Overview

Netcapital Inc. is a fintech company that operates a scalable technology platform to allow private companies to raise capital online from accredited and non-accredited investors. The company generates fees from listing private companies on its funding portal at www.netcapital.com and from advising companies on their Regulation A (“Reg A”) offerings. Netcapital Advisors, a wholly-owned subsidiary, provides marketing and strategic advice to companies in exchange for equity positions and cash fees.

The Netcapital funding portal is registered with the SEC and is a member of FINRA. It provides investors with opportunities to invest in private companies. Neither Netcapital Advisors nor any Netcapital entity operates as a broker-dealer with respect to Reg A offerings.

Netcapital generates revenue from the following sources:

• $5,000 engagement fee and 4.9% portal fee for capital raised on the funding portal
• 1% success fee paid in equity starting in fiscal year 2024
• Fees from consulting services and equity stakes in portfolio companies
• Flat monthly fees and administrative fees for Reg A offerings

In the six months ended October 31, 2024, Netcapital generated revenues of $312,755, with costs of service of $30,001, resulting in a gross profit of $282,754. This compares to revenues of $3,561,467, costs of $38,187, and a gross profit of $3,523,280 in the six months ended October 31, 2023.

The number of offerings that closed on the Netcapital funding portal was 63 in fiscal 2024 and 81 in fiscal 2023, of which 13 and 17 offerings, respectively, terminated without raising the minimum capital. As of the report date, Netcapital holds minority equity positions in 19 portfolio companies that have utilized the funding portal.

In addition to the funding portal, Netcapital provides services such as automated onboarding, regulatory filings, compliance review, custom offering pages, transfer agent and custodial services, email marketing, rolling closes, and ongoing support.

Netcapital Advisors, the company’s consulting group, provides services including incubation of technology startups, investor introductions, digital marketing, website design, message crafting, strategic advice, and technology consulting.

Broker-Dealer Business

Netcapital recently formed a wholly-owned subsidiary, Netcapital Securities Inc. (NSI), which has received approval from FINRA to become a FINRA-member broker-dealer. This allows NSI to conduct private placements, support Reg A and Reg D offerings, partner with other broker-dealers, and charge fees on capital raised.

Recent Developments

On November 22, 2024, NSI received FINRA approval to become a broker-dealer, positioning the company to support larger fundraises and expand the range of investment opportunities.

In August 2024, Netcapital entered into an At-The-Market Offering Agreement to sell up to $2.1 million in common stock, raising net proceeds of approximately $2.029 million.

Also in August 2024, Netcapital regained compliance with Nasdaq’s continued listing requirements after previously being at risk of delisting.

Results of Operations

Netcapital’s revenues decreased significantly in the three and six months ended October 31, 2024 compared to the prior year periods, primarily due to a lack of consulting service revenue. The company has shifted its focus to establishing the broker-dealer subsidiary to generate additional revenue sources.

Funding portal revenues also decreased, driven by a decline in dollars invested in issuers listed on the portal. New offerings launched decreased from 16 to 13 issuers in the three-month period and from 37 to 26 issuers in the six-month period.

Costs of revenues, payroll, marketing, and consulting expenses all decreased year-over-year, while general and administrative expenses increased significantly due to professional and legal fees related to launching the broker-dealer.

Liquidity and Capital Resources

As of October 31, 2024, Netcapital had $1.3 million in cash but negative working capital of $2.6 million. The company has been successful in raising capital through public offerings, including a $2.1 million at-the-market offering in 2024.

However, Netcapital’s management believes the company’s existing cash and anticipated cash flows may not be sufficient to meet its working capital and expenditure requirements for the next 12 months. The company has taken steps to reduce operating expenses and plans to seek additional financing, but there is substantial doubt about its ability to continue as a going concern if it is unable to generate adequate funds.

Critical Accounting Policies and Estimates

Netcapital’s financial statements are prepared in accordance with GAAP, requiring the company to make certain estimates, judgments, and assumptions that affect the reported amounts. There have been no material changes to the critical accounting estimates previously disclosed.