Filing summary
Registrant discrepancy: The supplied filing is EnergyTek Corp. (formerly Broadleaf Capital Partners, Inc.), not Red Cat Holdings, Inc. The summary below reflects the filing itself. It covers the quarter and nine months ended September 30, 2016; the interim financial statements are unaudited.
Business context and reporting period
On September 13, 2016, EnergyTek acquired Timefire, LLC, a virtual-reality content developer, in a reverse acquisition. Timefire was the accounting acquirer, and the combined company’s reported operations from the acquisition date reflect Timefire. Timefire’s former owners received 414 million common shares and 28 million five-year warrants, and owned approximately 99% of the then-outstanding common shares. The company also terminated its energy-asset joint venture, which was dissolved on September 26, 2016.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2016 | $0 | $203,640 |
| Revenue, 2015 | $0 | $6,500 |
| Operating expenses, 2016 | $592,538 | $966,342 |
| Operating expenses, 2015 | $132,396 | $305,965 |
| Net loss, 2016 | $596,824 | $773,101 |
| Net loss, 2015 | $133,083 | $300,619 |
| Net loss attributed to common shareholders, 2016 | $994,415 | $1,170,692 |
Nine-month revenue included $202,500 from completing software development work for a related party, including recognition of $156,000 previously recorded as unearned revenue. The 2016 common-shareholder loss includes $397,591 of Series A preferred-stock accretion, a deemed dividend. Basic and diluted loss per share were each reported as $0.00 when rounded. Profit margins are not meaningful given the losses and the absence of quarterly revenue.
- Cash flow: Nine-month operating cash use was $827,989; investing cash use was $8,317; financing cash provided was $1,607,504. Cash increased to $774,363 from $3,165 at year-end 2015.
- Balance sheet at September 30: Current assets were $1,000,084, including $214,750 held in restricted escrow; current liabilities were $209,887. Total assets were $7,247,076, including $6,160,229 of goodwill. Total liabilities were $1,313,163, including $174,058 in related-party notes and a $1,103,276 derivative liability. Series A preferred stock was presented as $396,728 of mezzanine equity.
- Financing and dilution: The Series A preferred-stock sale generated $1,500,004 gross proceeds and included 25,862,069 five-year warrants exercisable at $0.058 per share. At September 30, 53,862,069 warrants were outstanding. The filing also states that 221,199,427 potential common shares from preferred conversions, warrants, and restricted stock units were excluded from diluted loss per share as anti-dilutive.
Changes versus prior comparable periods
Quarterly operating expenses rose to $592,538 from $132,396, and net loss rose to $596,824 from $133,083; management attributed the increase primarily to merger-related costs. For the nine-month comparison, revenue increased from $6,500 to $203,640, largely because of the related-party software project. Nine-month expenses and net loss also increased, which management attributed to merger costs and higher employee headcount and research and development costs. Comparisons are affected by the reverse acquisition: Timefire’s operations are included only from September 13, 2016 in the reported consolidated results.
Outlook, risks, and unusual items
- Going concern and funding: The filing says the company has incurred losses and negative operating cash flows, has not generated sufficient revenue to fund operations, and depends on additional financing. Management stated it did not have sufficient working capital to support operations for the next 12 months and had no broker-dealer commitment for financing. It expressed confidence that financing efforts could meet needs if successful, but warned that availability and acceptable terms were not assured. The filing states substantial doubt exists about the company’s ability to continue as a going concern.
- Accounting and acquisition items: The reverse acquisition produced $6,160,229 of goodwill, which the company said was not expected to be tax deductible. The $1,103,276 warrant-related derivative liability was valued using Level 3 inputs, including estimated volatility. No goodwill impairment charge was recorded in the quarter.
- Preferred securities and equity: New Series A preferred stock was convertible into approximately 66.7 million common shares, subject to terms and ownership limits; the company recorded a beneficial conversion feature and accreted $397,591 during the period. The merger and financing warrants, preferred conversions, and incentive-plan awards create potential dilution.
- Commitments: The CEO, President, and Chief Strategy Officer each entered into a two-year employment agreement at $150,000 annually. The company entered a new office lease beginning October 1, 2016, with five months’ rent concession followed by stated monthly rent of $8,121 and then $8,375; it also remained obligated on its prior lease through January 2017 unless a replacement tenant was secured.
- Controls and subsequent events: Management concluded disclosure controls and procedures were not effective as of September 30 and said it was identifying remediation measures. The filing reports no material changes in legal proceedings and no significant off-balance-sheet arrangements. After quarter-end, the company disclosed a November 14 amendment to change its name to TimefireVR Inc. and effect a 1-for-10 reverse stock split, both effective November 21, 2016.
The filing provides no revenue or earnings guidance. Its forward-looking discussion is subject to risks and uncertainties.
Important facts for investors to verify
- Confirm the filing’s registrant and security identity: the document names EnergyTek Corp., not Red Cat Holdings, Inc.
- Review the reverse-acquisition accounting, acquisition-date valuation, goodwill, and the timing and comparability of reported Timefire results.
- Assess available unrestricted cash, escrow restrictions, operating cash burn, financing prospects, and the stated going-concern uncertainty.
- Verify the terms and potential dilution from preferred stock, warrants, restricted stock units, and the reverse split and name change.
- Review the company’s plans and progress to remediate ineffective disclosure controls, as well as the assumptions underlying the derivative liability valuation.