Filing summary: quarter ended March 31, 2017
Issuer identification: The filing is for TimefireVR Inc. (formerly EnergyTek Corp.), a virtual-reality content developer, not Red Cat Holdings, Inc. The filing describes TimefireVR’s acquisition of Timefire, LLC in September 2016 as a reverse recapitalization; its historical financial statements are those of Timefire, LLC.
Financial performance and position
- Revenue: $0 in Q1 2017, versus $203,640 in Q1 2016. The prior-year revenue came from a one-time related-party project.
- Operating expenses and loss: Expenses were $1,159,549, up from $207,176; operating loss was $1,159,549, versus $3,536. Management attributed the expense increase to post-merger operational ramp-up.
- Net income: $1,428,692, compared with a $5,448 net loss in Q1 2016. The 2017 result included a $2,623,178 noncash gain from the decrease in the fair value of warrant-related derivative liabilities; it therefore did not reflect profitable operations. Interest expense was $34,939.
- Cash flow: Operating cash use was $626,666, versus $93,033 in Q1 2016. Financing provided $712,500, primarily from convertible notes; investing cash flow was zero. Cash increased by $85,834 to $311,213.
- Liquidity: Current assets were $542,303 and current liabilities were $838,557, a working-capital deficit of approximately $296,000. Total assets were $619,762.
- Debt and other obligations: Convertible notes had aggregate principal of $750,000 and a net carrying value of $718,410 after discounts. The notes bear 8% interest, mature September 3, 2017, and generally require repayment at 120% of principal plus accrued interest at maturity; conversion at $0.30 per share is available under specified terms. Derivative liabilities were $1,768,897. Series A preferred stock was recorded as $1,500,004 of mezzanine equity.
- Margins: No revenue was reported in Q1 2017, so a meaningful operating margin is not available.
Material changes and unusual items
- Compared with Q1 2016, revenue ceased while operating expenses rose substantially. The reported swing to net income was principally due to the warrant valuation gain, rather than sales or operating performance.
- In March 2017, the company raised $712,500 gross through senior convertible notes, before reimbursement of lead-investor legal fees, and issued approximately 2.5 million five-year warrants exercisable at $0.35 per share.
- Warrant liabilities are measured using Level 3 valuation inputs, including estimated volatility. The filing reports 24,379,305 shares issuable upon conversion of preferred stock or exercise of warrants and options as of March 31, 2017.
- The company reported 45,081,128 common shares outstanding at quarter-end; 46,269,804 were outstanding as of May 15, 2017.
Outlook, risks, and contingencies
- Going concern: Management stated that revenue was insufficient to fund operations and that substantial doubt existed about the company’s ability to continue as a going concern. Management said additional financing was needed to meet cash requirements over the next year, but it had no broker-dealer commitment and insufficient working capital to support operations for 12 months. Further financing was not assured.
- Controls: Management concluded disclosure controls and procedures were not effective as of March 31, 2017 and was working to identify remediation measures.
- Commitments: The filing describes executive employment and consulting arrangements, office lease payments, and advisory, corporate-development, and software-integration agreements. The software-platform agreement includes a 25% royalty on attributable fees.
- Legal matters: No material changes to legal proceedings were reported. The company stated it had no significant off-balance-sheet arrangements.
- Guidance: The filing provides no quantified revenue, earnings, or cash-flow guidance. Management’s outlook depends on obtaining financing and generating future revenue.
Important facts for investors to verify
- Confirm the issuer: this filing names TimefireVR Inc., not Red Cat Holdings, Inc.
- Assess whether the company can obtain financing and meet the September 2017 note maturity and other operating obligations.
- Review the warrant valuation assumptions and the noncash nature of the gain that drove reported net income.
- Evaluate potential dilution from note conversion, preferred-stock conversion, warrants, options, and subsequent share issuances.
- Review the company’s progress remediating ineffective disclosure controls and its ability to develop revenue-generating operations.