Filing summary
Entity and period: The supplied filing is for ValueSetters Inc., a development-stage company, for the quarter ended January 31, 2014 (fiscal 2014 third quarter), with nine-month results compared with the period ended January 31, 2013. This does not match the request metadata naming Netcapital Inc.; verify the issuer and filing before relying on this summary.
Financial results and liquidity
| Metric | Three months ended Jan. 31, 2014 | Nine months ended Jan. 31, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $2,268 | $5,834 | $2,397 quarterly; $5,611 nine-month |
| Costs of services | $263 | $1,060 | $232 quarterly; $806 nine-month |
| Selling, general and administrative | $9,238 | $15,665 | $471 quarterly; $6,033 nine-month |
| Operating income (loss) | $(7,233) | $(10,891) | $1,694 quarterly; $(1,228) nine-month |
| Interest expense | $4,356 | $13,783 | $3,552 quarterly; $10,794 nine-month |
| Net income (loss) | $(11,589) | $(24,674) | $(1,858) quarterly; $(12,022) nine-month |
| Operating cash flow | Not separately presented | $(20,566) | $(4,153) nine-month |
Calculated gross profit was $2,005 for the quarter and $4,774 for the nine months, equivalent to gross margins of approximately 88% and 82%, respectively. Reported basic and diluted loss per share was shown as $(0.00); weighted-average shares were 500 million.
At January 31, 2014, cash was $3,623, current liabilities were $710,823, and working capital was negative $707,200. Total assets were $3,623 and stockholders' equity was in deficit by $707,200. Reported total debt was $503,663, up from $482,549 at April 30, 2013. Debt included $90,897 owed to the majority shareholder under a demand, secured facility, $348,616 in related-party demand notes, a $15,000 demand note, and $49,150 of bank debt. All liabilities shown on the balance sheet were current.
Changes and business context
- Nine-month revenue rose 4% year over year, which management attributed to referrals despite no advertising. Quarterly revenue fell 5%, attributed to not spending to attract users.
- Nine-month net loss more than doubled year over year. Quarterly operating results shifted from income of $1,694 to a loss of $7,233, and quarterly net loss increased from $1,858 to $11,589.
- Management attributed higher selling, general and administrative costs to public-company reporting expenses, including accounting, consulting, legal and filing costs. Higher online payment processing fees increased service costs; increased debt contributed to higher interest expense.
- The company described an online games and digital-content business centered on chess.net, with paid memberships priced at $4 monthly, $10 quarterly or $30 annually. It reported a licensing/distribution relationship for music, music videos and games, and said it began reselling a mobile VoIP application in fiscal 2014's fourth quarter.
- Financing cash flow was $21,114 for the nine months, primarily from related-party borrowing; there was no investing activity or capital expenditure. Cash increased by $548 from the start of the fiscal year.
Outlook, risks and controls
Management stated that existing cash was insufficient to fund ongoing losses, debt payments and working-capital needs, and that the company depended on additional capital. It said short-term financing from the majority shareholder was believed available, but outside financing could be difficult to obtain and no assurance was given that funding or business-plan targets would be achieved. Plans included seeking debt or equity financing, pursuing digital-product opportunities and using the CloudWebStore and StationDigital relationship to generate online sales. The filing warned that failure to raise funds or generate sufficient revenue could force reductions, reorganization, discontinuation or shutdown of operations. The financial statements included a going-concern warning and no adjustments for the consequences of a failure to continue.
The majority shareholder owned 59% of outstanding shares, was also the principal lender, and held a first lien over company assets; its secured loan was payable on demand and subject to restrictive covenants. A director also had substantial amounts owed to him and personally guaranteed bank and credit-card debt. The company reported approximately $1.032 million of tax-loss carryforwards, with a full valuation allowance; use may be limited under tax rules. Management concluded disclosure controls were ineffective, citing insufficient GAAP/SEC expertise, inadequate written procedures and lack of segregation of accounting duties. No material litigation or material subsequent events were reported. The filing did not provide a quantified revenue or earnings forecast.
Key facts for investors to verify
- Confirm issuer identity: the filing names ValueSetters Inc., not Netcapital Inc.
- Verify whether the company can meet near-term obligations given $3,623 cash, negative $707,200 working capital and demand debt.
- Assess the availability and terms of further related-party or external financing, including the demand feature, collateral lien and covenants.
- Evaluate whether the digital-content and VoIP initiatives are generating material revenue; current reported revenue remains very low.
- Review remediation of the disclosed ineffective disclosure controls and the company's ability to continue as a going concern.