Filing summary
Period and issuer: The supplied filing is ValueSetters, Inc.’s unaudited Form 10-Q for the quarter and six months ended October 31, 2017—not a Netcapital Inc. filing for 2016 Q2 as stated in the request metadata. The company describes itself as a Boston-based boutique advisory firm. Financial figures below are in U.S. dollars.
Key financial results
| Metric | Six months ended Oct. 31, 2017 | Prior-year comparable | Three months ended Oct. 31, 2017 | Prior-year comparable |
|---|---|---|---|---|
| Revenue | $26,052 | $9,673 | $24,119 | $5,932 |
| Operating loss | $(141,361) | $(266,037) | $(73,113) | $(132,078) |
| Net income (loss) | $103,507 | $(324,230) | $212,149 | $(161,297) |
| Interest expense | $56,046 | $58,193 | $26,997 | $29,219 |
| Operating cash flow | $(43,448) | $629 | Not separately provided | Not separately provided |
Revenue rose 169% for the six-month period and 307% for the quarter, which management attributed to increased consulting activity following the addition of a CEO, CFO and CTO. The company remained loss-making from operations. Reported net income mainly reflects gains on debt settlements: $299,964 for the six months and $312,259 for the quarter. Those gains are non-cash and should not be treated as evidence of profitable operations. The filing reports earnings per share rounded to $0.00.
Costs included six-month stock-based compensation of $86,312 and SG&A of $81,101; depreciation was zero, versus $190,530 in the prior-year period. No operating margin is stated; the reported figures imply a substantial operating loss relative to revenue.
Financial position and material changes
- At October 31, 2017, cash was $2,763, current assets were $4,763, and current liabilities were $811,903, resulting in negative working capital of $807,140. Total assets were $38,263.
- Total debt was $1,354,787, including a $1 million secured related-party loan. The company reported a stockholders’ deficit of $1,773,640.
- Compared with April 30, 2017, negative working capital improved from $2,590,703, primarily following debt settlements. Cash declined from $3,324. The secured loan was amended to reduce the balance to $1 million, lower the annual interest rate from 8% to 1.25%, and extend maturity to October 31, 2020.
- The company issued substantial equity in debt settlements and compensation. Shares outstanding rose from 530 million at April 30 to 683,964,346 at October 31; the largest shareholder/lender owned approximately 40%. A further conversion notice for $26,973 of debt and accrued interest into 8,755,867 shares was received after quarter-end; the shares had not been issued by the report date.
- The company acquired a 20% passive interest in AthenaSoft Corp. for 10 million shares, recorded at $23,000 using the cost method. Management says the company cannot access AthenaSoft’s financial records.
Outlook, risks and other disclosures
- Management says it expects to rely on additional capital in the near term and is seeking debt or equity financing, advisory engagements, and digital-product or acquisition opportunities. It described its advisory revenue pipeline as “cautiously” promising but gave no quantified guidance.
- The filing expressly raises substantial doubt about the company’s ability to continue as a going concern: it reports recurring losses, very limited cash, inability to meet obligations as due, and dependence on financing. Management warns that failure to raise funds or generate revenue could force significant reductions, reorganization, discontinuation or shutdown of operations.
- The principal lender is also the largest shareholder and holds a first lien on company assets. Related-party and other demand debt, restrictive loan covenants, and potential creditor demands pose liquidity risks. Management says it believes related-party creditors will not demand near-term payment, but provides no assurance.
- Disclosure controls and procedures were concluded to be ineffective. Cited weaknesses include limited GAAP/SEC reporting expertise, insufficient written procedures, and lack of segregation of accounting duties. No material control changes were reported during the quarter.
- The company reported no litigation believed likely to have a material adverse effect and no defaults upon senior securities. It reported approximately $2.1 million of federal net operating loss carryforwards, with a full valuation allowance against the related deferred tax asset.
Important facts for investors to verify
- Confirm the issuer and reporting period: the supplied text identifies ValueSetters, Inc. and the period ended October 31, 2017, notwithstanding the Netcapital/2016 Q2 metadata.
- Review the debt-settlement agreements and share issuances. The filing describes differing settlement amounts in its discussion of prior 8-K disclosures and later negotiations, including a reported $312,259 quarterly gain and $299,964 six-month gain.
- Assess near-term liquidity, the company’s ability to fund operations, creditor demand rights, and whether additional financing is available on acceptable terms.
- Evaluate dilution from the large debt-settlement and compensation issuances, outstanding convertible securities, and the subsequent debt-conversion notice.
- Consider the basis and prospects for the AthenaSoft investment and management’s statements about increased revenue beginning in November 2017; the filing provides no quantified forecast.