Netcapital (NCPL) - 2024 Q3 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements and Industry Data This section provides important disclaimers regarding forward-looking statements and the use of industry data in the report PART I—FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, revenue recognition, debt, equity, and investment valuations for Netcapital Inc. for the periods ended January 31, 2024, and April 30, 2023 Condensed Consolidated Balance Sheets This statement presents the company's financial position, including assets, liabilities, and equity, at specific points in time Condensed Consolidated Balance Sheets | Metric | January 31, 2024 (Unaudited) | April 30, 2023 (Audited) | | :-------------------------- | :--------------------------- | :----------------------- | | Cash and cash equivalents | $2,172,099 | $569,441 | | Accounts receivable net | $3,701,501 | $1,388,500 | | Total current assets | $6,052,065 | $2,540,971 | | Total assets | $44,135,447 | $41,820,093 | | Total current liabilities | $3,332,646 | $5,163,641 | | Total liabilities | $3,832,646 | $5,663,641 | | Total stockholders' equity | $40,302,801 | $36,156,452 | Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income or loss over specific reporting periods Condensed Consolidated Statements of Operations | Metric | Three Months Ended Jan 31, 2024 | Three Months Ended Jan 31, 2023 | Nine Months Ended Jan 31, 2024 | Nine Months Ended Jan 31, 2023 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenues | $1,042,793 | $2,260,414 | $4,604,260 | $5,379,960 | | Gross profit | $983,918 | $2,256,109 | $4,507,198 | $5,318,357 | | Total costs and expenses | $2,189,075 | $1,685,532 | $6,409,155 | $4,405,945 | | Operating income (loss) | $(1,205,157) | $570,577 | $(1,901,957) | $912,412 | | Net income (loss) | $(2,227,542) | $1,696,499 | $(2,379,581) | $1,944,114 | | Basic earnings (loss) per share | $(0.19) | $0.33 | $(0.25) | $0.46 | | Diluted earnings (loss) per share | $(0.19) | $0.33 | $(0.25) | $0.46 | Condensed Consolidated Statements of Changes in Stockholders' Equity This statement outlines the changes in the company's equity accounts, including common stock and retained earnings, over a period Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | Balance, April 30, 2023 | Balance, January 31, 2024 | | :-------------------------- | :---------------------- | :------------------------ | | Common Stock Shares | 6,440,527 | 17,231,132 | | Common Stock Amount | $6,441 | $17,231 | | Capital in Excess of Par Value | $30,500,944 | $37,077,147 | | Retained Earnings | $5,465,880 | $3,086,299 | | Total Equity | $36,156,452 | $40,302,801 | Condensed Consolidated Statements of Cash Flows This statement reports the cash generated and used by the company through its operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows | Metric | Nine Months Ended Jan 31, 2024 | Nine Months Ended Jan 31, 2023 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(2,379,581) | $1,944,114 | | Net cash used in operating activities | $(3,565,953) | $(3,414,714) | | Net cash provided by (used in) investing activities | $(20,000) | $200,000 | | Net cash provided by financing activities | $5,188,611 | $4,512,716 | | Net increase in cash | $1,602,658 | $1,298,002 | | Cash and cash equivalents, end of period | $2,172,099 | $1,771,927 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the condensed consolidated financial statements Note 1 – Summary of Significant Accounting Policies The financial statements are prepared in accordance with GAAP for interim financial information and SEC rules for Form 10-Q, using management estimates for areas like revenue recognition, equity securities valuation, and income taxes[22][23] The Company applies the CECL impairment model for financial assets, estimating expected credit losses over the contractual life of instruments, considering future economic conditions, past events, and current conditions[25] Note 2 – Concentrations This note discloses significant concentrations of revenue from key customers - For the three months ended January 31, 2024, one customer accounted for 78% of revenues. For the nine months ended January 31, 2024, three customers each constituted 27%, 24%, and 24% of revenues, respectively[28] Note 3 – Revenue Recognition The Company recognizes service revenue from consulting contracts, its funding portal, and game website using the five-step model of ASC 606, identifying performance obligations, determining transaction price, allocating it, and recognizing revenue upon satisfaction of obligations - The Company recognizes service revenue from consulting contracts, its funding portal, and game website using the five-step model of ASC 606, identifying performance obligations, determining transaction price, allocating it, and recognizing revenue upon satisfaction of obligations[29] - Revenue from subscriptions to the game website is recognized ratably over the contractual term, while professional services revenue is recognized over time as services are rendered[32] Revenues Disaggregated by Source | Revenue Source | Three Months Ended Jan. 31, 2024 | Three Months Ended Jan. 31, 2023 | Nine Months Ended Jan. 31, 2024 | Nine Months Ended Jan. 31, 2023 | | :--------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Consulting services | $862,846 | $2,028,260 | $3,585,213 | $4,784,650 | | Fees from online services | $179,947 | $232,154 | $1,019,047 | $595,310 | | Total revenues | $1,042,793 | $2,260,414 | $4,604,260 | $5,379,960 | Note 4 – Earnings Per Common Share This note details the calculation of basic and diluted earnings per common share Earnings (Loss) Per Common Share | Metric | Three Months Ended Jan 31, 2024 | Three Months Ended Jan 31, 2023 | Nine Months Ended Jan 31, 2024 | Nine Months Ended Jan 31, 2023 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) attributable to common stockholders – basic | $(2,227,542) | $1,696,499 | $(2,379,581) | $1,944,114 | | Weighted average common shares outstanding - basic | 11,466,523 | 5,166,299 | 9,457,740 | 4,208,216 | | Earnings (loss) per common share - basic | $(0.19) | $0.33 | $(0.25) | $0.46 | | Earnings (loss) per common share - diluted | $(0.19) | $0.33 | $(0.25) | $0.46 | - Outstanding vested warrants (11,110,932 shares for 3 months ended Jan 31, 2024) and options (635,146 shares for 3 months ended Jan 31, 2024) were not included in EPS calculations as their effect was anti-dilutive[42][43] Note 5 – Principal Financing Arrangements This note describes the company's debt obligations and financing agreements Debt Summary | Debt Type | January 31, 2024 | April 30, 2023 | Interest Rate | | :------------------------ | :--------------- | :------------- | :------------ | | Secured lender | $0 | $350,000 | 12.0% | | Notes payable – related parties | $15,000 | $15,000 | 0.0% | | U.S. SBA loan | $500,000 | $500,000 | 3.75% | | U.S. SBA loan | $1,885,800 | $1,885,800 | 1.0% | | Loan payable – bank | $34,324 | $34,324 | 10.9% | | Total Debt | $2,435,124 | $2,785,124 | | | Less: current portion of long-term debt | $1,935,124 | $2,285,124 | | | Total long-term debt | $500,000 | $500,000 | | - The Company fully paid off its secured lender debt of $350,000 in May 2023[45] - The $500,000 SBA loan's monthly payments are first applied to accrued interest, with principal payments not starting until 2026, classifying the entire balance as a long-term liability[48] - The $1,885,800 SBA loan's first payment due date has been postponed as the Company applied for forgiveness[49] Note 6 – Income Taxes This note provides information on the company's income tax expense or benefit and related components Income Tax Expense (Benefit) | Period | Income Tax Expense (Benefit) | | :----------------------------- | :--------------------------- | | Three Months Ended Jan 31, 2024 | $(1,713,999) | | Nine Months Ended Jan 31, 2024 | $(2,339,288) | | Three Months Ended Jan 31, 2023 | $697,000 | | Nine Months Ended Jan 31, 2023 | $499,000 | - The income tax benefit for the nine months ended January 31, 2024, includes an Employee Retention Credit (ERC) of $508,292[51] Note 7 – Related Party Transactions This note discloses transactions and balances with related parties - The Company paid Netcapital Systems LLC $95,000 and $100,000 for website software use in the three- and nine-month periods ended January 31, 2024, respectively[52] - Compensation to officers for the nine months ended January 31, 2024, included $281,689 in stock-based compensation and $751,488 in cash salary, significantly higher than the prior year[55][56] - The Company holds investments in several related parties, including KingsCrowd Inc. (valued at $513,550), Deuce Drone LLC (valued at $2,350,000, with $152,000 in notes receivable), Zelgor Inc. (valued at $1,400,000), and 6A Aviation Alaska Consortium, Inc. (investment of $240,080)[53][54][58][59] Note 8 – Stockholders' Equity This note details changes in stockholders' equity, including common stock issuances and warrant activities - As of January 31, 2024, 17,231,132 shares of common stock were outstanding, compared to 6,440,527 shares as of April 30, 2023[65] - The Company completed a public offering on December 27, 2023, issuing 4,800,000 common shares, 11,200,000 prefunded warrants, and 32,000,000 common warrants (Series A-1 and A-2) for gross proceeds of $4 million[79] - In January 2024, the Company issued 2,972,000 shares of common stock from the exercise of prefunded warrants[82] Note 9 – Fair Value This note explains the company's fair value measurements and hierarchy for financial instruments - The Company uses a fair value hierarchy (Level 1, 2, 3) to measure fair value, prioritizing observable inputs and minimizing unobservable inputs[83][85][86] Note 10 – Stock-Based Compensation Plans This note outlines the company's stock-based compensation arrangements and related expenses Stock-Based Compensation Expense | Category | Three Months Ended Jan 31, 2024 | Three Months Ended Jan 31, 2023 | Nine Months Ended Jan 31, 2024 | Nine Months Ended Jan 31, 2023 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Chief Executive Officer | $62,493 | $20,023 | $187,479 | $22,440 | | Chief Financial Officer | $14,914 | $6,179 | $44,742 | $11,012 | | Founder | $14,914 | — | $44,742 | — | | Business consultant | $141,151 | — | $423,453 | — | | Total stock-based compensation expense | $280,522 | $63,057 | $1,044,395 | $128,963 | - Total stock-based compensation expense significantly increased to $1,044,395 for the nine months ended January 31, 2024, from $128,963 in the prior year[88][89] Note 11 – Deposits and Commitments This note describes the company's significant deposits and contractual commitments - The Company has a virtual office agreement for approximately $6,400 per month, expiring in March 2025, with a $6,300 deposit[90] Note 12 – Intangible Assets This note provides details on the company's intangible assets and their amortization Intangible Assets | Category | January 31, 2024 | April 30, 2023 | | :------------------------ | :--------------- | :------------- | | Acquired users | $14,288,695 | $14,288,695 | | Acquired brand | $583,429 | $583,429 | | Acquired IP and Website | $435,000 | $435,000 | | Professional practice | $556,830 | $556,830 | | Literary works and contracts | $107,750 | $107,750 | | Total intangible assets | $15,971,704 | $15,971,704 | | Less: accumulated amortization | $181,400 | $96,407 | | Net intangible assets | $15,790,304 | $15,875,297 | - Net intangible assets decreased slightly to $15,790,304 as of January 31, 2024, from $15,875,297 as of April 30, 2023, with a weighted average remaining useful life of 13.41 years[92] Note 13 – Investments This note details the company's equity investments and their fair value changes - The Company received equity securities from 6 issuers in the three months ended January 31, 2024, as payment for services rendered on the Netcapital Funding Portal[93] - An unrealized loss of $2,696,135 was recognized for the three and nine months ended January 31, 2024, primarily due to a decrease in the value of KingsCrowd Inc. shares from $1.00 to $0.16 per share[110] Summary of Equity Investments | Investment | January 31, 2024 | April 30, 2023 | | :------------------------ | :--------------- | :------------- | | Netcapital Systems LLC | $48,128 | $48,128 | | MustWatch LLC | $440,000 | $440,000 | | Zelgor Inc. | $1,400,000 | $1,400,000 | | ChipBrain LLC | $3,366,348 | $3,366,348 | | Deuce Drone LLC | $2,350,000 | $2,350,000 | | Caesar Media Group Inc. | $1,999,127 | $1,632,752 | | Kingscrowd Inc. | $513,550 | $3,209,685 | | RealWorld LLC | $1,170,000 | — | | Total Investments | $21,844,698 | $22,955,445 | Note 14 – Going Concern Matters and Realization of Assets This note addresses the company's ability to continue as a going concern and the realization of its assets - As of January 31, 2024, the Company had working capital of $2,719,419, an operating loss of $1,901,957, and net cash used in operating activities of $3,565,953 for the nine months ended January 31, 2024[116] - Management has concluded that these conditions raise substantial doubt about the Company's ability to continue as a going concern within one year, despite efforts to reduce operating expenses and focus on the funding portal business[117] - The Company plans to seek additional financing through private placements, public offerings, and/or bank financing, but there is no assurance such funding will be available on acceptable terms[117] Note 15 – Subsequent Events This note discloses significant events that occurred after the balance sheet date - Subsequent to January 31, 2024, the Company issued 1,390,000 shares of common stock on February 20, 2024, and another 1,390,000 shares on March 8, 2024, upon the exercise of Prefunded Warrants[120] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Netcapital Inc.'s financial condition and operational results, highlighting its fintech business model, recent developments including Nasdaq compliance and public offerings, and a detailed comparison of financial performance for the three and nine months ended January 31, 2024 and 2023, alongside an assessment of liquidity and capital resources Overview This section provides a general description of the company's business model and operational highlights - Netcapital Inc. is a fintech company operating a scalable technology platform that enables private companies to raise capital online from accredited and non-accredited investors, primarily through Title III, Reg CF, and Regulation A offerings[126] - The Company generates fees from listing private companies on its SEC-registered funding portal (www.netcapital.com) and from advising companies on Reg A offerings. Its subsidiary, Netcapital Advisors, Inc., provides marketing and strategic advice, often in exchange for equity positions or cash fees[126][127] - For the nine months ended January 31, 2024, the Company generated $4,604,260 in revenues, with a gross profit of $4,507,198, including $3,489,013 in equity securities and $1,115,247 in cash-based revenues[128] - The Netcapital funding portal closed 36 offerings in the nine months ended January 31, 2024, compared to 30 in the prior year, and holds minority equity positions in 25 portfolio companies[128] Recent Developments This section outlines key recent events, including Nasdaq compliance and capital raising activities - Nasdaq granted an extension until August 26, 2024, for the Company to regain compliance with the minimum bid price requirement ($1.00 per share), with a reverse stock split being a potential option[133][134] - On December 27, 2023, the Company completed a public offering, raising $4 million in gross proceeds ($3.37 million net), by issuing common stock, prefunded warrants, and Series A-1 and A-2 warrants[135] Results of Operations This section analyzes the company's financial performance by comparing revenues and expenses across different periods Comparison of the Three Months Ended January 31, 2024 and 2023 This section compares the company's financial results for the three-month periods ended January 31, 2024 and 2023 - Revenues decreased by $1,217,621 (54%) to $1,042,793, primarily due to a $1,087,654 (56%) decrease in equity-based consulting services and a $52,245 (23%) decrease in funding portal revenues[136] - Costs of revenues increased significantly by 1,268% to $58,875, attributed to additional funding portal service costs[137] - General and administrative expenses increased by $524,206 (92%) to $1,092,459, mainly due to stock-based compensation for professional fees and increased legal costs[141] - The Company recognized an unrealized loss of $2,696,135 on equity securities, primarily from a decrease in KingsCrowd, Inc. value, contrasting with an unrealized gain of $1,866,468 in the prior year[143] Comparison of the Nine Months Ended January 31, 2024 and 2023 This section compares the company's financial results for the nine-month periods ended January 31, 2024 and 2023 - Revenues decreased by $775,700 (14%) to $4,604,260, driven by an $885,987 (20%) decrease in equity-based consulting services and a $313,450 (77%) decrease in cash-based consulting revenue[145] - Funding portal revenues increased, with portal fees up 152% ($375,683) and listing fees up 14% ($48,040), due to increased offering activity[145] - Marketing expense surged by $256,606 (400%) to $320,817, aimed at increasing awareness for funding portal operations and attracting new issuers and investors[148] - General and administrative expenses rose by $1,288,013 (104%) to $2,529,378, mainly due to professional fees, including stock-based compensation[150] - An unrealized loss of $2,696,135 on equity securities was recognized, primarily due to the decline in KingsCrowd, Inc. shares, compared to an unrealized gain of $1,857,500 in the prior year[152] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations and fund its operations - As of January 31, 2024, cash and cash equivalents increased to $2,172,099, and working capital improved to $2,719,419, from $569,441 cash and negative working capital of $2,622,670 at April 30, 2023[154] - The Company has successfully raised capital through multiple public offerings, including a December 2023 offering that generated approximately $3.37 million in net proceeds[154][160] - Despite recent capital raises, management believes existing cash and anticipated cash flows may not be sufficient for the next 12 months, leading to expense reductions and continued efforts to raise additional funds, which raises substantial doubt about the Company's ability to continue as a going concern[161] Year over Year Changes This section details the year-over-year changes in the company's cash flows from operating, investing, and financing activities - Net cash used in operating activities was $3,565,953 for the nine months ended January 31, 2024, compared to $3,414,714 in the prior year, primarily influenced by a net loss, receipt of equity in lieu of cash, and changes in deferred taxes[162] - Net cash used in investing activities was $20,000 in 2024 (note receivable), contrasting with $200,000 provided by investing activities in 2023 (sale of KingsCrowd Inc. shares)[163] - Net cash provided by financing activities increased to $5,188,611 in 2024, mainly from common stock sales, offset by debt repayments[164] Item 3. Quantitative and Qualitative disclosures about Market Risk As a 'smaller reporting company,' Netcapital Inc. is exempt from providing the quantitative and qualitative disclosures about market risk typically required by this Item - The Company is a 'smaller reporting company' and is not required to provide quantitative and qualitative disclosures about market risk[166] Item 4. Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company's disclosure controls and procedures and internal control over financial reporting were effective as of January 31, 2024, with no material changes in internal controls during the quarter - The PEO and PFO evaluated and concluded that the Company's disclosure controls and procedures were effective as of January 31, 2024[167] - Management assessed and concluded that the Company's internal control over financial reporting was effective as of January 31, 2024, based on the COSO framework[169] - There have been no material changes in internal controls over financial reporting during the quarter ended January 31, 2024[171] PART II—OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity sales, defaults, and other miscellaneous information Item 1. Legal Proceedings Netcapital Inc. is not currently involved in any litigation that is expected to have a material adverse effect on its financial condition or results of operations - The Company is not currently involved in any litigation that is believed to have a material adverse effect on its financial condition or results of operations[172] Item 1A. Risk Factors This section updates the risk factors from the Annual Report on Form 10-K, emphasizing the substantial doubt about the Company's ability to continue as a going concern, the ongoing challenge of maintaining Nasdaq listing compliance, and the significant risks associated with holding illiquid and volatile equity securities of early-stage companies - The Company's financial situation, including an operating loss and negative cash flow from operations, raises substantial doubt about its ability to continue as a going concern[174] - The Company received an extension until August 26, 2024, to regain compliance with Nasdaq's minimum bid price requirement of $1.00 per share, with potential delisting if compliance is not met[175][176] - A significant portion of the Company's assets are illiquid equity securities of early-stage private companies, subject to volatility and potential material adverse effects on financial condition due to valuation changes, as evidenced by a $2.7 million unrealized loss on KingsCrowd Inc. shares[177] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company reported no unregistered sales of equity securities or use of proceeds for the period - There were no unregistered sales of equity securities or use of proceeds to report[178] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities for the period - There were no defaults upon senior securities to report[179] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable[180] Item 5. Other Information The Company reported no other information for the period - There is no other information to report[181] Item 6. Exhibits This section lists all documents filed as exhibits to the Form 10-Q report - The exhibits include certifications from the Principal Executive Officer and Principal Financial Officer (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act) and various Inline XBRL documents[181] Signatures This section confirms the official signing and certification of the report by authorized company officers - The report is signed by Martin Kay, Chairman of the Board and Chief Executive Officer, and Coreen Kraysler, Chief Financial Officer, on March 18, 2024[183][184]