Business context and reporting period
This Form 10-Q covers the quarter and six months ended June 30, 2018; it was filed August 14, 2018. The filing identifies the registrant as nFüsz, Inc. (not TON Strategy Co). nFüsz markets subscription-based cloud software and interactive-video products, including notifiCRM, notifiMED and notifiEDU. The company describes its SaaS platform as having launched in late 2017.
Financial performance and condition
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Revenue | $8,239 | $16,242 |
| Operating income (loss) | $392,651 | ($4,998,920) |
| Net income (loss) | $1,771,886 | ($6,722,532) |
| Operating cash flow | Not provided for the quarter | ($1,889,395) |
| Modified EBITDA (non-GAAP) | ($762,662) | ($1,544,213) |
- Quarterly net income included a $1,444,164 gain from the change in fair value of derivative liabilities; six-month results included a $1,180,723 derivative-related expense. These noncash fair-value movements materially affected reported earnings.
- Cash was $1,420,798 at June 30, versus $10,560 at December 31, 2017. Current assets were $1,468,444 and current liabilities $3,686,026. Stockholders’ deficit was $2,180,711.
- Related-party notes payable totaled $1,964,985, generally bearing 12% interest. The balance sheet also reported a $1,014,227 derivative liability. Convertible notes were reported as paid or settled by June 30; the company raised $130,000 in cash through new convertible notes during the half-year.
- Basic and diluted loss per share for the first half was $0.05. Common shares outstanding rose from 119.1 million at year-end to 153.7 million at June 30; the filing reports 153,698,043 outstanding as of August 14.
- Operating margins are not meaningful given the very small revenue base and unusual expense movements.
Changes versus the prior comparable period
- Revenue increased from zero to $8,239 for the quarter and $16,242 for the first half, attributed to the SaaS platform launched in late 2017.
- First-half net loss widened from $2,968,585 in 2017 to $6,722,532 in 2018. The company attributed higher expenses mainly to share-based compensation, labor, marketing, professional services and debt-related costs.
- Quarterly net loss of $2,111,301 in 2017 became net income of $1,771,886 in 2018, largely reflecting derivative fair-value effects and a substantial reduction in reported general and administrative expense. The filing reports G&A expense of negative $490,145 for the 2018 quarter, attributing the decrease primarily to revaluation of unvested consultant awards.
- First-half operating cash use increased from $794,754 to $1,889,395. Financing provided $3,299,633 in the 2018 half-year, compared with $805,000 in 2017; 2018 financing included $2,978,500 from common-stock sales and $1,000,000 from a put-option share issuance.
Outlook, risks and unusual items
- Going concern: Management says substantial doubt exists about the company’s ability to continue as a going concern. Continued operations depend on raising additional debt or equity financing; the filing gives no assurance financing will be available or that the company will become profitable. Management estimated operating expenses could continue to exceed revenue in the next three months.
- Debt and dilution: After quarter-end, the CEO’s $1,248,883 secured note and $189,000 unsecured note, both due August 1, 2018, were extended to February 8, 2021. The secured-note extension included 2,446,700 warrants. Another $111,901 related-party note was past due at June 30 and the filing says settlement discussions were underway.
- Litigation: EMA Financial sued over the company’s refusal to honor a warrant exercise notice, seeking monetary and other relief. nFüsz disputes the claims and filed counterclaims; the case remained pending. The financial effect is not quantified.
- Controls: Management concluded disclosure controls and procedures were not effective as of June 30, 2018.
- Equity compensation and dilution: The filing reports substantial stock-based compensation and, at June 30, 21.3 million options and 29.4 million warrants outstanding, plus potential shares from convertible notes. Additional options and insider warrants were granted after quarter-end.
- No formal revenue, earnings or cash-flow guidance is provided. The filing reports no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the registrant’s identity and whether this nFüsz filing is the intended filing for the company named in the request.
- Review financing availability, cash runway, subsequent debt extensions, and the status of the past-due related-party note.
- Assess underlying subscription growth and cash economics; reported revenue remained very low relative to operating costs.
- Reconcile derivative-liability valuation assumptions and their large, volatile effect on reported earnings.
- Check the status and potential exposure from the EMA litigation and the remediation of ineffective disclosure controls.
- Review dilution from 2018 equity issuances, outstanding options and warrants, and post-quarter-end grants.