Filing summary
Entity discrepancy: The supplied filing is EnergyTek Corp. (formerly Broadleaf Capital Partners, Inc.), not Red Cat Holdings, Inc. It is a Form 10-Q for the quarter ended June 30, 2016, filed August 22, 2016. The interim financial statements are unaudited.
Business context and reporting period
EnergyTek operated through energy-related subsidiaries and the Wagley-EnergyTEK joint venture. Management said the decline in oil prices led it to halt oil-services operations and pursue selling its existing businesses and acquiring a company in another industry. A proposed acquisition remained subject to diligence, definitive agreements, disposition of current assets, and raising capital; completion was not assured.
Financial performance and position
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 |
|---|---|---|
| Revenue | $0 (prior year: $14,161) | $0 (prior year: $40,303) |
| Gross profit | $0 (prior year: $12,218) | $0 (prior year: $13,675) |
| Operating expenses | $48,583 (prior year: $54,137) | $93,249 (prior year: $91,770) |
| Net loss | $48,583 (prior year: $62,424) | $93,308 (prior year: $120,504) |
| Net cash used in operating activities | Not presented by quarter | $58,944 (prior year: $64,218) |
- Margins: With no reported revenue, gross and operating margins are not meaningful for 2016.
- Cash and liquidity: Cash was $9,703 at June 30, versus $6,647 at December 31, 2015. Current assets were $10,327 against current liabilities of $398,813.
- Debt: Notes payable totaled $315,504, all classified as current: $172,942 of other notes and $142,562 of related-party notes. Total liabilities were $398,813.
- Balance sheet: Total assets were $121,796 and shareholders’ deficit was $277,017. Net property and equipment was $11,469; intangible assets were $100,000.
- Cash flows: Six-month financing provided $62,000, primarily from new notes; cash increased by $3,056 to $9,703. No investing cash flow was reported.
Changes versus prior comparable periods
Revenue fell to zero in both the quarter and first half, which management attributed to depressed oil prices and lack of production. Quarterly operating expenses declined, while first-half expenses rose slightly. Net losses narrowed versus 2015; for the first half, the improvement was largely attributed to lower other expense, including substantially lower interest expense and no derivative gain in 2016. The filing’s MD&A contains some inconsistent wording about the direction of the loss change; the statement of operations reports losses of $48,583 for the quarter and $93,308 for the half-year.
Outlook, risks, and notable events
- Management stated that available cash was insufficient to fund operations for the next 12 months and warned that, if a proposed acquisition and financing were not completed by October 2016, the company would most likely have to cease operations. The filing identifies substantial doubt about the company’s ability to continue as a going concern.
- In July 2016, the company agreed to terminate the Wagley joint venture and arrange transfer of its subsidiaries, with related debt assumption of approximately $178,000. The filing also describes a potential transfer of 20 million JV-held shares subject to a later option and transaction conditions.
- After quarter-end, the company disclosed shareholder convertible-note borrowings of $30,000 each on July 15 and July 18, and a further $12,000 borrowing on August 9; these notes were due in November 2016 and bore 5% annual interest.
- Management reported ineffective internal controls over financial reporting and a material weakness, citing limited resources, limited personnel, and inadequate segregation of duties.
- The company reported no material changes in legal proceedings and no reported commitments or contingencies requiring disclosure. It had a $24.2 million tax-loss carryforward, subject to potential limitations and a full valuation allowance against the deferred tax asset.
Important facts for investors to verify
- Confirm the issuer identity: this document names EnergyTek Corp., not Red Cat Holdings, Inc.
- Check the status and terms of the proposed acquisition, financing, and planned disposition or transfer of the subsidiaries and joint venture.
- Verify current cash, debt maturities, related-party obligations, and whether additional financing was obtained after the reported period.
- Review the going-concern disclosure and the stated risk of ceasing operations if financing and the proposed transaction did not proceed.
- Assess the reported material weakness in internal controls and the impact of the post-quarter share and debt transactions.