Netcapital Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2021. The company operates a fintech platform for online private-company fundraising and provides consulting and strategic services. Its funding portal focuses on Regulation Crowdfunding and also earns listing fees and fees based on capital raised.
Financial performance and position
| Metric | Three months ended Oct. 31, 2021 | Six months ended Oct. 31, 2021 |
|---|---|---|
| Revenue | $1.200 million | $1.825 million |
| Gross profit / gross margin | $1.182 million / about 98.5% | $1.779 million / about 97.5% |
| Operating income (loss) | $(325,130) | $(1.401) million |
| Net income (loss) | $(274,156) | $1.183 million |
| Operating cash flow | Not separately presented | $(1.898) million |
Quarterly revenue increased 64% year over year, while six-month revenue declined 27%. The six-month comparison reflects lower noncash revenue from equity received for consulting services, partly offset by new funding-portal revenue. Six-month net income included a $3.276 million unrealized gain on equity securities; excluding that gain, reported operating performance was loss-making. The quarter’s reported revenue is $1,199,822 in the statements and $1,199,821 in MD&A.
At October 31, cash was $940,966, down from $2.474 million at April 30. Working capital remained negative at $2.550 million, improved from negative $4.667 million. Total debt was $5.329 million, including $3.576 million current and $1.753 million long-term. Total assets were $28.285 million and stockholders’ equity was $20.502 million. Equity securities totaled $9.624 million, including the KingsCrowd investment whose price increase drove the unrealized gain.
Material changes and notable items
- Funding-portal fees and listing fees contributed $818,428 of six-month revenue; these were absent in the comparable 2020 period. Equity received for consulting services fell to $902,174 from $2.315 million.
- Six-month costs and expenses rose to $3.180 million from $1.672 million. Management attributed increases largely to the portal business, additional staff, and stock-based consulting compensation; payroll was $1.792 million and general and administrative expense was $956,422.
- Cash used in operations was $1.898 million. Accounts receivable increased $792,742, while the cash-flow reconciliation also deducted the noncash securities gain. Investing activities used $247,166, including a $130,000 loan to affiliates and $117,166 investment in an affiliate.
- During the period, the company issued 176,934 shares for gross proceeds of $1.592 million and issued 361,736 shares valued at $3.523 million to settle supplemental acquisition consideration and related liabilities. Shares outstanding increased to 2,719,310 from 2,178,766 at April 30.
- In November 2021, the SBA forgave the $1.886 million May 2020 loan and returned $212,252 previously debited from the company’s bank account. Management believed the separate $1.886 million February 2021 SBA loan would also be forgiven; the filing does not report that forgiveness as completed.
Outlook, risks and contingencies
Management reported that investment commitments on the portal exceeded $2.9 million in June and reached more than $4.3 million in November; investments made through the portal in the first seven months of fiscal 2022 were 156% above the comparable prior-year period. Management expected existing cash and anticipated operating cash flows to meet requirements for the next 12 months, but noted uncertainty from market conditions, COVID-19 effects, and the pace of sustainable growth. No specific earnings or revenue guidance was provided.
Customer concentration remains material: two customers represented 50% of six-month revenue and 75% of quarterly revenue. The company reported no material pending litigation and no defaults upon senior securities. Its $1.0 million secured loan bears 8% interest, is secured by a first lien on company assets, and matures April 30, 2022; the agreement contains restrictive covenants. Related-party balances and transactions are also disclosed, including a majority shareholder’s 61.5% ownership at October 31.
Subsequent transactions included an agreement to acquire MSG Development Corp. for 75,000 company shares, 50,000 of which were issued in December, and a December issuance of 50,000 shares for a 10% interest in Caesar Media Group. Management said disclosure controls and internal control over financial reporting were effective as of October 31.
Important facts for investors to verify
- Whether the February 2021 SBA loan is forgiven, and the resulting effect on current liabilities and liquidity.
- Cash collection and aging of the $2.150 million accounts receivable balance, alongside ongoing operating cash use and negative working capital.
- Sustainability of portal revenue growth and the effect of customer concentration on future results.
- Valuation basis and realizability of the $9.624 million equity portfolio, particularly the KingsCrowd valuation and the $3.276 million unrealized gain.
- Share dilution, including post-period issuances and remaining consideration for the MSG acquisition.
- The quarter’s small revenue inconsistency between the financial statements and MD&A.