Filing identity and reporting period
Important mismatch: The request identifies Netcapital Inc. and 2017 Q3, but the supplied filing is ValueSetters, Inc.’s Form 10-Q for the quarter ended January 31, 2019, covering the third fiscal quarter and nine months of fiscal 2019. The filing describes Netcapital as a company ValueSetters consults for; the financial results below are ValueSetters’ and should not be attributed to Netcapital.
Business context and key financial metrics
ValueSetters describes itself as a Boston-based advisory firm providing capital-raising, strategy, technology consulting, and digital marketing services. It also reports equity interests in early-stage companies.
| Metric | Nine months ended Jan. 31, 2019 | Comparable 2018 period | Three months ended Jan. 31, 2019 | Comparable 2018 quarter |
|---|---|---|---|---|
| Revenue | $281,995 | $70,120 | $121,355 | $44,068 |
| Gross profit (margin) | $255,658 (90.7%) | $55,210 | $107,721 (88.8%) | $29,158 |
| Operating income (loss) | ($4,957) | ($163,410) | $17,548 | ($22,049) |
| Net income (loss) | ($15,171) | $71,845 | $12,391 | ($31,662) |
| Operating cash flow | $49,887 | ($31,782) | Not separately provided | Not separately provided |
- At January 31, 2019, cash was $45,799; current assets were $121,782 and current liabilities were $622,266, producing negative working capital of $500,484. Stockholders’ deficit was $1,471,184.
- Total debt was $1,126,224, including a $1 million secured note owed to the largest shareholder. The note bears 1.25% interest and matures October 31, 2020; other debt includes related-party notes, demand notes, and a bank loan.
- Nine-month financing cash flow was negative $5,743. Cash increased by $44,144 to $45,799 during the period.
Changes versus the comparable period
- Nine-month revenue rose $211,875, or 302%, with management attributing growth to more consulting clients. Third-quarter revenue increased 175% year over year.
- Nine-month gross profit increased to $255,658 from $55,210. The company moved from a nine-month operating loss of $163,410 to a $4,957 loss, while the current quarter recorded operating income of $17,548.
- Nine-month net results deteriorated from income of $71,845 to a loss of $15,171. The prior-year period included a $293,664 gain on debt settlement; there was no debt-settlement gain in the current period.
- Interest expense fell to $14,814 from $62,209 for the nine months, which management attributed to lower debt and the reduced rate on the secured lender’s note.
- Shares outstanding increased to 749,706,712 from 731,694,210 at April 30, 2018. The filing reports 749,706,712 shares outstanding as of March 18, 2019.
Outlook, risks, and unusual items
- Going concern: The company reports recurring losses, inability to meet obligations as they become due, and substantial doubt about its ability to continue as a going concern within one year after issuance. Management says its plans to raise capital, pursue digital-product opportunities, and continue advisory work may not sufficiently alleviate the doubt.
- Management expected its largest customer to continue generating revenue in fiscal Q4 and anticipated that approximately $55,000 of deferred revenue would be recognized then. It also said several current customers could contribute revenue in Q4 and fiscal 2020; these are expectations, not guarantees.
- Customer concentration is significant: one customer accounted for 74% of nine-month revenue and 70% of quarterly revenue. A different customer accounted for 10% of quarterly revenue.
- The company says it may need additional debt or equity financing and cannot assure that outside funding will be available on acceptable terms. It also relies on the possibility of short-term financing from its largest shareholder; related-party creditors could demand repayment.
- The secured lender is also the largest shareholder, holding 36% of outstanding shares. The loan is secured by a first lien on company assets and includes restrictive covenants.
- Management concluded disclosure controls were not effective, citing insufficient GAAP/SEC reporting expertise among accounting personnel and inadequate written accounting and reporting procedures. The company reported no material litigation and no material subsequent events through March 18, 2019.
Most important facts for investors to verify
- Confirm the intended issuer and period: this source is ValueSetters’ January 31, 2019 10-Q, not a Netcapital Inc. 2017 Q3 filing.
- Check whether ValueSetters can secure enough financing and address the disclosed going-concern uncertainty and negative working capital.
- Assess whether revenue growth is repeatable given the major customer concentration and the company’s stated reliance on future customer work.
- Review the terms, collateral, covenants, maturity, and related-party nature of the company’s debt, as well as potential share dilution.
- Monitor remediation of the disclosed weaknesses in disclosure controls and financial-reporting procedures.