Business context and reporting period
This is EnergyTek Corp.’s (formerly Broadleaf Capital Partners, Inc.) unaudited Form 10-Q for the quarter and six months ended June 30, 2014, filed August 6, 2014. The supplied filing is for EnergyTek, not Red Cat Holdings; investors should verify the issuer and filing identity.
In March 2014, subsidiaries acquired assets of Litigation Capital and Texas Gulf Oil & Gas. The company described its strategy as developing or acquiring businesses, particularly in energy and technology. It reported two operating segments: oil services and litigation.
Financial performance and condition
- Revenue: $15,355 in both the second quarter and first half of 2014, versus zero in the comparable 2013 periods. All first-half revenue was recorded from April through June: $14,216 from oil services and $1,139 from litigation services.
- Expenses and losses: Second-quarter operating expenses were $51,932 and net loss was $37,226, compared with $4,453 and $8,979, respectively, in Q2 2013. First-half operating expenses were $82,178 and net loss was $67,982, compared with $13,777 and $27,628 in first-half 2013. The filing attributes higher costs mainly to starting oil-services operations and expanding litigation operations.
- Margins: The filing does not report a consolidated gross margin. Segment data show first-half operating losses of $14,900 for oil services and $13,084 for litigation; reported revenue remained limited.
- Cash flow and liquidity: Cash was $13,630 at June 30, 2014, versus $7,045 at December 31, 2013. The cash-flow statement reports $51,739 from operating activities, $8,213,031 used in investing, and $8,167,877 from financing, with a $6,585 net change. The filing’s labels for operating cash flow and the net change conflict with the amounts and beginning/ending cash; see verification items below. Current assets were $180,996 and current liabilities $313,988, implying negative working capital of $132,992.
- Assets and debt: Total assets were $8,548,727, including $8,007,031 of goodwill/intangible assets and $195,700 of net property and equipment. Total liabilities were $313,988. Notes payable totaled $152,250, all classified as short-term, including a $135,000 equipment-purchase note convertible into 270,000 common shares.
- Equity and share structure: The balance sheet reports 167,097,874 common shares outstanding at June 30. Preferred shares were issued in connection with the acquisitions. The filing reports no income-tax expense and a full valuation allowance against deferred tax assets.
Material changes versus the prior period
The company moved from no reported revenue in first-half 2013 to $15,355 in first-half 2014, while its net loss increased by $40,354. The changes reflect newly acquired and ramping operations; the 2013 comparison also reflects the prior sale of Pipeline Nutrition, reported as discontinued operations. Goodwill and equipment were newly recorded following the acquisitions. Current liabilities rose from $27,701 at year-end 2013 to $313,988 at June 30, 2014.
Outlook, risks, contingencies and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing a $14,097,243 accumulated deficit, limited cash, and dependence on additional capital. Management said it planned to raise capital and pursue acquisitions but gave no assurance those plans would succeed. It also stated that $13,630 of cash was insufficient to fund operations for an extended period.
- Acquisition and contract uncertainty: A substantial portion of recorded goodwill relates to potential future earnings from a five-year oil-well servicing arrangement. The filing cautions that earnings are not guaranteed and depend on oil prices and the company’s ability to fund operations.
- Related parties: The company disclosed a $300,000 note receivable from the related-party buyer of Pipeline Nutrition, with $130,000 due in December 2014 and $160,000 due in March 2015, plus stated 8% interest and potential royalties. It also disclosed monthly payments of $2,500 to a related party for office and administrative services and short-term related-party notes.
- Controls and subsequent events: Management said disclosure controls were effective but internal control over financial reporting was ineffective, identifying a material weakness associated with limited personnel and resources; the company also had no audit committee or independent audit committee financial expert. After quarter-end, effective July 23, 2014, the company changed its name to EnergyTek, increased authorized common shares to 500 million, and effected a 1-for-150 reverse split.
- The company reported no current litigation or reportable commitments and contingencies. It cited risks including financing availability, demand, competition, staffing, and execution of its growth plans.
Important facts to verify
- Confirm issuer identity: this filing names EnergyTek Corp. (formerly Broadleaf Capital Partners), not Red Cat Holdings.
- Reconcile cash-flow presentation: operating activities are labeled “net cash used” despite a positive $51,739 amount, and the $6,585 change is labeled a decrease although cash rose from $7,045 to $13,630.
- Reconcile the cash-flow financing lines and supplemental disclosure: the statement lists preferred-stock financing proceeds while separately describing $8,023,377 of preferred stock issued non-cash for acquisitions.
- Review acquisition valuation assumptions supporting $8,007,031 of goodwill, especially the dependence on future oil-service contract earnings and financing.
- Assess near-term funding needs, short-term debt maturities, collection of the related-party note receivable, and the disclosed going-concern uncertainty.
- Verify the potential dilution and voting rights associated with Series C preferred stock, the convertible note, and the July 2014 reverse split.