Filing identity and reporting period
The supplied filing is a ValueSetters, Inc. Form 10-Q for the three months ended July 31, 2017, not a Netcapital Inc. filing for 2016 Q1 as indicated in the request metadata. ValueSetters describes itself as a Boston-based advisory firm; it says it consults for NetCapital Systems LLC, which operates a crowdfunding portal. The filing reports the quarter as the first quarter of fiscal 2018.
Financial results and condition
| Metric | Three months ended July 31, 2017 | Prior-year quarter |
|---|---|---|
| Revenue | $1,933 | $3,741 |
| Operating loss | $(68,248) | $(133,959) |
| Net loss | $(108,642) | $(162,933) |
| Operating cash used | $(38,175) | $(115) |
| Financing cash flow | $35,147 | $(660) |
| Cash at quarter end | $296 | $68 |
Revenue fell 48% year over year. Selling, general and administrative expense rose to $70,181 from $42,435; the filing attributes the increase primarily to rent, accounting and consulting costs. Depreciation was nil versus $95,265 in the prior-year quarter. Interest expense was $29,049, approximately unchanged. A $12,295 loss on debt settlement contributed to the current-quarter net loss. Gross margin is not separately reported.
At July 31, 2017, total assets were $9,805, including $296 cash and $3,209 prepaid expenses. Current liabilities were $2,652,265, resulting in negative working capital of $2,648,760. Total debt was $1,871,982, up from $1,857,790 at April 30, 2017. Stockholders’ deficit was $2,642,460. The company reported no capital expenditures or investing activity for the quarter.
Changes, outlook, and material risks
- Management linked the revenue decline to lower consulting services and said it expected revenue growth in the next three quarters following the addition of a CEO and CTO. The filing provides no quantified guidance.
- Management states that cash resources are insufficient to fund operating losses, debt payments, and working-capital needs. It plans to seek debt or equity financing, pursue software and digital-product opportunities, and expand advisory services; there is no assurance these plans will succeed.
- The company disclosed recurring losses, an inability to meet obligations as due, and substantial doubt about its ability to continue as a going concern. It depends on additional capital and expects near-term support from its largest shareholder, but financing may not be available on acceptable terms.
- The $1,217,069 secured loan from the largest shareholder, who owns 40% of the company, matured June 30, 2017 and was in default for non-payment. A $333,066 term note was also past due; the filing says the lenders had not issued default notices. The secured lender has a first lien on company assets, and the agreement includes restrictive covenants.
- Management describes $1,283,849 of liabilities to related parties and says unpaid interest accrues on related-party debt. A demand for repayment could impair the company’s ability to continue operating.
- Disclosure controls and procedures were deemed ineffective. Reported weaknesses include insufficient GAAP and SEC reporting expertise, inadequate written accounting procedures, and lack of segregation of duties.
- During the quarter, the company issued 24,590,000 shares to settle $24,590 of debt and 10,000,000 shares as CEO compensation. Subsequent-event disclosures describe additional executive stock awards approved effective September 1, 2017.
Key facts for investors to verify
- Confirm the issuer and period: the filing is for ValueSetters, Inc. and the quarter ended July 31, 2017, despite the Netcapital Inc./2016 Q1 request metadata.
- Reconcile share counts: the balance sheet reports 564,590,000 shares outstanding at July 31, while the cover page reports 574,590,000 as of September 20, 2017.
- Reconcile debt disclosures, including the $333,066 past-due note and the MD&A’s reference to a former-director loan totaling $443,011, as well as the status and terms of all defaulted obligations.
- Assess the company’s ability to obtain financing, manage near-zero cash and severe working-capital deficit, and continue as a going concern.
- Review the effects of outstanding and subsequent stock awards on dilution, compensation expense, and financial reporting controls.