TON Strategy Co quarterly report, Q2 FY2019

Business context and reporting period

This is Verb Technology Company, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019, filed August 14, 2019. The filing identifies Verb—not TON Strategy Co—as the registrant. Verb sells subscription-based interactive-video CRM software and, following its April 12 acquisition of Sound Concepts, also earns revenue from welcome kits, fulfillment and shipping.

Financial results and liquidity

For the six months, operating cash use increased from $1.890 million in 2018; net loss narrowed from $6.723 million. Reported revenue rose from $8,000 in Q2 2018 and $16,000 in the first half of 2018, primarily because Verb Direct was acquired during the current-year periods. Pro forma revenue, assuming the acquisition occurred January 1, 2018, was $3.733 million in Q2 2019 versus $3.109 million in Q2 2018, and $7.734 million versus $5.872 million for the six-month periods.

At June 30, 2019, cash was $412,000, current assets $2.152 million and current liabilities $5.011 million (current ratio approximately 0.43). Total liabilities were $7.079 million. Borrowings included $709,000 of notes payable and $1.177 million of related-party notes; operating lease liabilities totaled $1.230 million. The company reported $18.601 million of stockholders’ equity, versus a $5.055 million deficit at year-end 2018. The filing states that the April public offering generated $18.614 million net proceeds; $15 million funded the acquisition cash payment.

Material changes and unusual items

• The Sound Concepts acquisition was funded with $15 million cash and 3,327,791 restricted shares valued at $7.820 million. The purchase-price allocation remained provisional, including $12.347 million goodwill and $9.835 million net intangible assets on the June balance sheet.
• Q2 2019 gross profit was $1.691 million, led by digital revenue of $1.454 million (gross profit $1.278 million); welcome kits and fulfillment generated $1.784 million revenue and $399,000 gross profit; shipping generated $495,000 revenue and $14,000 gross profit.
• Q2 operating loss compared with operating income of $386,000 in Q2 2018. The prior-year quarter included a $495,000 general and administrative credit, primarily from a reversal of stock-based compensation. Current-quarter expenses included acquisition-related costs, higher R&D and $567,000 depreciation and amortization.
• Six-month other income included a $2.227 million gain on extinguishment of derivative liabilities; results also reflected debt-discount amortization and derivative fair-value movements. Such items materially affect reported net income and are not equivalent to operating cash generation.
• Common shares outstanding increased from 12.055 million at December 31, 2018 to 22.655 million at June 30, 2019, including the public offering and acquisition shares. Options and warrants outstanding were 2.833 million and 7.780 million, respectively.

Outlook, risks and contingencies

Management reported substantial doubt about Verb’s ability to continue as a going concern: it had incurred a six-month net loss of $5.351 million and used $3.535 million of operating cash. Management expected operating expenses over the next three months to continue to exceed revenue and said it intended to seek additional debt or equity financing; it gave no assurance financing would be available or that the company would become profitable. Further equity issuance could dilute shareholders.

After quarter-end, Verb closed an August 14 preferred-stock and warrant offering for $5.030 million gross proceeds. The preferred stock’s initial conversion price was $1.55, and its warrants’ initial exercise price was $1.88; both prices are subject to specified adjustments. The filing also reports post-quarter conversion of approximately $719,000 of notes and accrued interest into shares and warrants, and $300,000 net proceeds from subsequent unsecured debt financing.

Disclosure controls and procedures were deemed ineffective as of June 30, 2019; management reported no material change in internal control over financial reporting during the six-month period. Pending matters included an EMA warrant dispute, a former employee’s compensation claims and a July 2019 purported securities class action relating to a 2018 Oracle announcement. Verb denied the allegations and said it intended to defend the matters. It also disclosed a past-due $112,000 related-party note and ongoing negotiations with its holder.

Important facts for investors to verify

• Confirm Verb’s current cash runway, expected operating burn and financing needs, including the terms and dilution potential of post-quarter financing.
• Review the acquisition’s final purchase-price allocation, acquired business performance and whether reported revenue and margins are sustainable.
• Assess cash conversion and recurring operating performance separately from derivative remeasurement, debt-extinguishment gains and non-GAAP adjustments.
• Check share-count dilution from the offering, preferred-stock conversion, warrants, options and subsequent note conversions.
• Monitor remediation of ineffective disclosure controls, the going-concern uncertainty, litigation developments and settlement of the past-due related-party note.