Netcapital Inc. — Form 10-Q Summary
Reporting period: Quarter ended July 31, 2021 (fiscal 2022 first quarter); filed September 14, 2021. Comparative period is the three months ended July 31, 2020. Netcapital operates an online private-capital funding portal and provides advisory and consulting services.
Financial results and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $625,187 | $1,762,322 |
| Gross profit / gross margin | $596,882 / 95.5% | $1,331,303 / 75.5% |
| Operating income (loss) | ($1,076,090) | $52,495 |
| Unrealized gain on equity securities | $3,275,745 | — |
| Net income / diluted EPS | $1,457,410 / $0.65 | $30,871 / $0.07 |
| Net cash used in operating activities | $887,641 | $1,522,990 |
Reported net income was driven by a noncash fair-value gain, not operating profitability: the company recorded an operating loss of $1.08 million. The $3.28 million gain followed an observable price increase in its KingsCrowd shares. Net income included $707,000 of income tax expense.
At July 31, 2021, cash was $2.06 million, current assets $3.82 million, and current liabilities $5.33 million, for negative working capital of $1.51 million. Total assets were $28.48 million; total liabilities were $7.72 million; and stockholders’ equity was $20.77 million. Debt totaled $5.33 million, including $2.94 million classified as current and $2.38 million long term. Cash declined by $414,743 during the quarter. Financing activities provided $577,399, primarily from stock subscriptions; investing used $104,501, including a $100,000 loan to an affiliate.
Changes and notable items
- Revenue fell 65% year over year, primarily because noncash revenue from equity received for services declined to $50,000 from $1.75 million. The filing does not clearly quantify funding-portal revenue separately.
- Operating expenses rose to $1.67 million from $1.28 million. General and administrative expense increased to $395,052, which management attributed mainly to the acquired funding-portal business. Stock-based compensation increased to $296,980; payroll expense declined 15% to $927,333.
- Equity securities increased to $9.62 million from $6.30 million, principally reflecting the KingsCrowd valuation increase. The company issued 176,934 shares at $9.00 for gross proceeds of $1.59 million and issued 361,736 shares valued at $3.52 million to settle acquisition-related supplemental consideration. Shares outstanding were 2,718,373 at quarter-end, up from 2,178,766 at April 30, 2021.
- Related-party accounts payable declined substantially after the share issuance; the company reported $298,714 owed to its largest shareholder at July 31, 2021. It also paid that shareholder $50,000 for use of website software during the quarter.
Outlook, risks, and contingencies
Management said existing cash and anticipated operating cash flows should meet working-capital and expenditure needs for the next 12 months, while noting uncertainty from market conditions, COVID-19 effects, and the pace of sustainable growth. It reported record website users and investment dollars in June and July 2021, and stated portal market share was 7.4% for the quarter versus 4.0% a year earlier and 8.2% in July. These are management-reported indicators, not a quantified revenue forecast. Management anticipated no fiscal 2022 capital expenditures.
The company’s $1.0 million secured loan bears 8% interest, matures April 30, 2022, is secured by a first lien on company assets, and includes restrictive covenants. The company said it had applied, or planned to apply, for forgiveness of two SBA loans totaling $3.77 million and believed they would be forgiven in full; forgiveness was not established in the filing. The June 2020 SBA loan of $500,000 bears 3.75% interest and is personally guaranteed by the CFO. SBA payment timing and forgiveness remain important liquidity considerations.
Customer concentration remained notable: two customers accounted for 19% and 16% of quarterly revenue. The filing identifies valuation estimates and unobservable-input limitations for investments generally; KingsCrowd’s observable share price drove the quarter’s large unrealized gain. Management reported disclosure controls and internal control over financial reporting were effective and stated there were no material legal proceedings or material subsequent events.
Investor verification priorities
- Confirm the basis, liquidity, and realizability of the KingsCrowd valuation and the $3.28 million unrealized gain; assess how results look excluding that gain.
- Verify funding-portal revenue, issuer activity, and market-share calculations separately from consulting and noncash equity revenue.
- Track operating cash burn, negative working capital, and the company’s ability to fund obligations over the next 12 months.
- Confirm SBA loan forgiveness status, repayment schedules, secured-lender maturity, and compliance with restrictive covenants.
- Review customer concentration, related-party balances and transactions, and the effects of share issuances and potential further dilution.