Netcapital Inc. — Form 10-Q Summary
Period and context: The filing covers the fiscal third quarter and nine months ended January 31, 2021, with comparisons to the periods ended January 31, 2020. This differs from the request metadata, which says “2019 Q3.” Netcapital is a fintech company providing consulting and online private-capital fundraising services. It acquired Netcapital Funding Portal Inc. effective November 5, 2020.
Key financial results
- Revenue: Nine-month revenue was $3.771 million, up 137% from $1.593 million. Third-quarter revenue was $1.277 million, up 69% from $757,405. The filing attributes much of the nine-month increase to consulting and two customers; third-quarter revenue included $353,041 from the acquired funding portal.
- Profit and margins: Nine-month net income was $103,535 versus $1.162 million; third-quarter net income was $42,642 versus $595,174. Nine-month gross profit was $3.040 million (80.6% gross margin), compared with $1.585 million (99.5%). Operating income was $199,513 versus $1.176 million. Third-quarter gross margin was 98.7%; operating income was $92,658. Basic and diluted EPS were $0.11 for nine months and $0.02 for the quarter. Per-share figures reflect the 1-for-2,000 reverse split.
- Cash flow: Cash used in operating activities was $2.475 million for the nine months, versus $10,880 used in the prior-year period. Cash provided by financing was $2.386 million, principally from SBA loans; investing activities provided $364,939. Ending cash was $286,461, up from $11,206 at April 30, 2020. The operating cash outflow included $2.320 million of revenue received as equity rather than cash.
- Liquidity: Current assets were $1.517 million and current liabilities $7.250 million at January 31, 2021. Management reported negative working capital of $5.785 million, compared with $1.058 million at April 30, 2020.
- Debt and equity: Total debt was $3.443 million, including a $1.000 million secured note, $2.386 million in SBA loans, and other borrowings. The secured note matured October 31, 2020 and was extended to April 30, 2021; its interest rate rose to 8%. Current portion of long-term debt was $1.584 million. Total stockholders’ equity was $12.140 million, largely reflecting shares issued for the funding-portal acquisition.
Material changes and unusual items
- The acquisition was recorded at $15.149 million of total consideration, including 1,666,360 shares valued at $11.331 million and $3.818 million of promissory notes and interest. The balance sheet recorded $14.804 million of acquired intangible assets. In March 2021, the company approved approximately 398,000 shares to settle the $3.818 million acquisition-related amount.
- Revenue included substantial noncash consideration for consulting services: $2.320 million was recognized from equity received. Investments at cost rose to $3.727 million from $1.407 million.
- Related-party accounts payable reached $3.869 million, including the $3.818 million acquisition-related amount owed to the controlling shareholder. A related-party customer, Zelgor, contributed $1.400 million, or 37% of nine-month revenue.
- Share count increased substantially with acquisition shares; 2,081,752 shares were outstanding at January 31, 2021. The company reported 2,156,752 shares outstanding as of March 22, 2021.
Outlook, risks, and controls
- Going concern: Management concluded there is substantial doubt about the company’s ability to continue as a going concern within one year after issuance. It cites negative working capital, short-term debt exceeding $2.5 million, limited cash, and uncertainty about meeting obligations. Management’s plans depend on funding-portal growth, renegotiating SBA loan terms, and continuing consulting work. Management stated that without SBA loan forgiveness, its plans were not probable of alleviating the substantial doubt.
- Financing and outlook: Management expected higher potential portal revenue following the increase in the Reg CF issuer limit to $5 million, noting three issuers planned further offerings. The portal charges a 4.9% fee on investments. The filing provides no quantified revenue or earnings guidance. A further $1.886 million SBA loan was received in February 2021.
- Other risks: The $1.000 million secured note’s April 30, 2021 maturity, the availability of additional financing, dependence on SBA forgiveness, customer concentration, and the value and liquidity of equity-based consideration and investments are material uncertainties. The filing reports no material litigation and no off-balance-sheet arrangements.
- Controls: Management concluded disclosure controls were not effective because written accounting and financial-reporting procedures were insufficient. It reported no material changes in internal control during the quarter.
Important facts for investors to verify
- Confirm the reporting period: the supplied filing is for the quarter ended January 31, 2021, not 2019 Q3.
- Check the status and terms of SBA loan forgiveness, the secured-note maturity, and subsequent financing or repayment arrangements.
- Assess whether the acquired portal is generating cash revenue and whether the stated issuer offerings and fee assumptions are realized.
- Review the collectability and valuation of accounts receivable, equity-based revenue, and the $3.727 million investment portfolio.
- Evaluate related-party balances and revenue concentration, along with the effect of acquisition shares and other dilution.
- Monitor remediation of the disclosed material weakness in disclosure controls.