Netcapital Inc (NCPL) 2023 Q3 法說會逐字稿

Good day, and welcome to the Netcapital fiscal 2023 third-quarter earnings conference call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Coreen Kraysler. Ma'am, the floor is yours.

Thank you. Good morning and thank you for joining Netcapital's financial results conference call for the third quarter of fiscal 2023 ended January 31, 2023. This is Coreen Kraysler, CFO of Netcapital Inc. I will begin with a review of our financial results, and Jason Frishman, Founder, will follow with an update on our platform. Our CEO, Martin Kay, will conclude with some remarks before we open the call for questions.

Before we begin, I'd like to call your attention to the customary safe harbor disclosure regarding forward-looking information. Management's discussion may include forward-looking statements. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements.

Any forward-looking statements reflect management's current views with respect to operations, results of operations, growth strategy, liquidity, and future events. Netcapital assumes no obligation to publicly update or revise these forward-looking statements for any reason or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

I'll begin now with a review of our financial results for the third quarter of fiscal 2023. Total fiscal year-to-date revenues increased 48% year over year to $5.4 million compared to $3.6 million in the year-ago period. For the third quarter, we delivered revenue growth of 25% to $2.3 million. We generated positive operating income for the third quarter of approximately $571,000 compared to an operating loss of $136,000 in the year-ago quarter.

For the first nine months of fiscal year 2023, operating income was $912,000 compared to an operating loss of $1.5 million in the year-ago period. Net income per diluted share was $0.33 for the third quarter and $0.46 for the nine-month period. At January 31, 2023, we had cash and cash equivalents of $1.8 million as compared to $474,000 at April 30, 2022. As of January 31, 2023, equity securities at fair value totaled $19.3 million compared to $12.9 million at April 30, 2022.

Before I hand the call over to Jason, I would like to make some comments on the Silicon Valley Bank situation. Escrow accounts for Netcapital issuers are held at Silicon Valley Bank. These funds are fully insured. They are flowing freely, and we have full access to the account.

Netcapital's main operating accounts are held at Bank of America, which is designated as a systemically important bank, otherwise known as too big to fail. The company has additional accounts at Citizens Bank. We are currently exploring additional potential escrow partners.

I'll now turn the call over to Jason Frishman, Founder of Netcapital.

Thank you, Coreen. During the third quarter, we announced two strategic collaborations. First, we established a new ATS, or alternative trading systems, partnership with Templum Markets LLC. That brings numerous extended benefits to our funding portal users and issuers.

Through the ATS, we can offer investors who purchase stock through the Netcapital funding portal the ability to unlock liquidity through a structured, regulated alternative trading venue. We believe that our ability to facilitate secondary trading and liquidity represents a strong competitive advantage and key differentiator for Netcapital within the digital private markets landscape.

Next, we formed a revenue-sharing referral agreement with JD Merit Securities, LLC, a leading boutique investment bank focused on serving middle-market, technology-forward companies. JD Merit's mission to help companies at all stages to build, grow, and fund their businesses, and their client-centric approach to strategic advice aligns well with Netcapital's core values.

Through our mutually beneficial agreement, their team now has a robust solution for entrepreneurial startups through our SEC-registered funding portal, which empowers private companies to raise capital online. Collaborations like these are a key part of our ongoing efforts to exceed clients' and portal users' expectations and deliver services and solutions that are unmatched in the private capital market space.

I will now turn the call over to Martin Kay, CEO of Netcapital Inc.

Thank you, Coreen and Jason. The current economic environment has many investors and companies exploring new ideas and new strategies. Recent events in the banking industry serve as just the latest illustration of how concentrated and insular the traditional venture capital funding model has become. In contrast, Netcapital's platform breaks down those traditional barriers and offers opportunities for virtually anyone to invest in private companies.

Along the way, we are turning customers and communities into owners and brand ambassadors for the businesses they love, and this is a powerful symbiotic relationship. To do this effectively and efficiently, we've built out mature scalable operations and an ecosystem that spans the start-up adviser and investor communities. As Jason just described, we're continuing to extend our value proposition with a liquidity option.

Positioned at the intersection of the start-up adviser and investor communities, we believe we have a significant market opportunity right now for our integrated offerings to create value for both investors and entrepreneurs. We look forward to closing out our fiscal year next month with continued momentum that will further support our long-term business strategy.

Operator, we're ready for questions.

(Operator Instructions) Michael Mathison, Singular Research

Good morning, folks. A lot of good income that you've reported. So congratulations on that.

Thank you, Michael.

Here's my question. Most of the income clearly came from the unrealized gain on your equity stakes. I wonder if you're disclosing which particular stakes play the driving role in that.

I'm sure we did disclose that in a 10-Q. And thank you for asking. That was a result of an increase in value from two of our portfolio companies, ChipBrain and Watch Party. This was due to the fact that both of them did offerings at higher valuations than we had recorded previously in the balance sheet. So $1.7 million of the gain was from ChipBrain and roughly $200,000 was from Watch Party.

All right. Thank you for all of that detail. Kind of a related question. Could you just describe how you value these private securities and what your ongoing mark-to-market process looks like?

Absolutely. So the way it works is that if there is an observable change in the value of the securities, then we change that value on our balance sheet, and that runs through the income statement as an equity securities gain or loss. So we look at those valuations every quarter with our auditor. And the way, Michael, that we see those observable inputs is that all of our portfolio companies do Reg CF offerings on either our funding portal or competing funding portals, and that gives us price discovery for what the valuation of the securities are.

Terrific. Well, thank you for all of the information. And again, congratulations on some great numbers.

Thank you very much.

(Operator Instructions) Tim Johnson, Bard Associates.

Hi, Tim.

Good morning. Martin, with all the Sturm und Drang in the venture space as a result of SVB, is this good or bad for your business, do you think?

Hey. Thanks, Tim, for the question. And yes, we believe it's a great thing for our business. As I mentioned in my comments, it kind of, I think, illustrates how insular that community can be and how much potential there is outside of that. So we're -- we feel pretty strongly that that is a good indicator for our business. It's something that's very positive.

I'm thinking more that the VCs are going to be impaired by what's happened and that will drive customers to you as an alternative.

Exactly. That's exactly right. And we're already seeing a little bit of that in our business and some of the inquiries that we're getting inbound at this point.

Thank you.

Thank you.

Ian Black, private investor.

Hi. So you guys have had great results, but there's been problems with cash flow because you're mostly paid in equity securities. Do you have any goals for addressing that in the near term?

Hi, Ian. Thank you very much for your question. So we believe we have adequate liquidity resources in place to fund our business going forward. And we're also happy to see that as gas prices have been coming down over the last few months, we've seen a nice uptick in investments through our platform, which generates cash flow. And also, we expect to be launching soon our secondary transfer platform, which is a secondary -- it allows liquidity for people to trade the equities on our platform. And I'm going to let Jason or Martin jump in to talk about that feature that we'll be launching.

Thanks, Coreen. Sure. This is Jason. So the ATS will provide Netcapital users with the ability to enter a regulated venue to be able to offer to resell their securities and purchase securities in companies that have already issued shares. And so through the ATS, there's an ability to monetize over time the most successful companies that come through Netcapital. And as there's demand in those stocks, we can be in a position to facilitate ongoing transactions in the most successful names on the long tail. And so we view that as a potentially very strong opportunity for revenue growth down the line.

Okay. Thank you.

(Operator Instructions) Tim Johnson.

What's the current mix of cash and securities taken as fees for doing deals? And can you modify that mix?

So are you specifically talking about the consulting side of the business? Or are you asking overall what percentage of our revenues were from the equity securities?

More on the deal of the capital-raising side. You take a portion of it in stock and a portion in cash, correct?

So are you asking on the Netcapital platform?

Yes.

How much do we take cash and how much do we take as stock? Jason, do you want to address that?

Sure. Yeah. Hi, Tim. Good question. So yes, so we historically charge a 4.9% cash-based fee for all the funds raised through the platform. We've recently added to that a 1% stock-based fee. The stock is taken in kind. As a funding portal, we are allowed to take equity so long as it is the exact same equity that's being issued through the portal to the investors. So at the end of the raise, we receive 1% of the stock that they sold in equity. So it's 4.9% fee in cash and then an additional 1% fee in equity.

Got it. Thank you.

And the second part to your question, Tim, was could we change the mix of that? We certainly could. It's not something we're looking at right now. We just added this additional 1%. So we're sort of seeing how that goes. So far, it's gone pretty well. We haven't seen really any pushback from any of our issuers at providing that additional 1% fee in equity.

And we love the optionality that that provides us. It gives us an ability to win when our issuers win over time. And so we like the idea of having -- and obviously, it's a small stake because it's just 1% of what each company raises, but we love the idea of having a small stake in every company that comes through Netcapital for the optionality that it affords us.

When did you start doing that? And how much have you taken in via that component?

That is a good question. We -- it was -- it's a recent addition, I believe, within the last quarter. And I'm not sure, Coreen, you might know, have we -- I don't know if any of the deals have yet closed where we've had shares issued quite yet.

Yes.

So will you be disclosing that going forward quarterly?

Yes, we will.

But nothing in the third quarter so far?

That's correct. We just implemented it a few weeks ago.

Very good. Thank you.

Thanks, Tim.

Ian Black.

Hi, Ian.

So yes, just following up on that last question. So on your cash flow statement, you've got $4.6 million of equity in lieu of cash. So is that mostly coming from the consulting side?

I was having a little trouble hearing you. Can you repeat your question?

Yes. So you guys recorded $4.6 million of equity in lieu of cash on your cash flow statement for the last nine months. So is most of that equity coming from the consulting side rather than the Netcapital platform?

Yes. All that equity in lieu of cash that you've seen so far on our financial statements has been from the consulting side of the business, but that mix will change over time now that we're taking a 1% stake on all of the companies that list on the Netcapital platform moving forward.

Okay. Is the consulting side generally all equity? Or is there a cash component in that, too?

That is -- you generally, there's -- if there's a mix, it really varies a lot over time. More recently, it's been more equity, but there is a cash component that's lumpy over time.

Okay. Thank you.

Yes.

Rob Topping, Topping Capital.

Hi, Rob. You didn't send me your usual email.

It's coming. It's coming.

We'll look forward to that.

Congrats to all of you on the quarter.

Thank you.

I guess this is for Martin, but if anyone wants to comment on it, I just -- as to acquired assets in the quarter, any kind of 50,000-foot view on thinking on that?

Yeah. I'm sorry, Rob. I didn't quite hear your question there. I don't know if it's your phone or mine. But do you mind repeating that?

Let me try again. And if not, I'm sorry, I'm mobile. I'll take off my earbuds. The -- in the 10-Q, there were some acquired assets in the quarter, and I was just curious to get general idea on 50,000-foot view on that.

Coreen, is that something you want to comment on?

If it helps, Coreen, I'm speaking to -- I don't have the 10-Q in front of me, but the one-on-one or it looks like community-based around athletics.

Right. Yes. So one second.

Yeah, and I didn't mean to throw you guys a curveball. I'm just curious.

No, I know what it is. I'm just trying to think of the best way to describe it. It's a community that allows people to talk to their favorite sports figures, and there's a tie-in with the Bruins. One of -- the person who heads our business development team was on a path to become a professional hockey player before he had a very serious injury, and so that will tie in with some of the work that he has been doing on the side. So I think there's some interesting community aspects from that.

Yeah. No, definitely. All right. That makes sense. And I know who to talk to then in regard to that.

Yeah.

But I am seeing a lot of interesting things in that space, too. So that was one question.

Yeah. Excellent.

Well, congrats to you all. Thank you.

Thanks, Rob.

(Operator Instructions) There appeared to be no further questions in queue.

Great. Thank you so much, everyone, for joining. It was a really interesting and fun dialogue. We love to have your questions. And we look forward to talking to investors at the Sidoti Conference in May. Thank you very much.

Thank you all.

Thank you. This concludes today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.