.17    -    - 
Forfeited   (244,800)   3.53    -    - 
Exercised   (1,965,594)   1.10    -    - 
Outstanding at September 30, 2020, all vested   13,351,251   $2.50    3.63   $- 

 

At September 30, 2020, there was no intrinsic value as the exercise price of these stock warrants were greater than the market price.

 

During the period ended September 30, 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 12). In addition, the Company also granted warrants to certain shareholders to purchase 1,910,594 shares of common stock as part of settlement with regards to the Company’s public offering that occurred in July 2020 (see Note 12) . The warrants are fully vested upon grant, exercisable at $1.10 per share, expire in 0.01 year with an estimated fair value of $248,000 using the Black-Scholes Option pricing model. The Company accounted the estimated fair value of $248,000 as a financing costs.

 

During the period ended September 30, 2020, a total of 1,965,594 warrants were exercised into 1,965,594 shares of Common Stock at a weighted average exercise price of $1.10. The Company received cash of $2,165,000 upon exercise of the warrants.

 

16. ISSUANCE OF CLASS A and B UNITS

 

  a. Class A Units – during the period ended September 30, 2020, Verb Acquisition issued 100 Class A units to the Company as part of the organization of Verb Acquisition. The Class A Units have the following rights and privileges:

 

  1. Priority on distributions;
  2. Ability to remove the manager;
  3. Drag-along rights;
  4. Power to dissolve Verb Acquisition provided that a majority of the Class B Units also approve the dissolution;
  5. Ability to appoint a liquidator to wind up the affairs of Verb Acquisition;
  6. Entitled to distributions;
  7. Approve board appointments; and
  8. Approve any amendments to Verb Acquisition’s operating agreement, provided that a majority of the Class B Units also approve the amendment.

 

  b. Class B Units – during the period ended September 30, 2020, Verb Acquisition issued 2,642,159 Class B Units as part of its acquisition of SoloFire (see Note 3). The Class B Units have the following rights and privileges:

 

  1. Exchangeable for shares of the Company’s Common Stock at a conversion rate of 1 to 1;
  2. Power to dissolve Verb Acquisition, provided that a majority of the Class A Units also approve the dissolution;
  3. Entitled to profit distributions;
  4. Approve board appointments made by the Class A Units; and
  5. Approve any amendments to Verb Acquisition’s operating agreement, provided that a majority of the Class A Units also approve the amendment.

 

As the Class B Units are exchangeable for the Company’s Common Stock, for valuation purposes, the Company determined to use the trading price of the Company’s Common Stock at the date of the acquisition of SoloFire which amounted to $3,065,000.

 

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17. 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.

 

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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.

 

On May 15, 2020, we executed a binding Memorandum of Understanding with the lead plaintiff in the class action lawsuit to settle that action and release the claims asserted therein. The terms of the settlement are confidential pending submission to the court, and subject to several contingencies, including but not limited to court approval. We believe we have established an appropriate reserve to account for the potential settlement.

 

By Order dated October 27, 2020, the court granted preliminary approval of the class action settlement.

 

  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.

 

On November 5, 2020, we executed a binding settlement term sheet with the lead plaintiff in the derivative action to settle that action and release all claims asserted therein. The terms of the settlement are confidential pending submission to the court, and subject to several contingencies, including but not limited to court approval.

 

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 financial statements.

 

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Board of Directors

 

The Company has committed an aggregate of $475,000 in annual 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 September 30, 2020 was $309,000 As of September 30, 2020, total board fees to be recognized in future period amounted to $90,000 and will be recognized once the service has been rendered.

 

COVID-19

 

In March 2020, the World Health Organization declared that the rapidly spreading COVID-19 outbreak was a global pandemic (the “COVID-19 pandemic”). In response to the COVID-19 pandemic, many governments around the world have implemented, and continue to implement, a variety of measures to reduce the spread of COVID-19, including travel restrictions and bans, instructions to residents to practice social distancing, quarantine advisories, shelter-in place orders and required closures of non-essential businesses.

 

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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18. SUBSEQUENT EVENTS

 

Issuance of Common Stock

 

Subsequent to September 30, 2020, the Company issued 30,000 shares of Common Stock to vendors for services rendered with a fair value of $33,000. These shares of Common Stock were valued based on the market value of the Company’s stock price at the issuance date or the date the Company entered into the agreement related to the issuance.

 

Grant of Stock Options

 

Subsequent to September 30, 2020, the Company granted stock options to an employee to purchase a total of 914,171 shares of Common Stock for services rendered. The options have an average exercise price of $1.33 per share, expire in five years, and vest over a period of 0.5 to 4 years from grant date. The total fair value of these options at the grant date was $1,016,000 using the Black-Scholes option pricing model.

 

Restricted Stock Awards

 

Subsequent to September 30, 2020, the Company issued a 60,000 Restricted Stock Awards to an advisory board member that cliff vest quarterly over one year from grant date with an aggregate fair value of $68,000.

 

Registration of Common Stock, Options of Common Stock, and Shares of Common Stock Underlying Warrants

 

On October 20, 2020, the Company filed a registration statement on Form S-3 with the SEC. The prospectus contained in the registration statement to the proposed resale by the selling security holders named in the prospectus or their permitted assigns of an aggregate of up to 8,393,387 shares of our Common Stock held by the selling security holders, which amount consists of (i) 5,087,326 shares of Common Stock outstanding as of the date of the registration statement, (ii) an aggregate of 416,199 shares of Common Stock issuable upon exercise of Common Stock purchase warrants issued to a non-U.S. consultant in connection with a private placement of Common Stock to certain of the Company’s selling security holders, (iii) 247,703 restricted stock units granted pursuant to a Restricted Stock Award Agreement, and (iv) an aggregate of 2,642,159 shares of Common Stock which will be issued in the future from time to time to those of the Company’s selling security holders that are holders of Class B Units of Verb Acquisition under an exchange agreement among the holders of Class B Units pursuant to which the holders of Class B Units may exchange their Class B Units for shares of the Company’s Common Stock on a one-for-one basis.

 

Payment of Note Payable

 

In October 2020, the Company paid in full the note payable of $1,885,000 issued in September 2020 for the acquisition of SoloFire (see Note 3 and 8).

 

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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 September 30, 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 cause 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 interactive video-based 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 Stream eCommerce 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 ecommerce 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. For the nine months ended September 30, 2020, verbCRM was the primary source of subscription-based SaaS recurring digital revenue.

 

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, and adds gamification features that enhance the learning aspects of the application. verbLEARN launched in the fourth quarter of 2019, and for the nine months ended September 30, 2020 it was not a significant source of subscription-based SaaS recurring digital revenue because during that period it has been offered to our clients as a free-trial add-on service.

 

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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 live stream platform that allows hosts to utilize a variety of novel sales-driving features, including placing interactive icons on-screen that appear on the scr