Filing summary
Entity and period: The supplied filing is Valuesetters, Inc.’s Form 10-K for the fiscal year ended April 30, 2016, filed February 17, 2017. It is not a Netcapital Inc. filing, and the period is not 2015 Q4. Netcapital Systems LLC is mentioned as an early-stage company with which Valuesetters consulted and held an equity interest.
Business context
Valuesetters described a small Internet-based business spanning online chess subscriptions, digital products and Internet video calling, as well as consulting for early-stage companies in exchange for cash and/or equity. It said it had adapted a video-calling product for paid, scheduled calls between fans and athletes and intended to license the technology. The company reported no full-time employees and very limited part-time management capacity.
Financial performance and liquidity
| Metric | FY ended April 30, 2016 | FY ended April 30, 2015 |
|---|---|---|
| Revenue | $44,878 | $93,632 |
| Cost of services | $115,864 | $66,562 |
| Gross profit (loss) | $(70,986) | $27,070 |
| Operating expenses | $636,252 | $878,280 |
| Operating loss | $(707,238) | $(851,210) |
| Net loss | $(835,874) | $(485,668) |
| Net cash used in operating activities | $(21,729) | $(80,769) |
Revenue fell 52%. The company attributed the decline to moving its VoIP service from a colocation facility to Amazon Web Services, which temporarily disrupted revenue; management expected longer-term cost and scalability benefits. Cost of services exceeded revenue in FY2016. The filing does not provide a clear standalone gross-margin measure.
Selling, general and administrative expense declined 61% to $255,192, mainly because stock-based compensation fell from approximately $537,000 to $199,000. Depreciation rose to $381,060 from $222,285, and interest expense rose to $113,636 from $76,766. The prior-year results included $456,294 of derivative-related income; there was no such income in FY2016. Consequently, the operating loss narrowed while the net loss increased.
At April 30, 2016, cash was $843, current assets were $155,852, current liabilities were $764,915, and working capital was negative $609,063. Total assets were $701,699; stockholders’ deficit was $1,783,982. Total debt was $1,828,803, compared with $1,800,928 a year earlier. The largest shareholder and secured lender, Vaxstar LLC, was owed $1,167,700 at 8% interest; its loan was secured by a first lien on company assets and had a June 30, 2017 maturity. The filing also reports a $333,066 term note to a former director and a $42,747 bank loan.
Financing activities provided $17,335 in FY2016. The company reported no investing cash flow and no capital-asset expenditures. It issued 8 million shares for consulting services during the year; shares outstanding at year-end were 508 million.
Material changes versus the prior year
- Revenue declined by $48,754, or 52%, and cost of services increased by $49,302.
- SG&A declined by $400,803, while depreciation increased by $158,775 and interest expense increased by $36,870.
- Net loss increased by $350,206, reflecting the absence of the prior-year derivative gain, among other factors.
- Cash fell from $5,237 to $843, and negative working capital worsened from $343,081 to $609,063, primarily due to additional payables and borrowing.
- Debt increased by $27,875. The company reported accumulated losses of $2,953,021 at year-end.
Outlook, risks and unusual items
The auditor’s report was unqualified as to the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. Management said it expected to rely on additional capital, including possible equity financing and support from its largest shareholder. It planned to seek financing, market digital products, consider acquisitions, and provide consulting for cash as well as equity. The filing gives no firm revenue, earnings or cash-flow guidance and no assurance that financing or these plans will succeed.
Key risks include minimal cash and revenue, recurring losses, dependence on related-party financing, debt secured by company assets, potential dilution from future equity issuance, limited staffing, intense competition, and the illiquidity and uncertain value of early-stage equity investments. Management reported ineffective disclosure controls and internal control over financial reporting, citing inadequate GAAP/SEC accounting expertise, insufficient written procedures and lack of segregation of duties. It planned to address these weaknesses when funding allowed. The filing reported no material litigation known to management and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer and reporting period: the supplied document is Valuesetters, Inc.’s FY2016 Form 10-K, not a Netcapital Inc. 10-K or a 2015 Q4 report.
- Review the audited statements and debt note for the maturity, accrued interest, security interest and repayment terms of related-party debt, and confirm whether lender support continued after the filing date.
- Assess the going-concern warning, the company’s ability to fund operations, and any subsequent financing, restructuring or dilution.
- Check progress on the AWS transition, video-calling and digital-product revenue, and whether consulting equity interests have realized value or liquidity.
- Reconcile reported cash-flow figures: the cash-flow statement lists FY2015 financing cash flow of $84,383, while MD&A states $84,343.