Filing identity and reporting period
Important mismatch: The supplied filing is for ValueSetters, Inc., not Netcapital Inc. Its financial statements and MD&A cover the three and nine months ended January 31, 2018, compared with the corresponding 2017 periods. This conflicts with the request metadata identifying Netcapital and 2016 Q3; the filing cover text also contains a conflicting January 31, 2017 date. The summary below reflects the financial statements and discussion in the supplied text.
ValueSetters describes itself as a Boston-based advisory firm providing capital-raising, strategy, and technology consulting to early-stage companies. It also formed a software-development subsidiary, AthenaSoft Inc., and holds interests in certain early-stage businesses.
Financial performance and liquidity
Amounts below are in U.S. dollars. For the nine months ended January 31, 2018, revenue was $70,120, gross profit $55,210 (about 78.7% gross margin), operating loss $163,410, and net income $71,845. The net income included a $293,664 gain on debt settlement; it did not reflect profitable operations. For the three months ended January 31, 2018, revenue was $44,068, gross profit $29,158 (about 66.2% gross margin), operating loss $22,049, and net loss $31,662.
- Revenue growth: Nine-month revenue increased from $10,409 to $70,120; quarterly revenue increased from $736 to $44,068. Management attributed the increases to consulting work and new personnel, including the CEO and CFO, and software-development services.
- Expenses and interest: Nine-month selling, general and administrative expense was $105,921, versus $13,704 a year earlier. Stock-based compensation was $112,699, versus $114,744. Interest expense was $62,209, down from $86,734. No depreciation was recorded in 2018, compared with $285,795 in the prior nine-month period.
- Cash flow: Cash used in operating activities was $31,782 for the nine months, versus $3,545 used in the prior-year period. Financing activities provided $49,327; there was no investing activity. Cash increased to $20,869 from $3,324 at April 30, 2017.
- Liquidity: Current assets were $70,819 and current liabilities $808,761 at January 31, 2018, a working-capital deficit of $737,942. Total assets were $136,802, against a stockholders’ deficit of $1,671,959.
- Debt: Total debt was $1,337,227, including a $1,000,000 secured related-party loan, $200,000 in term notes, $75,800 in related-party notes, $38,127 due to a bank, and $23,300 in demand notes. The secured loan’s maturity was extended to October 31, 2020, and its stated rate reduced from 8% to 1.25% under an October 2017 amendment.
- Equity and dilution: Shares outstanding increased from 530,000,000 at April 30, 2017 to 708,049,380 at January 31, 2018. The filing reports 708,049,380 shares outstanding as of March 19, 2018.
Material changes and unusual items
- Debt restructuring and settlements reduced the working-capital deficit compared with April 30, 2017. The secured lender accepted 44,198,246 shares as part of an amendment that reduced the loan and accrued interest payable to $1,000,000. The lender is also the largest shareholder, with 38.3% ownership reported at January 31, 2018.
- A separate note and accrued interest were converted into 52,301,100 shares in October 2017; the filing reports a $312,259 gain on that settlement. Other debt conversions and settlements also generated gains or losses depending on the share value and amount retired.
- ValueSetters acquired a 20% passive interest in AthenaSoft Corp. for 10,000,000 shares and formed AthenaSoft Inc. as a U.S. marketing arm. The filing says the company cannot exert influence over AthenaSoft Corp. or access its financial records.
- The company issued substantial shares for debt settlements, officer and consultant compensation, and consulting/marketing arrangements. A two-year consulting agreement was funded with 10,000,000 shares valued at $70,000; most of the value remained recorded as prepaid expense at period-end.
Outlook, risks, and controls
The filing gives no quantitative revenue or earnings guidance. Management said it planned to seek debt or equity financing, develop digital products and acquisition opportunities, and grow advisory services. It stated that additional capital would be needed for operations and anticipated growth, and that success in raising funds or achieving positive cash flow was uncertain.
Going concern: The company reported recurring operating losses, inability to meet obligations as they become due, and insufficient existing cash to fund operating losses, debt payments, and working-capital needs. Management warned that failure to raise capital or generate adequate revenue could require significant reductions, reorganization, or cessation of operations. The filing says the independent auditor’s report expressed doubt about the company’s ability to continue as a going concern.
Other risks and contingencies: The secured loan is collateralized by a first lien on company assets and includes restrictive covenants. Some notes are past due or payable on demand. Management said related-party creditors were not expected to demand payment in the near term, but acknowledged that a demand could impair operations. The company reported no material litigation and no material subsequent events through March 19, 2018.
Disclosure controls: Management concluded disclosure controls and procedures were ineffective. Cited material weaknesses included insufficient GAAP and SEC-reporting expertise, inadequate written accounting procedures, and lack of segregation of duties because one person performed all accounting-related duties. No material change in internal control was reported during the quarter.
Investor facts to verify
- Confirm the correct issuer and reporting period: the supplied filing identifies ValueSetters, Inc. and primarily reports results through January 31, 2018, not Netcapital Inc. or 2016 Q3.
- Assess near-term liquidity and financing availability against the $737,942 working-capital deficit, $20,869 cash balance, and $1,337,227 total debt.
- Separate operating performance from the $293,664 nine-month debt-settlement gain when evaluating the reported net income.
- Review the terms, maturity status, covenants, and related-party nature of outstanding debt, including demand and past-due notes.
- Evaluate the extent of share issuance and potential dilution, and the valuation and terms of stock-based compensation, debt settlements, and investments.
- Track remediation of the disclosed ineffective controls and material weaknesses.