Earnings Call Transcript - NCPL Q3 2023

Operator, Operator

Good day and welcome to the Netcapital Fiscal 2023 Third Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host Coreen Kraysler. Ma'am, the floor is yours.

Coreen Kraysler, CFO

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'll 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 periods. 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.

Jason Frishman, Founder

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 stocks 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, 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.

Martin Kay, CEO

Thank you, Coreen and Jason. The current economic environment has many investors and companies exploring new ideas and 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're 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 startup advisor 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 startup advisor 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, Operator

Certainly, we will now begin the question-and-answer session. Your first question for today is from Michael Mathison at Singular Research.

Michael Mathison, Analyst

Good morning folks, a lot of good income that you recorded, so congratulations on that. 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 played the driving role in that?

Coreen Kraysler, CFO

I'm sure we did disclose that in the 10-Q and thank you for asking. That was the 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 a balance sheet. So, $1.7 million of the gain was from ChipBrain and roughly $200,000 was from Watch Party.

Michael Mathison, Analyst

Thank you for all the 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?

Coreen Kraysler, CFO

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.

Operator, Operator

Your next question for today is coming from Tim Johnson at Bard Associates.

Tim Johnson, Analyst

Martin, with all the turmoil in the venture space as a result of SBB, do you think this is good or bad for your business?

Martin Kay, CEO

Yes, we believe it's a great thing for our business. As I mentioned in my comments, it illustrates how insular that community can be and how much potential there is outside of that. So, we feel pretty strongly that this is a good indicator for our business and something that's very positive.

Tim Johnson, Analyst

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.

Martin Kay, CEO

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.

Operator, Operator

Your next question is coming from Ian Black, a private investor.

Unidentified Analyst, Analyst

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

Coreen Kraysler, CFO

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 market that 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.

Jason Frishman, Founder

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.

Operator, Operator

You have a follow-up question coming from Tim Johnson.

Tim Johnson, Analyst

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

Coreen Kraysler, CFO

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?

Tim Johnson, Analyst

More on the deal of the capital raising side, you take a portion of it in stock and a portion of cash, right?

Coreen Kraysler, CFO

So are you asking on the Netcapital platform? How much do we take as cash and how much do we take as stock? Jason, do you want to address that?

Jason Frishman, Founder

Sure. Yes. Hi, Tim, good question. So yes, 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 a 4.9% fee in cash and then an additional 1% fee in equity. I think the second part of your question Tim was: Could we change the mix of that? We certainly could. It's not something where 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 that 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 a small stake in every company that comes through Netcapital for the optionality that it affords us.

Tim Johnson, Analyst

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

Jason Frishman, Founder

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

Tim Johnson, Analyst

So, will you be disclosing that going forward quarterly?

Coreen Kraysler, CFO

Yes, we will.

Tim Johnson, Analyst

But nothing in the third quarter so far?

Coreen Kraysler, CFO

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

Operator, Operator

Your next question is also a follow-up question coming from Ian Black.

Unidentified Analyst, Analyst

Just following up on that last question. So, on your cash flow statement with that $4.6 million of equity in lieu of cash, is that mostly coming from the consulting side?

Coreen Kraysler, CFO

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 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.

Unidentified Analyst, Analyst

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

Coreen Kraysler, CFO

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.

Operator, Operator

Your next question for today is coming from Rob Topping at Topping Capital.

Rob Topping, Analyst

I guess this is for Martin, but if anyone wants to comment, just give us a 50,000-foot view on the acquired assets in the quarter.

Martin Kay, CEO

Yes, 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?

Rob Topping, Analyst

Let me try again. In the 10-Q, there were some acquired assets in the quarter. And I was just curious to get kind of a general idea from a high-level perspective on that.

Coreen Kraysler, CFO

Right, yes. So one second.

Rob Topping, Analyst

And I didn't mean to throw you a curveball.

Coreen Kraysler, CFO

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 persons on 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.

Rob Topping, Analyst

Yes, definitely. That makes sense and I know who to talk to regarding that, but I have seen a lot of interesting things in that space, too. Well, congrats to all. Thank you.

Coreen Kraysler, CFO

Thanks, Rob.

Operator, Operator

There appear to be no further questions in queue.

Coreen Kraysler, CFO

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.

Jason Frishman, Founder

Thank you all.

Operator, Operator

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.