Filing summary
Entity and period: The supplied filing is Valuesetters, Inc.’s Form 10-K for the fiscal year ended April 30, 2017, filed September 8, 2017. It is not identified as a Netcapital Inc. filing or a 2015 Q4 report; NetCapital Systems LLC is mentioned as an investee and consulting client. Verify the filing and issuer before relying on this summary.
Business context
Valuesetters describes a small Internet-based business spanning online games and subscriptions, video-calling services, and consulting for early-stage companies, sometimes in exchange for equity. Its products include Chess.net and a video-calling platform, and its strategy includes licensing technology and investing in early-stage businesses. It reported two full-time employees as of August 15, 2017.
Financial performance and liquidity
| Metric | FY ended Apr. 30, 2017 | FY ended Apr. 30, 2016 |
|---|---|---|
| Revenue | $21,508 | $44,878 |
| Costs of services | $0 | $115,864 |
| Selling, general and administrative expense | $189,491 | $255,192 |
| Depreciation | $381,060 | $381,060 |
| Operating loss | $549,043 | $707,238 |
| Net loss | $828,121 | $835,874 |
| Operating cash used | $14,179 | $21,729 |
| Cash at year-end | $3,324 | $843 |
| Total debt | $1,857,790 | $1,828,803 |
Revenue fell 52%, primarily due to reduced telecom revenue as the company shifted toward video calling and rebuilt that revenue base. FY2017’s reported net loss included a $158,772 impairment of VoIP assets and a $6,000 investment loss; interest expense was $115,301. In FY2016, service costs included a disputed colocation-services charge. Cash provided by financing was $16,660 in FY2017, principally from the largest shareholder’s working-capital line; there was no investing cash flow.
At April 30, 2017, current assets were $19,748 and current liabilities were $2,610,451; reported negative working capital was $2,590,703. Total assets were $19,748 and stockholders’ deficit was $2,590,703. Debt was classified as current at year-end, compared with $2,485,681 of long-term debt at April 30, 2016. The filing reports accumulated losses of $3,781,142.
Material changes, outlook, and risks
- The company wrote down its VoIP platform’s remaining carrying value to zero after a change in use and an impairment assessment.
- The largest shareholder, Vaxstar LLC, was also the secured lender. Its $1,199,327 loan carried 8% interest, was secured by a first lien on company assets, and matured June 30, 2017. The filing says it was in default for nonpayment after maturity. A former director’s $333,066 term note, plus $107,590 accrued interest, also matured June 30, 2017 and was technically in default. Management expected to negotiate extensions and said lenders had not issued default notices; no assurance of extensions was given.
- The auditor expressed substantial doubt about the company’s ability to continue as a going concern. Management’s plans included seeking debt or equity funding, developing or acquiring digital products, and providing consulting services with cash fees as well as equity compensation. The filing gives no assurance these plans will succeed and warns operations could be reduced, reorganized, discontinued, or shut down if funding or revenue is inadequate.
- Management estimated approximately $250,000 of capital needs to implement its strategy. There were no current equity-funding arrangements, and additional financing could be unavailable or highly dilutive. The company said it was not generating positive operating cash flow.
- Internal control over financial reporting and disclosure controls were deemed ineffective, with material weaknesses in accounting expertise, written procedures, and segregation of duties. Management planned to address these when funds allowed.
- Other cited risks include competition, uncertain customer demand and Internet regulation, limited personnel, illiquid early-stage investments, penny-stock trading restrictions, and reliance on a small number of individuals. The company reported no material litigation and no off-balance-sheet arrangements.
- Subsequent events disclosed 20,000,000 shares approved as compensation for the new CEO and 5,000,000 for the CTO; 24,590,000 shares were also issued to retire $24,590 of debt. As of August 31, 2017, 564,590,000 shares were outstanding.
Most important facts to verify
- Confirm the requested issuer and period: this filing is for Valuesetters, Inc., fiscal 2017, not Netcapital Inc. or 2015 Q4.
- Confirm whether the matured related-party loans were extended, repaid, or remain in default, and whether the secured lender continued funding operations.
- Review the complete audited statements and notes for debt, accrued interest, current liabilities, and any discrepancies in share and stockholders’ deficit disclosures.
- Assess whether subsequent share issuances, compensation awards, and other potential dilution are reflected in current capitalization information.
- Verify whether the company obtained financing, generated meaningful revenue, or remediated the disclosed material weaknesses after the reporting date.