Filing identity and reporting period
Important mismatch: The request identifies Netcapital Inc. and 2013 Q3, but the supplied filing is a ValueSetters, Inc. Form 10-Q for the quarter and nine months ended January 31, 2015. The filing reports fiscal 2015 results and was signed July 24, 2015.
ValueSetters describes an Internet-based business focused on digital products, including online games and mobile VoIP, and consulting services for early-stage companies. It acquired the VoX Communications and VoX Mobile business in September 2014.
Financial results
| Metric | Nine months ended Jan. 31, 2015 | Comparable 2014 period | Three months ended Jan. 31, 2015 | Comparable 2014 period |
|---|---|---|---|---|
| Revenue | $239,289 | $5,834 | $182,845 | $2,268 |
| Costs of services | $37,504 | $1,060 | $27,070 | $263 |
| Operating expenses | $683,156 | $16,725 | $348,356 | $9,501 |
| Operating loss | $(443,867) | $(10,891) | $(165,511) | $(7,233) |
| Net income (loss) | $(35,116) | $(24,674) | $(321,044) | $(11,589) |
| Net cash used in operations | $(55,958) | $(20,566) | Not separately stated |
The nine-month net loss was reduced by a $456,294 noncash gain from revaluing derivative liabilities. For the latest quarter, derivative revaluation produced a $120,359 loss. Revenue included $183,333 of consulting services paid with equity interests; the filing attributes the remaining growth mainly to VoIP operations. Management reports a 28% gross margin on VoIP sales and negligible costs for games and consulting.
Financial position and liquidity
- At January 31, 2015, cash was $4,829, current assets were $293,531, and current liabilities were $1,254,238. Reported negative working capital was $960,707, compared with $284,226 at April 30, 2014.
- Total assets were reported as $1,981,943 and stockholders’ deficit as $742,327. The balance sheet lists a $453,285 derivative liability.
- Reported total debt was $1,573,215, including $1,130,966 owed to the secured lender affiliated with the company’s largest shareholder. The secured loan matures June 30, 2017, bears 8% interest, and is secured by company assets. Related-party notes, bank debt, and demand notes make up the remainder.
- Operating cash use of $55,958 was more than offset by $59,164 of financing cash flow, principally related-party borrowing; cash increased by $3,206 during the nine months.
- The company reported no capital expenditures in the period and did not anticipate capital expenditures in fiscal 2015.
Material changes, outlook, and risks
- Revenue increased substantially from a very small prior-year base following the addition of VoIP operations and consulting services. Selling, general and administrative expense rose to $518,632 for the nine months, primarily reflecting stock-based compensation; interest expense rose to $47,543 as borrowings increased.
- In September 2014, the company acquired the VoIP business through a transaction with its largest shareholder and secured lender. The lender transferred 40 million shares to the seller and increased the company’s secured debt by $1 million. The company recorded acquired assets and assumed liabilities of $1,170,041 each.
- The company acquired 5% interests in three early-stage companies for consulting and advisory services. Management says it is pursuing acquisitions and cross-promotion among digital businesses, and seeks additional debt or equity funding to support operations, marketing, and growth.
- Going-concern warning: Management states that cash is insufficient to fund operating losses, capital expenditures, debt payments, and working capital; the company cannot meet obligations as they come due. It depends on additional financing, particularly support from its majority shareholder, and warns that failure to obtain funding or generate revenue could require reducing, reorganizing, or shutting down operations. The filing says the independent auditor’s report expressed doubt about the company’s ability to continue as a going concern.
- Disclosure controls and procedures were found ineffective. Identified weaknesses included insufficient GAAP and SEC reporting expertise, inadequate written accounting procedures, and lack of segregation of duties.
- No material litigation or material subsequent events were reported. The filing does not provide quantitative guidance for future revenue or profitability.
Key facts investors should verify
- Confirm the correct issuer and period: the supplied document is for ValueSetters, Inc., not Netcapital Inc., and covers the period ended January 31, 2015, not 2013 Q3.
- Review the going-concern disclosures, available financing, debt terms, and reliance on the largest shareholder and related parties.
- Assess revenue quality and cash conversion, including the $183,333 of consulting revenue received in equity and the company’s very low cash balance.
- Verify the share authorization and derivative accounting: the filing says all 500 million authorized shares were outstanding, reports derivative liabilities arising from agreements requiring shares, and separately states that 506 million shares were outstanding as of July 24, 2015.
- Reconcile figures that appear inconsistent within the supplied text. The operations statement and stock-compensation note report different nine-month stock-based compensation amounts ($349,252 and $349,332, respectively); some balance-sheet subtotals also do not reconcile to the displayed components.