TON Strategy Co quarterly report, Q1 FY2017

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Business context and reporting period

This is nFüsz, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017, filed May 10, 2017. The filing is by nFüsz, formerly bBooth, Inc.; it does not identify the filer as TON Strategy Co. The company offers interactive-video and cloud-based SaaS products under the Notifi brand. Its name change to nFüsz became effective April 21, 2017, after quarter-end.

Financial performance and position

  • Revenue: No revenue is reported in the statements of operations; the company also says it had not derived revenue from operations to date. Accordingly, a revenue growth rate or margin cannot be calculated from the filing.
  • Loss: Operating loss was $707,137, versus $545,340 in Q1 2016. Net loss was $856,820, versus $697,280; basic and diluted loss per share was $0.01 in both periods.
  • Expenses: Research and development expense rose to $89,600 from $36,450; general and administrative expense rose to $617,537 from $508,890. Interest expense, including debt-discount amortization, totaled $123,683, compared with $151,940.
  • Cash flow: Operating cash used was $318,092, versus $275,972. Financing provided $425,000, including $170,000 from common-stock sales and $255,000 net proceeds from Series A preferred stock. Cash increased by $106,908 to $123,670.
  • Liquidity and obligations: Current assets were $157,954 and current liabilities were $3,783,401 at March 31, 2017. Total liabilities, including the $268,143 net Series A preferred-stock liability, were approximately $4.05 million. Stockholders’ deficit was $3,834,770. The filing states substantial doubt exists about the company’s ability to continue as a going concern.
  • Debt: Current liabilities included $1,964,985 of related-party notes and a $680,268 convertible note. Related-party notes carried 12% interest; several were due April 1, 2017. The $680,268 Oceanside note was extended to August 4, 2017. The company also had $203,893 of notes payable net of discount.

Material changes versus the prior comparable period

  • Net loss increased by $159,540, while operating cash use increased by $42,120.
  • R&D spending increased by $53,150, primarily due to software development work; general and administrative expense increased by $108,647, primarily due to higher stock-based compensation.
  • Interest expense decreased by $28,257, primarily because of lower debt-discount amortization.
  • Financing cash inflows increased to $425,000 from $214,926, supporting a rise in quarter-end cash from $41,973 at March 31, 2016 to $123,670.
  • Common shares outstanding rose from 94,661,566 at December 31, 2016 to 98,895,733 at March 31, 2017; 103,641,566 were reported outstanding as of May 10, 2017.

Outlook, risks, contingencies and unusual items

  • Management expects operating expenses may continue to exceed revenue and says further debt or equity financing may be needed. It provides no specific revenue, earnings or cash-flow guidance and gives no assurance financing will be available or profitability achieved.
  • The Series A financing had $300,000 purchase consideration and $315,000 stated value; net proceeds were $255,000. It accrues 5% dividends and is mandatorily redeemable in five installments beginning approximately 180 days after the February 14 closing. Redemption may generally be in cash or common shares, subject to the agreement.
  • In April, the company issued 3,675,000 common shares for $260,000 net proceeds. On May 4, it extended two CEO-related notes due April 1, 2017—the $1,198,883 secured note and $189,000 unsecured note—to August 1, 2018. The secured-note extension included 1,755,192 warrants.
  • The company disclosed substantial doubt about going concern, negative operating cash flow, a substantial working-capital shortfall, and reliance on additional financing. It also warned of potential dilution, competitive and SaaS-adoption risks, cybersecurity and third-party service risks, and dependence on key personnel.
  • Management concluded disclosure controls and procedures were not effective as of March 31, 2017. No material change in internal control over financial reporting was reported during the quarter.
  • A vendor-related lawsuit seeks approximately $157,000 plus interest and costs. The company denies the claims, plans to defend the case, and recorded no reserve.
  • Non-cash and equity-related items included $176,621 of vendor shares for services, $87,652 of option compensation, and a $26,000 loss when shares valued at $56,000 settled $30,000 of accounts payable.

Important facts for investors to verify

  1. Whether financing was secured after the filing and whether available cash could meet operating needs and near-term obligations.
  2. The status, terms and actual settlement method of Series A redemptions, and the effect of any share-based redemption on dilution.
  3. Repayment or further extension of the related-party and other notes, including the amounts past due or approaching maturity at quarter-end.
  4. Whether the company generated material customer revenue after the reported period; no operating revenue is shown for the quarter.
  5. Progress addressing ineffective disclosure controls and the outcome or financial exposure of the Multicore litigation.
  6. Potential dilution from outstanding options and warrants—17,530,953 options and 18,455,264 warrants at March 31—and from subsequent share issuances.