Netcapital Inc. 10-Q

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 boutique advisory firm, based in Boston, Massachusetts. Our team of experts, including entrepreneurs, angel investors, industry specialists and digital marketing professionals work with companies at all stages to provide assistance with capital raising, strategy, technology consulting, digital marketing, economic development and logistics technology. 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 $50 million online from anyone. Reg CF, the smallest of the crowdfunding exemptions, allows issuers to raise up to $1.07 million from non-accredited investors every 12 months. In March 2020, the Securities and Exchange Commission (the "SEC") proposed meaningful changes to multiple securities exemptions in an effort to provide critical capital needed for emerging companies, from early-stage start-ups seeking seed capital, to companies that are pursuing a course to become a public reporting company. The new proposal intends to create a more rational framework to enhance an entrepreneur's access to capital while preserving important investor protections. 16 The new regulations, which we anticipate will be implemented before the end of the year, are designed to: · address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital; · increase the offering limits for Regulation A, Regulation CF, and Rule 504 offerings, and revise certain individual investment limits based on the SEC’s experience with the rules, marketplace practices, capital raising trends, and comments received; · provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and · harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections. The SEC proposed revisions to the offering and investment limits, which we believe will have a positive impact on our business. For Reg CF, the new rules include: · raising the offering limit in Reg CF from $1.07 million to $5 million; · amending the investment limits for investors in Reg CF offerings by: o not applying any investment limits to accredited investors; and o revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest. Reg CF will also benefit from “Testing the Waters” a rule currently utilized under Reg A+, that enables issuers to measure investor demand before spending tens of thousands of dollars on an actual offering. Special Purpose Vehicles (or SPVs) may now be included in Reg CF offers and this inclusion is designed to improve the viability of the exemption while providing greater investor protection. We believe these actions by the SEC will enhance the value of funding portals and strengthen the online capital raising process in private equity. Consequently, we have negotiated a transaction that will consolidate the operations of a Reg CF funding portal, Netcapital.com (“Netcapital”), with our financial results. Netcapital operates a Title III JOBS Act funding portal, and as of today is one of only a few dozen FINRA approved Reg CF portals. Although we have a written agreement that we filed as an exhibit to a Current Report on Form 8-K on August 26, 2020, the agreement is subject to certain events and it is possible that the transaction will not be finalized. Increasing our ownership in online businesses with private equity platforms is a significant component of our business strategy. For the past three years we have provided consulting services to Netcapital. In addition to the services we provided to Netcapital, we provide consulting services to some of our clients that utilize the Netcapital website to raise money from non-accredited and accredited investors. We believe we have been successful in providing advice and digital marketing services to our clients, who are allowed to advertise their fundraising, in conjunction with advertising provisions contained in the JOBS Act. During the past three years, many high-tech firms have become our clients, including Kingscrowd LLC, Deuce Drone LLC and ChipBrain LLC. These companies have contributed to our growth and we own minority positions in them. Our limited operating history and the uncertain nature of our future operations and the markets we address or intend to address make prediction of our future results of operations difficult. Results of Operations For the Three Months Ended July 31, 2020 Compared to the Three Months Ended July 31, 2019 Our revenues for the three-months ended July 31, 2020 increased by $1,643,590, or 1,384%, to $1,762,322 as compared to $118,732 reported for the three months ended July 31, 2019. The increase in revenues is attributable to new consulting services. Part of our strategy this year is to provide cash resources to accelerate the growth of companies that we take an equity position in so that the investments we make are able to quickly bring their product to market. For example, the consulting and cash resources that we provided to Watch Party LLC in the quarter ended July 31, 2020, allowed them to complete their iPhone app, which can now be downloaded from the App Store. 17 Costs of revenues increased by $428,653 to $431,019 for the three-months ended July 31, 2020 from $2,366 reported in the three-months ended July 31, 2019. The increase is primarily attributable to our increased revenues and the change in our strategy of how we accelerate the product development for the companies we invest in. Consulting fees decreased by $37,209, or 95%, to $1,991 for the three months ended July 31, 2020, as compared to $39,200 reported for the three months ended July 31, 2019. The decrease is attributable to our efforts to hire people as employees, not consultants, and consequently, wages and payroll related expenses in the three months ended July 31, 2020 amounted to $1,096,120 as compared to $0 in the three months ended July 31, 2019. Marketing expense increased by $562, or 16%, to $4,101 for the three months ended July 31, 2020, as compared to $3,539 reported for the three months ended July 31, 2019. The increase in expense is due to additional marketing outlets that we utilized in the three months ended July 31, 2020. Rent expense increased by $1,550, or 12%, to $14,079 for the three months ended July 31, 2020, as compared to $12,529 reported for the three months ended July 31, 2019. The increase in expense is a result of fewer discounts available to us in the three-month period ended July 31, 2020. General and administrative expenses increased by $37,759, or 1,117%, to $41,139 for the three months ended July 31, 2020, from $3,380 for the three months ended July 31, 2019. The increase is primarily attributed to $30,000 in legal fees for work to help us secure two loans from the U.S. Small Business Administration. Stock-based compensation increased by $92,868, to 121,378 for the three-months ended July 31, 2020 from $28,510 reported in the three-months ended July 31, 2019. 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 $5,550 to $10,283 for the three-months ended July 31, 2020, as compared to $4,733 for the three months ended July 31, 2019. The decrease in interest expense is attributable to reduced debt amounts. Liquidity and Capital Resources At July 31, 2020, we had cash and cash equivalents of $874,016 and negative working capital of $1,219,028 as compared to cash and cash equivalents of $11,206 and negative working capital of $877,581 at April 30, 2020. Net cash used in operating activities amounted to $1,522,990 and $17,620 in the three-months ended July 31, 2020 and 2019, respectively. 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. The principal source of cash from operating activities in the three-months ended July 31, 2019 was net income of $24,475 and a non-cash item, stock-based compensation of $28,510. However, changes in non-cash working capital balances used cash totaling $70,605 There was no investing activity in the three-months ended July 31, 2020 and 2019. For the three months ended July 31, 2020, net cash provided by financing activities amounted to $2,385,800, which consisted of two loans from the U.S. Small Business Administration. For the three months ended July 31, 2019, net cash used in financing activities amounted to $1,300, which consisted of a payment to a related-party lender. In the three-months ended July 31, 2020 and 2019, there were no expenditures for capital assets. We do not anticipate any capital expenditures in fiscal 2021. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of our company as a going concern. However, we have very limited liquidity. Management anticipates that we will be dependent, for the near future, on additional capital to fund our operating expenses and anticipated growth, which we intend to achieve through consulting services and the further development of a private equity platform for raising capital and trading securities. In the quarter ended July 31, 2020, we borrowed $2,385,800 to accelerate our growth and the growth of early-stage companies that we invested in. However, we now have to plan for new future payments to service our debt. Furthermore, the most recent report of our independent registered public accounting firm expresses doubt about our ability to continue as a going concern. 18 We owe a related party $1,000,000 under a secured term loan that matures on October 31, 2020. We believe we can renegotiate the payment terms of the loan. Any demand for payment from a related party will have an adverse impact on our ability to achieve our longer-term business objectives and will adversely affect our ability to continue operating as a going concern. While we continually look for other financing sources, in the current economic environment, the procurement of outside funding is extremely difficult and there can be no assurance that such financing will be available, or, if available, that such financing will be at a price that will be acceptable to us. Failure to generate sufficient revenues or raise additional capital will have an adverse impact on our ability to achieve our longer-term business objectives and will adversely affect our ability to continue operating as a going concern. 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.