VERB TECHNOLOGY COMPANY, INC. Forward-Looking Statements
The following discussion and analysis of the results of operations and financial condition of our company for the three and six month periods endedJune 30, 2021 and 2020 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 toVerb Technology Company, Inc. , aNevada 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 ("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 white-labelled Customer Relationship Management ("CRM") application for large sales-based enterprises; verbTEAMS, our CRM application for small-and medium-sized businesses and solopreneurs; verbLEARN, our Learning Management System application, verbLIVE, our Live Stream eCommerce application, and verbMAIL, our interactive video sales communication tool integrated with Microsoft Outlook. 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 on their devices in real time, 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 our platform applications. Our Products verbCRM combines the capabilities of 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, among many other novel features and functionalities designed to eliminate or reduce friction from the sales process for our users. The verbCRM app is designed to be easy to use and navigate, and takes little time and training for a user to begin using the app effectively. It usually takes less than four minutes for a novice user to create an interactive video from our app. Users can add interactive icons to pre-existing videos, as well as to newly created videos shot with practically any mobile device. verbCRM interactive videos can be distributed via email, text messaging, chat app, or posted to popular social media directly and easily from our app. No software download is required to view Verb interactive videos on virtually any mobile or desktop device, including smart TVs. verbLEARN is an interactive, video-based learning management system that incorporates all of the clickable in-video technology featured in our verbCRM application and adapts them 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, in addition to adding gamification features that enhance the learning aspects of the application. 32 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 screens of all viewers, providing in-video click-to-purchase capabilities for products or services featured in the live video broadcast, in real-time, driving friction-free selling. verbLIVE also provides the host with real-time viewer engagement data and interaction analytics. verbLIVE is entirely browser-based, allowing it to function easily and effectively on all devices without requiring the host or the viewers to download software, and is secured through end-to-end encryption. verbTEAMS is our interactive, video-based CRM for small-and medium-sized businesses and solopreneurs. verbTEAMS also incorporates verbLIVE as a bundled application. verbTEAMS features self-sign-up, self-onboarding, self-configuring, content management system capabilities, user level administrative capabilities, and high-quality analytics capabilities in both mobile and desktop platforms that sync with one another. It also has a built-in one-click sync capability with Salesforce.
Verb Partnerships and Integrations
verbMAIL for Microsoft Outlook is a product of our partnership with Microsoft and is available as an add-in to Microsoft Outlook for Outlook and Office 365 subscribers. verbMAIL allows users to create interactive videos seamlessly within Outlook by clicking the verbMAIL icon in the Outlook toolbar. The videos are automatically added to an email and can be sent easily through Outlook using the user's contacts they already have in Outlook. The application allows users to easily track viewer engagement and together with other features represents an effective sales tool available for all Outlook users worldwide. Currently offered without charge, a subscription-based paid version with a suite of enhanced features for sales and marketing professionals is slated for release later this year.
verbMAIL for
Salesforce Integration. We have completed and deployed the integration of verbLIVE into Salesforce and have launched a joint marketing campaign with Salesforce to introduce the verbLIVE plug-in functionality to current Salesforce users. We have also developed a verbCRM sync application for Salesforce users that is currently being utilized by at least one of our large enterprise clients and the verbLIVE plug-in is now being offered to all Salesforce users on a monthly subscription fee basis while we work to build adoption rates. Popular Enterprise Back-Office System Integrations. We have integrated verbCRM into systems offered by 17 of the most popular direct sales back-office system providers, such as Direct Scale, Exigo, By Design, Thatcher, Multisoft, Xennsoft, and Party Plan. Direct sales back-office systems provide many of the support functions required for direct sales operations, including payroll, customer genealogy management, statistics, rankings, and earnings, among other direct sales financial tracking capabilities. The integration into these back-office providers, facilitated through our own API development, allows single sign-on convenience for users, as well as enhanced data analytics and reporting capabilities for all users. Our experience confirms that our integration into these back-end platforms accelerates the adoption of verbCRM by large direct sales enterprises that rely on these systems and as such, we believe this represents a competitive advantage.
Non-Digital Products and Services
Historically, we provided certain non-digital services to some of our enterprise clients such as printing and fulfillment services. We designed and printed welcome kits and starter kits for their marketing needs and provided fulfillment services, which consisted of managing the preparation, handling and shipping of our client's custom-branded merchandise they use for marketing purposes at conferences and other events. We also managed the fulfillment of our clients' product sample packs that verbCRM users order through the app for automated delivery and tracking to their customers and prospects. However, inMay 2020 , we executed a contract with Range Printing ("Range"), a company in the business of providing enterprise class printing, sample assembly, warehousing, packaging, shipping, and fulfillment services. Pursuant to the contract, through an automated process we have established for this purpose, Range receives orders for samples and merchandise from us as and when we receive them from our clients and users, and print, assemble, store, package and ship such samples and merchandise on our behalf. The Range contract provides for a revenue share arrangement based upon the specific services to be provided by Range that is designed to maintain our relationship with our clients by continuing to service their non-digital needs, while eliminating the labor and overhead costs associated with the provision of such services by us. Our Market Our client base consists primarily of multi-national direct sales enterprises to whom we provide white-labeled, client-branded versions of our products. Our clients also include large professional associations, educational institutions, including school districts, auto sales, auto leasing, insurance, real estate, home security, not-for-profits, as well as clients in the health care industry, and the burgeoning CBD industry, among other business sectors. As ofAugust 9, 2021 , we provide subscription-based application services to approximately 140 enterprise clients for use in over 60 countries, in over 48 languages, which collectively account for a user base generated through more than 2.8 million downloads of our verbCRM application. Among the new business sectors targeted for this year are medical equipment and pharmaceutical sales, armed services and government institutions, small businesses and individual entrepreneurs. 33 Revenue Generation
A description of our principal revenue generating activities is as follows:
1. Digital Revenue which is divided into two main categories:
a. SaaS recurring digital revenue based on contract-based subscriptions to our
verb app products and platform services which include verbCRM, verbLEARN,
verbLIVE, and verbTeams. The revenue is recognized over the subscription
period. verbMAIL was released after the reporting period covered by this Form
10-Q and as such no revenue is attributed to verbMAIL.
b. Non-SaaS, non-recurring digital revenue, which is revenue generated by the
use of our app products and in-app purchases, such as sampling and other
services obtained through the app. 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.
2. Non-digital revenue, which is revenue we generate from non-app, non-digital
sources through ancillary services we provide as an accommodation to our
clients and customers. These services, which we now outsource to a strategic
partner as part of a cost reduction plan we instituted in 2020, include:
a. Design, printing services, and fulfillment. The revenue is recognized upon
completion and shipment of products or fulfillment to the customer.
b. Shipping services. The revenue is recognized when the corresponding products
or fulfillment are shipped.
Recent Developments
34
SoloFire Acquisition
In September 2020 we completed the acquisition of Ascend Certification, LLC , dba
SoloFire ("SoloFire"). SoloFire develops and markets leading SaaS-based sales
enablement applications for sales representatives of medical device, diagnostics
and life sciences companies. SoloFire's platform empowers sales and marketing
teams by allowing them to efficiently find, show, share and track regulatory and
industry compliant, accurate and up-to-date content. With SoloFire, content can
be locally stored, making it accessible without Wi-fi or mobile data, which is
often a challenge in hospital environments. The sales tools can be tailored to a
company's unique medical products, while creating personalized sales
conversations with physicians and other stakeholders. In addition, insights from
in-depth analytics capabilities enable sales and marketing teams to identify and
replicate the content that most resonates with clients, driving higher
conversion rates. We have begun combining VERB's sales enablement solutions,
including our interactive video and interactive livestream ecommerce features,
with the SoloFire mobile and desktop applications to provide even more powerful
tools for this exciting new target market.
Impact of COVID-19 on Our Business and Industry
Throughout 2020 and the first six months of 2021, governments and businesses around the world continue to take actions to mitigate the spread of COVID-19 and its variants, including, but not limited to, shelter-in-place orders, quarantines, significant restrictions on travel, as well as restrictions that prohibit many employees from going to work. Uncertainty with respect to the economic effects of the pandemic has introduced significant volatility in the financial markets. Despite increased vaccine distribution programs and loosening of COVID-19 related restrictions in the regions in which we operate during the six months endedJune 30, 2021 , both the pandemic and ongoing containment and mitigation measures have had, and are likely to continue to have, an adverse impact on the global andU.S. economies, the severity and duration of which are uncertain. It is likely that government stabilization efforts will only partially mitigate the consequences to the economy, and it is possible that COVID-19 variants may lead to a re-introduction of lock-down measures in future periods. As such, both the pandemic and containment and mitigation measures may adversely affect our business, operations and financial condition by, among other things, reducing demand for our applications, impairing the productivity of our workforce, and reducing our access to capital. The extent to which the COVID-19 pandemic will impact our business, financial conditions, and results of operations in the future remains uncertain and will be affected by a number of factors. These include the duration and extent of the pandemic, the emergence of variants to COVID-19 the duration and extent of imposed or recommended containment and mitigation measures, the extent, duration, and effective execution of government stabilization and recovery efforts, including those from the successful distribution of effective vaccines. The COVID-19 pandemic may have long-term effects on the nature of the office environment and remote working. This may present operational and workplace culture challenges that may adversely affect our business. However, we are committed to our employees returning to the workplace in the long-term. Throughout the six months endedJune 30, 2021 and through the filing of this Quarterly Report, we have encouraged safe practices designed to stem the infection and spread of COVID-19 within our workforce and beyond and to maintain the mental health and well-being of our employees. Beginning inMarch 2020 , in an effort to protect our employees and comply with applicable government orders, we restricted non-essential employee travel and transitioned our employees to a remote work environment. We currently expect the majority of our employees will continue working remotely at least through the end of 2021. Our workforce has continued to effectively develop and support our product and service offerings notwithstanding the current environment. We began the period endedJune 30, 2021 with healthy demand for our products and services, many of which are designed to enable our customers to manage their businesses virtually. In the six months endedJune 30, 2021 , we experienced some uncertainty regarding whether there would be variability in demand for the services we provide on our platform after lock-down measures were implemented. We expect demand variability for our products and services may continue as a result of the COVID-19 pandemic; however, our sales team reported a higher level of interest in our products and services during the period endedJune 30, 2021 . Although the impact has not been material to date, a prolonged downturn in economic conditions could have a material adverse effect on our customers and demand for our services. We continue to actively communicate with and listen to our customers to ensure we are responding to their needs in the current environment with innovative solutions that will not only be beneficial now but also over the long-term. We monitor developments related to COVID-19 and remain flexible in our response to the challenges presented by the pandemic. To mitigate the adverse impact COVID-19 may have on our business and operations, we implemented a number of measures in the year endedDecember 31, 2020 to protect the health and safety of our employees, as well as to strengthen our financial position. These efforts include eliminating, reducing, or deferring non-essential expenditures, as well as complying with local and state government recommendations to protect our
workforce. 35 Results of Operations
Three Months Ended
The following is a comparison of our results of operations for the three months
ended
Three Months Three Months
Ended June 30, Ended June 30,
2021 2020 Change
Revenue
SaaS recurring subscription revenue
209,000 406,000 (197,000 )
Design, printing, and fulfillment 477,000 713,000 (236,000 )
Shipping 105,000 259,000 (154,000 )
Total revenue 2,392,000 2,652,000 (260,000 )
Cost of Revenue
Digital 569,000 264,000 305,000
Design, printing, and fulfillment 464,000 662,000 (198,000 )
Shipping 86,000 209,000 (123,000 )
Total cost of revenue 1,119,000 1,135,000 (16,000 )
Gross margin 1,273,000 1,517,000 (244,000 )
Operating expenses
Research and development 3,213,000 1,627,000 1,586,000
Depreciation and amortization 400,000 357,000 43,000
General and administrative 6,542,000 4,018,000 2,524,000
Total operating expenses 10,155,000 6,002,000 4,153,000
Loss from operations (8,882,000 ) (4,485,000 ) (4,397,000 )
Other income (expense), net
Other income (expense) 20,000 9,000 11,000
Interest expense - amortization of debt
discount (565,000 ) (137,000 ) (428,000 )
Change in fair value of derivative
liability (2,445,000 ) 1,228,000 (3,673,000 )
Gain on extinguishment of PPP note
payable 91,000 - 91,000
Interest expense (31,000 ) (39,000 ) 8,000
Total other income, net (2,930,000 ) 1,061,000 (3,991,000 )
Net loss to common stockholders$ (11,812,000 ) $ (3,424,000 ) $ (8,388,000 ) 36 Revenue
SaaS recurring subscription revenue for the quarter endedJune 30, 2021 was$1.6 million , an increase of$327,000 , or 26% over the quarter endedJune 30, 2020 . The increase in SaaS recurring revenue is attributed to the addition of new clients and the expansion of existing clients for subscriptions to one or more of the software products in our suite of products that comprise our sales enablement platform. Those products now include verbCRM, verbLEARN, verbTEAMS, verbLIVE, and verbMAIL. The revenue we derive from these products is divided into two main categories: digital revenue and non-digital revenue. Within the digital revenue category, we have two forms of revenue. The first is SaaS recurring digital revenue based on contract-based subscriptions to our products and platform services. The second is non-SaaS, non-recurring digital revenue which is revenue generated by use of our apps and in-app purchases, such as sampling and other services obtained through the app. Non-digital revenue is revenue we generate from non-app, non-digital sources through ancillary services we provide as an accommodation to our clients and customers. These include printing and shipping services which we now outsource to a strategic partner as part of a cost reduction plan we instituted in 2020. Non-SaaS, non-digital revenue totaling$582,000 for the quarter endedJune 30, 2021 was down versus the$972,000 reported for the quarter endedJune 20, 2020 , consistent with our strategic decision to focus our sales initiatives on the higher margin SaaS recurring subscription revenue products. The table below sets forth our quarterly revenues from the quarter endedJune 30, 2019 through the quarter endedJune 30, 2021 , which reflects the trend of revenue since our NASDAQ listing inApril 2019 : 2019 Quarterly Revenue 2020 Quarterly Revenue 2021 Quarterly Revenue Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
SaaS recurring subscription revenue
995,000$ 1,057,000 $ 1,274,000 $ 1,478,000 $ 1,305,000 $ 1,461,000 $ 1,601,000 Other digital revenue 596,000 485,000 344,000 400,000 406,000 360,000 218,000 340,000 209,000 Total digital revenue 1,454,000 1,438,000 1,339,000 1,457,000 1,680,000 1,838,000 1,523,000 1,801,000 1,810,000
Design, printing, and fulfillment 1,784,000 1,164,000
965,000 728,000 713,000 836,000 467,000 615,000 477,000 Shipping 495,000 271,000 181,000 169,000 259,000 186,000 109,000 110,000 105,000 Total non-digital revenue 2,279,000 1,435,000 1,146,000 897,000 972,000 1,022,000 576,000 725,000 582,000 Grand total$ 3,733,000 $ 2,873,000 $ 2,485,000 $ 2,354,000 $ 2,652,000 $ 2,860,000 $ 2,099,000 $ 2,526,000 $ 2,392,000 Cost of Revenue
Total cost of revenue for the quarter endedJune 30, 2021 was$1.1 million , compared to$1.1 million for the quarter endedJune 30, 2020 . The slight decrease in cost of revenue is primarily attributed to a decrease in non-digital costs offset by increased digital costs to support additional enterprise customers on the platform, increased users within our existing customer base, and free trials associated with verbLIVE. 37 Gross Margin Total gross margin for the quarter endedJune 30, 2021 was$1.3 million , compared to$1.5 million for the prior year quarter. The decrease is attributed to increased hosting fees associated with free trials of verbLIVE, lower other digital revenue, and lower non-digital revenue. Operating Expenses Research and development expenses were$3.2 million for the quarter endedJune 30, 2021 , as compared to$1.6 million for the quarter endedJune 30, 2020 . Research and development expenses primarily consisted of fees paid to employees and vendors contracted to perform research projects and develop technology. The increase in research and development is attributed the development of verbLIVE, our attribution feature, enhancements to verbCRM, as well as the Microsoft Outlook integration, and our new Marketplace platform.
Depreciation and amortization expenses were
General and administrative expenses for the quarter endedJune 30, 2021 were$6.5 million , as compared to$4.0 million for the quarter endedJune 30, 2020 . The increase in spending was to support growth, anticipated product launches, implementation ofNetsuite computerized ERP system, ongoing compliance with Sarbanes Oxley, and an additional quarter of Solofire operations. The notable increases in general and administrative expenses versus the quarter endedJune 30, 2020 were increases in professional service cost of$1,104,000 , labor cost of$929,000 , and marketing and promotion cost of$287,000 . Other income (expense), net, for the quarter endedJune 30, 2021 was ($2,930,000 ), which was attributed to a change in the fair value of derivative liability of ($2,445,000 ), the amortization of debt discount of ($565,000 ), and interest expense of ($31,000 ). These were offset by a gain on debt extinguishment of$91,000 and other income of$20,000 . Other income (expense), net, for the quarter ended quarter endedJune 30, 2020 totaled$1.1 million , which was attributed to a change in the fair value of derivative liability of$1.2 million and other income of$9,000 , offset by interest expense for amortization of debt discount of ($137,000 ) and interest expense of ($39,000 ).
Six Months Ended
The following is a comparison of our results of operations for the six months
ended
Six Months Six Months
Ended June 30, Ended June 30,
2021 2020 Change
Revenue
SaaS recurring subscription revenue
549,000 806,000 (257,000 )
Design, printing, and fulfillment 1,092,000 1,441,000 (349,000 )
Shipping 215,000 428,000 (213,000 )
Total revenue 4,918,000 5,006,000 (88,000 )
Cost of Revenue
Digital 1,109,000 494,000 650,000
Design, printing, and fulfillment 1,049,000 1,338,000 (324,000 )
Shipping 176,000 366,000 (190,000 )
Total cost of revenue 2,334,000 2,198,000 136,000
Gross margin 2,584,000 2,808,000 (224,000 )
Operating expenses
Research and development 6,097,000 2,901,000 3,196,000
Depreciation and amortization 814,000 719,000 95,000
General and administrative 13,885,000 7,533,000 6,352,000
Total operating expenses 20,796,000 11,153,000 9,643,000
Loss from operations (18,212,000 )
(8,345,000 ) (9,867,000 )
Other income (expense), net Other income (expense) 74,000 3,000 71,000 Interest expense - amortization of debt discount (1,040,000 ) (274,000 ) (766,000 ) Change in fair value of derivative liability (1,945,000 ) 3,320,000 (5,265,000 ) Gain on extinguishment of PPP note payable 1,317,000 - 1,317,000 Debt extinguishment, net (287,000 ) - (287,000 ) Interest expense (64,000 ) (74,000 ) 10,000 Total other income, net (1,945,000 )
2,975,000 (4,920,000 )
Loss before income tax provision (20,157,000 )
(5,370,000 ) (14,787,000 )
Deemed dividend to Series A preferred stockholders -
(3,951,000 ) 3,951,000
Net loss to common stockholders$ (20,157,000 ) $ (9,321,000 ) $ (10,836,000 ) 38 Revenue SaaS recurring revenue increased 31% versus the six months endedJune 30, 2020 . The increase in SaaS recurring revenue is attributed to the addition of new clients and the expansion of existing clients for access to one or more of our suite of software products on our sales enablement platform. Those products now include verbCRM, verbLEARN, verbTEAMS, verbLIVE, and verbMAIL. The revenue we derive from these products is divided into two main categories: digital revenue and non-digital revenue. Within the digital revenue category, we have two forms of revenue. The first is SaaS recurring digital revenue based on contract-based subscriptions to our products and platform services. The second is non-SaaS, non-recurring digital revenue which is revenue generated by use of our apps and in-app purchases, such as sampling and other services obtained through the app. Non-digital revenue is revenue we generate from non-app, non-digital sources through ancillary services we provide as an accommodation to our clients and customers. These include printing and shipping services which we now outsource to a strategic partner as part of a cost reduction plan we instituted in 2020. Total revenue for the six months endedJune 30, 2021 was$4.9 million , a 2% decrease compared to the$5.0 million reported for the six months endedJune 30, 2020 . The decrease in revenue is attributed entirely to our non-digital products, consistent with our strategic decision to focus our sales initiatives on the higher margin SaaS recurring subscription revenue products. Total digital revenue for the six months endedJune 30, 2021 was$3.6 million , an increase of 15% compared to the$3.1 million reported for the six months endedJune 30, 2020 . The increase was primarily driven from SaaS recurring subscription-based revenue associated with our verbCRM, verbLEARN, verbTEAMS, and verbLIVE applications totaling$3.1 million , an increase of 31% compared to$2.3 million reported for the six months endedJune 30, 2020 . Non-subscription digital revenue for the quarter endedJune 30, 2021 was$549,000 , compared to$806,000 for the six months endedJune 30, 2020 . Total non-digital revenue for the six months endedJune 30, 2021 was$1.3 million , compared to$1.9 million reported for the six months endedJune 30, 2020 , which again, is consistent with the Company's strategy to exit the low margin printing, fulfillment, and shipping aspects of the legacy business to focus on our SaaS recurring revenue products. Cost of Revenue Total cost of revenue for the six months endedJune 30, 2021 was$2.3 million , compared to$2.2 million for the six months endedJune 30, 2020 . The increase in cost of revenue is primarily attributed to additional enterprise customers on the platform, increased users within our existing customer base, free trials associated with verbLIVE, all offset by a decrease in non-digital costs. Gross Margin
Total gross margin for the six months endedJune 30, 2021 was$2.6 million , compared to$2.8 million for the six months endedJune 30, 2020 . The decrease is attributed to increased hosting fees associated with free trials of verbLIVE, lower other digital revenue, and lower non-digital revenue. Operating Expenses Research and development expenses were$6.1 million for the six months endedJune 30, 2021 , as compared to$2.9 million for the six months endedJune 30, 2020 . Research and development expenses primarily consisted of fees paid to employees and vendors contracted to perform research projects and develop technology. The increase in research and development is attributed the development of verbLIVE, our attribution feature, enhancements to verbCRM, as well as the Microsoft Outlook integration, and our new Marketplace platform. Depreciation and amortization expenses were$814,000 for the six months endedJune 30, 2021 , as compared to$719,000 for the six months endedJune 30, 2020 . The increase is associated with the amortization of SoloFire intangible assets. General and administrative expenses for the six months endedJune 30, 2021 were$13.9 million , as compared to$7.5 million for the six months endedJune 30, 2020 . The increase in spending was to support growth, anticipated product launches, implementation ofNetsuite computerized ERP system, ongoing compliance with Sarbanes Oxley, and an additional six months of Solofire operations. The notable increases versus the six months endedJune 30, 2020 were increases in labor of$1.7 million , professional services of$1.5 million , non-cash stock compensation expense of$1.1 million , and marketing and promotion of$994,000 . Other income (expense), net, for the six months endedJune 30, 2021 was ($1,945,000 ), which was attributed to a change in the fair value of derivative liability of ($1,945,000 ), the amortization of debt discount of ($1,040,000 ), debt extinguishment of ($287,000 ) and interest expense of ($64,000 ). These were offset by a gain on extinguishment of PPP notes payable and accrued interest of$1,317,000 and other income of$74,000 . Other income (expense), net, for the six months ended quarter endedJune 30, 2020 totaled$2,975,000 , which was attributed to a change in the fair value of derivative liability of$3,320,000 and other income of$3,000 , offset by interest expense for amortization of debt discount of ($274,000 ), and interest expense of ($74,000 ).
Use of Non-GAAP Measures - Modified EBITDA
In addition to our results under generally accepted accounted principles
("GAAP"), we present Modified EBITDA as a supplemental measure of our
performance. However, Modified EBITDA is not a recognized measurement under GAAP
and should not be considered as an alternative to net income, income from
operations or any other performance measure derived in accordance with GAAP or
as an alternative to cash flow from operating activities as a measure of
liquidity. We define Modified EBITDA as net income (loss), plus interest
expense, depreciation and amortization, stock-based compensation, financing
costs and changes in fair value of derivative liability.
39
Management considers our core operating performance to be that which our
managers can affect in any particular period through their management of the
resources that affect our underlying revenue and profit generating operations
that period. Non-GAAP adjustments to our results prepared in accordance with
GAAP are itemized below. You are encouraged to evaluate these adjustments and
the reasons we consider them appropriate for supplemental analysis. In
evaluating Modified EBITDA, you should be aware that in the future we may incur
expenses that are the same as or similar to some of the adjustments in this
presentation. Our presentation of Modified EBITDA should not be construed as an
inference that our future results will be unaffected by unusual or non-recurring
items.
Three Months Ended Six Months Ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Net loss $ (11,812,000 ) $ (3,424,000 ) $ (20,157,000 ) $ (5,370,000 )
Adjustments:Other (income) / expense, net (20,000 ) (9,000 ) (74,000 ) (3,000 ) Stock compensation expense 1,264,000 1,609,000 3,666,000 2,552,000 Amortization of debt discount 565,000 137,000 1,040,000 274,000 Change in fair value of derivative liability 2,445,000 (1,228,000 ) 1,945,000 (3,320,000 ) Gain on extinguishment of PPP loan payable (91,000 ) (1,317,000 ) Debt extinguishment, net - - 287,000 - Interest expense 31,000 39,000 64,000 74,000
Depreciation and amortization 400,000 357,000 814,000 719,000 Total EBITDA adjustments 4,594,000 905,000
6,425,000 296,000
Modified EBITDA $ (7,218,000 ) $ (2,519,000 ) $ (13,732,000 ) $ (5,074,000 )
The $4.7 million decrease in Modified EBITDA for the three months ended June 30,
2021 , compared to the same period in 2020, resulted from increased research and
development, three months of expenses related to SoloFire, an increase in
professional services, labor related costs to support growth, and marketingand promotion.
The$8.7 million decrease in Modified EBITDA for the six months endedJune 30, 2021 , compared to the same period in 2020, resulted from increased research and development, six months of expenses related to SoloFire, an increase in professional services, labor related costs to support growth, and marketing
and
promotion.
We present Modified EBITDA because we believe it assists investors and analysts
in comparing our performance across reporting periods on a consistent basis by
excluding items that we do not believe are indicative of our core operating
performance. In addition, we use Modified EBITDA in developing our internal
budgets, forecasts and strategic plan; in analyzing the effectiveness of our
business strategies in evaluating potential acquisitions; and in making
compensation decisions and in communications with our board of directors
concerning our financial performance. Modified EBITDA has limitations as an
analytical tool, which includes, among others, the following:
? Modified EBITDA does not reflect our cash expenditures, or future
requirements, for capital expenditures or contractual commitments;
? Modified EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
? Modified EBITDA does not reflect future interest expense, or the cash
requirements necessary to service interest or principal payments, on our
debts; and
? Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
Modified EBITDA does not reflect any cash requirements for such replacements.
Liquidity and Capital Resources
Going Concern We have incurred operating losses and negative cash flows from operations since inception. We incurred a net loss of$20,157,000 during the six months endedJune 30, 2021 . We also utilized cash in operations of$13,620,000 during the six months endedJune 30, 2021 . As a result, our continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash flows from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our operations. 40
Our consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to meet our obligations and continue our operations for the next twelve months. Our continuation as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow. In addition, our independent registered public accounting firm, in its report on ourDecember 31, 2020 consolidated financial statements, has raised substantial doubt about our ability to continue as a going concern. There is no assurance that we will ever be profitable or that debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease operations for our business, the results of which would be that our stockholders would lose some or all of their investment. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern. Overview As ofJune 30, 2021 , we had cash of$6,449,000 . We estimate our operating expenses for the next twelve months may continue to exceed any revenue we generate, and we may need to raise capital through either debt or equity offerings to continue operations. Due to market conditions and the early stage of our operations, there is considerable risk that we will not be able to raise such financings at all, or on terms that are not dilutive to our existing stockholders. We can offer no assurance that we will be able to raise such funds. If we are unable to raise the funds we require for all of our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer, and we may be forced to reduce or discontinue operations.
The following is a summary of our cash flows from operating, investing, and
financing activities for the six months ended
Six Months Ended
June 30, 2021 June 30, 2020
Cash used in operating activities $ (13,620,000 ) $ (4,673,000 )
Cash provided (used) in investing activities 11,000 (316,000 )
Cash provided by financing activities 18,243,000 5,384,000
Increase in cash $ 4,634,000 $ 395,000
Cash Flows - Operating
For the six months ended June 30, 2021 , our cash flows used in operating
activities amounted to $13.6 million , compared to cash used for the six months
ended June 30, 2020 of $4.7 million . The change is attributed to the growth of
the business, product development, marketing and promotion, professional
services, inclusion of SoloFire operating expenses, a change in deferred
compensation of ($521,000 ), a change in accounts receivable of ($511,000 ), a
change in prepaid expenses of ($322,000 ), offset a change in accounts payable,
accrued expenses, and accrued interest of 433,000, and a change in deferred
revenue and customer deposits of $405,000 compared to the six months endedJune 30, 2020 . Cash Flows - Investing For the six months endedJune 30, 2021 , our cash flows from investing activities amounted to$11,000 , which was attributed to proceeds from the sale of fixed assets. For the six months endedJune 30, 2020 , our cash flows used in investing activities amounted to$(316,000) . The change is attributed to fixed asset purchases associated with new offices inNewport Beach, California . 41 Cash Flows - Financing
Our cash provided by financing activities for the six months endedJune 30, 2021 amounted to$18.2 million , which represented$14.1 million of net proceeds from the issuance of shares of our common stock, advances on future receipts of$7.4 million , proceeds from warrant exercises of$1.1 million , and proceeds from option exercises of$377,000 , all offset by($4.7) million of payments against advance on future receipts. Our cash provided by financing activities for the six months endedJune 30, 2020 amounted to$5.4 million , which represented$4.4 million of net proceeds from the issuance of shares of our common stock and$1.4 million of net proceeds from notes payable, offset by($1.0) million of payments against advance on future receipts, and deferred offering costs of ($150,000 ).
Notes Payable - Related Parties
We had the following outstanding notes payable to related parties as ofJune 30, 2021 : Original Balance at Note Issuance Date Maturity Date Interest Rate Borrowing June 30, 2021 Note (A) December 1, 2015 February 8, 2023 12.0 %$ 1,249,000 $ 725,000 Note (B) December 1, 2015 April 1, 2017 12.0 % 112,000 112,000 Note (C) April 4, 2016 June 4, 2021 12.0 % 343,000 40,000
Total notes payable - related parties, net
877,000
Non-current (725,000 )
Current $ 152,000 (A) On
Cutaia, our majority stockholder and Chief Executive Officer, to consolidate
all loans and advances made by
The note bears interest at a rate of 12% per annum, secured by the Company's
assets, and matured on
original note balance or
converted in 2018 while the remaining note balance of
convertible. During the year ended
no changes to the other terms of the note agreement. As of
the outstanding balance of the note amounted to
the Board approved the ability to convert the note into equity at the
discretion of the holder. The conversion price is the fair market value of
our common stock on the day of conversion.
(B) On
board of directors, in the amount of
fees as of
12% per annum, and matured in
outstanding principal balance of the note was equal to
(C) On
of
during the period December 2015 through March 2016 . A total of 30% of the
original note balance or $103,000 was convertible to common stock and was
converted in 2018 while the remaining note balance of $240,000 is not
convertible. The note, as amended, bears interest at a rate of 12% per
annum, is secured by our assets, and matured on June 4, 2021 . On May 19 ,2021 the Board approved the ability to convert the note into equity at the
discretion of the holder. The conversion price is the fair market value of
the Company's common stock on the day of conversion. On
price was
the day of conversion. As of
note amounted to $40,000 .
42
Deferred Incentive Compensation
Balance at
Note Issuance Date Maturity Date June 30, 2021
50% on January 10, 2021 and 50% on
Rory J. Cutaia (A) December 23, 2019 January 10, 2022 $ 215,000
50% on January 10, 2021 and 50% on
Rory J. Cutaia (B) December 23, 2019 January 10, 2022 161,000
50% on January 10, 2021 and 50% on
Jeff Clayborne (A) December 23, 2019 January 10, 2022 63,000
50% on January 10, 2021 and 50% on
Jeff Clayborne (B) December 23, 2019 January 10, 2022 82,000Total deferred compensation payable - related parties, net
521,000
Non-current -
Current $ 521,000 (A) On
determined that it is in our best interest and in the best interest of our
stockholders to defer payments to Messrs. Cutaia and Clayborne. We paid 50%
of the annual incentive compensation on
50% on
During the six months ended
outstanding balance. As of
(B) On
up-listing to The NASDAQ Capital Market and the acquisition of Verb Direct
totaling
in our best interest and in the best interest of our stockholders to defer
payments to Messrs. Cutaia and Clayborne. We paid 50% of these awards on
January 10, 2021 and the remaining 50% on January 10, 2022 .
During the six months ended June 30, 2021 , we paid $243,000 of the
outstanding balance. As of June 30, 2021 , the outstanding balance amounted to
$243,000 .
Advance on Future Receipts
Interest Original Balance at
Note Issuance Date Maturity Date Rate Borrowing June 30, 2021
January 13, September 10,
Note A 2021 2021 28 % $ 844,000 $ 213,000
January 13, September 10,
Note A 2021 2021 28 % 844,000 213,000
February 18, August 3,
2021 - March 2021 - August
Note B 3, 2021 15, 2021 3 % 1,696,000 440,000
December 31,
Note C June 30, 2021 2021 7 % 1,210,000 1,210,000
Note D June 30, 2021 March 1, 2022 28 % 2,720,000 2,720,000
Total $ 9,354,000 4,796,000Debt discount
(1,013,000 )
Net $ 3,783,000 (A) On
unaffiliated third party totaling
receipts/revenues of
unaffiliated third-party will auto withdraw an aggregate of
Company's operating account each banking day. The term of the agreement
extends 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. The Company may pay off either note for
paid within 30 days of funding; for
of funding; or for
advances are secured by the Company's tangible and intangible assets. As a
result, the Company recorded a liability of
future receipts sold and a debt discount of
difference between the future receipts sold and the cash received. The debt
discount is being amortized over the term of the agreement.
43
(B) In February and March, 2021, the Company received secured advances from an
unaffiliated third party totaling
receipts/revenues of
unaffiliated third-party will auto withdraw an average of
Company's operating account each month. The term of the agreement extends
until the advances are paid in full. The notes did not bear any interest,
however, the interest was imputed at a rate of 3% based on the face value of
the notes. As a result, the Company recorded a liability of
account for the future receipts sold and a debt discount of
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.
(C) On
third party totaling
of
third-party will auto withdraw an average of
operating account each month. The term of the agreement extends until the
advances are paid in full. The notes did not bear any interest, however, the
interest was imputed at a rate of 7% based on the face value of the notes and
the proceeds received. As a result, the Company recorded a liability of
the cash received. The debt discount is being amortized over the term of the
agreement.
(D) On
third party totaling
of 2,720,000. Pursuant to the terms of the agreement the unaffiliated
third-party will auto withdraw an aggregate of
operating account each banking day. The term of the agreement extends 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
and the proceeds received. The Company may pay off the note for
paid within 45 days of funding and for
days of funding. These advances are secured by the Company's tangible and
intangible assets. As a result, the Company recorded a liability of
the cash received. The debt discount is being amortized over the term of the
agreement.
Notes Payable
Interest Original Balance at
Note Issuance Date Maturity Date Rate Borrowing June 30, 2021
Note A April 17, 2020 April 17, 2022 1.00 % $ 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 -
Total notes payable 1,458,000 150,000
Non-current (1,458,000 ) (150,000 )
Current $ - $ -
(A) On
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 loan and accrued interest are forgivable after the earlier of (i) 24
weeks after the loan disbursement date and (ii)
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.
On
accounted as a gain on debt extinguishment.
(B) On
Business Administration under the Economic Injury Disaster Loan program in
the aggregate principal of $150,000 , in exchange for net proceeds of
$149,900 . $100 of financing costs is included in the original principalamount. The loan is unsecured and payable over 30 years at an interest rate
of 3.75%. Installment payments, including principal and interest, will begin
on May 15, 2021 .
44
(C) On May 1, 2020, SoloFire received loan proceeds in the amount of
under the PPP. The loan and accrued interest are forgivable after the earlier
of (i) 24 weeks after the loan disbursement date and (ii)
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.
On
accounted as a gain on debt extinguishment.
Critical Accounting Policies
Our financial statements have been prepared in accordance with GAAP, which require that we make certain assumptions and estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Significant estimates include valuation of derivative liability, valuation of debt and equity instruments, share-based compensation arrangements and long-lived assets. Amounts could materially change in the future.
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. We use Level 2 inputs for our valuation methodology for the derivative liabilities as their fair values were determined by using a Binomial pricing model. Our 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 adjustments to fair value of derivatives. 45 Share-Based Payments We account for share-based awards to employees and nonemployee directors and consultants in accordance with the provisions of ASC 718, Compensation-Stock Compensation, and under the recently issued guidance following FASB's pronouncement, ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Under ASC 718, and applicable updates adopted, share-based awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service, or vesting, period. We value our equity awards using the Black-Scholes option pricing model, and account for forfeitures when they occur. Use of the Black-Scholes option pricing model requires the input of subjective assumptions including expected volatility, expected term, and a risk-free interest rate. We estimate volatility using a blend of our own historical stock price volatility as well as that of market comparable entities since our common stock has limited trading history and limited observable volatility of its own. The expected term of the options is estimated by using theSecurities and Exchange Commission Staff Bulletin No. 107's Simplified Method for Estimate Expected Term. The risk-free interest rate is estimated using comparable published federal funds rates.Goodwill
In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, we review the recoverability of the carrying value of goodwill at least annually or whenever events or circumstances indicate a potential impairment. Our impairment testing will be done annually atDecember 31 (our fiscal year end). Recoverability of goodwill is determined by comparing the fair value of our 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.
Off-Balance Sheet Arrangements
As of
Intangible Assets with Finite Useful Lives
We have certain finite lived intangible assets that were initially recorded at their fair value at the time of acquisition. These intangible assets consist of developed technology. Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful life of five years. We review all finite lived intangible assets for impairment when circumstances indicate that their carrying values may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess carrying value over the fair value in our consolidated statements of operations.
Recently Issued Accounting Pronouncements
For a summary of our recent accounting policies, refer to Note 2, Summary of Significant Accounting Policies, of our unaudited condensed consolidated financial statements included under Item 1 - Financial Statements in this Form 10-Q.
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