|TEV||8||TEV/EBIT||7||TTM 2019-10-31, in MM, except price, ratios|
|Part I - Financial Information|
|Item 1. Financial Statements.|
|Note 1 - Basis of Presentation|
|Note 2 - Going Concern Matters and Realization of Assets|
|Note 3 - Revenue Recognition|
|Note 4 - Earnings per Common Share|
|Note 5 - Principal Financing Arrangements|
|Note 6 - Income Taxes|
|Note 7 - Related Party Transactions|
|Note 8 - Stockholders' Equity|
|Note 9 - Fair Value|
|Note 10 - Stock - Based Compensation Plans|
|Note 11 - Deposits and Commitments|
|Note 12 - Concentrations|
|Note 13 - Investments|
|Note 14 - Subsequent Events|
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.|
|Item 3. Quantitative and Qualitative Disclosures About Market Risk.|
|Item 4. Controls and Procedures.|
|Part II - Other Information|
|Item 1. Legal Proceedings.|
|Item 1A. Risk Factors.|
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	|
|Item 3. Defaults Upon Senior Securities.|
|Item 4. Mine Safety Disclosures.|
|Item 5. Other Information.|
|Item 6. Exhibits.|
|Balance Sheet||Income Statement||Cash Flow|
Rev, G Profit, Net Income
Ops, Inv, Fin
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: October 31, 2020
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-55036
F/K/A VALUESETTERS, INC.
|(Exact name of registrant as specified in its charter)|
|(State or other jurisdiction of incorporation or organization)|
745 Atlantic Avenue
Boston MA 02111
|(Address of principal executive offices)|
|(Registrant’s telephone number, including area code)|
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[X] 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 [X] 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 [X]||Smaller reporting company [X]|
|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 [X]
As of December 15, 2020, the Company had 2,085,815 shares of its common stock, par value $0.001 per share, issued and outstanding.
TABLE OF CONTENTS
|PART I—FINANCIAL INFORMATION|
|Item 1. Financial Statements.||3|
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.||17|
|Item 3. Quantitative and Qualitative disclosures about Market Risk.||21|
|Item 4. Controls and Procedures.||21|
|PART II—OTHER INFORMATION|
|Item 1. Legal Proceedings.||22|
|Item1A. Risk Factors.||22|
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.||22|
|Item 3. Defaults Upon Senior Securities.||22|
|Item 4. Mine Safety Disclosures.||22|
|Item 5. Other Information.||22|
|Item 6. Exhibits.||22|
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
F/K/A VALUESETTERS, INC.
Condensed Consolidated Balance Sheets
|October 31, 2020||April 30, 2020|
|Cash and cash equivalents||$||455,994||$||11,206|
|Total current assets||870,895||476,761|
|Deferred income tax asset||157,602||180,000|
|Non-current prepaid expenses||—||143,455|
|Investments at cost||3,721,514||1,406,982|
|Liabilities and Stockholders’ Equity|
|Notes payable – related parties||15,000||15,000|
|Secured noted payable to related party||1,000,000||1,000,000|
|Interest payable – related parties||37,536||31,235|
|Current portion of long-term debt||1,264,519||—|
|Loan payable – bank||34,324||34,324|
|Demand notes payable||7,860||7,860|
|Total current liabilities||2,875,018||1,534,342|
|Small Business Administration loans payable, net of current portion||1,121,281||—|
|Commitments and Contingencies||—||—|
|Common stock, $.001 par value; 900,000,000 shares authorized, 419,455 and 417,059 shares issued and outstanding at Oct. 31, 2020 and April 30, 2020, respectively||419||417|
|Capital in excess of par value||3,160,982||3,141,021|
|Total stockholders’ equity||760,012||679,156|
|Total liabilities and stockholders’ equity||$||4,756,311||$||2,213,498|
See Accompanying Notes to the Consolidated Financial Statements
F/K/A VALUESETTERS, INC.
|Condensed Consolidated Statements of Operations|
|For the Six Months Ended||For the Three Months Ended|
|October 31, |
|October 31, |
|October 31, |
|October 31, |
|Cost of revenues||714,224||4,848||283,205||2,482|
|Costs and expenses:|
|Wages and payroll expense||1,296,333||—||200,213||—|
|Selling, general and administrative||75,500||33,283||34,361||29,903|
|Total costs and expenses||1,672,407||254,337||393,599||167,179|
|Income from operations||106,855||576,540||54,360||547,332|
|Other income (expense):|
|Total other income (expense)||(23,564||)||(9,614||)||(13,281||)||(4,881||)|
|Net income before taxes||83,291||566,926||41,079||542,451|
|Basic earnings per share||$||0.15||$||1.43||$||0.07||$||1.31|
|Diluted earnings per share||$||0.15||$||1.43||$||0.07||$||1.31|
|Weighted average number of common shares outstanding:|
See Accompanying Notes to the Financial Statements
F/K/A VALUESETTERS, INC.
|Condensed Consolidated Statements of Stockholders' Equity|
|For the Six Months Ended October 31, 2020 and the Years Ended April 30, 2020, and 2019|
|Balance, April 30, 2018||367,273||$||367||$||2,165,655||$||(3,650,013||)||$||(1,483,991||)|
|Net loss, July 31, 2018||—||—||—||(7,207||)||(7,207||)|
|Q1 stock-based compensation||1,969||2||6,693||—||6,695|
|Q1 stock issued for purchase||100||—||700||—||700|
|Balance, July 31, 2018||369,342||369||2,173,048||(3,657,220||)||(1,483,803||)|
|Net loss, October 31, 2018||—||—||—||(20,355||)||(20,355||)|
|Q2 stock-based compensation||4,131||5||12,203||—||12,208|
|Q2 sale of common stock||1,400||1||4,999||—||5,000|
|Balance, October 31, 2018||374,873||375||2,190,250||(3,677,575||)||(1,486,950||)|
|Net income, January 31, 2019||—||—||—||12,391||12,391|
|Q3 stock-based compensation||1,406||1||3,374||—||3,375|
|Balance, January 31, 2019||376,279||376||2,193,624||(3,665,184||)||(1,471,184||)|
|Net income, April 30, 2019||—||—||—||598,051||598,051|
|Q4 stock-based compensation||1,406||2||7,873||—||7,875|
|Balance, April 30, 2019||377,685||378||2,201,497||(3,067,133||)||(865,258||)|
|Net income, July 31, 2019||—||—||—||24,475||24,475|
|Q1 stock-based compensation||1,406||1||19,687||—||19,688|
|Balance, July 31, 2019||379,091||379||2,221,184||(3,042,658||)||(821,095||)|
|Net income, October 31, 2019||—||—||—||542,451||542,451|
|Q2 stock-based compensation||37,656||38||917,305||—||917,343|
|Balance, October 31, 2019||416,747||417||3,138,489||(2,500,207||)||638,699|
|Net income, January 31, 2020||—||—||—||595,174||595,174|
|Q3 stock-based compensation||156||—||1,500||—||1,500|
|Balance, January 31, 2020||416,903||417||3,139,989||(1,905,033||)||1,235,373|
|Q4 stock-based compensation||156||—||1,032||—||1,032|
|Net loss, April 30, 2020||—||—||—||(557,249||)||(557,249||)|
|Balance, April 30, 2020||417,059||417||3,141,021||(2,462,282||)||679,156|
|Net income July 31, 2020||—||—||—||30,871||30,871|
|Q1 stock-based compensation||156||—||1,406||—||1,406|
|Balance July 31, 2020||417,215||417||3,142,427||(2,431,411||)||711,433|
|Net income October 31, 2020||—||—||—||30,022||30,022|
|Q2 stock-based compensation||2,240||2||18,555||—||18,557|
|Balance, October 31, 2020||419,455||$||419||$||3,160,982||$||(2,401,389||)||$||760,012|
See Accompanying Notes to the Consolidated Financial Statements
F/K/A VALUESETTERS, INC.
|Condensed Consolidated Statements of Cash Flows|
|Six Months||Six Months|
|October 31,||October 31,|
|Adjustments to reconcile net income to net cash used in operating activities:|
|Changes in deferred tax assets||22,398||—|
|Non-cash revenue from receipt of equity||(2,314,532||)||(653,864||)|
|Changes in non-cash working capital balances|
|Accounts payable – related party||34,490|
|Interest payable – related party||6,301||8,122|
|Cash provided by (used in) operating activities||(1,941,012||)||16,432|
|Proceeds from SBA loans||2,385,800||—|
|Payment on related party note||—||(4,300||)|
|Cash provided by (used in) financing activities||2,385,800||(4,300||)|
|Increase in cash and cash equivalents during the period||444,788||12,132|
|Cash and cash equivalents, beginning of the period||11,206||19,110|
|Cash and cash equivalents, end of the period||$||455,994||$||31,242|
|Cash paid for:|
|Non-cash financing activities|
|Common stock issued as prepaid compensation||$||—||$||915,000|
See Accompanying Notes to the Consolidated Financial Statements
F/K/A VALUESETTERS, INC.
Notes To Condensed Consolidated Financial Statements (Unaudited)
Note 1– Basis of Presentation
Netcapital Inc. (“we,” “our,” or the “Company”) is a provider of consulting services, subscription services, advertising and digital goods using technology distribution platforms like the Internet and mobile devices in the media and entertainment markets.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 footnotes 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 six- and three-month periods ended October 31, 2020, are not necessarily indicative of the results that may be expected for the fiscal year ended April 30, 2021. For further information, refer to the audited financial statements and footnotes thereto in our Annual Report on Form 10-K for the year ended April 30, 2020.
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses. The new guidance provides better representation about expected credit losses on financial instruments. This update requires the use of a methodology that reflects expected losses and requires consideration of a broader range of reasonable and supportive information to inform credit loss estimates. This ASU is effective for reporting periods beginning after December 15, 2022, with early adoption permitted. The company is studying the impact of adopting the ASU in fiscal year 2023, and what effect it could have. The Company believes the accounting change would not have a material effect on the financial statements.
In June 2018, the FASB issued ASU 2018-07, Improvement to Nonemployee Share-based Payment Accounting, which simplifies the accounting for share-based payments. The company elected early adoption of this ASU, using the modified retrospective approach, so that all stock compensation to employees and nonemployees is treated under the same guidance as in ASC 718.
In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance had no impact on our consolidated financial statements.
Management does not believe that any other 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.
Note 2 – 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, the Company has negative working capital of $1,867,687 and short-term debt of more than $2,300,000. In addition, the Company may be unable to meet all of its obligations as they become due. The Company believes that its existing cash resources may not be sufficient to fund its debt payments and working capital requirements. The Company anticipates a majority of its debt payments will be forgiven under the provisions of an SBA loan program, and such forgiveness will alleviate the uncertainty of being able to fund its debt service requirements.
The Company may not be able to raise sufficient additional debt, equity, or other cash on acceptable terms, if at all. Failure to generate sufficient revenues, obtain loan forgiveness, achieve certain other business plan objectives or raise additional funds could have a material adverse effect on the Company’s results of operations, cash flows and financial position, including its ability to continue as a going concern, and may require it to significantly reduce, reorganize, discontinue or shut down its operations.
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company which, in turn, is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in its existence.
Management’s plans include:
|1.||Seek to merge its business operations with some of the revenue-generating early-stage companies that it has incubated. The Company already owns a portion of more than a dozen companies and believes that the combination of some of those entities with the Company will provide an efficient use of fixed overhead and create additional cash flow from operations.|
|2.||Renegotiate the payment terms of an SBA loan.|
|3.||Continue to provide consulting services and continue to charge both a cash fee and an equity-based fee, when possible, in exchange for these services.|
Management has determined, based on the debt balances it is carrying, that without debt forgiveness it is not probable that management’s plan will sufficiently alleviate or mitigate, to a sufficient level, the relevant conditions or events noted above. Accordingly, the management of the Company 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.
Note 3 – Revenue Recognition
Revenue Recognition under ASC 606
The Company recognizes service revenue from its consulting contracts and its 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 and subscription services. 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.
Judgments and Estimates
The estimation of variable consideration for each performance obligation requires the Company to make subjective judgments. The Company enters 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 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 asset (Accounts Receivable).
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 or non-current assets in the consolidated balance sheets, depending on if their reduction will be recognized during the succeeding twelve-month period or beyond.
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 and training 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.
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 six- and three-month periods ended October 31, 2020 and 2019 are considered contract revenues. Contract revenue as of October 31, 2020 and April 30, 2020, which has not yet been recognized, amounted to $5,507 and $656, respectively, and is recorded on the balance sheet as deferred revenue. The Company expects to recognize revenue on all of its remaining performance obligations over the next 12 months.
Note 4 – Earnings Per Common Share
Income per common share data was computed as follows:
|Six Months Ended October 31, 2020||Six Months Ended October 31, 2019||Three Months Ended October 31, 2020||Three Months Ended October 31, 2019|
|Net income attributable to common stockholders – basic||$||60,893||$||566,926||$||30,022||$||542,451|
|Adjustments to net income||—||—||—||—|
|Net income attributable to common stockholders – diluted||$||60,893||$||566,926||$||30,022||$||542,451|
|Weighted average common shares outstanding – basic||415,726||395,765||415,815||415,254|
|Effect of dilutive securities||—||—||—||—|
|Weighted average common shares outstanding – diluted||415,726||395,765||415,815||415,254|
|Earnings per common share – basic||$||0.15||$||1.43||$||0.07||$||1.31|
|Earnings per common share – diluted||$||0.15||$||1.43||$||0.07||$||1.31|
For the six- and three-month periods ended October 31, 2020 and 2019, the Company had no convertible or dilutive securities.
Note 5 – Principal Financing Arrangements
The following table summarizes components debt as of October 31, 2020 and April 30, 2020:
|October 31, |
|April 30, 2020||Interest Rate|
|Secured lender (affiliate)||$||1,000,000||$||1,000,000||1.25||%|
|Notes payable – related parties||15,000||15,000||0.0||%|
|Demand notes payable||7,860||7,860||0.0||%|
|U.S. SBA loan||500,000||—||3.75||%|
|U.S. SBA loan||1,885,800||—||1.0||%|
|Loan payable – bank||34,324||34,324||5.5||%|
As of October 31, 2020 and April 30, 2020, the Company owed its principal lender (“Lender”) $1,000,000 under a loan and security agreement (“Loan”) dated April 28, 2011, that was amended on July 26, 2014 and again on October 31, 2017. The Lender was also the largest shareholder of the Company, owning 135,676 shares of common stock, or 32.3% of the 419,455 shares issued and outstanding, as of October 31, 2020. The Loan was amended on October 31, 2017 to change the maturity date to October 31, 2020, reduce the interest rate from 8% to 1.25% per annum, and reduce the default interest rate from 15% to 8% per annum. The Loan was not paid when it matured on October 31, 2020. The Loan maturity date has been extended to January 31, 2021 and the annual interest rate has been raised to 8% per annum effective November 1, 2020.
In connection with the financing, the Company has agreed to certain restrictive covenants, including, among others, that the Company may not convey, sell, lease, transfer or otherwise dispose of any part of its business or property, except as permitted in the agreement, dissolve, liquidate or merge with any other party unless, in the case of a merger, the Company is the surviving entity, incur any indebtedness except as defined in the agreement, create or allow a lien on any of its assets or collateral that has been pledged to the Lender, make any loans to any person, except for prepaid items or deposits incurred in the ordinary course of business, or make any material capital expenditures. To secure the payment of all obligations to the Lender, the Company granted to the Lender a continuing security interest and first lien on all of the assets of the Company.
As of October 31, 2020 and April 30, 2020, the Company’s related-party unsecured notes payable totaled $15,000. There is one note, payable on demand, with a zero percent interest rate. The Company also owes $34,324 as of October 31, 2020 and April 30, 2020 to Chase Bank. The Company pays interest expense to Chase Bank, which is calculated at a rate of 5.5% per annum.
On May 6, 2020, the Company borrowed $1,885,800 (the “May Loan”) and on June 17, 2020 the Company borrowed $500,000 (the “June Loan”) from a U.S. Small Business Administration (the "SBA") loan program. The May Loan has an initial term of two years and an interest rate of 1% per annum. Principal payments are delayed until the Company negotiates with the lender as to the amount of principal that is subject to repayment. If repayment of the May Loan is required, payments begin after a six-month deferral period, in which interest accrues, and payments are to be made in equal installments of approximately $106,125 over an 18-month period. Of the $1,885,800 balance, $1,260,334 is considered a short-term liability. Accrued interest payable on the May Loan amounted to $9,197 as of October 31, 2020.
The June Loan requires installment payments of $2,437 monthly, beginning on June 17, 2021 over a term of thirty years. 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. $4,185 of the June Loan is recorded as a current liability and the remaining $495,815 is classified as a long-term liability. Accrued interest payable on the June Loan amounted to $6,935 as of October 31, 2020.
Demand notes payable totaled $7,860 as of October 31, 2020 and April 30, 2020. These notes have an interest rate of 0%.
Note 6 – Income Taxes
As of October 31, 2020 and April 30, 2020, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $700,000 expiring in the years of 2021 through 2035.
The Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017. Among numerous provisions, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. As a result of the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%.
As of April 30, 2020, the Company had net deferred tax assets calculated at an expected rate of 21%, or approximately $180,000. As of April 30, 2020, the Company recognized the net deferred asset to the extent of the impact on current book earnings, as the Company’s management believed that historical, current and expected earnings are sufficient to meet the more likely than not standard to enable the Company to recognize the net deferred tax asset. Given that management believes it is more likely than not that the company will utilize the deferred tax asset, there is no valuation allowance as of October 31, 2020 and April 30, 2020.
As of October 31, 2020, the deferred tax asset has been reduced to $157,602 by the tax provision of $22,398 for the six months ended October 31, 2020. Due to the availability of a tax loss carryforward to offset any potential income tax in the six- and three-month periods ended October 31, 2019, the Company recorded no income tax expense in those periods.
Note 7 – Related Party Transactions
The Company’s principal lender was its largest shareholder as of October 31, 2020 and until November 5, 2020. See Note 14. As of October 31, 2020 and April 30, 2020, the Company owed its principal lender, under a secured lending agreement, $1,000,000. Under the existing loan agreement, as amended, the maximum amount of the loan is $1,250,000, and the loan matures on January 31, 2021. This shareholder owned 135,687 shares of common stock, or 32.3% of the 419,455 shares issued and outstanding as of October 31, 2020. Accrued interest payable on this secured loan as of October 31, 2020 and April 30, 2020 amounted to $37,536 and $31,235, respectively.
Compensation to officers in the six- and three-month periods ended October 31, 2020 and 2019 consisted of common stock valued at $164,885 and $82,263 respectively, and cash wages of $138,462 and $72,000, respectively.
Compensation to a related party consultant in the six-and three-month periods ended October 31, 2020 and 2019 consisted of common stock valued at $38,757 and $19,378, respectively, and cash payments of $46,154 and $24,000, respectively. This consultant is also the controlling shareholder of Zelgor Inc. and the Company’s earned revenues from Zelgor Inc. of $1,400,000 and $350,000 in the six- and three-month periods ended October 31, 2020.
The Company owes a director $16,680 as of October 31, 2020 and April 30, 2020, which is recorded as accounts payable, plus $15,000 in a non-interest-bearing note payable. Also included in related-party accounts payable is $34,490 due to a company controlled by a different director.
Note 8 – Stockholders’ Equity
The Company is authorized to issue 900,000,000 shares of its common stock, par value $0.001. As of October 31, 2020 and April 30, 2020, 419,455 and 417,059 shares were outstanding, respectively.
In August 2020, the board of directors authorized a reverse split of the common stock on a 1-for-2,000 basis, whereby the Company issued to each of its stockholders one share of Common Stock for every 2,000 shares of common stock held by such stockholder. The reverse split was effective on November 5, 2020. The financial statements as of and for the six- and three-month periods ended October 31, 2020 and 2019 have been adjusted to give effect to the reverse split. The effect of this adjustment was to reduce the common stock balance sheet account and increase the balance sheet account for capital in excess of par value by $835,642 as of October 31, 2020. As of April 30, 2020, the balance sheet accounts for capital in excess of par value and for common stock were increased and decreased by $830,852, respectively.
In the first quarter of fiscal 2021, the Company issued an aggregate of 156 shares of restricted stock to its Chief Marketing Officer as compensation. The shares were valued at the market price on the date of issuance for a total of $1,406.
In the second quarter of fiscal 2021, the Company issued an aggregate of 156 shares of restricted stock to its Chief Marketing Officer and 2,084 shares to its Director of Business Development as compensation. The shares were valued at the market price on the date of issuance for a total of $18,557.
In the first quarter of fiscal 2020, the Company issued an aggregate of 2,812,500 shares of restricted stock to its Chief Executive Officer, Chief Financial Officer and Chief Marketing Officer as compensation. The shares were valued at the market price on the date of issuance for a total of $19,688.
On September 9, 2019, the Company signed a stock-based compensation agreement, ending on July 31, 2021, with its Chief Executive Officer. The Company issued 12,500 shares of its common stock in conjunction with this agreement. The shares were valued at the market price on the date of issuance for a total of $305,000.
On September 9, 2019, the Company signed a stock-based compensation agreement with its Chief Financial Officer, ending on July 31, 2021. The Company issued 12,500 shares of its common stock in conjunction with this agreement. The shares were valued at the market price on the date of issuance for a total of $305,000.
On September 9, 2019, the Company signed stock-based compensation agreements with two consultants, ending on July 31, 2021. The Company issued 6,250 shares of its common stock to each consultant in conjunction with these agreements. The shares were valued at the market price on the date of issuance for a total of $305,000. One of the consultants is considered a related party and provides marketing and business development services to the Company. The second consultant provides business services to public companies.
On October 31, 2019, the Company recorded the issuance of 156 shares of common stock to its Chief Marketing Officer. The shares were valued at the market price on the date of issuance for a total of $2,344 and recorded as an expense in the quarter ended October 31, 2019.
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:
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
The Company entered consulting agreements to issue common stock and recorded the applicable non-cash expense in accordance with the authoritative guidance of the Financial Accounting Standards Board. For the six- and three-month periods ended October 31, 2020, the Company recorded $259,909 and $138,531, respectively, in stock-based compensation expense. For the six- and three-month periods ended October 31, 2019, the Company recorded $108,531 and $80,021, respectively, in stock-based compensation expense.
As of October 31, 2020, there was $369,064 of prepaid stock-based compensation expense for services that end on August 31, 2021.
As of October 31, 2020, an aggregate of 938 and 10,417 shares of common stock can be earned by the Company’s Chief Marketing Officer and Director of Business Development, respectively, from unvested stock grants. For the Chief Marketing Officer, shares vest at a rate of 156 shares per quarter, over the next six quarters. For the Director of Business Development, shares vest at a rate of 260 shares per month, over the next forty months.
The components of the stock-based compensation expense are presented in the following table:
|Stock-based compensation expense||Six Months Ended October 31, 2020||Six Months Ended October 31, 2019||Three Months Ended October 31, 2020||Three Months Ended October 31, 2019|
|Chief Executive Officer||$||81,216||$||31,702||$||40,608||$||22,952|
|Chief Financial Officer||81,216||31,702||40,608||22,952|
|Chief Marketing Officer||2,453||4,531||1,047||2,343|
|Related party consultant||38,757||11,476||19,379||11,476|
|Director of Business Development||17,510||—||17,510||—|
|Total stock-based compensation expense||$||259,909||$||108,531||$||138,531||$||80,021|
The table below presents the prepaid compensation expense as of October 31, 2020 and April 30, 2020:
|Description||October 31, 2020||April 30, 2020|
|Chief Executive Officer||$||120,499||$||201,715|
|Chief Financial Officer||120,499||201,715|
|Related party consultant||64,033||102,790|
Note 11 – Deposits and Commitments
The Company utilizes office space in Boston, Massachusetts, under a month-to-month lease agreement that allows to company to end its lease by providing 30-day written notice. The lease agreement includes a deposit of $6,300.
Note 12 – Concentrations
For the six- and three-month periods ended October 31, 2020, the Company had one customer that constituted 56% and 48% of its revenues, respectively, and a second customer that constituted 26% and 27% of its revenues, respectively. For the six- and three-month periods ended October 31, 2019, the Company had one customer that constituted 65% and 75% of its revenues, respectively; a second customer that constituted 18% and 8% of its revenues, respectively; and a third customer that constituted 11% and 13% of its revenues, respectively.
Note 13 – Investments
In May 2020, the Company entered a consulting contract with Watch Party LLC (“WP”), which allowed the Company to receive up to 110,000 membership interest units of WP in return for consulting services. 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, resulting in revenues of $235,400 and $208,650 for the six- and three-months ended October 31, 2020.
In May 2020, the Company entered a consulting contract with ChipBrain LLC (“Chip”), which allowed the Company to receive up to 710,200 membership interest units of Chip in return for consulting services. The Chip units are valued at $0.93 per unit based on a sales price of $0.93 per unit on an online funding portal, resulting in revenues of $660,486 and $195,486 for the six- and three-months ended October 31, 2020.
In May 2020, the Company entered a consulting contract with Zelgor Inc. (“Zelgor”), which allowed the Company to receive up to 1,400,000 shares of common stock of Zelgor in return for consulting services. The Company earned 1,050,000 shares in the quarter ended July 31, 2020 and 350,000 shares in the quarter ending October 31, 2020. 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, resulting in revenues of $1,400,000 and $1,050,000 for the six- and three-months ended October 31, 2020. The $1.00 per share valuation was derived based on a combination of multiple transactions on a secondary trading platform in which shares were purchased at $1.00 per share, and two private offerings of shares, one at a selling price of $0.50 per share and the other at $2.00 per share.
On January 2, 2020, the Company entered a consulting contract with Deuce Drone LLC (“Drone”), which allowed the Company to receive up to 2,350,000 membership interest units of Drone in return for consulting services. The Company earned all 2,350,000 membership interest units in fiscal 2020. The Drone units are 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 is currently selling Drone units for $1.00 per unit on an online funding portal.
In August 2019, the Company entered 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 are valued at $1.80 per unit based on a sales price of $1.80 per unit when the units were earned, or $540,000. Kingscrowd units currently trade at a price of $2.75 per unit on a secondary trading platform.
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 40 units in the quarter ended July 31, 2020, at a value of $91.15 per unit, or $3,646. 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 October 31, 2020, the Company owns 528 Netcapital units, at a value of $48,128.
On July 20, 2020 the Company entered a consulting agreement with Vymedic, Inc. which gives the Company a $50,000 fee over a 5-month period. Half the fee is payable in stock and half is payable in cash. As of October 31, 2020, the Company had earned $15,000 worth of stock.
The following table summarizes the components of investments as of October 31, 2020 and April 30, 2020:
|October 31, 2020||April 30, 2020|
|Netcapital Systems LLC||$||48,128||$||44,482|
|Watch Party LLC||235,400||—|
|Deuce Drone LLC||822,500||822,500|
|Total Investments at cost||$||3,721,514||$||1,406,982|
The above investments do not have a readily determinable fair value, as identified in ASC 321-10-35-2, and all investments are measured at cost less impairment. The Company monitors the investments for any changes in observable prices from orderly transactions.
Note 14 – Subsequent Events
In addition to the reverse split on November 5, 2020 (see Note 8), the Company changed its name to Netcapital Inc. On August 23, 2020, the Company entered into an Agreement and Plan of Merger (“Agreement”) whereby NetCapital Systems LLC (“Systems”) would become an 80% owner of the Company. Pursuant to the requirements of this agreement, the Company filed a definitive information statement on September 21, 2020 to change the Company’s corporate name from ValueSetters, Inc. to NetCapital Inc and to amend the Company’s Articles of Incorporation to effect a stock combination, or reverse stock split, pursuant to which 2,000 shares of the Company’s common stock would be exchanged for one new share of common stock. In conjunction with the merger agreement, the Company issued 1,666,360 to Systems on November 5, 2020.
The Agreement calls for a tax-free merger of Netcapital Funding Portal Inc. (“NFPI”), a wholly owned subsidiary of Systems, with Netcapital Acquisition Vehicle Inc., an indirect wholly owned subsidiary of the Company, wherein NFPI is the surviving corporation. This transaction is designed to enhance the Company’s revenues and ability to provide services to democratize the private capital markets while helping companies at all stages to build, grow and fund their businesses with a full range of services from strategic advice to raising capital. As a result of the transaction, the company is expected to be a leading provider of private capital transactions for entrepreneurs seeking to raise money under the exemption provided by section 4(a)(6) of the Securities Act of 1933.
ASC 805-10-25-4 requires the identification of one of the combining entities in each business combination as the acquirer. Upon evaluation of the components of the business combination, including the relative voting rights in the combined entity, the composition of the governing body and senior management of the combined entity, the relative size of each entity and the terms of the exchange of equity interests, the Company intends to record the transaction in the third quarter of fiscal 2021 as a purchase.
The following table summarizes the value of the consideration for NFPI and the amounts of the assets acquired and liabilities assumed in conjunction with the Agreement.
1,666,360 shares of common stock of the Company
|Recognized amounts of identifiable assets acquired and liabilities assumed:|
|Receivable from Netcapital Systems||295,000|
|Total identifiable net assets||$||11,331,248|
The fair value of the common shares issued as the consideration for NFPI was determined on the basis of the closing market price of the Company’s common shares on the date the shares were issued. The fair value of the assets and the liabilities of NFPI equaled their book value. Four identifiable intangible assets were valued; platform users, platform investors, platform issuers and unpatented technology (collectively the “Intangible Assets”). The estimated market value of the Intangible assets is approximately $27,800,000. These values are derived from comparing the NFPI Intangible Assets to the values recorded by funding portal offerings of NFPI’s competitors in public filings via Regulations CF and Regulation A. The Agreement was not completed in the current reporting quarter, and therefore the Company has not finished its evaluation of the Intangible Assets. The fair value of the acquired Intangible Assets is provisional pending receipt of the final valuations for those assets.
The excess of purchase price over the total identifiable tangible net assets is estimated to be $628,435, which leaves an aggregate value of $10,702,813 to be assigned to the Intangible Assets. The estimated value of the $27,800,000 of Intangible Assets is allocated on a percentage basis in the above table to equal $10,702,813.
None of NFPI’s revenues and earnings are included in the Company’s consolidated income statements for the six months ended October 31, 2020 and 2019. If the entities had been combined for these two reporting periods, the supplemental pro forma revenues and earnings are as follows:
|Supplemental pro forma for 4/1/20 – 10/31/20||$||2,866,063||$||282,264|
|Supplemental pro forma for 4/1/19 – 10/31/19||$||1,018,200||$||680,212|
Included in the supplemental pro forma information above is revenue earned by the Company from Netcapital Systems LLC of $18,646 and $152,864 in the six-month periods ended October 31, 2020 and 2019, respectively.
The Company evaluated subsequent events through the date these financial statements were available to be issued. There were no other material subsequent events that required recognition or additional disclosure in these financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the U.S. Securities and Exchange Commission (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
We are a boutique advisory firm, based in Boston, Massachusetts. Our team of experts, including entrepreneurs, angel investors, industry specialists and digital marketing professionals work with companies at all stages to provide assistance with capital raising, strategy, technology consulting, digital marketing, economic development and logistics technology.
We specialize in Regulation Crowdfunding (“Reg CF”), under the provisions of Title III of the JOBS Act of 2012. We believe that new capital raising techniques, such as Reg CF, democratize capital raising, similar to the way that social networks democratize broadcast mechanisms that once belonged only to traditional media. Reg CF is one of three securities exemptions that enable online capital formation. Reg D 506(c) allows an unlimited amount of money to be raised from accredited investors. Reg A+ enables an issuer to raise up to $50 million online from anyone. Reg CF, the smallest of the crowdfunding exemptions, allows issuers to raise up to $1.07 million from non-accredited investors every 12 months.
In March 2020, the Securities and Exchange Commission (the "SEC") proposed meaningful changes to multiple securities exemptions in an effort to provide critical capital needed for emerging companies, from early-stage start-ups seeking seed capital, to companies that are pursuing a course to become a public reporting company. The new proposal intends to create a more rational framework to enhance an entrepreneur's access to capital while preserving important investor protections.
The new regulations were approved on November 2, 2020 and will be effective 60 days after publication in the Federal Register. For many small- and medium-sized businesses, this exempt offering framework is the only viable channel for raising capital. The amended regulations are designed to:
|·||address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital;|
|·||increase the offering limits for Regulation A, Regulation CF, and Rule 504 offerings, and revise certain individual investment limits based on the SEC’s experience with the rules, marketplace practices, capital raising trends, and comments received;|
|·||provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and|
|·||harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections.|
The SEC proposed revisions to the offering and investment limits, which we believe will have a positive impact on our business. For Reg CF, the new rules include:
|·||raising the offering limit in Reg CF from $1.07 million to $5 million;|
|·||amending the investment limits for investors in Reg CF offerings by:|
|·||not applying any investment limits to accredited investors; and|
|·||revising the calculation method for investment limits for non-accredited investors to allow them to rely on the greater of their annual income or net worth when calculating the limit on how much they can invest.|
We believe these actions by the SEC will enhance the value of funding portals and strengthen the online capital raising process in private equity. Consequently, we negotiated a transaction that consolidates the operations of a Reg CF funding portal, Netcapital.com (“Funding Portal”), with our financial results. Funding Portal operates a Title III JOBS Act funding portal, and as of today is one of only a few dozen FINRA approved Reg CF portals.
A new issuer launched on Funding Portal on November 26, 2020, and raised $1,070,000, the maximum amount allowed, within three hours. We anticipate this issuer will come back to Funding Portal to raise additional money once the $5 million ceiling is instituted. We believe the increase of the maximum offering limit to $5 million will be beneficial to many issuers and to our company, as many issuers need more than $1.07 million in private capital and are capable of raising up to $5 million.
For the past three years we have provided consulting services to Netcapital. In addition to the services we provided to Netcapital, we provide consulting services to some of our clients that utilize the Funding Portal website to raise money from non-accredited and accredited investors. We believe we have been successful in providing advice and digital marketing services to our clients, who are allowed to advertise their fundraising, in conjunction with advertising provisions contained in the JOBS Act. During the past three years, many high-tech firms have become our clients, including Kingscrowd LLC, Deuce Drone LLC and ChipBrain LLC. These companies have contributed to our growth and we own minority positions in them.
Our limited operating history and the uncertain nature of our future operations and the markets we address or intend to address make prediction of our future results of operations difficult.
Results of Operations
For the Six Months Ended October 31, 2020 Compared to the Six Months Ended October 31, 2019
Our revenues for the six months ended October 31, 2020 increased by $1,657,761, or 198%, to $2,493,486 as compared to $835,725 reported for the six months ended October 31, 2019. The increase in revenues is attributable to an increase in consulting services, and specifically to two customers that accounted for an aggregate of 82% of our revenues, or $2,060,486 in the six months ended October 31, 2020.
Costs of revenues increased by $709,376 to $714,224 for the six-months ended October 31, 2020 from $4,848 reported in the six-months ended October 31, 2020. The increase is primarily attributable to our increased revenues and the change in our strategy of how we accelerate the product development for the companies we invest in.
Stock-based compensation expense increased by $151,378, or 139%, to $259,909 for the six months ended October 31, 2020, as compared to $108,531 reported for the six months ended October 31, 2019. The increase in expense is due to a higher price per share of our stock at the time when stock grants were issued for stock-based compensation earned in fiscal 2021 as compared for fiscal 2020.
Consulting expense decreased by $75,115, or 94%, to $5,085 for the six months ended October 31, 2020, from $80,200 for the six months ended October 31, 2019. The decrease is attributed to our increase in wages during the six-month period ended October 31, 2020.
Wages totaled $1,296,333 for the six months ended October 31, 2020, compared to wages of $0 for the six months ended October 31, 2019. The increase is due to our efforts to pay regular cash compensation to our executives, instead of only stock-based compensation, to hire personnel to provide additional services to our clients and to allow us to segregate duties and enhance internal controls over financial reporting.
Selling, general and administrative expenses increased by $42,217, or 127%, to $75,500 for the six months ended October 31, 2020, from $33,283 for the six months ended October 31, 2019. The increase is primarily attributed to increased levels of customer service and sales activity.
Interest expense increased by $13,950, or 145%, to $23,564 for the six-month period ended October 31, 2020, as compared to $9,614 for the six months ended October 31, 2019. Our debt balances were higher at October 31, 2020 as compared to October 31, 2019 due to two new loans totaling $2,385,800 in fiscal 2021.
For the Three Months Ended October 31, 2020 Compared to the Three Months Ended October 31, 2019
Our revenues for the three-months ended October 31, 2020 increased by $14,171, or 2%, to $731,164 as compared to $716,993 reported for the three months ended October 31, 2019. The increase in revenues is attributable to an increase in consulting services, and specifically to two customers that accounted for a total of 75% of our revenues, or $545,486 in the three months ended October 31, 2020.
Costs of revenues increased by $280,723 to $283,205 for the three-months ended October 31, 2020 from $2,482 reported in the three-months ended October 31, 2019. The increase is primarily attributable to the change in our strategy of how we spend money to help accelerate the product development for the companies we invest in.
Stock-based compensation increased by $58,510, or 73%, to $138,531 for the three-months ended October 31, 2020 from $80,021 reported in the three-months ended October 31, 2019. The increase in expense is primarily due to the higher price per share of our stock at the time when stock grants were issued for stock-based compensation earned in fiscal 2021 as compared for fiscal 2020.
Consulting expense decreased by $37,906, or 92%, to $3,094 for the three months ended October 31, 2020, from $41,000 for the three months ended October 31, 2019. The decrease is attributed to our increase in wages during the six-month period ended October 31, 2020.
Wages totaled $200,213 for the three months ended October 31, 2020, compared to wages of $0 for the three months ended October 31, 2019. The increase is due to our efforts to pay regular cash compensation to our executives, instead of only stock-based compensation, to hire personnel to provide additional services to our clients and to allow us to segregate duties and enhance internal controls over financial reporting.
Selling, general and administrative expenses increased by $4,458, or 15%, to $34,361 for the three-months ended October 31, 2020 from $29,903 reported in the three-months ended October 31, 2019. The increase is primarily attributable to increased levels of customer service and sales activity.
Interest expense increased by $8,400, or 172%, to $13,281 for the three-month period ended October 31, 2020, as compared to $4,881 for the three months ended October 31, 2019. Our debt balances were higher as of October 31, 2020 as compared to October 31, 2019 due to two new loans totally $2,385,800 in fiscal 2021.
Liquidity and Capital Resources
On October 31, 2020, we had cash and cash equivalents of $455,994 and negative working capital of $1,867,687 as compared to cash and cash equivalents of $11,206 and negative working capital of $877,581 on April 30, 2020.
Net cash used in operating activities amounted to $1,941,012 in the six-months ended October 31, 2020 as compared to net cash provided by operating activities of $16,432 in the six months ended October 31, 2019. The principal source of cash from operating activities in the six-months ended October 31, 2020 was net income of $60,893 and a non-cash item, stock-based compensation of $259,909. However, these items were offset by changes in non-cash revenue from the receipt of equity of $2,314,532. The principal source of cash from operating activities in the six-months ended October 31, 2019 was net income of $566,926 and a non-cash item, stock-based compensation of $108,531. However, these items were offset by changes in non-cash revenue from the receipt of equity of $653,864 and changes in non-cash working capital balances, which used cash totaling $5,161.
There was no investing activity in the six-months ended October 31, 2020 and 2019.
For the six months ended October 31, 2020, net cash provided by financing activities amounted to $2,385,800, which consisted of two loans from the U.S. Small Business Administration. For the six months ended October 31, 2019, net cash used in financing activities amounted to $4,300, which consisted of principal payments of outstanding related-party debt.
In the six-months ended October 31, 2020 and 2019, there were no expenditures for capital assets. We do not anticipate any capital expenditures in fiscal 2021.
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of our company as a going concern. However, management anticipates that we will be dependent, for the near future, on additional capital to fund our operating expenses and anticipated growth, which we intend to achieve through consulting services and the further development of a private equity platform for raising capital. In the quarter ended July 31, 2020, we borrowed $2,385,800 to accelerate our growth and the growth of early-stage companies that we invested in. However, we now have to plan for new future payments to service our debt. Furthermore, the most recent report of our independent registered public accounting firm expresses doubt about our ability to continue as a going concern.
We owe a related party $1,000,000 under a secured term loan that matures on January 31, 2021. We believe we can renegotiate the payment terms of the loan. Any demand for payment from a related party will have an adverse impact on our ability to achieve our longer-term business objectives and will adversely affect our ability to continue operating as a going concern.
While we continually look for other financing sources, in the current economic environment, the procurement of outside funding is extremely difficult and there can be no assurance that such financing will be available, or, if available, that such financing will be at a price that will be acceptable to us. Failure to generate sufficient revenues or raise additional capital will have an adverse impact on our ability to achieve our longer-term business objectives and will adversely affect our ability to continue operating as a going concern.
We have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide information under this item.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures.
The Company’s management, with the participation of the Company’s principal executive officer (“PEO”) and principal financial officer (“PFO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the PEO and PFO concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the PEO and PFO, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses in our disclosure controls and procedures consisted of:
|●||There are insufficient written policies and procedures to insure the correct application of accounting and financial reporting with respect to the current requirements of GAAP and SEC disclosure requirements.|
(b) Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three-month period ended October 31, 2020, we issued 156 shares of common stock to our Chief Marketing Officer and 260 shares of our common stock to our Director of Business Development, as stock-based compensation.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
101.CAL XBRL Calculation
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|Date: December 15, 2020||NETCAPITAL INC.|
|By: /s/ Cecilia Lenk|
|Chairman of the Board and Chief Executive Officer|
|By: /s/ Coreen Kraysler|
|Principal Financial Officer|