10-Q: Netcapital Q1 Loss Widens Amid Revenue Growth, Capital Raises

Netcapital Inc. reported increased revenue and significant capital raises in Q1 2026, but also a wider net loss and ongoing 'going concern' doubts.

Summary

• Netcapital Inc. reported a net loss of $(3,642,052) for the three months ended July 31, 2025, a significant increase from $(2,527,170) in the same period last year.
• Revenues increased by 34% to $190,058 for the three months ended July 31, 2025, compared to $142,227 in the prior year, primarily driven by portal fees and equity fees from one major customer.
• The company's cash and cash equivalents significantly increased to $4,562,491 as of July 31, 2025, from $289,428 as of April 30, 2025, largely due to successful capital raising activities.
• Working capital improved from a deficit of $(5,096,155) on April 30, 2025, to a positive $186,766 on July 31, 2025.
• Operating expenses rose, with payroll and related expenses increasing by 58% to $1,793,450 and general and administrative costs, including legal fees, increasing by 14% to $1,568,506.
• The company acquired a perpetual software license from Horizon Globex GmbH for 500,000 shares of common stock, valued at $2,840,000, which is now classified as an indefinite-lived intangible asset.
• Management has concluded that there is substantial doubt about the company's ability to continue as a going concern due to recurring operating losses and negative cash flows from operations.
• Subsequent to the quarter end, Netcapital settled two defaulted promissory notes totaling $627,420 by paying $313,710 in cash and issuing 138,686 shares of common stock valued at $313,710.

Sentiment

Score: 3

Explanation: The sentiment is negative due to a significantly widened net loss, increased cash burn from operations, and the explicit 'going concern' warning. While capital raises improved liquidity, they appear to be primarily for survival and debt settlement, and the company continues to face substantial financial challenges and internal control issues.

Positives

• Total revenues increased by 34% to $190,058 for the three months ended July 31, 2025, compared to $142,227 in the prior year.
• Cash and cash equivalents increased significantly to $4,562,491 as of July 31, 2025, from $289,428 as of April 30, 2025, reflecting successful capital raises.
• Working capital improved from a deficit of $(5,096,155) to a positive $186,766.
• Gross profit increased to $182,649 from $132,007 year-over-year.
• The company recognized an unrealized gain of $44,945 on equity securities from a funding portal issuer.
• Acquired a perpetual, royalty-free software license from Horizon Globex GmbH, enhancing capital-raising and secondary trading services capabilities.

Negatives

• Net loss widened to $(3,642,052) for the three months ended July 31, 2025, from $(2,527,170) in the prior year.
• Net cash used in operating activities increased to $(4,214,258) from $(1,963,645) year-over-year, indicating increased cash burn.
• Payroll and payroll-related expenses increased by 58% to $1,793,450, attributed to salary increases and bonuses for employee retention.
• General and administrative expenses increased by 14% to $1,568,506, primarily due to higher legal costs, with approximately 60% related to regulatory matters.
• Interest expense surged by 245% to $36,067 due to increased debt amounts from notes sold in March, April, and May 2025.
• Accretion expense on short-term notes amounted to $356,413, a new expense from original issue discounts on recently issued debt.
• The company has substantial customer concentration, with one customer accounting for 73% of revenues for the three months ended July 31, 2025.
• Two promissory notes totaling $600,000 principal amount were in default as of July 31, 2025, and subsequently settled by cash and stock issuance.

Risks

• Substantial doubt exists about the company's ability to continue as a going concern due to recurring operating losses and negative cash flows.
• The company may face difficulties in achieving sufficient revenues or securing additional financing to support working capital requirements and repay existing debt.
• Exposure to securities litigation or shareholder activism could result in significant costs, divert management attention, and negatively impact stock price.
• The highly regulated securities industry subjects the company to various regulatory inquiries, governmental investigations, and potential litigation, leading to increased legal and compliance costs.
• Internal control weaknesses, including a material weakness related to legal expense accrual and a significant deficiency in investment valuation, could affect financial reporting reliability.
• Significant customer concentration (one customer accounted for 73% of Q1 2026 revenues) poses a risk if that customer experiences declining sales or reduces demand for services.

Future Outlook

Management plans to continue focusing on growing its funding portal business, expanding broker-dealer operations to include Regulation D offerings, and actively seeking additional financing through private placements, public offerings, and/or bank financing. However, management has concluded that these plans are unlikely to sufficiently alleviate the substantial doubt about the company's ability to continue as a going concern.

Management Comments

• Management is focused on growing the funding portal business, which generates cash revenues and has seen year-over-year revenue growth.
• The company plans to continue operating with lower fixed overhead amounts and seeks to raise money from private placements, public offerings, and/or bank financing.
• Management has determined that it is unlikely its current plans will sufficiently alleviate or mitigate the conditions raising substantial doubt about the company's ability to continue as a going concern.

Industry Context

Netcapital operates in the evolving fintech sector, specifically in online capital raising (crowdfunding via Reg CF and Reg A offerings) and broker-dealer services. The expansion into Reg A and Reg D offerings through its FINRA-approved broker-dealer subsidiary positions it to capture a broader market for private company investments. The industry is characterized by increasing regulatory scrutiny, which has led to higher compliance costs for Netcapital and other financial institutions.

Management Changes

Corporate Governance

Legal Proceedings

• The company is subject to various regulatory inquiries, governmental investigations, or other claims arising in the ordinary course of business, particularly from the SEC, FINRA, and Nasdaq Stock Market.
• Increased legal and compliance costs have been incurred due to heightened regulatory scrutiny of financial institutions.
• Approximately 60% of the $1,077,587 in legal costs incurred in the three months ended July 31, 2025, were related to responding to regulatory matters.

Related Party Transactions

• Paid Netcapital Systems LLC (29% owned by Founder Jason Frishman) $285,000 for software use in Q1 2026, up from $95,000 in Q1 2025. Owed $95,000 as of July 31, 2025.
• Cecilia Lenk, CEO of Netcapital Advisors Inc., is a director of KingsCrowd Inc., in which Netcapital holds 3,209,685 shares valued at $577,743.
• John Fanning Jr., son of the CFO, is the controlling shareholder of Zelgor Inc., in which Netcapital holds 1,400,000 shares valued at $1,400,000. He received cash wages of $14,100 in Q1 2026.
• Compensation to officers (Martin Kay and Coreen Kraysler) included stock-based compensation of $508,269 and cash salaries of $697,742 in Q1 2026.
• Coreen Kraysler, CFO, personally guaranteed a $500,000 SBA promissory note.
• John Fanning, husband of the CFO, provides informal advisory services to the company and some portfolio companies like KingsCrowd and Zelgor.

Stakeholder Impact

• Shareholders face significant dilution from recent and ongoing capital raises (e.g., multiple stock offerings, warrant exercises, debt settlements via stock issuance).
• Shareholders are exposed to substantial risk due to the 'going concern' warning, indicating potential inability to meet obligations or continue operations.
• Employees and management benefit from increased payroll expenses and stock-based compensation, aimed at retention.
• Creditors (noteholders) have seen some debt repaid or settled through a combination of cash and equity, indicating efforts to manage liabilities but also financial strain.
• Customers of the funding portal may benefit from expanded services (Reg A/D offerings) and improved software capabilities (Horizon license), but the company's financial instability could pose risks to their offerings.

Next Steps

• Seek stockholder approval for the amendment to the 2023 Omnibus Equity Incentive Plan to increase authorized shares and evergreen limit.
• File resale registration statements for shares underlying warrants issued in July 2025 offerings within 30 days of the purchase agreements.
• Continue remediation efforts for identified material weakness in internal control over financial reporting and significant deficiency in investment valuation policies.
• Pursue growth in the funding portal business and expand broker-dealer operations to include Regulation D offerings.
• Seek additional financing through private placements, public offerings, and/or bank financing to support working capital requirements.

Key Dates

Recommendation

Despite increased revenue and successful capital raises, the company's net loss widened significantly, and cash used in operating activities more than doubled. The explicit 'substantial doubt about the Company’s ability to continue as a going concern' is a critical red flag. Recent capital raises appear to be primarily for survival and debt settlement, including settling defaulted notes by issuing shares at a low price, rather than funding sustainable growth. The ongoing internal control weaknesses and high legal costs related to regulatory matters further compound the risk. A seasoned investor would likely view these factors as indicative of severe financial distress and recommend selling to mitigate further potential losses.

Keywords

Fintech, Crowdfunding, SEC Filing, 10-Q, Capital Raise, Going Concern, Netcapital, NCPL, Reg CF, Reg A, Broker-Dealer, Equity Financing, Financial Results