Earnings Call Transcript - NCPL Q1 2025

Operator, Operator

Good day, everyone, and welcome to the Netcapital Inc. Quarterly Earnings Call. 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, Matt. Good morning, everyone, and thank you for joining Netcapital's First Quarter Fiscal 2025 Financial Results Conference Call. This is Coreen Kraysler, CFO of Netcapital Inc. I will begin with a review of our financial results. Following that, our Chief Executive Officer, Martin Kay, will deliver his prepared remarks before we open up the Q&A portion of our call. Before we begin, I'd like to draw 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 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. With that said, I'd like to now turn to our financial results for the first quarter of fiscal 2025. Revenues for the first quarter of fiscal 2025 for the period ending July 31, 2024, decreased by almost $1.4 million or approximately 91% to $142,227 compared to approximately $1.5 million in the first quarter of 2024. The decline in revenue was primarily attributed to a decrease in revenues for the services that we provide in exchange for equity securities during the quarter. We had no revenues from equity-based contracts as compared to over $1.1 million in such revenues in the 3 months ended July 31, 2023. We are focusing on establishing a broker-dealer subsidiary so that the company may have additional sources of revenue, and we have not been pursuing equity-based revenue contracts. Total funding portal revenues declined by $233,800 or approximately 62% to $242,056 during the first quarter of fiscal 2025. Total funding portal revenue consists of portal fees, listing fees and a 1% equity fee. Revenue from portal fees decreased by $132,427 or approximately 60% in the 3 months ended July 31, 2024, to $89,429 from $221,856 in the 3 months ended July 31, 2023. Revenues from portal fees consist of a 4.9% fixed fee of the total capital raised by the issuer plus fixed miscellaneous charges for administrative fees, such as the rolling close or the filing of an amended offering statement. The decline in portal fees is a result of a decrease in the amount of capital that we raised on our funding portal during the period. Total funds raised in offerings decreased by almost $1.8 million or approximately 60% in the 3-month period ending July 31, 2024, to approximately $1.2 million as compared to approximately $2.96 million in the same period of 2023. Revenue from listing fees decreased by $111,500 or approximately 72% to $42,500 in the 3 months ended July 31, 2024, as compared to $154,000 in the 3 months ended July 31, 2023. Listing fees are typically $5,000 per issuer and they are the first form of revenue earned by our funding portal when an issuer signs a contract with us to sell securities on the portal. The drop in listing fees can be attributed to our loss of an experienced salesperson due to technical difficulties.

Operator, Operator

Coreen, I apologize. This is the operator. Your line is breaking up. I'm attempting to dial up to your line to get a clear connection.

Coreen Kraysler, CFO

Okay.

Operator, Operator

Coreen, your line is live.

Coreen Kraysler, CFO

Thank you. We had an operating loss of approximately $2.5 million for the first quarter of fiscal 2025 as compared to an operating loss of $749,020 for the first quarter of fiscal 2024. Our net loss for the first quarter of fiscal 2025 was $2,527,170 as compared to $491,665 for the same period prior. We reported a loss per share of $5.10 for the first quarter ended July 31, 2024, compared to a loss per share of $4.61 for the same period in the prior year. I'll now turn the call over to our CEO, Martin Kay.

Martin Kay, CEO

Thank you, Coreen. I appreciate everyone for joining this call today. We encountered some challenges during the quarter, particularly with our operational and financial metrics. The fundraising climate tends to slow down in the summer, and our business experiences some cyclicality and unpredictability. Nevertheless, we've made significant strides this quarter. Firstly, we launched the beta version of our secondary trading platform through Templum ATS, providing investors with an additional trading option via the Netcapital funding portal. Templum ATS is now approved in over 50 U.S. states and territories, potentially enhancing liquidity for our investors in secondary trading. Another crucial initiative is our application for broker-dealer registration with FINRA, which Coreen mentioned. We plan to utilize this to offer Reg A+ and Reg D deals and establish broker-dealer partnerships, which could boost our revenues through hosting and fees and enhance our distribution capabilities, expanding our ecosystem and addressable market. During the quarter, we also established an ATM agreement and regained compliance with NASDAQ's Listing Rule 5550(a)(2) known as the bid price rule, ensuring our continued trading on NASDAQ. Maintaining our NASDAQ listing is vital for supporting shareholder value and confidence. Despite the challenges, we remain devoted to our vision of empowering entrepreneurs and investors by offering a streamlined platform for capital raising and investing in early-stage and growth-stage companies. Our portal provides access to capital through equity crowdfunding and other investment opportunities, promoting a democratized investment process and encouraging innovation and growth. By prioritizing transparency, efficiency, and user engagement, Netcapital aims to build a more inclusive financial ecosystem that benefits both issuers and investors. Thank you again for your interest and support of Netcapital. Operator, we are ready for questions.

Operator, Operator

Your first question is coming from John Gilliam from Point Clear.

John Gilliam, Analyst

Yes, Martin. Could you give us an idea of the launch date of the secondary trading portal where it will be fully available to retail investors?

Martin Kay, CEO

I'm sorry, I didn't quite catch the question there. My phone bleeped. You were asking about the secondary?

John Gilliam, Analyst

Asking about the launch date of the trading platform, the secondary trading platform. Yes. When will it be available for retail investors?

Martin Kay, CEO

Got it. Great question. And that's not something that we have specifically stated to the market at this point. We're still working through some issues with usability and so on, and we want to make sure that when we go live with it to a broader group outside of our closed beta that we get the most impact from that launch. So we're holding off for now on launching that more broadly.

John Gilliam, Analyst

At the Wainwright conference, you mentioned it would launch soon. I guess what I'm looking for is a ballpark idea. Are we talking Q4? Are we talking 2025, calendar year 2025? Just a ballpark idea.

Martin Kay, CEO

I can't provide anything too specific, but we are working as quickly as possible with regulators, customers, issuers, and investors to ensure that we launch it with the greatest impact in the marketplace.

John Gilliam, Analyst

That's not a very good answer. Really looking for, I mean, is it going to be in the next year? Is it going to be 2 years?

Martin Kay, CEO

It's certainly not going to be...

John Gilliam, Analyst

It's been 18 months since it was announced, 18 months ago, thereabouts is when it was announced. So just trying to get an idea. I mean, what are we looking at?

Martin Kay, CEO

It's a very fair question. As we've announced, we have had the end-to-end platform developed in partnership with ATS Templum for some months now. We've been testing it with a closed group of beta users. We hope to launch before the end of this calendar year. However, there are factors that are somewhat beyond our control regarding regulations. Unfortunately, I can't be much more specific than that.

John Gilliam, Analyst

All right. With regard to the companies that are listed on our balance sheet at the price that they've had offerings recently, will all of those securities be available to trade on the secondary trading platform when it opens?

Martin Kay, CEO

That is the intention, yes. That's what we have stated in our filings.

Operator, Operator

Your next question is coming from Patrick Rooney from Crosby Capital.

Unknown Analyst, Analyst

On your ATM, do you intend to do a press release as you partially complete that or only when it's totally complete? That's one. Second question, what is your monthly burn rate?

Martin Kay, CEO

And I think you meant the ATM, right, Pat, you were asking about that or?

Unknown Analyst, Analyst

Yes, the ATM. In other words, if it gets partially done, you do not $2.1 million, but you do $300,000. Will you make a press release or no?

Coreen Kraysler, CFO

We do not announce usage of the ATM. You will see it in our quarterly filings.

Unknown Analyst, Analyst

You will not make an announcement if you're successfully...

Coreen Kraysler, CFO

We are not obligated to issue a press release or an 8-K when we utilize the ATM, but we do report the ATM usage in our quarterly filings.

Unknown Analyst, Analyst

Okay. And the burn rate, I assume that, go ahead, monthly burn rate...

Coreen Kraysler, CFO

We've said in the past that our burn rate is $300,000 plus a month.

Operator, Operator

Your next question is coming from Robert Topping from Topping Capital.

Rob Topping, Analyst

Sorry for the background noise here. I'm on the street. But I'll probably just kind of extend to the 2 earlier questions in another manner. But on the operating burn, given all the investments in the ATS system, do you see that curtailing? I mean when you effectively do a full launch, does the burn on that slow down pretty dramatically? I mean how much of that $300,000 a month is dedicated towards that? And then the other question I had, and I may circle back with 2 more. But the other question I had is on the ATS launch, is some of the friction regulatory? Or is it just the beta group and the technology and working through that?

Martin Kay, CEO

I'll begin, and Coreen can definitely add her insights. Regarding the secondary and the burn, there is indeed a connection. One of our main focuses is dedicating significant time, resources, and efforts, both from our team and external partners, to educate regulators about our actions, the reasons behind them, and how they fit within the regulatory framework. So, yes, Rob, I appreciate your questions. There is a relationship here, but it may not align with your initial assumptions about platform development. The technology is never truly finished; there's always room for improvement and enhancement. We currently have a beta version ready for launch, which we shared with a select group. Enhancements will continue as we progress. At this moment, our priority is to ensure that the regulators we work with fully understand our initiatives and the rationale behind them. Does that help address part of your question? Apologies if...

Rob Topping, Analyst

Yes, it does. I was on mute. Sorry about that. And I'll circle back with my other questions here, give somebody else a chance.

Martin Kay, CEO

Regarding the burn, you asked a question about that, Rob. As we've mentioned, in May, we started our broker-dealer application process to engage in larger transactions. Our burn is determined by revenue minus costs, and we expect that this will help us create additional revenue streams beyond our current status.

Rob Topping, Analyst

But it seems like from what Coreen has said, I think, is I mean $1 million a quarter burn is kind of a fair or a conservative amount. Is that correct? Because there's operating and then a lot of other numbers that show up. But I think I just heard $300,000 a month. So if I was just mindset of $1 million a quarter, that would be good number on the operating burn?

Martin Kay, CEO

I think that's correct. I'm not going to say it's entirely predictable, but there are factors that can influence our revenue. We occasionally have large clients that significantly increase our capital during certain quarters, which can affect our numbers. Additionally, we are responding to regulatory inquiries, as is common in financial services and specifically in our industry, which also consumes resources. But generally speaking, what we've communicated in the past still holds true.

Operator, Operator

Your next question is coming from Jon Wheeler from Resurgent Realty.

Jon Wheeler, Analyst

Martin, this question is for you. So I have a couple of questions. And I think the first question would be at the current stock price, why is management and the Board of Directors not really stepping up to buy the shares to support the company at this time? So I'm not going to give you 2 or 3 questions at one time, but if you could answer that question, that's my first question. Hello?

Coreen Kraysler, CFO

I'll answer that. Jon, are you there?

Jon Wheeler, Analyst

Yes. I think we've had a bad connection all morning. Can you hear me now?

Coreen Kraysler, CFO

I can hear you. So my answer to your question would be both. We're severely restricted in what we can do in terms of management purchasing shares themselves due to the nature of the fundraising that we have been doing. So we've been very severely restricted in doing that so far. What's your next question, please?

Jon Wheeler, Analyst

So the next question is, you're publicly traded, and it seems to be at some point in time dealing with reality and the associated public costs to be publicly traded, your $300,000 per month burn rate, when I looked at your last filing, it says you have a little over $800,000 cash on hand, what point in time do you all face reality from the standpoint maybe it's not best to be in a public platform and more so private, maybe more so associated with some of your peer groups because I feel like every 6 months, there's another warrant to conversion, $2 million extreme dilution. And now you've put up an ATM with Wainwright, which will be another dilution. At what point in time does the treadmill stop from potentially moving from public to private? That's question two.

Martin Kay, CEO

I apologize for losing track of your last question, but I caught this one. We are fully committed to our vision in this business. We believe in the business and the value we can create. Our focus is on the long term, and our success is tied to the success of our issuers. Each quarter, we see more examples of our issuers achieving success as they progress. For example, Avadain raised about $4.5 million on our platform last fall. They recently announced the addition of Henry Ford III to their board, who is also part of the Ford Motor Company board. This is one of many success stories that illustrate the growing market awareness and the mainstream acceptance of our model. We deeply appreciate the investors and shareholders who have remained with us through this journey. Regarding when things might change, there is a gradual momentum building in the industry. We hold a portfolio of minority positions and have started taking 1% of equity from every issuer on our platform since FY '24. Currently, we have 37 of these small equity positions alongside 22 portfolio companies, which offers us various options. If any of these positions become liquid or successfully advance, it validates our model and generates liquidity for us. We're also in discussions with some notable issuers who could attract attention if they participate on our platform. While I cannot predict specific outcomes, I can assure you that the activity in our space is increasing. These early-stage private companies take time to mature, but some will succeed, driving the value we are creating.

Operator, Operator

Thank you. That concludes our Q&A session. I will now hand the conference back to our host for closing remarks. Please go ahead.

Coreen Kraysler, CFO

Thank you for joining, everyone. We really appreciate all your support, and we look forward to speaking with you again soon. Thank you.

Martin Kay, CEO

Thank you all.

Operator, Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.