Netcapital Inc. 10-Q Summary: Quarter Ended January 31, 2022
Business Context and Reporting Period
Netcapital Inc. is a fintech company operating an SEC-registered funding portal (Netcapital.com) and a consulting group (Netcapital Advisors). The company facilitates private capital raising for companies under Regulation CF and provides strategic advice, marketing, and technology consulting. This report covers the quarterly period ended January 31, 2022, and the nine-month period ended on the same date. The company is classified as a non-accelerated filer and a smaller reporting company.
Key Financial Metrics
| Metric | Nine Months Ended Jan 31, 2022 | Nine Months Ended Jan 31, 2021 | Three Months Ended Jan 31, 2022 | Three Months Ended Jan 31, 2021 |
|---|---|---|---|---|
| Revenues | $3,636,050 | $3,770,813 | $1,811,041 | $1,277,327 |
| Net Income | $3,004,260 | $103,535 | $1,821,006 | $42,642 |
| Operating Income (Loss) | ($1,536,943) | $199,513 | ($135,723) | $92,658 |
| Cash and Cash Equivalents | $477,134 (End of Period) | $2,473,959 (End of Prior Year) | N/A | |
| Total Debt | $3,442,984 | $5,328,784 | N/A | |
| Working Capital | ($502,393) | ($4,666,833) | N/A |
Revenue Composition (Nine Months 2022): Consulting services for equity securities ($2.10M), Portal fees ($951.7K), Listing fees ($288K), and other consulting revenue ($293.2K).
Profit Margins: Gross margin was approximately 97.6% for the nine months ended Jan 31, 2022. Net income margin was 82.6% for the same period, heavily influenced by non-operating items.
Material Changes vs. Prior Period
- Net Income Surge: Net income increased by 2,802% for the nine months ended Jan 31, 2022, compared to the prior year. This is primarily driven by a one-time debt forgiveness of $1,904,302 related to an SBA loan and an unrealized gain on equity securities of $3,275,745.
- Operating Loss: Despite the net income, the company reported an operating loss of $1.54M for the nine-month period, compared to an operating profit of $199.5K in the prior year. This reflects increased operating expenses, particularly payroll and consulting fees.
- Revenue Mix Shift: While total revenue decreased slightly (4%) year-over-year for the nine-month period, the composition shifted. Non-cash revenue from equity receipt decreased by $1.04M, but this was offset by growth in funding portal fees and listing fees.
- Expense Increases: Payroll and payroll-related expenses increased by 41% ($879K) due to staff expansion. General and administrative expenses increased by 443% ($1.04M), attributed to the newly acquired funding portal business. Consulting expenses rose 73% due to stock-based compensation for outside firms.
- Debt Reduction: Total debt decreased by approximately $1.89M due to the forgiveness of the SBA "May Loan."
Guidance, Outlook, and Risks
Management Commentary: Management believes existing cash balances and anticipated cash flows will be sufficient for the next 12 months. They anticipate the negative working capital balance will be eliminated by the forgiveness of the remaining $1.89M SBA loan. The company notes that the pandemic has driven users toward online investing, resulting in regular monthly increases in users and capital raised.
Unusual Items:
- Debt Forgiveness: $1.90M recognized as other income.
- Unrealized Gains: $3.28M gain on equity securities (specifically KingsCrowd Inc.) recognized as other income.
- Non-Cash Revenue: Significant portion of revenue ($2.10M for nine months) derived from receiving equity in lieu of cash for consulting services.
Risks and Contingencies:
- Liquidity: The company currently has negative working capital of $502,393 and cash of $477,134. Future liquidity depends on anticipated SBA loan forgiveness and continued fundraising.
- Customer Concentration: For the nine months ended Jan 31, 2022, two customers accounted for 30% and 28% of revenues, respectively.
- Related Party Transactions: Significant transactions exist with Netcapital Systems LLC (majority shareholder), including debt settlements via stock issuance and software usage fees.
- Valuation of Investments: A significant portion of assets ($11.26M) consists of equity securities in private companies, valued based on observable prices or cost, which may be volatile.
Investor Verification Checklist
- SBA Loan Forgiveness Status: Verify the confirmation of the $1.89M SBA loan forgiveness to ensure the projected improvement in working capital materializes.
- Recurring Revenue Quality: Assess the sustainability of revenue streams, noting that a large portion ($2.1M) was non-cash equity compensation in the last nine months.
- Operating Cash Flow: Review the negative operating cash flow of $2.3M for the nine-month period to understand the cash burn rate relative to the $477K cash balance.
- Equity Investment Valuations: Scrutinize the $3.28M unrealized gain on KingsCrowd Inc. and the valuation methodologies for other private equity holdings ($11.26M total).
- Related Party Dependencies: Evaluate the extent of reliance on Netcapital Systems LLC for software usage and the impact of related-party debt settlements on future capital structure.