Netcapital Inc 10-Q for FY2021 Q1
Netcapital Inc. (NCPL)
About this 10-Q
Netcapital Inc filed this 10-Q on September 21, 2020, covering the quarter ended July 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended July 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.76M
- up 1384.3% from $118.73K a year earlier
- Net income
- $30.87K
- up 26.1% from net income of $24.48K a year earlier
- Diluted EPS
- $0.00
- compared with $0.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 2020
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-55036
| VALUESETTERS INC. |
| (Exact name of registrant as specified in its charter) |
| Utah | 87-0409951 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
745 Atlantic Avenue Boston MA 02111 |
| (Address of principal executive offices) |
(781) 925-1700
|
| (Registrant’s telephone number, including area code) |
Indicate by check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [X] | Smaller reporting company [X] |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes[ ] No [X]
As of September
21, 2020 the Company had 831,581,712 shares of its common stock, par value $0.001 per share, issued and outstanding.
TABLE OF CONTENTS
| Page | |
| PART I—FINANCIAL INFORMATION | |
| Item 1. Financial Statements. | 3 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 16 |
| Item 3. Quantitative and Qualitative disclosures about Market Risk. | 19 |
| Item 4. Controls and Procedures. | 19 |
| PART II—OTHER INFORMATION | |
| Item 1. Legal Proceedings. | 20 |
| Item1A. Risk Factors. | 20 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 20 |
| Item 3. Defaults Upon Senior Securities. | 20 |
| Item 4. Mine Safety Disclosures. | 20 |
| Item 5. Other Information. | 20 |
| Item 6. Exhibits. | 20 |
| Signatures. | 21 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
VALUESETTERS, INC.
Condensed Consolidated Balance Sheets
| July 31, 2020 | April 30, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 874,016 | $ | 11,206 | ||||
| Accounts receivable | 6,000 | — | ||||||
| Prepaid expenses | 478,727 | 465,555 | ||||||
| Total current assets | 1,358,743 | 476,761 | ||||||
| Deposits | 6,300 | 6,300 | ||||||
| Deferred income tax asset | 168,659 | 180,000 | ||||||
| Non-current prepaid expenses | 23,483 | 143,455 | ||||||
| Investments at cost | 3,161,028 | 1,406,982 | ||||||
| Total assets | $ | 4,718,213 | $ | 2,213,498 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Trade | $ | 278,752 | $ | 278,752 | ||||
| Related party | 16,680 | 16,680 | ||||||
| Accrued expenses | 198,406 | 149,835 | ||||||
| Deferred revenue | 35,572 | 656 | ||||||
| Notes payable – related parties | 15,000 | 15,000 | ||||||
| Secured noted payable to related party | 1,000,000 | 1,000,000 | ||||||
| Interest payable – related parties | 34,386 | 31,235 | ||||||
| Current portion of long-term debt | 956,791 | — | ||||||
| Loan payable – bank | 34,324 | 34,324 | ||||||
| Demand notes payable | 7,860 | 7,860 | ||||||
| Total current liabilities | 2,577,771 | 1,534,342 | ||||||
| Small Business Administration loans payable | 1,429,009 | — | ||||||
| Total liabilities | 4,006,780 | 1,534,342 | ||||||
| Commitments and Contingencies | — | — | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, $.001 par value; 900,000,000 shares authorized, 831,581,712 and 831,269,212 shares issued and outstanding at July 31, 2020 and April 30, 2020, respectively | 831,582 | 831,269 | ||||||
| Capital in excess of par value | 2,311,262 | 2,310,169 | ||||||
| Accumulated deficit | (2,431,411 | ) | (2,462,282 | ) | ||||
| Total stockholders’ equity | 711,433 | 679,156 | ||||||
| Total liabilities and stockholders’ equity | $ | 4,718,213 | $ | 2,213,498 | ||||
See Accompanying Notes to the Consolidated Financial Statements
| 3 |
| VALUESETTERS, INC. |
| Condensed Consolidated Statements of Operations |
| (Unaudited) |
| For the Three Months Ended | ||||||||
| July 31, 2020 | July 31, 2019 | |||||||
| Revenues | $ | 1,762,322 | $ | 118,732 | ||||
| Cost of revenues | 431,019 | 2,366 | ||||||
| Gross profit | 1,331,303 | 116,366 | ||||||
| Costs and expenses: | ||||||||
| Stock-based compensation | 121,378 | 28,510 | ||||||
| Wage expenses | 1,096,120 | — | ||||||
| Consulting fees | 1,991 | 39,200 | ||||||
| Marketing | 4,101 | 3,539 | ||||||
| Rent | 14,079 | 12,529 | ||||||
| General and administrative | 41,139 | 3,380 | ||||||
| Total costs and expenses | 1,278,808 | 87,158 | ||||||
| Income from operations | 52,495 | 29,208 | ||||||
| Other income (expense): | ||||||||
| Interest expense | (10,283 | ) | (4,733 | ) | ||||
| Total other income (expense) | (10,283 | ) | (4,733 | ) | ||||
| Net income before taxes | 42,212 | 24,475 | ||||||
| Income tax | 11,341 | — | ||||||
| Net income | $ | 30,871 | $ | 24,475 | ||||
| Basic earnings per share | $ | 0.00 | $ | 0.00 | ||||
| Diluted earnings per share | $ | 0.00 | $ | 0.00 | ||||
| Weighted average number of common shares outstanding: | ||||||||
| Basic | 831,272,609 | 752,549,783 | ||||||
| Diluted | 831,272,609 | 752,549,783 | ||||||
See Accompanying Notes to the Consolidated Financial Statements
| 4 |
| VALUESETTERS, INC. |
| Condensed Consolidated Statements of Stockholders' Equity |
| For the Three Months Ended July 31, 2020 and the Years Ended April 30, 2020, and 2019 |
| (Unaudited) |
| Capital in | ||||||||||||
| Excess of | Accumulated | Total | ||||||||||
| Shares | Amount | Par Value | Deficit | Equity | ||||||||
| Balance, April 30, 2018 | 731,694,210 | $ | 731,694 | $ | 1,434,328 | $ | (3,650,013 | ) | $ | (1,483,991 | ) | |||||||||
| Net loss, July 31, 2018 | — | — | — | (7,207 | ) | (7,207 | ) | |||||||||||||
| Q1 stock-based compensation | 3,937,501 | 3,938 | 2,757 | — | 6,695 | |||||||||||||||
| Q1 stock issued for purchase | 200,000 | 200 | 500 | — | 700 | |||||||||||||||
| Balance, July 31, 2018 | 735,831,711 | 735,832 | 1,437,585 | (3,657,220 | ) | (1,483,803 | ) | |||||||||||||
| Net loss, October 31, 2018 | — | — | — | (20,355 | ) | (20,355 | ) | |||||||||||||
| Q2 stock-based compensation | 8,262,501 | 8,262 | 3,946 | — | 12,208 | |||||||||||||||
| Q2 sale of common stock | 2,800,000 | 2,800 | 2,200 | — | 5,000 | |||||||||||||||
| Balance, October 31, 2018 | 746,894,212 | 746,894 | 1,443,731 | (3,677,575 | ) | (1,486,950 | ) | |||||||||||||
| Net income, January 31, 2019 | — | — | — | 12,391 | 12,391 | |||||||||||||||
| Q3 stock-based compensation | 2,812,500 | 2,813 | 562 | — | 3,375 | |||||||||||||||
| Balance, January 31, 2019 | 749,706,712 | 749,707 | 1,444,293 | (3,665,184 | ) | (1,471,184 | ) | |||||||||||||
| Net income, April 30, 2019 | — | — | — | 598,051 | 598,051 | |||||||||||||||
| Q4 stock-based compensation | 2,812,500 | 2,812 | 5,063 | — | 7,875 | |||||||||||||||
| Balance, April 30, 2019 | 752,519,212 | 752,519 | 1,449,356 | (3,067,133 | ) | (865,258 | ) | |||||||||||||
| Net income, July 31, 2019 | — | — | — | 24,475 | 24,475 | |||||||||||||||
| Q1 stock-based compensation | 2,812,500 | 2,813 | 16,875 | — | 19,688 | |||||||||||||||
| Balance, July 31, 2019 | 755,331,712 | 755,332 | 1,466,231 | (3,042,658 | ) | (821,095 | ) | |||||||||||||
| Net income, October 31, 2019 | — | — | — | 542,451 | 542,451 | |||||||||||||||
| Q2 stock-based compensation | 75,312,500 | 75,312 | 842,031 | — | 917,343 | |||||||||||||||
| Balance, October 31, 2019 | 830,644,212 | 830,644 | 2,308,262 | (2,500,207 | ) | 638,699 | ||||||||||||||
| Net income, January 31, 2020 | — | — | — | 595,174 | 595,174 | |||||||||||||||
| Q3 stock-based compensation | 312,500 | 313 | 1,187 | — | 1,500 | |||||||||||||||
| Balance, January 31, 2020 | 830,956,712 | 830,957 | 2,309,449 | (1,905,033 | ) | 1,235,373 | ||||||||||||||
| Q4 stock-based compensation | 312,500 | 312 | 720 | — | 1,032 | |||||||||||||||
| Net loss, April 30, 2020 | — | — | — | (577,249 | ) | (557,249 | ) | |||||||||||||
| Balance, April 30, 2020 | 831,269,212 | 831,269 | 2,310,169 | (2,462,282 | ) | 679,156 | ||||||||||||||
| Net income July 31, 2020 | — | — | — | 30,871 | 30,871 | |||||||||||||||
| Q1 stock-based compensation | 312,500 | 313 | 1,093 | — | 1,406 | |||||||||||||||
| Balance, July 31, 2020 | 831,581,712 | $ | 831,582 | $ | 2,311,262 | $ | (2,431,411 | ) | $ | 711,433 |
See Accompanying Notes to the Consolidated Financial Statements
| 5 |
| VALUESETTERS, INC. |
| Condensed Consolidated Statements of Cash Flows |
(Unaudited)
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| July 31, | July 31, | |||||||
| 2020 | 2019 | |||||||
| Operating activities | ||||||||
| Net income | $ | 30,871 | $ | 24,475 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Stock-based compensation | 121,378 | 28,510 | ||||||
| Changes in deferred tax assets | 11,341 | — | ||||||
| Non-cash revenue from receipt of equity | (1,754,046 | ) | (56,932 | ) | ||||
| Changes in non-cash working capital balances | ||||||||
| Accounts receivable | (6,000 | ) | (33,000 | ) | ||||
| Contracts receivable | — | 15,000 | ||||||
| Prepaid expense | (13,172 | ) | — | |||||
| Accrued expenses | 48,571 | (4,687 | ) | |||||
| Interest payable – related party | 3,151 | 4,061 | ||||||
| Deferred revenue | 34,916 | 4,953 | ||||||
| Cash used in operating activities | (1,522,990 | ) | (17,620 | ) | ||||
| Financing activities | ||||||||
| Proceeds from SBA loans | 2,385,800 | — | ||||||
| Payment on related party note | — | (1,300 | ) | |||||
| Cash provided by (used in) financing activities | 2,385,800 | (1,300 | ) | |||||
| Increase (decrease) in cash and cash equivalents during the period | 862,810 | (18,920 | ) | |||||
| Cash and cash equivalents, beginning of the period | 11,206 | 19,110 | ||||||
| Cash and cash equivalents, end of the period | $ | 874,016 | $ | 190 | ||||
| Cash paid for: | ||||||||
| Interest | $ | 480 | $ | 672 | ||||
| Income taxes | $ | — | $ | — | ||||
See Accompanying Notes to the Consolidated Financial Statements
| 6 |
VALUESETTERS, INC.
Notes To Condensed Consolidated Financial Statements (Unaudited)
Note 1– Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended July 31, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ended April 30, 2021. For further information, refer to the audited financial statements and footnotes thereto in our Annual Report on Form 10-K for the year ended April 30, 2020.
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses. The new guidance provides better representation about expected credit losses on financial instruments. This update requires the use of a methodology that reflects expected losses and requires consideration of a broader range of reasonable and supportive information to inform credit loss estimates. This ASU is effective for reporting periods beginning after December 15, 2022, with early adoption permitted. The company is studying the impact of adopting the ASU in fiscal year 2023, and what effect it could have. The Company believes the accounting change would not have a material effect on the financial statements.
In June 2018, the FASB issued ASU 2018-07, Improvement to Nonemployee Share-based Payment Accounting, which simplifies the accounting for share-based payments. The company elected early adoption of this ASU, using the modified retrospective approach, so that all stock compensation to employees and nonemployees is treated under the same guidance as in ASC 718.
In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance had no impact on our consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Note 2 – Going Concern Matters and Realization of Assets
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. However, the Company has negative working capital of $1,219,028 and an accumulated deficit of $2,431,411. In addition, the Company may be unable to meet all of its obligations as they become due. The Company believes that its existing cash resources are not sufficient to fund its lease and debt payments and working capital requirements.
The Company may not be able to raise sufficient additional debt, equity or other cash on acceptable terms, if at all. Failure to generate sufficient revenues, achieve certain other business plan objectives or raise additional funds could have a material adverse effect on the Company’s results of operations, cash flows and financial position, including its ability to continue as a going concern, and may require it to significantly reduce, reorganize, discontinue or shut down its operations.
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company which, in turn, is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in its existence.
| 7 |
Management’s plans include:
| 1. | Seek to merge its business operations with some of the revenue-generating early-stage companies that it has incubated. The Company already owns a portion of more than a dozen companies and believes that the combination of some of those entities with ValueSetters will provide an efficient use of fixed overhead and create additional cash flow from operations. |
| 2. | Renegotiate the payment terms of the $1,000,000 secured related party note payable that matures on October 31, 2020. |
| 3. | Continue to provide consulting services and continue to charge both a cash fee and an equity-based fee, when possible, in exchange for these services. |
Management has determined, based on its recent history and its liquidity issues, that it is not probable that management’s plan will sufficiently alleviate or mitigate, to a sufficient level, the relevant conditions or events noted above. Accordingly, the management of the Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of these financial statements.
There can be no assurance that the Company will be able to achieve its business plan objectives. If the Company is unable to generate adequate funds from operations or raise sufficient additional funds, the Company may not be able to repay its existing debt, continue to operate its business network, respond to competitive pressures or fund its operations. As a result, the Company may be required to significantly reduce, reorganize, discontinue or shut down its operations. The financial statements do not include any adjustments that might result from this uncertainty.
Note 3 – Revenue Recognition
Revenue Recognition under ASC 606
The Company recognizes service revenue from its consulting contracts and its game website using the five-step model as prescribed by ASC 606:
• Identification of the contract, or contracts, with a customer;
• Identification of the performance obligations in the contract;
• Determination of the transaction price;
• Allocation of the transaction price to the performance obligations in the contract; and
• Recognition of revenue when or as, the Company satisfies a performance obligation.
The Company identifies performance obligations in contracts with customers, which primarily are professional services and subscription services. The transaction price is determined based on the amount the Company expects to be entitled to receive in exchange for transferring the promised services to the customer. The transaction price in the contract is allocated to each distinct performance obligation in an amount that represents the relative amount of consideration expected to be received in exchange for satisfying each performance obligation. Revenue is recognized when performance obligations are satisfied. The Company usually bills its customers before it provides any services and begins performing services after the first payment is received. Contracts are typically one year or less. For larger contracts, in addition to the initial payment, the Company may allow for progress payments throughout the term of the contract.
Judgments and Estimates
The estimation of variable consideration for each performance obligation requires the Company to make subjective judgments. The Company enters contracts with customers that regularly include promises to transfer multiple services, such as digital marketing, web-based videos, offering statements, and professional services. For arrangements with multiple services, the Company evaluates whether the individual services qualify as distinct performance obligations. In its assessment of whether a service is a distinct performance obligation, the Company determines whether the customer can benefit from the service on its own or with other readily available resources, and whether the service is separately identifiable from other services in the contract. This evaluation requires the Company to assess the nature of each individual service offering and how the services are provided in the context of the contract, including whether the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment based on the facts and circumstances of the contract.
| 8 |
When agreements involve multiple distinct performance obligations, the Company allocates arrangement consideration to all performance obligations at the inception of an arrangement based on the relative standalone selling prices (“SSP”) of each performance obligation. Where the Company has standalone sales data for its performance obligations which are indicative of the price at which the Company sells a promised service separately to a customer, such data is used to establish SSP. In instances where standalone sales data is not available for a particular performance obligation, the Company estimates SSP by the use of observable market and cost-based inputs. The Company continues to review the factors used to establish list price and will adjust standalone selling price methodologies as necessary on a prospective basis.
Service Revenue
Service revenue from subscriptions to the Company's game website is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as a deferred revenue. Professional services revenue is recognized over time as the services are rendered.
When a contract with a customer is signed, the Company assesses whether collection of the fees under the arrangement is probable. The Company estimates the amount to reserve for uncollectible amounts based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded as operating expenses against the contract asset (Accounts Receivable).
Contract Assets
Contract assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed. The revenue is recognized when the customer receives services. Contract assets are included in other current or non-current assets in the consolidated balance sheets, depending on if their reduction will be recognized during the succeeding twelve-month period or beyond.
Deferred Revenue
Deferred revenues represent billings or payments received in advance of revenue recognition and are recognized upon transfer of control. Balances consist primarily of annual plan subscription services and professional and training services not yet provided as of the balance sheet date. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues in the consolidated balance sheets, with the remainder recorded as other non-current liabilities in the consolidated balance sheets.
Costs to Obtain a Customer Contract
Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized as other current or non-current assets and amortized on a straight-line basis over the life of the contract, which approximates the benefit period. The benefit period was estimated by taking into consideration the length of customer contracts, technology lifecycle, and other factors. All sales commissions are recorded as consulting fees within the Company's consolidated statement of operations.
Remaining Performance Obligations
The Company's subscription terms are typically less than one year. All of the Company’s revenues in the three-month periods ended July 31, 2020 and 2019, which amounted to $1,762,322 and $118,732, respectively, are considered contract revenues. Contract revenue as of July 31, 2020 and April 30, 2020, which has not yet been recognized, amounted to $35,572 and $656, respectively, and is recorded on the balance sheet as deferred revenue. The Company expects to recognize revenue on all of its remaining performance obligations over the next 12 months.
| 9 |
Note 4 – Earnings Per Common Share
Income per common share data was computed as follows:
| Three Months Ended July 31, 2020 | Three Months Ended July 31, 2020 | |||||||
| Net income attributable to common stockholders – basic | $ | 30,871 | $ | 24,475 | ||||
| Adjustments to net income | — | — | ||||||
| Net income attributable to common stockholders – diluted | $ | 35,871 | $ | 24,475 | ||||
| Weighted average common shares outstanding – basic | 831,272,609 | 752,549,783 | ||||||
| Effect of dilutive securities | — | — | ||||||
| Weighted average common shares outstanding – diluted | 831,272,609 | 752,549,783 | ||||||
| Earnings per common share – basic | $ | 0.00 | $ | 0.00 | ||||
| Earnings per common share – diluted | $ | 0.00 | $ | 0.00 | ||||
For the three-month periods ended July 31, 2020 and 2019, the Company had no convertible or dilutive securities.
Note 5 – Principal Financing Arrangements
The following table summarizes components debt as of July 31, 2020 and April 30, 2020:
| July 31, 2020 | April 30, 2020 | Interest Rate | ||||||||||
| Secured lender (affiliate) | $ | 1,000,000 | $ | 1,000,000 | 1.25 | % | ||||||
| Notes payable – related parties | 15,000 | 15,000 | 0.0 | % | ||||||||
| Demand notes payable | 7,860 | 7,860 | 0.0 | % | ||||||||
| U.S. SBA loan | 500,000 | — | 3.75 | % | ||||||||
| U.S. SBA loan | 1,885,800 | — | 1.0 | % | ||||||||
| Loan payable – bank | 34,324 | 34,324 | 5.5 | % | ||||||||
| Total Debt | $ | 3,442,984 | $ | 1,057,184 | ||||||||
As of July 31, 2020 and April 30, 2020, the Company owed its principal lender (“Lender”) $1,000,000 under a loan and security agreement (“Loan”) dated April 28, 2011, that was amended on July 26, 2014 and again on October 31, 2017. The Lender is also the largest shareholder of the Company, owning 271,371,454 shares of common stock, or 32.6% of the 831,581,712 shares issued and outstanding, as of July 31, 2020.
The Loan was amended on October 31, 2017 to change the maturity date to October 31, 2020, reduce the interest rate from 8% to 1.25% per annum, and reduce the default interest rate from 15% to 8% per annum (the “Amendments”). In conjunction with the Amendments, the Lender also agreed to reduce the total debt and accrued interest payable by $453,031 to $1,000,000, in exchange for the Company issuing to the Lender 44,198,246 shares of its common stock. Consequently, upon issuance of the 44,198,246 shares, the Company recorded an increase of $44,198 in common stock and $408,833 in capital in excess of par value.
In connection with the financing, the Company has agreed to certain restrictive covenants, including, among others, that the Company may not convey, sell, lease, transfer or otherwise dispose of any part of its business or property, except as permitted in the agreement, dissolve, liquidate or merge with any other party unless, in the case of a merger, the Company is the surviving entity, incur any indebtedness except as defined in the agreement, create or allow a lien on any of its assets or collateral that has been pledged to the Lender, make any loans to any person, except for prepaid items or deposits incurred in the ordinary course of business, or make any material capital expenditures. To secure the payment of all obligations to the Lender, the Company granted to the Lender a continuing security interest and first lien on all of the assets of the Company.
| 10 |
As of July 31, 2020 and April 30, 2020, the Company’s related-party unsecured notes payable totaled $15,000. The Company also owes $34,324 as of July 31, 2020 and April 30, 2020 to Chase Bank. The Company pays interest expense to Chase Bank, which is calculated at a rate of 5.5% per annum.
On May 6, 2020 the Company borrowed $1,885,800 (the “May Loan”) and on June 17, 2020 the Company borrowed $500,000 (the “June Loan”) from a U.S. Small Business Administration (the "SBA") loan program. The May Loan has an initial term of two years and an interest rate of 1% per annum. Principal payments are delayed until the Company negotiates with the lender as to the amount of principal that is subject to repayment. If repayment of the May Loan is required, payments begin after a six-month deferral period, in which interest accrues, and payments are to be made in equal installments of approximately $106,125 over an 18-month period. Of the $1,885,800 balance, $955,125 is considered a short-term liability. Accrued interest payable on the May Loan amounted to $4,443 as of July 31, 2020.
The June Loan requires installment payments of $2,437 monthly, beginning on June 17, 2021 over a term of thirty years. Interest accrues at a rate of 3.75% per annum. The Company agreed to grant a continuing security interest in its assets to secure payment and performance of all debts, liabilities, and obligations to the SBA. The June Loan was personally guaranteed by the Company’s Chief Financial Officer. $1,666 of the June Loan is recorded as a current liability and the remaining $498,334 is classified as a long-term liability. Accrued interest payable on the June Loan amounted to $2,209 as of July 31, 2020.
Demand notes payable totaled $7,860 as of July 31, 2020 and April 30, 2020. These notes have an interest rate of 0%.
Note 6 – Income Taxes
As of July 31, 2020 and April 30, 2020, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $700,000 expiring in the years of 2021 through 2035.
The Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017. Among numerous provisions, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. As a result of the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.
As of April 30, 2020, the Company had net deferred tax assets calculated at an expected rate of 21%, or approximately $180,000. As of April 30, 2020, the Company recognized the net deferred asset to the extent of the impact on current book earnings, as the Company’s management believed that historical, current and expected earnings are sufficient to meet the more likely than not standard to enable the Company to recognize the net deferred tax asset. As allowable under accounting standards, the Company elected to fully remove the valuation allowance as of April 30, 2020.
As of July 31, 2020, the deferred tax asset has been reduced to $168,659 by the tax provision of $11,341 for the three months ended July 31, 2020. Due to the nominal income for the three-month period ended July 31, 2019, and the availability of a tax loss carryforward to offset any potential tax, the Company recorded no income tax expense for the three months ended July 31, 2019.
Note 7 – Related Party Transactions
The Company’s largest shareholder is also its principal lender. As of July 31, 2020 and April 30, 2020, the Company owed its largest shareholder, under a secured lending agreement, $1,000,000. Under the existing loan agreement, as amended, the maximum amount of the loan is $1,250,000, and the loan matures on October 31, 2020. The largest shareholder of the Company owns 271,371,454 shares of common stock, or 32.6% of the 831,581,712 shares issued and outstanding as of July 31, 2020. Accrued interest payable on this secured loan as of July 31, 2020 and April 30, 2020 amounted to $34,386 and $31,235, respectively.
| 11 |
Compensation to officers in the three-month periods ended July 31, 2020 and 2019 consisted of common stock valued at $82,622 and $19,688 respectively, and cash payments of $66,462 and $30,000, respectively.
Compensation to a related party consultant in the three-month periods ended July 31, 2020 and 2019 consisted of common stock valued at $19,378 and $0 respectively, and cash payments of $22,154 and $7,200, respectively. This consultant is also the controlling shareholder of Zelgor Inc. and $1,050,000 of the Company’s revenues in the quarter ended July 31, 2020 were from Zelgor Inc.
The Company owes a director $16,680 as of July 31, 2020 and April 30, 2020, which is recorded as accounts payable, plus $15,000 in a non-interest-bearing note payable.
Note 8 – Stockholders’ Deficit
The Company is authorized to issue 900,000,000 shares of its common stock, par value $0.001. 831,581,712 and 831,269,212 shares were outstanding as of July 31, 2020 and April 30, 2020, respectively.
In the first quarter of fiscal 2021, the Company issued an aggregate of 312,500 shares of restricted stock to its Chief Marketing Officer as compensation. The shares were valued at $1,406.
In the first quarter of fiscal 2020, the Company issued an aggregate of 2,812,500 shares of restricted stock to its Chief Executive Officer, Chief Financial Officer and Chief Marketing Officer as compensation. The shares were valued at $19,688.
Note 9 – Fair Value
The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
- Level 1: inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the company has the ability to access at the measurement date.
- Level 2: inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
- Level 3: inputs are unobservable inputs for the asset or liability.
Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, we base fair value on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon management’s own estimates, are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used.
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Note 10 – Stock-Based Compensation Plans
The Company entered consulting agreements to issue common stock and recorded the applicable non-cash expense in accordance with the authoritative guidance of the Financial Accounting Standards Board. For the three-month periods ended July 31, 2020 and 2019, the Company recorded $121,378 and $28,510, respectively, in stock-based compensation expense.
As of July 31, 2020, there was $489,038 of prepaid stock-based compensation expense for services that end on August 31, 2021.
As of July 31, 2020, an aggregate of 2,187,500 shares of common stock can be earned by the Company’s Chief Marketing Officer from unvested stock grants. 312,500 shares vested on July 31, 2020 and were recorded as stock-based compensation of $1,406. These shares vest at a rate of 312,500 shares per quarter, over the next seven quarters.
The table below presents the components of stock-based compensation expense for the three-month periods ended July 31, 2020 and 2019.
| Description | July 31, 2020 | July 31, 2019 | ||||||
| Chief Executive Officer | $ | 40,608 | $ | 8,750 | ||||
| Chief Financial Officer | 40,608 | 8,750 | ||||||
| Chief Marketing Officer | 1,406 | 2,188 | ||||||
| Marketing consultant | — | 8,822 | ||||||
| Related party consultant | 19,378 | — | ||||||
| Business consultant | 19,378 | — | ||||||
| Total | $ | 121,378 | $ | 28,510 | ||||
The table below presents the prepaid compensation expense as of July 31, 2020 and April 30, 2020:
| Description | July 31, 2020 | April 30, 2020 | ||||||
| Chief Executive Officer | $ | 161,107 | $ | 201,715 | ||||
| Chief Financial Officer | 161,107 | 201,715 | ||||||
| Related party consultant | 83,412 | 102,790 | ||||||
| Business consultant | 83,412 | 102,790 | ||||||
| Marketing consultant | — | — | ||||||
| Total | $ | 489,038 | $ | 609,010 | ||||
Note 11 – Deposits and Commitments
The Company utilizes office space in Boston, Massachusetts, under a month-to-month lease agreement that allows to company to end its lease by providing 30-day written notice. The lease agreement includes a deposit of $6,300.
Note 12 – Concentrations
For the three-month period ended July 31, 2020, the Company had one customer that constituted 60% of its revenues, a second customer that constituted 26% of its revenues and a third customer that constituted 12% of its revenues. For the three-month period ended July 31, 2019, the Company had one customer that constituted 81% of its revenues.
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Note 13 – Investments
In May 2020, the Company entered a consulting contract with Watch Party LLC (“WP”), which allowed the Company to receive up to 110,000 membership interest units of WP in return for consulting services. The Company earned 97,500 membership interest units in the quarter ended July 31, 2020. The WP units are valued at $2.14 per unit based on a sales price of $2.14 per unit on an online funding portal, resulting in revenues of $208,650 for the three-months ended July 31, 2020 and deferred revenue of $26,750 as of July 31, 2020.
In May 2020, the Company entered a consulting contract with ChipBrain LLC (“Chip”), which allowed the Company to receive up to 710,200 membership interest units of Chip in return for consulting services. The Company earned 500,000 membership interest units in the quarter ended July 31, 2020 and anticipates earning the remaining units in the quarter ending October 31, 2020. The Chip units are valued at $0.93 per unit based on a sales price of $0.93 per unit on an online funding portal, resulting in revenues of $465,000 for the three-months ended July 31, 2020.
In May 2020, the Company entered a consulting contract with Zelgor Inc. (“Zelgor”), which allowed the Company to receive up to 1,400,000 shares of common stock of Zelgor in return for consulting services. The Company earned 1,050,000 shares in the quarter ended July 31, 2020 and anticipates earning the remaining shares in the quarter ending October 31, 2020. The Zelgor shares are valued at $1.00 per share based on a sales price of $1.00 per share on an online funding portal, resulting in revenues of $1,050,000 for the three-months ended July 31, 2020. The $1.00 per share valuation was derived based on a combination of multiple transactions on a secondary trading platform in which shares were purchased at $1.00 per share, and two private offerings of shares, one at a selling price of $0.50 per share and the other at $2.00 per share.
On January 2, 2020, the Company entered a consulting contract with Deuce Drone LLC (“Drone”), which allowed the Company to receive up to 2,350,000 membership interest units of Drone in return for consulting services. The Company earned all 2,350,000 membership interest units in fiscal 2020. The Drone units are valued at $0.35 per unit based on a sales price of $0.35 per unit when the units were earned, or $822,500. Drone is currently selling Drone units for $1.00 per unit on an online funding portal.
In August 2019, the Company entered a consulting contract with Kingscrowd LLC (“Kingscrowd”), which allowed the Company to receive 300,000 membership interest units of Kingscrowd in return for consulting services. The Kingscrowd units are valued at $1.80 per unit based on a sales price of $1.80 per unit when the units were earned, or $540,000. Kingscrowd units currently trade at a price of $1.80 per unit on a secondary trading platform.
During fiscal 2019, the Company entered a consulting contract with NetCapital Systems LLC (“NetCapital”), which allowed the Company to receive up to 1,000 membership interest units of NetCapital in return for consulting services. The Company earned 40 units in the quarter ended July 31, 2020, at a value of $91.15 per unit, or $3,646. The Company earned all 1,000 Netcapital units but sold a portion of the units in fiscal 2020 at a sales price of $91.15 per unit. As of July 31, 2020 the Company owns 528 Netcapital units, at a value of $48,128.
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The following table summarizes the components of investments as of July 31, 2020 and April 30, 2020:
| July 31, 2020 | April 30, 2020 | |||||||
| Netcapital Systems LLC | $ | 48,128 | $ | 44,482 | ||||
| Watch Party LLC | 235,400 | — | ||||||
| Zelgor Inc. | 1,050,000 | — | ||||||
| ChipBrain LLC | 465,000 | — | ||||||
| Deuce Drone LLC | 822,500 | 822,500 | ||||||
| Kingscrowd LLC | 540,000 | 540,000 | ||||||
| Total Investments at cost | $ | 3,161,028 | $ | 1,406,982 | ||||
The above investments do not have a readily determinable fair value, as identified in ASC 321-10-35-2, and all investments are measured at cost less impairment. The Company monitors the investments for any changes in observable prices from orderly transactions.
Note 14 – Subsequent Events
On August 23, 2020, the Company entered into an Agreement and Plan of Merger whereby NetCapital Systems LLC would become an 80% owner of the Company. In conjunction with this agreement, the Company filed a preliminary information statement on September 8, 2020 to change the Company’s corporate name from ValueSetters, Inc. to NetCapital Inc and to amend the Company’s Articles of Incorporation to effect a stock combination, or reverse stock split, pursuant to which up to 2,000 shares of the Company’s common stock would be exchanged for one new share of common stock.
The merger agreement is contingent upon certain closing conditions and is not yet finalized. The reverse split is currently pending and FINRA has not been notified of an effective date for the reverse split to occur. Consequently, the financial statements of the merger candidate are not retrospectively presented, given that the effective date of the proposed merger has not been determined.
The Company evaluated subsequent events through the date these financial statements were available to be issued. There were no other material subsequent events that required recognition or additional disclosure in these financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the U.S. Securities and Exchange Commission (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Overview
We are a boutique advisory firm, based in Boston, Massachusetts. Our team of experts, including entrepreneurs, angel investors, industry specialists and digital marketing professionals work with companies at all stages to provide assistance with capital raising, strategy, technology consulting, digital marketing, economic development and logistics technology.
We specialize in Regulation Crowdfunding (“Reg CF”), under the provisions of Title III of the JOBS Act of 2012. We believe that new capital raising techniques, such as Reg CF, democratize capital raising, similar to the way that social networks democratize broadcast mechanisms that once belonged only to traditional media. Reg CF is one of three securities exemptions that enable online capital formation. Reg D 506(c) allows an unlimited amount of money to be raised from accredited investors. Reg A+ enables an issuer to raise up to $50 million online from anyone. Reg CF, the smallest of the crowdfunding exemptions, allows issuers to raise up to $1.07 million from non-accredited investors every 12 months.
In March 2020, the Securities and Exchange Commission (the "SEC") proposed meaningful changes to multiple securities exemptions in an effort to provide critical capital needed for emerging companies, from early-stage start-ups seeking seed capital, to companies that are pursuing a course to become a public reporting company. The new proposal intends to create a more rational framework to enhance an entrepreneur's access to capital while preserving important investor protections.
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The new regulations, which we anticipate will be implemented before the end of the year, are designed to:
| · | address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital; |
| · | increase the offering limits for Regulation A, Regulation CF, and Rule 504 offerings, and revise certain individual investment limits based on the SEC’s experience with the rules, marketplace practices, capital raising trends, and comments received; |
| · | provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and |
| · | harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections. |
The SEC proposed revisions to the offering and investment limits, which we believe will have a positive impact on our business. For Reg CF, the new rules include:
| · | raising the offering limit in Reg CF from $1.07 million to $5 million; |
| · | amending the investment limits for investors in Reg CF offerings by: |
| o | not applying any investment limits to accredited investors; and |
| o | revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest. |
Reg CF will also benefit from “Testing the Waters” a rule currently utilized under Reg A+, that enables issuers to measure investor demand before spending tens of thousands of dollars on an actual offering. Special Purpose Vehicles (or SPVs) may now be included in Reg CF offers and this inclusion is designed to improve the viability of the exemption while providing greater investor protection.
We believe these actions by the SEC will enhance the value of funding portals and strengthen the online capital raising process in private equity. Consequently, we have negotiated a transaction that will consolidate the operations of a Reg CF funding portal, Netcapital.com (“Netcapital”), with our financial results. Netcapital operates a Title III JOBS Act funding portal, and as of today is one of only a few dozen FINRA approved Reg CF portals. Although we have a written agreement that we filed as an exhibit to a Current Report on Form 8-K on August 26, 2020, the agreement is subject to certain events and it is possible that the transaction will not be finalized. Increasing our ownership in online businesses with private equity platforms is a significant component of our business strategy.
For the past three years we have provided consulting services to Netcapital. In addition to the services we provided to Netcapital, we provide consulting services to some of our clients that utilize the Netcapital website to raise money from non-accredited and accredited investors. We believe we have been successful in providing advice and digital marketing services to our clients, who are allowed to advertise their fundraising, in conjunction with advertising provisions contained in the JOBS Act. During the past three years, many high-tech firms have become our clients, including Kingscrowd LLC, Deuce Drone LLC and ChipBrain LLC. These companies have contributed to our growth and we own minority positions in them.
Our limited operating history and the uncertain nature of our future operations and the markets we address or intend to address make prediction of our future results of operations difficult.
Results of Operations
For the Three Months Ended July 31, 2020 Compared to the Three Months Ended July 31, 2019
Our revenues for the three-months ended July 31, 2020 increased by $1,643,590, or 1,384%, to $1,762,322 as compared to $118,732 reported for the three months ended July 31, 2019. The increase in revenues is attributable to new consulting services. Part of our strategy this year is to provide cash resources to accelerate the growth of companies that we take an equity position in so that the investments we make are able to quickly bring their product to market. For example, the consulting and cash resources that we provided to Watch Party LLC in the quarter ended July 31, 2020, allowed them to complete their iPhone app, which can now be downloaded from the App Store.
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Costs of revenues increased by $428,653 to $431,019 for the three-months ended July 31, 2020 from $2,366 reported in the three-months ended July 31, 2019. The increase is primarily attributable to our increased revenues and the change in our strategy of how we accelerate the product development for the companies we invest in.
Consulting fees decreased by $37,209, or 95%, to $1,991 for the three months ended July 31, 2020, as compared to $39,200 reported for the three months ended July 31, 2019. The decrease is attributable to our efforts to hire people as employees, not consultants, and consequently, wages and payroll related expenses in the three months ended July 31, 2020 amounted to $1,096,120 as compared to $0 in the three months ended July 31, 2019.
Marketing expense increased by $562, or 16%, to $4,101 for the three months ended July 31, 2020, as compared to $3,539 reported for the three months ended July 31, 2019. The increase in expense is due to additional marketing outlets that we utilized in the three months ended July 31, 2020.
Rent expense increased by $1,550, or 12%, to $14,079 for the three months ended July 31, 2020, as compared to $12,529 reported for the three months ended July 31, 2019. The increase in expense is a result of fewer discounts available to us in the three-month period ended July 31, 2020.
General and administrative expenses increased by $37,759, or 1,117%, to $41,139 for the three months ended July 31, 2020, from $3,380 for the three months ended July 31, 2019. The increase is primarily attributed to $30,000 in legal fees for work to help us secure two loans from the U.S. Small Business Administration.
Stock-based compensation increased by $92,868, to 121,378 for the three-months ended July 31, 2020 from $28,510 reported in the three-months ended July 31, 2019. The increase in expense is primarily due to the higher price per share of our common stock when shares were issued.
Interest expense increased by $5,550 to $10,283 for the three-months ended July 31, 2020, as compared to $4,733 for the three months ended July 31, 2019. The decrease in interest expense is attributable to reduced debt amounts.
Liquidity and Capital Resources
At July 31, 2020, we had cash and cash equivalents of $874,016 and negative working capital of $1,219,028 as compared to cash and cash equivalents of $11,206 and negative working capital of $877,581 at April 30, 2020.
Net cash used in operating activities amounted to $1,522,990 and $17,620 in the three-months ended July 31, 2020 and 2019, respectively. The principal source of cash from operating activities in the three-months ended July 31, 2020 was net income of $30,781 and a non-cash item, stock-based compensation of $121,738. However, these items were offset by changes in non-cash revenue from the receipt of equity of $1,754,046. The principal source of cash from operating activities in the three-months ended July 31, 2019 was net income of $24,475 and a non-cash item, stock-based compensation of $28,510. However, changes in non-cash working capital balances used cash totaling $70,605
There was no investing activity in the three-months ended July 31, 2020 and 2019.
For the three months ended July 31, 2020, net cash provided by financing activities amounted to $2,385,800, which consisted of two loans from the U.S. Small Business Administration. For the three months ended July 31, 2019, net cash used in financing activities amounted to $1,300, which consisted of a payment to a related-party lender.
In the three-months ended July 31, 2020 and 2019, there were no expenditures for capital assets. We do not anticipate any capital expenditures in fiscal 2021.
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of our company as a going concern. However, we have very limited liquidity. Management anticipates that we will be dependent, for the near future, on additional capital to fund our operating expenses and anticipated growth, which we intend to achieve through consulting services and the further development of a private equity platform for raising capital and trading securities. In the quarter ended July 31, 2020, we borrowed $2,385,800 to accelerate our growth and the growth of early-stage companies that we invested in. However, we now have to plan for new future payments to service our debt. Furthermore, the most recent report of our independent registered public accounting firm expresses doubt about our ability to continue as a going concern.
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We owe a related party $1,000,000 under a secured term loan that matures on October 31, 2020. We believe we can renegotiate the payment terms of the loan. Any demand for payment from a related party will have an adverse impact on our ability to achieve our longer-term business objectives and will adversely affect our ability to continue operating as a going concern.
While we continually look for other financing sources, in the current economic environment, the procurement of outside funding is extremely difficult and there can be no assurance that such financing will be available, or, if available, that such financing will be at a price that will be acceptable to us. Failure to generate sufficient revenues or raise additional capital will have an adverse impact on our ability to achieve our longer-term business objectives and will adversely affect our ability to continue operating as a going concern.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide information under this item.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures.
The Company’s management, with the participation of the Company’s principal executive officer (“PEO”) and principal financial officer (“PFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the PEO and PFO concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the PEO and PFO, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses in our disclosure controls and procedures consisted of:
| ● | There is a lack of accounting personnel with the requisite knowledge of Generally Accepted Accounting Principles in the US (“GAAP”) and the financial reporting requirements of the SEC; and |
| ● | There are insufficient written policies and procedures to insure the correct application of accounting and financial reporting with respect to the current requirements of GAAP and SEC disclosure requirements. |
(b) Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three-month period ended July 31, 2020, we issued 312,500 shares of common stock to our Chief Marketing Officer as stock-based compensation.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
| 31 | Rule 13a-14(a) Certification |
| 32 | Rule 13a-14(b) Certification |
| 101.INS | XBRL Instance |
| 101.SCH | XBRL Schema |
101.CAL XBRL Calculation
| 101.DEF | XBRL Definition |
| 101.LAB | XBRL Label |
| 101.PRE | XBRL Presentation |
| 20 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: September 21, 2020 | VALUESETTERS, INC. |
| By: /s/ Cecilia Lenk | |
| Cecilia Lenk | |
| Chairman of the Board and Chief Executive Officer | |
| By: /s/ Coreen Kraysler | |
| Coreen Kraysler | |
| Principal Financial Officer |
| 21 |
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Cecilia Lenk, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of ValueSetters, Inc.; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report; | ||||
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: | ||||
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||||
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||||
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||||
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | ||||
| 5. | I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | ||||
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||||
| b) | Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting. | ||||
Date: September 21, 2020 |
By: | /s/ Cecilia Lenk | |||
| Cecilia Lenk | |||||
Principal Executive Officer, ValueSetters, Inc. |
|||||
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Coreen Kraysler, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of ValueSetters, Inc.; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report; | ||||
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: | ||||
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||||
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||||
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||||
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | ||||
| 5. | I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | ||||
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||||
| b) | Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting. | ||||
Date: September 21, 2020 |
By: | /s/ Coreen Kraysler | |||
| Coreen Kraysler | |||||
Principal Financial Officer ValueSetters, Inc. |
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of ValueSetters Inc. (the “Company”), on Form 10-Q for the quarter ended July 31, 2020, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Cecilia Lenk, Principal Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | Such Quarterly Report on Form 10-Q for the quarter ended July 31, 2020, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in such Quarterly Report on Form 10-Q for the quarter ended July 31, 2020, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: September 21, 2020 | By: | /s/ Cecilia Lenk | |
| Cecilia Lenk | |||
Principal Executive Officer, ValueSetters, Inc. |
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This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of ValueSetters Inc. (the “Company”), on Form 10-Q for the quarter ended July 31, 2020, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Coreen Kraysler, Principal Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
| (3) | Such Quarterly Report on Form 10-Q for the quarter ended July 31, 2020, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (4) | The information contained in such Quarterly Report on Form 10-Q for the quarter ended July 31, 2020, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: September 21, 2020 | By: | /s/ Coreen Kraysler | |
| Coreen Kraysler | |||
Principal Financial Officer ValueSetters, Inc. |
|||
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.