Filing identity and reporting period
Important metadata mismatch: The supplied filing is a Form 10-Q for ValueSetters, Inc., for the quarter ended January 31, 2020 (fiscal 2020 third quarter), not a Netcapital Inc. filing or a 2018 Q3 filing. The company describes itself as a Boston-based advisory firm serving companies seeking capital, with a focus on Regulation Crowdfunding; it also takes equity interests in some clients.
Financial performance and position
| Metric | Three months ended Jan. 31, 2020 | Nine months ended Jan. 31, 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $757,405 | $1,593,130 | $121,355 and $281,995, respectively |
| Gross profit | $754,043 | $1,584,920 | $107,721 and $255,658, respectively |
| Operating income (loss) | $599,863 | $1,176,403 | $17,548 and $(4,957), respectively |
| Net income (loss) | $595,174 | $1,162,100 | $12,391 and $(15,171), respectively |
| Operating cash flow | Not separately reported | $(10,880) | $49,887 for nine months |
- Nine-month revenue rose 465%; third-quarter revenue rose 524%. Gross margin was approximately 99.5% for the nine-month period, compared with approximately 90.7% in 2019. Reported basic and diluted EPS rounded to $0.00.
- At January 31, 2020, cash was $3,930; total assets were $2.80 million, including $2.06 million of investments carried at cost. Current liabilities were $1.56 million, and working capital was negative $1,095,254. Accumulated deficit was $1.91 million.
- Total debt was approximately $1.114 million: a $1.0 million secured note to the largest shareholder, $71,800 in related-party notes, a $34,324 bank loan and $7,860 in demand notes. The secured note matures October 31, 2020 and bears 1.25% interest. Related-party interest payable was $36,285.
- Shares outstanding increased from 752.5 million at April 30, 2019 to 831.0 million at January 31, 2020. The filing reports $232,461 of stock-based compensation for the nine months; prepaid stock compensation totaled $731,769.
Changes and notable items
- Management attributed revenue growth mainly to consulting services and new customers. Two customers represented 78% of nine-month revenue; one customer alone represented 92% of third-quarter revenue ($700,000).
- Investments at cost rose from $647,317 to $2,058,113, including interests in Netcapital Systems, Deuce Drones and Kingscrowd. The filing says these investments lack readily determinable fair values; no unrealized gains or losses were recorded.
- Net income did not translate into positive operating cash flow: the $1.41 million increase in investments was the principal offset to earnings and noncash stock compensation. Cash declined by $15,180 over the nine months.
- Management said executives and consultants accepted substantial stock compensation to conserve cash. The company issued 75 million shares under compensation agreements in September 2019, in addition to other share awards.
Outlook, risks and controls
- Going concern: The filing states there is substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Management said existing cash was insufficient for debt payments and working capital, and that its financing and business plans were not probable to alleviate the doubt. Plans include seeking debt or equity financing, developing digital products and continuing advisory services.
- Management said near-term financing might be available from the largest shareholder, but outside financing may be difficult or unavailable on acceptable terms. It also said related-party creditors might demand payment, which could impair operations. The company had paid only $4,300 of principal on related-party debt during the nine months and accrued interest.
- No formal revenue or earnings guidance is provided. Management cautioned that recent results may not indicate full-year results and said sustained performance depends on repeat customers and additional capital.
- Disclosure controls were deemed ineffective. Reported material weaknesses were insufficient GAAP/SEC reporting expertise among accounting personnel and inadequate written accounting and reporting procedures.
- The filing reports no material litigation and no defaults upon senior securities. A subsequent event disclosed a March 10, 2020 grant of 25 million shares to a business development director, vesting monthly over four years.
Key facts for investors to verify
- Confirm the issuer and reporting period: the supplied document is ValueSetters, Inc.’s January 31, 2020 10-Q, despite the request’s Netcapital Inc./2018 Q3 metadata.
- Assess the company’s ability to fund operations and repay the $1 million secured related-party note due October 31, 2020, given cash of $3,930 and negative working capital.
- Verify the sustainability and cash-collection profile of revenue, customer concentration, and the valuation and recoverability of the equity investments recorded at cost.
- Review dilution and future compensation expense from stock awards and prepaid compensation, as well as remediation of the disclosed control weaknesses.