Netcapital Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2022, the first quarter of fiscal 2023. Netcapital operates an SEC-registered online funding portal for private-company offerings and provides consulting, marketing, and strategic services. The financial statements are unaudited.
Financial performance and position
| Metric | Quarter ended July 31, 2022 | Prior-year quarter |
|---|---|---|
| Revenue | $1,340,573 | $625,187 |
| Gross profit / margin | $1,319,510 / 98.4% | $596,882 / 95.5% |
| Operating income (loss) | $6,670 | ($1,076,090) |
| Net income | $64,477 | $1,457,410 |
| Basic / diluted EPS | $0.02 / $0.02 | $0.66 / $0.65 |
| Cash used in operating activities | $1,063,672 | $887,641 |
- Revenue grew 114%. Consulting services were $1,161,830, including $1,025,000 identified as consulting services for equity securities; online-service fees were $178,743. Portal fees fell to $51,000 from $437,317.
- Operating expenses totaled $1,312,840, down from $1,672,972, mainly reflecting lower consulting and payroll costs. Operating income was only $6,670 despite higher revenue.
- Net income included a $297,000 income-tax benefit and a $224,260 gain on debt conversion, partly offset by a $406,060 realized loss on investment. The prior-year comparison included a $3,275,745 unrealized gain on equity securities. Net income and EPS therefore do not, by themselves, reflect underlying operating performance.
- At July 31, cash was $2,556,170, versus $473,925 at April 30, 2022. Working capital was $737,279, compared with a $3,113,403 deficit at April 30.
- Total assets were $34,172,270 and stockholders’ equity was $29,664,394. Assets included $13,455,193 of equity securities at fair value and $15,515,623 of net purchased technology.
- Total debt was $2,839,784, including $2,347,703 current debt and $492,081 long-term debt. Total liabilities were $4,507,876. Accounts receivable was $2,154,700.
- Operating cash outflow exceeded net income; the filing attributes this in part to $1.2 million of equity securities received in lieu of cash. Financing activities provided $2,945,917, primarily from the stock offering.
Material changes and notable transactions
- On July 15, 2022, Netcapital completed an underwritten offering of 1,205,000 common shares and warrants, raising $5,000,750 gross and $3,949,117 net. Shares and warrants began trading on Nasdaq under NCPL and NCPLW. The warrants are immediately exercisable at $5.19 and expire in five years.
- On July 21, the company paid $1 million to its secured lender, reducing that balance from $1.4 million to $400,000. The loan matures April 30, 2023, bears 8% interest, is secured by company assets, and carries restrictive covenants.
- The company issued shares to retire $300,000 of convertible notes plus accrued interest. Quarter-end shares outstanding were 4,272,677; 4,297,677 were reported outstanding as of September 12, 2022. The offering and warrants increased potential dilution.
- Two customers accounted for 52% and 24% of quarterly revenue, respectively, versus 19% and 16% in the prior-year quarter.
- Equity holdings include investments received as payment for services. The filing reports a $1.2 million Reper investment received in May in satisfaction of a receivable. The portfolio’s reported values may not represent cash realizable in a sale.
- Related-party matters include software fees paid to Netcapital Systems LLC, the company’s largest shareholder, and business/investment relationships involving companies whose boards include the CEO. The filing reports no material litigation.
Outlook, risks, and controls
Management said existing cash and anticipated operating cash flows should meet working-capital and expenditure needs for the next 12 months; no formal revenue or earnings guidance was provided. The company reported no expected fiscal 2023 capital expenditures. Management noted that market volatility, economic conditions, the pace of sustainable growth, and the post-pandemic normalization of in-person activity could affect liquidity and demand. Other cited risks include dependence on a small number of issuers and customers, attracting issuers and investors, competition, access to capital, regulation and licensing, staffing and technology costs, and the development of a secondary trading market.
Management stated that disclosure controls and internal control over financial reporting were effective as of July 31, 2022, with no material control changes during the quarter. The company’s auditors were not required to provide an internal-control attestation. The filing reports no material changes to risk factors from the prior annual report.
Important facts for investors to verify
- Whether revenue growth can be sustained, particularly given the concentration in two customers and the large contribution from consulting services for equity securities.
- The collectability and cash conversion of receivables, and the valuation and liquidity of equity securities received for services.
- Whether cash generation can improve from the reported quarterly operating cash outflow and support management’s 12-month liquidity assessment.
- The secured loan’s April 2023 maturity, covenants, repayment requirements, and the status of the SBA loans, including the pending forgiveness application noted for one loan.
- The actual dilution from outstanding warrants, options, and common shares, and the terms and final proceeds of the public offering.