Earnings Transcript for NCPL - Q4 Fiscal Year 2023

Operator: Good morning, everybody, and welcome to the Netcapital Earnings Conference Call. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Coreen Kraysler of Netcapital Inc. Coreen, over to you. :

Coreen Kraysler: 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. Net capital 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: Thank you, Coreen, and thanks, again, for you folks for 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. And 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 cost 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 translate to value creation for both investors and entrepreneurs alike, and as we look ahead, our focus for the fiscal '24 is on continued scaling of our portal business, focused on targeting 3 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. And we're 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 net capital 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 offering. 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 development is underway, and we look forward to sharing more details through 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 Instructions] Your first question is coming from Mark Nelson of [indiscernible] Inc.

Mark Nelson: Can you talk a little bit about the sectors of the business that are driving some of the profitability that we've seen lately, and 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: Coreen, do you want to answer that one?

Coreen Kraysler: Sure, absolutely. Thanks for your question, Mark. So the key driver of profitability this year was our consulting business had a very strong year. We had several new clients, new portfolio companies that we launched. And as a result of that, that drove the strength in revenues this year.

But we're extremely excited about the secondary transfer platform functionality that we expect -- that we announced that we expect to launch the beta test of by the end of calendar year this year and expect that to drive significant momentum for the funding portal going forward? :

Mark Nelson: 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: So well, that's an interesting question that you have asked. So the contracts themselves are short-term, but we take significant equity stakes in most of the companies that we work with. So we do work with them on an ongoing basis for the long-term. So sort of a mix.

Mark Nelson: Great. No further questions.

Coreen Kraysler: Thank you.

Operator: [Operator Instructions] Okay. We don't appear to have any further questions. I'll now -- apologies somebody is just jumped into queue there. We have a question coming from Robert Topping of Topping Capital.

Rob Topping: 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? Or just trying to get more insight to that? And then I have 2 other questions after that.

Coreen Kraysler: Yes. So it was a combination of we did write up the value of 2 of our companies. So that increased the value by $1.9 million of that was 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. And then the additional value increase was more portfolio companies that we added.

Rob Topping: Got it. Yes. And I was speaking of year-over-year. when you write up, are you writing up to the latest round offering? Or are you taking a discount of that? How do you approach that [indiscernible] reduce there?

Coreen Kraysler: Yes. So the way it works, Robert, is that we have to look at the valuations with our auditor every quarter. And 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 up.

Rob Topping: Got it. Okay. And then I'm not sure this might be for Martin or Cecilia or you, but someone on the team is just -- I know there's been some talk about, at some point, kind of expanding categories or new categories, and I noticed this based on, will be offering the other day. And I said I was just wondering, if there is additional insight into how you're thinking about that, I guess, Martin, to you now that you're a few quarters in. But just curious how you guys are thinking about that?

Martin Kay: Yes, that's an interesting one, Rob, the baseball movie, that's great. And look, I mean, we -- as I mentioned in my comments, we've seen some concentrations in some sectors that you would expect. Fintech and AI obviously popular across the economy and certainly the early-stage community. So we feel those same trends.

But I don't think right now other than supporting those things that are popular and trending right now, we're not making any deliberate moves into other spaces. And we've had other media companies in the past on our platform. In fact, one of the companies Coreen just mentioned MustWatch is in the same space.:

So we're pretty agnostic with respect to industry sector at this point. Is that answer your question, Rob? :

Rob Topping: Yes, that's helpful. And then the last question, I was saving a sensitive one for the last -- sorry, but -- and it's really twofold. One, any status on the SBA loan? And then secondly, the constant selling of stock. I understand the need for working capital and all.

But do you have any -- it's come at every lower price. Do you have any kind of thoughts on the go forward on that? Are you kind of over in the hump? I know there was a lot to do coming in. And to understand it, but I'm just trying to get a sense of how you're thinking about cost of capital going forward. :

Martin Kay: Sure. I'll take that Robert that one and then Coreen some comments on your SBA loan question.

We're laser focused on building long-term value, right? So built on the fundamentals, the 3 fundamental the issuer that we talked about. We believe that in democratizing private markets, we're tapping 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, the 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 the mix of organic activity and partnerships with others that can grow the community and extending our own value proposition through the secondary.:

And all of those things we want to do as quickly as possible. It's a big market. We have competitors. There's going to be room for more than one, but we want to be the winner in this space. And so we want to be well funded and accelerate activity in those areas as fast as we can. So that's what we're focused on building long-term value and accessing capital to support that effort. :

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

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

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

Coreen Kraysler: Thank you very much.

Martin Kay: Thanks, Rob.

Operator: [Operator Instructions] 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: 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 and enjoy the rest of your summer. Thank you.

Martin Kay: Thank you all.

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.