Netcapital Inc. (NASDAQ:NCPL) Q3 2023 Earnings Call Transcript

Netcapital Inc. (NASDAQ:NCPL) Q3 2023 Earnings Call Transcript March 17, 2023

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: 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 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: Thank you, Coreen. During the third quarter, we announced two strategic collaborations. First, we established a new ATS or Alternative Trading System’s 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 company.

JD Merit 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, who are 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: 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’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.

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Q&A Session

Operator: Certainly, at this time, we will be conducting a question-and-answer session. Your first question for today is coming from Michael Mathison at Singular Research.

Michael Mathison: Good morning folks, 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 play the driving role in that?

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

Tim Johnson: Martin, with all the sturm und drang in the venture space as a result of SBB. Is this good or bad for your business, do you think?

Martin Kay: 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 feel pretty strongly that, that is a good indicator for our business and something that’s very positive.

Tim Johnson: 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: 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: Your next question is coming from Ian Black , a Private Investor.

Unidentified Analyst: So you guys had great results, but there’s been cash flow because you’re mostly paid in equity securities. Do you have any goals for addressing that near-term?

Coreen Kraysler: 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 and 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.