Filing summary
Filing identity and period: The supplied filing is ValueSetters, Inc.’s Form 10-K for the fiscal year ended April 30, 2020, signed August 10, 2020. It is not a Netcapital Inc. filing and does not report “2018 Q4”; the requested company and period therefore do not match the source.
Business context
ValueSetters describes itself as a Boston-based advisory firm providing capital-raising, strategy, technology consulting and digital marketing services, with a focus on Regulation Crowdfunding. It also takes equity in some early-stage clients. Consulting services generated most of fiscal 2020 revenue.
Financial performance
| Metric | FY ended Apr. 30, 2020 | FY ended Apr. 30, 2019 |
|---|---|---|
| Revenue | $1,753,558 | $1,013,612 |
| Gross profit | $1,742,453 | $988,414 |
| Operating income | $1,147,222 | $624,433 |
| Net income | $604,851 | $582,880 |
| Net cash from (used in) operations | ($3,604) | $30,558 |
| Cash and cash equivalents | $11,206 | $19,110 |
| Working capital | ($1,057,581) | ($518,875) |
| Total debt, as disclosed in debt note | $1,057,184 | $1,118,284 |
Revenue rose 73%, while operating income increased 84%. Reported net income was supported by a $180,000 deferred tax benefit; the income statement also reports $129,000 of income tax expense. Gross profit was approximately 99% of revenue and operating income approximately 65%.
Other notable FY2020 items included a $527,540 realized loss on sale of investments, $185,952 in impairment losses, and $356,252 in stock-based compensation. Operating cash flow was negative despite reported net income, with the filing citing $1,538,980 of investment additions received in connection with customer contracts. Investments were carried at $1,406,982 at year-end, primarily equity in Deuce Drone and Kingscrowd, plus a remaining Netcapital interest.
Liquidity, debt and capital
The company reported current liabilities of $1,534,342 at April 30, 2020, including a $1,000,000 secured related-party note, classified as current and due October 31, 2020. The note bears 1.25% interest, is secured by a first lien on company assets, and has restrictive covenants. The lender, Vaxstar LLC, is also the largest shareholder; the CEO leads both entities. The company said it had not paid principal or interest on this note and would need to renegotiate it.
After year-end, ValueSetters borrowed a total of $2,385,800 from SBA programs: a $1,885,800 loan in May 2020 at 1% interest with an initial two-year term, and a $500,000 loan in June 2020 at 3.75% interest, repayable over 30 years with installments starting June 2021. The June loan is secured by company assets and personally guaranteed by the CFO.
Changes, outlook and key risks
- Revenue growth reflected expanded consulting activity, but three customers represented 91% of FY2020 revenue (47%, 31% and 13%), creating substantial concentration risk.
- Management said SEC-proposed changes to crowdfunding rules could benefit its business, but these were proposals, not established results or guaranteed guidance. It also described a possible additional Netcapital investment as subject to a verbal agreement and not assured.
- The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. The company cited negative working capital, limited cash, accumulated losses, uncertain future cash generation, and the upcoming related-party loan maturity. Management’s plans included continued consulting, potential combinations with incubated businesses and development of online products; success was not assured.
- Management reported ineffective disclosure controls and internal control over financial reporting, identifying inadequate GAAP/SEC accounting expertise and insufficient written procedures as material weaknesses.
- COVID-19 effects were described as uncertain. Other risks include reliance on a small number of people, competition, difficulty obtaining financing, illiquid early-stage investments, and dilution from stock issuance. Shares outstanding increased to 831,269,212 from 752,519,212 during FY2020, largely through stock-based compensation.
- The filing reports no material litigation and no off-balance-sheet arrangements. The company paid no dividends and did not expect to do so in the foreseeable future.
Investor verification priorities
- Confirm the requested issuer and period: this source is ValueSetters’ FY2020 10-K, not a Netcapital Inc. 2018 Q4 report.
- Reconcile filing inconsistencies: the risk-factor text gives accumulated losses of $2,642,282, while the balance sheet reports an accumulated deficit of $2,462,282; the MD&A also cites $424,851 as net income in one cash-flow discussion, whereas the financial statements report $604,851 net income and $424,851 pretax income.
- Verify the SBA loan balances, terms, restrictions and subsequent repayment status, as well as the status of the $1 million related-party loan due October 2020.
- Assess collectibility and realizable value of the equity investments, their limited liquidity, and the basis for reported valuations and impairments.
- Review customer concentration, stock compensation and dilution, and progress in remediating the disclosed material weaknesses and going-concern risks.