Business context and reporting period
Entity mismatch: The supplied filing is TimefireVR Inc.’s Form 10-Q for the quarter ended June 30, 2018, not a Red Cat Holdings, Inc. filing. The company reported a transition from virtual-reality operations to cryptocurrency mining after selling its Timefire LLC subsidiary on January 3, 2018. It said it was mining Bitcoin and Ether, and planned to mine Litecoin; its name change to TeraForge Ventures Inc. was subject to shareholder approval.
Financial results and position
- Q2 2018: Revenue was $8,917 versus none in Q2 2017. Cost of sales was $56,003, producing a gross loss of $47,086. Operating expenses were $436,922 and net loss was $477,917, compared with net income of $458,860 in the prior-year quarter.
- First six months: Revenue was $8,917 versus none in 2017; gross loss was $47,954; operating expenses were $1,072,559; and net loss was $929,995, versus net income of $1,887,552 in the prior-year period. The prior-year results included substantial noncash gains from changes in derivative fair value, making the comparison less indicative of operating performance.
- Cash flow: Six-month operating cash use was $1,045,364 and investing cash use was $328,810, offset in part by $1,000,000 of financing proceeds. Cash declined from $559,237 at year-end 2017 to $185,063 at June 30, 2018.
- Liquidity and debt: Current assets were $569,608 against current liabilities of $2,131,610. Convertible notes were $1,789,152 net on the balance sheet; disclosed principal was $1,826,579, with $292,575 of accrued interest. The notes were due in April 2019 and included an 8% interest rate, a 120% maturity repayment amount, and a first lien on company assets.
- Other balance-sheet items: Total assets were $1,336,427, total liabilities were $2,362,786, and shareholders’ deficit was $1,026,359. The company held $53,418 in cryptocurrency at quarter-end and reported a $55,083 six-month fair-value loss on cryptocurrency. It had deposited $459,648 toward mining equipment.
Material changes and unusual items
- The January sale of Timefire LLC generated a reported $670,428 gain, including $100,000 cash, a secured $120,000 note receivable, and liabilities assumed by the buyers. The VR business’s results were classified as discontinued operations.
- The company issued $1 million in proceeds from secured convertible notes in March and agreed to extend earlier notes. In January, it exchanged preferred securities, notes, and warrants for Series E preferred stock; subsequent conversions materially increased common shares. Common shares outstanding were 228,460,470 at June 30 and 235,460,470 as of August 14, 2018.
- Derivative liabilities were $231,176 at June 30 and were valued using Level 3 inputs. Fair-value changes can materially affect reported earnings.
- A mining colocation agreement was scheduled to begin August 1, 2018, with a two-year initial term and monthly obligations of $30,212 under then-current specifications. The company said mining equipment was expected to enter operation in the quarter ending September 30, 2018.
Outlook, risks and contingencies
Management provided no quantified revenue or earnings guidance. It stated that revenue was insufficient to fund operations, it lacked capital for estimated 12-month working-capital needs, and it had no commitment for additional financing. Management warned that without financing the company would cease operations; the filing says these conditions raise substantial doubt about its ability to continue as a going concern. Financing could be highly dilutive.
After quarter-end, the company reported approximately $60,000 cash as of August 10 and an August 7 borrowing that provided $76,000 in proceeds through an $80,000 note bearing 12% interest, due in six months or upon a qualifying financing. Disclosure controls and procedures were deemed ineffective as of June 30. The filing describes legal proceedings only in general terms and reports no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for TimefireVR Inc., not Red Cat Holdings, Inc.
- Verify the availability and timing of new financing, the company’s near-term cash needs, and its ability to meet note obligations.
- Check whether mining equipment became operational as planned and whether mining revenue can cover operating and colocation costs.
- Review the convertible notes, preferred-stock conversion terms, warrants, and resulting potential dilution.
- Assess the valuation and volatility risks of cryptocurrency holdings and Level 3 derivative liabilities, as well as the ineffective disclosure controls.