Shares of Netcapital Inc., a digital private capital markets ecosystem, nosedived after the company reported a dramatic 91% fall in revenue for the first quarter of fiscal year 2025. The Boston-based fintech firm’s revenue plummeted to $142,227 from $1.52 million in the same period the previous year, triggering a wave of concern among investors and prompting a sharp decline in its stock price. The steep drop in revenue is largely attributed to a decline in the income generated from services exchanged for equity securities, which has been a core component of Netcapital’s business model.

Financial Turmoil and Rising Losses

Netcapital’s financial report for the quarter ended July 31, 2024, paints a bleak picture. The company saw its total funding portal revenues—a mix of portal fees, listing fees, and a 1% equity fee—fall by 62% compared to the previous year, dropping to $142,056 from $375,856. Meanwhile, the company’s net loss widened significantly, soaring 414% to $2.53 million from a loss of $491,655 in the same period last year. This massive increase in net loss also resulted in a loss per share of $5.10, up from $4.61 a year earlier.

Netcapital’s CEO, Martin Kay, acknowledged the challenging quarter and pointed to the reduced revenue from services provided in exchange for equity as a key factor. Kay emphasized that while the numbers are disappointing, the company is laying the groundwork for future opportunities. However, investors were not reassured, as the company’s efforts to turn the tide have been met with skepticism amid a highly volatile economic environment.

Strategic Moves to Combat Financial Decline

In response to the steep revenue decline, Netcapital is focusing on several strategic initiatives. One of the major steps includes its subsidiary, Netcapital Securities Inc., applying for broker-dealer registration with the Financial Industry Regulatory Authority (FINRA). This registration is critical for expanding the company’s services and generating additional revenue from Reg A+ and Reg D offerings hosted on the Netcapital platform. However, the approval process remains lengthy and uncertain, with the company unable to provide a concrete timeline for when this might be completed.

Additionally, in July 2024, Netcapital launched a beta version of its secondary trading platform through the Templum Alternative Trading System (ATS) to a closed group of users. This platform is designed to offer investors who purchase stock through the Netcapital funding portal a chance to engage in secondary trading, potentially enhancing liquidity and attracting a broader investor base. Nevertheless, the platform’s success hinges on overcoming regulatory obstacles, which remain a significant concern for the company.

Operating Challenges and Increased Costs

Netcapital’s financial woes are compounded by rising operational costs. The company reported a substantial increase in its operating loss, which surged by 235% to $2.51 million compared to $749,020 in the same quarter last year. This increase is primarily driven by higher general administrative expenses, payroll, and consulting fees. The need to manage these escalating costs while pursuing growth opportunities presents a daunting challenge for Netcapital’s management.

Industry experts believe that Netcapital needs to streamline its operations and improve cost management to stabilise its financial situation. The company is working on cost-control measures and efficiency improvements, but these efforts may not be sufficient to counter the dramatic revenue decline and escalating losses.

Expert Opinion: Is There a Path to Recovery?

Financial analysts suggest that while Netcapital’s recent initiatives are steps in the right direction, the company faces an uphill battle. The decision to register as a broker-dealer and launch a secondary trading platform shows Netcapital is aware of the need to diversify and expand its revenue streams. However, without clear timelines and more immediate revenue-boosting measures, investor confidence may continue to wane.

There is also a need for Netcapital to consider alternative strategies, such as focusing more on organic growth and reducing its dependence on equity-for-service models that have proven unreliable. Netcapital must show that it can adapt to changing market conditions and regulatory landscapes. It needs to address their cash burn rate and find more predictable income sources to reassure investors.

Future Prospects and Investor Sentiment

The coming months will be critical for Netcapital as it works to regain investor confidence. The company is scheduled to host an investor conference call on September 17, 2024, where it is expected to provide more details on its strategic plans and address investor concerns directly. With just $855,181 in cash and cash equivalents as of July 31, 2024, Netcapital’s financial flexibility is limited, making its next steps crucial for its survival and potential recovery.

Netcapital Inc.’s first-quarter 2025 results have raised serious concerns about the company’s financial stability and future prospects. The 91% revenue drop, soaring losses, and uncertain regulatory pathways for its new ventures have all contributed to a steep decline in its stock price. While management is optimistic about their strategic moves, the path to recovery is fraught with challenges. Investors will be closely watching how Netcapital navigates these turbulent waters, especially as the company works to secure broker-dealer registration and fully launch its secondary trading platform.

  Boston, Financial Industry Regulatory Authority, Martin Kay, NASDAQ, Netcapital Inc., Netcapital Securities Inc., Templum Alternative Trading System