Netcapital Inc 10-Q for FY2025 Q2
Netcapital Inc. (NCPL)
About this 10-Q
Netcapital Inc filed this 10-Q on December 16, 2024, covering the quarter ended October 31, 2024 (FY2025 Q2).
Headline figures
Quarter ended October 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $170.53K
- down 91.6% from $2.04M a year earlier
- Net loss
- $2.22M
- compared with net income of $339.62K a year earlier
- Diluted EPS
- -$2.34
- compared with $2.52 a year earlier
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 | ||
| The Stock Market LLC | ||||
| The |
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 December 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.
| -4- |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NETCAPITAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| October 31, 2024 (Unaudited) | April 30, 2024 (Audited) | |||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable net | ||||||||
| Interest receivable | ||||||||
| Note 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 | Six Months Ended | Six Months Ended | |||||||||||||
| October 31, 2024 | October 31, 2023 | October 31, 2024 | October 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 income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Amortization of intangible assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) before taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax expense (benefit) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Basic earnings (loss) per share | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Diluted earnings (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
For the Six Months Ended October 31, 2024 (Unaudited) and the Year Ended April 30, 2024
| Common Stock | Shares to | Capital in Excess of | Retained 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 | ( | ) | ||||||||||||||||||||||
| Balance | ( | ) | ||||||||||||||||||||||
| Vesting of stock options | - | |||||||||||||||||||||||
| Reduction in shares to be issued | ( | ) | ||||||||||||||||||||||
| Sale of common stock | ||||||||||||||||||||||||
| Net loss October 31, 2024 quarter | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance October 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
See Accompanying Notes to the Condensed Consolidated Financial Statements
| -7- |
NETCAPITAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended | Six Months Ended | |||||||
| October 31, 2024 | October 31, 2023 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income (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 | ( | ) | ||||||
| Other receivables | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Income taxes payable | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Accrued interest payable | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Note receivable | ( | ) | ||||||
| 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 consolidated 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- and six-month periods ended October 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.
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 organized in 2024 and was approved by FINRA to operate as a broker dealer.
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
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.
The Company accounts for allowance for credit losses under the current expected credit loss (“CECL”) impairment model for its financial assets, including accounts receivable, and presents the net amount of the financial instrument expected to be collected. The CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers forecasts of future economic conditions in addition to information about past events and current conditions. Based on this model, the Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the receivable balance, current and historical customer trends, communications with its customers, and macro-economic conditions. Amounts are written off after considerable collection efforts have been made and the amounts are determined to be uncollectible.
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.
| -9- |
Note 2 – Concentrations
For
the three and six months ended October 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 and six months
ended October 31, 2024, 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:
Schedule of Disaggregation of Revenue
| Three Months Ended Oct. 31, 2024 | Three Months Ended Oct. 31, 2023 | Six Months Ended Oct. 31, 2024 | Six Months Ended Oct. 31, 2023 | |||||||||||||
| Consulting services | $ | $ | $ | $ | ||||||||||||
| Fees from online services | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
| -12- |
Schedule of Earnings Per Share
| Three Months Ended October 31, 2024 | Three Months Ended October 31, 2023 | Six Months Ended October 31, 2024 | Six Months Ended October 31, 2023 | |||||||||||||
| Net income (loss) attributable to common stockholders – basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Adjustments to net income | ||||||||||||||||
| Net income (loss) attributable to common stockholders – diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average common shares outstanding - basic | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Weighted average common shares outstanding – diluted | ||||||||||||||||
| Earnings (loss) per common share - basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Earnings (loss) per common share - diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
shares of common stock that are issuable pursuant to a stock subscription agreement are included in the calculation of diluted earnings per share for the three months ended October 31, 2024. The shares are not included in the calculation of diluted earnings per share for the three and six months ended October 31, 2024 or the six months ended October 31, 2023, because their effect is anti-dilutive.
Outstanding vested warrants to purchase shares of common stock are not included in the calculation of earnings per share for the three- and six month periods ended October 31, 2024 because their effect is anti-dilutive. Outstanding vested warrants to purchase shares of common stock are not included in the calculation of earnings per share for the three- and six-month periods ended October 31, 2023 because their effect is anti-dilutive.
Outstanding vested options to purchase shares of common stock are not included in the calculation of earnings per share for the three- and six-month periods ended October 31, 2024 because their effect is anti-dilutive. Outstanding vested options to purchase shares of common stock are not included in the calculation of earnings per share for the three- and six-month periods ended October 31, 2023 because their effect is anti-dilutive.
| -13- |
Note 5 – Principal Financing Arrangements
The following table summarizes components debt as of October 31, 2024 and April 30, 2024:
Schedule of Debt
| October 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 and six months ended October 31, 2024, the Company recorded income tax expense due to the net loss recorded in both periods.
For the three and six months ended October 31, 2023, the Company recorded an income tax benefit of $
Note 7 – Related Party Transactions
Netcapital
Systems LLC, a Delaware limited liability company (“Systems DE”), 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 October 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 October 31, 2024 and April
30, 2024, the Company owns membership interest units of Deuce Drone LLC., valued at $
Compensation
to officers in the three- and six-month periods ended October 31, 2024 consisted of stock-based compensation valued at $ and $,
respectively, and cash salary of $
Compensation
to officers in the three- and six-month periods ended October 31, 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- and six-month periods ended October 31, 2024 consisted
of cash wages of $
As
of October 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, 14,286 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 October 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 Systems DE.
| -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”, or “Wainwright”), 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 $
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 $
| -17- |
On
August 23, 2024, we entered into an At The Market Offering Agreement (the “ATM Agreement”) with Wainwright to sell shares
of our common stock, par value $ per share, (the “Shares”) having an aggregate sales price of up to $
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 October 31, 2024 and April 30, 2024:
Schedule of Financial Assets Measured at Fair Value on a Recurring Basis
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| October 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 and six months ended October 31, 2024, stock-based compensation expense amounted to $ and $, respectively. For the three and six months ended October 31, 2023, stock-based compensation expense amounted to $ and $, respectively.
Schedule of Stock-based Compensation Expense
| Stock-based compensation expense | Three Months Ended Oct. 31, 2024 | Three Months Ended Oct. 31, 2023 | Six Months Ended Oct. 31, 2024 | Six Months Ended Oct. 31, 2023 | ||||||||||||
| Chief Executive Officer | $ | $ | $ | $ | ||||||||||||
| Chief Financial Officer | ||||||||||||||||
| Chief Executive Officer, Advisors | ||||||||||||||||
| Founder | ||||||||||||||||
| Marketing consultant | ||||||||||||||||
| Marketing 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 October 31, 2024 and April 30, 2024
Schedule of Intangible Assets
| October 31, 2024 | April 30, 2024 | |||||||
| Acquired users | $ | $ | ||||||
| Acquired brand | ||||||||
| Total intangible assets | ||||||||
| Less: accumulated amortization | ||||||||
| Net intangible assets | $ | $ | ||||||
As
of October 31, 2024, the weighted average remaining useful life for technology, trade names, professional practice, literary works and
domains is
Note 13 – Investments
In
the six-month period ended October 31, 2024,
In
March 2024, the Company received units of StockText 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
March 2024, the Company received units of Fantize 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
February 2024, the Company received units of AceHedge 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 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
In
May 2020, the Company entered a consulting contract with ChipBrain LLC (“Chip”), which allowed the Company to receive
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 October 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
In
August 2019, the Company entered into a consulting contract with KingsCrowd LLC (“KingsCrowd”), which allowed the Company
to receive
During
fiscal 2019, the Company entered a consulting contract with Systems DE, which allowed the Company to receive up to
| -21- |
In
July 2020 the Company entered 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 October 31, 2024 and April 30, 2024:
Schedule of Investments
| October 31, 2024 | April 30, 2024 | |||||||
| 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 | ||||||||
| Total | $ | $ | ||||||
| $ | $ | |||||||
The above investments in equity securities are within the scope of ASC 321. The Company monitors the investments for any changes in observable prices from orderly transactions. All investments are initially measured at cost and evaluated for changes in estimated fair value.
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, at October 31, 2024, the Company had negative working capital of $
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 turned its focus to its funding portal business, which generates cash revenues and has seen a growth in revenues on a quarter-to-quarter basis in fiscal 2025. 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
The Company evaluated subsequent events through the date these financial statements were available to be issued.
There were no material subsequent events that required recognition or additional disclosure in these financial statements.
| -22- |
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 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.
| -23- |
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 engagement 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 $312,755, with costs of service of $30,001, in the six months ended October 31, 2024 for a gross profit of $282,754 in the six months ended October 31, 2024 as compared to revenues of $3,561,467, with costs of service of $38,187, in the six months ended October 31, 2023, for a gross profit of $3,523,280 (consisting of $2,626,667 in equity securities from Portfolio Companies for payment of services).
The total number of offerings on the Netcapital funding portal in fiscal 2024 and 2023 that closed was 63 and 81, respectively, of which 13 and 17 offerings hosted on the Netcapital funding platform in fiscal 2024 and 2023, respectively terminated their listings without raising the required minimum amount of capital. For the three- and six-months periods ended October 31, 2024, 13 and 26 issuers have launched an offering on the portal, respectively, as compared to 16 and 37 issuers that launched an offering in the three- and six-month periods ended October 31, 2023, respectively. As of the date of this report, we have minority equity positions in 19 Portfolio Companies that have utilized the funding portal to facilitate their offerings, which equity was received as payment for services.
Netcapital funding portal 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 investment from virtually anyone, including friends, family, customers, employees, etc.
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 the final close date of an 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; |
| ● | digital marketing; |
| ● | website design, software and software development; |
| ● | message crafting, including pitch decks, offering pages, and ad creation; |
| ● | strategic advice; and |
| ● | technology consulting. |
| -24- |
Broker-Dealer Business
Our recently formed wholly owned subsidiary, Netcapital Securities Inc. has received approval from the Financial Industry Regulatory Authority (“FINRA”) to become a FINRA-member broker dealer. 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.
Recent Developments
On November 22, 2024, Netcapital Securities Inc. (“NSI”), received approval from FINRA to become a FINRA-member broker-dealer. This approval allows NSI to:
| ● | Conduct private placements of securities and referral business; | |
| ● | Support companies raising equity capital under Regulation A (“Reg A”) and Regulation D (“Reg D”); | |
| ● | Partner with other broker-dealers to syndicate deals; and | |
| ● | Charge fees on capital raised under Reg A and Reg D, as well as enter into fee-sharing agreements with other broker-dealers. |
The FINRA approval positions the Company to support larger fundraises and expand the range of investment opportunities available to its investor base.
At-The-Market Agreement
On August 23, 2024, we entered into an At The Market Offering Agreement (the “ATM Agreement”) with Wainwright to sell shares of our 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 acted as sales agent. The sales of the Shares made under the ATM Agreement were 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. We paid Wainwright a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares. From August 23, 2024 through October 29, 2024, the Company sold 1,122,693 shares of its common stock pursuant to the ATM Agreement for gross proceeds of 2,099,667. No additional Shares will be sold under this ATM Agreement. Net proceeds amounted to approximately $2,029,000.
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.
| -25- |
Results of Operations
Comparison of the Three Months Ended October 31, 2024 and 2023
Our revenues for the three months ended October 31, 2024, decreased by $1,871,130, or approximately 92%, to $170,528, as compared to $2,041,658 during the three months ended October 31, 2023. The decrease in revenues was attributed to the lack of consulting service revenue in the quarter ended October 31, 2024, as compared to revenue of $1,516,667 for consulting services for equity securities and $62,000 for consulting revenue in the three months ended October 31, 2023. In fiscal 2025, management has focused 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. Effective November 22, 2024, the Company received approval from FINRA to have a broker-dealer subsidiary.
In the three months ended October 31, 2024, we recorded $170,372 in funding portal revenues, consisting of portal fees of $108,124, listing fees of $47,500, and equity fees of $14,748, as compared to funding portal revenues of $462,706 in the three months ended October 31, 2023, consisting of portal fees of $317,206, listing fees of $145,500 and equity fees of $0. The decrease in revenues was primarily attributed to a decrease in dollars invested in issuers listed on the funding portal, which decreased to $2,052,547 from the quarter ended October 31, 2024 from $6,288,508 for the quarter ended October 31, 2023. In the three months ended October 31, 2024, dollars invested were approximately one-third of the dollars invested in the three months ended October 31, 2023. New offerings launched amounted to 13 issuers in the three months ended October 31, 2024, as compared to 16 issuers in the three months ended October 31, 2023. The components of revenue were as follows:
| Oct. 31, 2024 | Oct. 31, 2023 | |||||||
| Consulting services for equity securities | $ | - | $ | 1,516,667 | ||||
| Consulting revenue | - | 62,000 | ||||||
| Portal fees | 108,124 | 317,206 | ||||||
| Listing fees | 47,500 | 145,500 | ||||||
| Portal 1% equity fee | 14,748 | - | ||||||
| Game site revenue | 156 | 285 | ||||||
| Total | $ | 170,528 | $ | 2,041,658 | ||||
Costs of revenues decreased by $353 to $19,781, or approximately 2% for the three months ended October 31, 2024 from $20,134 during the three months ended October 31, 2023. The decrease was attributed to lower revenues.
Payroll and payroll related expenses decreased by $301,134, or approximately 29%, to $749,701 for the three months ended October 31, 2024, as compared to $1,050,835 during the three months ended October 31, 2023. The decrease was attributed to a decrease in the number of employees. As employees left the Company, given our decrease in revenues, we did not replace them.
Marketing expense decreased by $34,523, or approximately 74%, to $12,208 for the three months ended October 31, 2024, as compared to $46,731 during the three months ended October 31, 2023. The decrease in expense was primarily attributed to a decrease in marketing outlets that we utilized in the three months ended October 31, 2024.
Rent expense increased by $1,063, or approximately 6%, to $19,442 for the three months ended October 31, 2024, as compared to $18,379 during the three months ended October 31, 2023. The increase was primarily attributed to general inflationary costs.
General and administrative expenses increased by $843,557, or approximately 130%, to $1,492,182 for the three months ended October 31, 2024, from $648,625 during the three months ended October 31, 2023. The increase was primarily attributed to professional and legal fees, which include fees for launching our broker-dealer subsidiary.
Consulting expense decreased by $125,089, or approximately 61%, to $79,645 for the three months ended October 31, 2024 from $204,734 during the three months ended October 31, 2023. The decrease was primarily attributed to our efforts to control expenses associated with overseas programmers.
Interest expense decreased by $961 to $9,601, or approximately 9%, for the three months ended October 31, 2024, as compared to $10,562 during the three months ended October 31, 2023. The decrease in interest expense was primarily attributed to lower debt amounts that resulted from paying off a secured term loan.
Comparison of the Six Months Ended October 31, 2024 and 2023
Our revenues for the six months ended October 31, 2024, decreased by $3,248,712, or approximately 92%, to $312,755, as compared to $3,561,467 during the six months ended October 31, 2023. The decrease in revenues was attributed to the lack of consulting service revenue in the six-month period ended October 31, 2024, as compared to revenue of $2,626,667 for consulting services for equity securities and $95,700 for consulting revenue in the six months ended October 31, 2023. In fiscal 2025, management has focused 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. Effective November 22, 2024, the Company received approval from FINRA to have a broker-dealer subsidiary.
In the six months ended October 31, 2024, we recorded $312,428 in funding portal revenues, consisting of portal fees of $197,553, listing fees of $90,000, and equity fees of $24,875, as compared to funding portal revenues of $838,562 in the six months ended October 31, 2023, consisting of portal fees of $539,062, listing fees of $299,500 and equity fees of $0. The decrease in revenues was primarily attributed to a decrease in investments in funding portal issuers, which decreased to $3,023,234 from the six months ended October 31, 2024 from $10,287,341 for the six months ended October 31, 2023. In the six months ended October 31, 2024, dollars invested were approximately 29% of the dollars invested in the six months ended October 31, 2023. New offerings launched amounted to 26 issuers in the six months ended October 31, 2024, as compared to 37 issuers in the six months ended October 31, 2023. The components of revenue were as follows:
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The components of revenue were as follows:
| Oct. 31, 2024 | Oct. 31, 2023 | |||||||
| Consulting services for equity securities | $ | - | $ | 2,626,667 | ||||
| Consulting revenue | - | 95,700 | ||||||
| Portal fees | 197,553 | 539,062 | ||||||
| Listing fees | 90,000 | 299,500 | ||||||
| Portal 1% equity fee | 24,875 | - | ||||||
| Game site revenue | 327 | 538 | ||||||
| Total | $ | 312,755 | $ | 3,561,467 | ||||
Costs of revenues decreased by $8,186 to $30,001, or approximately 21%, for the six months ended October 31, 2024 from $38,187 during the six months ended October 31, 2023. The decrease was primarily attributed to lower revenues.
Payroll and payroll related expenses decreased by $201,583, or approximately 10%, to $1,886,294 for the six months ended October 31, 2024, as compared to $2,087,877 during the six months ended October 31, 2023. The decrease was attributed to a decrease in the number of employees. As employees left the Company, given our decrease in revenues, we did not replace them.
Marketing expense decreased by $269,513, or approximately 93%, to $19,106 for the six months ended October 31, 2024, as compared to $288,619 during the six months ended October 31, 2023. The decrease in expense was primarily attributed to a decrease in marketing outlets that we utilized in fiscal 2025.
Rent expense increased by $569, or approximately 2%, to $38,558 for the six months ended October 31, 2024, as compared to $37,989 during the six months ended October 31, 2023. The increase was primarily attributed to a new office-space agreement.
General and administrative expenses increased by $1,435,519, or approximately 100%, to $2,872,438 for the six months ended October 31, 2024, from $1,436,919 during the six months ended October 31, 2023. The increase was primarily attributed to professional and legal fees, which include fees for launching our broker-dealer subsidiary.
Consulting expense decreased by $191,650, or 52%, to $177,026 for the six months ended October 31, 2024 from $368,676 during the six months ended October 31, 2023. The decrease was primarily attributed to our efforts to control expenses associated with overseas programmers.
Interest expense decreased by $3,801 to $20,065, or approximately 16%, for the six months ended October 31, 2024, as compared to $23,866 during the six months ended October 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 October 31, 2024, we had cash and cash equivalents of $1,346,739 and negative working capital of $2,615,585 as compared to cash and cash equivalents of $863,182 and negative working capital of $2,074,163 as of April 30, 2024.
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. 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.
On August 23, 2024, we entered into an At The Market Offering Agreement (the “ATM Agreement”) with Wainwright to sell shares of our 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 acted as sales agent. The sales of the Shares made under the ATM Agreement were 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. We paid Wainwright a commission rate equal to 3.0% of the aggregate gross proceeds from each sale of Shares. From August 23, 2024 through October 29, 2024, the Company sold 1,122,693 shares of its common stock pursuant to the ATM Agreement for gross proceeds of 2,099,667. No additional Shares will be sold under this ATM Agreement. Net proceeds amounted to approximately $2,029,000.
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 $3,451,087 and $1,945,814 for the six months ended October 31, 2024 and 2023, respectively. The principal sources of cash from operating activities in the six months ended October 31, 2024 was a non-cash item, stock-based compensation of $278,742 and an increase in accounts payable and accrued expenses of $911,387. These amounts were offset by a loss of $4,747,671. The principal source of cash from operating activities in the six months ended October 31, 2023 was a non-cash item, stock-based compensation of $763,873. However, the sources of cash were offset by a receipt of equity in lieu of cash of $1,170,000 and an increase in accounts receivable of $1,517,167.
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Net cash provided by investing activities amounted to $0 and $20,000 in the six months ended October 31, 2024 and 2023, respectively. The Company purchased a note receivable for $20,000 in the six months ended October 31, 2023.
For the six months ended October 31, 2024, net cash provided by financing activities amounted to $3,934,644, which consisted of proceeds from the sale of common stock of $1,979,000 and proceeds from the exercise of warrants of $1,955,644. For the six months ended October 31, 2023, net cash provided by financing activities amounted to $1,925,200, which consisted of proceeds from the sale of common stock of $2,275,200, which was offset by repayment of $350,000 in principal to our secured lender.
In the six months ended October 31, 2024 and 2023, there were no expenditures for capital assets. We do not anticipate any capital expenditures in fiscal 2025.
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.
(a) Disclosure Controls and Procedures.
The Company’s management, with the participation of the Principal Executive Officer (the “PEO”) and Principal Financial Officer (the “PFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of October 31, 2024. Based on that evaluation, the PEO and the PFO concluded that, as of October 31, 2024 such controls and procedures were effective.
(b) Management’s Assessment of Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of management, including the PEO and the PFO, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of October 31, 2023, based on the criteria established in a report entitled “2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929. Based on this evaluation, the Company’s management has evaluated and concluded that the Company’s internal control over financial reporting was effective as of October 31, 2024.
The Company’s annual report on Form 10-K for the year ended April 30, 2024 does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. The Company’s registered public accounting firm was not required to issue an attestation on its internal controls over financial reporting pursuant to the rules of the SEC. The Company will continue to evaluate the effectiveness of internal controls and procedures on an ongoing basis.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended October 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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.
At October 31, 2024, we had negative working capital of $2,615,585 and for the six months ended October 31, 2024, we had an operating loss of $4,747,671 and net cash used in operating activities amounted to $3,451,087. 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 turned our focus to our funding portal business, and we plan to use our funding portal experience to build a broker-dealer business, initially for Regulation A and Regulation D offerings. We plan to continue to 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 our business plan objectives or be able to achieve or maintain cash-flow-positive operating results. If we 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.
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 October 31, 2024 and April 30, 2024, approximately $25.4 million and $25.3 million, respectively, 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. 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 listing our common stock on the Nasdaq. In the event we are unable to have our shares traded on Nasdaq, our common stock could potentially trade 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 traded 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.
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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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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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 October 31, 2024, none of the Company’s directors or executive officers
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ITEM 6. EXHIBITS.
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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: December 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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EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Martin Kay, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Netcapital Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report; |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: December 16, 2024 | By: | /s/ Martin Kay |
| Martin Kay | ||
| Principal Executive Officer Netcapital Inc. |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Coreen Kraysler, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Netcapital Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report; |
| 4. | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: December 16, 2024 | By: | /s/ Coreen Kraysler |
| Coreen Kraysler | ||
| Principal Financial and Accounting Officer Netcapital Inc. |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Netcapital Inc. (the “Company”), on Form 10-Q for the quarter ended October 31, 2024, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Martin Kay, Principal Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | Such Quarterly Report on Form 10-Q for the quarter ended October 31, 2024, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (2) | The information contained in such Quarterly Report on Form 10-Q for the quarter ended October 31, 2024, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: December 16, 2024 | By: | /s/ Martin Kay |
| Martin Kay | ||
| Principal Executive Officer Netcapital Inc. |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report of Netcapital Inc. (the “Company”), on Form 10-Q for the quarter ended October 31, 2024, as filed with the U.S. Securities and Exchange Commission on the date hereof, I, Coreen Kraysler, Principal Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
| (3) | Such Quarterly Report on Form 10-Q for the quarter ended October 31, 2024, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| (4) | The information contained in such Quarterly Report on Form 10-Q for the quarter ended October 31, 2024, fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: December 16, 2024 | By: | /s/ Coreen Kraysler |
| Coreen Kraysler | ||
| Principal Financial and Accounting Officer Netcapital Inc. |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.