Business context and reporting period
Netcapital Inc. (Nasdaq: NCPL) filed this unaudited Form 10-Q for the quarter and six months ended October 31, 2023, its fiscal second quarter. The company operates an online funding portal for private-company offerings and provides consulting and related services. Its consulting subsidiary may receive equity as well as cash for services.
Financial performance and position
| Metric | Three months ended Oct. 31, 2023 | Six months ended Oct. 31, 2023 | Prior comparable period |
|---|---|---|---|
| Revenue | $2.042 million | $3.561 million | $1.779 million; $3.120 million |
| Gross profit / margin | $2.022 million / 99.0% | $3.523 million / 98.9% | $1.743 million / 98.0%; $3.062 million / 98.2% |
| Operating income (loss) | $52,220 | $(696,800) | $335,165; $341,835 |
| Net income (loss) | $339,616 | $(152,039) | $183,138; $247,615 |
| Operating cash flow | Not presented for quarter | $(1.946) million | $(2.055) million |
Second-quarter diluted EPS was $0.04, compared with $0.04 a year earlier; six-month diluted EPS was $(0.02), compared with $0.07.
At October 31, cash was $528,827; current assets were $3.920 million and current liabilities $5.052 million, producing negative working capital of $1.131 million. Total debt was $2.435 million, including $1.935 million classified as current and $500,000 long-term. Total assets were $44.679 million, including $24.492 million of equity securities and $15.819 million of net purchased technology/intangibles. Accounts receivable was $2.900 million. Stockholders’ equity was $39.128 million.
Six-month investing cash flow was $(20,000); financing cash flow was $1.925 million, including $2.275 million from common-stock sales and $350,000 of secured debt repayment. Cash declined $40,614 over the period.
Material changes versus the prior comparable period
- Revenue rose 15% for the quarter and 14% for the six months. Funding-portal revenue increased to approximately $463,000 for the quarter from $184,000, and to approximately $839,000 for the six months from $363,000, reflecting increased offering activity.
- Six-month operating results moved from $341,835 income to a $696,800 loss. Payroll, marketing, consulting, and general and administrative expenses increased; six-month marketing expense rose to $288,619 from $40,662 and general and administrative expense to $1.437 million from $673,112.
- Quarterly net income increased, despite lower operating income, with a $326,289 income-tax benefit. The six-month tax benefit was $625,289 and included a $508,292 employee retention credit. Six-month results also differed from the prior year, which included a $224,260 debt-conversion gain and a $406,060 realized investment loss.
- Cash used in operations remained substantial. The company received $1.170 million in equity securities instead of cash for services during the six-month period; accounts receivable also increased by $1.517 million in the cash-flow reconciliation.
- Common shares outstanding increased from 6,440,527 at April 30 to 9,459,132 at October 31. The company completed equity offerings in May and July 2023 and issued additional shares for equity interests and other consideration.
- The secured lender was repaid in May 2023; reported secured-lender debt fell from $350,000 at April 30 to zero at October 31.
Outlook, risks and unusual items
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. It cited negative working capital, operating losses and negative operating cash flow, and said its cost reductions and financing plans may not sufficiently mitigate the conditions.
- Cost reductions and financing: Beginning in November 2023, the company laid off some employees; executives agreed to defer half of their cash salaries. Management plans to maintain lower fixed overhead and seek private placements, public offerings or bank financing, but gives no assurance funding will be available on acceptable terms.
- Nasdaq bid-price deficiency: Nasdaq notified the company on September 1, 2023 that its share price had been below the $1 minimum for 30 consecutive business days. The company said it may consider a reverse stock split. The filing gives conflicting compliance deadlines—February 28, 2024 in the MD&A and February 8, 2024 in the risk-factor section.
- Revenue and valuation exposure: A substantial portion of six-month revenue—$2.627 million of $3.561 million—was consulting services paid in equity securities. The company reports that three customers accounted for 74% of quarterly revenue and 73% of six-month revenue, based on the disclosed concentration percentages. Many portfolio investments are carried at cost or based on offering prices; actual realizable value may differ.
- Other risks: Management cites dependence on financing, customer and issuer concentration, competition, regulatory and licensing requirements, attracting issuers and investors, and the possibility that a secondary market for portal offerings does not develop. It reported no material litigation and no material subsequent events requiring disclosure.
- Controls: Management assessed disclosure controls and internal control over financial reporting as effective at October 31, 2023; the independent auditor was not required to attest to internal controls.
Important facts for investors to verify
- Reconcile the filing’s cash-flow amount: the financial statement reports $1.946 million of operating cash used, while MD&A elsewhere reports $1.966 million.
- Confirm the applicable Nasdaq compliance deadline and current listing status, given the conflicting dates in the filing.
- Assess the collectability and timing of the $2.900 million accounts receivable balance and how much reported revenue converts to cash versus equity securities.
- Review available liquidity, near-term debt obligations, and whether the company has secured financing sufficient to address its going-concern uncertainty.
- Evaluate the valuation basis, liquidity and potential impairment risk of the $24.492 million investment portfolio and $15.819 million net intangible-asset balance.
- Assess customer concentration, the effect of recent equity issuance and potential dilution from outstanding warrants and options.