Filing identity and reporting period
The supplied filing is for Valuesetters, Inc., not Netcapital Inc. It is a Form 10-Q for the quarter ended January 31, 2017 (fiscal 2017 third quarter), filed May 26, 2017. This does not match the request metadata identifying Netcapital Inc. and 2015 Q3. The figures below summarize the supplied filing.
Business context
Valuesetters describes an Internet-based business focused on digital products and a video-calling service, alongside consulting and investments in early-stage companies. It says it is rebuilding telecom revenue after shifting to a video-calling product hosted on Amazon Web Services. It also describes its relationship with NetCapital Systems LLC, in which it holds an interest.
Financial performance and position
| Metric | Nine months ended Jan. 31, 2017 | Prior-year comparable period | Three months ended Jan. 31, 2017 | Prior-year comparable quarter |
|---|---|---|---|---|
| Revenue | $10,409 | $42,631 | $736 | $3,259 |
| Operating loss | $403,834 | $566,161 | $137,797 | $137,444 |
| Interest expense | $86,734 | $85,675 | $28,541 | $28,635 |
| Net loss | $490,568 | $651,836 | $166,338 | $166,079 |
| Cash used in operating activities | $(3,545) | $(12,144) | Not stated separately |
For the nine-month period, revenue fell 75%, while net loss narrowed by about 25%. The filing attributes the revenue decline to reduced telecom revenue during the transition to video calling. Lower stock-based compensation contributed to reduced selling, general and administrative expense. No meaningful gross-margin comparison is provided; current-period cost of services is reported as zero.
At January 31, 2017, cash was $318, total assets were $304,618, and stockholders’ deficit was $2,267,550. Current liabilities were $2,572,168. Current assets of $44,581 imply negative working capital of $2,527,587; the going-concern note instead states $2,507,587, an inconsistency to verify. Total debt was reported as $1,840,767, including $1,181,744 owed to the secured lender, the company’s largest shareholder. The filing reports no capital expenditures during the nine-month period.
Changes, outlook, and risks
- Revenue declined substantially year over year, while nine-month operating and net losses improved. Quarterly net loss was approximately unchanged.
- Cash decreased from $843 at April 30, 2016 to $318 at January 31, 2017. Operating cash use was partly offset by $5,000 of additional secured-lender borrowing; financing activities provided net cash of $3,020.
- Management says available cash is insufficient to fund ongoing losses, capital expenditures, debt payments, and working-capital needs. The filing states the company cannot meet obligations as they come due and raises substantial doubt about its ability to continue as a going concern. Continued operations depend on raising capital, generating revenue, or obtaining further financing; no assurance is given that funding will be available on acceptable terms.
- Management’s plans include seeking debt or equity funding and pursuing software niches, digital products, and acquisition opportunities. The filing gives no quantified revenue, earnings, or cash-flow guidance.
- The secured loan from the largest shareholder matures June 30, 2017, is secured by a first lien on company assets, and includes restrictive covenants. Other notes include $533,066 classified as current, with stated maturities in June and September 2017.
- During the quarter, Valuesetters issued 10 million restricted shares in exchange for interests in other companies. After quarter-end, it agreed to issue 12 million shares for six months of media and related services under an agreement effective March 13, 2017.
- Management concluded disclosure controls were ineffective, citing insufficient GAAP and SEC reporting expertise, inadequate written procedures, and lack of segregation of accounting duties. The filing reports no material litigation and no change in internal control during the quarter.
Important facts for investors to verify
- Confirm the filing’s issuer and period: the document is Valuesetters Inc.’s January 31, 2017 10-Q, not a Netcapital Inc. 2015 Q3 filing.
- Reconcile the conflicting negative working-capital figures in the financial statements and going-concern note.
- Assess the company’s ability to refinance or repay near-term debt, particularly the secured related-party loan maturing June 30, 2017, and the $533,066 of notes classified as current.
- Verify financing availability and the assumptions behind management’s going-concern plans; reported cash was only $318.
- Review the share issuances for consulting, investments, and media services, including dilution and valuation; shares outstanding were 518 million at January 31 and 530 million as of May 26, 2017.