Netcapital Inc. — Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2021, compared with fiscal 2020. Although the request metadata says “2020 Q4,” this filing is an annual report for fiscal 2021.
Business context
Netcapital operates an online platform for private companies raising capital, principally through Regulation Crowdfunding, alongside consulting and advisory services that may be compensated in equity. It acquired Netcapital Funding Portal Inc. effective November 5, 2020. The acquired portal is SEC-registered and a FINRA member. The company reported that the SEC raised the Reg CF offering limit to $5 million in March 2021.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $4,721,003 | $1,753,558 |
| Gross profit | $3,961,845 | $1,742,453 |
| Gross margin | Approximately 83.9% | Approximately 99.4% |
| Operating income (loss) | $(401,501) | $1,147,222 |
| Net income | $1,469,660 | $604,851 |
| Basic / diluted EPS | $1.18 / $0.89 | $1.50 / $1.50 |
| Net cash used in operating activities | $(3,250,868) | $(3,604) |
| Cash at year-end | $2,473,959 | $11,206 |
| Total debt | $5,328,784 | $1,057,184 |
Revenue increased 169%, primarily from expanded consulting services and funding-portal revenue. Costs of services rose to $759,158. Payroll and related expenses were $3,117,075, and general and administrative costs were $464,955. FY2021 net income included a $2,571,494 unrealized gain on equity securities; operating results were a loss before this and other non-operating items. The company’s equity investments were carried at $6,298,008.
Working capital was negative $4,666,833 at April 30, 2021. Management said subsequent conversion of approximately $5 million in current liabilities into common shares eliminated the negative working-capital balance. It also reported $300,000 raised in May 2021 and expected an SBA loan of approximately $1.8 million to be forgiven; forgiveness was not yet assured. Management believed cash and expected operating cash flows would cover requirements for the next 12 months.
Material changes and unusual items
- The funding-portal acquisition was accounted for as a purchase. Consideration included 1,666,360 common shares valued at $11,331,248 and $3,817,516 of supplemental consideration. The company recognized $14,803,954 of purchased technology/intangible assets. The filing identifies valuation of acquired intangibles and investments as critical audit matters.
- Operating cash use increased substantially despite reported net income. Noncash equity-based revenue, the unrealized investment gain, and a $1,417,257 increase in accounts receivable were significant cash-flow reconciliation items.
- Debt increased largely through SBA borrowing. Debt included a $1 million secured note at 8%, with maturity extended to April 30, 2022, and SBA loans. The secured lender has a first lien on company assets and the agreement contains restrictive covenants.
- Four customers represented 70% of FY2021 revenue; the largest accounted for 30%. Revenue included $1.4 million from Zelgor, a related party to a consultant.
- After year-end, the company issued shares to settle $3,523,462 of supplemental consideration and completed a common-stock offering for gross proceeds of $1,592,400. The filing also reports 2,717,436 shares outstanding as of August 31, 2021.
Outlook, risks and other disclosures
Management cited record users and investment activity in June and July 2021, and reported portal market share of 7.0% of industry commitments for the quarter ended June 30, 2021, versus 2.2% a year earlier. These are management-reported operating indicators, not a quantified financial forecast; the filing provides no formal revenue or earnings guidance. Management cautioned that the company’s limited operating history makes future performance difficult to predict.
Key risks include evolving securities regulation, competition, the need for additional capital, debt-service and refinancing risk, customer concentration, illiquid and judgmentally valued private-company investments, potential issuer disclosure liability, cyber and service disruptions, and possible dilution. The company reported no material litigation and no off-balance-sheet arrangements. COVID-19 had not significantly affected reported operations as of the filing, but future effects remained uncertain. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-controls attestation. The financial statements received an unqualified audit opinion.
Investor verification priorities
- Review the acquisition accounting, including the valuation, useful lives and subsequent performance of the $14.8 million acquired intangible assets.
- Assess the liquidity and realizable value of the $6.3 million equity-investment portfolio, which generated most of the reported net income uplift, and the basis for its fair values.
- Verify collection of receivables, including the $1.36 million net balance, and monitor customer concentration and related-party revenue.
- Confirm post-year-end liability conversions, share issuances, offering proceeds and resulting dilution against subsequent filings.
- Check the status of SBA forgiveness, required debt payments and compliance with secured-loan covenants; distinguish management’s forgiveness expectations from completed forgiveness.