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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: January 31, 2024

 

OR

 

 TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 001-41443

 

NETCAPITAL INC.

(Exact name of registrant as specified in its charter)

 

Utah   87-0409951
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

1 Lincoln Street

Boston MA 02111

(Address of principal executive offices)

 

(781) 925-1700

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name or former address, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of exchange on which registered
Common Stock, par value $0.001 per share   NCPL   The Nasdaq Stock Market LLC
Redeemable warrants exercisable for one share of Common Stock at an exercise price of $5.19   NCPLW   The Nasdaq Stock Market LLC

 

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.

Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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 ☐ Non-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 ☐ No ☒

 

As of March 18, 2024 the registrant had 20,011,132 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. 5
Condensed Consolidated Balance Sheets as of January 31, 2024 (unaudited) and April 30, 2023 5
Condensed Consolidated Statements of Operations for the three and nine months ended January 31, 2024 and 2023 (unaudited) 6
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended January 31, 2024 and the year ended April 30, 2023 (unaudited) 7
Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2024 and 2023 (unaudited) 8
Notes to Unaudited Condensed Consolidated Financial Statements 9
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 23
   
Item 3. Quantitative and Qualitative disclosures about Market Risk. 29
   
Item 4. Controls and Procedures. 29
   
PART II—OTHER INFORMATION  
   
Item 1. Legal Proceedings. 30
   
Item1A. Risk Factors. 30
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 31
   
Item 3. Defaults Upon Senior Securities. 31
   
Item 4. Mine Safety Disclosures. 32
   
Item 5. Other Information. 32
   
Item 6. Exhibits. 32
   
Signatures. 33

 

 -2- 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

 

capital requirements and the availability of capital to fund our growth and to service our existing debt;
   
difficulties executing our growth strategy, including attracting new issuers and investors;
   
our anticipated use of the net proceeds from our recent public offering;
   
economic uncertainties and business interruptions resulting from the coronavirus COVID-19 global pandemic and its aftermath;
   
as restrictions related to the coronavirus COVID-19 global pandemic are removed and face-to-face economic activities normalize, it may be difficult for us to maintain the recent sales gains that we have experienced;
   

 

all the risks of acquiring one or more complementary businesses, including identifying a suitable target, completing comprehensive due diligence uncovering all information relating to the target, the financial stability of the target, the impact on our financial condition of the debt we may incur in acquiring the target, the ability to integrate the target’s operations with our existing operations, our ability to retain management and key employees of the target, among other factors attendant to acquisitions of small, non-public operating companies;
   
difficulties in increasing revenue per issuer;
   
challenges related to hiring and training fintech employees at competitive wage rates;
   
difficulties in increasing the average number of investments made per investor;
   
shortages or interruptions in the supply of quality issuers;
   
our dependence on a small number of large issuers to generate revenue;
   
negative publicity relating to any one of our issuers;
   
competition from other online capital portals with significantly greater resources than we have;
   
changes in investor tastes and purchasing trends;
   
our inability to manage our growth;
   
our inability to maintain an adequate level of cash flow, or access to capital, to meet growth expectations;
   
changes in senior management, loss of one or more key personnel or an inability to attract, hire, integrate and retain skilled personnel;

 

 -3- 

 

 

labor shortages, unionization activities, labor disputes or increased labor costs, including increased labor costs resulting from the demand for qualified employees;
   
our vulnerability to increased costs of running an online portal with any cloud partner;
   
our vulnerability to increasing labor costs;
   
the impact of governmental laws and regulation;
   
failure to obtain or maintain required licenses;
   
changes in economic or regulatory conditions and other unforeseen conditions that prevent or delay the development of a secondary trading market for shares of equity that are sold on our online portal; and
   
inadequately protecting our intellectual property or breaches of security of confidential user information.

 

You are cautioned that all forward-looking statements involve risks and uncertainties. We undertake no obligation to amend this Form 10-Q or our annual report on Form 10-K or revise publicly these forward-looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to applicable federal securities laws) to reflect subsequent events or circumstances.

 

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

 

This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.

 

 -4- 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

NETCAPITAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

           
   January 31, 2024
(Unaudited)
   April 30, 2023
(Audited)
 
Assets:          
Cash and cash equivalents  $2,172,099   $569,441 
Accounts receivable net   3,701,501    1,388,500 
Note receivable   20,000    - 
Prepaid expenses   158,465    583,030 
Total current assets   6,052,065    2,540,971 
           
Deposits   6,300    6,300 
Notes receivable - related parties   202,000    202,000 
Purchased technology, net   15,790,304    15,875,297 
Investment in affiliate   240,080    240,080 
Equity securities   21,844,698    22,955,445 
Total assets  $44,135,447   $41,820,093 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable          
Trade  $828,836   $578,331 
Related party   75,204    75,204 
Accrued expenses   394,911    285,065 
Stock subscription payable   10,000    10,000 
Deferred revenue   487    661 
Interest payable   88,084    98,256 
Current taxes payable   -    174,000 
Deferred tax liability, net   -    1,657,000 
Related party debt   15,000    15,000 
Secured note payable   -    350,000 
Current portion of SBA loans   1,885,800    1,885,800 
Loan payable - bank   34,324    34,324 
Total current liabilities   3,332,646    5,163,641 
           
Long-term liabilities:          
Long-term SBA loans, less current portion   500,000    500,000 
Total liabilities   3,832,646    5,663,641 
           
Commitments and contingencies   -    - 
           
Stockholders’ equity:          
Common stock, $.001 par value; 900,000,000 shares authorized, 17,231,132 and 6,440,527 shares issued and outstanding   17,231    6,441 
Shares to be issued   122,124    183,187 
Capital in excess of par value   37,077,147    30,500,944 
Retained earnings   3,086,299    5,465,880 
Total stockholders’ equity   40,302,801    36,156,452 
Total liabilities and stockholders’ equity  $44,135,447   $41,820,093 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements

 

 -5- 

 

 

NETCAPITAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

                     
   Three Months
Ended
   Three Months
Ended
   Nine Months
Ended
   Nine Months
Ended
 
   January 31, 2024   January 31, 2023   January 31, 2024   January 31, 2023 
                 
Revenues  $1,042,793   $2,260,414   $4,604,260   $5,379,960 
Costs of services   58,875    4,305    97,062    61,603 
Gross profit   983,918    2,256,109    4,507,198    5,318,357 
                     
Costs and expenses:                    
Consulting expense   175,357    130,500    544,033    455,892 
Marketing   32,198    23,549    320,817    64,211 
Rent   19,544    17,187    57,533    51,586 
Payroll and payroll related expenses   869,517    946,043    2,957,394    2,592,891 
General and administrative costs   1,092,459    568,253    2,529,378    1,241,365 
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 
                     
Other income (expense):                    
Interest expense   (11,918)   (17,632)   (35,784)   (76,922)
Gain on debt conversion   -    -    -    224,260 
Amortization of intangible assets   (28,331)   (25,914)   (84,993)   (68,076)
Unrealized gain (loss) on equity securities   (2,696,135)   1,866,468    (2,696,135)   1,857,500 
Realized loss on sale of investment   -    -    -    (406,060)
Total other income (expense)   (2,736,384)   1,822,922    (2,816,912)   1,530,702 
Net income (loss) before taxes   (3,941,541)   2,393,499    (4,718,869)   2,443,114 
Income tax expense (benefit)   (1,713,999)   697,000    (2,339,288)   499,000 
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 
                     
Weighted average number of common shares outstanding:                    
Basic   11,466,523    5,166,299    9,457,740    4,208,216 
Diluted   11,466,523    5,166,549    9,457,740    4,208,466 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements

 

 -6- 

 

 

NETCAPITAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

For the Nine Months Ended January 31, 2024 and the Year Ended April 30, 2023

 

                               
   Common Stock   Shares to   Capital in
Excess of
   Retained    Total 
   Shares   Amount   Be Issued   Par Value   Earnings   Equity 
Balance, April 30, 2022   2,934,344   $2,934   $244,250   $22,479,769   $2,510,908   $25,237,861 
                               
Shares issued for debt conversion   133,333    134    -    379,852    -    379,986 
Sale of common stock   1,205,000    1,205    -    3,947,912    -    3,949,117 
Vesting of stock options   -    -    -    32,953    -    32,953 
Net income for July 31, 2022 quarter   -    -    -    -    64,477    64,477 
Balance, July 31, 2022   4,272,677    4,273    244,250    26,840,486    2,575,385    29,664,394 
                               
Sale of common stock   2,600    3    -    23,397    -    23,400 
Purchase of equity interest   37,500    37    -    366,338    -    366,375 
Vesting of stock options   -    -    -    32,953    -    32,953 
Net income for Oct. 31, 2022 quarter   -    -    -         183,138    183,138 
Balance October 31, 2022   4,312,777    4,313    244,250    27,263,174    2,758,523    30,270,260 
                               
Sale of common stock   1,434,000    1,434    -    1,620,025    -    1,621,459 
Purchase of equity interest   18,750    19    -    171,105    -    171,124 
Purchase of intellectual property   300,000    300    -    434,700    -    435,000 
Reduction in shares to be issued   6,250    6    (61,063)   61,057    -    - 
Vesting of stock options   -    -    -    63,057    -    63,057 
Net income for Jan. 31, 2023 quarter   -    -    -    -    1,696,499    1,696,499 
Balance January 31, 2023   6,071,777    6,072    183,187    29,613,118    4,455,022    34,257,399 
                               
Purchase of equity interest   18,750    19    -    195,233    -    195,252 
Vesting of stock options   -    -    -    132,943    -    132,943 
Stock-based compensation   350,000    350    -    559,650    -    560,000 
Net income Q4   -    -    -         1,010,858    1,010,858 
Balance April 30, 2023   6,440,527    6,441    183,187    30,500,944    5,465,880    36,156,452 
                               
Vesting of stock options   -    -    -    139,371    -    139,371 
Stock-based compensation   100,000    100    -    143,900    -    144,000 
Sale of common stock   2,825,000    2,825    -    2,272,375    -    2,275,200 
Purchase of equity interest   18,750    18    -    183,170    -    183,188 
Stock-based settlement   49,855    50    -    58,779    -    58,829 
Net loss July 31, 2023 quarter   -    -    -    -    (491,655)   (491,655)
Balance July 31, 2023   9,434,132    9,434    183,187    33,298,539    4,974,225    38,465,385 
                               
Vesting of stock options   -    -    -    139,371    -    139,371 
Reduction in shares to be issued   6,250    6    (61,063)   61,057    -    - 
Purchase of equity interest   18,750    19    -    183,170    -    183,189 
Net income October 31, 2023 quarter   -    -    -    -    339,616    339,616 
Balance October 31, 2023   9,459,132    9,459    122,124    33,682,137    5,313,841    39,127,561 
                               
Vesting of stock options   -    -    -    139,371    -    139,371 
Sale of common stock   4,800,000    4,800    -    3,255,639    -    3,260,439 
Warrant exercise   2,972,000    2,972    -    -    -    2,972 
Net loss January 31, 2024 quarter   -    -    -    -    (2,227,542)   (2,227,542)
Balance January 31, 2024   17,231,132   $17,231   $122,124   $37,077,147   $3,086,299   $40,302,801 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements

 

 -7- 

 

 

NETCAPITAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

           
   Nine Months Ended   Nine Months Ended 
   January 31, 2024   January 31, 2023 
OPERATING ACTIVITIES          
Net income (loss)  $(2,379,581)  $1,944,114 
Adjustment to reconcile net income (loss) to net cash used in operating activities:          
Stock-based compensation   1,044,395    128,963 
Receipt of equity in lieu of cash   (1,219,012)   (4,600,000)
Unrealized (gain) loss on equity securities   2,696,135    (1,857,500)
Gain on debt conversion   -    (224,260)
Provision for bad debts   6,000    2,600 
Realized loss on investment   -    406,060 
Changes in deferred taxes   (1,657,000)   499,000 
Amortization of intangible assets   84,993    68,076 
Changes in non-cash working capital balances:          
Accounts receivable   (2,319,001)   267,369 
Prepaid expenses   1,113    (31,150)
Accounts payable and accrued expenses   360,351    115,259 
Accounts payable - related party   -    (8,819)
Income taxes payable   (174,000)   - 
Deferred revenue   (174)   (1,814)
Accrued interest payable   (10,172)   (122,612)
Net cash used in operating activities   (3,565,953)   (3,414,714)
           
INVESTING ACTIVITIES          
Note receivable   (20,000)   - 
Proceeds from sale of investment   -    200,000 
Net cash provided by (used in) investing activities   (20,000)   200,000 
           
FINANCING ACTIVITIES          
Payment to secured lender   (350,000)   (1,050,000)
Payment of related party note   -    (7,860)
Proceeds from sale of common stock   5,538,611    5,570,576 
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, beginning of the period   569,441    473,925 
Cash and cash equivalents, end of the period  $2,172,099   $1,771,927 
           
Supplemental disclosure of cash flow information:          
Cash paid for taxes  $-   $- 
Cash paid for interest  $34,710   $2,077 
           
Supplemental Non-Cash Financing Information:          
Common stock issued to pay promissory notes  $-   $266,272 
Common stock issued to purchase 10% interest in Caesar Media Group Inc.  $366,377   $537,499 
Common stock issued to pay related party payable  $-   $113,714 
Common stock issued to purchase subsidiary  $-   $61,063 
Common stock issued to purchase intellectual property  $-   $435,000 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements

 

 -8- 

 

 

NETCAPITAL INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1– Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements of Netcapital Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles (“GAAP”) 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 notes 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- and nine-month periods ended January 31, 2024, are not necessarily indicative of the results that may be expected for the fiscal year ended April 30, 2024. For further information, refer to the audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended April 30, 2023.

 

Use of Estimates

 

Preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, accounts receivable, valuation of equity securities, income taxes, and valuation of long-lived assets including intellectual property and purchased technology. These estimates are based on management’s knowledge of current events, interpretation of regulations, and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.

 

Significant Accounting Policies

 

There have been no material changes to our significant accounting policies from our Annual Report on Form 10-K for the fiscal year ended April 30, 2023.

 

The Company accounts for allowance for credit losses under the current expected credit loss (“CECL”) impairment model for its financial assets, including accounts receivable, and presents the net amount of the financial instrument expected to be collected. The CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers forecasts of future economic conditions in addition to information about past events and current conditions. Based on this model, the Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the receivable balance, current and historical customer trends, communications with its customers, and macro-economic conditions. Amounts are written off after considerable collection efforts have been made and the amounts are determined to be uncollectible.

 

Management does not believe that any 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.

 

 -9- 

 

 

Note 2 – Concentrations

 

For the three and nine months ended January 31, 2024, the Company had one customer that constituted 78% and 27% of revenues, and a second customer that constituted 0% and 24% of revenues, and a third customer that constituted 0% and 24% of revenues, respectively. For the three and nine months ended January 31, 2023, the Company had one customer that constituted 0% and 39% of revenues, a second customer that constituted 35% and 15% of revenues, a third customer that constituted 35% and 15% of revenues, and a fourth customer that constituted 17% and 7% of revenues, respectively.

 

Note 3 – Revenue Recognition

 

Revenue Recognition under ASC 606

 

The Company recognizes service revenue from its consulting contracts, funding portal and 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 portal 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.

 

 -10- 

 

 

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 assets.

 

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 are 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.

 

 -11- 

 

 

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.

 

Remaining Performance Obligations

 

The Company’s subscription terms are typically less than one year. All of the Company’s revenues in the three and nine months ended January 31, 2024, which amounted to $1,042,793 and $4,604,260, respectively, are considered contract revenues. Contract revenue as of January 31, 2024 and April 30, 2023, which has not yet been recognized, amounted to $487 and $661, respectively, and is recorded on the balance sheet as deferred revenue. The Company expects to recognize revenue on all of its remaining performance obligations over the next 12 months.

 

Disaggregation of Revenue

 

Revenue is from U.S.-based companies with no notable geographical concentrations in any area. A distinction exists in revenue source; revenues are either generated online or from consulting services.

 

Revenues disaggregated by revenue source consist of the following:

 

   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 

 

 -12- 

 

 

Note 4 – Earnings Per Common Share

 

Net income per common and diluted share were calculated as follows for the three- and nine-month periods ended January 31, 2024 and 2023:

 

   Three Months
Ended
January 31, 2024
   Three Months
Ended
January 31, 2023
   Nine Months
Ended
January 31, 2024
   Nine Months
Ended
January 31, 2023
 
Net income (loss) attributable to common stockholders – basic  $(2,227,542)  $1,696,499   $(2,379,581)  $1,944,114 
Adjustments to net income                
Net income (loss) attributable to common stockholders – diluted  $(2,227,542)  $1,696,499   $(2,379,581)  $1,944,144 
                     
Weighted average common shares outstanding - basic   11,466,523    5,166,299    9,457,740    4,208,216 
Effect of dilutive securities       250        250 
Weighted average common shares outstanding – diluted   11,466,523    5,166,549    9,457,740    4,208,466 
                     
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 

 

250 shares of common stock that are issuable pursuant to a stock subscription agreement are included in the calculation of diluted earnings per share for the three and nine months ended January 31, 2023. The 250 shares are not included in the calculation of diluted earnings per share for the three and nine months ended January 31, 2024 because their effect is anti-dilutive.

 

Outstanding vested warrants to purchase 11,110,932 and 1,541,682 shares of common stock are not included in the calculation of earnings per share for the three and nine months ended January 31, 2024 and 2023, respectively, because their effect is anti-dilutive.

 

Outstanding vested options to purchase 635,146 and 169,333 shares of common stock are not included in the calculation of earnings per share for the three and nine months ended January 31, 2024 and 2023, respectively, because their effect is anti-dilutive.

 

 -13- 

 

 

Note 5 – Principal Financing Arrangements

 

The following table summarizes components debt as of January 31, 2024 and April 30, 2023:

 

   January 31, 2024   April 30, 2023   Interest Rate 
             
Secured lender  $   $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      

 

As of January 31, 2024 and April 30, 2023, the Company owed its principal lender $0 and $350,000, respectively, under an amended loan and security agreement dated July 26, 2014, amended several times thereafter and paid in full in May 2023.

 

As of January 31, 2024 and April 30, 2023, the Company’s related-party unsecured notes payable totaled $15,000.

 

The Company owes $34,324 as of January 31, 2024 and April 30, 2023 to Chase Bank. For the loan from Chase Bank, the Company pays interest only on a monthly basis, which represents a rate of 10.9% per annum as of January 31, 2024.

 

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 a U.S. Small Business Administration (“SBA”) loan program.

 

The June Loan required installment payments of $2,437 monthly, beginning on June 17, 2021, over a term of thirty years. However, the SBA postponed the first installment payment for 18 months, and the first payment became due on December 17, 2022. The monthly payments of $2,437 are first applied to accrued interest payable. The monthly payments will not be applied to any of the outstanding principal balance until 2026. Consequently, the entire loan balance of $500,000 is classified as a long term liability. 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.

 

The February Loan bears interest at a rate of 1% per annum and the due date of the first payment has been postponed by the SBA because the Company has applied for forgiveness of the February Loan.

 

 -14- 

 

 

Note 6 – Income Taxes

 

For the three and nine months ended January 31, 2024, the Company recorded an income tax benefit of $1,713,999 and $2,339,288, respectively. For the three and nine months ended January 31, 2023, the Company recorded income tax expense of $697,000 and $499,000, respectively. Included in the income tax benefit for the nine months ended January 31, 2024 is an employee retention credit (“ERC”) of $508,292, as provided under the Coronavirus Aid, Relief and Economic Security Act. The ERC is a tax incentive available to the Company for retaining employees during the economic challenges posed by the COVID-19 pandemic.

 

Note 7 – Related Party Transactions

 

The Company’s largest shareholder, Netcapital Systems LLC (“Systems”), of which Jason Frishman, Founder, owns a 29% interest, owns 1,711,261 shares of common stock, or 9.9% of the Company’s 17,231,132 outstanding shares as of January 31, 2024. The company paid Systems $95,000 and $100,000 in the three- and nine-month periods ended January 31, 2024, and $100,000 and $300,000 in the three- and nine month periods ended January 31, 2023, respectively, for use of the software that runs the website www.netcapital.com.

 

Cecilia Lenk, the Chief Executive Officer of Netcapital Advisors Inc., (“Advisors”), our wholly owned subsidiary, is a member of the board of directors of KingsCrowd Inc. The Company sold 606,060 shares of KingsCrowd in June 2022 for proceeds of $200,000 and recorded a realized loss on the sale of the investment of $406,060 during the nine months ended January 31, 2023. As of January 31, 2024 and April 30, 2023, the Company owned 3,209,685 shares of KingsCrowd Inc., valued at $513,550 and $3,209,685, respectively.

 

Cecilia Lenk, the Chief Executive Officer of Advisors is a member of the board of directors of Deuce Drone LLC. As of January 31, 2024 and April 30, 2023, the Company owns 2,350,000 membership interest units of Deuce Drone LLC., valued at $2,350,000. The Company has notes receivable aggregating to $152,000 from Deuce Drone LLC as of January 31, 2024 and April 30, 2023.

 

Compensation to officers in the three- and nine-month periods ended January 31, 2024 consisted of stock-based compensation valued at $94,631 and $281,689, respectively, and cash salary of $218,471 and $751,488, respectively.

 


Compensation to officers in the three- and nine-month periods ended January 31, 2023 consisted of stock-based compensation valued at $32,382 and $44,464, respectively, and cash salary of $141,769 and $391,384, respectively.

 

 -15- 

 

 

Compensation to a related party consultant, John Fanning Jr., son of our CFO, in the three- and nine-month periods ended January 31, 2024 consisted of cash wages of $14,624 and $44,641, respectively, and for the three- and nine-month periods ended January 31, 2023 consisted of cash wages of $15,000 and $45,000, respectively This consultant is also the controlling shareholder of Zelgor Inc. and $0 and $33,000 of the Company’s revenues in the three- and nine-month periods ended January 31, 2024, respectively, and $16,500 and $44,000 of the Company’s revenues in the three- and nine-month periods ended January 31, 2023, respectively, were from Zelgor Inc. As of January 31, 2024 and April 30, 2023, the Company owned 1,400,000 shares which are valued at $1,400,000.

 

As of January 31, 2024 and April 30, 2023, the Company has invested $240,080 in an affiliate, 6A Aviation Alaska Consortium, Inc., in conjunction with a land lease in an airport in Alaska. Cecilia Lenk, the Chief Executive Officer of Advisors is also the Chief Executive Officer of 6A Aviation Alaska Consortium, Inc.

 

We owe Steven Geary, a director, $31,680 as of January 31, 2024 and April 30, 2023. This obligation is not interest bearing. $16,680 is recorded as a related party trade accounts payable and $15,000 as a related party note payable. We have no signed agreements for the indebtedness to Mr. Geary and accordingly such obligations are not deemed in default. We owe Paul Riss, a director of our Netcapital Funding Portal Inc., $58,524, which is recorded as a related party trade accounts payable, and along with the $16,680 amount due to Mr. Geary, accounts for the total related party trade accounts payable amount of $75,204. The related party trade accounts payable obligations are not interest bearing and are not deemed in default.

 

During the nine months ended January 31, 2023, we paid $12,019 to a related party to retire a note payable of $3,200 and expenses payable of $8,819.

 

In January 2023 we granted stock options to purchase an aggregate of 1,600,000 shares of our common stock to four related parties as follows: our Chief Executive Officer, Martin Kay, 1,000,000 shares; our Chief Financial Officer, Coreen Kraysler 200,000 shares; our Founder, Jason Frishman, 200,000 shares; and a director of Netcapital Funding Portal, Inc., Paul Riss, 200,000 shares. The options have an exercise price of $1.43, vest monthly on a straight-line basis over a 4-year period and expire in 10 years.

 

On April 25, 2023, the Company also granted an aggregate of 80,000 options, or 20,000 options each to the following board members: Cecilia Lenk, Avi Liss, Steven Geary and Arnold Scott, to purchase shares of our common stock at an exercise price of $1.40 per share. The options vest monthly on a straight-line basis over a 4-year period and expire in 10 years.

 

Coreen Kraysler, our Chief Financial Officer, has personally guaranteed a $500,000 promissory note from the U.S. Small Business Administration. The note bears interest at an annual rate of 3.75%, has a 30-year term, and monthly payments of $2,437 began on December 17, 2022.

 

Note 8 – Stockholders’ Equity

 

The Company is authorized to issue 900,000,000 shares of its common stock, par value $0.001. 17,231,132 and 6,440,527 shares were outstanding as of January 31, 2024 and April 30, 2023, respectively.

 

During the quarter ended July 31, 2022, the Company issued 39,901 shares of common stock with a value of $113,714 to settle a related party payable of $294,054. The Company also issued 93,432 shares of common stock valued at $266,272 to retire $300,000 of convertible promissory notes plus accrued interest of $10,192. The convertible note holders also received warrants to purchase shares of common stock at a per share exercise price of $5.19, that are exercisable immediately, and expire five years from the date of issuance. These equity issuances resulted in a gain from the conversion of debt totaling $224,260, which is recorded as other income in the income statement.

 

On July 15, 2022, the Company completed an underwritten public offering of 1,205,000 shares of the Company’s common stock and warrants to purchase 1,205,000 shares of the Company’s common stock at a combined public offering price of $4.15 per share and warrant. The gross proceeds from the offering were $5,000,750 prior to deducting underwriting discounts, commissions, and other offering expenses, which resulted in net proceeds of $3,949,117. The warrants have a per share exercise price of $5.19, are exercisable immediately, and expire five years from the date of issuance.

 

 -16- 

 

 

In addition, the Company granted the underwriter a 45-day option to purchase up to an additional 180,750 shares of common stock and/or up to 180,750 additional warrants to cover over-allotments, if any. In connection with the closing of the offering, the underwriter partially exercised its over-allotment option and purchased an additional 111,300 warrants, and the Company issued an aggregate of 60,250 warrants to 20 individual representatives of the underwriter.

 

On December 16, 2022 the Company completed an underwritten public offering of 1,247,000 shares of the Company’s common stock, at a price to the public of $1.40 per share. Pursuant to the terms of an underwriting agreement, the Company also granted the underwriters a 45-day option to purchase up to an additional 187,000 shares of common stock solely to cover over-allotments, at the same price per share of $1.40, less the underwriting discounts and commissions. In conjunction with this offering, the Company issued the underwriter and its designees warrants to purchase 62,350 shares of our common stock at an exercise price of $1.75. The underwriters exercised their over-allotment option and on January 5, 2023, the Company issued an additional 187,000 shares of its common stock. The Company received net proceeds of $1,621,459 for the issuance of a total of 1,434,000 shares of common stock for both the initial and over-allotment offering. In conjunction with the exercise of the over-allotment, the Company issued the underwriter and its designees warrants to purchase 9,350 shares of our common stock with an exercise price of $1.75.

 

During the year ended April 30, 2023, in addition to the public offerings, the Company issued 75,000 shares of common stock, valued at $732,751, in conjunction with the purchase of a 10% equity stake in Caesar Media Group, Inc., 300,000 shares of common stock, valued at $435,000 to purchase the website and intellectual property of a real-time video conferencing website, 2,600 shares of common stock in conjunction with a stock subscription agreement with accredited investors, valued at $23,400, and 6,250 shares of common stock in conjunction with an acquisition agreement that requires shares to be issued by the Company.

 

On January 5, 2023, the Company announced the formation of the Netcapital Inc. 2023 Omnibus Equity Incentive Plan (the “Plan”), which was subsequently approved by a vote of the shareholders. In January 2023, the Company granted stock options to four individuals to purchase an aggregate of 1,600,000 of the Company’s common stock at a price of $1.43 per share and on April 25, 2023 also granted 350,000 stock options under the Plan to employees, consultants, and directors at an exercise price of $1.40 per share. All stock options in the Plan vest monthly on a straight-line basis over a 4-year period and expire in 10 years.

 

In May 2023, the Company issued 100,000 shares of its common stock, valued at $144,000, in conjunction with a consulting agreement with a business.

 

On May 23, 2023, the Company entered into a securities purchase agreement with certain institutional investors, pursuant to which the Company agreed to issue and sell to such investors, in a registered direct offering (the “Offering”), 1,100,000 shares of the Company’s common stock, par value $0.001 per share, at a price of $1.55 per Share, for aggregate gross proceeds of $1,705,000, before deducting the placement agent’s fees and other offering expenses payable by the Company. The Offering closed on May 25, 2023.

 

Also, in connection with the Offering, on May 23, 2023, the Company entered into a placement agency agreement with ThinkEquity LLC, pursuant to which, the Company issued warrants to purchase up to 55,000 shares of common stock at an exercise price of $1.94, which were issued on May 25, 2023.

 

In July 2023, the Company issued 49,855 shares of its common stock in consideration of a release from an unrelated third party in conjunction with the settlement of an outstanding debt between such third party and Netcapital Systems LLC.

 

 -17- 

 

 

On July 24, 2023 the Company completed an underwritten public offering of 1,725,000 shares of the Company’s common stock, at a price to the public of $0.70 per share for aggregate gross proceeds of $1,207,500, before deducting underwriting discounts and offering expenses payable by the Company. In conjunction with this offering, the Company issued the underwriter, and its designees, warrants to purchase 86,250 shares of the Company’s common stock at an exercise price of $0.875.

 

On July 31, 2023 and on October 26, 2023, the Company issued 18,750 shares of its common stock in conjunction with the purchase of a 10% interest in Caesar Media Group Inc. October 26, 2023, the Company issued 6,250 shares of its common stock in conjunction with its purchase of MSG Development Corp. (“MSG”), a wholly owned subsidiary. As a result of the issuance to MSG, the equity account for shares to be issued decreased by $61,063 from $183,187 to $122,124. The Company did not receive any proceeds for the issuance of these shares.

 

On December 27, 2023, the Company completed a public offering of (i) 4,800,000 shares of common stock, par value $0.001 per share, of the Company (the “Common Share”); (ii) 11,200,000 prefunded warrants (the “Prefunded Warrants”) to purchase 11,200,000 shares of Common Stock of the Company (the “Prefunded Warrant Shares”); (iii) 16,000,000 Series A-1 warrants (the “Series A-1 Common Warrants”) to purchase 16,000,000 shares of Common Stock of the Company (the “Series A-1 Common Warrant Shares”) and (iv) 16,000,000 Series A-2 warrants (the “Series A-2 Common Warrants,” together with the Series A-1 Warrants, the “Common Warrants”) to purchase 16,000,000 shares of Common Stock of the Company (the “Series A-2 Common Warrant Shares,” together with the Series A-1 Common Warrants Shares, the “Common Warrant Shares”). The offering price of each Common Share and accompanying Series A-1 Common Warrant and Series A-2 Common Warrant was $0.25, and the offering price of each Prefunded Warrant and accompanying Series A-1 Common Warrant and Series A-2 Common Warrant was $0.249. The Common Shares, Prefunded Warrants, Prefunded Warrant Shares, Series A-1 Common Warrants, Series A-1 Common Warrant Shares, Series A-2 Common Warrants, Series A-2 Common Warrant Shares are collectively referred to as the “Securities.”

 

Each Common Warrant has an exercise price of $0.25 per share. The Common Warrants became exercisable on February 23, 2024. The Series A-1 Common Warrants expire on February 23, 2029. The Series A-2 Common Warrants expire on August 23, 2025. A holder may not exercise any portion of the Common Warrants to the extent the Purchaser would own more than 4.99% of the outstanding Common Stock immediately after exercise. A holder may increase or decrease this percentage with respect to either the Series A-1 Common Warrants or the Series A-2 Common Warrants to a percentage not in excess of 9.99%, except that any such increase shall require at least 61 days’ prior notice to the Company.

 

The Prefunded Warrants were immediately exercisable and may be exercised at a nominal exercise price of $0.001 per share of Common Stock at any time until all of the Prefunded Warrants are exercised in full. A holder may not exercise any portion of the Prefunded Warrants to the extent the Purchaser would own more than 4.99% of the outstanding Common Stock immediately after exercise. The holder may increase or decrease this percentage with respect to Prefunded Warrants to a percentage not in excess of 9.99%, except that any such increase shall require at least 61 days’ prior notice to the Company.

 

As compensation to H.C. Wainwright & Co., LLC as the exclusive placement agent in connection with the offering of the Securities (the “Placement Agent”), the Company paid the Placement Agent a cash fee of 7.5% of the aggregate gross proceeds raised in the offering, plus a management fee equal to 1.0% of the gross proceeds raised in the offering and reimbursement of certain expenses and legal fees. The Company also issued warrants to designees of the Placement Agent (the “Placement Agent Warrants”) to purchase up to 1,200,000 shares of Common Stock. The Placement Agent Warrants have substantially the same terms as the Common Warrants, except that the Placement Agent Warrants have an exercise price equal to $0.3125 per share and expire on December 27, 2028.

 

On January 19, 2024, the Company issued 1,390,000 shares of common stock upon the exercise of Prefunded Warrants and receipt of the exercise price of $1,390. On January 31, 2024, the Company issued 1,582,000 shares of common stock upon the exercise of 1,582,000 Prefunded Warrants and receipt of the exercise price of $1,582.

 

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:

 

  Level 1: inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the company has the ability to access at the measurement date.
     
  Level 2: inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
     
  Level 3: inputs are unobservable inputs for the asset or liability.

 

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.

 

Note 10 – Stock-Based Compensation Plans

 

In addition to cash payments, the Company enters agreements to issue common stock and records the applicable non-cash expense in accordance with the authoritative guidance of the Financial Accounting Standards Board.

 

For the three and nine months ended January 31, 2024, stock-based compensation expense amounted to $280,522 and $1,044,395, respectively. For the three and nine months ended January 31, 2023, stock-based compensation expense amounted to $63,057 and $128,963, respectively.

 

The table below presents the components of compensation expense for the issuance of shares of common stock and stock options to employees and consultants for the three- and nine-month periods ended January 31, 2024 and 2023.

 

Stock-based compensation expense  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 
Chief Executive Officer, Advisors   2,310    1,221    4,726    3,663 
Founder   14,914        44,742     
Marketing consultant           144,000     
Marketing consultant           58,829     
Employee and consultant options   44,740    35,634    136,424    91,848 
Business consultant   141,151        423,453     
Total stock-based compensation expense  $280,522   $63,057   $1,044,395   $128,963 

 

 -18- 

 

 

Note 11 – Deposits and Commitments

 

We utilize an office at 1 Lincoln Street in Boston, Massachusetts. We currently pay a membership fee of approximately $6,400 a month, under a virtual office agreement that expires in March 2025 and includes a deposit of $6,300.

 

Note 12 – Intangible Assets

 

Intangible assets with defined useful lives are generally measured at cost less straight-line amortization. The useful life is determined using the period of the underlying contract or the period of time over which the intangible asset can be expected to be used. Impairments are recognized if the recoverable amount of the asset is lower than the carrying amount. The recoverable amount is the higher of either the fair value less costs to sell or the value in use. The value in use is determined on the basis of future cash inflows and outflows, and the weighted average cost of capital. Intangible assets with indefinite useful lives, such as trade names and trademarks, that have been acquired as part of acquisitions are measured at cost and tested for impairment annually, or if there is an indication that their value has declined.

 

The following table sets forth the major categories of the intangible assets as of January 31, 2024 and April 30, 2023

 

   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 

 

As of January 31, 2024, the weighted average remaining useful life for technology, trade names, professional practice, literary works and domains is 13.41 years. Accumulated amortization amounted to $181,400 and $96,407 as of January 31, 2024 and April 30, 2023, resulting in net intangible assets of $15,790,304 and $15,875,297, respectively.

 

Note 13 – Investments

 

In the three-month period ended January 31, 2024, the Company received equity securities from 6 issuers that closed on the sale of securities on the Netcapital Funding Portal. In addition to cash fees, various issuers pay the Company a fee of 1% of the equity securities sold on the funding portal. As of January 31, 2024, the Company received 8,989 shares of common stock of Avadain, Inc., valued at $44,945; 12 membership units of Averroes Software LLC, valued at $120; 13 shares of common stock of NeuraMetrix, Inc., valued at $117; 1,366 shares of common stock of Recruiting Analytics Inc., valued at $1,626; 422 membership units of Harvest Today, LLC, valued at $1,266; and 939 shares of common stock of VideoXRM, Inc., valued at $939.

 

In May 2023, the Company received 2,853,659 units of RealWorld LLC as a payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $0.41 per unit based on a sales price of $0.41 per unit on an online funding portal. The receipt of the units satisfied an accounts receivable balance of $1,170,000. As of January 31, 2024, the Company owned 2,853,659 units which are valued at $1,170,000.

 

In April 2023, the Company received 2,853,659 units of HeadFarm LLC as a payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $0.41 per unit based on a sales price of $0.41 per unit on an online funding portal. The receipt of the units satisfied an accounts receivable balance of $1,170,000. As of January 31, 2024 and April 30, 2023, the Company owned 2,853,659 units which are valued at $1,170,000.

 

In April 2023, the Company received 2,853,659 units of CupCrew LLC as a payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $0.41 per unit based on a sales price of $0.41 per unit on an online funding portal. The receipt of the units satisfied an accounts receivable balance of $1,170,000. As of January 31, 2024 and April 30, 2023, the Company owned 2,853,659 units which are valued at $1,170,000.

 

 -19- 

 

 

In April 2023, the Company received 2,853,659 units of CountSharp LLC as a payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $0.41 per unit based on a sales price of $0.41 per unit on an online funding portal. The receipt of the units satisfied an accounts receivable balance of $1,170,000. As of January 31, 2024 and April 30, 2023, the Company owned 2,853,659 units which are valued at $1,170,000.

 

In January 2023, the Company received 2,100,000 units of Dark LLC as a payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $1.00 per unit based on a sales price of $1.00 per unit on an online funding portal. The receipt of the units satisfied an accounts receivable balance of $2,100,000. As of January 31, 2024 and April 30, 2023, the Company owned 2,100,000 units which are valued at $2,100,000.

 

In August 2022, the Company received 1,911,765 units of NetWire LLC as a payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $0.68 per unit based on a sales price of $0.68 per unit on an online funding portal. The receipt of the units satisfied an accounts receivable balance of $1,300,000. As of January 31, 2024 and April 30, 2023, the Company owned 1,911,765 units which are valued at $1,300,000.

 

In May 2022, the Company received 1,764,706 units of Reper LLC as a payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $0.68 per unit based on a sales price of $0.68 per unit on an online funding portal. The receipt of the units satisfied an accounts receivable balance of $1,200,000. As of January 31, 2024 and April 30, 2023, the Company owned 1,764,706 units which are valued at $1,200,000.

 

In April 2022, the Company received 3,000,000 units of Cust Corp. as a payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $0.40 per unit based on a sales price of $0.40 per unit on an online funding portal. The receipt of the units satisfied an accounts receivable balance of $1,200,000. As of January 31, 2024 and April 30, 2023, the Company owned 3,000,000 units which are valued at $1,200,000.

 

In January 2022, the Company received 1,700,000 units of ScanHash LLC as a payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $0.25 per unit based on a sales price of $0.25 per unit on an online funding portal. The receipt of the units satisfied $425,000 of an accounts receivable balance. As of January 31, 2024 and April 30, 2023, the Company owned 1,700,000 units which are valued at $425,000.

 

In January 2022, the Company received 2,850,000 units of Hiveskill LLC as payment for services rendered in conjunction with a crowdfunding offering. The units are valued at $0.25 per unit based on a sales price of $0.25 per unit on an online funding portal. The receipt of the units satisfied an accounts receivable balance of $712,500. As of January 31, 2024 and April 30, 2023, the Company owned 2,850,000 units which are valued at $712,500.

 

 -20- 

 

 

In fiscal 2022, the Company purchased a 10% interest, or 400 shares of common stock, in Caesar Media Group Inc. (“Caesar”) for an initial purchase price of 50,000 shares of the Company’s common stock, valued at $500,000. Caesar is a marketing and technology solutions provider. The purchase agreement included additional contractual requirements for the Company and Caesar, including the issuance of an additional 150,000 shares of common stock of the Company over a two-year period, which have all been issued as of October 31, 2023. As of January 31, 2024 and April 30, 2023, there have been no observable price changes in the value of the Caesar’s common stock and the Company has valued its ownership in Caesar at cost, which amounted to $1,999,127 as of January 31, 2024, and $1,632,752 as of April 30, 2023.

 

In May 2020, the Company entered a consulting contract with Watch Party LLC (“WP”), which allowed the Company to receive 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. As of January 31, 2024 and April 30, 2023, the Company owned 110,000 WP units, which are valued at $440,000.

 

In May 2020, the Company entered a consulting contract with ChipBrain LLC (“Chip”), which allowed the Company to receive 710,200 membership interest units of Chip in return for consulting services. 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. Subsequently, Chip sold identical units for $2.40 per unit, and as of January 31, 2024 and April 30, 2023, the 710,200 units owned by the Company are valued at $3,366,348.

 

In May 2020, the Company entered a consulting contract with a related party, Zelgor Inc. (“Zelgor”), which allowed the Company to receive 1,400,000 shares of common stock of Zelgor in return for consulting services. 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. As of January 31, 2024 and April 30, 2023, the Company owned 1,400,000 shares which are valued at $1,400,000.

 

On January 2, 2020, the Company entered a consulting contract with Deuce Drone LLC (“Drone”), which allowed the Company to receive 2,350,000 membership interest units of Drone in return for consulting services. The Drone units were originally 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 January 31, 2024 and April 30, 2023, the units owned by the Company are valued at $2,350,000.

 

In August 2019, the Company entered into 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 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 and is selling shares at $1.00 per share. In connection with the conversion to a corporation, each membership interest unit converted into 12.71915 shares of common stock. The Company sold 606,060 shares of KingsCrowd in June 2022 for proceeds of $200,000 and recorded a realized loss on the sale of the investment of $406,060. KingsCrowd filed a post qualification offering circular amendment on July 21, 2022 and continued to sell shares of common stock to the public for $1.00 per share. On March 1, 2024, KingsCrowd filed a Form 1-SA that disclosed it had sold shares of common stock at a price of $0.16 per share. The Company noted that this observable price change occurred before January 31, 2024, and consequently recorded an unrealized loss on equity securities of $2,696,135 for the three- and nine-month periods ended January 31, 2024. As of January 31, 2024 and April 30, 2023, the Company owned 3,209,685 shares of KingsCrowd valued at $513,550 and $3,209,685, respectively.

 

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 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 January 31, 2024 and April 30, 2023, the Company owned 528 Netcapital units, at a value of $48,128.

 

 -21- 

 

 

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 was payable in stock and half was payable in cash. As of January 31, 2024 and April 30, 2023, the Company owned 4,000 units, at a value of $11,032.

 

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 was payable in CRT units. As of January 31, 2024 and April 30, 2023, the Company owned 5,000 units, at a value of $50,000.

 

The following table summarizes the components of investments as of January 31, 2024 and April 30, 2023:

 

   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 
Vymedic Inc.   11,032    11,032 
C-Reveal Therapeutics LLC   50,000    50,000 
Deuce Drone LLC   2,350,000    2,350,000 
Hiveskill LLC   712,500    712,500 
ScanHash LLC   425,000    425,000 
Caesar Media Group Inc.   1,999,127    1,632,752 
Cust Corp.   1,200,000    1,200,000 
Kingscrowd Inc.   513,550    3,209,685 
Reper LLC   1,200,000    1,200,000 
Dark LLC   2,100,000    2,100,000 
Netwire LLC   1,300,000    1,300,000 
CountSharp LLC   1,170,000    1,170,000 
CupCrew LLC   1,170,000    1,170,000 
HeadFarm LLC   1,170,000    1,170,000 
RealWorld LLC   1,170,000     
Avadain, Inc.   44,945     
Averroes Software LLC   120     
NeuraMetrix, Inc.   117     
Recruiting Analytics Inc.   1,626     
Harvest Today, LLC   1,266     
VideoXRMn Inc.   939     
Total  $21,844,698   $22,955,445 

 

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.

 

Note 14 – Going Concern Matters and Realization of Assets

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. However, as of January 31, 2024, the Company had working capital of $2,719,419 and for the nine months ended January 31, 2024, the Company had an operating loss of $1,901,957 and net cash used in operating activities amounted to $3,565,953.

 

There can be no assurances that we will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. The Company has recently reduced its operating expenses and has turned its focus to its funding portal business, which generates cash revenues and has seen a growth in revenues on a year-to-year basis. The Company plans to continue operating with lower fixed overhead amounts and seeks to raise money from private placements, public offerings and/or bank financing. The Company’s management has determined, based on its recent history and the negative cash flow from operations, that it is unlikely that its plan will sufficiently alleviate or mitigate, to a sufficient level, the relevant conditions or events noted above. To the extent that funds generated from any private placements, public offerings and/or bank financing, if available, are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Accordingly, the Company’s management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of these financial statements. There can be no assurance that the Company will be able to achieve its business plan objectives or be able to achieve or maintain cash-flow-positive operating results. If the Company is unable to generate adequate funds from operations or raise sufficient additional funds, the Company may not be able to repay its existing debt, continue to operate its business network, respond to competitive pressures or fund its operations. As a result, the Company may be required to significantly reduce, reorganize, discontinue or shut down its operations. The financial statements do not include any adjustments that might result from this uncertainty.

 

Note 15 – Subsequent Events

 

The Company evaluated subsequent events through the date these financial statements were available to be issued.

 

On February 20, 2024 the Company received a warrant exercise notice of Prefunded Warrants to purchase 1,390,000 Warrant Shares and issued 1,390,000 shares of its common stock upon the receipt of the exercise price of $1,390. On March 8, 2024 the Company received a warrant exercise notice of Prefunded Warrants to purchase 1,390,000 Warrant Shares and issued 1,390,000 shares of its common stock upon the receipt of the exercise price of $1,390. There were no other material subsequent events that required recognition or additional disclosure in these financial statements.

 

 -22- 

 

 

PART I

 

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 Netcapital Inc. (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. Unless the context otherwise requires, references in this prospectus to the “Company,” “we,” “us,” and “our” refer to Netcapital Inc. and its subsidiaries.

 

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 fintech company with a scalable technology platform that allows private companies to raise capital online from accredited and non-accredited investors. We give investors the opportunity to access investments in private companies. We believe our model is disruptive to traditional private equity investing and is based on Title III, Reg CF of the JOBS Act. In addition, we have recently expanded our model to include Regulation A (“Reg A”) offerings. We generate fees from listing private companies on our funding portal located at www.netcapital.com. We generate fees from listing private companies on netcapital.com. We also generate fees from advising companies with respect to their Reg A offerings posted on www.netcapital.com. Our consulting group, Netcapital Advisors, Inc. (Netcapital Advisors), which is a wholly-owned subsidiary, provides marketing and strategic advice in exchange for equity positions and/or cash fees. The Netcapital funding portal is registered with the SEC, is a member of the Financial Industry Regulatory Authority, or FINRA, a registered national securities association, and provides investors with opportunities to invest in private companies. Neither Netcapital Advisors, nor any Netcapital entity or subsidiary, is a broker- dealer, nor do any of such entities operate as a broker-dealer with respect to any Reg A offering listed on the www.netcapital.com website.

 

 -23- 

 

 

We provide private company investment access to accredited and non-accredited investors through our online portal (www.netcapital.com), which is operated by our wholly owned subsidiary Netcapital Funding Portal, Inc. The Netcapital funding portal charges a $5,000 engagement fee and a 4.9% success fee for capital raised at closing. In addition, the portal generates fees for other ancillary services, such as rolling closes. Netcapital Advisors generates fees and equity stakes from consulting in select portfolio and non-portfolio clients. With respect to its services for Reg A offerings, Netcapital Advisors charges a monthly flat fee for each month the offering is listed on the netcapital.com website as well as a nominal administrative flat fee for each investor that is processed to cover out-of-pocket costs.

 

We generated revenues of $4,604,260, with costs of service of $97,062, in the nine months ended January 31, 2024 for a gross profit of $4,507,198 (consisting of $3,489,013 in equity securities for payment of services and $1,115,247 in cash-based revenues, offset by $97,062 for costs of services) in the nine months ended January 31, 2024 as compared to revenues of $5,379,960 with costs of service of $61,603 in the nine months ended January 31, 2023 for a gross profit of $5,318,357 (consisting of $4,375,000 in equity securities for the payment of services and $1,004,960 in cash-based revenues, offset by $61,603 for costs of services) in the nine months ended January 31, 2023. Our cash-based gross profits as a percentage of gross profits were approximately 7% and 2%, respectively in the nine month periods ended January 31, 2024 and 2023, entities (for which we performed services) in which we own equity during such periods. The total number of offerings on the Netcapital funding portal in the nine months ended January 31, 2024 and 2023 that closed was 36 and 30, respectively, of which 11 and 7 offerings hosted on the Netcapital funding platform in the nine months ended January 31, 2024 and 2023, respectively, terminated their listings without raising the required minimum dollar amount of capital. The total number of offerings on the Netcapital funding portal in fiscal 2023 and 2022 that closed was 63 and 81, respectively, of which 13 and 17 offerings hosted on the Netcapital funding platform in fiscal 2023 and 2022, respectively, terminated their listings without raising the required minimum dollar amount of capital. As of the date of this report, we own minority equity positions in 25 portfolio companies that have utilized the funding portal to facilitate their offerings, which equity was received as payment for services.

 

Netcapital.com is an SEC-registered funding portal that enables private companies to raise capital online, while investors are able to invest from almost anywhere in the world, at any time, with just a few clicks. Securities offerings on the portal are accessible through individual offering pages, where companies include product or service details, market size, competitive advantages, and financial documents. Companies can accept investments from virtually anyone, including friends, family, customers, and employees. Customer accounts on our platform are not permitted to hold or use digital securities to make an investment.

 

In addition to access to the funding portal, Netcapital provides the following services:

 

a fully automated onboarding process;
automated filing of required regulatory documents;
compliance review;
a custom-built offering page on our portal website;
third party transfer agent and custodial services;
email marketing to our proprietary list of investors;
rolling closes, which provide potential access to liquidity before final close date of offering;
assistance with annual filings; and
direct access to our team for ongoing support.

 

Our consulting group, Netcapital Advisors helps companies at all stages to raise capital. Netcapital Advisors provides strategic advice, technology consulting and digital marketing services to assist with fundraising campaigns on the Netcapital platform. The company also acts as an incubator and accelerator for select disruptive start-ups.

 

Netcapital Advisors’ services include:

 

incubation of technology start-ups;
investor introductions;
online marketing;
website design, software and software development;
message crafting, including pitch decks, offering pages, and ad creation;
strategic advice; and
technology consulting.

 

 -24- 

 

 

Recent Developments

 

Extension Notice from Nasdaq to Regain Compliance with the Minimum Bid Price Rule

 

As previously disclosed on a Current Report on Form 8-K filed by us on September 1, 2023, we received a notification from The Nasdaq Stock Market, LLC (“Nasdaq”) notifying us that we were not in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market. Specifically, Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. We initially had 180 calendar days, or until February 28, 2024, to regain compliance with the minimum bid price requirement. We were unable to regain compliance with the minimum bid price requirement by February 28, 2024.

 

On February 29, 2024, we received a letter (the “Extension Notice”) from Nasdaq notifying us that our request for an extension to regain compliance with the minimum bid price requirement has been granted, and we have an additional 180 calendar days, or until August 26, 2024, to regain compliance with the minimum bid price requirement. Nasdaq’s determination was based on us meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Nasdaq Capital Market with the exception of the bid price requirement, and our written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. The Extension Notice has no immediate effect on the listing or trading of our common stock on The Nasdaq Capital Market and, at this time, our common stock will continue to trade on The Nasdaq Capital Market under the symbol “NCPL.”

 

If at any time before August 26, 2024, the bid price of our common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will notify us that we are in compliance with the minimum bid price requirement. However, if compliance with the minimum bid price requirement cannot be demonstrated by August 26, 2024, Nasdaq will notify us that our common stock will be delisted from The Nasdaq Capital Market, at which time, we may appeal Nasdaq’s determination to a Hearings Panel.

 

We intend to monitor the closing bid price of its common stock and may, if appropriate, consider implementing available options, including, but not limited to, implementing a reverse stock split of our outstanding securities during the second compliance period, to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules.

 

December 2023 Public Offering

 

On December 27, 2023, we completed a public offering of (i) 4,800,000 shares of our common stock; (ii) 11,200,000 prefunded warrants to purchase 11,200,000 shares of our common stock; (iii) 16,000,000 Series A-1 warrants to purchase 16,000,000 shares of our common and (iv) 16,000,000 Series A-2 warrants to purchase 16,000,000 shares of our common stock of the Company for gross proceeds of $4 million, before deducting underwriting discounts and offering expenses payable by us. The offering price of each common share and accompanying Series A-1 warrant and Series A-2 warrant was $0.25, and the offering price of each prefunded warrant and accompanying Series A-1 warrant and Series A-2 warrant was $0.249. Each Common Warrant has an exercise price of $0.25 per share. The Series A-1 Common Warrants will expire on February 23, 2029. The Series A-2 Common Warrants will expire August 23, 2025 following the date of Shareholder Approval. We received net proceeds of approximately $3.37 million from this offering, after deducting the estimated offering expenses payable by us, including the placement agent fees. We also issued warrants to designees of the H.C. Wainwright, who served as placement agent for this offering to purchase up to 1,200,000 shares of our common stock, which warrants have substantially the same terms as the Series A-1 warrants and Series A-2 warrants, except that warrants issued to the designees of the placement agent have an exercise price equal to $0.3125 per share and expire on December 27, 2028.

 

 -25- 

 

 

Results of Operations

 

Comparison of the Three Months Ended January 31, 2024 and 2023

 

Our revenues for the three months ended January 31, 2024, decreased by $1,217,621, or approximately 54%, to $1,042,793 as compared to $2,260,414 during the three months ended January 31, 2023. The decrease in revenues was primarily attributed to a decrease in revenues for consulting services that we provide in exchange for equity securities during the quarter ended January 31, 2024, as compared to the quarter ended January 31, 2023. In the three months ended January 31, 2024, revenues from equity-based contracts decreased by $1,087,654, or 56%, to $862,346, as compared to revenues of $1,950,000 in the three months ended January 31, 2023. A decrease of $52,245, or 23%, was also noted in funding portal revenues in the three months ended January 31, 2024, when compared to the prior year fiscal quarter. In the three months ended January 31, 2024, we recorded $179,588 in funding portal revenues, consisting of portal fees of $84,548 and listing fees of $95,040, as compared to funding portal revenues of $231,833 in the three months ended January 31, 2023, consisting of portal fees of $99,333 and listing fees of $132,500. The decrease in funding portal revenues in the three months ended January 31, 2024 is primarily attributable to fewer issuers listing to raise capital on the funding portal platform.

 

The components of revenue were as follows:

 

   Jan. 31, 2024   Jan. 31, 2023 
Consulting services for equity securities  $862,346   $1,950,000 
Consulting revenue   500    78,260 
Portal fees   84,548    99,333 
Listing fees   95,040    132,500 
Other revenue   359    321 
Total  $1,042,793   $2,260,414 

 

Costs of revenues increased by $54,570 to $58,875, or approximately 1,268% for the three months ended January 31, 2024 from $4,305 during the three months ended January 31, 2023. The increase was attributed to additional costs for funding portal services.

 

Payroll and payroll related expenses decreased by $76,526, or 8%, to $869,517 for the three months ended January 31, 2024, as compared to $946,043 during the three months ended January 31, 2023. The decrease was attributed to the elimination of certain positions during the quarter ended January 31, 2024.

 

Marketing expense increased by $8,649, or approximately 37%, to $32,198 for the three months ended January 31, 2024, as compared to $23,549 during the three months ended January 31, 2023. The increase in expense was primarily attributed to an increase in marketing outlets that we utilized in the three months ended January 31, 2024.

 

Rent expense increased by $2,357, or approximately 14%, to $19,544 for the three months ended January 31, 2024, as compared to $17,187 during the three months ended January 31, 2023. The increase was primarily attributed to a new office-space agreement that became effective in the current fiscal year.

 

General and administrative expenses increased by $524,206, or 92%, to $1,092,459 for the three months ended January 31, 2024, from $568,253 during the three months ended January 31, 2023. The increase was primarily attributed to stock-based compensation utilized to pay for professional fees and increased legal costs.

 

Consulting expense increased by $44,857, or approximately 34%, to $175,357 for the three months ended January 31, 2024 from $130,500 during the three months ended January 31, 2023. The increase was primarily attributed to an increase in overseas programmers.

 

We recognized an unrealized loss in the value of our equity securities of $2,696,135 for the three months ended January 31, 2024, as compared to an unrealized gain of $1,866,468 in the value of our equity securities for the three months ended January 31, 2023. The loss in fiscal 2024 was attributable to a decrease in value to $0.16 per share from $1.00 per share for 3,209,685 shares that we own of KingCrowd, Inc. The gain in fiscal 2023 resulted from an increase in value of $204,000 for our 110,000 units of MustWatch LLC, from $2.14 per unit to $4.00 per unit, and an increase in value of $1,661,868 for our 710,200 units of ChipBrain LLC, from $0.93 per unit to $4.74 per unit

 

Interest expense decreased by $5,714 to $11,918, or approximately 32%, for the three months ended January 31, 2024, as compared to $17,632 during the three months ended January 31, 2023. The decrease in interest expense was primarily attributed to lower debt amounts that resulted from paying off a secured term loan.

 

Comparison of the Nine Months Ended January 31, 2024 and 2023

 

Our revenues for the nine months ended January 31, 2024, decreased by $775,700, or approximately 14%, to $4,604,260, as compared to $5,379,960 during the nine months ended January 31, 2023. The decrease in revenues is attributable to a decrease in revenue of $885,987, or 20%, in consulting services that are provided in exchange for equity securities, and a decrease in cash-based consulting revenue of $313,450, or 77%. These decreases were offset by an increase in funding portal revenues in the nine-month period ended January 31, 2024, as compared to the nine-month period ended January 31, 2023, consisting of an increase in portal fees of $375,683, or 152%, and an increase in listing fees of $48,040, or 14%. The increase in funding portal revenues in the nine months ended January 31, 2024 is primarily attributable to increased offering activity on the platform that generated increased investments by investors who purchased securities on the portal.

 

 -26- 

 

 

The components of revenue were as follows:

 

   Jan. 31, 2024   Jan. 31, 2023 
Consulting services for equity securities  $3,489,013   $4,375,000 
Consulting revenue   96,200    409,650 
Portal fees   623,610    247,927 
Listing fees   394,540    346,500 
Other revenue   897    883 
Total  $4,604,260   $5,379,960 

 

Costs of revenues increased by $35,459 to $97,062, or approximately 58%, for the nine months ended January 31, 2024 from $61,603 during the nine months ended January 31, 2023. The increase was primarily attributed to an increase in costs for the funding portal.

 

Payroll and payroll related expenses increased by $364,503, or approximately 14%, to $2,957,394 for the nine months ended January 31, 2024, as compared to $2,592,891 during the nine months ended January 31, 2023. The increase was attributed to higher wages in the first half of the fiscal year and additional stock-based compensation.

 

Marketing expense increased by $256,606, or approximately 400%, to $320,817 for the nine months ended January 31, 2024, as compared to $64,211 during the nine months ended January 31, 2023. The increase was to bring awareness to the funding portal operations and the Company to attract new issuers and investors.

 

Rent expense increased by $5,947, or approximately 12%, to $57,533 for the nine months ended January 31, 2024, as compared to $51,586 during the nine months ended January 31, 2023. The increase was primarily attributed to a new office-space agreement that became effective in the current fiscal year.

 

General and administrative expenses increased by $1,288,013, or approximately 104%, to $2,529,378 for the nine months ended January 31, 2024, from $1,241,365 during the nine months ended January 31, 2023. The increase was primarily attributed to professional fees, including stock-based compensation.

 

Consulting expense increased by $88,141, or 19%, to $544,033 for the nine months ended January 31, 2024 from $455,892 during the nine months ended January 31, 2023. The increase was primarily attributed to increased payments to software engineers.

 

We recognized an unrealized loss in the value of our equity securities of $2,696,135 for the nine months ended January 31, 2024, as compared to an unrealized gain of $1,857,500 in the value of our equity securities for the nine months ended January 31, 2023. The loss in fiscal 2024 was attributable to a decrease in value to $0.16 per share from $1.00 per share for 3,209,685 shares of common stock that we own of KingCrowd, Inc. The gain in fiscal 2023 resulted from an increase in value of $204,000 for our 110,000 units of MustWatch LLC, from $2.14 per unit to $4.00 per unit, and an increase in value of $1,661,868 in our 710,200 units of ChipBrain LLC, from $0.93 per unit to $4.74 per unit, less an unrealized loss of $8,968 in the value of the 4,000 shares of Vymedic Inc. from $5.00 per share to $2.76 per share.

 

Interest expense decreased by $41,138 to $35,784, or approximately 54%, for the nine months ended January 31, 2024, as compared to $76,922 during the nine months ended January 31, 2023. The decrease in interest expense was primarily attributed to lower debt amounts that resulted from paying off a secured term loan.

 

Liquidity and Capital Resources

 

As of January 31, 2024, we had cash and cash equivalents of $2,172,099 and working capital of $2,719,419 as compared to cash and cash equivalents of $569,441 and negative working capital of $2,622,670 at April 30, 2023.

 

We have been successful in raising capital by completing public offerings of our common stock.

 

On July 15, 2022, we completed an underwritten public offering of 1,205,000 shares of our common stock and warrants to purchase 1,205,000 shares of our common stock at a combined public offering price of $4.15 per share and warrant. The gross proceeds from the offering were $5,000,750 prior to deducting underwriting discounts, commissions, and other offering expenses. The warrants have a per share exercise price of $5.19, are exercisable immediately, and expire five years from the date of issuance. With the use of proceeds, we paid $1 million of debt to our secured lender, to reduce the outstanding principal balance to $400,000.

 

 -27- 

 

 

On December 16, 2022 we completed an underwritten public offering of 1,247,000 shares of our common stock, at a price to the public of $1.40 per share. In conjunction with this offering, we issued the underwriter and its designees warrants to purchase 62,350 shares of our common stock at an exercise price of $1.75. The underwriters exercised their over-allotment option and on January 5, 2023, we issued an additional 187,000 shares of its common stock at a price of $1.40 per share. We received net proceeds of $1,621,459 for the issuance of a total of 1,434,000 shares of common stock in both the initial and over-allotment offering. In conjunction with the exercise of the over-allotment, the Company issued the underwriter and its designees warrants to purchase 9,350 shares of our common stock with an exercise price of $1.75.

 

On May 23, 2023, we entered into a securities purchase agreement with certain institutional investors, pursuant to which sold to such investors, in a registered direct offering (the “Offering”), 1,100,000 shares of our common stock, at a price of $1.55 per share, for aggregate gross proceeds of $1,705,000, before deducting the placement agent’s fees and other offering expenses payable by us. This offering closed on May 25, 2023.

 

With the use of proceeds, we paid our secured lender $350,000 in principal plus accrued interest of $17,167.23 to retire all outstanding obligations to the secured lender.