Netcapital Inc. 10-K

ITEM 1. BUSINESS. 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 is posting 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. We are encouraged by our growth over the past year, as the market share earned by the Netcapital funding portal in the quarter ended June 30, 2021 was 7.0% of the industry investment commitments, as compared to 2.2% of the industry investment commitments in the quarter ended June 30, 2020. 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. Development of Business We were incorporated in the State of Utah in April 1984 under our previous name, DBS Investments, Inc. A change of control of our company occurred in December 2003 and we changed our name to ValueSetters, Inc., when we, in conjunction with a plan of reorganization, merged with Valuesetters L.L.C., an Arizona limited liability corporation. In order to take advantage of the increasing game activities on the Internet, on November 23, 2010, we signed a contract to purchase all the assets of NetGames.com, a company that owned several websites and operated a small Internet-based chess game known as Chess.net. As noted above, in 2014, we began our consulting business, and we now own a portion of several companies as a result of our consulting work. Many of these businesses operate solely on the Internet and many use the Internet to raise capital. We believe the value of our ownership interests in several of these companies may be significant. In 2016, we began consulting for companies seeking to raise capital via Reg CF. In 2020, we purchased Netcapital Funding Portal Inc., a regulated funding portal operating under the provisions of Reg CF. On November 5, 2020, we changed our name to Netcapital Inc. to leverage the strength of Netcapital’s well-established brand and unique private capital markets platform. Competition We compete with a number of public and private companies that provide assistance with capital raising, strategy, technology consulting, and digital marketing. Most of our competitors have significant financial resources and occupy entrenched positions in the market with name-brand recognition. The majority of our capital raising and digital marketing business is on the Internet. The barriers to entry into most Internet markets are relatively low, making them accessible to a large number of entities and individuals. We believe the principal competitive factors in our industry that create certain barriers to entry include but are not limited to reputation, technology, financial stability and resources, proven track record of successful operations, critical mass, and independent oversight and transparency of business practices. While these barriers will limit those able to enter or compete effectively in the market, it is likely that new competitors as well as laws and regulations of governmental authority will be established in the future, in addition to our known current competitors. We face significant competition in every aspect of our business, including from companies that facilitate online capital formation and the sharing of content and information, companies that enable marketers to display advertising, companies that distribute video and other forms of media content, and companies that provide development platforms for applications developers. We compete to attract, engage, and retain customers, to attract and retain marketers, and to attract and retain developers to build compelling applications that integrate with our products. Increased competition from current and future competitors may in the future materially adversely affect our business, revenues, operating results and financial condition. 2 Industry Regulation We are subject, both directly and indirectly, to various laws and regulations relating to our business. If any of the laws are amended, compliance could become more expensive and directly affect our income. We intend to comply with such laws, but new restrictions may arise that could materially adversely affect our Company. Specifically, the SEC regulates our funding portal business, and our funding portal is also a member of FINRA and is regulated by FINRA. Research and Development We do not currently have a budget specifically allocated for research and development purposes. Major Customers For the year ended April 30, 2021, the Company had one customer that constituted 30% of its revenues, a second customer that constituted 15% of its revenues, a third customer that constituted 14% of its revenues and a fourth customer that accounted for 11% of its revenues. For the year ended April 30, 2020, the Company had one customer that constituted 47% of its revenues, a second customer that constituted 31% of its revenues and a third customer that accounted for 13% of its revenues. Corporate Information We maintain a corporate website with the address http://www.netcapitalinc.com, our funding portal maintains a website with the address http://www.netcapital.com, and Netcapital Advisors maintains a website at http://www.netcapitaladvisors.com. We have not incorporated by reference into this Report on Form 10-K the information on any of our websites and you should not consider any of such information to be a part of this document. Our website addresses are included in this document for reference only. We make available free of charge through our corporate website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports through a link to the EDGAR database as soon as reasonably practicable after we electronically file such material with, or furnish such material to the SEC. You can also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1.800.SEC.0330. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including all of our filings. 3