Filing identity and reporting period
Important mismatch: The supplied filing is ValueSetters, Inc.’s unaudited Form 10-Q for the quarter and six months ended October 31, 2018 (fiscal 2019 Q2), filed December 17, 2018. It is not identified as a Netcapital Inc. filing, and it does not cover 2017 Q2. The summary below reflects the filing text provided.
Business context and financial results
ValueSetters describes itself as an internet-based digital-products business and a consulting company serving early-stage companies, including companies seeking crowdfunding. Its activities include online chess subscriptions, a virtual-reality game, and advisory services. Management attributed the period’s revenue growth mainly to consulting services.
- Six months ended October 31, 2018: Revenue was $160,640, up $134,588 (517%) from $26,052. Gross profit was $147,937, compared with $26,052; gross margin was approximately 92%, versus 100% with no reported cost of revenue in the prior period. Operating loss narrowed to $22,505 from $141,361. Net loss was $27,562, versus net income of $103,507.
- Three months ended October 31, 2018: Revenue was $68,722, up $44,603 (185%) from $24,119. Gross profit was $60,598, compared with $24,119; gross margin was approximately 88%, versus 100%. Operating loss was $17,625, compared with $73,113. Net loss was $20,355, versus net income of $212,149.
- Cash flow: Operating activities provided $8,890 in the six months, versus using $43,448 in the prior-year period. Financing activities used $5,520, including loan principal payments, partly offset by $5,000 from a stock sale. Cash increased $3,370 to $5,025.
- Liquidity and debt at October 31, 2018: Current assets were $46,775 and current liabilities $571,080, producing negative working capital of $524,305. Total debt was $1,126,447, including a $1,000,000 secured related-party loan. Total liabilities were $1,571,080; stockholders’ deficit was $1,486,950.
- Share count: 746,894,212 shares were issued and outstanding at October 31, 2018, versus 731,694,210 at April 30, 2018. The filing reports 746,894,212 outstanding as of December 17, 2018.
Material changes and notable items
- Revenue increased substantially, attributed by management to consulting work and expanded digital-marketing capabilities following the hiring of a Chief Marketing Officer. Selling, general and administrative expense rose to $133,895 for the six months from $81,101, largely due to compensation; stock-based compensation fell to $36,547 from $86,312.
- Interest expense declined to $9,657 from $56,046 for the six months. The filing attributes this partly to reduced debt and the senior lender’s interest-rate reduction from 8% to 1.25% under a 2017 amendment.
- Prior-year net income included a $299,964 gain on debt settlement for the six-month period and a $312,259 gain for the three-month period. No comparable debt-settlement gain was recorded in 2018; prior-year profitability therefore is not directly indicative of operating performance.
- One customer accounted for 78% of six-month revenue and 73% of second-quarter revenue, creating significant customer concentration.
- The company issued shares for compensation and sold $5,000 of restricted stock in the quarter. Outstanding shares increased from the prior fiscal year-end.
Outlook, risks, and controls
The filing gives no quantified revenue or earnings guidance. Management said it was cautiously optimistic about the advisory revenue pipeline, intended to pursue consulting, digital products and potential acquisitions, and did not anticipate capital expenditures in fiscal 2019. It expects to depend on additional capital to fund operations and growth.
- Going concern: The company disclosed recurring losses, limited liquidity, inability to meet obligations as they become due, negative working capital, and insufficient cash to fund expected requirements. Management concluded that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance; it stated that its plans were not probable to alleviate the doubt sufficiently. Failure to raise funds or generate revenue could require significant reductions, reorganization, or cessation of operations.
- Financing and related parties: The $1 million senior secured loan is owed to the largest shareholder, bears 1.25% interest, matures October 31, 2020, and is secured by a first lien on company assets. The agreement contains restrictive covenants. Management said it believed related-party creditors would not demand near-term repayment, but acknowledged that any demand could impair operations. Additional outside financing is uncertain.
- Other risks: Revenue concentration, limited operating history, recurring losses, potential share dilution, and dependence on successful growth and financing. The filing says federal net operating loss carryforwards were approximately $1.8 million and could be subject to annual limitations.
- Disclosure controls: Management concluded disclosure controls and procedures were ineffective, citing insufficient GAAP/SEC reporting expertise and inadequate written accounting and reporting procedures. No material change in internal control over financial reporting was reported during the quarter.
- The company reported no material pending legal proceedings and no defaults upon senior securities. The financial statements are unaudited and state that they do not include adjustments that might be required if the company cannot continue as a going concern.
Key facts for investors to verify
- Confirm the intended issuer and period: the provided document identifies ValueSetters, Inc. and October 31, 2018, not Netcapital Inc. or 2017 Q2.
- Assess cash runway, near-term obligations, and the availability and terms of additional financing, including reliance on the largest shareholder and related parties.
- Evaluate whether consulting revenue is repeatable and whether customer concentration can be reduced.
- Review the senior secured loan covenants, collateral, maturity, and potential consequences of any lender demand or covenant issue.
- Monitor share issuance, stock-based compensation, and dilution, as well as remediation of the disclosed control weaknesses.