Business Overview and History

Netcapital Inc. (NCPL) is a digital private capital markets ecosystem that provides private companies with the ability to raise capital online from accredited and non-accredited investors. The company's innovative platform and services have positioned it as a disruptive force in the traditional private equity investing landscape.

Netcapital was founded in 2016 as a fintech company focused on facilitating private capital raises for companies through its online funding portal. The company's key subsidiary, Netcapital Funding Portal Inc., is an SEC-registered funding portal and a member of FINRA, allowing private companies to raise capital online. Through the Netcapital platform, investors can access a diverse range of investment opportunities, including early-stage startups and growth-stage businesses.

In its early years, Netcapital generated revenue primarily from consulting services and advisory fees, often taking equity positions in client companies as payment. This strategy allowed the company to build up a portfolio of minority stakes in startups and private companies that had utilized its funding portal services. In fiscal year 2023, Netcapital generated $7.1 million in revenue from these consulting and advisory services, highlighting the success of this business model.

However, fiscal year 2024 brought significant challenges for Netcapital. The company experienced a sharp decline in consulting revenue, which decreased by over 50% to $3.44 million. This led to an overall 42% decrease in total revenues for the year to $4.95 million, compared to $8.49 million the prior year. Additionally, Netcapital recognized a $2.7 million unrealized loss on the value of its equity securities portfolio and recorded a $1.05 million impairment charge related to intangible assets it had acquired.

These factors contributed to Netcapital reporting an operating loss of $3.44 million and a net loss of $4.99 million for fiscal 2024, in contrast to the operating income of $2.27 million and net income of $2.95 million the company achieved in the prior fiscal year. The decline in business and financial performance presented significant challenges for Netcapital during this period.

Despite these setbacks, the company's funding portal business showed promising growth, with portal fee revenue increasing by 109% year-over-year to $874,368 in fiscal 2024. This was driven by a higher number of successful offerings on the platform and an increase in the average amount raised per offering, which grew from $128,170 in fiscal 2023 to $280,978 in fiscal 2024.

To further expand its service offerings, Netcapital announced in May 2024 that its wholly-owned subsidiary, Netcapital Securities Inc., had applied for broker-dealer registration with the Financial Industry Regulatory Authority (FINRA). This strategic move is expected to create opportunities for the company to host and generate additional fees from Regulation A (Reg A) and Regulation D (Reg D) offerings on the Netcapital platform. Reg A+ offerings, in particular, allow companies to raise up to $75 million from both accredited and non-accredited investors, which represents a significant expansion from the $5 million limit under the company's current Reg CF offerings.

Financial Performance and Liquidity

For the full fiscal year 2024, Netcapital reported a 42% decrease in revenues to $4.95 million, compared to $8.49 million in the previous fiscal year. This decline was primarily attributable to a 52% drop in consulting services revenue, which decreased from $7.1 million in fiscal 2023 to $3.44 million in fiscal 2024. The company's consulting subsidiary, Netcapital Advisors, did not earn any equity securities from consulting work in the fourth quarter of fiscal 2024.

However, the company's funding portal business showed promising growth, with portal fee revenue increasing by 109% year-over-year to $874,368 in fiscal 2024. This was driven by a higher number of successful offerings on the platform and an increase in the average amount raised per offering.

The company's most recent quarter (Q3 2024) showed a significant decline in revenue, with total revenue of $170,530, down 92% from $2.04 million in Q3 2023. This decrease was primarily attributed to a lack of consulting service revenue in Q3 2024, compared to $1.52 million in consulting services revenue in Q3 2023. The net loss for Q3 2024 was $2.22 million.

As of October 31, 2024, Netcapital had cash and cash equivalents of $1.35 million. The company's liquidity position remains a concern, with a debt-to-equity ratio of 0.013, a current ratio of 0.35, and a quick ratio of 0.35 as of the same date. These metrics indicate potential challenges in meeting short-term obligations.

The company's operating cash flow for the most recent fiscal year was negative $4.88 million, which was also the free cash flow for the period. This negative cash flow, combined with the net loss of $4.99 million for the fiscal year, underscores the financial challenges facing Netcapital.

Business Segments and Revenue Streams

Netcapital operates through two main business segments: the Netcapital Funding Portal and Netcapital Advisors consulting group.

The Netcapital Funding Portal segment is the core of the company's business. It operates an SEC-registered online equity-based funding portal that allows private companies to raise capital from both accredited and non-accredited investors. The funding portal charges various fees, including a $5,000 engagement fee, a 4.90% portal fee on capital raised, and, beginning in fiscal year 2024, a 1% success fee paid in equity of the funding portal customer. The portal also generates fees for ancillary services such as rolling closes.

In the six months ended October 31, 2024, the Netcapital Funding Portal segment generated $312,430 in revenue, consisting of $197,550 in portal fees, $90,000 in listing fees, and $24,880 in equity fees. This represented a decrease from the prior year period, which saw $838,560 in funding portal revenue, as the number of new offerings launched on the portal decreased from 37 to 26.

The Netcapital Advisors segment provides marketing, strategic, and technology consulting services to companies, often in exchange for equity stakes in those companies. In the six months ended October 31, 2023, Netcapital Advisors generated $2.63 million in revenue from consulting services for equity securities, as well as an additional $95,700 in cash consulting revenue. However, in the current six-month period, the company did not report any consulting service revenue, as management has shifted its focus to building out the broker-dealer capabilities of the business.

Recent Developments and Strategic Initiatives

In November 2024, Netcapital's wholly-owned subsidiary, Netcapital Securities Inc., received approval from FINRA to become a FINRA-member broker-dealer. This approval allows the subsidiary to conduct private placements of securities, support companies raising equity capital under Regulation A and Regulation D, and partner with other broker-dealers.

The company has also recently announced the launch of the beta version for a secondary trading platform to a closed group of users in collaboration with Templum Markets. This initiative aims to provide improved liquidity for investors and expand the pool of potential investors for issuers on the platform.

Netcapital is focused on expanding its revenue base by hosting and generating additional fees from Regulation A and Regulation D offerings on the Netcapital platform, earning fees from introductions to other FINRA broker-dealers, and expanding distribution capabilities by leveraging strategic partnerships.

Risks and Challenges

Netcapital's financial situation raises substantial doubt about the company's ability to continue as a going concern. The negative working capital, operating losses, and negative cash flows from operations suggest that the company may need to seek additional financing to support its ongoing operations and growth initiatives.

Furthermore, the company's reliance on a limited number of large customers for a significant portion of its revenues poses a risk. The loss of or reduction in business from these key customers could have a material adverse effect on Netcapital's financial performance.

Regulatory and legal uncertainties also present challenges for the company. As a heavily regulated industry, the securities business is subject to extensive rules and regulations, and any non-compliance could result in sanctions, fines, or even the revocation of licenses. Netcapital's ability to navigate these regulatory waters will be crucial to its long-term success.

Outlook and Future Prospects

While Netcapital has not provided specific financial guidance for the upcoming fiscal year, the company's recent initiatives suggest a strategic focus on expanding its service offerings and revenue streams. The potential to facilitate Reg A+ and Reg D offerings, which allow for larger capital raises, could unlock new growth opportunities for Netcapital.

The company's efforts to expand its broker-dealer capabilities and launch a secondary trading platform are aimed at diversifying its revenue sources and enhancing the value proposition for both issuers and investors on its platform. These initiatives, if successful, could help offset the recent declines in consulting revenue and position Netcapital for future growth.

However, the company's ability to execute on these strategies while addressing its liquidity challenges will be critical in determining its future success. Investors and stakeholders will be closely monitoring Netcapital's progress in stabilizing its financial position and capitalizing on the opportunities in the evolving private capital markets landscape.

Conclusion

Netcapital's journey to revolutionize private capital markets access has faced significant challenges, as evidenced by the sharp decline in consulting services revenue and the company's ongoing liquidity concerns. However, the growth in the funding portal business, the strategic initiatives aimed at expanding service offerings, and the potential to unlock new revenue streams suggest that Netcapital remains positioned to capitalize on the growing demand for private market investments.

As the company navigates the regulatory landscape, works to strengthen its financial position, and implements its new broker-dealer and secondary trading capabilities, investors will closely monitor its ability to execute on its long-term vision and drive sustainable growth. The coming months will be crucial for Netcapital as it seeks to leverage its new capabilities, reverse recent financial trends, and establish a solid foundation for future success in the dynamic private capital markets ecosystem.