Business context and reporting period
This is a Form 10-Q for the quarter ended March 31, 2019. The filing identifies the registrant as Verb Technology Company, Inc.; this differs from the “TON Strategy Co” company name in the request metadata. Verb marketed subscription-based cloud software under the Tagg brand, including interactive-video CRM products. In February 2019, it changed its name from nFüsz, Inc. and effected a 1-for-15 reverse stock split; historical share and per-share data reflect the split.
Financial performance and liquidity
- Revenue: $9,000, versus $8,000 in Q1 2018. Management said subscription revenue remained virtually flat while the company developed integrations and prepared for the Sound Concepts combination.
- Costs and losses: Cost of revenue was $30,000, implying a gross loss of $21,000 (gross margin approximately -233%). Operating expenses were $2.783 million and operating loss was $2.774 million, compared with an operating loss of $5.392 million in Q1 2018. Net loss was $3.008 million, or $0.25 per share, versus $8.494 million, or $1.00 per share.
- Adjusted performance: Modified EBITDA, a non-GAAP measure defined by the company, was a loss of $1.919 million versus a loss of $777,000. The filing attributes the deterioration mainly to higher professional-service and research and development costs.
- Cash flow: Operating cash use was $1.089 million, compared with $993,000 in Q1 2018. Financing provided $514,000; cash fell by $575,000 to $59,000 at quarter-end. Cash paid for interest was $32,000.
- Balance sheet and liquidity: Current assets were $278,000 against current liabilities of $6.843 million, a working-capital deficit of approximately $6.565 million. Total assets were $824,000, total liabilities $7.908 million, and stockholders’ deficit $7.084 million.
- Debt and other liabilities: Balance-sheet amounts included $1.867 million of convertible notes net of discount, $355,000 of other notes net of discount, $1.235 million of related-party notes, and a $2.020 million derivative liability. The filing reports $112,000 of related-party principal past due and under settlement discussions.
Material changes and subsequent events
- Research and development increased to $564,000 from $130,000, primarily for Verb Direct integration and platform work targeting Salesforce, Microsoft, Adobe and other partners. General and administrative expense fell to $2.189 million from $5.269 million, mainly because stock-based compensation declined by $3.759 million; professional-service costs rose by $508,000.
- Other expense fell to $234,000 from approximately $3.1 million, substantially reflecting a $944,000 favorable change in derivative fair value in 2019 versus a $2.625 million unfavorable change in 2018. Debt-discount amortization was $1.054 million in Q1 2019.
- In April, the company completed a public offering that generated approximately $20.5 million gross and $18.94 million net. It used $15 million of proceeds for the cash portion of its Sound Concepts acquisition and approximately $2.025 million to repay notes; offering expenses were approximately $2.1 million. Sound Concepts was acquired April 12 for stated consideration of $25 million: $15 million cash and $10 million in restricted shares. The sellers also purchased $4 million of offering units, reducing the company’s net cash outlay for the acquisition to approximately $11 million.
- After quarter-end, the company reported repayment in May of the $1.5 million and $500,000 Bellridge notes; the $400,000 convertible notes were converted into restricted common shares in April. The offering and acquisition were not reflected in the March 31 balance sheet.
Outlook, risks and unusual items
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, operating cash use, minimal quarter-end cash and stockholders’ deficit. Continuation depended on raising financing and achieving sufficient operating cash flow; management gave no assurance that financing or profitability would be achieved. The April offering provided subsequent funding, but does not alter the reported quarter-end liquidity.
- Management outlook: Management expected near-term operating expenses to exceed revenue. It planned to use funds for Sound Concepts integration, software integrations, TaggMED clinical-trial initiatives and working capital. Management expected the acquisition and integration to increase sales and operating profitability, but provided no quantified forecast or timetable.
- Execution and dilution: Integration and product-development costs, dependence on additional financing, potential equity dilution, and debt-service obligations remain key risks. The April offering included warrants, and the acquisition included restricted shares; the filing reported 22,309,788 shares outstanding as of May 15, 2019.
- Lease: A new 89-month headquarters lease was expected to begin in July 2019. The company anticipated recording approximately $1.7 million of right-of-use asset and lease liability upon taking possession.
- Legal matters: The EMA Financial warrant dispute remained pending, with the company seeking an injunction and pursuing counterclaims. A former employee also asserted approximately $300,000 in bonus claims; the company disputed the claims and cited a release. The filing did not quantify potential exposure.
- Controls: Management concluded disclosure controls and procedures were not effective as of March 31, 2019. It reported no material change in internal control over financial reporting during the quarter.
- Unusual accounting items: Derivative liabilities were valued using Level 3 inputs and a model dependent on assumptions, including high share-price volatility. Changes in fair value materially affected reported other expense.
Important facts for investors to verify
- Confirm the registrant identity and the company-name discrepancy in the request metadata.
- Review post-offering cash, debt repayments and liquidity against actual subsequent-period filings; the March 31 cash balance was only $59,000.
- Assess Sound Concepts’ acquired results, purchase accounting, integration costs and whether projected sales and profitability benefits materialized.
- Track dilution from offering shares and warrants, acquisition shares, conversions, options and other equity awards.
- Follow remediation of ineffective disclosure controls, the past-due related-party note and the outcomes or developments in the disclosed legal matters.