Netcapital Inc (NCPL) 2022 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Netcapital Inc. quarterly conference call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Coreen Kraysler. Coreen, the floor is yours.

Thank you, Paul. Hello, everyone, and welcome to Netcapital Inc.'s fiscal 2022 second quarter earnings conference call. Thank you so much for joining us this afternoon. This is Coreen Kraysler, CFO of Netcapital Inc. And with me today are Cecilia Lenk, CEO of Netcapital Inc., and Jason Frishman, CEO. of Netcapital Funding Portal Inc.

In today's presentation we'll review Netcapital Inc.'s performance for the first half of fiscal 2022, which ended October 31, 2021. A copy of the slide deck we'll be using today is available on the Investors section of our website at netcapitalinc.com/investors. A recording of this call will be made available on our website shortly after its conclusion. Please be sure to note the Safe Harbor disclaimer regarding forward-looking statements on page 2 of the presentation. After today's remarks, the operator, Paul, will open up the line for questions.

Netcapital delivered strong first half results with rapid earnings growth and a substantial increase in the value of our equity securities portfolio. Net income for the first six months of fiscal 2022 increased 1,843% to almost $1.2 million, while the Company generated revenues of more than $1.8 million.

On a per share basis, fully diluted EPS was $0.47 compared to $0.15 in the prior period, an increase of 213%. And as of October 31, 2021, equity securities at fair value totaled more than $9.6 million compared to $3.7 million one year ago, an increase of 159%.

We believe Our stock is significantly undervalued relative to peers. When we compare the price to revenue multiple of competing companies such as Wefunder and StartEngine, our stock sells at a substantial discount, seven times revenues for Netcapital, or NCPL, versus 38 times for Wefunder and 33 times for StartEngine.

Netcapital is a fintech company with a scalable technology platform that allows private companies to raise capital online and gives both accredited and non-US accredited investors access to new investment opportunities in private companies.

Through our consulting business, Netcapital Advisors, we also market private capital raises and incubate and take equity positions in select early-stage companies with disruptive technologies. Our mission is to democratize access to private capital markets. To accomplish this, we created a digital private market ecosystem that addresses two major problems: access to capital for private companies, and access to deal flow for investors.

The Netcapital funding portal is registered with the US Securities and Exchange Commission and is a member of the Financial Industry Regulatory Authority, a registered national securities association. Established by the JOBS Act of 2016, the funding portal industry is currently in its infancy.

Through the first 11 months of 2021, private companies raised $452 million under Reg CF via funding portals such as Netcapital.com, an increase of 155% from the same period last year. In 2020, $206 million was raised, a 96% increase from 2019. As the industry continues to grow, we believe that there is a significant opportunity to disrupt traditional private capital markets with Netcapital's digital private capital markets ecosystem.

Private capital markets reached $7.4 trillion at the end of 2020 according to Morgan Stanley. And this number is expected to reach $13 trillion over the next five years. Within this market, private equity represents the largest share with assets in excess of $3 trillion and a 10-year compound annual growth rate of 10%.

Since 2000, global PE net asset value has increased almost tenfold, nearly three times faster than the size of the public equity market. Both Mackenzie and Boston Consulting Group predict that this strong growth will continue as investors allocate increasing amounts to private equity due to historically higher returns and lower volatility than public markets.

A subset of private equity, venture capital funding for private companies, was more than $149 billion last year in the US alone and more than $70 billion in the three months ended June 30, 2021, according to CB Insights. Meanwhile, Reg CF funding commitments were $134 million for the October quarter, representing less than 0.1% of the size of the US VC funding market.

The recent increase in annual Reg CF funding limits from $1 million to $5 million, we believe that the opportunity for funding portals such as Netcapital to take share from the venture capital market is significant.

In addition, institutions are increasing allocations to alternative investments in the private markets since private equity has outperformed public markets for the past 20 years. According to Mackenzie, private equity returns of 14.3% over the past 10 years, beat the S&P 500 by 50 basis points. This outperformance was even higher over the past 20 years with private equity outperforming the S&P return by 350 basis points.

Like institutional investors, retail investors are expected to increase their allocation to private investments. With $42 trillion in global assets, retail investors represent another largely untapped pool of potential account holders for the Netcapital funding portal. Retail investments totaled $21 trillion in the US alone at the end of 2020, up 14% from the prior year.

While retail investors hold roughly half of total public market assets, they hold only 10% of private market assets under management according to Boston Consulting Group. With only 1% to 5% of their portfolio allocated to private investments, even a small increase in retail allocation to private investments could have a large impact on the market opportunity for Netcapital.

The Netcapital funding portal charges a 4.9% success fee for capital raise through the platform, as well as engagement and other fees. Netcapital Advisors generates fees from consulting, and the equity stakes we take in select technology companies provide optionality through possible exits such as a sale or IPO.

Two major tailwinds are driving accelerated growth in the shift to digital fundraising: the COVID-19 pandemic; and regulatory enhancements to the JOBS Act. The pandemic drove a rapid need to bring as many processes as possible online. With travel restrictions in place and most people in lockdown, entrepreneurs were no longer able to fundraise in person and have increasingly turned to online capital raising through funding portals.

In addition, exempt offering regulatory enhancements by the SEC went into effect this March. These amendments increase the offering limit for Regulation Crowdfunding, Regulation A and Rule 504 offerings. Propelled by this rule change, Reg CF commitments of $56 million in March of 2021 were more than five times higher than in March of the previous year.

We believe that the recent increase in offering limits, in combination with pandemic-driven acceleration in the need for digital fundraising, have been the primary drivers of the 155% increase in Reg CF commitments through the first 11 months of 2021.

We expect these changes to continue to have a significant positive impact on demand as they increase the attractiveness of digital fundraising options and pave the way for larger companies to utilize the exempt framework. This could also potentially drive higher demand for Netcapital Advisor services as well.

In another important regulatory development, the US Department of Labor recently expressed their support for retail investment in private equity. In 2020, the Department of Labor released an information letter backing private equity as an investment option for defined contribution plans. As a result, large asset managers are working on adding private investment choices to their retirement products, according to a study conducted by BCG.

Netcapital's business model was made possible by the JOBS Act. In an effort to enhance economic growth and to democratize access to private investment opportunities, Congress finalized the Jumpstart Our Business Startups Act in 2016. Title III of the JOBS Act enabled early-stage companies to offer and sell securities to the general public for the first time. The SEC then adopted Regulation Crowdfunding, or Reg CF, in order to implement the JOBS Act crowdfunding provision.

Reg CF has several important features that change the landscape for private capital raising and investment. For the first time, this regulation allows the general public to invest in private companies, no longer limiting early-stage investment opportunities to a select few. It enables private companies to advertise their offerings to the public through general solicitation, and conditionally exempts securities sold under Section 46 from the registration requirements of the Securities and Exchange Act of 1934.

The Netcapital platforms' main competitors include StartEngine, WeFunder and Republic. Given the rapid growth in the industry, and the potential to disrupt the multitrillion dollar private equity market, we believe there is more than sufficient room for multiple players in the space. We also believe that Netcapital provides the lowest cost solution for digital capital raising versus our peers. Ease of onboarding new clients helps by providing fully automated filings and forms needed to initiate the offering also gives us a significant competitive advantage.

I'll now turn the call over to Jason Frishman, CEO of Netcapital Funding Portal Inc., to discuss our growth strategy.

Thank you, Coreen. Following our strong financial results for the first half, the Netcapital Funding Portal continued its momentum with $4.3 million raised through the portal in the month of November alone, a new monthly high for netcapital.com, resulting in a healthy 9% market share.

To keep the momentum going, primary components of our growth strategy are as follows: generating new investor accounts, growing the number of investor accounts on our platform is a top priority as investment dollars flowing through our platform are a key revenue driver and a key selling point to attract new issuers. One of the beauties of our business is that, when the issuers advertise their offerings on Netcapital's platform, they are generating new investor accounts for us at no cost to Netcapital.

By growing the number of issuers who list on our platform, that has a positive effect on the number of account holders in Netcapital as well as on the number of dollars that flow through our platform. We plan to supplement our issuer spend on advertising by increasing our digital marketing spend in it as well.

Second, increase the number of companies that list on our platform. When a new company lists on Netcapital, they bring their customers, supporters and brand ambassadors as new investors to Netcapital. High-quality issuers are also a key selling point for new investors joining the Netcapital platform in search deal flow. We plan to increase the number of companies that list on our platform through increased marketing spend and by expanding our business development effort.

Third, invest in technology. As a fintech company technology is critical to everything that we do. We plan to continue to invest in developing innovative technologies to move our business forward. Our focus will continue to be on making Netcapital the easiest place to buy and sell securities in private companies.

Lastly, open the secondary transfer feature, lack of liquidity is a key issue for investors in private companies as the private markets currently lack the public market infrastructure that allows the easy transfer of securities. It is a goal of ours to open a secondary transfer feature that would facilitate potential liquidity for investors who participate in the primary offerings on the Netcapital platform. We are hopeful that when available the secondary transfer features may enable access to a number of retail, strategic, institutional and financial investors.

And now I will hand the call over to Cecilia Lenk, CEO of Netcapital Inc. Cecilia?

Thank you, Jason. This was a strong quarter for our Company as the purchase of the Netcapital Funding Portal placed us at the forefront of emerging technology and digital capital markets. with a significant increase in Reg CF offering limits from $1 million to $5 million, the outlook for the industry remains bright. I couldn't be more proud of our team and I want to thank our amazing team members for all of their hard work and dedication to Netcapital.

Lastly, I want to remind everyone that Netcapital is a mission driven company. We're passionate about empowering entrepreneurs to succeed and democratizing access to capital and to investment opportunities in private companies. We are successful when our clients are successful.

We're truly grateful for the opportunity to partner with so many talented entrepreneurs and investors. Our entire team looks forward to continuing our good work together and looks to the future with optimism. And now we will open the call for questions. Operator?

(Operator Instructions) And there were no questions from the lines at this time.

Great. Thank you so much. We're super excited about the momentum the Netcapital Funding Portal is delivering with over $4 million invested through the portal in the month of November alone, which was a new record for netcapital.com.

Earnings growth remains strong with earnings per share growth of more than 200% in the first half. While we believe the six-fold increase in the value of our [king's cut] investment over the last two years really validates our portfolio model. Thank you, everyone, for joining the call. Have a wonderful holiday season. Goodbye to everyone.

Thank you, ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.