Netcapital Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended October 31, 2022; year-to-date figures cover the six months ended that date. Comparisons are with the corresponding 2021 periods. The filing was signed December 12, 2022.
Business context and financial performance
Netcapital operates an online funding portal for private-company offerings and provides consulting, marketing, and strategic services. It earns portal engagement and success fees and may receive equity as compensation for consulting services.
| Metric | Three months ended Oct. 31, 2022 | Three months ended Oct. 31, 2021 | Six months ended Oct. 31, 2022 | Six months ended Oct. 31, 2021 |
|---|---|---|---|---|
| Revenue | $1.779 million | $1.200 million | $3.120 million | $1.825 million |
| Gross profit | $1.743 million | $1.182 million | $3.062 million | $1.779 million |
| Operating income (loss) | $335,165 | ($325,130) | $341,835 | ($1.401 million) |
| Net income (loss) | $183,138 | ($274,156) | $247,615 | $1.183 million |
| Basic earnings (loss) per share | $0.04 | ($0.10) | $0.07 | $0.48 |
Second-quarter revenue rose approximately 48%; six-month revenue rose approximately 71%. Gross margins were about 98% in both current periods. Operating margin was approximately 18.8% for the quarter and 11.0% year to date. The six-month net-income comparison is distorted by a $3.276 million unrealized investment gain in the prior-year period; the current period instead included a $406,060 realized investment loss and a $224,260 gain on debt conversion.
Cash flow, balance sheet, and financing
- Cash and equivalents were $1.565 million at October 31, 2022, versus $473,925 at April 30, 2022. Current assets were $3.892 million and current liabilities $4.188 million, leaving negative working capital of approximately $296,200, improved from negative $3.113 million.
- Operating activities used $2.055 million of cash in the six months, compared with $1.898 million used in the prior-year period. A key noncash item was $2.5 million of services revenue received as equity rather than cash.
- Financing activities provided $2.946 million, including $3.949 million of net proceeds from a July public offering, partly offset by a $1 million secured-debt payment. Investing activities provided $200,000 from the sale of KingsCrowd shares.
- Total debt was $2.840 million, down from $4.143 million at April 30. The secured lender balance fell to $400,000; the loan maturity was extended to April 30, 2023. The filing reports $2.351 million of current debt and $489,063 of long-term debt.
- Equity securities at fair value totaled $15.113 million, up from $12.861 million. Purchased technology, net, was $15.495 million. The carrying value of these assets, particularly private-company investments, is important to assess alongside available cash.
- The public offering issued 1,205,000 common shares and warrants; net proceeds were $3.949 million. As of October 31, 4,312,777 shares were outstanding, and 1,469,982 warrants were outstanding at a $5.19 exercise price. As of December 12, the company reported 4,619,027 shares issued and outstanding.
Material changes, outlook, and risks
- Revenue growth was driven chiefly by consulting services for equity securities: $1.4 million in the quarter and $2.425 million year to date. Portal fees were lower year to date than in the comparable period, while consulting revenue increased.
- One customer represented 79% of quarterly revenue and 67% of six-month revenue. This concentration makes results sensitive to a limited number of customers and offerings.
- Management said existing cash and anticipated operating cash flows should be sufficient for working capital and expenditures over the next 12 months. This is management’s expectation, not a guarantee; operating cash flow was negative and working capital remained negative.
- The secured loan is collateralized by company assets and includes restrictive covenants. SBA loans include a $500,000 loan with payments scheduled to begin December 17, 2022; the filing also says the company applied for forgiveness of another SBA loan, with its first payment postponed pending that application.
- Management cited risks including access to capital, dependence on large issuers, attracting issuers and investors, competition, regulation and licensing, staffing costs, technology and security risks, and uncertainty around growth and market conditions. It cautioned that COVID-era increases in online investing may not persist. No specific revenue or earnings guidance was provided.
- Management reported disclosure controls and internal control over financial reporting were effective as of October 31, 2022. The company reported no material litigation and no material changes to previously disclosed risk factors.
- Subsequent events included a December 2022 issuance of 300,000 shares to acquire intellectual property and other assets of the 1ON1.FANS interactive video platform; the filing provides no purchase valuation in the text supplied.
Investor verification priorities
- Confirm the collectability and timing of accounts receivable, and the liquidity or realizable value of the $15.113 million investment portfolio, including equity received instead of cash for services.
- Assess cash burn, negative working capital, and the assumptions supporting management’s 12-month liquidity outlook.
- Review the secured-loan maturity, covenants, SBA repayment and forgiveness status, and ability to service debt.
- Evaluate customer concentration and whether equity-based consulting revenue can be sustained or converted to cash.
- Quantify potential dilution from the warrants, options, and subsequent share issuances, and verify the terms and valuation of the 1ON1.FANS acquisition.