Filing summary
Issuer and period: The supplied filing is Valuesetters, Inc.’s Form 10-K for the fiscal year ended April 30, 2015, signed February 14, 2017. It is not a Netcapital Inc. filing, and it does not report a 2014 Q4 period. Valuesetters describes an internet games and digital-products business, VoIP/video-calling services, and consulting for early-stage companies, including an equity interest in NetCapital Systems LLC.
Financial results and liquidity
| Metric | FY ended April 30, 2015 | FY ended April 30, 2014 |
|---|---|---|
| Revenue | $93,632 | $4,679 |
| Cost of services | $66,562 | $1,242 |
| Gross profit / margin | $27,070 / 28.9% | $3,437 / 73.5% |
| Operating loss | $(851,210) | $(9,745) |
| Net loss | $(485,668) | $(27,985) |
| Cash used in operations | $(80,769) | $(20,152) |
Revenue rose by $88,953, or 1,901%, primarily reflecting VoIP services ($72,145 of the increase) and consulting ($15,000). SG&A increased to $655,995, largely due to noncash stock-option compensation and a disputed investor-relations share award. Depreciation was $222,285. Interest expense rose to $76,766. A $456,294 gain from a derivative-liability fair-value adjustment substantially offset operating losses; the filing attributes elimination of derivative liabilities to an increase in authorized shares.
At April 30, 2015, cash was $5,237, negative working capital was $343,081, total assets were $1,313,084, total liabilities were $2,261,192, and stockholders’ deficit was $948,108. Reported total debt was $1,800,928, up from $507,804 in 2014. The principal secured related-party lender balance was $1,146,860, at 8% interest, secured by a first lien on company assets. The lender was also the largest shareholder. The company reported no capital expenditures and no investing cash flow; financing provided approximately $84,000, chiefly through borrowings.
Material changes, outlook, and risks
- The September 2014 acquisition of VoIP-business assets added equipment and software and was financed through a $1 million increase in secured debt. The company also pursued video calling, online chess, consulting, and equity-for-services investments.
- Management planned to seek debt or equity funding, market digital products, consider acquisitions, and seek cash fees in addition to equity for consulting. It estimated about $250,000 in capital needs. The filing gives no revenue or earnings guidance.
- The auditor issued an unqualified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. Management said existing cash was insufficient and that continued operations depended on new financing and revenue growth; no assurance of either was provided.
- Key risks include minimal cash and negative working capital, recurring losses, dependence on a related-party lender, debt covenants and accrued interest, potential dilution, illiquid early-stage investments, intense competition, and reliance on a very small, part-time team.
- Management reported ineffective internal controls and material weaknesses involving accounting expertise, written procedures, and segregation of duties. It planned to address these weaknesses when funding permitted.
- Unusual items include $537,500 of stock-based compensation, $456,294 of derivative-related income, and a $12,500 investment impairment. The filing’s risk discussion separately cites a $460,000 investment-value loss, which appears inconsistent with the financial statements and notes.
Important facts for investors to verify
- Confirm issuer and period: the filing is for Valuesetters, Inc., fiscal 2015—not Netcapital Inc. or 2014 Q4.
- Reconcile the stated $460,000 investment loss in risk factors with the $12,500 impairment in the audited statements and notes.
- Reconcile financing cash flow: the cash-flow statement reports $84,383, while MD&A reports $84,343.
- Verify debt balances, related-party obligations, accrued interest, collateral and covenant terms, and whether the lender continued to provide funding.
- Review the derivative-liability accounting and the $456,294 noncash gain, along with stock compensation and the disputed 6 million-share investor-relations award.
- Assess the going-concern warning, negative working capital, control weaknesses, and whether subsequent financing or operating developments improved liquidity.