Filing summary
Period and entity: Unaudited Form 10-Q for the quarter and six months ended October 31, 2014, filed by Valuesetters, Inc. The request identifies Netcapital Inc.; the filing itself names Valuesetters, Inc., so the issuer identity should be verified. The filing describes an internet-based digital products business and recent expansion into VoIP and consulting.
Financial performance and position
| Metric | Six months ended Oct. 31, 2014 | Comparable 2013 period |
|---|---|---|
| Revenue | $56,444 | $3,566 |
| Operating income (loss) | $(278,356) | $(3,658) |
| Net income (loss) | $285,928 | $(13,085) |
| Net cash used in operating activities | $(9,973) | $(11,964) |
For the three months ended October 31, 2014, revenue was $39,768, operating loss was $76,904, and net income was $166,616; the corresponding 2013 figures were $1,420, $62, and a net loss of $4,883. The reported six-month profit was driven principally by a $576,653 gain from remeasuring derivative liabilities, not operating profitability. Management reported a 47% gross margin on VoIP sales.
At October 31, 2014, cash was $2,780; current assets were $259,581 and current liabilities were $835,122, resulting in negative working capital of $575,541. Total assets were $1,847,104, total liabilities were $2,268,388, and stockholders’ deficit was $421,284. Total debt was $1,521,442, including a $1,100,200 secured related-party loan. Cash increased by $1,157 during the six months, mainly due to $11,130 of net financing cash inflow.
Changes and significant items
- Revenue increased substantially from a small prior-year base, reflecting VoIP activity and consulting services. Some consulting consideration was received as equity interests; the cash flow statement also identifies $35,000 of non-cash revenue.
- Expenses rose, especially selling, general and administrative expense, which included $280,393 of six-month stock-based compensation. The balance sheet included $429,186 of prepaid stock-based compensation.
- In September 2014, the company acquired a VoIP business for a $1 million increase to its secured loan. The transaction recorded $1,170,041 of assets and the same amount of liabilities. Separately, it acquired a consulting firm for a $200,000 convertible note, recorded entirely as goodwill.
- The secured loan from the largest shareholder increased from $93,219 at April 30 to $1,100,200 at October 31 and matures June 30, 2017. It is secured by a first lien on company assets and carries restrictive covenants.
- The company reported no material subsequent events and no material litigation. It anticipated no capital expenditures in fiscal 2015.
Outlook, risks, and controls
Management disclosed substantial doubt about the company’s ability to continue as a going concern. It stated that cash resources were insufficient for operating losses, debt and lease payments, capital expenditures, and working capital needs, and that the company could not meet obligations as they came due. Management planned to seek additional debt or equity financing, use available majority-shareholder financing in the short term, and pursue digital-product and acquisition opportunities. There is no assurance financing will be available on acceptable terms or that the business plan will succeed; failure could require significant reductions, reorganization, or cessation of operations.
Management concluded that disclosure controls and procedures were ineffective, citing insufficient GAAP and SEC reporting expertise, inadequate written procedures, and lack of segregation of accounting duties. The filing does not provide a formal revenue or earnings guidance range. The company was a smaller reporting company and did not provide the risk-factor discussion requested under that item.
Investor verification points
- Confirm the issuer’s identity and relationship, if any, between Netcapital Inc. and the Valuesetters, Inc. named in this filing.
- Reconcile derivative accounting: the statements report a $576,653 six-month gain, while the notes state a $579,653 six-month gain; the statements show no quarterly gain, while the notes report a $329,043 three-month gain. The balance sheet lists a $332,926 derivative liability, while the fair-value table lists $329,926.
- Verify related-party ownership and balances: the filing gives two different share counts for the principal lender (231,673,207 and 241,673,207), and related-party amounts are presented differently across notes.
- Assess liquidity and refinancing dependence, including the very low cash balance, negative working capital, secured related-party debt, and covenants.
- Evaluate the acquisition economics, asset valuations, non-cash consulting revenue, and whether reported derivative gains and stock-based compensation obscure underlying operating performance.