Filing summary
Entity and period: The supplied filing is TimefireVR Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018, signed November 19, 2018. This does not match the request metadata naming Red Cat Holdings, Inc.; verify the issuer before relying on this summary.
Business context
TimefireVR sold its virtual-reality subsidiary, Timefire LLC, on January 3, 2018, and shifted its focus to cryptocurrency mining. Mining began in April 2018; the company reports mining bitcoin, ether and litecoin. Management said the mining operation had moved from Brooklyn, New York, to Allentown, Pennsylvania. The filing also says the company was pursuing a name change to TeraForge Ventures Inc., subject to shareholder approval.
Key financial results
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $58,380 | $67,297 | $0 continuing-operations revenue |
| Gross profit (loss) | $(81,834) | $(129,788) | $0 |
| Operating expenses | $325,476 | $1,398,035 | $90,283 quarterly; $885,123 nine months |
| Net income (loss) | $(511,155) | $(1,441,150) | $(328,233) quarterly; $1,559,319 income nine months |
| Operating cash flow | Not separately stated | $(720,864) | $(1,143,258) |
| Investing cash flow | Not separately stated | $(974,810) | $0 |
| Financing cash flow | Not separately stated | $1,150,000 | $919,900 |
Gross margin was negative: approximately (140%) for the quarter and (193%) for the nine months, based on reported revenue and cost of sales. The filing does not provide a clear positive operating margin measure; operating losses were $407,310 for the quarter and $1,527,823 for the nine months.
At September 30, 2018, cash was $13,563, current assets were $349,966, current liabilities were $2,438,839, total liabilities were $2,661,155, and shareholders’ deficit was $1,421,266. Convertible notes payable were reported at $1,952,189 net of discount; the notes’ aggregate outstanding principal was separately stated as $1,982,829, with $392,563 accrued interest. Cash declined from $559,237 at December 31, 2017. Property and equipment, mainly mining equipment, was $889,923 net.
Material changes and unusual items
- Revenue began with cryptocurrency mining in 2018; there was no continuing-operations revenue in the 2017 comparison.
- The nine-month 2017 net income included a $4,129,252 noncash gain from the change in fair value of derivative liabilities. The 2018 nine-month period instead recorded a $153,156 derivative fair-value expense. These items materially affect the year-over-year earnings comparison.
- The sale of Timefire LLC generated a reported $670,428 gain in discontinued operations. The sale consideration included $100,000 cash and a secured $120,000 note, as well as liabilities assumed by the buyer.
- The $120,000 sale note was past due at September 30, 2018. The filing reports a $20,000 partial payment on November 1 and an 18% default interest rate beginning September 28.
- Common shares outstanding increased from 47,269,804 at December 31, 2017 to 235,460,470 at September 30, 2018. The Series E preferred stock was convertible into 122,190,000 common shares at September 30; warrants outstanding covered 49,887,720 shares.
Outlook, risks and contingencies
- Liquidity and going concern: Management said the company lacked capital for its estimated next 12 months of working-capital needs, had no committed additional financing, and could cease operations if it could not obtain financing. The filing states that substantial doubt exists about its ability to continue as a going concern.
- Debt and financing: Convertible notes were due in April 2019 and included an 8% interest rate, conversion features, and repayment provisions of 120% of principal plus accrued interest at maturity. The notes were secured by a first lien on company assets. Management warned that future financing could be highly dilutive; no assurance of financing was given.
- Operating commitments: A colocation agreement effective August 1, 2018 had a two-year initial term and a stated monthly obligation of $30,212. The company gave notice on November 15 that it intended to terminate its cryptocurrency advisory agreement effective December 15, 2018.
- Controls: Management concluded disclosure controls and procedures were not effective as of September 30, 2018.
- The filing gives no specific revenue, earnings, or cash-flow guidance. It identifies uncertainty around cryptocurrency-business costs, financing availability, and forward-looking plans.
Important facts for investors to verify
- Confirm the filing’s issuer: the document identifies TimefireVR Inc., not Red Cat Holdings, Inc.
- Verify the status and collectability of the overdue subsidiary-sale note, including subsequent payments and default interest.
- Confirm available liquidity, financing prospects, and the terms and repayment status of notes due in April 2019.
- Assess mining revenue relative to cost of sales and the ongoing colocation commitment, and confirm the status of the advisory-agreement termination.
- Review potential dilution from preferred-stock conversions, warrants, options, and any new financing; confirm shareholder action on the proposed company name change and sale ratification.
- Review the causes and remediation plans for ineffective disclosure controls and the going-concern uncertainty.