Filing identity and reporting period
Important period and issuer mismatch: The supplied filing is ValueSetters, Inc.’s Form 10-Q for the three months ended July 31, 2020—not a Netcapital Inc. 2019 Q1 filing. The company signed the report on September 21, 2020. It later proposed a merger with NetCapital Systems LLC and a name change to NetCapital Inc.; those transactions were not finalized as of the filing.
ValueSetters described itself as a Boston-based advisory firm providing capital-raising, consulting, and digital-marketing services, with a focus on Regulation Crowdfunding and investments in early-stage companies.
Financial results and position
| Metric | Three months ended July 31, 2020 | Prior-year period |
|---|---|---|
| Revenue | $1,762,322 | $118,732 |
| Gross profit / margin | $1,331,303 / 75.5% | $116,366 / 98.0% |
| Operating income | $52,495 | $29,208 |
| Net income | $30,871 | $24,475 |
| Interest expense | $10,283 | $4,733 |
| Operating cash flow | $(1,522,990) | $(17,620) |
- Revenue increased $1,643,590, or 1,384%, year over year. The filing attributes the increase to consulting services. A substantial portion was noncash consideration in equity of investee companies.
- Operating expenses were $1,278,808, including $1,096,120 of wages and $121,378 of stock-based compensation. Net margin was approximately 1.8%.
- Cash and cash equivalents were $874,016 at July 31, versus $11,206 at April 30. Current assets were $1,358,743 and current liabilities were $2,577,771, producing negative working capital of $1,219,028.
- Total debt was $3,442,984, compared with $1,057,184 at April 30. The increase primarily reflects $2,385,800 in SBA loans. Total assets were $4,718,213; stockholders’ equity was $711,433.
- Investments at cost totaled $3,161,028, largely equity interests received for consulting services. The company stated these investments had no readily determinable fair value and were measured at cost less impairment.
Material changes and significant items
- Revenue concentration was high: three customers represented 60%, 26%, and 12% of quarterly revenue. Zelgor Inc. alone contributed $1,050,000, or approximately 60%.
- Revenue included $1,754,046 of noncash equity consideration, as reflected in the cash-flow reconciliation. The company recorded equity-related consulting revenue from Watch Party, ChipBrain, and Zelgor.
- Cash from financing activities was $2,385,800, while operating activities used $1,522,990; the financing inflow drove the quarterly cash increase.
- The $1,000,000 secured loan from the company’s largest shareholder, bearing 1.25% interest, matures October 31, 2020. The lender held 32.6% of the company’s shares and had a first lien on company assets. Management said it intended to renegotiate the loan terms.
- The SBA loans consisted of a $1,885,800 loan at 1% and a $500,000 loan at 3.75%. Repayment terms differ; the filing classifies $956,791 of debt as current and $1,429,009 as long-term SBA debt.
- Management disclosed material weaknesses in disclosure controls: insufficient GAAP/SEC reporting expertise among accounting personnel and inadequate written accounting and reporting procedures. Management concluded controls were not effective at period-end.
Outlook, risks, and contingencies
- Going concern: The filing identifies substantial doubt about the company’s ability to continue as a going concern within one year. Management said existing cash was insufficient for lease payments, debt service, and working capital, and that its plans were not probable to alleviate the doubt. Failure to raise funds or generate adequate revenue could require reduced, reorganized, discontinued, or shut-down operations.
- Management’s stated plans included pursuing combinations with revenue-generating companies it had incubated, renegotiating the related-party loan, and continuing consulting services, potentially for both cash and equity consideration. No quantified financial guidance was provided.
- The company expected proposed SEC changes to Regulation Crowdfunding rules to benefit its business, but these were management expectations, not a financial forecast.
- The proposed merger with NetCapital Systems LLC, under which NetCapital Systems would become an 80% owner, was subject to closing conditions. A proposed name change and reverse stock split were also pending.
- No material litigation was reported. The filing states the office lease is month-to-month and may be ended with 30 days’ written notice.
Key facts investors should verify
- Confirm the issuer and reporting period: the filing is for ValueSetters, Inc. for the quarter ended July 31, 2020; it does not match the request’s Netcapital Inc. 2019 Q1 label.
- Verify the status and final terms of the proposed NetCapital Systems merger, name change, and reverse stock split.
- Assess the ability to refinance or repay the $1 million related-party loan due October 31, 2020, and the company’s capacity to service SBA debt.
- Review the valuation, liquidity, and collectability of the equity investments and the sustainability of revenue dependent on a small number of customers.
- Reconcile apparent filing inconsistencies: the MD&A gives operating cash-flow reconciliation figures that differ from the financial statements, and the earnings-per-share note reports diluted net income of $35,871 despite the income statement reporting net income of $30,871 and no dilutive securities.
- Check subsequent filings for developments in cash, working capital, customer concentration, control remediation, and the going-concern risk.