Netcapital Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2024; filed March 18, 2024. Netcapital operates an online funding portal for private-company offerings and provides related consulting and advisory services. Unless stated otherwise, comparisons are with the periods ended January 31, 2023.
Financial performance
| Metric | Three months ended Jan. 31, 2024 | Nine months ended Jan. 31, 2024 | Comparable prior-year period |
|---|---|---|---|
| Revenue | $1.04 million, down 54% | $4.60 million, down 14% | $2.26 million quarterly; $5.38 million nine-month |
| Gross profit | $984,000 | $4.51 million | $2.26 million quarterly; $5.32 million nine-month |
| Gross margin | 94.4% | 97.9% | 99.8% quarterly; 98.9% nine-month |
| Operating income (loss) | $(1.21) million | $(1.90) million | $571,000 quarterly; $912,000 nine-month |
| Net income (loss) | $(2.23) million | $(2.38) million | $1.70 million quarterly; $1.94 million nine-month |
| Operating cash flow | Not separately presented | $(3.57) million | $(3.41) million nine-month |
The quarterly and nine-month losses included a $2.70 million unrealized loss on equity securities, principally Netcapital’s KingsCrowd holding. The nine-month income tax benefit was $2.34 million and included a $508,292 employee retention credit. Basic and diluted loss per share was $0.19 for the quarter and $0.25 for the nine months.
Revenue was largely consulting services; $3.49 million of nine-month revenue was paid in equity securities. Funding portal revenue rose year over year for the nine months, including higher portal fees, but declined in the quarter as fewer issuers listed. Nine-month gross profit included $3.49 million in equity received for services and $1.12 million in cash-based revenue, before service costs.
Balance sheet, cash flow and financing
- At January 31, 2024, cash was $2.17 million, current assets $6.05 million, current liabilities $3.33 million, and reported working capital $2.72 million. Working capital was negative $2.62 million at April 30, 2023.
- Total debt was $2.44 million, including $1.89 million of SBA debt classified as current and $500,000 of long-term SBA debt. The $350,000 secured lender balance was paid off in May 2023.
- Nine-month cash used in operations was $3.57 million. Financing provided $5.19 million, primarily from common-stock sales, partly offset by $350,000 paid to the secured lender. Cash increased by $1.60 million from fiscal year-end.
- Equity securities were carried at $21.84 million, about half of total assets, and consist substantially of private-company holdings with limited liquidity. Accounts receivable was $3.70 million, up from $1.39 million at April 30, 2023.
- Stockholders’ equity was $40.30 million. Shares outstanding were 17,231,132 at January 31 and 20,011,132 as of March 18, 2024. The December 2023 offering generated approximately $3.37 million net proceeds and included substantial prefunded and common warrants; further exercises may dilute shareholders.
Material changes, outlook and risks
- Nine-month revenue fell 14%, while operating expenses rose about 45% to $6.41 million. General and administrative costs more than doubled, with management citing professional fees and stock-based compensation. Marketing expense also increased substantially.
- Management reduced headcount beginning in November 2023, cut operating costs, and said it would focus on the funding portal and continue seeking financing. The filing provides no quantified revenue or earnings guidance.
- Management concluded that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance. It said cost reductions and planned financing may not sufficiently alleviate the conditions; further financing is not assured.
- Revenue is concentrated: one customer accounted for 78% of quarterly revenue and 27% of nine-month revenue. Management also identifies dependence on a small number of large issuers and challenges in attracting issuers and investors.
- Netcapital received a Nasdaq extension through August 26, 2024 to regain the $1.00 minimum bid-price requirement, requiring at least 10 consecutive business days at or above that price. The company said it may use a reverse stock split; failure to comply could lead to delisting.
- Management attributed the KingsCrowd valuation reduction to an observed $0.16 share price versus $1.00 previously. The filing also notes that private-company investment values may be volatile and may not be realizable at reported carrying values.
- Management reported disclosure controls and internal control over financial reporting were effective as of January 31, 2024. It reported no material litigation and no material changes to previously disclosed risk factors other than the items described in the filing.
Most important facts for investors to verify
- Whether operating cash burn, receivable collections, and funding needs improve after the reporting date, and whether additional capital is available on acceptable terms.
- The collectability and timing of the $3.70 million accounts receivable balance, and the valuation and potential liquidity of the $21.84 million private-company investment portfolio.
- The extent of dilution from outstanding prefunded warrants and other warrants, and the updated share count after subsequent exercises.
- Progress toward Nasdaq bid-price compliance before August 26, 2024, including whether a reverse stock split is pursued.
- The effect of customer and issuer concentration on revenue, especially given the quarter’s 78% single-customer concentration and the decline in quarterly revenue.