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) |
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[ ]
As of September 14,
2021 the Company had shares of its common stock, par value $0.001 per share, issued and outstanding.
TABLE OF CONTENTS
| Page | |
| PART I—FINANCIAL INFORMATION | |
| Item 1. Financial Statements. | 3 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 17 |
| Item 3. Quantitative and Qualitative disclosures about Market Risk. | 19 |
| Item 4. Controls and Procedures. | 19 |
| PART II—OTHER INFORMATION | |
| Item 1. Legal Proceedings. | 21 |
| Item1A. Risk Factors. | 21 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 21 |
| Item 3. Defaults Upon Senior Securities. | 21 |
| Item 4. Mine Safety Disclosures. | 21 |
| Item 5. Other Information. | 21 |
| Item 6. Exhibits. | 21 |
| Signatures. | 22 |
NETCAPITAL INC.
Condensed Consolidated Balance Sheets
| Assets: | July 31, 2021 (Unaudited) | April 30, 2021 (Audited) | ||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable net | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Deposits | ||||||||
| Notes receivable - related parties | ||||||||
| Purchased technology | ||||||||
| Investment in affiliate | ||||||||
| Equity securities at fair value | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Trade | $ | $ | ||||||
| Related party | ||||||||
| Accrued expenses | ||||||||
| Stock subscription payable | ||||||||
| Deferred revenue | ||||||||
| Interest payable | ||||||||
| Deferred tax liability, net | ||||||||
| Related party debt | ||||||||
| Secured note 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 | ||||||||
| 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
| 3 |
| NETCAPITAL INC. |
| Condensed Consolidated Statements of Operations |
| (Unaudited) |
| Three Months Ended | Three Months Ended | |||||||
| July 31, 2021 | July 31, 2020 | |||||||
| Revenues | $ | $ | ||||||
| Costs of services | ||||||||
| Gross profit | ||||||||
| Costs and expenses: | ||||||||
| Stock-based compensation | ||||||||
| 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 | ( | ) | ( | ) | ||||
| Unrealized gain on equity securities | ||||||||
| Total other income (expense) | ( | ) | ||||||
| Net income before taxes | ||||||||
| Income taxes | ( | ) | ( | ) | ||||
| Net income | $ | $ | ||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
| Weighted average number of common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See Accompanying Notes to the Condensed Consolidated Financial Statements
| 4 |
| NETCAPITAL INC. |
| Condensed Consolidated Statements of Stockholders' Equity |
| For the Three Months Ended July 31, 2021 and the Years Ended April 30, 2021, and 2020 |
| (Unaudited) |
| Capital in | Retained | |||||||||||||||||
| Common Stock | Excess of | Earnings | Total | |||||||||||||||
| Shares | Amount | Par Value | (Deficit) | Equity | ||||||||||||||
| Balance, April 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||
| Q1 stock-based compensation | ||||||||||||||||||
| Net income, July 31, 2019 | — | |||||||||||||||||
| Balance, July 31, 2019 | ( | ) | ( | ) | ||||||||||||||
| Q2 stock-based compensation | ||||||||||||||||||
| Net income, October 31, 2019 | — | |||||||||||||||||
| Balance, October 31, 2019 | ( | ) | ||||||||||||||||
| Q3 stock-based compensation | ||||||||||||||||||
| Net income, January 31, 2020 | — | |||||||||||||||||
| Balance, January 31, 2020 | ( | ) | ||||||||||||||||
| Q4 stock-based compensation | ||||||||||||||||||
| Net loss, April 30, 2020 | — | ( | ) | ( | ) | |||||||||||||
| Balance, April 30, 2020 | ( | ) | ||||||||||||||||
| Q1 stock-based compensation | ||||||||||||||||||
| Net income, July 31, 2020 | — | |||||||||||||||||
| Balance, July 31, 2020 | ( | ) | ||||||||||||||||
| Q2 stock-based compensation | ||||||||||||||||||
| Net income, October 31, 2020 | — | |||||||||||||||||
| Balance, October 31, 2020 | ( | ) | ||||||||||||||||
| Shares issued to acquire funding portal | ||||||||||||||||||
| Return of shares of common stock | ( | ) | ( | |||||||||||||||
| Q3 stock-based compensation | ||||||||||||||||||
| Net income, January 31, 2021 | — | |||||||||||||||||
| Balance, January 31, 2021 | ( | ) | ||||||||||||||||
| Q4 stock-based compensation | ||||||||||||||||||
| Shares issued for debt settlement | ||||||||||||||||||
| Net income, April 30, 2021 | — | |||||||||||||||||
| Balance, April 30, 2021 | ( | ) | ||||||||||||||||
| Q1 stock-based compensation | ||||||||||||||||||
| Sale of common stock | ||||||||||||||||||
| Shares issued to acquire funding portal | ||||||||||||||||||
| Net income, July 31, 2021 | — | |||||||||||||||||
| Balance, July 31, 2021 | $ | $ | $ | $ | ||||||||||||||
See Accompanying Notes to the Condensed Consolidated Financial Statements
| 5 |
| NETCAPITAL INC. |
| Condensed Consolidated Statements of Cash Flows |
(Unaudited)
Three Months Ended July 31, 2021 | Three Months Ended July 31, 2020 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Adjustment to reconcile net income to net cash used in operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Non-cash revenue from the receipt of equity | ( | ) | ( | ) | ||||
| Unrealized gain on equity securities | ( | ) | ||||||
| Changes in deferred taxes | ||||||||
| Changes in non-cash working capital balances: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Accrued interest payable | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Loans to affiliates | ( | ) | ||||||
| Investment in affiliate | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from SBA loans | ||||||||
| Proceeds from stock subscriptions | ||||||||
| 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 reduce related party payable | $ | $ | ||||||
See Accompanying Notes to the Condensed Consolidated Financial Statements
| 6 |
NETCAPITAL INC.
Notes To Condensed Consolidated Financial Statements (Unaudited)
Note 1– Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended July 31, 2021, are not necessarily indicative of the results that may be expected for the fiscal year ended April 30, 2022. For further information, refer to the audited financial statements and footnotes thereto in our Annual Report on Form 10-K for the year ended April 30, 2021.
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses. The new guidance provides better representation about expected credit losses on financial instruments. This update requires the use of a methodology that reflects expected losses and requires consideration of a broader range of reasonable and supportive information to inform credit loss estimates. This ASU is effective for reporting periods beginning after December 15, 2022, with early adoption permitted. The company is studying the impact of adopting the ASU in fiscal year 2023, and what effect it could have. The Company believes the accounting change would not have a material effect on the financial statements.
In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance had no impact on our consolidated financial statements.
Management does not believe that any other 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.
Note 2 – Concentrations
For the three-month
period ended July 31, 2021, 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 and its 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 success fee of 4.9% of the money raised on the funding portal. The transaction price is determined based on the amount the Company expects to be entitled to receive in exchange for transferring the promised services to the customer. The transaction price in the contract is allocated to each distinct performance obligation in an amount that represents the relative amount of consideration expected to be received in exchange for satisfying each performance obligation. Revenue is recognized when performance obligations are satisfied. The Company usually bills its customers before it provides any services and begins performing services after the first payment is received. Contracts are typically one year or less. For larger contracts, in addition to the initial payment, the Company may allow for progress payments throughout the term of the contract.
| 7 |
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 asset (Accounts Receivable).
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 is 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.
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.
| 8 |
Remaining Performance Obligations
The Company's subscription
terms are typically less than one year. All of the Company’s revenues in the three-month periods ended July 31, 2021 and 2020,
which amounted to $
Income per common share data was computed as follows:
| Three Months Ended July 31, 2021 | Three Months Ended July 31, 2020 | |||||||
| Net income attributable to common stockholders – basic | $ | $ | ||||||
| Adjustments to net income | ||||||||
| Net income attributable to common stockholders – diluted | $ | $ | ||||||
| Weighted average common shares outstanding – basic | ||||||||
| Effect of dilutive securities | ||||||||
| Weighted average common shares outstanding – diluted | ||||||||
| Earnings per common share – basic | $ | $ | ||||||
| Earnings per common share – diluted | $ | $ | ||||||
35,557 shares that are issuable to satisfy a supplemental consideration liability were included for the calculation of earnings per share for the three months ended July 31, 2021 because their effect is dilutive. No dilutive securities existed for the three months ended July 31, 2020.
| 9 |
Note 5 – Principal Financing Arrangements
The following table summarizes components debt as of July 31, 2021 and April 30, 2021:
July 31, 2021 |
April 30, 2021 | Interest Rate | ||||||||||
| Secured lender | $ | $ | % | |||||||||
| Notes payable – related parties | % | |||||||||||
| U.S. SBA loan | % | |||||||||||
| U.S. SBA loan | % | |||||||||||
| U.S. SBA loan | % | |||||||||||
| Loan payable – bank | % | |||||||||||
| Total Debt | ||||||||||||
| Less: current portion of long-term debt | ||||||||||||
| Total long-term debt | $ | $ | ||||||||||
As of April 30, 2021
and 2020, the Company owed its principal lender (“Lender”) $
The Loan was amended on October 31, 2020 to change the maturity date to January 31, 2021, and increase the interest rate from 1.25% to 8% per annum. The Loan has been further amended to change the maturity date to April 30, 2022.
In connection with the financing, the Company has agreed to certain restrictive covenants, including, among others, that the Company may not convey, sell, lease, transfer or otherwise dispose of any part of its business or property, except as permitted in the agreement, dissolve, liquidate or merge with any other party unless, in the case of a merger, the Company is the surviving entity, incur any indebtedness except as defined in the agreement, create or allow a lien on any of its assets or collateral that has been pledged to the Lender, make any loans to any person, except for prepaid items or deposits incurred in the ordinary course of business, or make any material capital expenditures. To secure the payment of all obligations to the Lender, the Company granted to the Lender a continuing security interest and first lien on all of the assets of the Company.
As of July 31, 2021
and April 30, 2021, the Company’s related-party unsecured notes payable totaled $
On May 6, 2020, the Company borrowed $1,885,800 (the “May Loan”), on June 17, 2020 the Company borrowed $500,000 (the “June Loan”), and on February 2, 2021, the Company borrowed $1,885,800 (the “February Loan”) from an a U.S. Small Business Administration (“SBA”) loan program.
The May loan bears interest at a rate of 1% per annum and the SBA has postponed any installment payments until September 6, 2021. The Company has applied for forgiveness of the May Loan and believes it will be forgiven in its entirety.
The June Loan required installment payments of $2,594 monthly, beginning on June 17, 2021, over a term of thirty years. However, the SBA has postponed the first installment payment for 12 months. Interest accrues at a rate of 3.75% per annum. The Company agreed to grant a continuing security interest in its assets to secure payment and performance of all debts, liabilities, and obligations to the SBA. The June Loan was personally guaranteed by the Company’s Chief Financial Officer.
| 10 |
The February loan bears interest at a rate of 1% per annum and the due date of the first payment is May 22, 2022. The Company plans to apply for forgiveness of the February Loan and believes it will be forgiven in its entirety.
Note 6 – Income Taxes
As of July 31, 2021
and April 30, 2021, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $
For the three months
ended July 31, 2021, the Company recorded income tax expense of $
As of July 31, 2021
and April 30, 2021, the Company had net deferred tax assets calculated at an expected federal rate of 21%, and a state rate of 8%, when
applicable, or approximately $556,000 and $313,000, respectively. As a result of unrealized book gains on equity securities, the Company
also has a deferred tax liability of $
| July 31, 2021 | April 30, 2021 | |||||||
| Deferred tax assets, net: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Bad debt allowance | ||||||||
| Stock-based compensation | ||||||||
| Deferred tax assets | ||||||||
| Deferred tax liability | ||||||||
| Unrealized gain | ||||||||
| Net deferred tax liability | $ | ( | ) | $ | ( | ) | ||
Note 7 – Related Party Transactions
The Company’s majority shareholder, Netcapital Systems LLC, owns 1,671,360 shares of common stock, or 61.5% of the Company as of July 31, 2021. The Company has a demand note payable to Netcapital Systems LLC of $4,600 and a demand note payable to one of its managers of $3,200. In addition, as of April 30, 2021, the Company accrued a payable of $3,817,516 for supplemental consideration owed in conjunction with its purchase of Netcapital Funding Portal Inc., which was reduced to $294,054 as of July 31, 2021, because of the issuance to 361,736 shares of common stock, valued at $3,523,462. In total, the Company owed its largest shareholder $298,714 and $3,822,116 as of July 31, 2021 and April 30, 2021, respectively. The company paid its majority shareholder $50,000 in the first quarter of fiscal 2022 for use of the software that runs the website www.netcapital.com.
Compensation to officers in the three-month periods ended July 31, 2021 and 2020 consisted of common stock valued at $92,931 and $82,622, respectively, and cash payments of $77,538 and $66,462, respectively.
Compensation to a related party consultant in the three-month periods ended July 31, 2021 and 2020 consisted of common stock valued at $19,378 and $19,378 respectively, and cash payments of $25,846 and $22,154, respectively. This consultant is also the controlling shareholder of Zelgor Inc. and $1,050,000 of the Company’s revenues in the quarter ended July 31, 2020 were from Zelgor Inc.
| 11 |
Compensation to managers of Netcapital Systems LLC in the three-month periods ended July 31, 2021 and 2020 consisted of common stock valued at $19,378 and $19,378, respectively, and cash payments of $51,692 and $0, respectively.
The Company owes a director $16,680 as of July 31, 2021 and April 30, 2021, which is recorded as accounts payable, plus $15,000 in a non-interest-bearing note payable.
Note 8 – Stockholders’ Equity
The Company is authorized to issue 900,000,000 shares of its common stock, par value $0.001. 2,718,373 and 2,178,766 shares were outstanding as of July 31, 2021 and April 30, 2021, respectively. In August 2020, the board of directors authorized a reverse split of the common stock on a 1-for-2,000 basis, whereby the Company issued to each of its stockholders one share of Common Stock for every 2,000 shares of common stock held by such stockholder. The reverse split was effective on November 5, 2020. The financial statements for the three months ended July 31, 2020 have been adjusted to give effect to the reverse split.
On July 26, 2021, the Company issued 361,736 shares of its common stock as payment of $3,523,462 of supplemental consideration that was owed to its affiliate, Netcapital Systems LLC. The 361,736 shares of common stock include an aggregate of 35,609 shares of common stock, that paid off liabilities totaling $346,821, that were made to our Chief Executive Officer, a company controlled by a member of the board of managers of Netcapital Systems LLC and to an individual manager.
On July 27, 2021, the Company completed an offering for gross proceeds of $1,592,395 in conjunction with the sale of restricted shares of common stock at a price of $9.00 per share. A total of 176,934 shares of common stock were issued.
Effective July 31, 2021, the Company issued an aggregate of 937 shares of restricted stock to two employees. The shares were valued at $14,056.
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:
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.
| 12 |
Note 10 – Stock-Based Compensation Plans
The Company entered consulting agreements to issue common stock and recorded the applicable non-cash expense in accordance with the authoritative guidance of the Financial Accounting Standards Board. For the three-month periods ended July 31, 2021 and 2020, the Company recorded $ and $, respectively, in stock-based compensation expense.
As of July 31, 2021
and April 30, 2021, there was $
As of July 31, 2021, an aggregate of 8,543 shares of common stock can be earned by the Company’s employees from unvested stock grants. 156 shares vest quarterly over the next three quarters and 781 shares vest quarterly over the next 10.3 quarters.
The table below presents the components of stock-based compensation expense for the three-month periods ended July 31, 2021 and 2020.
| Description | July 31, 2021 | July 31, 2020 | ||||||
| Chief Executive Officer | $ | $ | ||||||
| Chief Financial Officer | ||||||||
| Chief Marketing Officer | ||||||||
| Marketing employee | ||||||||
| Marketing consultant | ||||||||
| Marketing consultant | ||||||||
| Related party consultant | ||||||||
| Business consultant | ||||||||
| Total | $ | $ | ||||||
The table below presents the prepaid compensation expense as of July 31, 2021 and April 30, 2021:
| Description | July 31, 2021 | April 30, 2021 | ||||||
| Chief Executive Officer | $ | $ | ||||||
| Chief Financial Officer | ||||||||
| Related party consultant | ||||||||
| Business consultant | ||||||||
| Marketing consultant | ||||||||
| Marketing consultant | ||||||||
| Total | $ | $ | ||||||
Note 11 – Deposits and Commitments
The Company utilizes office space in Boston, Massachusetts, under a month-to-month lease agreement that allows to company to end its lease by providing 30-day written notice. The lease agreement includes a deposit of $6,300.
| 13 |
Note 12 – Business Acquisition
On August 23, 2020, the Company entered into an Agreement and Plan of Merger (“Agreement”) whereby Netcapital Systems LLC (“Systems”) would become an 80% owner of the Company. Pursuant to the requirements of this agreement, the Company filed a definitive information statement on September 21, 2020 to change the Company’s corporate name from ValueSetters, Inc. to Netcapital Inc. and to amend the Company’s Articles of Incorporation to effect a stock combination, or reverse stock split, pursuant to which 2,000 shares of the Company’s common stock would be exchanged for one new share of common stock. In conjunction with the merger agreement, the Company issued 1,666,360 shares of common stock to Systems on November 5, 2020.
The Agreement is a tax-free merger of Netcapital Funding Portal Inc. (“FP”), a wholly owned subsidiary of Systems, with Netcapital Acquisition Vehicle Inc., an indirect wholly owned subsidiary of the Company, wherein FP was the surviving corporation. This transaction is designed to enhance the Company’s revenues and ability to provide services to democratize the private capital markets while helping companies at all stages to build, grow and fund their businesses with a full range of services from strategic advice to raising capital. As a result of the transaction, the company is expected to be a leading provider of private capital transactions for entrepreneurs seeking to raise money under the exemption provided by section 4(a)(6) of the Securities Act of 1933, which allows private companies to raise up to $5 million every 12 months.
ASC 805-10-25-4 requires the identification of one of the combining entities in each business combination as the acquirer. Upon evaluation of the components of the business combination, including the relative voting rights in the combined entity, the composition of the governing body and senior management of the combined entity, the relative size of each entity and the terms of the exchange of equity interests, the Company recorded the transaction in the third quarter of fiscal 2021 as a purchase. In conjunction with the purchase, Systems agreed to vote all of its shares of common stock to support the resolutions of the existing board of directors of the Company.
The following table summarizes the value of the consideration for FP and the amounts of the assets acquired and liabilities assumed in conjunction with the Agreement.
| Consideration: 1,666,360 shares of common stock of the Company | $ | |||
| Payment of promissory notes and interest | ||||
| Total consideration | $ | |||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | ||||
| Cash | $ | |||
| Current assets | ||||
| Accounts payable | ( | ) | ||
| Platform users | ||||
| Platform investors | ||||
| Platform issuers | ||||
| Unpatented technology | ||||
| Total identifiable net assets | $ |
The
fair value of the common shares issued as the consideration for FP was determined by the most recent (the prior day’s) closing
price of the Company’s common shares at the time the shares were issued. The fair value of the assets and the liabilities of FP
equaled their book value. Four identifiable intangible assets were valued; platform users, platform investors, platform issuers and unpatented
technology (collectively the “Intangible Assets”). The estimated market value of the Intangible Assets is approximately $
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The excess of purchase price over the total identifiable tangible net assets of $344,810, leaves an aggregate value of $14,803,954 to be assigned to the Intangible Assets. The estimated value of the $27,800,000 of Intangible Assets is allocated on a percentage basis in the above table to equal $14,803,954.
None of FP’s revenues and earnings are included in the Company’s consolidated income statements through the day of closing of November 5, 2020. The consolidated income statements for the year ended April 30, 2021 include $834,981 in revenues from FP. If the entities had been combined for the two reporting periods, the supplemental pro forma revenues and earnings are as follows:
| Revenues | Earnings | |||||||||
| Supplemental pro forma for 4/1/20 – 11/04/20 | $ | $ | ||||||||
| Supplemental pro forma for 4/1/19 – 11/04/19 | $ | $ | ||||||||
Included in the supplemental pro forma information above is revenue earned by the Company from Netcapital Systems LLC of $18,646 and $152,864 in the periods ended November 4, 2020 and 2019, respectively.
Note 13 – Investments
In May 2020, the Company entered a consulting contract with Watch Party LLC (“WP”), which allowed the Company to receive up to 110,000 membership interest units of WP in return for consulting services. The Company earned 97,500 membership interest units in the quarter ended July 31, 2020. The WP units are valued at $2.14 per unit based on a sales price of $2.14 per unit on an online funding portal, resulting in revenues of $208,650 for the three-months ended July 31, 2020. As of July 31, 2021 and April 30, 2021, the Company owns 110,000 WP units, which are valued at $235,400.
In May 2020, the Company entered a consulting contract with ChipBrain LLC (“Chip”), which allowed the Company to receive up to 710,200 membership interest units of Chip in return for consulting services. The Company earned 500,000 membership interest units in the quarter ended July 31, 2020 and earned the remaining units in the quarter ending October 31, 2020. The Chip units were initially valued at $0.93 per unit based on a sales price of $0.93 per unit on an online funding portal, resulting in revenues of $465,000 for the three-months ended July 31, 2020. Subsequently, ChipBrain sold identical units for $2.40 per unit, and as of July 31, 2021 and April 30, 2021, the units owned by the Company are valued at $1,704,480.
In May 2020, the
Company entered a consulting contract with Zelgor Inc. (“Zelgor”), which allowed the Company to receive up to 1,400,000 shares
of common stock of Zelgor in return for consulting services. The Company earned 1,050,000 shares in the quarter ended July 31, 2020 and
earned the remaining shares in the quarter ending October 31, 2020. The Zelgor shares are valued at $1.00 per share based on a sales
price of $1.00 per share on an online funding portal, resulting in revenues of $
On January 2, 2020, the Company entered a consulting contract with Deuce Drone LLC (“Drone”), which allowed the Company to receive up to 2,350,000 membership interest units of Drone in return for consulting services. The Company earned all 2,350,000 membership interest units in fiscal 2020. The Drone units were initially valued at $0.35 per unit based on a sales price of $0.35 per unit when the units were earned, or $822,500. Drone subsequently sold identical Drone units for $1.00 per unit on an online funding portal and as of July 31, 2021 and April 30, 2021, the units owned by the Company are valued at $2,350,000.
In August 2019, the
Company entered a consulting contract with KingsCrowd LLC (“KingsCrowd”), which allowed the Company to receive 300,000 membership
interest units of KingsCrowd in return for consulting services. The KingsCrowd units were initially valued at $1.80 per unit based on
a sales price of $1.80 per unit when the units were earned, or $540,000.
In December 2020, KingsCrowd converted from a limited liability company to a corporation to facilitate raising capital under Regulation
A. KingsCrowd filed a Form 1-A Offering Statement under the Securities Act of 1933. In connection with the conversion to a corporation,
each membership interest unit converted into 12.71915 shares of common stock. As of July 31, 2021 and April 30, 2021, the Company owns
3,815,745 shares of KingsCrowd Inc. In July 2021, KingsCrowd subsequently sold identical shares of common stock for $1.00 per share,
and as of July 31, 2021 and April 30, 2021, the units owned by the Company are valued at $
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During fiscal 2019, the Company entered a consulting contract with NetCapital Systems LLC (“NetCapital”), which allowed the Company to receive up to 1,000 membership interest units of NetCapital in return for consulting services. The Company earned 40 units in the quarter ended July 31, 2020, at a value of $91.15 per unit, or $3,646. The Company earned all 1,000 Netcapital units but sold a portion of the units in fiscal 2020 at a sales price of $91.15 per unit. As of July 31, 2021 and April 30, 2021, the Company owns 528 Netcapital units, at a value of $48,128.
In July 2020 the Company entered a consulting agreement with Vymedic, Inc. for a $40,000 fee over a 5-month period. Half the fee is payable in stock and half is payable in cash. As of April 30, 2021, the Company earned $20,000 worth of stock. As of July 31, 2021 and April 30, 2021, the Company owns 4,000 units, at a value of $20,000.
In August 2020 the Company entered a consulting agreement with C-Reveal Therapeutics LLC (“CRT”). for a $120,000 fee over a 12-month period. $50,000 of the fee is payable in CRT units. The Company earned the units in fiscal 2021 and received them in the first quarter of fiscal 2022. As of July 31, 2021 the Company owns 5,000 units, at a value of $50,000.
The following table summarizes the components of investments as of July 31, 2021 and April 30, 2021:
| July 31, 2021 | April 30, 2021 | |||||||
| Netcapital Systems LLC | $ | $ | ||||||
| Watch Party LLC | ||||||||
| Zelgor Inc. | ||||||||
| ChipBrain LLC | ||||||||
| Vymedic Inc. | ||||||||
| C-Reveal | ||||||||
| Deuce Drone LLC | ||||||||
| Kingscrowd Inc. | ||||||||
| Total Investments at cost | $ | $ | ||||||
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. During the three months ended July 31, 2021, the Company identified that one security, Kingscrowd Inc., had an observable price change. The result of the price change was an increase in the fair value of the equity securities totaling $3,275,745 in the three months ended July 31, 2021, which was recorded in the income statement as an unrealized gain on equity securities.
Note 14 – 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.
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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 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.
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
We are a fintech company with a scalable technology platform that allows private companies to raise capital online and provides private equity investment opportunities to investors. The company's consulting group, Netcapital Advisors, delivers marketing and strategic advice and takes equity positions in select companies with disruptive technologies. The Netcapital funding portal is registered with the U.S. Securities & Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA), a registered national securities association.
We specialize in Regulation Crowdfunding (“Reg CF”), under the provisions of Title III of the JOBS Act of 2012. We believe that new capital raising techniques, such as Reg CF, democratize capital raising, similar to the way that social networks democratize broadcast mechanisms that once belonged only to traditional media. Reg CF is one of three securities exemptions that enable online capital formation. Reg D 506(c) allows an unlimited amount of money to be raised from accredited investors. Reg A+ enables an issuer to raise up to $75 million online from anyone. Reg CF, the smallest of the crowdfunding exemptions, allows issuers to raise up to $5 million from non-accredited investors every 12 months.
The $5 million limit was increased on March 15, 2021 by the Securities and Exchange Commission (the "SEC") from the previous level of $1.07 million. We believe this change has already impacted the number of issuers and users on our website and consequently increased our sales. Our website posted a record number of users and dollars invested in June and July of 2021. We also see from industry statistics that investment commitments of Reg CF funding portals increased by $71 million, or 154%, to $117 million for the quarter ended June 30, 2021, as compared to investment commitments of $46 million for the quarter ended June 30, 2020.
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We are encouraged by our growth over the past year, as the market share earned by the Netcapital funding portal in the three months ended July 31, 2021 was 7.4% of the industry investment commitments, as compared to 4.0% of the industry investment commitments in the three months ended July 31, 2020. For the month of July 2021, Netcapital funding portal’s market share amounted to 8.2% of the industry investment commitments. We believe our increase in revenues and our gain in market share over the past year is a trend we can continue. However, our limited operating history and the uncertain nature of our future operations and the markets we address or intend to address make predictions of our future results of operations difficult.
Results of Operations
For the Three Months Ended July 31, 2021 Compared to the Three Months Ended July 31, 2020
Our revenues for the three-months ended July 31, 2021 decreased by $1,137,135, or 65%, to $625,187, as compared to $1,762,322 reported for the three months ended July 31, 2020. The decrease in revenues is attributable to a decrease in non-cash revenue from the receipt of equity, which amounted to $50,000 in the quarter ended July 31, 2021, as compared to $1,754,046 in the quarter ended July 31, 2020. This decrease was offset by revenues from our funding portal and by an unrealized gain in the equity we received in prior quarters of $3,275,745, as a result of observable price increases in our equity holdings. We recorded other income consisting of unrealized gains of $3,275,745 in the three months ended July 31, 2021 as compared to $0 in the three months ended July 31, 2020.
Costs of revenues decreased by $402,714 to $28,305 for the three-months ended July 31, 2021 from $431,019 reported in the three-months ended July 31, 2020. The decrease is attributable to our decrease in non-cash revenues from the receipt of equity.
Payroll and payroll related expenses decreased by $168,787, or 15%, to $927,333 for the three months ended July 31, 2021, as compared to $1,096,120 reported for the three months ended July 31, 2020. The decrease is attributable to a reduction in staff.
Marketing expense increased by $17,725, or 432%, to $21,826 for the three months ended July 31, 2021, as compared to $4,101 reported for the three months ended July 31, 2020. The increase in expense is due to additional marketing outlets that we utilized in the three months ended July 31, 2021.
Rent expense decreased by $1,949, or 14%, to $12,130 for the three months ended July 31, 2021, as compared to $14,079 reported for the three months ended July 31, 2020. The decrease in expense is a result of discounts available to us in the three-month period ended July 31, 2021 and our ability to have personnel work from home.
General and administrative expenses increased by $353,913, or 860%, to $395,052 for the three months ended July 31, 2021, from $41,139 for the three months ended July 31, 2020. The increase is primarily attributed to additional expenses we incurred in the current fiscal year for our newly acquired funding portal business.
Stock-based compensation increased by $175,602, to $296,980, or 145%, for the three-months ended July 31, 2021 from $121,378 reported in the three-months ended July 31, 2020. The increase in expense is primarily due to the higher price per share of our common stock when shares were issued.
Interest expense increased by $24,962 to $35,245 for the three-months ended July 31, 2021, as compared to $10,283 for the three months ended July 31, 2020. The increase in interest expense is attributable to higher debt amounts and a higher interest rate on our secured debt.
Liquidity and Capital Resources
At July 31, 2021, we had cash and cash equivalents of $2,059,216 and negative working capital of $1,511,576 as compared to cash and cash equivalents of $2,473,956 and negative working capital of $4,666,833 at April 30, 2021.
We have been successful in raising capital by selling restricted common stock in private placements and by borrowing funds from the U.S. Small Business Administration. The negative working capital balance as of April 30, 2021 has been significantly reduced by converting approximately $5 million in current liabilities into shares of common stock at a price range of $9.00 to $9.74 per share.
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We believe that our existing cash investment balances, and our anticipated cash flows from operations will be sufficient to meet our working capital and expenditure requirements for the next 12 months. Although we believe we have adequate sources of liquidity over the next 12 months, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity. Up to this point in time, we believe the pandemic has helped drive people to online investing, as we see regular monthly increases in users and dollars invested, and an increase in issuers seeking to use online fund-raising services in lieu of face-to-face meetings.
Net cash used in operating activities amounted to $887,641 and $1,522,990 in the three months ended July 31, 2021 and 2020, respectively. The principal source of cash from operating activities in the three months ended July 31, 2021 was net income of $1,457,410 and a non-cash item, stock-based compensation of $296,980. However, these sources of cash were offset by an unrealized gain on equity securities of $3,275,745. The principal source of cash from operating activities in the three months ended July 31, 2020 was net income of $30,781 and a non-cash item, stock-based compensation of $121,738. However, these items were offset by changes in non-cash revenue from the receipt of equity of $1,754,046.
Net cash used in investing activities amounted to $104,501 in the three months ended July 31, 2021. The use of cash consisted of loans to affiliates of $100,000 and an investment in an affiliate of $4,501. There was no investing activity in the three-months ended July 31, 2020.
For the three months ended July 31, 2021, cash provided financing activities amounted to $577,399, which consisted of proceeds from stock subscriptions for the sale of common stock. For the three months ended July 31, 2020, cash provided by financing activities amounted to $2,385,800, which consisted of two loans from the U.S. Small Business Administration.
In the three months ended July 31, 2021 and 2020, there were no expenditures for capital assets. We do not anticipate any capital expenditures in fiscal 2022.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide information under this item.
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 July 31, 2021. Based on that evaluation, the PEO and the PFO concluded that, as of July 31, 2021, 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.
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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 July 31, 2021, 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 July 31, 2021.
The Company’s annual report on Form 10-K for the year ended April 30, 2021 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 July 31, 2021 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.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three-month period ended July 31, 2021, we issued 937 shares of unregistered common stock as stock-based compensation, for services rendered to the Company. We sold 176,934 shares of unregistered common stock to accredited investors at a sale price of $9.00 per share. We also issued 361,736 shares of unregistered common stock in conjunction with our purchase of Netcapital Funding Portal Inc.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
31 Rule 13a-14(a) Certification
32 Rule 13a-14(b) Certification
| 101.INS | XBRL Instance |
| 101.SCH | XBRL Schema |
101.CAL XBRL Calculation
| 101.DEF | XBRL Definition |
| 101.LAB | XBRL Label |
| 101.PRE | XBRL Presentation |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Date: September 14, 2021 | NETCAPITAL INC. |
| By: /s/ Cecilia Lenk | |
| Cecilia Lenk | |
| Chairman of the Board and Chief Executive Officer | |
| By: /s/ Coreen Kraysler | |
| Coreen Kraysler | |
| Principal Financial Officer |
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