Filing summary
Period and issuer: This is an unaudited Form 10-Q for the three months ended July 31, 2014, the first quarter of fiscal 2015. The filing identifies the registrant as Valuesetters Inc., not Netcapital Inc.; verify the issuer and period against the intended filing.
Financial performance
| Metric | Quarter ended July 31, 2014 | Comparable 2013 quarter |
|---|---|---|
| Revenue | $16,676 | $2,146 |
| Operating expenses | $186,373 | $5,866 |
| Operating loss | $(169,697) | $(3,720) |
| Net income (loss) | $154,067 | $(8,202) |
| Operating cash flow | $(6,895) | $(7,614) |
Revenue rose $14,530, or 677%, primarily from $15,000 of consulting services paid in equity interests in two early-stage companies. The reported net income was driven by a $329,043 gain from remeasuring derivative liabilities; the company still had a substantial operating loss. Selling, general and administrative expense included $175,703 of stock-based compensation. Reported basic and diluted earnings per share were both $0.00.
Liquidity, debt and balance sheet
- Cash was $374 at July 31, 2014, down from $1,623 at April 30. Operating activities used $6,895; financing provided $5,646.
- Total assets were $580,850, including $505,476 of prepaid expenses and $75,000 of investments. Stockholders’ deficit was $553,144.
- Total debt was $512,287, including $348,914 of related-party demand notes, a $98,179 secured related-party loan, $47,817 owed to a bank, and $17,377 of other notes. The secured lender is also the 54% shareholder and has a first lien on company assets.
- The notes report negative working capital of $431,199, while MD&A reports negative working capital of $442,252. The filing does not reconcile this difference.
Material developments, outlook and risks
- Management stated that cash resources were insufficient to fund ongoing losses, debt payments and working-capital needs, and that the company could not meet obligations as they became due. The filing raises substantial going-concern doubt and warns that operations could be reduced, reorganized or shut down without adequate financing.
- Management planned to seek debt or equity funding and pursue digital products and acquisitions. It said short-term funding might be available from the majority shareholder, but outside financing was difficult and not assured. No revenue or earnings guidance was provided; management did not anticipate capital expenditures in fiscal 2015.
- The company’s business included online games and subscriptions, a mobile VoIP app, and consulting for small companies in exchange for equity. Management said Google had provided $50,000 of vendor credit and planned advertising support for the app beginning in late September 2014.
- In July, the company agreed to issue shares for investor-awareness and consulting services, and granted options to consultants. Because all 500 million authorized common shares were already issued, these agreements were treated as derivative liabilities. The quarter-end derivative liability was $362,136. Subsequent events included a September 11 acquisition of a consulting firm for $200,000, financed with a three-year, 2% convertible note for up to 20 million shares.
- Disclosure controls were deemed ineffective due to limited GAAP/SEC accounting expertise, insufficient written procedures and lack of segregation of duties. The company reported no material litigation and identified no defaults upon senior securities.
Important facts to verify
- Confirm that this Valuesetters Inc. filing is the intended filing for Netcapital Inc.
- Reconcile the reported working-capital figures and the MD&A cash-flow discussion’s reference to $143,014 of net income with the financial statements’ $154,067.
- Assess the sustainability of revenue and the effect of the noncash derivative gain on reported earnings.
- Verify near-term financing availability, related-party debt terms and covenants, and the company’s ability to meet obligations.
- Review the share-authorization shortfall, derivative valuations, potential dilution and the subsequent acquisition’s convertible note.
- Consider the ineffective disclosure controls and the concentration of financing and ownership with related parties.