Filing identity and reporting period
Material metadata mismatch: The supplied filing is ValueSetters, Inc.’s Form 10-K, not a Netcapital Inc. filing. It reports the fiscal year ended April 30, 2019, compared with the year ended April 30, 2018—not “2017 Q4.”
ValueSetters describes itself as a Boston-based advisory firm providing capital-raising, strategy, technology consulting, and marketing services, and also operates an Internet chess site. It sometimes receives equity in early-stage companies for consulting work.
Financial performance and position
| Metric | FY2019 / April 30, 2019 | FY2018 / April 30, 2018 |
|---|---|---|
| Revenue | $1,013,612 | $111,171 |
| Gross profit (margin) | $988,414 (97.5%) | $87,286 (78.5%) |
| Operating income (loss) | $624,433 | $(192,054) |
| Net income | $582,880 | $131,129 |
| Cash from (used in) operations | $30,558 | $(50,156) |
| Cash and cash equivalents | $19,110 | $1,655 |
| Working capital | $(518,875) | $(538,991) |
| Total debt | $1,118,284 | $1,136,387 |
Net margin was approximately 57.5% in FY2019. Earnings per share were reported as $0.00 in both years, rounded to cents. Total liabilities were $1,584,684, total assets $719,426, and stockholders’ deficit $865,258 at April 30, 2019.
Material changes versus the prior year
- Revenue rose $902,441, or 812%, attributed to expansion of consulting services. Netcapital Systems LLC represented 65% of FY2019 revenue and Braidy Industries, Inc. 23%.
- Net income increased from $131,129 to $582,880. FY2018 included a $385,823 gain on debt conversion; FY2019 included a $23,000 impairment loss on an early-stage-company investment.
- Interest expense fell to $19,408 from $69,490, reflecting debt conversions and the reduction of the secured related-party loan rate from 8% to 1.25% in October 2017.
- Investments rose to $647,317 from $23,000. The FY2019 amount principally reflects 709 Netcapital membership units earned under a consulting contract and valued using a private transaction price; the company also impaired its $23,000 AthenaSoft investment.
- Cash from operations improved, but remained only $30,558 despite reported net income of $582,880. The cash-flow statement shows substantial non-cash investment and contract-receivable movements.
Liquidity, debt, outlook, and risks
The auditor reported substantial doubt about the company’s ability to continue as a going concern. Management said existing cash was insufficient for continuing operations and obligations, and planned to seek debt or equity financing, continue consulting, and pursue digital products and acquisition opportunities. It gave no quantified financial guidance.
- The $1,000,000 secured note owed to largest shareholder Vaxstar LLC matures October 31, 2020, bears 1.25% annual interest, is secured by a first lien on company assets, and carries restrictive covenants. Principal and interest had not been paid; interest accrued.
- Management said bank-loan principal payments had been temporarily suspended because of limited cash flow; the bank balance was $34,324. Related-party lenders could demand repayment, and continued shareholder financing was not assured.
- Revenue is highly concentrated: two customers accounted for 88% in FY2019, versus 46% in FY2018. A significant part of reported FY2019 revenue involved consulting consideration received in equity, rather than cash.
- Management identified ineffective disclosure controls and internal control over financial reporting, citing insufficient GAAP/SEC accounting expertise and inadequate written procedures. It planned to hire accounting support when funding permitted.
- Other risks include limited operating history, financing and dilution risk, illiquid early-stage investments, competition and regulatory change, and limited trading liquidity. The company reported no material litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the intended issuer and period: this filing names ValueSetters, Inc. and covers FY2019, not Netcapital Inc. or 2017 Q4.
- Review the valuation, recognition, and liquidity of the $647,317 Netcapital investment and the related consulting revenue, including the underlying private transaction and contract terms.
- Assess whether the company can convert reported earnings into cash, fund operations, and meet or refinance its obligations, especially the Vaxstar loan and bank debt.
- Verify customer concentration, contract continuation, and management’s unquantified FY2020 expectations.
- Track remediation of the disclosed material weaknesses and consider dilution, related-party lending terms, and the company’s substantial stockholders’ deficit.