6-K 1 verb6k_jun2003.txt FORM 6-K, JUNE 30, 2003 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 6-K REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13A-16 OR 15D-16 OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarter ended June 30, 2003 VERB EXCHANGE INC. 000-30683 ------------------------------------------------------ --------------------- (Translation of Registrant's name into English) SEC File No. Suite 908 - 1055 Dunsmuir Street, P. O. Box 49266, Vancouver, BC, Canada V7X 1L2 -------------------------------------------------------------------------------- (Address of principal executive offices) [Indicate by check mark whether the Registrant files or will file annual reports under cover of forms 20-F or Form 40-F.] Form 20-F X Form 40-F ------- ------- [Indicate by check mark whether the Registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act 1934.] Yes No X ------- ------- VERB EXCHANGE INC. Unaudited Interim Consolidated Financial Statements (Expressed in Canadian dollars) For the Six Months ended June 30, 2003 and 2002 2 VERB EXCHANGE INC. Interim Consolidated Balance Sheets (Expressed in Canadian dollars) As at June 30, 2003

--------------------------------------------------------------------------------------------------------- ~~March~~30 31Jun ~~December~~2003 31 ~~2003~~Dec 2002 --------------------------------------------------------------------------------------------------------- (Unaudited) (Audited) Assets Current ~~assets~~Assets: Cash and cash equivalent $ 12234,~~329~~254 $ - Accounts receivable ~~106~~167,~~712~~848 108,814 Contracts receivable 264,097 - Goods and services tax receivable -27,251 45,934 Prepaid expenses 53114,~~270~~625 53,270 ------------------------------------------------------------------------------------------------------- ~~172~~808,~~311~~075 208,018 Technology, net of accumulated amortization of $2,~~203~~467,~~140~~517 (2002 $1,938,763) 21,~~026~~762,~~889~~512 2,291,266 Fixed assets ~~164~~197,~~953~~202 177,723 Contracts receivable 200,091 - Other assets 4034,~~972~~839 40,972 --------------------------------------------------------------------------------------------------------- ~~$ 2~~3,~~405~~002,~~125~~720 $ 2,717,979 ~~-------------------------------------------------------------------------------------------------~~ Liabilities and Shareholders' Equity Current liabilities: Bank Overdraft $ - $ 36,387 Accounts payable and accrued liabilities ~~(note 4)~~ 1,~~470~~348,~~645~~652 1,~~210~~323,~~458~~355 Demand loan 2019,~~079~~776 20,079 Due to Zwiss A.V.V. 200,000 200,000 ~~Advance payable (note 6) 116,657 112,897~~ Deferred lease inducement 2621,~~286~~358 31,215 Deferred revenue 32306,~~615~~059 34,332 Current portion of capital lease obligation 2418,~~352~~592 31,697 ------------------------------------------------------------------------------------------------------- 1,~~890~~914,~~634~~436 1,677,065 Deferred revenue 200,091 - Capital lease obligation 917,~~871~~051 9,871 Shareholders' equity: Share capital (note 5) 8,~~053~~785,~~410~~466 8,032,910 ~~Warrants~~Warrant (note 5) 4,539,352 4,539,352 Contributed surplus 412,866 412,866 Deficit (12,~~501~~866,~~008~~542) (11,954,085) ---------------------------------------------------------------------------------------------------- ~~504~~1,~~620~~071,234 1,031,043 --------------------------------------------------------------------------------------------------------- $ 23,~~405~~002,~~125~~720 $ 2,717,979 ---------------------------------------------------------------------------------------------------------

Going concern (note 2) Subsequent events (note 7) See accompanying notes to consolidated financial statements. Approved on behalf of the Board: Nathanael Lineham Director Ross Wilmo Director -------------------------- ---------------------------- 3 VERB EXCHANGE INC. Interim Consolidated Statements of Operations and Deficit (Expressed in Canadian dollars) Three and Six months ended June 30, 2003 and 2002

---------------------------------------------------------------------------------------------------------------------- ~~March~~3 31Months ~~March~~Ended 313 Months Ended 6 Months Ended 6 Months Ended 30 Jun 2003 30 Jun 2002 30 Jun 2003 30 Jun 2002 ---------------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue (note 6) $ ~~590~~1,~~825~~240,761 $ 2821,~~025~~430 $ 1,831,586 $ 49,455 Cost of Sales ~~187~~526,~~817~~386 1519,~~543~~342 720,443 53,042 ---------------------------------------------------------------------------------------------------------------------- Gross Margin ~~403~~714,~~008~~375 122,~~482~~088 1,111,143 (3,587) Expenses: Amortization ~~277~~281,~~147~~253 280,208 558,400 560,416 Bad debt expense - - 29,422 - ~~Billing~~Communications 657,~~240~~009 1822,~~157~~585 ~~Communications 38~~95,~~875~~884 2750,~~832~~417 Foreign exchange loss (gain) (619,~~624)~~852 ~~942~~598 13,228 1,540 General and administrative ~~132~~164,~~115~~866 ~~158~~189,~~090~~606 296,981 347,696 Bank Charges and Interest 1625,~~238~~590 511,~~577~~088 41,828 16,663 Management fees 2824,000 1615,000 52,000 31,500 Professional and consulting fees ~~284~~259,~~865~~420 ~~187~~283,~~339~~117 544,285 470,456 Salaries and wages ~~103~~150,~~346~~626 ~~198~~226,~~840~~601 253,972 425,441 Travel 4097,~~307~~292 4774,~~284~~443 137,599 121,727 ----------------------------------------------------------------------------------------------------------------- ~~949~~1,~~931~~079,908 ~~940~~1,~~769~~103,246 2,023,599 2,025,858 ---------------------------------------------------------------------------------------------------------------------- Loss for the period ~~546~~365,~~923~~534 ~~928~~1,~~287~~101,158 912,457 2,029,445 Deficit, beginning of period 12,501,008 8,419,532 11,954,085 7,491,245 ---------------------------------------------------------------------------------------------------------------------- Deficit, end of period $12,866,542 $ 9,520,690 $ 12,~~501~~866,~~008~~542 $ 89,~~419~~520,~~532~~690 ---------------------------------------------------------------------------------------------------------------------- Loss per share: Basic $0.03 0.0525 $0.07 0.2147 Diluted 0.0503 0.2125 0.07 0.47 ---------------------------------------------------------------------------------------------------------------------- Weighted average number of common stock: Basic 1012,~~383~~915,~~955~~810 4,320,925 12,915,810 4,320,925 Diluted 1012,~~383~~915,~~955~~810 4,320,925 12,915,810 4,320,925 ----------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements. 4 VERB EXCHANGE INC. Interim Consolidated Statements of Cash Flows (Expressed in Canadian dollars) Three and Six months ended June 30, 2003 and 2002

--------------------------------------------------------------------------------------------------------------------------------- ~~March~~3 31Months ~~March~~Ended 313 Months Ended 6 Months Ended 6 Months Ended 30 Jun 2003 30 Jun 2002 30 Jun 2003 30 Jun 2002 --------------------------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) --------------------------------------------------------------------------------------------------------------------------------- Cash provided by (used in): Operations: Loss for the period $(365,534) $(~~546~~1,~~923~~101,158) $(912,457) $(~~928~~2,~~287~~029,445) Items not involving cash: Amortization ~~277~~281,~~147~~253 280,208 558,400 560,416 Deferred lease inducement (4,928) - (9,857) - Deferred income 473,535 - 471,818 - Change in non-cash operating working capital: Accounts receivable (61,136) (2,~~102~~558) 5(59,~~610~~034) 3,052 Contracts receivable (464,188) - (464,188) - Goods and Services tax 49(27,~~933~~251) (415,~~119~~517) 18,683 (19,636) Prepaid expenses -(61,355) 10(26,~~000~~635) (61,355) (16,635) Accounts payable and accrued liabilities ~~256~~(238,~~188~~650) 29118,~~412~~676 ~~Deferred lease inducement (4~~25,~~929)~~296 ~~- Deferred income (1~~175,~~717)~~981 - --------------------------------------------------------------------------------------------------------------------------- 31(468,~~801~~254) 794,656) (~~607~~432,~~176~~694) (1,373,939) Investing: Purchase of fixed assets (49,125) (609) (49,125) (33,914) Disposal of other assets 6,133 - 6,133 - (42,992) (609) (42,992) (33,914) Financing: Demand loan (303) - (29303) (50,~~814~~693) ~~Advances~~Due ~~payable~~to 3Ayotte Music - 527,~~760~~808 - - Common shares issued for cash 279,500 - 300,000 - Issuance of convertible debentures - ~~105~~8,~~600~~000 ~~Private~~- ~~Placement 20~~113,~~500~~600 - Cash received ~~from~~on ~~(payment~~acquisition ~~to)~~of ~~loan~~Millennium ~~from~~(Note ~~Pensbreigh~~6) ~~Holdings~~244,361 ~~Inc.~~ - ~~(100~~244,~~000)~~361 - Cash received on ~~loan~~acquisition ~~from~~of ~~Ayotte~~Lattice ~~Music~~(Note ~~Inc.~~6) 208,195 - ~~650~~208,~~000~~195 ~~Repayment~~- ofChange in capital lease obligations 1,419 810 (75,~~345~~926) 15,448 733,172 584,290 746,327 1,203,835 Increase in cash and cash equivalents 221,926 (11210,~~653~~975) 270,641 (204,018) Cash and cash equivalents (bank indebtedness), beginning of period 12,329 151,882 (36,387) 144,925 -------------------------------------------------------------------------------------------- ~~16,915 614,133~~ -------------------------------------~~-------------------------------------------------------~~ ~~Increase~~Cash ~~in cash~~ and cash equivalents ~~48,716~~(bank 6indebtedness),~~957~~ ~~Cash~~end ~~and~~of ~~cash~~period ~~equivalents~~$ 234,254 ~~beginning~~$ ~~of period~~ (3659,~~387~~093) ~~144~~$ 234,~~925~~254 $ (59,093) -------------------------------------------------------------------------------------------- ~~Cash and cash equivalents, end of period $ 12,329 $ 151,882~~ -------------------------------------~~-------------------------------------------------------~~

See accompanying notes to consolidated financial statements. 5 VERB EXCHANGE INC. Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Three and Six Months Ended June 30, 2003 1. NATURE OF OPERATIONS: Verb Exchange Inc. is in the business of developing and delivering solutions of the communication and messaging needs of business and professional. In particular, Verb is pioneering the development of Presence Communications, the ability to control and direct how, when and where we communicate without being tied to a specific devise, location or service provider. Verb Exchange Inc. (the "Company") was originally incorporated under the laws of the Province of British Columbia on February 11, 1974 and was continued under the laws of the Province of Alberta and subsequently continued federally under the Canada Business Corporations Act on May 16, 2000. On December 31, 2001, the Company operated as Ayotte Music Inc. ("Ayotte") in the business of manufacturing drums for the music entertainment industry. Effective November 30, 2001, Ayotte sold its assets in connection with its core business of manufacturing and distribution of drums and related products to Shetland Enterprises ("Shetland"). Verb Exchange Inc. ("Verb") commenced operations on December 1, 1999 as an unincorporated business, and was incorporated on January 14, 2000 under the Company Act (British Columbia). The Company was a private company engaged in the business of marketing telecommunications products and is working on the development and deployment of unified communications solutions. On November 11, 2002, Ayotte acquired 100% of the issued and outstanding securities of Verb in exchange for shares and warrants of Ayotte As this acquisition resulted in the shareholders of Verb owning greater than 50% of Ayotte's common shares, the Acquisition was accounted for as a reverse takeover and the acquisition of the net assets of Ayotte were recorded at their fair value, which approximated their carrying value. No goodwill was recorded on the acquisition. Subsequent to completion of this transaction, the amalgamated company adopted the name, Verb Exchange Inc. 2. GOING CONCERN: These consolidated financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern which assumes the realization of assets and discharge of liabilities in the normal course of business. For the six months ended June 30, 2003, the Company incurred a loss from continuing operations of $912,457 and used cash in operating activities of $432,694. At June 30, 2003, the Company has a working capital deficiency of $1,106,361 and an accumulated deficit of $12,866,542 that raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue the development of its products and its operations is dependent upon the continued support of its shareholders, obtaining additional financing and generating revenues sufficient to cover its operating costs in an industry characterized by rapid technological change. There is no assurance that the Company will be successful in achieving any or all of these objectives over the coming year and, accordingly, it is possible that the Company will be unable to continue as a going concern. 3. SIGNIFICANT ACCOUNTING POLICIES: The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles. The consolidated financial statements reflect the following significant accounting policies. 6 VERB EXCHANGE INC. Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Three and Six Months Ended June 30, 2003 (a) Basis of presentation: These interim condensed consolidated financial statements have been prepared using generally accepted accounting principles in the Canada. The interim financial statements include all adjustments, consisting solely of normal recurring adjustments, which in management's opinion are necessary for fair presentation of the financial results for interim periods. The financial statements have been prepared consistent with the accounting policies described in the Company's annual audited financial statements. Reference should be made to those statements included with the Company's annual report filed on Form 20-F. Certain comparative figures have been reclassified to conform to the presentation adopted in the current period. These condensed consolidated financial statements include the accounts of the Company's wholly owned operating subsidiary, Verb Exchange (Management) Inc. and its wholly owned operating subsidiary, Cadium Systems Inc. All material intercompany balances and transactions have been eliminated. In accordance with accounting principles for reverse-takeovers, the consolidated financial statements reflect the financial position, results of operations and cash flows of Verb historically, consolidated with Ayotte from November 11, 2002, the date of completion of the transaction. (b) Revenue recognition: Revenue from the sale of master agencies (following the execution of a formal agreement) is initially deferred and then included in income as cash payments are received. Revenue from the sale of certified agencies is recorded as cash is received. Deposit payments received prior to the execution of the formal agency agreement are also deferred. Subscription service revenue is recorded as the service is provided and payments are received, generally on a monthly basis. All such payments are non-refundable. (c) Stock-based compensation: The Company has a stock-based compensation plan. Effective January 1, 2002, the Company adopted the new Recommendation of the Canadian Institute of Chartered Accountants Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments. The Company applies Section 3870 prospectively to all stock-based payments to employees and non-employees granted on or after January 1, 2002. The Company accounts for all options granted to employees, including directors, under the intrinsic value method, whereby the excess, if any, of the quoted market value of the stock at the date of grant over the exercise price of the option is recorded as stock based compensation expense. As the exercise price of options granted is equal to the market value on the measurement date, the Company has determined that the application of this accounting policy did not affect reported results of operations for the six months ended June 30, 2003. Options granted to non-employees on or after January 1, 2002 are accounted for under the fair value based method. Under this method, options granted to non-employees are measured at their fair value and recognized as the options are earned. Due to the nature of the Company's stock options plans, no transition adjustments were required to be recognized on adoption of the polices effective January 1, 2002. 7 VERB EXCHANGE INC. Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Three and Six Months Ended June 30, 2003 4. RELATED PARTY TRANSACTIONS: At June 30, 2003, the Company had outstanding payables to a director of $239,731 (2002 - $46,344) for professional fees which are included in accounts payable and accrued liabilities. Amounts due to other related parties included in accounts payable and accrued liabilities aggregate $108,425 (2002 - nil). These amounts are non-interest bearing. Also during the six months, the Company paid $52,000 (2002 - $28,500) for management fees to a director of the Company. 5. SHARE CAPITAL (a) Authorized share capital: 100,000,000 common shares without par value 100,000,000 preferred shares without par value (b) Issued and outstanding share capital:

------------------------------------------------------------------------------------------~~----------~~ Number of shares Amount ------------------------------------------------------------------------------------------~~----------~~ ~~Balances~~Balance at December 31, 2001 2,898,800 $3,169,072 Issued for exercise of stock options 190,000 95,000 Issued on exercise of warrants 200,000 150,000 ~~Sale~~Issue of special warrants - 720,040 Balance, at November 11, 2002 3,288,800 4,134,112 Adjustments to share capital to comply with recapitalization accounting 4,320,925 3,002,588 Issued for services rendered on capital transactions 1,050,000 472,500 Issued for cash 1,724,230 896,210 Share issue cost - (472,500) ~~The~~Balance ~~Company,~~at ~~balance,~~ December 31, 2002 10,383,955 8,032,910 ------------------------------------------------------------------------------------------~~----------~~ ToCommon beshares issued ~~102~~for cash 1,500,000 20300,~~500~~000 Shares issued on exercise of special warrants 990,138 - Shares issued to Millennium shareholders 1,372,497 244,361 Shares issued to Lattice shareholders 1,201,076 208,195 ------------------------------------------------------------------------------------------~~---------~~ ~~Total~~Balance asat ofJune ~~March 31~~30, 2003 1015,~~486~~447,~~455~~666 $8,~~053~~785,~~410~~466 ------------------------------------------------------------------------------------------~~----------~~

2,953,176 shares were originally held in escrow with 10% released on November 11, 2002, with an additional 15% to be released every six months thereafter, until November 11, 2005. As at June 30, 2003, there are a total of 2,139,879 shares held in escrow. 8 VERB EXCHANGE INC. Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Three and Six Months Ended June 30, 2003 (c) Stock options:

------------------------------------------------------------------------------------- Outstanding options -------------------------- ~~Outstanding options~~ ------------------------------ ~~Number Exercise of shares price~~ ----------------------------- Number Exercise of shares price ------------------------------------------------------------------------------------- ~~Balances~~Balance as at December 31, 2002 ~~and~~1,717,000 ~~March~~$ 310.50 Cancelled 155,000 $ 0.50 --------- ------- Balance at June 30, 2003 1,~~717~~562,000 $ 0.50 ------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Weighted average Weighted Weighted Range of Number remaining average Number Average exercise prices outstanding contractual life exercise price exercisable exercise price --------------------------------------------------------------------------------------- $0.50 1,562,000 4.4 years $ 0.50 669,428 $ 0.50 ---------------------------------------------------------------------------------------

(d) Warrants:

---------------------------------------------------------------------------------------------------~~----------------~~ ~~Weighted~~Outstanding ~~average~~warrants ~~Weighted Weighted Range of Number remaining average Number average exercise prices outstanding contractual life exercise price exercisable exercise price~~ ---------------------------------------~~----------------------------------------------------------------------------~~ ~~$0.50~~Number ~~1,717,000~~Exercise ~~4.9~~of ~~years~~warrants $price ~~0.50~~or ~~95,389~~range ~~$ 0.50~~ ---------------------------------------------------------------------------------------------------~~----------------~~ Balance at December 31, 2002 4,118,868 $0.35 to $7.41(US$5.00)

Warrants issued with common shares 750,000 $0.35 Warrants issued to Millenium shareholders 130,428 $0.31 Warrants issued to Lattice shareholders 120,107 $0.42 ---------- -----

Balance at June 30, 2003 5,119,403 $0.31 to $7.41(US$5.00) ---------------------------------------------------------------------------------------------------

On April 23, 2003, the Company completed a private placement to sell 1,500,000 Units of the Company at a price of $0.20 per Unit. Each Unit consisted of one common share of the Company and one-half of one non-transferable share purchase warrant. Each whole share purchase warrant will entitle the holder to acquire one additional previously unissued common share at a price of $0.35 for a period of one year following closing. On June 16, 2003, the Company issued 130,428 and 120,107 warrants to previous shareholders of Millennium Ventures Ltd. and Lattice Capital Corporation which are exercisable at $0.31and $0.42 respectively and expire December 20, 2004. The Company repriced and extended the expiration date of certain warrants. At June 30, 2003, the Company has 5,119,403 warrants outstanding, exercisable at prices ranging from $0.31 to US$5.00 each, and expiring at various dates to December 20, 2004. 9 VERB EXCHANGE INC. Notes to Consolidated Financial Statements (Expressed in Canadian dollars) Three and Six Months Ended June 30, 2003 (e) Pro forma compensation expense: Under the intrinsic value method, the Company has not recognized any compensation expense for options issued to its employees during the six months ended June 30, 2003 and 2002. Had the Company determined compensation expense for option grants made to employees after the six months ended June 30, 2003 and 2002 based on the fair values at grant dates of the stock options consistent with the fair value method, the Company's loss and loss per share for the six months ended June 30, 2003 and 2002 would have been the pro forma amounts indicated below. ----------------------------------------------------------------------- June 30,2003 June 30, 2002 ----------------------------------------------------------------------- Net loss - as reported 912,457 2,029,445 Net loss - pro forma 1,011,937 2,029,445 Net loss per share - as reported 0.06 0.38 Net loss per share - pro forma 0.07 0.38 ----------------------------------------------------------------------- The weighted average estimated fair value at the date of grant for options granted during the six months ended June 30, 2003 and 2002 was $0.05 per share. The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions: ----------------------------------------------------------------------- Risk-free interest rate 4.5% Dividend yield - Volatility factor 150% Weighted average expected life of the options 5 years -------------------------------------------------------------------------------- For the purposes of pro forma disclosures, the estimated fair value of the option is amortized to expense on a straight-line basis over the vesting period. 6. ACQUISITION: Effective June 15th, 2003, the Company acquired and merged with Millennium Ventures Ltd. for 1,372,497 shares and 130,428 warrants and with Lattice Capital Corporation for 1,201,076 shares and 120,107 warrants. As a result, the Company netted cash of $452,556. 7. SUBSEQUENT EVENTS: On July 7, 2003, the Company granted 1,088,000 options and repriced all outstanding options to $0.35 per share. The Company is offering up to 2,142,858 shares in a private placement at a price of $0.28 per share for total proceeds up to $600,000. These shares will be subject to an additional hold period of four( months. Effective August 14th, 2003, the Company obtained Exchange approval to convert payables of $175,000 for shares at a price of $0.28 per share. 10 VERB EXCHANGE INC. QUARTERLY REPORT TO SHAREHOLDERS FOR THREE MONTHS ENDED JUNE 30, 2003 -------------------------------------------------------------------------------- SCHEDULE "B" - SUPPLEMENTARY INFORMATION 1. General and Administrative Expenses: 6 Months Ended June 30, 2003 ---------------------------- Office Office 28,893 Auto 17,473 Meals & Entertainment 11,549 Postage/Courier 7,438 Print/Photocopy 20,034 85,387 Marketing Marketing 57,321 Service Promotion 44,245 Investor Relations 202,566 Rent 86,092 Miscellaneous recoveries (17,870) ---------- $ 132,115 2. See "Note 4 - Related Party Transaction" to Schedule "A". 3. (a) See "Note 5 - Share Capital" to Schedule `A'. (b) See "Note 5 - Share Capital" to Schedule `A'. 4. (a) See "Note 5 - Share Capital" to Schedule `A'. (b) See "Note 5 - Share Capital" to Schedule `A'. (c) See "Note 5 - Share Capital" to Schedule `A'. (d) See "Note 5 - Share Capital" to Schedule `A'. 5. Directors and Officers of Verb Exchange Inc.: Pierre Lapointe - Chairman Nathanael Lineham - Director, President and CEO Jeff Durno - Director Ross Wilmot - Director Noel R. Bambrough - Director Scott Ackeran - Director Paul Witzel - Director David Ebert - CFO Secretary 11 VERB EXCHANGE INC. QUARTERLY REPORT TO SHAREHOLDERS FOR THREE MONTHS ENDED MARCH 31, 2003 -------------------------------------------------------------------------------- SCHEDULE "C" - MANAGEMENT DISCUSSION ------------------------------------ Note: The following management discussion has been prepared as a summary of activities for the three and six months ended June 30, 2003 and of significant subsequent events to the date of this report. NATURE OF BUSINESS PRINCIPAL PRODUCTS AND SERVICES Verb is in the business of developing and delivering solutions for the communication and messaging needs of businesses and professionals through the development of Presence Communications, defined as the ability to control and direct how, when and where we communicate without being tied to a specific device, location or service provider, anytime or anywhere in North America. This is made possible, in part, by assigning a unique identifier (an identity) to the user rather than to traditional points of access, (i.e., cell phone, land line, voicemail, computer, etc.). It provides users the freedom to control and direct how, when, and where they communicate using simple voice commands. Verb concentrates on enhancing access to and the management of various communications formats (voice, fax, e-mail) as well as eliminating the need for redundant devices so that organizations and individuals can communicate more effectively and realize increased productivity. There are two distinct messaging platforms: tagline(TM), a full featured Unified Communications platform that utilizes speech recognition and text to speech capabilities, and myMessenger(TM), a java based Interactive Voice Broadcast delivery system. Verb's products and services are offered to subscribers on a hosted basis or ASP (Application Service Provider) model for a monthly subscription fee. There is a variety of price plans which provide access to the platform in bundles of minutes, and subscription is automatically renewed each month unless the subscriber chooses to cancel the service. Currently there are three distinct services based on the two platforms that comprise Verb's product suite: tagline(TM), myMessenger(TM) and the Presence Console. TAGLINE(TM) The tagline(TM) service gives users control over their communications. Tagline functions as a virtual personal assistant to screen, handle and direct calls, faxes and emails. The user decides when and how they receive calls through the tagline(TM) filtering and screening capabilities. The system allows the user to identify callers by contact name or phone number. The user determines the security levels, so all messages and incoming calls are secure and offers the ability to have messages sent to them by email, phone, wireless PDA or computer. MYMESSENGER(TM) myMessenger(TM) is an web-enabled interactive voice broadcast system, proprietary to Verb. And can broadcast to both on platform recipients (other myMessenger subscribers) or off platform recipients, (anyone with a live telephone number). With one toll-free call to the myMessenger(TM) 12 service, the user can record a personal voice message and have it delivered to all the contacts in their existing database anywhere in North America for a per message charge if they are off-platform, or without cost if they are on-platform. The recipient of the message can respond to the voice mail with a voice reply back to the myMessenger(TM) mailbox or with a simple yes/no answer -through the telephone keypad. myMessenger(TM) will provide a detailed report indicating how many people were contacted, how many calls were answered by voicemail and how many attempts were made to contact each person. The system will also send notification when someone has responded to a message or when a broadcast is complete. The system offers both an interactive voice response and web interface to allow users to access information by phone or through the web. PRESENCE CONSOLE The Presence Console manages all forms of communication - voice, mobility, Internet and instant messaging, including corporate grade instant messaging, media streaming and web conferencing. Presence Console is a web based content delivery, instant messaging and monitoring application, developed by, and proprietary to Verb, which becomes the subscriber's command center. Its integration with Internet-related tasks gives the user access to common tasks such as web searches and email. Furthermore, the interactive nature of the application allows "dynamic content" (in the form of banner ads and scrolling news headlines) to be fed to the user. From Presence Console, the subscriber can easily manage all tagline(TM) functions while continuing to work in other programs. Presence Console is a unique feature option for the GUI (Graphical User Interface) and an important component of the private label branding solution Verb offers to resellers. When branding the interface for a specific group, Verb is able to offer Presence Console as a means for a subscribing organization to extend their web and brand presence to their client's desktops. Verb will charge specific user groups by the download for the use of Presence Console. Presence Console also interfaces with tagline(TM) and myMessenger(TM) to provide quick access to certain features such as notification of pending messages without having to log into the GUI. Each component of the Verb suite (tagline(TM), myMessenger(TM) and Presence Console) has been configured to be 'stand-alone' in the marketplace or can be bundled together for multiple applications within an organization. DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION Note: the consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Verb Exchange (Management), Inc. and Cadium Systems Inc. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 : REVENUES: Revenue increased by $562,800 to $590,825 in 2003 compared to the first quarter of 2002 ($28,025) due primarily to the launch of Verb's agency program which has been well received in the market. COST OF SALES: Cost of sales increased by $172,274 to $187,817 in 2003 from $15,543 in 2002 and was comprised of direct costs of delivery including telecom charges, commissions and other selling costs. 13 EXPENSES: Total expenses were up $9,162 (2003 - $949,931) compared to the same quarter in the prior year (2002 - $940,769). There was a large decrease of $25,975 in general and administrative costs in 2003 ($132,115) compared to the first quarter of 2002 ($158,090). More specifically, marketing costs were down by $29,159 to $5,546 in 2003 compared to the first quarter of 2002 ($34,705). This decrease was partially offset by an increase in office expenses of $10,457 to $27,374 in 2003 compared to the first quarter of 2002 ($16,917) due to increased activities as a result of the launch of our agency program. Salaries and wages were down 48% or $95,494 to $103,346 in 2003 from $198,840 in 2002 while professional and consulting fees were up $97,526 to $284,865 in 2003 from $187,339 in 2002 as consultants offered more varied expertise as the company prepared to launch our agency program and bring product lines to market. Both these expense categories are expected to increase over the next two quarters as we continue to build out our agency program. Billing, foreign exchange and travel are down by $11,917, $7,566 and $6,977 respectively. Billing is down as last year's quarter includes more than 3 months expense as the supplier was new and did not issue any invoices until the year turned over. Travel should increase as more agencies are signed up across North America. Communications, interest expense and management fees were $11,043, $10,661 and $11,500 higher respectively in 2003 compared to the first quarter of 2002. Increased sales activity, settling terms for the repayment of outstanding payables and more market reflected remuneration are the reasons for the increases. Communications cost should increase with sales while interest expense should remain constant as we balance the financing of our expansion with the repayment of old debt. The bad debt expense of $29,422 resulted from a write-down of Ayotte's receivable from the sale of the drum business prior to the reverse takeover transaction. Net loss for the quarter was $546,923 in 2003, a $381,364 drop from the previous year's quarterly loss of $928,287. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002 : REVENUES: In the second quarter ended June 30, 2003, revenue continued to increase by $1,219,331 to $1,240,761 from $21,430 in 2002 as Verb's agency program launch continued. The Company focused on the establishment of master agencies to aid in the expansion of certified agencies to sell its products. Four new master agencies were sold securing key areas in California, Florida and New Jersey in the US and the Atlantic region in Canada. Revenues exclude additional amounts totaling $464,188(US$ 344,480) not yet received from these sales as contracts receivable and the corresponding deferred revenue. These amounts are reflected on the balance sheet. 14 COST OF SALES: Cost of sales is comprised of all direct costs of providing the service, including telecom charges, commissions and other selling costs. Cost of sales increased by $507,325 to $526,386 in the second quarter of 2003 compared to $19,061 in 2002. The increase in cost of sales is consistent with the increase in revenue. EXPENSES: Total expenses for the three months ended 2003 were down by $23,619 to $1,079,908 as compared to $1,103,527 in the same period of 2002. General and administration was down by $24,740 to $164,866 in 2003 from $189,606 in 2002. Salaries and wages were also down by $75,975 to $150,626 as were professional and consulting fees, down $23,696 to $259,420 in 2003. This decrease reflected the realignment of the Company's marketing activity. Increases in these categories are expected in the third quarter to complete the redeployment of the sales force. Communications (up by $34,424) and travel (up by $22,849) are higher as predicted and again will continue to increase with sales. Net loss for the second quarter of 2003 was $365,534 or $0.03 per share compared to $1,101,158 or $0.25 per share for 2002. This improvement directly reflects the strength of the agency program. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002: REVENUES: Revenues for the first six months increased to $1,831,586 compared to $49,455 over the same period in 2002 as Verb launched its agency program setting up Certified Agents to sell its products. It then expanded its focus to complete selling Master Agents across Canada while securing key areas in California, Florida and New Jersey in the US. COST OF SALES: Cost of sales is comprised of all direct costs of providing the service, including telecom charges, commissions and other selling costs. Cost of sales for the six months ended June 30th, 2003 increased $685,839 to $720,443 in 2003 compared to $53,042 in 2002 consistent with revenue. EXPENSES: Total expenses were contained to $2,023,599 year to date for 2003 compared to $2,025,858 for 2002. While continuing its research and development efforts, the Company has moved to commercialization without incurring additional costs. General and administration costs were down $50,716 to $296,981 from $347,696 in 2002. Salaries and wages dropped by $171,469 to $253,972 from $425,441 in 2002 while professional and consulting fees increased by $73,830 to $544,285 from $470,456 in 2002. The combined personnel cost decline of $97,639 reflects changes in personnel by management to meet current needs. Increases in communications (up by $45,467), bank charges and interest (up by $25,164), travel (up by $15,872) and management fees (up by $20,500) over the same time period in 2002 offset the decline in personnel costs. Net loss for the year to date was $912,457 or $0.07 per share, an improvement of $1,116,988 from the $2,029,445 or $0.47 per share loss in 2002. This improvement again directly reflects the strength of the agency program. 15 FINANCIAL POSITION, LIQUIDITY, AND CAPITAL RESOURCES: The Company's overall financial position from operations has strengthened during the first six months of the year. While the loss during that time was $912,457, the cash impact of the net loss after adjusting for non-cash items (primarily amortization of $558,400) and changes in other working capital items was reduced to only $432,694. Financing over the six months included the completion of a private placement of 1,500,000 units of the Company at a price of $0.20 per unit for a total proceeds of $300,000. Each unit consisted of one common share of the Company and one-half of one non-transferable share purchase warrant. Each whole share purchase warrant entitles the holder thereof to acquire one additional previously unissued common share at a price of $0.35 for a period of one year following closing. The Company also acquired two Capital Pool Corporations and issued 1,372,497 shares and 130,428 warrants to the shareholders of Millennium Ventures Inc. and 1,201,076 shares and 120,107 warrants to the shareholders of Lattice Capital Corporation and consequently acquired cash held by these companies aggregating $452,556. In summary, the Company's cash position has strengthened from a deficiency of $36,387 to a closing balance at June 30th, 2003 of $234,254. This improvement reflects essentially the contributions in the first six months of this year from the completion of the unit private placement amounting to $300,000 and the cash received from the Millennium and Lattice mergers totaling $452,556, offset by the net impact of the operating loss of $432,694. As at June 30, 2003, the Company's working capital deficit also improved by $362,686 to $1,106,361compared to $1,469,047 at the December 31st, 2002 year end. Historically, the Company has financed its operations mainly through the sale of equity securities and also through short term debt and related party loans, but the Company's main source of cash is shifting from external capital to internally generated cash flows as illustrated by these results. However, Management recognizes as part of its near term strategy that additional external financing is required and is currently completing two such initiatives, an offering of 2,142,858 shares for private placement at a price of $0.28 per share for total proceeds of up to $600,000, as well as a debt settlement of related party loans of $175,000 for shares for which Exchange approval has been received. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VERB EXCHANGE INC. (Registrant) Date: September 3, 2003 By: /s/ David Ebert ------------------------------------ DAVID EBERT, Chief Financial Officer 17

-------------------------------------------------------------------------------- March 31,2003 March 31, 2002 -------------------------------------------------------------------------------- Net loss - as reported 546,923 928,287 Net loss - pro forma 646,403 928,287 Net loss per share - as reported 0.05 0.21 Net loss per share - pro forma 0.06 0.21 --------------------------------------------------------------------------------

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