Filing summary
Filing identity and period: The supplied filing is ValueSetters, Inc.’s Form 10-K for the fiscal year ended April 30, 2018, filed July 30, 2018. This does not match the request metadata identifying Netcapital Inc. and “2016 Q4.” The filing describes NetCapital Systems LLC as a company in which ValueSetters has an equity interest and provides consulting services; it is not a Netcapital Inc. filing.
Business context
ValueSetters combined Internet-based games and digital products with consulting services for early-stage companies, sometimes accepting equity in exchange for services. Consulting generated most fiscal 2018 revenue. The company also reported acquiring SpaceoutVR after year-end and owning interests in other early-stage businesses, including NetCapital Systems LLC.
Financial performance and liquidity
| Metric | FY ended Apr. 30, 2018 | FY ended Apr. 30, 2017 |
|---|---|---|
| Revenue | $111,171 | $21,508 |
| Gross profit | $87,286 | $21,508 |
| Operating loss | $(192,054) | $(549,043) |
| Net income (loss) | $131,129 | $(828,121) |
| Cash used in operations | $(50,156) | $(14,179) |
| Cash and cash equivalents | $1,655 | $3,324 |
| Negative working capital | $538,991 | $2,590,703 |
| Total debt | $1,136,387 | $1,828,803 |
Revenue increased 417%, primarily due to consulting. The company nonetheless recorded an operating loss; reported net income reflected a $385,823 gain on debt conversion. Interest expense declined to $69,490 from $115,301, partly after the secured related-party loan’s rate was reduced from 8% to 1.25%. Fiscal 2018 gross profit was $87,286 on $111,171 revenue; the filing does not state a gross-margin percentage.
Financing activities provided $48,487, but did not offset operating cash use; cash declined by $1,669 during the year. Assets were $98,405 and stockholders’ deficit was $1,483,991 at year-end. The company issued 153.3 million shares for debt settlements and 38.4 million shares for services during fiscal 2018; shares outstanding rose from 530.0 million to 731.7 million.
Material changes, outlook, and risks
- Negative working capital improved substantially, primarily through debt restructuring and conversions of liabilities into common stock. The principal lender extended the $1 million secured note to October 31, 2020, lowered its interest rate, and received shares as part of the restructuring. Its first lien covers company assets.
- Management reported consulting revenue above $75,000 in the first quarter of fiscal 2019, but provided no formal financial guidance. It planned to pursue consulting, digital products, marketing, hiring, and additional financing, subject to available capital.
- The auditor and management disclosed substantial doubt about the company’s ability to continue as a going concern. Management said cash resources were insufficient for operating losses, debt and other requirements; continued operations depend on revenue growth and additional financing. The lender’s future advances are not assured.
- Related-party lenders are material: ValueSetters owed its largest shareholder $1 million and reported other related-party balances. It had not paid principal or interest on the main related-party note; accrued interest and any lender demand could pressure liquidity. The company also had a $37,487 bank loan.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, citing insufficient GAAP/SEC accounting expertise and inadequate written procedures. The company planned to address the weaknesses when funding allowed.
- Other key risks include limited operating history, very low liquidity, dependence on a small number of people, intense competition, uncertain demand and regulatory changes, illiquid early-stage investments, potential dilution, and limited trading liquidity. The filing states there were no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the filing’s issuer and fiscal period: the document is for ValueSetters, Inc., year ended April 30, 2018, not Netcapital Inc. or 2016 Q4.
- Review whether consulting revenue and subsequent-period sales converted into collected cash and recurring operating cash flow.
- Verify current cash, working capital, total obligations, accrued interest, lender support, and compliance with the secured loan’s covenants.
- Assess the effect of debt conversions, service-related share issuance, and any later financings on dilution and ownership.
- Check progress in remediating the disclosed material weaknesses and the auditor’s going-concern assessment in later filings.
- Review the value and liquidity of equity investments, including the relationship with NetCapital Systems LLC, and the terms and subsequent performance of the SpaceoutVR acquisition.