Filing summary
Period and entity: The supplied filing is ValueSetters, Inc.’s unaudited Form 10-Q for the three months ended July 31, 2016 (first quarter of fiscal 2017), not a Netcapital Inc. 2015 Q3 filing as indicated in the request metadata. The filing describes an internet-based digital products and video-calling business, alongside consulting and investments in early-stage companies.
Financial performance
| Metric | Three months ended July 31, 2016 | Prior-year period |
|---|---|---|
| Revenue | $3,741 | $23,609 |
| Costs and expenses | $137,700 | $205,488 |
| Operating loss | $133,959 | $181,879 |
| Interest expense | $28,974 | $28,464 |
| Net loss | $162,933 | $210,343 |
| Net cash used in operating activities | $115 | $9,820 |
Revenue fell 84%, which management attributed to lower telecom-business revenue as it shifted toward video calling on Amazon Web Services and rebuilt its revenue base. Selling, general and administrative expense declined to $42,435 from $104,347, primarily because stock-based compensation fell to $38,248 from $88,248. Depreciation was $95,265 in both periods. A gross margin is not clearly presented; the 2016 statement reports no cost of services.
At July 31, 2016, total assets were $565,394, including only $68 of cash; total liabilities were $2,512,309 and stockholders’ deficit was $1,946,915. Working capital was negative $2,171,482, compared with negative $609,063 at April 30, 2016. Total debt was reported at $1,831,056. Operating cash use was nearly offset by noncash depreciation and stock compensation; financing activities used $660 for bank-loan payments. There was no investing activity or capital expenditure in the quarter.
Changes, outlook and risks
- Despite the lower net loss and lower operating expenses year over year, revenue contracted sharply and liquidity weakened substantially from the prior fiscal year-end.
- Management says the company cannot meet obligations as they become due and that existing cash is insufficient for operating losses, debt and lease payments, capital expenditures, and working capital. The filing raises substantial doubt about the company’s ability to continue as a going concern.
- Management plans to seek debt or equity financing, pay down debt, and pursue digital-product opportunities and acquisitions. It also says short-term funding may be available from the largest shareholder, but outside financing may be difficult and there is no assurance of funding or profitability. No quantified revenue or earnings guidance is provided.
- The largest shareholder is also the principal secured lender, holding 45% of outstanding shares and having a loan balance of $1,170,613; the loan is secured by a first lien on company assets and matures June 30, 2017. Debt covenants restrict certain transactions and borrowing.
- Disclosure controls and procedures were deemed ineffective. Reported material weaknesses include limited GAAP/SEC reporting expertise, insufficient written procedures, and lack of segregation of duties. Management reported no material changes to internal control during the quarter.
- The company reported no material litigation, no unregistered securities sales, and no defaults upon senior securities. It reported approximately $1.7 million of tax-loss carryforwards, with a full valuation allowance against the related deferred tax asset.
Key facts for investors to verify
- Confirm the filing identity and period: the document is for ValueSetters, Inc. and July 31, 2016, despite the request metadata naming Netcapital Inc. and 2015 Q3.
- Assess cash runway, ability to meet near-term obligations, and whether the largest shareholder will provide additional financing.
- Review debt maturities, secured-lender terms and covenants, and the related-party nature of the principal financing.
- Track whether the video-calling transition and early-stage investments produce material recurring revenue, and whether reported investments are recognized or impaired.
- Monitor remediation of the disclosed control weaknesses and the company’s ability to file reliable financial reports.