Netcapital Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2023 (the first quarter of fiscal 2024); comparisons are with the three months ended July 31, 2022. The filing was signed September 14, 2023.
Business context
Netcapital operates an online funding portal for private-company offerings and provides consulting, marketing and valuation services. It earns portal engagement and success fees, as well as consulting fees; consulting arrangements may also be paid in equity. The company describes its platform as serving accredited and non-accredited investors.
Financial results and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Revenue | $1.520 million | $1.341 million |
| Gross profit | $1.502 million | $1.320 million |
| Gross margin | 98.8% | 98.4% |
| Operating income (loss) | $(749,020) | $6,670 |
| Net income (loss) | $(491,655) | $64,477 |
| Net cash used in operating activities | $(1.464) million | $(1.064) million |
- Revenue increased 13%. Online-service fees rose to $376,109 from $178,743, while consulting-services revenue was $1.144 million versus $1.162 million. Management attributed growth principally to higher portal success fees and listing fees.
- Operating performance deteriorated despite revenue growth. Payroll rose 35% to $1.037 million, marketing rose to $241,888 from $7,780, and general and administrative expense doubled to $788,294. The filing attributes increases to hiring and salary increases, portal promotion, and professional fees including stock-based compensation.
- Cash was $1.031 million at July 31, versus $569,441 at April 30. Working capital remained negative at $1.639 million, improved from negative $2.623 million. Operating cash use included a $1.170 million receipt of equity securities instead of cash for services.
- Cash provided by financing was $1.925 million, primarily common-stock proceeds of $2.275 million, partly offset by a $350,000 secured-debt repayment. No investing cash flows were reported for the quarter.
- Total debt was $2.435 million, including $1.886 million of current SBA debt, $500,000 of long-term SBA debt, $34,324 due to a bank and $15,000 of related-party notes. The $350,000 secured lender balance was paid off in May 2023. The CFO personally guaranteed the $500,000 SBA loan.
- Total assets were $43.434 million, including $24.309 million in equity securities and $15.847 million in net purchased technology. Equity was $38.465 million. Equity securities increased from $22.955 million, principally with receipt of $1.170 million in RealWorld LLC units for services.
- The company recorded a $299,000 income tax benefit despite a pretax loss of $790,655. The balance sheet included a $1.532 million net deferred tax liability, largely related to unrealized gains on equity securities.
Material changes, financing and outlook
- Shares outstanding increased from 6,440,527 at April 30 to 9,434,132 at July 31, approximately 46%. The quarter included a May registered direct offering of 1.1 million shares, which generated $1.469 million net proceeds, and a July public offering of 1.725 million shares at $0.70 per share for $1.208 million gross proceeds. Warrants were also issued in connection with these offerings.
- Stock-based compensation expense was $483,351, compared with $32,953 a year earlier. The company also issued shares for consulting services, a debt settlement and an equity investment.
- Management believes cash, anticipated operating cash flows, potential equity or debt offerings and possible sales of portfolio-company equity will be sufficient for working capital and expenditures for the next 12 months. This expectation is subject to operating performance, market conditions and access to capital. No fiscal 2024 capital expenditures were anticipated.
- Nasdaq notified the company on September 1, 2023 that its share price had failed the $1.00 minimum bid-price requirement. The filing says the shares could continue trading during a compliance period and that a reverse split may be considered. The filing gives inconsistent compliance deadlines: February 28, 2024 in the recent-developments discussion and February 8, 2024 in the risk-factor discussion.
- Management reported no material subsequent events requiring financial-statement disclosure, no material litigation, and no material changes to previously disclosed risk factors other than the Nasdaq listing issue. Management concluded disclosure controls and internal control over financial reporting were effective as of July 31, 2023; no external auditor attestation was required.
Key risks and unusual items
- Two customers accounted for 37% of revenue each in the quarter, or 74% combined, creating significant customer concentration.
- The company depends on equity issuances and other capital sources while reporting negative working capital and operating cash outflows. Further financing may dilute shareholders or may not be available on acceptable terms.
- A substantial portion of assets consists of equity securities received for services and valued using offering or other transaction prices. The filing cautions that fair values based on limited observable market data may not be realized in a sale; liquidity and valuation uncertainty are material considerations.
- Management identifies risks involving issuer and investor growth, dependence on large issuers, competition, regulation and licensing, personnel and labor costs, cloud-platform costs, cybersecurity, and potential difficulty developing a secondary market.
Important facts for investors to verify
- Confirm the applicable Nasdaq bid-price compliance deadline and any subsequent company or Nasdaq updates; the filing states two different dates.
- Assess the collectability and timing of accounts receivable and the quality, valuation basis and potential liquidity of the $24.309 million equity-securities portfolio.
- Track cash burn, negative working capital, debt service and management’s stated 12-month liquidity assumptions, including dependence on future financing or asset sales.
- Evaluate customer concentration and whether portal-fee and listing-fee growth can continue without further disproportionate increases in payroll, marketing and administrative expenses.
- Review dilution from the quarter’s offerings, outstanding warrants and options, and additional equity-based compensation or acquisitions.