Filing summary
Important filing mismatch: The supplied metadata identifies Netcapital Inc. and “2018 Q2,” but the filing text is a ValueSetters Inc. Form 10-Q for the quarter ended October 31, 2019. The summary below reflects the filing text, not the metadata.
Business context and reporting period
ValueSetters describes itself as a Boston-based boutique advisory firm providing capital-raising, strategy, technology consulting, and marketing services, with a focus on Regulation Crowdfunding. It also takes equity stakes in some technology start-ups. The filing reports the three and six months ended October 31, 2019, compared with the corresponding 2018 periods. Financial amounts below are in dollars.
Financial results and liquidity
| Metric | Six months ended Oct. 31, 2019 | Six months ended Oct. 31, 2018 |
|---|---|---|
| Revenue | $835,725 | $160,640 |
| Gross profit | $830,877 | $147,937 |
| Operating income (loss) | $576,540 | $(22,505) |
| Net income (loss) | $566,926 | $(27,562) |
| Cash provided by operating activities | $16,432 | $8,890 |
- For the three months ended October 31, 2019, revenue was $716,993 and net income was $542,451, versus revenue of $68,722 and a net loss of $20,355 in the comparable 2018 quarter. Basic and diluted EPS were reported as $0.00 for 2019.
- Gross margin was approximately 99% in both 2019 reporting periods. Operating cash flow remained modest despite reported income; the filing attributes $659,025 of cash use to changes in non-cash working-capital balances during the six-month period.
- At October 31, 2019, cash was $31,242, current assets were $496,797, current liabilities were $1,554,223, and working capital was negative $1,057,426. Total assets were $2,192,922; total liabilities were $1,554,223; and stockholders’ equity was $638,699.
- Total debt was $1,113,984, including a $1 million secured related-party loan reclassified as current because it matures October 31, 2020. The lender is also the largest shareholder, with 32.7% of outstanding shares. The loan bears 1.25% interest and is secured by a first lien on company assets.
- Cash increased from $19,110 at April 30, 2019 to $31,242 at October 31, 2019. Financing activities used $4,300, principally for related-party debt payments.
Material changes and unusual items
- Six-month revenue rose $675,085, or 420%; quarterly revenue rose $648,271, or 943%. Management attributed the increase chiefly to consulting work for a new customer, which generated $540,000—65% of six-month revenue and 75% of quarterly revenue.
- Customer concentration remains significant: two additional customers represented 18% and 11% of six-month revenue. Management cautions that repeat business is not assured.
- Shares outstanding increased from 752,519,212 at April 30 to 830,644,212 at October 31. The company issued 75,312,500 shares as stock-based compensation in the quarter, including substantial awards to executives and consultants under agreements running through July 2021. The filing reports $915,000 of common stock issued as prepaid compensation and $854,199 of total prepaid stock compensation at quarter-end.
- Stock-based compensation expense rose to $108,531 for the six months, from $36,547 a year earlier. The filing says stock compensation was used in part to preserve cash.
- Investments at cost increased by $653,864 on the balance sheet. The cash-flow statement presents an investment-related working-capital use of $653,864, while MD&A says there was no investing activity; the filing does not clearly reconcile this presentation.
Outlook, risks, and controls
- Going concern: Management and the notes state there is substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Management says existing cash is insufficient for debt payments and working-capital needs, and that its financing and business plans are not probable to alleviate the doubt sufficiently.
- Management plans to seek debt or equity funding, pursue digital-product opportunities, and continue advisory services. It says it expects to depend on additional capital, and there is no assurance that funding will be available on acceptable terms. The filing provides no quantified revenue or earnings guidance.
- Management says related-party creditors are not expected to demand payment in the near term, but acknowledges they could do so. The company says it has paid only $4,300 in principal and has not paid interest on related-party debt; interest continues to accrue.
- Disclosure controls and procedures were deemed ineffective. The cited material weaknesses were insufficient personnel with GAAP and SEC reporting expertise and insufficient written accounting and reporting policies.
- The company reported no material litigation or material subsequent events. Its office lease is month-to-month. The filing notes approximately $1.3 million in federal net operating loss carryforwards, subject to possible limitations.
Most important facts for investors to verify
- Confirm the issuer and reporting period: the supplied filing is for ValueSetters Inc. and the period ended October 31, 2019, not Netcapital Inc. or 2018 Q2.
- Assess whether the $540,000 customer engagement is recurring and whether the company can reduce its dependence on a few customers.
- Review the ability to meet the $1 million related-party loan maturity in October 2020, and confirm any extensions, repayment arrangements, or additional financing.
- Evaluate cash conversion and reconcile the reported investment increase with the cash-flow and MD&A disclosures.
- Consider dilution from the 75.3 million compensation shares issued during the quarter and the remaining prepaid stock-compensation expense.
- Monitor remediation of the disclosed control weaknesses and the company’s stated going-concern uncertainty.