Filing identity and reporting period
The supplied filing is a ValueSetters, Inc. Form 10-Q for the quarter ended July 31, 2018 (the first quarter of fiscal 2019), filed September 10, 2018. This does not match the request metadata identifying Netcapital Inc. and 2017 Q1; verify the issuer and period before relying on this summary.
Business context
ValueSetters describes itself as an Internet-based digital-products business, including online chess and a recently acquired virtual-reality game, and a consulting business that assists early-stage companies seeking capital. Management said the quarter’s increase in consulting revenue came from services for a company preparing a crowdfunding offering. The company also reported ownership interests in early-stage businesses, including NetCapital Systems LLC, KingsCrowd LLC, and Zelgor.
Financial performance
| Metric | Three months ended July 31, 2018 | Prior comparable quarter |
|---|---|---|
| Revenue | $91,918 | $1,933 |
| Cost of revenue | $4,579 | $0 |
| Gross profit / gross margin | $87,339 / approximately 95% | $1,933 / 100% |
| Operating loss | $4,880 | $68,248 |
| Interest expense | $5,027 | $29,049 |
| Net loss | $7,207 | $108,642 |
| Basic and diluted loss per share | $0.00 as reported | $0.00 as reported |
Revenue rose $89,985, or approximately 4,655%, year over year. Management attributed the improvement primarily to consulting services. Selling, general and administrative expense was $76,003 in the financial statements, while MD&A cites $76,703; management linked the increase to compensation for a newly hired Chief Marketing Officer. Stock-based compensation was $16,216, down from $33,215.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $16,738 at July 31, 2018, compared with $1,655 at April 30, 2018.
- Working capital was negative $529,980; total current assets were $58,488 and current liabilities were $588,468.
- Total debt was $1,129,523, including a $1,000,000 secured loan from the largest shareholder, $76,100 in related-party notes, $17,300 in demand notes, and $36,123 owed to a bank. The secured loan bears 1.25% interest and matures October 31, 2020; it is secured by a first lien on company assets and includes restrictive covenants.
- Total liabilities were $1,588,468, and stockholders’ deficit was $1,483,803.
- The cash-flow statement reports operating cash flow of $17,153 and financing cash use of $2,070. However, MD&A reports operating cash flow of $22,153. The statements also label the $15,083 change in cash as a decrease, although beginning and ending cash indicate an increase.
Material changes, outlook, and risks
- The company reported substantial doubt about its ability to continue as a going concern within one year after issuance. Management said available cash was insufficient for operating losses, debt service, and working-capital needs, and that it was not probable its plans would adequately alleviate the doubt.
- Management plans to seek debt or equity financing, pursue digital-product opportunities, and continue capital-raising advisory work. It said consulting revenue in this quarter was the highest in company history, but repeat business and future cash generation were uncertain. No specific revenue or earnings guidance was provided.
- Management said it did not anticipate capital expenditures in fiscal 2019 and believed short-term financing from the largest shareholder might be available, but stated that outside financing could be difficult to obtain and was not assured.
- The company issued 200,000 shares in connection with acquiring the SpaceoutVR game and received $5,000 under an agreement for up to 2,800,000 additional shares, which had not yet been issued. It also issued 3,937,501 shares for executive and consultant compensation. A further 5,200,000 compensation shares were issued in August 2018.
- Disclosure controls and procedures were deemed ineffective. Reported material weaknesses included insufficient GAAP and SEC-reporting expertise among accounting personnel and inadequate written accounting and reporting policies.
- The filing reports no material pending litigation and no defaults upon senior securities. It also notes approximately $1.8 million of federal net operating loss carryforwards, subject to potential limitations.
Important facts for investors to verify
- Confirm that this ValueSetters filing—not a Netcapital filing—is the intended issuer and reporting period.
- Reconcile operating cash flow ($17,153 in the statement versus $22,153 in MD&A) and the reported cash-change sign against the cash balances.
- Reconcile selling, general and administrative expense ($76,003 in the financial statements versus $76,703 in MD&A).
- Assess the company’s near-term financing needs, going-concern uncertainty, related-party funding reliance, debt covenants, and ability to meet obligations.
- Review dilution from issued and planned shares, including the pending subscription shares and subsequent consultant compensation shares.