Netcapital Inc. - Quarter Report: 2020 July (Form 10-Q)

Management’s plans include:

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.

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.  

Note 4 – Earnings Per Common Share

Income per common share data was computed as follows:

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:

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.

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.

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.

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.

The table below presents the prepaid compensation expense as of July 31, 2020 and April 30, 2020:

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.

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.

The following table summarizes the components of investments as of July 31, 2020 and April 30, 2020:

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.

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.

The new regulations, which we anticipate will be implemented before the end of the year, are designed to:

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:

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

 

 

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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

 

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