UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended:
OR
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
Indicate by check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 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.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of September 16, 2024 the registrant had shares of its common stock, par value $ per share, issued and outstanding.
TABLE OF CONTENTS
| -2- |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:
| ● | capital requirements and the availability of capital to fund our growth and to service our existing debt; |
| ● | difficulties executing our growth strategy, including attracting new issuers and investors; |
| ● | our anticipated use of the net proceeds from our recent public offering; |
| ● | economic uncertainties and business interruptions resulting from the coronavirus COVID-19 global pandemic and its aftermath; |
| ● | as restrictions related to the coronavirus COVID-19 global pandemic are removed and face-to-face economic activities normalize, it may be difficult for us to maintain the recent sales gains that we have experienced; |
●
|
all the risks of acquiring one or more complementary businesses, including identifying a suitable target, completing comprehensive due diligence uncovering all information relating to the target, the financial stability of the target, the impact on our financial condition of the debt we may incur in acquiring the target, the ability to integrate the target’s operations with our existing operations, our ability to retain management and key employees of the target, among other factors attendant to acquisitions of small, non-public operating companies; |
| ● | difficulties in increasing revenue per issuer; |
| ● | challenges related to hiring and training fintech employees at competitive wage rates; |
| ● | difficulties in increasing the average number of investments made per investor; |
| ● | shortages or interruptions in the supply of quality issuers; |
| ● | our dependence on a small number of large issuers to generate revenue; |
| ● | negative publicity relating to any one of our issuers; |
| ● | competition from other online capital portals with significantly greater resources than we have; |
| ● | changes in investor tastes and purchasing trends; |
| ● | our inability to manage our growth; |
| ● | our inability to maintain an adequate level of cash flow, or access to capital, to meet growth expectations; |
| ● | changes in senior management, loss of one or more key personnel or an inability to attract, hire, integrate and retain skilled personnel; |
| -3- |
| ● | labor shortages, unionization activities, labor disputes or increased labor costs, including increased labor costs resulting from the demand for qualified employees; |
| ● | our vulnerability to increased costs of running an online portal with any cloud partner; |
| ● | our vulnerability to increasing labor costs; |
| ● | the impact of governmental laws and regulation; |
| ● | failure to obtain or maintain required licenses; |
| ● | changes in economic or regulatory conditions and other unforeseen conditions that prevent or delay the development of a secondary trading market for shares of equity that are sold on our online portal; and |
| ● | inadequately protecting our intellectual property or breaches of security of confidential user information. |
You are cautioned that all forward-looking statements involve risks and uncertainties. We undertake no obligation to amend this Form 10-Q or our annual report on Form 10-K or revise publicly these forward-looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to applicable federal securities laws) to reflect subsequent events or circumstances.
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETCAPITAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, 2024 (Unaudited) | April 30, 2024 (Audited) | |||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable net | ||||||||
| Note receivable | ||||||||
| Interest receivable | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Deposits | ||||||||
| Notes receivable - related parties | ||||||||
| Purchased technology, net | ||||||||
| Investment in affiliate | ||||||||
| Equity securities | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Interest payable | ||||||||
| Current portion of SBA loans | ||||||||
| Loan payable - bank | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Long-term SBA loans, less current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $ par value; shares authorized, and shares issued and outstanding | ||||||||
| Shares to be issued | ||||||||
| Capital in excess of par value | ||||||||
| Retained earnings (deficit) | ( | ) | ||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See Accompanying Notes to the Condensed Consolidated Financial Statements
| -5- |
NETCAPITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Three Months Ended | |||||||
| July 31, 2024 | July 31, 2023 | |||||||
| Revenues | $ | $ | ||||||
| Costs of services | ||||||||
| Gross profit | ||||||||
| Costs and expenses: | ||||||||
| Consulting expense | ||||||||
| Marketing | ||||||||
| Rent | ||||||||
| Payroll and payroll related expenses | ||||||||
| General and administrative costs | ||||||||
| Total costs and expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Amortization of intangible assets | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||
| Net loss before taxes | ( | ) | ( | ) | ||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic loss per share | $ | ( | ) | $ | ( | ) | ||
| Diluted loss per share | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See Accompanying Notes to the Condensed Consolidated Financial Statements
| -6- |
NETCAPITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
For the Three Months Ended July 31, 2024 and the Year Ended April 30, 2024
| Capital in | Retained | |||||||||||||||||||||||
| Common Stock | Shares to | Excess of | Earnings | Total | ||||||||||||||||||||
| Shares | Amount | Be Issued | Par Value | (Deficit) | Equity | |||||||||||||||||||
| Balance April 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Vesting of stock options | - | |||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Sale of common stock | ||||||||||||||||||||||||
| Purchase of equity interest | ||||||||||||||||||||||||
| Stock-based settlement | ||||||||||||||||||||||||
| Reduction in shares to be issued | ( | ) | ||||||||||||||||||||||
| Warrant exercise | ||||||||||||||||||||||||
| Net loss year ended April 30, 2024 | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance April 30, 2024 | ||||||||||||||||||||||||
| Vesting of stock options | - | |||||||||||||||||||||||
| Round up of fractional shares | ( | ) | ||||||||||||||||||||||
| Warrant exercise | ||||||||||||||||||||||||
| Net loss July 31, 2024 quarter | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance July 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
See Accompanying Notes to the Condensed Consolidated Financial Statements
| -7- |
NETCAPITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended | Three Months Ended | |||||||
| July 31, 2024 | July 31, 2023 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustment to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Receipt of equity in lieu of cash | ( | ) | ( | ) | ||||
| Provision for bad debts | ||||||||
| Changes in deferred taxes | ( | ) | ||||||
| Amortization of intangible assets | ||||||||
| Changes in non-cash working capital balances: | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Other receivables | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Income taxes payable | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Accrued interest payable | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES | - | - | ||||||
| - | - | |||||||
| Net cash provided by (used in) investing activities | ||||||||
| FINANCING ACTIVITIES | ||||||||
| Payment to secured lender | ( | ) | ||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from sale of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash and cash equivalents, beginning of the period | ||||||||
| Cash and cash equivalents, end of the period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental Non-Cash Financing Information: | ||||||||
| Common stock issued to purchase | $ | $ | ||||||
See Accompanying Notes to the Condensed Consolidated Financial Statements
| -8- |
NETCAPITAL INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1– Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements of Netcapital Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended July 31, 2024, are not necessarily indicative of the results that may be expected for the fiscal year ended April 30, 2025. For further information, refer to the audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended April 30, 2024.
Reverse Stock Split
On
July 29, 2024, following shareholder approval we filed articles of amendment (the “Articles of Amendment”) to our Articles
of Incorporation, as amended, with the Utah Department of Commerce, Division of Corporations and Commercial Code to effectuate a
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after the elimination of significant intercompany balances and transactions. The wholly owned subsidiaries are Netcapital Funding Portal Inc., an equity-based funding portal registered with the SEC, Netcapital Advisors Inc., which provides marketing and strategic advice to select companies, MSG Development Corp, a business valuation company, which was acquired in November 2021, and Netcapital Securities Inc., which was acquired in 2024 and has applied to FINRA to operate as a broker dealer.
Use of Estimates
Preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, accounts receivable, valuation of equity securities, income taxes, and valuation of long-lived assets including intellectual property and purchased technology. These estimates are based on management’s knowledge of current events, interpretation of regulations, and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.
Significant Accounting Policies
There have been no material changes to our significant accounting policies from our Annual Report on Form 10-K for the fiscal year ended April 30, 2024.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses. The new guidance provides better representation about expected credit losses on financial instruments. This update requires the use of a methodology that reflects expected losses and requires consideration of a broader range of reasonable and supportive information to inform credit loss estimates. This ASU is effective for reporting periods beginning after December 15, 2022. The adoption of this standard did not have a material impact on the Company’s financial statements.
In March 2023, the FASB issued ASU 2023-01, which provides additional guidance on the accounting for leasehold improvements associated with leases and clarifies certain lessor transactions. The standard is effective for fiscal years beginning after December 15, 2023. The Company has evaluated the potential impact of this ASU on its financial statements and related disclosures. As the Company does not have any leases, we do not anticipate that the adoption of ASU 2023-01 will have a material impact on our financial position, results of operations, or cash flows.
In June 2022, the FASB issued ASU 2022-03, which clarifies the guidance on the fair value measurement of equity securities that are subject to contractual sale restrictions. The standard provides specific guidance on measuring the fair value of these securities and requires additional disclosures. This ASU is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company has evaluated the impact of ASU 2022-03 and determined that it does not currently hold any equity securities subject to contractual sale restrictions. Therefore, the adoption of this standard is not expected to have a material impact on our financial position, results of operations, or cash flows.
Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
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Note 2 – Concentrations
For
the three months ended July 31, 2024, the Company had one customer that constituted
Note 3 – Revenue Recognition
Revenue Recognition under ASC 606
The Company recognizes service revenue from its consulting contracts, funding portal and game website using the five-step model as prescribed by ASC 606:
| ● | Identification of the contract, or contracts, with a customer. |
| ● | Identification of the performance obligations in the contract. |
| ● | Determination of the transaction price. |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when or as the Company satisfies a performance obligation. |
The
Company identifies performance obligations in contracts with customers, which primarily are professional services, listing fees on our
funding portal, and a portal fee of
| -10- |
Judgments and Estimates
The estimation of variable consideration for each performance obligation requires the Company to make subjective judgments. The Company enters into contracts with customers that regularly include promises to transfer multiple services, such as digital marketing, web-based videos, offering statements, and professional services. For arrangements with multiple services, the Company evaluates whether the individual services qualify as distinct performance obligations. In its assessment of whether a service is a distinct performance obligation, the Company determines whether the customer can benefit from the service on its own or with other readily available resources, and whether the service is separately identifiable from other services in the contract. This evaluation requires the Company to assess the nature of each individual service offering and how the services are provided in the context of the contract, including whether the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment based on the facts and circumstances of the contract.
When agreements involve multiple distinct performance obligations, the Company allocates arrangement consideration to all performance obligations at the inception of an arrangement based on the relative standalone selling prices (SSP) of each performance obligation. Where the Company has standalone sales data for its performance obligations which are indicative of the price at which the Company sells a promised service separately to a customer, such data is used to establish SSP. In instances where standalone sales data is not available for a particular performance obligation, the Company estimates SSP by the use of observable market and cost-based inputs. The Company continues to review the factors used to establish list price and will adjust standalone selling price methodologies as necessary on a prospective basis.
Service Revenue
Service revenue from subscriptions to the Company’s game website is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as a deferred revenue. Professional services revenue is recognized over time as the services are rendered.
When a contract with a customer is signed, the Company assesses whether collection of the fees under the arrangement is probable. The Company estimates the amount to reserve for uncollectible amounts based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded as operating expenses against the contract assets.
Contract Assets
Contract assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed. The revenue is recognized when the customer receives services. Contract assets are included in other current assets in the consolidated balance sheets and will be recognized during the succeeding twelve-month period.
Deferred Revenue
Deferred revenues represent billings or payments received in advance of revenue recognition and are recognized upon transfer of control. Balances consist primarily of annual plan subscription services and professional services not yet provided as of the balance sheet date. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues in the consolidated balance sheets, with the remainder recorded as other non-current liabilities in the consolidated balance sheets.
| -11- |
Costs to Obtain a Customer Contract
Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized as other current or non-current assets and amortized on a straight-line basis over the life of the contract, which approximates the benefit period. The benefit period was estimated by taking into consideration the length of customer contracts, technology lifecycle, and other factors. All sales commissions are recorded as consulting fees within the Company’s consolidated statement of operations.
Remaining Performance Obligations
The
Company’s subscription terms are typically less than one year. All of the Company’s revenues in the three months ended July
31, 2024 and 2023, which amounted to $
Disaggregation of Revenue
Revenue is from U.S.-based companies with no notable geographical concentrations in any area. A distinction exists in revenue source; revenues are either generated online or from consulting services.
Revenues disaggregated by revenue source consist of the following:
Three Months Ended July 31, 2024 | Three Months Ended July 31, 2023 | |||||||
| Consulting services | $ | $ | ||||||
| Fees from online services | ||||||||
| Total revenues | $ | $ | ||||||
| -12- |
Three Months Ended July 31, 2024 | Three Months Ended July 31, 2023 | |||||||
| Net loss attributable to common stockholders – basic | $ | ( | ) | $ | ( | ) | ||
| Adjustments to net income | ||||||||
| Net loss attributable to common stockholders – diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding - basic | ||||||||
| Effect of dilutive securities | ||||||||
| Weighted average common shares outstanding – diluted | ||||||||
| Loss per common share - basic | $ | ( | ) | $ | ( | ) | ||
| Loss per common share - diluted | $ | ( | ) | $ | ( | ) | ||
Four () shares of common stock that are issuable pursuant to a stock subscription agreement are not included in the calculation of diluted earnings per share for the three months ended July 31, 2023 because their effect is anti-dilutive.
Outstanding vested warrants to purchase and shares of common stock are not included in the calculation of earnings per share for the three months ended July 31, 2024 and 2023, respectively, because their effect is anti-dilutive.
Outstanding vested options to purchase and shares of common stock are not included in the calculation of earnings per share for the three months ended July 31, 2024 and 2023, respectively, because their effect is anti-dilutive.
| -13- |
Note 5 – Principal Financing Arrangements
The following table summarizes components debt as of July 31, 2024 and April 30, 2024:
| July 31, 2024 | April 30, 2024 | Interest Rate | ||||||||||
| U.S. SBA loan | $ | $ | % | |||||||||
| U.S. SBA loan | % | |||||||||||
| Loan payable – bank | % | |||||||||||
| Total Debt | ||||||||||||
| Less: current portion of long-term debt | ||||||||||||
| Total long-term debt | $ | $ | ||||||||||
The
Company owes $
On
June 17, 2020 the Company borrowed $
The
June Loan required installment payments of $
The
February Loan bears interest at a rate of
| -14- |
Note 6 – Income Taxes
For
the three months ended July 31, 2024, the Company recorded income tax expense due to the operating loss in the three months ended
July 31, 2024. For the three months ended July 31, 2023, the Company recorded income tax benefit of $
Note 7 – Related Party Transactions
Netcapital
Systems LLC (“Systems”), of which Jason Frishman, Founder, owns a
Cecilia
Lenk, the Chief Executive Officer of Netcapital Advisors Inc., (“Advisors”), our wholly owned subsidiary, is a member of
the board of directors of KingsCrowd Inc. As of July 31, 2024 and April 30, 2024, the Company owned shares of KingsCrowd Inc.,
valued at $
Cecilia
Lenk, the Chief Executive Officer of Advisors is a member of the board of directors of Deuce Drone LLC. As of July 31, 2024 and April
30, 2024, the Company owns membership interest units of Deuce Drone LLC., valued at $
Compensation
to officers in the three-month periods ended July 31, 2024 and 2023 consisted of stock-based compensation valued at $ and $,
respectively, and cash salary of $
| -15- |
Compensation
to a related party consultant, John Fanning Jr., son of our CFO, in the three-month periods ended July 31, 2024 and 2023 consisted of
cash wages of $
As
of July 31, 2024 and April 30, 2024, the Company has invested $
In January 2023 we granted stock options to purchase an aggregate of shares of our common stock to four related parties as follows: our Chief Executive Officer, Martin Kay, shares; our Chief Financial Officer, Coreen Kraysler shares; our Founder, Jason Frishman, shares; and a director of Netcapital Funding Portal, Inc., Paul Riss, shares. The options have an exercise price of $, vest monthly on a straight-line basis over a -year period and expire in years.
On April 25, 2023, the Company granted an aggregate of options, or options each to the following board members: Cecilia Lenk, Avi Liss, Steven Geary and Arnold Scott, to purchase shares of our common stock at an exercise price of $ per share. The options vest monthly on a straight-line basis over a -year period and expire in years.
Coreen
Kraysler, our Chief Financial Officer, has personally guaranteed a $
Note 8 – Stockholders’ Equity
The Company is authorized to issue shares of its common stock, par value $. and shares were outstanding as of July 31, 2024 and April 30, 2024, respectively.
In
May 2023, the Company issued shares of its common stock, valued at $
On
May 23, 2023, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company
agreed to issue and sell to such investors, in a registered direct offering (the “Offering”), shares of the Company’s
common stock, par value $ per share, at a price of $ per Share, for aggregate gross proceeds of $
Also,
in connection with the Offering, on May 23, 2023, the Company entered into a placement agency agreement with ThinkEquity LLC, pursuant
to which, the Company issued warrants to purchase up to shares of common stock at an exercise price of $
In July 2023, the Company issued shares of its common stock in consideration of a release from an unrelated third party in conjunction with the settlement of an outstanding debt between such third party and Netcapital Systems LLC.
| -16- |
On
July 24, 2023 the Company completed an underwritten public offering of shares of the Company’s common stock, at a price
to the public of $ per share for aggregate gross proceeds of $
On
July 31, 2023 and on October 26, 2023, the Company issued shares of its common stock in conjunction with the purchase of a
On
December 27, 2023, the Company completed a public offering of (i)
The
Series A-1 Warrants have a current exercise price of $
The
Prefunded Warrants were immediately exercisable and may be exercised at a nominal exercise price of $
As
compensation to H.C. Wainwright & Co., LLC as the exclusive placement agent in connection with the offering of the Securities (the
“Placement Agent”), the Company paid the Placement Agent a cash fee of
On
January 19, 2024, the Company issued shares of common stock upon the exercise of Prefunded Warrants and receipt of the exercise
price of $
| -17- |
On
May 24, 2024, the Company entered into inducement offer letter agreements with certain investors that held certain outstanding Series
A-2 warrants to purchase up to an aggregate of shares of our common stock with an exercise price of $
Note 9 – Fair Value
The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| ● | Level 1: inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the company has the ability to access at the measurement date. | |
| ● | Level 2: inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. | |
| ● | Level 3: inputs are unobservable inputs for the asset or liability. |
Financial assets measured at fair value on a recurring basis are summarized below as of July 31, 2024 and April 30, 2024:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| July 31, 2024 | ||||||||||||||||
| Equity securities at fair value | $ | $ | $ | $ | ||||||||||||
| April 30, 2024 | ||||||||||||||||
| Equity securities at fair value | $ | $ | $ | $ | ||||||||||||
Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, we base fair value on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon management’s own estimates, are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used.
Note 10 – Stock-Based Compensation Plans
In addition to cash payments, the Company enters agreements to issue common stock and records the applicable non-cash expense in accordance with the authoritative guidance of the Financial Accounting Standards Board.
For the three months ended July 31, 2024 and 2023, stock-based compensation expense amounted to $and $, respectively.
| Stock-based compensation expense | Three Months Ended July 31, 2024 | Three Months Ended July 31, 2023 | ||||||
| Chief Executive Officer | $ | $ | ||||||
| Chief Financial Officer | ||||||||
| Chief Executive Officer, Advisors | ||||||||
| Founder | ||||||||
| Third-party contractor | ||||||||
| Business consultant | ||||||||
| Employee and consultant options | ||||||||
| Business consultant | ||||||||
| Total stock-based compensation expense | $ | $ | ||||||
| -18- |
Note 11 – Deposits and Commitments
We
utilize an office at 1 Lincoln Street in Boston, Massachusetts. We currently pay a membership fee of approximately $
Note 12 – Intangible Assets
Intangible assets with defined useful lives are generally measured at cost less straight-line amortization. The useful life is determined using the period of the underlying contract or the period of time over which the intangible asset can be expected to be used. Impairments are recognized if the recoverable amount of the asset is lower than the carrying amount. The recoverable amount is the higher of either the fair value less costs to sell or the value in use. The value in use is determined on the basis of future cash inflows and outflows, and the weighted average cost of capital. Intangible assets with indefinite useful lives, such as trade names and trademarks, that have been acquired as part of acquisitions are measured at cost and tested for impairment annually, or if there is an indication that their value has declined.
The following table sets forth the major categories of the intangible assts as of July 31, 2024 and April 30, 2024
| July 31, 2024 | April 30, 2024 | |||||||
| Acquired users | $ | $ | ||||||
| Acquired brand | ||||||||
| Total intangible assets | ||||||||
| Less: accumulated amortization | ||||||||
| Net intangible assets | $ | $ | ||||||
As
of July 31, 2024, the weighted average remaining useful life for technology, trade names, professional practice, literary works and domains
is
Note 13 – Investments
In
the three-month period ended July 31, 2024,
In
May 2023, the Company received units of RealWorld LLC as a payment for services rendered in conjunction with a crowdfunding
offering. The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of
the units satisfied an accounts receivable balance of $
In
April 2023, the Company received units of HeadFarm LLC as a payment for services rendered in conjunction with a crowdfunding
offering. The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of
the units satisfied an accounts receivable balance of $
In
April 2023, the Company received units of CupCrew LLC as a payment for services rendered in conjunction with a crowdfunding
offering. The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of
the units satisfied an accounts receivable balance of $
| -19- |
In
April 2023, the Company received units of CountSharp LLC as a payment for services rendered in conjunction with a crowdfunding
offering. The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of
the units satisfied an accounts receivable balance of $
In
January 2023, the Company received units of Dark LLC as a payment for services rendered in conjunction with a crowdfunding
offering. The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of
the units satisfied an accounts receivable balance of $
In
August 2022, the Company received units of NetWire LLC as a payment for services rendered in conjunction with a crowdfunding
offering. The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of
the units satisfied an accounts receivable balance of $
In
May 2022, the Company received units of Reper LLC as a payment for services rendered in conjunction with a crowdfunding offering.
The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of the units
satisfied an accounts receivable balance of $
In
April 2022, the Company received units of Cust Corp. as a payment for services rendered in conjunction with a crowdfunding
offering. The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of
the units satisfied an accounts receivable balance of $
In
January 2022, the Company received units of ScanHash LLC as a payment for services rendered in conjunction with a crowdfunding
offering. The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of
the units satisfied $
In
January 2022, the Company received units of Hiveskill LLC as payment for services rendered in conjunction with a crowdfunding
offering. The units are valued at $ per unit based on a sales price of $ per unit on an online funding portal. The receipt of
the units satisfied an accounts receivable balance of $
| -20- |
In
fiscal 2022, the Company purchased a
In
May 2020, the Company entered a consulting contract with Watch Party LLC (“WP”), which allowed the Company to receive
membership interest units of WP in return for consulting services. The Company earned membership interest units in the quarter
ended July 31, 2020. The WP units are valued at $ per unit based on a sales price of $ per unit on an online funding portal.
As of July 31, 2024 and April 30, 2024, the Company owned WP units, which are valued at $
In
May 2020, the Company entered a consulting contract with ChipBrain LLC (“Chip”), which allowed the Company to receive
membership interest units of Chip in return for consulting services. The Chip units were initially valued at $ per unit based on
a sales price of $ per unit on an online funding portal. Subsequently, Chip sold identical units for $ per unit, and as of July
31, 2024 and April 30, 2024, the units owned by the Company are valued at $
In
May 2020, the Company entered a consulting contract with a related party, Zelgor Inc. (“Zelgor”), which allowed the Company
to receive shares of common stock of Zelgor in return for consulting services. The Zelgor shares are valued at $ per share
based on a sales price of $ per share on an online funding portal. As of July 31, 2024 and April 30, 2024, the Company owned
shares which are valued at $
On
January 2, 2020, the Company entered a consulting contract with Deuce Drone LLC (“Drone”), which allowed the Company to receive
membership interest units of Drone in return for consulting services. The Drone units were originally valued at $ per unit
based on a sales price of $ per unit when the units were earned, or $
In
August 2019, the Company entered into a consulting contract with KingsCrowd LLC (“KingsCrowd”), which allowed the Company
to receive membership interest units of KingsCrowd in return for consulting services. The KingsCrowd units were valued at $
per unit based on a sales price of $ per unit when the units were earned, or $
During
fiscal 2019, the Company entered a consulting contract with NetCapital Systems LLC (“NetCapital”), which allowed the Company
to receive up to membership interest units of NetCapital in return for consulting services. The Company earned all Netcapital
units but sold a portion of the units in fiscal 2020 at a sales price of $ per unit. As of July 31, 2024 and April 30, 2024, the
Company owned Netcapital units, at a value of $
| -21- |
In
July 2020 the Company entered into a consulting agreement with Vymedic, Inc. for a $
In
August 2020 the Company entered a consulting agreement with C-Reveal Therapeutics LLC (“CRT”). for a $
The following table summarizes the components of investments as of July 31, 2024 and April 30, 2024 and presents the cumulative adjustments to the value of each security:
| Original Cost | Value at July 31, 2024 | Value at April 30, 2024 | Annual Adjustment 2024 | Annual Adjustment 2023 | Cumulative Adjustment | |||||||||||||||||||
| Systems DE | $ | $ | $ | $ | $ | $ | ( | ) | ||||||||||||||||
| MustWatch LLC | ||||||||||||||||||||||||
| Zelgor Inc. | ||||||||||||||||||||||||
| ChipBrain LLC | ||||||||||||||||||||||||
| Vymedic Inc. | ( | ) | ( | ) | ||||||||||||||||||||
| C-Reveal Therapeutics LLC | ||||||||||||||||||||||||
| Deuce Drone LLC | ||||||||||||||||||||||||
| Hiveskill LLC | ||||||||||||||||||||||||
| ScanHash LLC | ||||||||||||||||||||||||
| Caesar Media Group Inc. | ||||||||||||||||||||||||
| Cust Corp. | ||||||||||||||||||||||||
| Kingscrowd Inc. | ( | ) | ||||||||||||||||||||||
| Reper LLC | ||||||||||||||||||||||||
| Dark LLC | ||||||||||||||||||||||||
| Netwire LLC | ||||||||||||||||||||||||
| CountSharp LLC | ||||||||||||||||||||||||
| CupCrew LLC | ||||||||||||||||||||||||
| HeadFarm LLC | ||||||||||||||||||||||||
| RealWorld LLC | ||||||||||||||||||||||||
| Acehedge LLC | ||||||||||||||||||||||||
| Fantize LLC | ||||||||||||||||||||||||
| StockText LLC | ||||||||||||||||||||||||
| Multiple Issuers as a group | ||||||||||||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
In accordance with ASC 321, the Company uses the measurement alternative for equity securities without readily determinable fair values. The table above summarizes the annual and cumulative adjustments for these investments. The Company evaluates these investments for impairment and adjusts their carrying amounts based on observable price changes in orderly transactions for identical or similar investments of the same issuer. No observable price changes were recorded in the three months ended July 31, 2024.
Note 14 – Going Concern Matters and Realization of Assets
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the ordinary course of business. However, as of July 31, 2024, we had negative
working capital of $
| -22- |
There can be no assurances that we will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. The Company has recently reduced its operating expenses and has turned its focus to its funding portal business, which generates cash revenues and has seen a growth in revenues on a year-to-year basis. The Company plans to continue operating with lower fixed overhead amounts and seeks to raise money from private placements, public offerings and/or bank financing. The Company’s management has determined, based on its recent history and the negative cash flow from operations, that it is unlikely that its plan will sufficiently alleviate or mitigate, to a sufficient level, the relevant conditions or events noted above. To the extent that funds generated from any private placements, public offerings and/or bank financing, if available, are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Accordingly, the Company’s management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of these financial statements. There can be no assurance that the Company will be able to achieve its business plan objectives or be able to achieve or maintain cash-flow-positive operating results. If the Company is unable to generate adequate funds from operations or raise sufficient additional funds, the Company may not be able to repay its existing debt, continue to operate its business network, respond to competitive pressures or fund its operations. As a result, the Company may be required to significantly reduce, reorganize, discontinue or shut down its operations. The financial statements do not include any adjustments that might result from this uncertainty.
Note 15 – Subsequent Events
At-The-Market Agreement
On
August 23, 2024, the Company entered into an At The Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright
& Co., LLC (“Wainwright”), to sell shares of its common stock, par value $ per share, (the “Shares”)
having an aggregate sales price of up to $
Regained Compliance with Nasdaq Continued Listing Requirements
On August 19, 2024, we received a notice from The Nasdaq Stock Market, LLC (“Nasdaq”), dated August 19, 2024, informing us that we had regained compliance with Nasdaq’s Listing Rule 5550(a)(2) (the “Bid Price Rule”) for continued listing on The Nasdaq Capital Market, as the bid price of our common stock closed at or above $ per share for a minimum of 10 consecutive business days since August 2, 2024.
As previously disclosed on a Current Report on Form 8-K filed by us, Nasdaq had previously notified us on September 1, 2023 that we were not in compliance with the Bid Price Rule because our common stock failed to maintain a minimum bid price of $ per share for 30 consecutive business days. Further as of July 22, 2024, Nasdaq determined that that our securities had a closing bid price of $ or less for ten consecutive trading days and as a result, Nasdaq delivered written notice to the Company on July 23, 2024 under which it advised us that Nasdaq has determined to delist our securities from The Nasdaq Capital Market. We requested a hearing to appeal Nasdaq’s delisting determination, but since the Company has regained compliance with Nasdaq’s continued listing requirements as described above, the hearing was cancelled.
Reverse Stock Split
On
July 29, 2024, following shareholder approval we filed articles of amendment (the “Articles of Amendment”) to our Articles
of Incorporation, as amended, with the Utah Department of Commerce, Division of Corporations and Commercial Code to effectuate a
The Company evaluated subsequent events through the date these financial statements were available to be issued.
| -23- |
PART I
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This quarterly report on Form 10-Q and other reports filed by Netcapital Inc. (the “Company”) from time to time with the U.S. Securities and Exchange Commission (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. Unless the context otherwise requires, references in this prospectus to the “Company,” “we,” “us,” and “our” refer to Netcapital Inc. and its subsidiaries.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
Overview
Netcapital Inc. is a fintech company with a scalable technology platform that allows private companies to raise capital online from accredited and non-accredited investors. We give investors the opportunity to access investments in private companies. We believe our model is disruptive to traditional private equity investing and is based on Title III, Reg CF of the JOBS Act. In addition, we have recently expanded our model to include Regulation A (“Reg A”) offerings. We generate fees from listing private companies on our funding portal located at www.netcapital.com. We generate fees from listing private companies on netcapital.com. We also generate fees from advising companies with respect to their Reg A offerings posted on www.netcapital.com. Our consulting group, Netcapital Advisors, Inc. (Netcapital Advisors), which is a wholly-owned subsidiary, provides marketing and strategic advice in exchange for equity positions and/or cash fees. The Netcapital funding portal is registered with the SEC, is a member of the Financial Industry Regulatory Authority, or FINRA, a registered national securities association, and provides investors with opportunities to invest in private companies. Neither Netcapital Advisors, nor any Netcapital entity or subsidiary, is a broker- dealer, nor do any of such entities operate as a broker-dealer with respect to any Reg A offering listed on the www.netcapital.com website. In May 2024, we announced that our wholly owned subsidiary, Netcapital Securities Inc. applied for broker-dealer registration. Netcapital Securities Inc.’s application to become a registered broker-dealer remains subject to regulatory approval and/or licensing from the Financial Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). No assurance can be given as to when or if such approvals may be granted or when, if at all, Netcapital will be able to expand the services it offers.
| -24- |
We provide private company investment access to accredited and non-accredited investors through our online portal (www.netcapital.com), which is operated by our wholly owned subsidiary Netcapital Funding Portal, Inc. The Netcapital funding portal charges a $5,000 listing fee and a 4.9% portal fee for capital raised at closing, and beginning in fiscal year 2024, a 1% success fee paid for with equity of the funding portal customer. In addition, the portal generates fees for other ancillary services, such as rolling closes. Netcapital Advisors generates fees and equity stakes from consulting in select portfolio (“Portfolio Companies”) and non-portfolio clients. With respect to its services for Reg A offerings, Netcapital Advisors charges a monthly flat fee for each month the offering is listed on the netcapital.com website as well as a nominal administrative flat fee for each investor that is processed to cover out-of-pocket costs.
We generated revenues of $142,227, with costs of service of $10,220, in the three months ended July 31, 2024 for a gross profit of $132,007 (consisting of $10,127 in equity securities for payment of services and $132,100 in cash-based revenues, offset by $10,220 for costs of services), as compared to revenues of $1,519,809 with costs of service of $18,053 in the three months ended July 31, 2023 for a gross profit of $1,501,756 (consisting of $1,110,000 in equity securities for the payment of services and $409,809 in cash-based revenues, offset by $18,053 for costs of services). Our cash-based gross profits as a percentage of gross profits were approximately 0% and 2%, respectively in the three month periods ended July 31, 2024 and 2023, for Portfolio Companies. The total number of offerings on the Netcapital funding portal in the three months ended July 31, 2024 and 2023 that closed was 16 and 7, respectively, of which 4 and 3 offerings hosted on the Netcapital funding platform in the three months ended July 31, 2024 and 2023, respectively, terminated their listings without raising the required minimum dollar amount of capital.
In fiscal 2024 and 2023, the average amount raised in an offering on the Netcapital funding portal was $280,978 and $128,170, respectively. The total number of offerings on the Netcapital funding portal in fiscal 2024 and 2023 that closed was 70 and 63, respectively, of which 17 and 13 offerings hosted on the Netcapital funding platform in fiscal 2024 and 2023, respectively, terminated their listings without raising the required minimum dollar amount of capital. As of the date of this report, we own minority equity positions in 20 Portfolio Companies that have utilized the funding portal to facilitate their offerings, for which equity was received as payment for services.
Netcapital.com is an SEC-registered funding portal that enables private companies to raise capital online, while investors are able to invest from almost anywhere in the world, at any time, with just a few clicks. Securities offerings on the portal are accessible through individual offering pages, where companies include product or service details, market size, competitive advantages, and financial documents. Companies can accept investments from virtually anyone, including friends, family, customers, and employees. Customer accounts on our platform are not permitted to hold or use digital securities to make an investment.
In addition to access to the funding portal, Netcapital provides the following services:
| ● | a fully automated onboarding process; |
| ● | automated filing of required regulatory documents; |
| ● | compliance review; |
| ● | a custom-built offering page on our portal website; |
| ● | third party transfer agent and custodial services; |
| ● | email marketing to our proprietary list of investors; |
| ● | rolling closes, which provide potential access to liquidity before final close date of offering; |
| ● | assistance with annual filings; and |
| ● | direct access to our team for ongoing support. |
Our consulting group, Netcapital Advisors helps companies at all stages to raise capital. Netcapital Advisors provides strategic advice, technology consulting and digital marketing services to assist with fundraising campaigns on the Netcapital platform. The company also acts as an incubator and accelerator for select disruptive start-ups.
Netcapital Advisors’ services include:
| ● | incubation of technology start-ups; |
| ● | investor introductions; |
| ● | online marketing; |
| ● | website design, software and software development; |
| ● | message crafting, including pitch decks, offering pages, and ad creation; |
| ● | strategic advice; and |
| ● | technology consulting. |
| -25- |
Proposed Broker-Dealer Business
Our recently formed wholly owned subsidiary, Netcapital Securities Inc. has applied for broker-dealer registration with the Financial Industry Regulatory Authority (“FINRA”). We believe that by having a registered broker-dealer, it may create opportunities to expand the Company’s revenue base by hosting and generating additional fees from Reg A+ and Reg D offerings on the Netcapital platform;, earning additional fees in connection with offerings that may result from the introduction of clients to other FINRA broker-dealers and expanding our distribution capabilities by leveraging strategic partnerships with other broker-dealers to distribute offerings of issuers that utilize the Netcapital platform to a wider range of investors in order to maximize market penetration and optimize capital raising efforts. Netcapital Securities Inc.’s application to become a registered broker-dealer remains subject to regulatory approval and/or licensing from the Financial Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). No assurance can be given as to when or if such approvals may be granted or when, if at all, Netcapital will be able to expand the services it offers. As of the date of this Quarterly Report, Netcapital Securities Inc. has not conducted any business activities
Recent Developments
At-The-Market Agreement
On August 23, 2024, the Company entered into an At The Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC (“Wainwright”), to sell shares of its common stock, par value $0.001 per share, (the “Shares”) having an aggregate sales price of up to $2,100,000, from time to time, through an “at the market offering” program under which Wainwright will act as sales agent. The sales, if any, of the Shares made under the ATM Agreement will be made by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company will pay Wainwright a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares. As of the date of this filing, the Company has sold 56,000 shares of its common stock pursuant to the ATM Agreement for net proceeds of approximately $148,294.
Regained Compliance with Nasdaq Continued Listing Requirements
On August 19, 2024, we received a notice from The Nasdaq Stock Market, LLC (“Nasdaq”), dated August 19, 2024, informing us that we had regained compliance with Nasdaq’s Listing Rule 5550(a)(2) (the “Bid Price Rule”) for continued listing on The Nasdaq Capital Market, as the bid price of our common stock closed at or above $1.00 per share for a minimum of 10 consecutive business days since August 2, 2024.
As previously disclosed on a Current Report on Form 8-K filed by us, Nasdaq had previously notified us on September 1, 2023 that we were not in compliance with the Bid Price Rule because our common stock failed to maintain a minimum bid price of $1.00 per share for 30 consecutive business days. Further as of July 22, 2024, Nasdaq determined that that our securities had a closing bid price of $0.10 or less for ten consecutive trading days and as a result, Nasdaq delivered written notice to the Company on July 23, 2024 under which it advised us that Nasdaq has determined to delist our securities from The Nasdaq Capital Market. We requested a hearing to appeal Nasdaq’s delisting determination, but since the Company has regained compliance with Nasdaq’s continued listing requirements as described above, the hearing was cancelled.
Reverse Stock Split
On July 29, 2024, following shareholder approval we filed articles of amendment (the “Articles of Amendment”) to our Articles of Incorporation, as amended, with the Utah Department of Commerce, Division of Corporations and Commercial Code to effectuate a 1-for-70 reverse stock split (the “Reverse Stock Split”) of our issued and outstanding shares of common stock, which Articles of Amendment became effective on August 1, 2024. The Reverse Stock Split became effective at 4:01pm Eastern Time on August 1, 2024, and our common stock began trading on a split-adjusted basis at the open of trading on The Nasdaq Capital Market on August 2, 2024. Upon effectiveness of the Reverse Stock Split, every seventy (70) shares of our common stock issued and outstanding were automatically reclassified and combined into one share of our common stock, without any change in the par value per share. Additionally, equitable adjustments corresponding to the Reverse Stock Split ratio were made (i) the exercise prices of and number of shares of Common Stock underlying the Company’s public and private warrants in accordance with their terms, (ii) the number of shares of Common Stock underlying the Company’s outstanding equity awards in accordance with their terms, and (iii) the number of shares of Common Stock issuable under the Company’s equity incentive plan. No fractional shares were issued in connection with the Reverse Stock Split. Any stockholder who would otherwise be entitled to receive a fractional share instead became entitled to receive one whole share of Common Stock in lieu of such fractional share. Following the Reverse Stock Split, we had 718,934 shares of our common stock outstanding, which includes 139,781 shares of our common stock that were issued for rounding up fractional shares resulting from the Reverse Stock Split. The Reverse Stock Split is retroactively reflected in the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statements of changes in shareholders’ equity and loss per share data.
| -26- |
Launch of Beta Version for Secondary Trading Platform
In July 2024, we announced the launch of our beta version of a secondary trading platform through the Templum ATS to a closed group of users. This secondary trading platform has been designed to provide investors who purchase stock through the Netcapital funding portal with the potential for secondary trading through access to the Templum ATS.
May 2024 Warrant Inducement
On May 24, 2024, we entered into inducement offer letter agreements with certain investors that held certain outstanding Series A-2 warrants to purchase up to an aggregate of 204,572 shares of our common stock with an exercise price of $17.50 per share, originally issued in December 2023 at a reduced exercise price of $10.85 per share (which reduced exercise price was granted to all holders on Series A-2 warrants by the board on May 24, 2024) in partial consideration for the Company’s agreement to issue in a private placement (i) new Series A-3 common stock purchase warrants to purchase up to 253,947 shares of our common stock at an exercise price of $8.74 per share and (ii) new Series A-4 common stock purchase warrants to purchase up to 253,947 shares of our common stock at an exercise price of $8.74 per share for aggregate gross proceeds of approximately $2.2 million from the exercise of the existing warrants, before deducting placement agent fees and other expenses payable by the Company. The Series A-3 Warrants and Series A-4 Warrants are exercisable beginning on the effective dates of stockholder approval of the issuance with such warrants expiring on (i) the five year anniversary of the initial exercise date for the Series A-3 Warrants and (ii) the eighteen month anniversary of the initial exercise date for the Series A-4 Warrants. This transaction closed on May 29, 2024. H.C. Wainwright was the exclusive agent for the transaction for which we paid them a cash fee equal to 7.5% from the exercise of the Series A-2 warrant at the reduced exercise price and a management fee equal to 1.0% of such aggregate gross proceeds. We also issued warrants to designees of H.C. Wainwright to purchase up to 19,048 shares of our common stock at an exercise price of $10.93 per share.
Application for Broker-Dealer License
In May 2024, we announced that our wholly-owned subsidiary, Netcapital Securities Inc. applied for broker-dealer registration with the Financial Industry Regulatory Authority (“FINRA”). We believe that by having a registered broker-dealer, it could create opportunities to expand revenue base by hosting and generating additional fees from Reg A+ and Reg D offerings on the Netcapital platform;, earning additional fees in connection with offerings that may result from the introduction of clients to other FINRA broker-dealers and expanding our distribution capabilities by leveraging strategic partnerships with other broker-dealers to distribute offerings of issuers that utilize the Netcapital platform to a wider range of investors in order to maximize market penetration and optimize capital raising efforts. Netcapital Securities Inc.’s application to become a registered broker-dealer remains subject to regulatory approval and/or licensing from the Financial Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). No assurance can be given as to when or if such approvals may be granted or when, if at all, Netcapital will be able to expand the services it offers.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this Form 10-Q. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
| -27- |
Results of Operations
Comparison of the Three Months Ended July 31, 2024 and 2023
Our revenues for the three months ended July 31, 2024, decreased by $1,377,582, or approximately 91%, to $142,227 as compared to $1,519,809 during the three months ended July 31, 2023. The decrease in revenues was primarily attributed to a decrease in revenues for the services that we provide in exchange for equity securities during the quarter ended July 31, 2024, as compared to the quarter ended July 31, 2023. In the three months ended July 31, 2024, we had no revenues from equity-based contracts, as compared to $1,110,000 in such revenues in the three months ended July 31, 2023. Management is focusing on establishing a broker-dealer subsidiary so that the Company may have additional sources of revenue, and we have not been pursuing the equity-based revenue contracts.
The components of revenue were as follows:
| July 31, 2024 | July 31, 2023 | |||||||
| Consulting services for equity securities | $ | - | $ | 1,110,000 | ||||
| Consulting revenue | - | 33,700 | ||||||
| Portal fees | 89,429 | 221,856 | ||||||
| Listing fees | 42,500 | 154,000 | ||||||
| Game website revenue | 171 | 253 | ||||||
| Portal 1% equity fee | 10,127 | - | ||||||
| Total | $ | 142,227 | $ | 1,519,809 | ||||
The decrease of $1,110,000 in revenue from consulting services for equity securities in the three months ended July 31, 2024, as compared to the three months ended July 31, 2023, occurred because we provided no consulting services in exchange for equity in the July 31, 2024 quarter, as compared to 2 companies that received such services in the three months ended July 31, 2023. These services were provided by our consulting subsidiary, Netcapital Advisors, Inc. (“Advisors”), and Advisors did not earn any equity securities from consulting work in the first quarter of fiscal 2025. However, our subsidiary Netcapital Funding Portal Inc. (“Funding Portal”) began charging a fee of 1% of the equity raised by issuers that engage with the Funding Portal and the Funding Portal earned equity securities from 7 clients in the three-months ended July 31, 2024, with an aggregate value of $10,127, as compared to $0 in the three months ended July 31, 2023.
Consulting revenue consists of fees earned by Advisors. Revenue generated by Advisors decreased by $33,700 to $0 in the three months ended July 31, 2024, from $33,700 in the three months ended July 31, 2023.The decrease in consulting fees from Advisors in fiscal 2025 is the result of their focus on assisting with the launch of the proposed broker-dealer business.
Revenue from portal fees decreased by $132,427, or 60%, in the three months ended July 31, 2024, to $89,429, from $221,856 in the three months ended July 31, 2023. Revenue from portal fees consists of a 4.9% fee of the total capital raised by an issuer plus fixed miscellaneous charges for administrative fees, such as a rolling close, or the filing of an amended offering statement. The decrease in portal fees is attributable to the decrease in the amount of capital raised on the Funding Portal. In the three-month periods ended July 31, 2024 and 2023, total dollars raised in offerings decreased by $1,790,844, or 60%, to $1,169,917 in the July 2024 quarter, from $2,960,761 in the July 2023 quarter. The total number of issuers on the Funding Portal in the three months ended July 31, 2024 and 2023 that successfully closed an offering was 11 and 4, respectively.
The number of successful closings in a quarter is defined as an issuer that raised more than the targeted amount in its offering statement and stopped selling securities on the Funding Portal (a “Final Closing”). This number is not necessarily an indicator of quarterly revenue because an issuer may have several rolling closes in previous quarters before the Final Closing, and the Funding Portal receives its 4.9% portal fee for each rolling close.
Revenue from listing fees decreased by $111,500, or approximately 72%, to $42,500 in the three months ended July 31, 2024 as compared to $154,000 in the three months ended July 31, 2023. Listing fees are typically $5,000 per issuer, and they are the first form of revenue earned by our Funding Portal when an issuer signs a contract with us to sell securities on the funding portal. The drop in listing fees can be attributed to our loss of an experienced salesperson whose replacement has not yet been fully trained. After the listing contract is signed, an issuer typically takes two months before it is ready to launch an offering. Most issuers remain on the funding portal, marketing their offering, for a period of six to nine months.
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Costs of revenues decreased by $7,833 to $10,220, or approximately 43% for the three months ended July 31, 2024 from $18,053 during the three months ended July 31, 2023. The decrease was attributed to the decline in Funding Portal revenues.
Payroll and payroll related expenses increased by $99,551, or 10%, to $1,136,593 for the three months ended July 31, 2024, as compared to $1,037,042 during the three months ended July 31, 2023. The increase was attributed to the salary increases and bonuses for certain key positions, to assist with employee retention, during the quarter ended July 31, 2024.
Marketing expense decreased by $234,990, or approximately 97%, to $6,898 for the three months ended July 31, 2024, as compared to $241,888 during the three months ended July 31, 2023. The decrease in expense was primarily attributed to a special marketing program that was instituted in the July 31, 2023 quarter that was not repeated in the quarter ended July 31, 2024.
Rent expense decreased by $494, or approximately 3%, to $19,116 for the three months ended July 31, 2024, as compared to $19,610 during the three months ended July 31, 2023. The decrease was primarily attributed to a decrease in variable costs charged to us in the current fiscal year.
General and administrative expenses increased by $591,962, or 75%, to $1,380,256 for the three months ended July 31, 2024, from $788,294 during the three months ended July 31, 2023. The increase was primarily attributed to increased legal costs and proxy solicitation fees.
Consulting expense decreased by $66,561, or approximately 41%, to $97,381 for the three months ended July 31, 2024 from $163,942 during the three months ended July 31, 2023. The decrease was primarily attributed to a decrease in overseas programmers.
Amortization expense decreased by $19,462, or 69% to $8,869 for the three months ended July 31, 2024 from $28,331 during the three months ended July 31, 2023. The decrease is the result of an impairment loss recognized in the fourth quarter of fiscal 2024 that reduced the value of the amortizable asset as of July 31, 2024.
Interest expense decreased by $2,840 to $10,464, or approximately 21%, for the three months ended July 31, 2024, as compared to $13,304 during the three months ended July 31, 2023. The decrease in interest expense was primarily attributed to lower debt amounts that resulted from paying off a secured term loan.
Liquidity and Capital Resources
As of July 31, 2024, we had cash and cash equivalents of $855,181 and negative working capital of $2,507,576 as compared to cash and cash equivalents of $863,182 and negative working capital of $2,074,163 as of April 30, 2023.
We have been successful in raising capital by completing public offerings of our common stock.
On December 27, 2023, the Company completed a public offering of (i) 68,572 shares of common stock, par value $0.001 per share, of the Company (the “Common Share”); (ii) 160,000 prefunded warrants (the “Prefunded Warrants”) to purchase 160,000 shares of Common Stock of the Company (the “Prefunded Warrant Shares”); (iii) 228,572 Series A-1 warrants (the “Series A-1 Common Warrants”) to purchase 228,572 shares of Common Stock of the Company (the “Series A-1 Common Warrant Shares”) and (iv) 228,572 Series A-2 warrants (the “Series A-2 Common Warrants,” together with the Series A-1 Warrants, the “Common Warrants”) to purchase 228,572 shares of Common Stock of the Company (the “Series A-2 Common Warrant Shares,” together with the Series A-1 Common Warrants Shares, the “Common Warrant Shares”). The offering price of each Common Share and accompanying Series A-1 Common Warrant and Series A-2 Common Warrant was $17.50, and the offering price of each Prefunded Warrant and accompanying Series A-1 Common Warrant and Series A-2 Common Warrant was $17.43. The Series A-1 Warrants have a current exercise price of $14.10 per share and are exercisable until February 23, 2029 and the Series A-2 Common Warrants have a current exercise price of $8.74 per share and are exercisable until August 23, 2025. Following adjustments in connection with the August 2024 reverse stock split, there are currently Series A-1 Warrants to purchase 283,752 shares of Common Stock outstanding and Series A-2 Warrant to purchase 28,386 shares of Common Stock outstanding.
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On May 24, 2024, the Company entered into inducement offer letter agreements with certain investors that held certain outstanding Series A-2 warrants to purchase up to an aggregate of 204,572 shares of our common stock with an exercise price of $17.50 per share, originally issued in December 2023 at a reduced exercise price of $10.85 per share (which reduced exercise price was granted to all holders on Series A-2 warrants by the board on May 24, 2024) in partial consideration for the Company’s agreement to issue in a private placement (i) new Series A-3 common stock purchase warrants to purchase up to 253,947 shares of our common stock at an exercise price of $8.74 per share and (ii) new Series A-4 common stock purchase warrants to purchase up to 253,947 shares of our common stock at an exercise price of $8.74 per share for aggregate gross proceeds of approximately $2.2 million from the exercise of the existing warrants, before deducting placement agent fees and other expenses payable by the Company. The Series A-3 Warrants and Series A-4 Warrants are exercisable beginning on the effective dates of stockholder approval of the issuance with such warrants expiring on (i) the five year anniversary of the initial exercise date for the Series A-3 Warrants and (ii) the eighteen month anniversary of the initial exercise date for the Series A-4 Warrants. This transaction closed on May 29, 2024. H.C. Wainwright was the exclusive agent for the transaction for which we paid them a cash fee equal to 7.5% from the exercise of the Series A-2 warrant at the reduced exercise price and a management fee equal to 1.0% of such aggregate gross proceeds. We also issued warrants to designees of H.C. Wainwright to purchase up to 19,048 shares of our common stock at an exercise price of $10.93 per share.
We believe that our existing cash investment balances, our anticipated cash flows from operations and liquidity sources including offering of equity and/or debt securities and/or the sale of equity positions in certain portfolio companies for which we provide marketing and strategic advice may not be sufficient to meet our working capital and expenditure requirements for the next 12 months. Consequently, beginning in November 2023, we laid off some employees, and took other steps to reduce operating expenses. We plan to continue operating with lower fixed overhead amounts and seek to raise money from private placements, public offerings and/or bank financing. Our management has determined, based on its recent history and the negative cash flow from operations, that it is unlikely that its plan will sufficiently alleviate or mitigate, to a sufficient level, the relevant conditions or events noted above. To the extent that funds generated from any private placements, public offerings and/or bank financing, if available, are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms. Accordingly, the Company’s management has concluded that these conditions raise substantial doubt about our ability to continue as a going concern. There can be no assurance that we will be able to achieve our business plan objectives or be able to achieve or maintain cash-flow-positive operating results. If we are unable to generate adequate funds from operations or raise sufficient additional funds, we may not be able to repay our existing debt, continue to operate our business network, respond to competitive pressures or fund our operations. As a result, we may be required to significantly reduce, reorganize, discontinue or shut down our operations.
Year over Year Changes
Net cash used in operating activities amounted to $1,963,645 and $1,464,023 for the three months ended July 31, 2024 and 2023, respectively. The principal sources of cash from operating activities in the three months ended July 31, 2024 were increase in account payable and accrued expense of $313,620, collection of accounts receivable of $134,849, and stock-based compensation of $139,371. However, the sources of cash were offset by a net loss of $2,527,170, a receipt of equity in lieu of cash of $10,127, and an increase in prepaid expenses of $24,856. The principal uses of cash from operating activities in the three months ended July 31, 2023 were a net loss of $491,655 and the receipt of equity securities in lieu of cash amounting to $1,170,000. These uses of cash were partially offset by a non-cash item, stock-based compensation of $483,351.
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In the three months ended July 31, 2024 and 2023, there were no investing activities.
For the three months ended July 31, 2024, net cash provided by financing activities amounted to $1,955,644, which consisted of proceeds from the exercise of warrants. For the three months ended July 31, 2023, cash provided by financing activities amounted to $1,925,200, which consisted of proceeds of $2,275,200 for the sale of common stock, offset by a $350,000 payment to retire debt from a secured lender.
In the three months ended July 31, 2024 and 2023, there were no expenditures for capital assets. We do not anticipate any capital expenditures in fiscal 2024.
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements. We believe that the estimates, judgments and assumptions are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. For a discussion of our critical accounting estimates, please read Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended April 30, 2024 filed with the SEC on July 29, 2024. There have been no material changes to the critical accounting estimates previously disclosed in such report.
Recently Issued Accounting Standards Not Yet Effective or Adopted
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on the accompanying unaudited condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15 and 15d-15(e)) as of July 31, 2024, the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
ITEM 1A. RISK FACTORS.
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended April 30, 2024 as filed with the SEC on July 29, 2024 (“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report, except as discussed below. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
Our financial situation creates doubt whether we will continue as a going concern.
As of July 31, 2024, we had negative working capital of $2,507,576 and for the three months ended July 31, 2024, we had an operating loss of $2,508,237 and net cash used in operating activities amounted to $1,963,645. There can be no assurances that we will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. Our management has recently reduced its operating expenses and we have turned our focus to our funding portal business, which generates cash revenues and has seen a growth in revenues on a year-to-year basis. We plan to continue operating with lower fixed overhead amounts and seek to raise money from private placements, public offerings and/or bank financing. Our management has determined, based on its recent history and the negative cash flow from operations, that it is unlikely that its plan will sufficiently alleviate or mitigate, to a sufficient level, the relevant conditions or events noted above. To the extent that funds generated from any private placements, public offerings and/or bank financing, if available, are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms. Accordingly, our management has concluded that these conditions raise substantial doubt about our ability to continue as a going concern. There can be no assurance that we will be able to achieve its business plan objectives or be able to achieve or maintain cash-flow-positive operating results. If we are unable to generate adequate funds from operations or raise sufficient additional funds, we may not be able to repay our existing debt, continue to operate our business network, respond to competitive pressures or fund our operations. As a result, we may be required to significantly reduce, reorganize, discontinue, or shut down our operations.
Our business and operations could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of business and growth strategy and impact our stock price.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing recently. Volatility in the stock price of our Common Stock or other reasons may in the future cause us to become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could result in substantial costs and divert management’s attention and the attention and resources of our board of directors (our “Board”) from our business. Additionally, such securities litigation and shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist shareholder matters. Further, our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and shareholder activism
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A significant portion of our total assets are held in equity securities of early-stage companies, which securities are illiquid and subject to volatility, which factors could have a material adverse effect on our financial condition and results of operations.
Payment related to the consulting and advisory services provided by Netcapital Advisors is often made through equity stakes from such customers. As of July 31, 2024 and April 30, 2024, approximately $25.3 million of our holdings are issued by companies whose securities do not trade on public markets. The securities issued are typically in private companies with no established trading market for their securities, that often have limited operating histories, limited operating cash, and negative cash flows. Additionally, these securities are primarily restricted, and are subject to legal holding periods pursuant to Rule 144 or other applicable exemptions. The stock price of such issuers is often volatile, unpredictable, and with limited liquidity, and the value of such securities on the date of receipt compared to the date when we are able to legally sell the securities may decrease significantly. The value ascribed to our assets in our financial statements as of a particular date may be materially greater than or less than the value that would be realized if our assets were to be liquidated as of such date. Accordingly, the value of such holdings may change over time due to factors that we do not control, such as issuance of securities by such companies at lower prices or other market factors. One such example of a change in value occurred in the period ended January 31, 2024, we recognized an unrealized loss of approximately $2.7 million on the value of our equity securities due to the decline in value of a single issuer, which represented an impairment of more than 80% of the previous value of our holdings in such issuer, which resulted in a reduction of our retained earnings. Changes to the value of our holdings could have a material adverse effect on our financial condition and results of operations.
Our ability to have our securities traded on the Nasdaq Capital Market is subject to us meeting applicable listing criteria.
We are currently listed on the Nasdaq Stock Market, LLC (“Nasdaq”), a national securities exchange. The Nasdaq requires companies desiring to list their common stock to meet certain listing criteria including total number of shareholders: minimum stock price, total value of public float, and in some cases total shareholders’ equity and market capitalization. Our failure to meet such applicable listing criteria could prevent us from continuing to list our common stock on the Nasdaq. In the event we are unable to have our shares listed on Nasdaq, our common stock could potentially quote on the OTCQX or the OTCQB, each of which is generally considered less liquid and more volatile than the Nasdaq. Our failure to have our shares listed on the Nasdaq could make it more difficult for you to trade our shares, could prevent our common stock trading on a frequent and liquid basis and could result in the value of our common stock being less than it would be if we were able to list our shares on the Nasdaq.
As previously disclosed on a Current Report on Form 8-K filed by us, Nasdaq had previously notified us on September 1, 2023 that we were not in compliance with the Nasdaq’s Listing Rule 5550(a)(2) the “Bid Price Rule”) because it failed to maintain a minimum bid price of $1.00 per share for 30 consecutive business days. Further as of July 22, 2024, Nasdaq determined that that our securities had a closing bid price of $0.10 or less for ten consecutive trading days and as a result, Nasdaq delivered written notice to the Company on July 23, 2024 under which it advised us that Nasdaq has determined to delist our securities from The Nasdaq Capital Market. We requested a hearing to appeal Nasdaq’s delisting determination. On August 19, 2024, we received a notice from The Nasdaq Stock Market, LLC (“Nasdaq”), dated August 19, 2024, informing us that we had regained compliance with the “Bid Price Rule for continued listing on The Nasdaq Capital Market, as the bid price of our common stock closed at or above $1.00 per share for a minimum of 10 consecutive business days since August 2, 2024. As a result of our demonstrated compliance with Nasdaq’s continued listing requirements, such aforementioned hearing was cancelled
Although our common stock is currently listed on Nasdaq, we may not be able to continue to meet the exchange’s minimum listing requirements or those of any other national exchange. The Listing Rules of Nasdaq require listing issuers to comply with certain standards in order to remain listed on its exchange. If, for any reason, we should fail to maintain compliance with these listing standards and Nasdaq should delist our securities from trading on its exchange and we are unable to obtain listing on another national securities exchange, a reduction in some or all of the following may occur, each of which could have a material adverse effect on our shareholders:
| ● | the liquidity of our common stock; | |
| ● | the market price of our common stock; | |
| ● | our ability to obtain financing for the continuation of our operations; | |
| ● | the number of institutional and general investors that will consider investing in our common stock; | |
| ● | the number of investors in general that will consider investing in our common stock; | |
| ● | the number of market makers in our common stock; | |
| ● | the availability of information concerning the trading prices and volume of our common stock; and | |
| ● | the number of broker-dealers willing to execute trades in shares of our common stock. |
Regulatory and legal uncertainties could harm our business.
The securities businesses are heavily regulated. Firms in financial service industries have been subject to an increasingly regulated environment over recent years, and penalties and fines sought by regulatory authorities have increased accordingly. Our funding portal and proposed broker-dealer subsidiaries are subject to extensive regulations. Regulatory bodies include, but are not limited to, the SEC, FINRA, and the Nasdaq Stock Market. Our mode of operation and profitability may be directly affected by additional legislation changes in rules promulgated by various government agencies and self-regulatory organizations that oversee our businesses, and changes in the interpretation or enforcement of existing laws and rules. Noncompliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market or the revocation or limitation of licenses. Noncompliance with applicable laws or regulations could adversely affect our reputation, prospects, revenues and earnings. In addition, changes in current laws or regulations or in governmental policies could adversely affect our business, financial condition and results of operations.
Stock exchanges, other self-regulatory organizations and state securities commissions can censure, fine, issue cease-and-desist orders, suspend or expel a funding portal, broker-dealer or any of its officers or employees. Our ability to comply with all applicable laws and rules is largely dependent on our internal systems to ensure compliance, as well as our ability to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions in the future due to claimed noncompliance, which could have a material adverse effect on our business, financial condition and results of operations. To continue to operate, we may have to comply with the regulatory controls of each jurisdiction in which we conduct, or intend to conduct business, the requirements of which may not be clearly defined.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
Purchases of equity securities by the issuer and affiliated purchasers.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
Legal Proceedings
From time to time, we may become involved in litigation or regulatory proceedings in the ordinary course of our business, including litigation or regulatory proceedings that could be material to our business.
In addition, the securities industry is highly regulated and many aspects of our business involve substantial risk of liability. In past years, there has been an increasing incidence of litigation involving the securities industry, including class action suits that generally seek substantial damages, including in some cases punitive damages. Compliance problems that are reported to federal, state and provincial regulators, exchanges or other self-regulatory organizations by dissatisfied customers are investigated by such regulatory bodies, and, if pursued by such regulatory body or such customers, may rise to the level of arbitration or disciplinary action. We are also subject to periodic regulatory audits and inspections for various federal, self-regulatory and state regulators. Any such audits and inspections could require significant amounts of management time, result in the diversion of significant operational resources, require us to change our business practices or products, result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market or the revocation or limitation of licenses, result in negative publicity, or otherwise harm our business and financial results.
Pending Regulatory Inquiries
Our businesses are heavily regulated by state and federal regulatory agencies as well as the Nasdaq Stock Market and FINRA. In the current era of heightened regulatory scrutiny of financial institutions, we have incurred increased compliance costs, along with the industry as a whole. Increased regulation also creates increased barriers to entry.
We receive many regulatory inquiries each year in addition to being subject to frequent regulatory examinations. The great majority of these inquiries do not lead to fines or any further action against us. We are generally the subject of regulatory inquiries regarding subjects including, but not limited to: anti-money laundering, compliance, registration, record-keeping, and other topics of recent regulatory interest. We have procedures for evaluating whether potential regulatory fines are probable, estimable and material and for updating its contingency reserves and disclosures accordingly. In the current climate, we expect that we may, from time to time, be subject to regulatory fines on various topics on an ongoing basis, as other regulated financial services businesses do. The amount of any fines, and when and if they will be incurred, typically is impossible to predict given the nature of the regulatory process.
Rule 10b5-1 Trading Plans
During
the fiscal quarter ended July 31, 2024, none of the Company’s directors or executive officers
ITEM 6. EXHIBITS.
*Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: September 16, 2024 | NETCAPITAL INC. | |
| By: | /s/ Martin Kay | |
| Martin Kay | ||
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | ||
| By: | /s/ Coreen Kraysler | |
Coreen Kraysler | ||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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