Business context and reporting period
This is the unaudited Form 10-Q for the three months ended March 31, 2018. Important identity mismatch: the filing names the registrant as TimefireVR Inc., not Red Cat Holdings, Inc. The filing says the company sold its virtual-reality subsidiary, Timefire LLC, on January 3, 2018, and was shifting its focus to cryptocurrency mining, including bitcoin mining in Brooklyn, New York. It was considering a name change to TeraForge Ventures, subject to shareholder approval.
Financial performance and position
- Revenue: $0 in both Q1 2018 and Q1 2017; no revenue-based margin is available.
- Operating expenses: $636,505, up from $450,772. The filing attributes the increase primarily to officer compensation and professional fees.
- Net result: $452,078 loss, versus $1,428,692 net income in Q1 2017. Q1 2018 included a $670,428 gain on the sale of Timefire LLC, a $268,928 derivative fair-value loss, and a $56,600 loss on ether. Q1 2017 included a $2,623,178 derivative fair-value gain.
- Cash flow: $344,854 used in operations and $52,610 used in investing; $1,000,000 provided by financing. Cash increased by $602,536 to $1,161,773 at quarter-end. The filing separately reports approximately $795,000 cash as of May 15, 2018.
- Liquidity and balance sheet: Current assets were $1,516,242 versus current liabilities of $2,050,974. Total assets were $1,567,479 and total liabilities were $2,389,062; shareholders’ deficit was $821,583.
- Debt: Convertible notes had $1,826,579 aggregate principal, reported net of $49,253 debt discount at $1,777,326; accrued interest was $200,154. The March 2018 notes are secured by a first lien on company assets and bear 8% interest. Warrant derivative liabilities were $338,088.
- Equity and dilution: 155,601,804 common shares were outstanding at March 31, 2018. The filing reports 258,424,724 shares issuable upon conversion of preferred stock or exercise of warrants and options. Subsequent conversions and an advisor issuance brought reported shares outstanding to 209,218,470 as of May 18.
Material changes versus the prior comparable period
- The company disposed of its virtual-reality subsidiary, recognized a $670,428 gain, and classified the business’s results as discontinued operations.
- It entered cryptocurrency through a $100,000 ether purchase; the holding was valued at $43,400 on March 31, with a $56,600 fair-value loss recorded.
- It raised $1,000,000 gross proceeds from secured convertible notes and issued warrants covering 35,087,720 common shares. Previously overdue March and August 2017 notes were exchanged for Series E preferred stock; October and December 2017 note maturities were extended to April 15, 2019.
- Operating expenses rose, while reported net income in Q1 2017—driven substantially by a non-cash derivative fair-value gain—became a net loss in Q1 2018.
Outlook, risks, and unusual items
- Going concern: Management says additional financing is required to fund the next 12 months and that substantial doubt exists about the company’s ability to continue as a going concern. It had no committed additional financing and warned that unavailable financing could force it to cease operations; any financing could be highly dilutive.
- Outlook: Management described plans to expand cryptocurrency mining and explore locations, acquisitions, and joint ventures, but provided no quantified guidance. It said the costs and liquidity needs of the cryptocurrency business were uncertain.
- Controls: Management concluded disclosure controls were not effective as of March 31 and said working-capital constraints prevented remediation efforts.
- Unusual transactions: The subsidiary sale included $100,000 cash, a $120,000 secured note, and liabilities assumed by buyers. The filing says shareholder approval was required under Nevada law, describes use of irrevocable proxies, and reports that a preliminary proxy statement had not been finalized.
- Other risks: Ether and warrant valuations involve fair-value estimates; the company also reported prior defaults on senior notes, although certain notes were converted or had their due dates extended. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Confirm whether this filing is the intended issuer’s report: its registrant is TimefireVR Inc., not Red Cat Holdings, Inc.
- Verify the status and terms of shareholder ratification of the Timefire LLC sale, and collection and maturity details of the $120,000 note receivable.
- Review the full debt agreements, default and repayment provisions, collateral, conversion terms, and potential dilution from preferred stock, notes, warrants, and options.
- Assess cash burn, financing availability, and the company’s ability to fund operations and its cryptocurrency-mining plans.
- Check subsequent share issuances and the status of the disclosed mining-equipment purchase, and review remediation of the ineffective disclosure controls.