Business context and reporting period
This is nFüsz, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The filing does not identify TON Strategy Co.; the company name in the request metadata does not match the filing. nFüsz marketed subscription-based, cloud software featuring interactive video, including notifiCRM and products for healthcare, education, and live or recorded video.
Financial performance and condition
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 |
|---|---|---|
| Revenue | $10,085 | $26,327 |
| Operating expenses | $674,592 | $5,689,754 |
| Loss from operations | $664,507 | $5,663,427 |
| Net loss | $1,469,992 | $8,192,523 |
| Loss per share, basic and diluted | $0.01 | $0.06 |
| Cash used in operating activities | Not provided for the quarter | $2,801,405 |
For the nine months, Modified EBITDA, a company-defined non-GAAP measure, was a loss of $2,712,068, compared with a loss of $1,481,295 in 2017. The filing cautions that this measure is not a substitute for GAAP results or operating cash flow. Gross margin is not clearly presented.
At September 30, 2018, cash was $379,461, total assets $596,891, total liabilities $2,880,313, and stockholders’ deficit $2,283,422. Current assets of $445,339 were substantially below current liabilities of $2,056,095. Related-party notes payable totaled $1,176,447, including $824,218 classified as long-term; the filing also reports a $673,376 derivative liability. The company had no convertible notes payable outstanding at quarter-end, after repayment or conversion of prior notes.
Material changes versus the prior comparable period
- Revenue rose from zero in both 2017 comparison periods following the SaaS platform launch in late 2017, but remained very small.
- Quarterly net loss improved to $1.47 million from $1.88 million, largely alongside lower general and administrative expense and lower interest expense. Nine-month net loss worsened to $8.19 million from $4.85 million, with higher operating expenses and financing-related charges.
- Nine-month operating cash use increased to $2.80 million from $1.17 million; financing activities provided $3.17 million, including $2.98 million from common-stock sales and $1.00 million from a put-option exercise.
- Shares issued and outstanding rose from 119.1 million at December 31, 2017 to 175.2 million at September 30, 2018. The filing reports 180.8 million shares outstanding as of November 14, 2018.
Outlook, risks, contingencies, and unusual items
- Going concern: Management and the auditor’s prior report raised substantial doubt about the company’s ability to continue as a going concern. Management said operating expenses could continue to exceed revenue and that additional debt or equity financing would be needed; financing availability and terms were not assured.
- Subsequent financing: After quarter-end, the company issued $1.9 million in convertible notes, receiving net proceeds of $1,614,480, and reported cash of $1,326,805 as of November 14, 2018. It also described an anticipated underwritten public offering, which was not assured.
- Proposed acquisition: On November 8, 2018, nFüsz agreed to acquire Sound Concepts for $25 million in value, comprising $15 million cash and $10 million in stock. Closing was expected in Q1 2019 but was conditional, including on completion of an underwritten public offering; there was no assurance it would close.
- Debt and accounting items: The company recorded substantial debt-related and derivative-related expenses, including $1,074,602 related to warrants issued to extend a CEO-related note and $747,623 of debt-discount amortization for the nine-month period. Derivative valuations depend on estimates and market-sensitive assumptions.
- Legal matter: EMA Financial sued over a disputed warrant exercise; nFüsz filed counterclaims. The matter was pending, and the company said it intended to defend itself.
- Governance and controls: Management concluded disclosure controls and procedures were not effective at September 30, 2018. No material change in internal control over financial reporting was reported during the quarter.
- The filing states that Item 1A risk factors were not applicable to the company as a smaller reporting company; this does not mean the business is without risk.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for nFüsz, Inc., not TON Strategy Co.
- Review the company’s ability to fund ongoing operations, the terms and dilution potential of post-quarter financing, and the status of the proposed public offering.
- Check whether the Sound Concepts acquisition closed, its financing and integration requirements, and the company’s ability to meet the cash consideration.
- Reconcile share issuance, options, warrants, and potential conversion shares when assessing dilution; the filing reports 33,984,605 options and 19,152,038 warrants outstanding at quarter-end.
- Monitor the pending EMA litigation, the past-due $111,901 related-party note, and the company’s disclosure-control weaknesses.