Netcapital Inc. Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal third quarter and nine months ended January 31, 2023; the comparable periods ended January 31, 2022. Netcapital operates an online funding portal for private-company offerings and provides consulting, marketing, and strategic services. The portal charges a $5,000 engagement fee and a 4.9% success fee on capital raised at closing. Financial statements are unaudited interim statements.
Key financial metrics
| Metric | Three months ended Jan. 31, 2023 | Three months ended Jan. 31, 2022 | Nine months ended Jan. 31, 2023 | Nine months ended Jan. 31, 2022 |
|---|---|---|---|---|
| Revenue | $2.260 million | $1.811 million | $5.380 million | $3.636 million |
| Gross profit | $2.256 million | $1.772 million | $5.318 million | $3.551 million |
| Operating income (loss) | $571,000 | $(136,000) | $912,000 | $(1.537) million |
| Net income | $1.696 million | $1.821 million | $1.944 million | $3.004 million |
| Diluted earnings per share | $0.33 | $0.63 | $0.46 | $1.14 |
| Net cash used in operating activities | Not stated for quarter | Not stated for quarter | $(3.415) million | $(2.303) million |
Gross margin was approximately 99.8% for the quarter and 98.9% for the nine-month period. Net income included substantial gains from equity-security revaluations: $1.866 million in the quarter and $1.858 million for the nine months. These gains are not operating cash receipts.
- Liquidity: Cash and cash equivalents were $1.772 million at January 31, 2023, versus $474,000 at April 30, 2022. Working capital remained negative at $845,000, improved from negative $3.113 million.
- Debt: Total debt was $2.785 million, down from $4.143 million. The $350,000 secured-lender balance was due April 30, 2023, carried an 8% interest rate, and was secured by a first lien on company assets. SBA loans and other borrowings made up the remainder.
- Assets and equity: Total assets were $39.576 million, including $19.250 million of equity securities and $15.904 million of net purchased technology and other intangible assets. Stockholders’ equity was $34.257 million.
Material changes versus comparable periods
- Quarterly revenue increased 25%; nine-month revenue increased 48%. Management attributed the growth principally to consulting services compensated with equity securities. Equity-related consulting revenue was $1.950 million for the quarter and $4.375 million for the nine months.
- Despite higher revenue, quarterly net income declined from $1.821 million to $1.696 million, and nine-month net income declined from $3.004 million to $1.944 million. Nine-month operating results improved from a $1.537 million loss to $912,000 of operating income.
- Revenue growth did not translate into positive operating cash flow. The company received $4.600 million of equity securities instead of cash for services during the nine months, contributing to $3.415 million of operating cash use.
- Cash rose primarily with financing: net cash provided by financing activities was $4.513 million, including $5.571 million of stock-sale proceeds, partly offset by $1.050 million paid to the secured lender.
- Common shares outstanding increased from 2.934 million at April 30, 2022 to 6.072 million at January 31, 2023. The company completed public offerings and issued warrants; it also granted 1.6 million options to four related parties at $1.43 per share, subject to stockholder approval.
Outlook, commentary, risks, and unusual items
- Management said cash, capital sources, and anticipated operating cash flows should meet working-capital and expenditure needs for the next 12 months. No quantified revenue, earnings, or other formal financial guidance was provided.
- Management cited dependence on a small number of large issuers, difficulty attracting issuers and investors, competition, access to capital, regulatory and licensing requirements, staffing costs, and the ability to sustain growth among key risks. Four customers represented 35%, 35%, and 17% of quarterly revenue, respectively; one customer accounted for 39% of nine-month revenue.
- Equity compensation and mark-to-market gains are important to reported results. The company’s $19.250 million equity-securities portfolio includes investments received for services, and valuations rely in part on observable prices from transactions or offerings. The company also recorded a $406,060 realized loss on its KingsCrowd share sale.
- The May 2020 SBA loan of $1.886 million, including accrued interest, was forgiven in the prior-year comparative period; this $1.904 million gain did not recur in the current period. The current-period $224,260 gain on debt conversion followed the retirement of convertible notes through share issuance.
- After quarter-end, Silicon Valley Bank entered FDIC receivership. The company reported that it withdrew its approximately $330,000 operating-account balance and that approximately $755,000 held in an SVB investor escrow account was insured and available for withdrawal. Management said it believed the company had no exposure to loss.
- Management reported disclosure controls and internal control over financial reporting were effective as of January 31, 2023. It reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether equity-compensated consulting revenue can be sustained and converted into cash, given the nine-month operating cash outflow and negative working capital.
- The basis, liquidity, and potential volatility of the $19.250 million investment portfolio and the effect of future fair-value changes on earnings and taxes.
- The company’s ability to address the secured lender’s April 30, 2023 maturity and comply with its restrictive covenants, as well as the timing and terms of SBA repayments.
- The impact of share issuance, warrants, and the 1.6 million related-party options on dilution; confirm the status of stockholder approval for the 2023 Omnibus Equity Incentive Plan.
- Revenue concentration and the level of dependence on major customers, including the customer representing 39% of nine-month revenue.
- Reconcile management’s liquidity expectations with the negative working-capital position and recurring operating cash use; confirm the status of SVB escrow funds and related banking arrangements.