Earnings Call Transcript - NCPL Q4 2023

Operator, Operator

Good morning, everyone, and welcome to the Netcapital Earnings Conference Call. It is now my pleasure to hand it over to your host, Coreen Kraysler of Netcapital Inc. Coreen, you may proceed.

Coreen Kraysler, CFO

Thank you so much. Good morning, everyone, and thank you for joining Netcapital's financial results conference call for our full fiscal year 2023 ended April 30. This is Coreen Kraysler, CFO of Netcapital Inc. Joining me on the call are Martin Kay, CEO; and Jason Frishman, Founder. I will begin with a review of our financial results and our CEO, Martin Kay, will follow with closing remarks before we open the call up 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 fiscal 2023. Total revenues for the year were up 55% to $8.5 million from $5.5 million in fiscal year 2022. We generated operating income of $2.3 million in fiscal 2023 versus an operating loss of $1 million last fiscal year. Equity securities at fair value totaled $23 million at April 30, 2023, versus $12.9 million at April 30, 2022. And finally, we paid down approximately $1 million in debt in fiscal 2023. I'll now turn the call over to our CEO, Martin Kay.

Martin Kay, CEO

Thank you, Coreen, and thanks, again, for everyone joining the call. Two things I wanted to cover. In January of this year, we announced an ATS or Alternative Trading System partnership with Templum Markets. By offering secondary trading functionality, our goal there is to provide potential liquidity for investors by allowing users to trade shares. This is one of the great opportunities ahead for our platform, and coupled with our key competitive advantages, including lower costs for digital capital raising and ease of onboarding, our value proposition continues to expand. As we move forward this year, our primary purpose is, as it always has been, to continue to make private capital markets work for everyone. We believe the value proposition of our integrated offerings translates to value creation for both investors and entrepreneurs alike, and as we look ahead, our focus for fiscal '24 is on the continued scaling of our portal business, focused on targeting three primary levers. The first is increasing the pipeline of high-quality scale issuers. So we're building referral partnerships and targeting larger Reg A+ offerings. We are also prioritizing industries where we see a lot of investor demand. For example, a recent review showed that fintech and AI together accounted for almost 60% of capital raised across companies that we're raising on the Netcapital platform. So increasing the pipeline of high-quality scale issuers is number one. Second is growing the investor community, the other side of our network and transaction volumes. So in addition to fine-tuning our own marketing outreach, we're partnering with niche agencies and others to support issuers in driving investors to their offerings. So that's the second thing. And then third, as I mentioned, the anticipated launch of our secondary trading functionality. We expect this liquidity model to support the growth of both the investor and issuer communities, and to generate a potential new revenue stream for Netcapital. So exciting developments are underway, and we look forward to sharing more details throughout the year. And as always, again, thank you for your interest and support of Netcapital. Operator, I think we're ready for questions.

Operator, Operator

Your first question is coming from Mark Nelson of Inc.

Mark Nelson, Analyst

Can you talk a little bit about the sectors of the business that are driving some of the profitability that we've seen lately? We know that you've been doing both consulting as well as the additional growth of the platform. Can you talk about how each of those lines of business are driving your current profitability?

Martin Kay, CEO

Coreen, do you want to answer that one?

Coreen Kraysler, CFO

Sure, absolutely. Thanks for your question, Mark. The key driver of profitability this year was our consulting business, which had a very strong year. We had several new clients and new portfolio companies that we launched. As a result of that, it drove the strength in revenues this year. But we're extremely excited about the secondary transfer platform functionality that we announced, which we expect to launch the beta test of by the end of the calendar year this year, and we expect that to drive significant momentum for the funding portal going forward.

Mark Nelson, Analyst

I have a follow-up question for the consulting work. Is that a long-term contract? Or is that basically work from quarter to quarter?

Coreen Kraysler, CFO

That's an interesting question. The contracts themselves are short-term, but we take significant equity stakes in most of the companies that we work with. We work with them on an ongoing basis for the long-term, so it's sort of a mix.

Mark Nelson, Analyst

Great. No further questions.

Coreen Kraysler, CFO

Thank you.

Operator, Operator

Okay. We don't appear to have any further questions. However, someone has just entered the queue. We now have a question from Robert Topping of Topping Capital.

Rob Topping, Analyst

Congratulations on the quarter. A couple of my questions were answered, so that's good on the revenue side and the platform. I guess the other couple of questions I had were on the increase in equity securities fair value, I think, from 12.8 to 22.9. What's driving that? And how concentrated is it in terms of the increase in value? Is it one issue that you have an equity exposure on? Just trying to get more insight into that. And then I have two other questions after that.

Coreen Kraysler, CFO

Yes. It was a combination. We did write up the value of two of our companies, which increased the value by $1.9 million of that amount from the write-up. The majority of that was driven by ChipBrain, and part of that by MustWatch, and that is because they did follow-on offerings at higher valuations, so we had to write up those values. The additional value increase was from more portfolio companies that we added.

Rob Topping, Analyst

Got it. Yes. I was referring to year-over-year figures. When you write up, are you adjusting to the latest round offering, or are you applying a discount? How do you handle that reduction?

Coreen Kraysler, CFO

Yes. The way it works, Robert, is that we have to look at the valuations with our auditor every quarter. If there's an observable input as to what the price of those securities are, which is an offering, then we have to write up or down to whatever that value is that the company last raised money at.

Rob Topping, Analyst

Got it. Okay. I'm not sure if this is for Martin or Coreen, but someone on the team has mentioned the possibility of expanding into new categories. I noticed this based on some information and was wondering if you could provide any additional insight into your thoughts on that. Martin, since you have been in this role for a few quarters now, I'm curious about your perspective on it.

Martin Kay, CEO

Yes, that's an interesting topic, Rob, the baseball movie, that's great. We've seen some concentrations in sectors that you would expect. Fintech and AI are obviously popular across the economy and particularly in the early-stage community, so we observe those same trends. However, at this moment, aside from supporting those currently popular and trending areas, we are not making any deliberate moves into other sectors. We have previously had other media companies on our platform. In fact, one of the companies Coreen mentioned, MustWatch, operates in the same space. We are quite open regarding industry sectors at this point. Does that address your question, Rob?

Rob Topping, Analyst

Yes, that's helpful. I have one last sensitive question. Firstly, what is the status of the SBA loan? Secondly, regarding the ongoing stock sales, I understand the need for working capital, but this has been happening at increasingly lower prices. What are your thoughts on this moving forward? Have you managed to overcome the challenges? I recognize there was a lot to address initially, but I'm trying to understand how you view the cost of capital in the future.

Martin Kay, CEO

Sure. I'll take that one, Robert, and then Coreen can provide some comments on your SBA loan question. We're laser-focused on building long-term value, right? Built on the fundamentals, the three fundamentals about the issuer that we talked about. We believe that by democratizing private markets, we're addressing a very real problem for investors and issuers, and it's a large potential market, number one. Number two, we're going after that with a differentiated solution, a business model that combines, as we've discussed, cash fees with a growing portfolio of equity positions. And so third, it's all about scale. Our solution is highly scalable, and we're very focused on growing that issuer and investor community through, as we've discussed, a mix of organic activity and partnerships with others that can enhance the community and extend our own value proposition through the secondary. All of those things we want to do as quickly as possible. It's a big market. We have competitors, and there's going to be room for more than one, but we want to be the winner in this space. We want to be well funded and accelerate activity in those areas as fast as we can. That's what we're focused on: building long-term value and accessing capital to support that effort.

Rob Topping, Analyst

Got it. Okay. And Coreen, any update on the SBA loan?

Coreen Kraysler, CFO

No, there is no update. We filed our paperwork and there's just no update.

Rob Topping, Analyst

Yes, I know how that goes. Okay. All right. Well, congratulations to you all.

Coreen Kraysler, CFO

Thank you very much.

Martin Kay, CEO

Thanks, Rob.

Operator, Operator

Okay. We don't appear to have any further questions. I will now hand back over to the management team for any closing comments.

Coreen Kraysler, CFO

Thank you very much for joining, everyone. We're really pleased with the revenue growth that we generated this year. We're looking forward to offering liquidity to investors on the Netcapital platform through our secondary transfer functionalities that we hope to begin offering in beta by the end of this calendar year. Enjoy the rest of your summer. Thank you.

Martin Kay, CEO

Thank you all.

Operator, Operator

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