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 Netcapital Inc. is a digital private markets ecosystem. We help private companies at all stages to build, grow, and fund their businesses with a full range of services from strategic advice to raising capital. 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. We acquired Netcapital Funding Portal Inc (“FP”). Prior to March 15, 2021, the maximum dollar amount that an issuer could raise on FP’s funding portal was $1,070,000. Three issuers that reached the maximum amount plan to return to the funding portal to raise $5 million. If those three issuers are successful at raising $5 million, FP will earn a fee of 4.9% of the amount raised. One of these issuers reached the prior maximum level of $1,070,000 in less than one day. We believe the increase of the maximum offering limit to $5 million will be beneficial to many issuers and to our Company and will increase the potential revenues of FP. 18 Results of Operations For the Nine Months Ended January 31, 2021 Compared to the Nine Months Ended January 31, 2020 Our revenues for the nine months ended January 31, 2021 increased by $2,177,683, or 137%, to $3,770,813 as compared to $1,593,130 reported for the nine months ended January 31, 2020. The increase in revenues is attributable to an increase in consulting services, and specifically to two customers that accounted for an aggregate of 55% of our revenues, or $2,060,486 in the nine months ended January 31, 2021. Costs of revenues increased by $722,133 to $730,343 for the nine-months ended January 31, 2021 from $8,210 reported in the nine-months ended January 31, 2020. 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. Stock-based compensation expense increased by $153,660, or 66%, to $386,121 for the nine months ended January 31, 2021, as compared to $232,461 reported for the nine months ended January 31, 2020. The increase in expense is due to a higher price per share of our stock at the time when stock grants were issued for stock-based compensation earned in fiscal 2021 as compared for fiscal 2020. Consulting expense decreased by $82,315, or 94%, to $5,085 for the nine months ended January 31, 2021, from $87,400 for the nine months ended January 31, 2020. The decrease is attributed to our increase in wages during the nine-month period ended January 31, 2021. General and administrative expenses increased by $194,113, or 474%, to $235,054 for the nine months ended January 31, 2021, from $40,941 for the nine months ended January 31, 2020. The increase is primarily attributed to increased levels of customer service and sales activity. Interest expense increased by $39,387, or 275%, to $53,690 for the nine-month period ended January 31, 2021, as compared to $14,303 for the nine months ended January 31, 2020. Our debt balances were higher at January 31, 2021 as compared to January 31, 2020 due to two new loans totaling $2,385,800 in fiscal 2021. In addition, effective November 1, 2020, the annual interest rate on our $1,000,000 senior secured note increased from 1.25% to 8%. For the Three Months Ended January 31, 2021 Compared to the Three Months Ended January 31, 2020 Our revenues for the three-months ended January 31, 2021 increased by $519,922, or 69%, to $1,277,327 as compared to $757,405 reported for the three months ended January 31, 2020. The increase in revenues is primarily attributable to the inclusion of revenues of $353,041 during the period ended January 31, 2021, from the funding portal subsidiary that we purchased in November 2020. Costs of revenues increased by $12,757 to $16,119 for the three-months ended January 31, 2021 from $3,362 reported in the three-months ended January 31, 2020. The increase is primarily attributable to our purchase of the funding portal. Stock-based compensation increased by $2,282, or 2%, to $126,212 for the three-months ended January 31, 2021 from $123,930 reported in the three-months ended January 31, 2020. The increase in expense is primarily due to the higher price per share of our stock at the time when stock grants were issued for stock-based compensation earned in fiscal 2021 as compared for fiscal 2020. Consulting expense decreased by $7,200, or 100%, to $0 for the three months ended January 31, 2021, from $7,200 for the three months ended January 31, 2020. The decrease is attributed to our increase in wages during the three-month period ended January 31, 2021. General and administrative expenses increased by $151,896, or 1,983%, to $159,554 for the three-months ended January 31, 2021 from $7,658 reported in the three-months ended January 31, 2020. The increase is primarily attributable to increased levels of customer service and sales activity and the acquisition of a wholly owned subsidiary, FP. 19 Interest expense increased by $25,437, or 542%, to $30,126 for the three-month period ended January 31, 2021, as compared to $4,689 for the three months ended January 31, 2020. Our debt balances were higher at January 31, 2021 as compared to January 31, 2020 due to two new loans totaling $2,385,800 in fiscal 2021. In addition, effective November 1, 2020, the annual interest rate on our $1,000,000 senior secured note increased from 1.25% to 8%. Liquidity and Capital Resources On January 31, 2021, we had cash and cash equivalents of $286,461 and negative working capital of $5,785,323 as compared to cash and cash equivalents of $11,206 and negative working capital of $1,057,581 on April 30, 2020. Net cash used in operating activities amounted to $2,475,484 in the nine-months ended January 31, 2021 as compared to net cash used in operating activities of $10,880 in the nine months ended January 31, 2020. The principal source of cash from operating activities in the nine-months ended January 31, 2021 was net income of $103,535 plus stock-based compensation expense of $386,121. These sources were offset by non-cash revenue from the receipt of equity of $2,319,532 and changes in non-cash working capital balances of $716,896. The principal source of cash from operating activities in the nine-months ended January 31, 2020 was net income of $1,162,100 and stock-based compensation of $232,461, but these sources were offset by an increase in non-cash revenue from the receipt of equity of $1,410,796. Cash provided by investing activities totaled $364,939 in the nine months ended January 31, 2021, from the purchase of our funding portal business. There was no investing activity in the nine months ended January 31, 2020. For the nine months ended January 31, 2021, 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 nine months ended January 31, 2020, net cash used in financing activities amounted to $4,300, which consisted of principal payments of outstanding related-party debt. In the nine-months ended January 31, 2021 and 2020, 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, 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 our private equity platform for raising capital. 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. In February 2021 we borrowed again from the USSBA approximately $1.8 million. We owe $1,000,000 under a secured term loan that matures on April 30, 2021. We believe we can renegotiate the payment terms of the loan. Any demand for payment from the lender 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. We have no off-balance sheet arrangements. 20 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.