Business context and reporting period
This Form 10-Q is for Valuesetters Inc., a development-stage online chess and games company, for the quarter ended July 31, 2013 (the first quarter of fiscal 2014; fiscal year ends April 30). The request identifies Netcapital Inc., but the filing names Valuesetters Inc.; the filing does not explain the discrepancy.
The company operated chess.net, offering free play and paid memberships, and said it intended to pursue other internet-based games and products. The company reported 500 million common shares outstanding.
Financial performance and position
- Revenue: $2,146, up $476 (29%) from $1,670 in the prior-year quarter. Management attributed the increase to referrals, with no advertising spend.
- Costs and earnings: Service costs were $649 and SG&A was $5,217, versus $406 and $15, respectively. Operating loss was $3,720, compared with operating income of $1,249. Interest expense rose to $4,482 from $3,538; net loss was $8,202 versus $2,289. Basic and diluted loss per share was reported as $0.00, rounded.
- Cash flow: Operating cash use was $7,614, compared with $1,371 in the prior-year quarter. Financing provided $5,797, primarily from the majority shareholder’s working-capital line; there was no investing activity. Cash declined by $1,817 to $1,258.
- Liquidity and debt: Current assets were $1,258, all cash, against current liabilities of $691,986; reported working capital was negative $690,728. Total debt was $488,346, including $75,043 owed to the majority-shareholder lender, $348,066 in related-party demand notes, $50,237 owed to a bank, and a $15,000 demand note. Most obligations are current or payable on demand.
- Equity: Stockholders’ deficit was $690,728. No options, warrants, or other convertible securities were outstanding as of September 15, 2013.
Changes, outlook and risks
Revenue increased, but expenses and interest costs rose and the company moved from prior-year quarterly operating income to a net loss. SG&A included $3,000 of consulting fees and $1,775 of website development fees. The company reported no capital expenditures in either quarter and did not anticipate fiscal 2014 capital expenditures to expand the existing chess.net business.
Management stated that cash was insufficient to fund operating losses, debt payments, and working-capital needs, and that the company could not meet obligations as they came due. The filing identifies substantial doubt about the company’s ability to continue as a going concern. Management planned to seek debt or equity financing, repay debt, fund marketing and hiring, and pursue acquisitions or other digital products; there is no assurance these plans will succeed. Failure to raise funds or generate adequate revenue could force significant reductions, reorganization, or shutdown of operations. The majority shareholder is also the principal lender, and its secured loan is payable on demand and secured by company assets.
Disclosure controls were concluded to be ineffective. Identified material weaknesses included insufficient GAAP and SEC reporting expertise, inadequate written accounting and reporting procedures, and lack of segregation of duties. The filing reported no material litigation, no defaults upon senior securities, and no material subsequent events.
Important facts to verify
- Confirm whether this Valuesetters Inc. filing is the intended filing for the Netcapital Inc. request.
- Reconcile the prior-year net-loss figures: the statements of loss and cash flows report $2,289, while the statement of comprehensive loss reports $2,695.
- Confirm related-party balances and descriptions: the notes cite $314,000 owed under a board member’s demand note and separately report $421,774 owed to a director for loans, interest, and unpaid expenses; the related-party debt presentation may require clarification.
- Assess near-term funding availability, demand repayment exposure, and the going-concern uncertainty, given cash of $1,258 and substantial current liabilities.
- Review remediation of the disclosed control weaknesses and the accuracy of the reported financial statements.