SEC Filing Summary
Issuer identity: The supplied filing is for TimefireVR Inc. (formerly EnergyTek Corp.), not Red Cat Holdings, Inc. Verify the issuer and filing before relying on this summary.
Business Context and Reporting Period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. TimefireVR describes itself as a virtual-reality content developer, but says it is also exploring entry into virtual currency. The acquired Timefire business had generated no material revenue. The company states its selling activity was not sufficient to fund operations.
Financial Results and Liquidity
| Metric | Three months ended September 30, 2017 | Nine months ended September 30, 2017 |
|---|---|---|
| Revenue | $340 | $828 |
| Gross profit | $238 | $580 |
| Operating expenses | $333,888 | $2,317,547 |
| Net income (loss) | $(328,233) | $1,559,319 |
| Operating cash flow | $(995,858) for nine months |
- Nine-month net income included a $4,129,252 noncash gain from a decline in the fair value of warrant derivative liabilities. Excluding this item, the reported profit does not represent operating profitability.
- Gross margin was approximately 70% for the quarter and 70% for the nine months, but on very small revenue.
- At September 30, cash was $2,021; current assets were $159,607 and current liabilities were $1,469,454, a working-capital deficit of $1,309,847. Total liabilities were $1,732,277, and shareholders’ equity was a deficit of $3,001,519.
- Current liabilities included $713,158 of convertible notes, a $100,000 related-party convertible note, $90,000 in related-party demand advances, $57,400 in a related-party short-term advance, and $211,965 of accrued interest. The filing separately reports that overdue notes and related amounts totaled approximately $1,012,000 at maturity and approximately $1,047,000 due as of November 14, 2017.
- Nine-month financing cash inflows were $772,500, primarily net proceeds from convertible notes and related-party advances. Cash fell by $223,358 over the period.
Material Changes Versus Prior Period
- Revenue for the nine months fell to $828 from $203,640 in 2016; the prior-year revenue was primarily from a one-time development project for a related party.
- Quarterly operating expenses declined to $333,888 from $592,538, which management attributed mainly to personnel reductions. Nine-month expenses increased to $2,317,547 from $966,342 as operations ramped up following the 2016 merger.
- The company reported a nine-month profit versus a loss in 2016, principally because of the noncash warrant fair-value gain; the quarter remained loss-making.
- Convertible debt and accrued interest rose substantially, and the company failed to repay notes at maturity. Common shares outstanding increased to 47,269,804 from 44,520,065 at year-end 2016.
Outlook, Risks, Contingencies, and Unusual Items
- Management said substantial doubt exists about the company’s ability to continue as a going concern. It stated the company lacked capital for estimated needs over the next 12 months, had no committed financing, and could cease operations if financing were unavailable. Any financing could be highly dilutive.
- Management was negotiating a nonbinding term sheet from a group including former executives to acquire Timefire LLC assets. The proposed consideration included limited cash and a 12-month note, and assumption of specified obligations; the company cautioned that a sale was uncertain. The filing also says the company remained uncertain it could resolve obligations to its secured creditors.
- The March 2017 convertible notes matured September 3, 2017 and were not repaid; the filing reports a default. The notes carry 8% interest and a 120%-of-principal repayment provision, with an 18% default rate. A further $70,000 senior secured convertible note was issued October 27, 2017, due November 27, 2017, with an 8% rate and a 120% repayment provision.
- After quarter-end, the CEO and President resigned as officers and directors; Jonathan Read was appointed CEO on October 20, 2017. Past-due compensation obligations remained.
- On July 5, 2017, the company laid off non-officer personnel and subsequently brought back some workers as staff or contractors, slowing product development. Management also disclosed that two executive employment agreements were in default as of September 30.
- Disclosure controls and procedures were reported ineffective as of September 30, 2017. Management said working-capital constraints prevented remediation efforts.
Important Facts for Investors to Verify
- Confirm that this TimefireVR filing is the intended document for the requested company; it does not identify Red Cat Holdings as the registrant.
- Check the status and terms of the proposed asset sale, including which liabilities would be assumed and what cash or note consideration the company would receive.
- Verify the current status, full payoff amounts, and any restructuring or enforcement actions relating to overdue and subsequent convertible notes.
- Assess whether the company obtained financing sufficient to fund operations, and whether the going-concern uncertainty was resolved.
- Review subsequent operating results, management changes, and the remediation of ineffective disclosure controls.