Business context and reporting period
This is Broadleaf Capital Partners, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2014—not a filing identified as Red Cat Holdings, Inc. The company described itself as an investment and business-incubation vehicle, with an emphasis on energy markets. In March, subsidiaries acquired assets associated with Litigation Capital and Texas Gulf Oil & Gas. The filing says the acquired assets were not yet placed in service.
Financial results and liquidity
- Revenue: $0, versus $10,377 in Q1 2013. The prior-year sales came from Pipeline Nutrition, which had been disposed of before this quarter.
- Profit and expenses: Gross profit was $0; operating expenses were $16,030, down from $29,783. Net loss was $16,540, compared with a $18,649 loss. Net other expense was $510, versus $9,441 of net other income in the prior-year quarter. Basic and diluted loss per share were each reported as $(0.000).
- Cash flow: The cash flow statement reports $64,001 of cash provided by operating activities, despite the net loss, primarily because accounts payable and accrued expenses increased by $80,031. Investing activities used $8,052,681, largely for acquired assets and equipment; financing activities provided $8,032,877. Cash increased by $44,197 to $51,242.
- Balance sheet and liquidity: Total assets were $8,398,923, including $7,751,031 of intangible customer assets and $256,000 of goodwill. Current assets were $181,242, including $130,000 of current notes receivable; current liabilities were $112,742. The filing says cash was insufficient to fund operations for an extended period.
- Debt: Notes payable were $17,250, all classified as current, and accrued interest was $510. The notes are related-party obligations bearing stated interest of 8%; principal and interest are due at maturity in December 2014.
- Equity and margins: The company issued preferred stock in connection with the acquisitions. No operating margin is meaningful for Q1 2014 because there was no revenue.
Material changes versus the prior comparable period
Revenue and cost of sales both fell to zero following the Pipeline Nutrition divestiture. Operating expenses declined by $13,753, which management attributed mainly to expense reductions and lower filing and company-maintenance costs. The net loss narrowed by $2,109, but other income declined because the prior-year quarter included investment payouts. Compared with December 31, 2013, reported assets rose from $307,045 to $8,398,923, principally reflecting the March acquisitions and related preferred-stock consideration.
Outlook, commentary, risks and unusual items
- Going concern: The filing cites an accumulated deficit of $14,045,801, recurring losses and cash-flow constraints, and substantial doubt about the company’s ability to continue as a going concern. Management planned to seek capital and pursue acquisitions, but gave no assurance those plans would succeed.
- Acquisition uncertainty: The Texas Gulf asset valuation relies on potential future earnings from a five-year wellhead-services arrangement. The filing says those earnings are not guaranteed and depend on crude-oil prices and the company’s ability to raise operating capital. Management expected the acquired subsidiaries to provide liquidity over the next 12 months, but the filing supplies no quantified forecast.
- Controls and governance: Management said disclosure controls were effective at March 31, 2014, but separately concluded that internal control over financial reporting was not effective and that a material weakness existed, citing limited personnel and resources and the absence of an audit committee and independent financial expert.
- Other risks: The filing highlights possible additional financing and dilution, limited trading liquidity and penny-stock restrictions. It reports no open or pending legal proceedings and says no reportable commitments or contingencies were identified.
- Leadership: The filing reports that Damon L. Wagley became president after Mike King’s resignation. A note gives resignation dates in 2013, while other sections describe April 2014 events.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Broadleaf Capital Partners, Inc., not Red Cat Holdings, Inc.
- Reconcile preferred-stock acquisition disclosures. The filing gives differing share counts and descriptions, including 900 Series A shares in one section and 90 shares in another, and reports $7,722,650 of Series A consideration for the Texas Gulf assets.
- Reconcile diluted-share figures: the statement of operations reports 317,485,961 weighted-average diluted shares, while the EPS note reports 257,097,874. The filing’s reported diluted loss per share and treatment of convertible preferred stock also merit review.
- Verify the cash-flow presentation and acquisition financing, including the reported preferred-stock financing proceeds and the supplemental disclosure of preferred stock issued for acquisition assets.
- Assess the support for the $7.75 million customer-intangible valuation and the projected well-services earnings, including whether the assets entered service and whether the company obtained sufficient operating capital.
- Review the going-concern disclosures, near-term cash needs, related-party obligations, control weaknesses, and inconsistent dates and figures elsewhere in the filing.