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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
_X_ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1997.
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Commission File Number 0-22610
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VALUESTAR CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1202005
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(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
1120A Ballena Blvd., Alameda, California 94501
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(Address of principal executive offices) (Zip Code)
(510) 814-7070
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES _X_ NO ____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.00025 par value 8,376,246
- ------------------------------- ---------
(Class) (Outstanding at October 31, 1997)
Transitional Small Business Disclosure Format (check one): YES __ NO _X_
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<PAGE>
VALUESTAR CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997 and
and June 30, 1997 (unaudited) 3
Consolidated Statements of Operations for the three
months ended September 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1997 and 1996 (unaudited) 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K *
SIGNATURES 13
* No information provided due to inapplicability of the item.
2
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<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VALUESTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
September 30, June 30,
1997 1997
ASSETS
<S> <C> <C>
Current Assets
Cash $ 17,562 $ 44,225
Accounts receivable, net 325,021 295,542
Inventories 17,157 27,863
Prepaid and other -- 7,035
----------- -----------
359,740 374,665
Deferred costs - net (Note 4) 157,551 134,085
Property, equipment, and intangibles-net 50,160 49,422
----------- -----------
$ 567,451 $ 558,172
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Bank line of credit (Note 5) $ 250,000 $ --
Accounts payable 341,614 373,226
Accrued expenses 87,846 112,277
Deferred revenue 14,225 22,720
Current maturities of notes payable (Note 6) 130,000 30,000
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823,685 538,223
Long-term notes (Note 6) -- 100,000
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Total liabilities 823,685 638,223
Stockholders' Deficit (Note 7)
Common stock, $.00025 par value,
20,000,000 shares authorized,
8,326,246 shares issued and
outstanding each period 2,082 2,082
Additional paid in capital 3,759,351 3,759,351
Common stock subscribed 50,000 --
Accumulated Deficit (4,067,250) (3,841,484)
----------- -----------
Total Stockholders' Deficit (255,817) (80,051)
----------- -----------
$ 567,868 $ 558,172
=========== ===========
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
3
</TABLE>
<PAGE>
<TABLE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended
September 30,
1997 1996
<S> <C> <C>
Revenues $ 524,216 $ 269,255
Costs and expenses:
Cost of revenues 153,515 113,173
Sales costs 176,572 239,927
Marketing and promotion 261,678 180,382
General and administrative 155,654 131,096
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Total costs and expenses 747,419 664,578
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Loss from operations (223,203) (395,323)
Interest expense (5,229) (500)
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Net loss $ (228,432) $ (395,823)
=========== ===========
Net loss per share $ (0.03) $ (0.06)
=========== ===========
Weighted average number of common shares outstanding 8,326,246 7,026,818
=========== ===========
<FN>
See accompanying notes to interim consolidated financial statements.
</FN>
4
</TABLE>
<PAGE>
VALUESTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
September 30,
1997 1996
Cash Flows from Operating Activities
Net (loss) $(228,432) $(395,823)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,249 2,167
Changes in assets and liabilities:
Accounts receivable (30,229) (60,229)
Inventories 10,706 (3,865)
Prepaid expenses and other 7,035 (5,154)
Deferred costs (23,466) (44,693)
Accounts payable (31,612) 24,764
Accrued expenses (21,431) 23,156
Deferred revenue (8,495) (28,008)
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Net Cash Flows Used by Operations (323,675) (487,685)
Cash Flows from Investing Activities
Equipment acquisitions (2,988) (6,278)
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Net Cash Used by Investing Activities (2,988) (6,278)
Cash Flows from Financing Activities
Common stock subscribed 50,000 --
Proceeds from bank line 250,000 --
Shareholder advances 90,000 100,000
Repayment of shareholder advances (90,000) --
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Net Cash Provided by Financing Activities 300,000 100,000
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Decrease in Cash and Cash Equivalents (26,663) (393,963)
Cash and Cash Equivalents at Beginning of Period 44,225 454,809
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Cash at End of Period $ 17,562 $ 60,846
========= =========
Supplemental Cash Flow Information:
Cash paid for interest 5,229 500
See accompanying notes to interim consolidatedfinancial statements.
5
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VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1997
1. OPERATIONS
The Company, a Colorado corporation, conducts its operations through ValueStar,
Inc., a wholly-owned subsidiary. ValueStar, Inc. was incorporated in California
in 1991, and is a provider of service and professional business rating
information to consumers. A certification trademark, ValueStar(R) Certified is
issued to businesses that have successfully passed an independent rating of
their customer's satisfaction. The Company's activities are currently
concentrated in Northern California. The Company communicates information about
highly rated service and professional firms that have earned "ValueStar
Certified" through various media including its Internet site
(www.valuestar.com), a periodic publication (Consumer ValueStar Reports) and a
voice-text service (808-STAR).
The Company's revenues are primarily from research and rating fees paid by new
and renewal customers, annual certification fees from qualified applicants and
renewal customers, and sales of information services products. The Company, from
time to time, provides discounts, incentives and satisfaction guarantees to
first time applicants, and may extend payment terms on the annual certification
fee. Certification fees and related cost of sales consisting of research and
rating fees are recognized when all related services are provided to the
customer. The Company provides a reserve for customer satisfaction guarantees.
Sales of information services are recognized as materials are delivered or
shipped or services are rendered.
Costs incurred in printing and distributing the Company's consumer publication,
Consumer ValueStar Report, published in January and July, and any related
revenues are recognized upon publication.
2. STATEMENT PRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. They do not disclose all disclosures provided in annual financial
statements. The interim financial statements and notes thereto should be read in
conjunction with the Company's audited financial statements and notes thereto
for the year ended June 30, 1997.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the three month period are
not necessarily indicative of the results that may be expected for the year.
Certain reclassifications have been made in the prior year to conform to the
current period presentation.
3. INVENTORIES
Inventory is recorded at the lower of cost (using the first-in first-out method
of accounting) or market. Inventories consist of brochures and related materials
for resale.
4. DEFERRED COSTS
All direct costs related to marketing and advertising the ValueStar
certification to business and consumers are expensed in the period incurred,
except for direct-response advertising costs, which are capitalized and
amortized over a twelve month period. Deferred costs consist of direct-response
advertising programs consisting of telemarketing, printing, and mailing costs..
Deferred costs are periodically evaluated to determine if adjustments for
impairment are necessary.
5. LINE OF CREDIT
The Company has a $250,000 revolving bank line of credit, with interest at prime
plus 2%. The bank's commitment under this agreement matures in August 1998. The
line of credit is guaranteed by certain officers and directors of the Company.
The Company has agreed to issue warrants to the guarantors exercisable into
250,000 shares of Common Stock at $1.25 per share for five years. These warrants
have not yet been issued.
6. NOTES PAYABLE
The Company is obligated on two 12% notes in the amount of $50,000 each for an
aggregate of $100,000 one of which is payable to the spouse of a director. These
notes are due on September 30, 1998. The Company is also obligated on two 12%
demand notes aggregating $30,000 payable to shareholders.
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VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1997
<TABLE>
7. STOCKHOLDERS' DEFICIT
The following table summarizes equity transactions during the three months ended
September 30, 1997:
<CAPTION>
Shares Dollars
<S> <C> <C>
Balance June 30, 1997 8,326,246 $3,761,433
Common stock subscribed but unissued at September 30, 1997 -- 50,000
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Balance September 30, 1997 8,326,246 $3,811,433
========= ==========
</TABLE>
The Company issued 50,000 common shares in October 1997 related to these
subscriptions and warrants to purchase 50,000 common shares at $1.25 per share
until 2002.
At September 30, 1997 the Company had options outstanding pursuant to its 1992
ISO Plan covering 250,000 common shares with exercise prices of $0.40 to $0.50
per share expiring in 2000 and 2001. The Company also had options outstanding
pursuant to its 1992 NSO Plan covering 250,000 common shares with exercise
prices of $0.40 to $0.50 per share expiring between 1999 and 2001. The Company
has options outstanding pursuant to its 1996 Stock Option Plan, as amended and
restated, covering 147,000 common shares with an exercise price of $0.50 to
$0.75 per share expiring in 2001 and 2002 and options outstanding pursuant to
its 1997 Stock Option Plan covering 57,000 common shares with an exercise price
of $0.75 per share expiring in 2002.
On March 14, 1997 the Company adopted the 1997 Employee Stock Compensation Plan
providing for the issuance of up to 4,000 common shares to non-executive
employees. At September 30, 1997 an aggregate of 2,900 common shares had been
granted pursuant to this plan.
At September 30, 1997 the Company had the following stock purchase warrants
outstanding each exercisable into one common share (see also notes):
Number Exercise Price Expiration Date
------ -------------- ---------------
150,000 $0.75 April, 2002
10,000 $0.75 September, 1998
200,000 $1.25 June, 2002
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360,000
The Company has authorized 5 million shares of capital stock as preferred stock,
with a par value of $0.00025 per share. No preferred stock is issued or
outstanding.
8. INCOME TAXES
At September 30, 1997 a valuation allowance has been provided to offset the net
deferred tax assets as management has determined that it is more likely than not
that the deferred tax asset will not be realized. The Company has for federal
income tax purposes net operating loss carryforwards of approximately $3,300,000
which expire through 2012 of which certain amounts are subject to limitations
under the Internal Revenue Code, as amended.
9. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
accounting Standards ("SFAS") No. 128, "Earnings Per Share" and Statement of
Financial Accounting Standards No. 129 "Disclosures of Information About an
Entity's Capital Structure." SFAS No. 128 provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS 128
provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. SFAS No. 129 establishes standards for
disclosing information about an entity's
7
<PAGE>
VALUESTAR CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1997
capital structure. SFAS No. 128 and SFAS No. 129 are effective for financial
statements issued for periods ending after December 15, 1997. Their
implementation is not expected to have a material effect on the consolidated
financial statements.
The Financial Accounting Standards Board has also issued SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that displays with the
same prominence as other financial statements. SFAS No. 131 supersedes SFAS No.
14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS No. 130 and No. 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on the future consolidated financial statement disclosures. Results of
operations and financial position, however, will be unaffected by implementation
of these standards.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING,
"BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB PURSUANT
TO RULE 15d-2 FOR THE YEAR ENDED JUNE 30, 1997 AND THE COMPANY'S REGISTRATION
STATEMENTON FORM 10-SB DATED MAY 29, 1997, AS AMENDED.
Overview
The Company's revenues are generated primarily from research and rating fees
paid by new and renewal businesses, annual certification fees from qualified
applicants and renewals and from the sale of information products and services.
The Company from time to time provides discounts, incentives from basic pricing
and may provide satisfaction guarantees to first time applicants and also from
time to time extends payment terms on the annual certification fee.
Certification fees are recognized when material services or conditions relating
to the certification have been performed. The material services are the delivery
of certification materials and manuals along with an orientation and the
material condition is the execution of the license agreement specifying the
conditions and limitation on using the certification. The Company currently
charges businesses $795 and up for use of the certification which must be
renewed each year.
Research and rating fee revenue is deferred until the research report is
delivered. The basic research and rating price is $470 and up. The Company
currently offers a $400 promotional discount to new applicants. For most
licensees the research covers a two year period and the Company charges $70 for
mid-term ratings. Approximately 70% of applicants successfully pass the
Company's research and rating requirements and are eligible for certification
and more than 90% of eligible applicants license the certification. More than
90% of renewal applicants pass subsequent ratings. The Company provides reserves
for any satisfaction guarantees. Sales of information materials and other
services are recognized as materials are delivered or shipped or services
rendered.
The Company expenses research and rating costs as incurred. Costs incurred in
printing and distributing the Company's Consumer ValueStar Report publication
published in January and July and any related revenues are recognized upon
publication.
Effective July 1, 1994, with the adoption by the Company of Statement of
Position No. 93-7 (SOP 93-7), Reporting on Advertising Costs, certain
advertising costs are deferred and amortized over a twelve month period on a
straight-line method. These costs, which relate directly to targeted new
licensee solicitations, primarily include targeted direct-response
8
<PAGE>
advertising programs consisting of telephone sales, printing and mailing costs.
No indirect costs are included in deferred advertising costs. Costs incurred for
other than specific targeted customers, including general marketing and
promotion expenses, are expensed as incurred.
The net effect of capitalizing and amortizing deferred costs was a reduction in
costs and expenses of $23,466 and $44,693 for the three months ended September
30, 1997 and 1996, respectively.
The Company estimates new licensees have an average life exceeding four years.
Since the Company's annual licensee renewal rate has averaged more than 75%
during the last three fiscal years and renewals provide margin in excess of
renewal costs, the Company believes deferred costs will be realized from future
operations. Deferred costs are periodically evaluated to determine if
adjustments for impairment are necessary.
Since inception the Company has been growing and developing its business and has
incurred losses in each year since inception and at September 30, 1997 had an
accumulated deficit of $4,067,250. There can be no assurance of future
profitability.
Effect of Growth in New Licensees and License Renewals
The Company's business model, similar to other membership based organizations,
is predicated on growing new members (business licensees) and maintaining high
renewal rates and expanding the revenues from each member. The Company's renewal
licensees contribute higher gross margins than new applicants due to reduced
sales costs. Also a growing and larger base of licensees reduces the costs
(relative to revenues) associated with printing and distributing the Company's
Consumer ValueStar Report, maintaining the ValueStar.com and Internet site,
providing voice-text services. The marginal costs of more licensees is minimal
compared to these base printing, distribution and maintenance costs.
Since a considerable portion of the Company's operations are engaged towards the
solicitation of new service and professional business applicants in order to
expand the base of licensees, the Company incurs substantial costs towards this
activity. Currently theCompany is only deferring direct telephone sales costs
and direct response advertising and amortizing them over twelve months. Other
costs are expensed as occurred.
At September 30, 1997 the Company had 995 licensees compared to 446 licensees on
September 30,1996.
The Company believes as a market territory matures and the Company has a larger
base of licensees then many fixed and indirect costs will decline as a
percentage of revenues. The Company's operations require that it achieve a
critical mass of licensees sufficient to cover general management, overhead and
indirect costs of operations. Management estimates based on the current cost
structure and level of advertising and promotion expenditures that this critical
mass is approximately 1,200 licensees. There can be no assurance the Company can
achieve this level of licensees and thereafter, if achieved, operations can be
impacted by changes in the cost structure, elections regarding advertising and
promotions and growth rates (due to the lower margins associated with first year
licensees).
At September 30, 1997 the Company had 210 (166 new and 44 renewal) prospective
licensees in the application and rating phase. Generally there is a 60 day
period between the initial signup of an applicant and the execution of a license
agreement for successful applicants. Based on management's experience, these 210
prospective licensees are expected to represent approximately $200,000 of
revenues that should be recognized in the second fiscal quarter (generally
analogous to backlog).
Effective January 1, 1997 the Company changed its new business marketing focus
to telephone sales from a field sales force. This has resulted in a significant
increase in applicants for ratings and reduced unit sales costs.
Results of Operations
Revenues. Revenues consist of certification fees from new and renewal business
licensees, rating fees from new and renewal business applicants, sale proceeds
from information materials and premium listings, and other ancillary revenues.
The Company reported total revenues of $ 524,216 for the three months ended
September 30, 1997, a 95% increase over revenues of $269,255 for the first
quarter of the prior fiscal year. During the current first quarter license fees
accounted for 75% of revenue (70% for the prior years first quarter). The growth
in revenues is the result of improved new sales velocity and the impact of a
larger base of business member renewals.
During fiscal 1996 and the first half of fiscal 1997 the Company experimented
with various direct mail and direct sales methods. Effective January 1, 1997 the
Company changed from a field sales force to telephone sales to obtain new rating
applicants. The Company believes, based on its over 75% historical renewal rate,
that investments in new licensees will contribute to greater recurring revenues
in future periods. At September 30, 1997 the Company had 210 applicants in
various stages of rating, effectively a (anticipated revenue) backlog estimated
at $200,000 to be recognized in the second fiscal quarter ending December 31,
1997 from license fees. However due to lower sales in the second fiscal quarter
of the prior year (affecting prospective renewals), the timing of processing
applications and seasonality (sales in the fourth calendar quarter are generally
lower than other quarters), management expects second quarter fiscal 1998 (year
ending June 30, 1998) to be less than the first quarter, however greater than
the second quarter of the prior year.
9
<PAGE>
Revenues can vary from quarter to quarter due to seasonality, effectiveness of
sales methods and promotions, levels of expenditures targeted at prospective
licensees, the numbers of licensees up for renewal, renewal rates, pricing
policies, timing of service performance by outside contractors and other
factors, some beyond the control of management.
Cost of Revenues. Cost of revenues consist primarily of rating costs paid to
third parties for performing customer satisfaction research on business
applicants, in-house staffing and costs related to auditing and rating of
applicants and costs of information products and licensing materials. Cost of
revenues represented 30% of sales in the first quarter of fiscal 1998, a
reduction from 42% in the first quarter of the prior year. During the current
year, the Company made changes to make ratings more efficient and has arranged
for improved third party pricing to reduce rating costs. The increased volume of
revenues also reduces the percentage of revenues associated with certain fixed
rating costs. Cost of revenues may vary from quarter to quarter both in amount
and as a percentage of sales.
Sales Costs. Sales costs for the three months ended September 30, 1997 were
$176,572 or 34% of revenues compared to $239,927 or 90% of revenues for the
comparable prior period. In the first quarter of the prior year, the Company
relied on a direct sales force supported by direct mail to generate sales. In
the current quarter, the Company had implemented the telephone sales approach,
also supported by direct mail. This has resulted in significantly reduced unit
selling costs. Also in the first quarter of the current year approximately 32%
of license fees came from renewals with limited sales costs, compared to
approximately 28% of license fees coming from renewals in the prior period's
first quarter. The Company expects sales costs as a percentage of revenues will
vary in future periods resulting from variances in renewal rates, the effect of
new sales promotions and costs thereof, level and percentage of fixed selling
costs and other factors, some beyond the control of management.
Marketing and Promotion Expenses. Marketing and promotion expenses aggregated
$261,678 in the first quarter of fiscal 1998 compared to $180,382 in the first
quarter of fiscal 1997. Included in marketing and selling expenses in each
quarter were printing and distribution costs of the Company's Consumer ValueStar
Report publication targeted at consumers. Printing and distribution costs of
$102,000 in the first fiscal 1997 quarter were comparable to the fiscal 1996
first quarter, however the company was able to print and distribute more copies
due to better prices. During the three months ended September 30, 1997 the
Company expended $65,000 on paid advertising targeted at expanding consumer
awareness of ValueStar Certified. No paid advertising was employed in the prior
year's first quarter.
Marketing and promotion expenses are subject to significant variability based on
decisions regarding the timing and size of distribution of Consumer ValueStar
Report and decisions regarding direct mail activities, paid advertising, public
relations and market and brand awareness efforts. The Company anticipates
continuing to make significant expenditures in marketing and promotion efforts
as the Company supports a growing licensee base but anticipates these costs will
decrease as annual percentage of revenues as revenues grow. However amounts and
percentages on a quarterly basis may vary significantly.
General and Administrative Expenses. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
management activities, including legal, accounting and other professional fees.
They totaled $155,654 for the three months ended September 30, 1997 compared to
$131,096 for the comparable prior period. The major increases include a $5,000
increase in office supplies due to additional personnel and a $10,000 increase
in corporate costs.
To date development expenses associated with the design, development and testing
of the Company's programs and services have not been material and are included
in sales and marketing or general and administrative expenses (if performed by
executive management). In the future, as the Company develops new programs or
services, it anticipates that it may segregate development expenses as an
expense category.
The Company had a net loss of $228,432 for the three months ended September 30,
1997 compared to a net loss of $395,823 in fiscal 1997's first quarter. The
significantly decreased loss resulted primarily from improved selling efficiency
and reduced rating costs. Also the increase in total revenues reduced the effect
of fixed operating costs. The Company anticipates it will continue to experience
operating losses until it achieves a critical mass base of renewing licensees as
it pursues aggressive growth in new licensees. Achievement of positive operating
results will require obtaining a sufficient base of new licensees and renewal
licensees to support operating and corporate costs. There can be no assurance
the Company can sustain renewal rates or achieve a profitable base of
operations.
Liquidity and Capital Resources
Since the Company commenced operations it has had significant negative cash flow
from operating activities. The negative cash flow from operating activities was
$1,519,799 for the fiscal year ended June 30, 1997, and $722,518 for the fiscal
year ended June 30, 1996. At June 30, 1997 the Company had a working capital
deficit of $163,558 and at September 30, 1997 a working capital deficit of
$463,945 resulting from operations being financed by short-term debt. For the
three months ended September 30, 1997 negative cash flow from operating
activities was $323,675 due to the continued operating losses and heavy
investment in new licensee growth. Included in working capital at September 30,
1997 is net accounts receivable of $325,021 representing approximately 55 days
of revenues and an annualized turnover ratio of approximately 6.4. This compares
to approximately 102 days of revenues and turnover of approximately 3.6 at June
30, 1997. The improved turnover and reduced receivable level results from
increased revenues and concentrated collection efforts. Management believes that
60 to 90 days sales in receivables is reasonable based on the nature of the
Company's business. At September 30, 1997 the Company has not experienced and
does not anticipate any significant accounts receivable recoverability problems.
10
<PAGE>
The Company has financed its operations primarily through the sale of common
equity and shareholder loans subsequently converted to common stock. There are
no commitments for future investments by these or other parties and there can be
no assurance that the Company can continue to finance its operations through
these or other sources. During fiscal 1997 the Company obtained $1,122,175 from
equity and debt sources. For the three months ended September 30, 1997 the
Company obtained $250,000 from a bank line of credit and $50,000 from common
stock subscriptions and repaid $90,000 of shareholder advances obtained during
the period. The bank line of credit is guaranteed by certain officers and
directors.
Other than cash on hand of $17,562 at September 30, 1997 and accounts receivable
of $325,021, the Company has no material unused sources of liquidity at this
time and the Company expects to incur additional operating losses in future
fiscal quarters as a result of continued operations and investments in licensee
growth. The timing and amounts of these expenditures and the extent of operating
losses will depend on many factors, some of which are beyond the Company's
control.
The Company believes, but there can be no assurance, given the above sources of
liquidity and the combination of anticipated renewal revenues, current levels of
new sales and licensee growth, that it will require approximately $300,000 of
additional funding for the next twelve months. However should actual results
differ significantly from management's plans, then the Company may require
substantially greater additional operating funds. There can be no assurance that
additional funding will be available or on what terms. Potential sources of such
funds include shareholder and other debt financing or additional equity
offerings. In such an event without additional funding the Company will be
required to curtail or scale back staffing and operations in more reliance on
higher profitable renewals and limit new licensee growth.
The Company intends to expand operations beyond the greater San Francisco Bay
and Sacramento areas in the future, however any significant expansion will
require additional funds. Potential sources of any such funds may include
shareholder and other debt financing or additional offerings of the Company's
equity securities. There can be no assurance that any funds will be available
from these or other potential sources.
Tax Loss Carryforwards
As of June 30, 1997, the Company had approximately $3.3 million of tax loss
carryforwards. A valuation allowance has been recorded for the net deferred tax
asset arising primarily from such tax loss carryforwards because, in the
Company's assessment, it is more likely than not that the deferred tax asset
will not be realized.
Business Risks
This quarterly report contains a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from historical results or those anticipated. In this
report, the words "anticipates," "believes," "expects," "intends," "future" and
similar expressions identify forward-looking statements. Readers are cautioned
to consider the specific risk factors described below and not to place undue
reliance on the forward-looking statements contained herein, which speak only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that may
arise after the date hereof.
Absence of Profitable Operations and Possible Insufficiency of
Capital - The Company has incurred significant operating losses since
inception. The Company incurred an operating loss of $1.4 million for
the fiscal year ended June 30, 1997 and $228,000 for the three months
ended September 30, 1997. The Company has had limited financial results
upon which investors may base an assessment of its potential. There can
be no assurance profitable operations can be achieved and management
believes that additional capital will be required.
Possible Inability to Continue as a Going Concern - The Company has
suffered recurring losses from operations. This factor, in combination
with (i) reliance upon debt and equity financing to fund losses from
operations and cash flow deficits, (ii) material net losses and cash
flow deficits from operations and (iv) the possibility that the Company
may be unable to meet its debts as they come due, raise doubt about the
Company's ability to continue as a going concern. The Company's ability
to continue as a going concern is dependent upon obtaining additional
capital and ultimately achieving and maintaining profitable operations,
as to which no assurance can be given.
Competition and Technological Change - The possibility exists that a
business rating service and certification mark similar to or
competitive with that of the Company will be developed. It is also
possible that future
11
<PAGE>
competition will try to duplicate the Company's concept. The Company
could face head-on competition from vastly larger and better financed
companies with the means to launch a high-impact campaign locally or
nationally. Technological changes in the manner of selecting service
businesses and communicating information to consumers could also have a
negative impact on the Company's business. As a provider of consumer
information through the Internet and various media the Company will be
required to adapt to new and changing technologies. There can be no
assurance that the Company's services will remain viable or competitive
in face of technological change.
Dependence on Officers and Directors - The Company is substantially
dependent upon the experience and knowledge of its officers and
directors. The loss to the Company of such persons, particularly Mr.
James Stein, could be detrimental to the Company's development,
especially since it may not have the funds to hire management personnel
with the requisite expertise.
Managing a Growing and Changing Business - The Company continues to
experience changes in its operations resulting from expansion of its
business and other factors which has and may place demands on its
administrative, operational and financial resources. The Company's
future performance will depend in part on its ability to manage growth
and to adapt its administrative, operational and financial control
systems to the needs of an expanding entity. The failure of management
to anticipate, respond to and manage changing business conditions could
have a material adverse effect on the Company's business and results of
operations.
Government Regulation and Legal Uncertainties - The Company is not
currently subject to direct regulation other than federal and state
regulation applicable to businesses generally. The Company may also be
subject to uninsured claims by consumers for actions of licensees or
other claims incident to its business operations.
Stock Trading Risks and Uncertainties - On May 28, 1997 the Company's
Common Stock commenced trading on the National Association of
Securities Dealers, Inc. ("NASD") OTC Electronic Bulletin Board.
Securities traded on the Bulletin Board are, for the most part thinly
traded and subject to special regulations. The Company's Common Stock
is currently defined as "penny stocks" under the Exchange Act, and
rules of the Securities and Exchange Commission thereunder. The
Exchange Act and such penny stock rules generally impose additional
sales practice and disclosure requirements upon broker-dealers who sell
the Company's securities to persons other than certain "accredited
investors" (generally, institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 jointly with spouse) or in transactions
not recommended by the broker-dealer. For transactions covered by the
penny stock rules, the broker-dealer must make a suitability
determination for each purchaser and receive the purchaser's written
agreement prior to the sale. In addition, the broker-dealer must make
certain mandated disclosures in penny stock transactions, including the
actual sale or purchase price and actual bid and offer quotations, the
compensation to be received by the broker-dealer and certain associated
persons, and deliver certain disclosures required by the Securities and
Exchange Commission. Consequently, the penny stock rules may affect the
ability of broker-dealers to make a market in or trade the Company's
shares and thus may also affect the ability of purchasers of shares to
resell those shares in the public markets.
Like that of securities of other small, growth-oriented companies, the
Company's shares are expected to experience future significant price
and volume volatility, increasing the risk of ownership to investors.
Sales of substantial amounts of Common Stock in the public market could
adversely affect the prevailing market price of the Common Stock.
Future changes in market price and volume cannot be predicted as to
timing or extent. Any historical performance that may develop does not
guarantee or imply future performance. Future announcements concerning
the Company or its competitors, quarterly variations in operating
results, announcements of technological or service innovations, the
introduction of new products or services, changes in pricing policies
by the Company or competitors, litigation relating to services or other
litigation, changes in performance estimates by analysts or others,
issuances of or registration of additional securities, or other factors
could cause the market price of the Common Stock to fluctuate
substantially. In addition, the stock market has from time to time
experienced significant price and volume fluctuations that have
particularly affected the market price of small companies and have
often been unrelated to the operating performance of particular
companies.
PART II. OTHER INFORMATION
Item 5. Other Information
(a) Pursuant to the instructions of this item, the Company elects to report
sales of equity securities pursuant to Regulation S otherwise reportable on Form
8-K. On October 29, 1997 the Company completed the sale of 50,000 shares of its
Common Stock at $1.00 per share and warrants to purchase 50,000 common shares at
$1.25 per share until September 30, 1997. The stock was subscribed and paid for
on or prior to September 30, 1997. Proceeds of $50,000 supplement working
capital. The shares were sold by the Company without an underwriter to two
qualified investors (already shareholders) outside of the United States and were
issued in accordance with Regulation S of the Securities Act of 1933. The
Company obtained a signed representation from each person to whom securities
were issued that such person was not a U.S. person within the meaning of
Regulation S and was not acquiring such securities for the account or benefit of
a U.S. person and each certificate representing the securities and warrants so
issued contains a legend indicating that transfer of the securities represented
thereby is prohibited except in accordance with Regulation S, and the Company
believes that it complied with the other provisions of Regulation S in respect
of such Regulation S transaction.
12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VALUESTAR CORPORATION
Date: November 7, 1997 By: /s/BENJAMIN A. PITTMAN
-----------------------
Benjamin A. Pittman
Secretary and Controller
(Principal Financial and Accounting
Officer and duly authorized to sign on
behalf of the Registrant)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR QUARTER ENDED SEPTEMBER 30, 1997 INCLUDED IN
THE QUARTERLY REPORT 10QSB. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,562
<SECURITIES> 0
<RECEIVABLES> 365,173
<ALLOWANCES> 35,631
<INVENTORY> 17,157
<CURRENT-ASSETS> 399,740
<PP&E> 49,422
<DEPRECIATION> 2,249
<TOTAL-ASSETS> 567,451
<CURRENT-LIABILITIES> 823,685
<BONDS> 0
0
0
<COMMON> 2,082
<OTHER-SE> (257,899)
<TOTAL-LIABILITY-AND-EQUITY> 567,868
<SALES> 0
<TOTAL-REVENUES> 524,216
<CGS> 0
<TOTAL-COSTS> 153,515
<OTHER-EXPENSES> 593,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,229
<INCOME-PRETAX> 228,432
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