Business context and reporting period
Netcapital Inc. filed this Form 10-K for the fiscal year ended April 30, 2022, with fiscal 2021 as the comparable period. The company operates an online funding portal for private-company securities offerings and provides advisory, consulting, and business-valuation services. Its funding portal charges a $5,000 engagement fee and a 4.9% success fee on capital raised at closing. The filing was signed August 5, 2022.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $5,480,835 | $4,721,003 |
| Gross profit | $5,370,720 | $3,961,845 |
| Operating income (loss) | ($1,031,146) | ($401,501) |
| Net income | $3,503,530 | $1,469,660 |
| Basic / diluted EPS | $1.31 / $1.27 | $1.18 / $0.89 |
| Cash used in operating activities | ($3,006,667) | ($3,250,868) |
| Cash and cash equivalents at year-end | $473,925 | $2,473,959 |
| Total debt | $4,142,984 | $5,328,784 |
Gross margin was approximately 98% in FY2022 versus 84% in FY2021; operating margin was approximately (19%) versus (9%), and net margin approximately 64% versus 31%. Net income included a $3,275,745 unrealized gain on equity securities and $1,904,296 of SBA loan forgiveness. Excluding these items, reported net income is not a measure of recurring operating profitability. The company recorded a $126,372 interest expense and $544,000 income tax expense in FY2022.
Revenue increased 16%. Consulting services for equity securities contributed $3,375,000, consulting revenue $503,233, portal fees $1,206,957, and listing fees $394,490. Consulting services for equity securities were largely noncash consideration. Online-service fees increased, while consulting services for equity securities declined from $3,547,032 to $3,375,000. Costs of services fell to $110,115 from $759,158, but payroll, consulting, and general and administrative expenses rose; G&A reached $1,602,031, up 245%, primarily reflecting legal, professional, and software costs.
Cash used in operations remained substantial despite reported net income, reflecting noncash equity revenue and valuation gains, debt forgiveness, and a $1,153,598 increase in accounts receivable. Investing activities used $319,166; financing activities provided $1,325,799. Working capital was negative $3,113,403 at April 30, 2022, compared with negative $4,666,833 a year earlier. Accounts receivable, net, was $2,433,900. Current liabilities were $6,027,590 and total liabilities $6,522,663.
Equity securities at fair value were $12,861,253, up from $6,298,008; these holdings are not necessarily liquid. The company reported total assets of $31,760,524 and stockholders’ equity of $25,237,861. Its audit opinion was unqualified. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not required to, and did not, attest to internal-control effectiveness.
Material changes and subsequent developments
- Revenue rose $759,832, or 16%, with portal fees up 130% to $1,206,957 and listing fees up 31% to $394,490.
- Net income more than doubled, but operating losses widened and cash declined by $2,000,034. Earnings were materially supported by unrealized investment gains and debt forgiveness.
- Debt declined year over year, principally after forgiveness of a $1,904,296 SBA loan, but FY2022 included $700,000 of new secured borrowing and $300,000 of convertible notes. At year-end, $3,647,911 of debt was classified as current.
- After year-end, the company completed a July 2022 public offering of 1,205,000 shares and warrants for gross proceeds of $5,000,750 before expenses, and listed on Nasdaq. It also paid $1 million to its secured lender, reducing that principal from $1.4 million to $400,000. The filing also reports post-year-end share issuances to settle convertible notes and supplemental consideration.
Outlook, commentary, and risks
Management stated that existing cash investment balances and anticipated operating cash flows were expected to meet working-capital and expenditure needs for the next 12 months, while noting economic and market uncertainty. No quantified revenue, earnings, or cash-flow guidance is provided. Management described growth plans that include increasing investor and issuer accounts, hiring business-development staff, investing in technology, exploring international expansion, and developing a secondary-transfer feature; these are plans, not assurances of execution.
Key risks include negative working capital and recurring operating cash outflow; dependence on additional capital; a secured loan bearing 8% interest, due April 30, 2023 at the reporting date, secured by company assets and subject to restrictive covenants; customer concentration, with three customers representing 62% of FY2022 revenue; and reliance on noncash, illiquid equity consideration and investment valuations. Other significant risks include evolving securities regulation, competition, dependence on licensed portal technology and a single escrow provider, cybersecurity, and the possibility that investment-company regulation could constrain operations. Management noted COVID-19 had not significantly affected operations to the report date, but future effects were uncertain. The company reported no known legal claims expected to have a material adverse effect.
Most important facts for investors to verify
- How much FY2022 revenue and earnings are repeatable cash operating results, given noncash equity-service revenue, unrealized gains, and SBA debt forgiveness?
- Whether receivables are collectible and whether cash generation can improve, given $2.43 million of net receivables, negative working capital, and operating cash outflow.
- The current debt balance, maturity terms, covenant compliance, accrued interest, and use of post-offering proceeds; the filing’s post-year-end debt reduction should be checked against subsequent filings.
- The liquidity, valuation basis, and potential impairment or realizable sale value of the $12.86 million investment portfolio, including the KingsCrowd-related fair-value increase.
- The effect of customer concentration, related-party arrangements, equity compensation, and the July 2022 share-and-warrant offering on future revenue and shareholder dilution.