Filing identity and reporting period
The supplied filing is a Form 10-Q for ValueSetters, Inc., not Netcapital Inc. It reports the three months ended July 31, 2019 (fiscal Q1 2020), with comparative results for the three months ended July 31, 2018. The company describes itself as a Boston-based advisory firm focused on capital raising, consulting, and digital marketing. The filing was signed September 13, 2019.
Financial results and liquidity
| Metric | Three months ended July 31, 2019 | Prior-year period |
|---|---|---|
| Revenue | $118,732 | $91,918 |
| Gross profit | $116,366 | $87,339 |
| Gross margin | 98.0% | 95.0% |
| Operating income (loss) | $29,208 | $(4,880) |
| Net income (loss) | $24,475 | $(7,207) |
| Operating cash flow | $(17,620) | $17,153 |
Revenue increased 29% year over year. Net income per share rounded to $0.00. Cash fell to $190 from $19,110 at April 30, 2019. At July 31, current assets were $56,067 and current liabilities were $587,711, producing negative working capital of $531,644. Total assets were $766,616; total liabilities were $1,587,711; stockholders’ deficit was $821,095.
Total debt was $1,116,984, including a $1.0 million secured note owed to the largest shareholder, who held 36% of the shares at quarter-end. That note bears 1.25% interest and matures October 31, 2020; it is secured by a first lien on company assets and includes restrictive covenants. Operating cash use reflected $70,605 of cash consumed by changes in working capital. Financing activities used $1,300, principally a related-party note payment.
Changes, outlook, and material risks
- Operating results improved from a prior-year operating loss and net loss to operating and net income. Lower general and administrative costs and cost of revenues contributed; stock-based compensation and consulting fees increased.
- Management expected fiscal Q2 revenue to be significantly higher than Q1, citing four service contracts expected to generate aggregate revenue of $706,932 as performance obligations were satisfied. Subsequent-event disclosures separately describe an August $90,000 advisory engagement and a $540,000 marketing and advisory contract paid in 300,000 membership units stated to trade at $1.80 each.
- The filing states there is substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Management says existing cash is insufficient for lease, debt, and working-capital needs; it may seek debt or equity, pursue digital-product opportunities, and continue advisory services. Management also concludes its plans are not probable of sufficiently mitigating the going-concern conditions.
- Revenue was highly concentrated: one customer contributed 81% of Q1 revenue, and one customer represented 100% of net receivables at July 31. The filing identifies a different customer as the concentration in each prior-year comparison.
- The company reported $704,249 of NetCapital Systems LLC membership units as an investment at cost, valued using a private transaction price; the measurement is classified as Level 3. The filing says 771 of 1,000 units had been earned by July 31, with the balance earnable through June 2020.
- Disclosure controls were deemed ineffective due to insufficient GAAP/SEC-reporting expertise among accounting personnel and inadequate written accounting and reporting procedures. The filing reports no material litigation and no changes in internal control during the quarter.
- After quarter-end, the company reported issuing 25 million shares each to its CEO and CFO and 12.5 million shares to each of two consultants under two-year compensation agreements. It reported 830,331,712 shares outstanding as of September 13, versus 755,331,712 at July 31.
Important facts for investors to verify
- Confirm the correct issuer and period: the supplied document is ValueSetters’ July 31, 2019 10-Q, not a Netcapital Inc. 2018 Q1 filing.
- Assess near-term funding needs, access to additional financing, related-party lender support, and the implications of the disclosed going-concern substantial doubt.
- Verify collection and repeatability of revenue given customer concentration, and whether the cited Q2 contracts were performed and recognized as projected.
- Review the valuation assumptions and realizability of the Level 3 membership-unit investment, and the terms and dilution from subsequent share issuances.
- Consider the disclosed ineffective controls and monitor remediation; the filing does not provide a clear remediation timetable.