Netcapital Inc. 10-Q

Item 1. Financial Statements. NETCAPITAL INC. Condensed Consolidated Balance Sheets January 31, 2021 April 30, 2020 (Unaudited) Assets Current assets: Cash and cash equivalents $ 286,461 $ 11,206 Accounts receivable, net of allowance of $29,000 972,586 — Prepaid expenses 258,306 465,555 Total current assets 1,517,353 476,761 Deposits 6,300 6,300 Deferred income tax asset 137,712 180,000 Non-current prepaid expenses — 143,455 Purchased technology and customers 14,803,954 — Investments at cost 3,726,514 1,406,982 Total assets $ 20,191,833 $ 2,213,498 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Trade $ 311,357 $ 278,752 Related party 3,868,686 16,680 Accrued expenses 428,075 149,835 Deferred revenue 589 656 Notes payable – related parties 22,860 15,000 Secured noted payable 1,000,000 1,000,000 Interest payable – related parties — 31,235 Current portion of long-term debt 1,584,115 — Loan payable – bank 34,324 34,324 Demand notes payable — 7,860 Total current liabilities 7,250,006 1,534,342 Small Business Administration loans payable 801,685 — Total liabilities 8,051,691 1,534,342 Commitments and Contingencies — — Stockholders’ equity: Common stock, $.001 par value; 900,000,000 shares authorized, 2,081,752 and 417,059 shares issued and outstanding at Jan. 31, 2021 and April 30, 2020, respectively 2,081 417 Capital in excess of par value 14,496,808 3,141,021 Accumulated deficit (2,358,747 ) (2,462,282 ) Total stockholders’ equity 12,140,142 679,156 Total liabilities and stockholders’ equity $ 20,191,833 $ 2,213,498 See Accompanying Notes to the Consolidated Financial Statements 3 NETCAPITAL INC. Condensed Consolidated Statements of Operations (Unaudited) For the Nine Months Ended For the Three Months Ended January 31, 2021 January 31, 2020 January 31, 2021 January 31, 2020 Revenues $ 3,770,813 $ 1,593,130 $ 1,277,327 $ 757,405 Cost of revenues 730,343 8,210 16,119 3,362 Gross profit 3,040,470 1,584,920 1,261,208 754,043 Costs and expenses: Stock-based compensation 386,121 232,461 126,212 123,930 Consulting fees 5,085 87,400 — 7,200 Marketing 21,620 9,665 12,838 3,063 Rent 39,516 38,050 12,718 12,329 Wages and payroll expense 2,153,561 — 857,228 — Selling, general and administrative 235,054 40,941 159,554 7,658 Total costs and expenses 2,840,957 408,517 1,168,550 154,180 Income from operations 199,513 1,176,403 92,658 599,863 Other income (expense): Interest expense (53,690 ) (14,303 ) (30,126 ) (4,689 ) Total other income (expense) (53,690 ) (14,303 ) (30,126 ) (4,689 ) Net income before taxes 145,823 1,162,100 62,532 595,174 Income tax (42,288 ) — (19,890 ) — Net income $ 103,535 $ 1,162,100 $ 42,642 $ 595,174 Basic earnings per share $ 0.11 $ 2.89 $ 0.02 $ 1.43 Diluted earnings per share $ 0.11 $ 2.89 $ 0.02 $ 1.43 Weighted average number of common shares outstanding: Basic 948,058 402,284 2,012,723 415,324 Diluted 948,058 402,284 2,012,723 415,324 See Accompanying Notes to the Financial Statements 4 NETCAPITAL INC. Condensed Consolidated Statements of Stockholders' Equity For the Nine Months Ended January 31, 2021 and the Years Ended April 30, 2020, and 2019 (Unaudited) Capital in Excess of Accumulated Total Shares Amount Par Value Deficit Equity Balance, April 30, 2018 367,273 $ 367 $ 2,165,655 $ (3,650,013 ) $ (1,483,991 ) Net loss, July 31, 2018 — — — (7,207 ) (7,207 ) Q1 stock-based compensation 1,969 2 6,693 — 6,695 Q1 stock issued for purchase 100 — 700 — 700 Balance, July 31, 2018 369,342 369 2,173,048 (3,657,220 ) (1,483,803 ) Net loss, October 31, 2018 — — — (20,355 ) (20,355 ) Q2 stock-based compensation 4,131 5 12,203 — 12,208 Q2 sale of common stock 1,400 1 4,999 — 5,000 Balance, October 31, 2018 374,873 375 2,190,250 (3,677,575 ) (1,486,950 ) Net income, January 31, 2019 — — — 12,391 12,391 Q3 stock-based compensation 1,406 1 3,374 — 3,375 Balance, January 31, 2019 376,279 376 2,193,624 (3,665,184 ) (1,471,184 ) Net income, April 30, 2019 — — — 598,051 598,051 Q4 stock-based compensation 1,406 2 7,873 — 7,875 Balance, April 30, 2019 377,685 378 2,201,497 (3,067,133 ) (865,258 ) Net income, July 31, 2019 — — — 24,475 24,475 Q1 stock-based compensation 1,406 1 19,687 — 19,688 Balance, July 31, 2019 379,091 379 2,221,184 (3,042,658 ) (821,095 ) Net income, October 31, 2019 — — — 542,451 542,451 Q2 stock-based compensation 37,656 38 917,305 — 917,343 Balance, October 31, 2019 416,747 417 3,138,489 (2,500,207 ) 638,699 Net income, January 31, 2020 — — — 595,174 595,174 Q3 stock-based compensation 156 — 1,500 — 1,500 Balance, January 31, 2020 416,903 417 3,139,989 (1,905,033 ) 1,235,373 Q4 stock-based compensation 156 — 1,032 — 1,032 Net loss, April 30, 2020 — — — (557,249 ) (557,249 ) Balance, April 30, 2020 417,059 417 3,141,021 (2,462,282 ) 679,156 Net income July 31, 2020 — — — 30,871 30,871 Q1 stock-based compensation 156 — 1,406 — 1,406 Balance July 31, 2020 417,215 417 3,142,427 (2,431,411 ) 711,433 Net income October 31, 2020 — — — 30,022 30,022 Q2 stock-based compensation 2,240 2 18,555 — 18,557 Balance, October 31, 2020 419,455 419 3,160,982 (2,401,389 ) 760,012 Shares issued to acquire funding portal 1,666,360 1,666 11,329,582 — 11,331,248 Net income January 31, 2021 — — — 42,642 42,642 Return of common stock (5,000 ) (5 ) 5 — — Q3 stock-based compensation 937 1 6,239 — 6,240 Balance, January 31, 2021 2,081,752 $ 2,081 $ 14,496,808 $ (2,358,747 ) $ 12,140,142 See Accompanying Notes to the Consolidated Financial Statements 5 NETCAPITAL INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Nine Months Ended Ended January 31, January 31, 2021 2020 Operating activities Net income $ 103,535 $ 1,162,100 Adjustments to reconcile net income to net cash used in operating activities: Stock-based compensation 386,121 232,461 Non-cash revenue from receipt of equity (2,319,532 ) (1,410,796 ) Provision for bad debts 29,000 — Changes in deferred tax assets 42,288 Changes in non-cash working capital balances Accounts receivable (1,001,586 ) 6,000 Contracts receivable — 15,000 Prepaid expense (3,144 ) — Accrued expenses 250,587 (12,742 ) Accounts payable – related party 37,314 — Interest payable – related party — 12,183 Deferred revenue (67 ) (15,086 ) Cash provided by (used in) operating activities (2,475,484 ) (10,880 ) Investing activities Proceeds from purchase of funding portal 364,939 — Cash provided by investing activities 364,939 — Financing activities Proceeds from SBA loans 2,385,800 — Payment on related party note — (4,300 ) Cash provided by (used in) financing activities 2,385,800 (4,300 ) Increase (decrease) in cash and cash equivalents during the period 275,255 (15,180 ) Cash and cash equivalents, beginning of the period 11,206 19,110 Cash and cash equivalents, end of the period $ 286,461 $ 3,930 Cash paid for: Interest $ 1,595 $ 2,120 Income taxes $ — $ — Non-cash financing activities Common stock issued as prepaid compensation $ — $ 915,000 See Accompanying Notes to the Consolidated Financial Statements 6 NETCAPITAL INC. Notes To Condensed Consolidated Financial Statements (Unaudited) Note 1– Basis of Presentation Netcapital Inc. (“we,” “our,” or the “Company”) is a fintech company dedicated to democratizing private capital markets. We help companies at all stages to build, grow and fund their businesses with a full range of services from strategic advice to raising capital. One of our subsidiaries, Netcapital Funding Portal Inc., which we purchased effective November 5, 2020, allows companies to close capital digitally and provides investors access to pre-IPO investment opportunities. A second subsidiary, Netcapital Advisors Inc., which we incorporated in Delaware on August 25, 2020, provides professional advice to entrepreneurs and assists companies with digital marketing, business planning and raising capital. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of significant intercompany balances and transactions. The Company has an April 30 fiscal year end. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine- and three-month periods ended January 31, 2021, are not necessarily indicative of the results that may be expected for the fiscal year ended April 30, 2021. For further information, refer to the audited financial statements and footnotes thereto in our Annual Report on Form 10-K for the year ended April 30, 2020. In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses . The new guidance provides better representation about expected credit losses on financial instruments. This update requires the use of a methodology that reflects expected losses and requires consideration of a broader range of reasonable and supportive information to inform credit loss estimates. This ASU is effective for reporting periods beginning after December 15, 2022, with early adoption permitted. The company is studying the impact of adopting the ASU in fiscal year 2023, and what effect it could have. The Company believes the accounting change would not have a material effect on the financial statements. In June 2018, the FASB issued ASU 2018-07, Improvement to Nonemployee Share-based Payment Accounting, which simplifies the accounting for share-based payments. The company elected early adoption of this ASU, using the modified retrospective approach, so that all stock compensation to employees and nonemployees is treated under the same guidance as in ASC 718. In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance had no impact on our consolidated financial statements. Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances. Note 2 – Going Concern Matters and Realization of Assets The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. However, the Company has negative working capital and short-term debt of more than $2,500,000. In addition, the Company may be unable to meet all of its obligations as they become due. The Company believes that its existing cash resources may not be sufficient to fund its debt payments and working capital requirements. The Company anticipates a majority of its debt payments will be forgiven under the provisions of an SBA loan program, and such forgiveness will alleviate the uncertainty of being able to fund its debt service requirements 7 The Company may not be able to raise sufficient additional debt, equity, or other cash on acceptable terms, if at all. Failure to generate sufficient revenues, obtain loan forgiveness, achieve certain other business plan objectives or raise additional funds could have a material adverse effect on the Company’s results of operations, cash flows and financial position, including its ability to continue as a going concern, and may require it to significantly reduce, reorganize, discontinue or shut down its operations. In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company which, in turn, is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in its existence. Management’s plans include: 1. Leverage the rapid month-to-month growth of its recently acquired subsidiary, Netcapital Funding Portal Inc (“FP”). FP’s revenues have grown every month since October 2020 and FP receives a 4.9% fee on all investments made on Netcapital.com. 2. Renegotiate the payment terms of an SBA loan. 3. Continue to provide consulting services and continue to charge both a cash fee and an equity-based fee, when possible, in exchange for these services. Management has determined, based on the debt balances it is carrying, that without debt forgiveness on its SBA loans, it is not probable that management’s plan will sufficiently alleviate or mitigate, to a sufficient level, the relevant conditions or events noted above. Accordingly, the management of the Company has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of these financial statements. Note 3 – Revenue Recognition Revenue Recognition under ASC 606 The Company recognizes service revenue from its consulting contracts and its game website using the five-step model as prescribed by ASC 606: • Identification of the contract, or contracts, with a customer; • Identification of the performance obligations in the contract; • Determination of the transaction price; • Allocation of the transaction price to the performance obligations in the contract; and • Recognition of revenue when or as, the Company satisfies a performance obligation. The Company identifies performance obligations in contracts with customers, which primarily are professional services, listing fees on our funding portal, and a portal fee of 4.9% of the money raised on the funding portal. The transaction price is determined based on the amount the Company expects to be entitled to receive in exchange for transferring the promised services to the customer. The transaction price in the contract is allocated to each distinct performance obligation in an amount that represents the relative amount of consideration expected to be received in exchange for satisfying each performance obligation. Revenue is recognized when performance obligations are satisfied. The Company bills its customers for professional services and listing fees at a negotiated price. The portal fee is fixed at 4.9%. Most of the Contracts are typically one year or less. For larger contracts, in addition to the initial payment, the Company may allow for progress payments throughout the term of the contract. 8 Judgments and Estimates The estimation of variable consideration for each performance obligation requires the Company to make subjective judgments. The Company enters contracts with customers that regularly include promises to transfer multiple services, such as digital marketing, web-based videos, offering statements, and professional services. For arrangements with multiple services, the Company evaluates whether the individual services qualify as distinct performance obligations. In its assessment of whether a service is a distinct performance obligation, the Company determines whether the customer can benefit from the service on its own or with other readily available resources, and whether the service is separately identifiable from other services in the contract. This evaluation requires the Company to assess the nature of each individual service offering and how the services are provided in the context of the contract, including whether the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment based on the facts and circumstances of the contract. When agreements involve multiple distinct performance obligations, the Company allocates arrangement consideration to all performance obligations at the inception of an arrangement based on the relative standalone selling prices (“SSP”) of each performance obligation. Where the Company has standalone sales data for its performance obligations which are indicative of the price at which the Company sells a promised service separately to a customer, such data is used to establish SSP. In instances where standalone sales data is not available for a particular performance obligation, the Company estimates SSP by the use of observable market and cost-based inputs. The Company continues to review the factors used to establish list price and will adjust standalone selling price methodologies as necessary on a prospective basis. Service Revenue Service revenue from subscriptions to the Company's game website is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the platform is made available to the customer. Payments received in advance of subscription services being rendered are recorded as a deferred revenue. Professional services revenue is recognized over time as the services are rendered. When a contract with a customer is signed, the Company assesses whether collection of the fees under the arrangement is probable. The Company estimates the amount to reserve for uncollectible amounts based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded as operating expenses against the contract asset (Accounts Receivable). Contract Assets Contract assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed. The revenue is recognized when the customer receives services. Contract assets are included in other current or non-current assets in the consolidated balance sheets, depending on if their reduction will be recognized during the succeeding twelve-month period or beyond. Deferred Revenue Deferred revenues represent billings or payments received in advance of revenue recognition and are recognized upon transfer of control. Balances consist primarily of annual plan subscription services and professional and training services not yet provided as of the balance sheet date. Deferred revenues that will be recognized during the succeeding twelve-month period are recorded as current deferred revenues in the consolidated balance sheets, with the remainder recorded as other non-current liabilities in the consolidated balance sheets. Costs to Obtain a Customer Contract Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized as other current or non-current assets and amortized on a straight-line basis over the life of the contract, which approximates the benefit period. The benefit period was estimated by taking into consideration the length of customer contracts, technology lifecycle, and other factors. All sales commissions are recorded as consulting fees within the Company's consolidated statement of operations. Remaining Performance Obligations The Company's subscription terms are typically less than one year. All of the Company’s revenues in the nine- and three-month periods ended January 31, 2021 and 2020 are considered contract revenues. Contract revenue as of January 31, 2021 and April 30, 2020, which has not yet been recognized, amounted to $589 and $656, respectively, and is recorded on the balance sheet as deferred revenue. The Company expects to recognize revenue on all of its remaining performance obligations over the next 12 months. 9 Note 4 – Earnings Per Common Share Income per common share data was computed as follows: Nine Months Ended January 31, 2021 Nine Months Ended January 31, 2020 Three Months Ended January 31, 2021 Three Months Ended January 31, 2020 Net income attributable to common stockholders – basic $ 103,535 $ 1,162,100 $ 42,642 $ 595,174 Adjustments to net income — — — — Net income attributable to common stockholders – diluted $ 103,535 $ 1,162,100 $ 42,642 $ 595,174 Weighted average common shares outstanding – basic 948,058 402,284 2,012,723 415,324 Effect of dilutive securities — — — — Weighted average common shares outstanding – diluted 948,058 402,284 2,012,723 415,324 Earnings per common share – basic $ 0.11 $ 2.89 $ 0.02 $ 1.43 Earnings per common share – diluted $ 0.11 $ 2.89 $ 0.02 $ 1.43 For the nine- and three-month periods ended January 31, 2020 and 2019, the Company had no convertible or dilutive securities. Note 5 – Principal Financing Arrangements The following table summarizes components debt as of January 31, 2021 and April 30, 2020: January 31, 2021 April 30, 2020 Interest Rate Secured lender (affiliate) $ 1,000,000 $ 1,000,000 8.00 % Notes payable – related parties 22,860 15,000 0.0 % Demand notes payable - 7,860 0.0 % U.S. SBA loan 500,000 - 3.75 % U.S. SBA loan 1,885,800 - 1.0 % Loan payable – bank 34,324 34,324 5.5 % Total Debt $ 3,442,984 $ 1,057,184 As of January 31, 2021 and April 30, 2020, the Company owed its principal lender (“Lender”) $1,000,000 under a loan and security agreement (“Loan”) dated April 28, 2011, that was amended on July 26, 2014 and again on October 31, 2017. Until November 5, 2020, the Lender was also the largest shareholder of the Company, owning 135,676 shares of common stock, or 32.3% of the 419,455 shares issued and outstanding, as of October 31, 2020. 10 As of January 31, 2021, the Lender owns 6.5% of the outstanding common stock of the Company and is no longer considered a related party. The Loan was amended on October 31, 2017 to change the maturity date to October 31, 2020, reduce the interest rate from 8% to 1.25% per annum, and reduce the default interest rate from 15% to 8% per annum. The Loan was not paid when it matured on October 31, 2020. The Loan maturity date has been extended to April 30, 2021 and the annual interest rate has been raised to 8% per annum effective November 1, 2020. In connection with the financing, the Company has agreed to certain restrictive covenants, including, among others, that the Company may not convey, sell, lease, transfer or otherwise dispose of any part of its business or property, except as permitted in the agreement, dissolve, liquidate or merge with any other party unless, in the case of a merger, the Company is the surviving entity, incur any indebtedness except as defined in the agreement, create or allow a lien on any of its assets or collateral that has been pledged to the Lender, make any loans to any person, except for prepaid items or deposits incurred in the ordinary course of business, or make any material capital expenditures. To secure the payment of all obligations to the Lender, the Company granted to the Lender a continuing security interest and first lien on all of the assets of the Company. As of January 31, 2021 and April 30, 2020, the Company’s related-party unsecured notes payable totaled $22,860 and $15,000, respectively. There are three notes, payable on demand, with a zero percent interest rate. Two of these notes, totaling $7,860, were not considered related party loans on April 30, 2020 and were recorded as demand notes payable on that date. The Company also owes $34,324 as of January 31, 2021 and April 30, 2020 to Chase Bank. The Company pays interest expense to Chase Bank, which is calculated at a rate of 5.5% per annum. On May 6, 2020, the Company borrowed $1,885,800 (the “May Loan”) and on June 17, 2020 the Company borrowed $500,000 (the “June Loan”) from a U.S. Small Business Administration (the "SBA") loan program. The May Loan has an initial term of two years and an interest rate of 1% per annum. Principal payments are delayed until the Company negotiates with the lender as to the amount of principal that is subject to repayment. If repayment of the May Loan is required, payments begin after a six-month deferral period, in which interest accrues, and payments are to be made in equal installments of approximately $106,125 over an 18-month period. Of the $1,885,800 balance, $1,577,388 is considered a short-term liability. Accrued interest payable on the May Loan amounted to $13,950 as of January 31, 2020. The June Loan requires installment payments of $2,437 monthly, beginning on June 17, 2021 over a term of thirty years. Interest accrues at a rate of 3.75% per annum. The Company agreed to grant a continuing security interest in its assets to secure payment and performance of all debts, liabilities, and obligations to the SBA. The June Loan was personally guaranteed by the Company’s Chief Financial Officer. $6,727 of the June Loan is recorded as a current liability and the remaining $493,273 is classified as a long-term liability. Accrued interest payable on the June Loan amounted to $11,661 as of January 31, 2021. Note 6 – Income Taxes As of January 31, 2021 and April 30, 2020, the Company had net operating loss carryforwards for federal income tax purposes of approximately $700,000 expiring in the years of 2021 through 2035. The Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017. Among numerous provisions, the Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created new taxes on certain foreign sourced earnings. As a result of the Tax Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. As of April 30, 2020, the Company had net deferred tax assets calculated at an expected rate of 21%, or approximately $180,000. As of April 30, 2020, the Company recognized the net deferred asset to the extent of the impact on current book earnings, as the Company’s management believed that historical, current, and expected earnings are sufficient to meet the more likely than not standard to enable the Company to recognize the net deferred tax asset. Given that management believes it is more likely than not that the company will utilize the deferred tax asset, there is no valuation allowance as of January 31, 2021 and April 30, 2020. 11 As of January 31, 2020, the deferred tax asset has been reduced to $137,712 by the tax provision of $42,288 for the nine months ended January 31, 2021. For the nine- and three-month periods ended January 31, 2021, the Company recorded tax expense of $42,288 and $19,890, respectively. Due to the availability of a net operating loss carryforward in fiscal 2020, for the nine- and three-month periods ended January 31, 2020, the Company recorded no tax expense . Note 7 – Related Party Transactions The Company’s majority shareholder, Netcapital Systems LLC, owns 1,671,360 shares of common stock, or 80.3% of the Company as of January 31, 2021. The Company has a demand note payable to Netcapital Systems LLC of $4,600 and a demand note payable to one of its managers of $3,200. In addition, the Company has accrued a payable of $3,817,516 for supplemental consideration owed in conjunction with its purchase of Netcapital Funding Portal Inc. This amount is scheduled to be paid off by the issuance of common stock. In total the Company owes its largest shareholder $3,822,176. As of January 31, 2021 and April 30, 2020, the Company owes $34,490 and $0 to a company that is controlled by one of its directors. Compensation to officers in the nine- and three-month periods ended January 31, 2021 consisted of common stock valued at $301,783 and $86,417 and cash wages of $210,462 and $72,000, respectively. Compensation to officers in the nine- and three-month periods ended January 31, 2020 consisted of common stock valued at $145,685 and $77,750 and cash wages of $62,000 and $0 respectively. Compensation to a related party consultant in the nine-and three-month periods ended January 31, 2021 and 2020 consisted of common stock valued at $38,757 and $19,378, respectively, and cash payments of $46,154 and $24,000, respectively. This consultant is also the controlling shareholder of Zelgor Inc. and the Company’s earned revenues from Zelgor Inc. of $1,400,000 and $350,000 in the nine- and three-month periods ended January 31, 2021 . The Company owes a director $16,680 as of January 31, 2021 and April 30, 2020, which is recorded as accounts payable, plus $15,000 in a non-interest-bearing note payable. Also included in related-party accounts payable is $34,490 due to a company controlled by a different director. Note 8 – Stockholders’ Equity The Company is authorized to issue 900,000,000 shares of its common stock, par value $0.001. As of January 31, 2021 and April 30, 2020, 2,081,752 and 417,059 shares were outstanding, respectively. In August 2020, the board of directors authorized a reverse split of the common stock on a 1-for-2,000 basis, whereby the Company issued to each of its stockholders one share of Common Stock for every 2,000 shares of common stock held by such stockholder. The reverse split was effective on November 5, 2020. The financial statements as of and for the nine- and three-month periods ended January 31, 2021 and 2020 have been adjusted to give effect to the reverse split. As of April 30, 2020, the balance sheet accounts for capital in excess of par value and for common stock were increased and decreased by $830,852, respectively. In the first quarter of fiscal 2021, the Company issued an aggregate of 156 shares of restricted stock to its Chief Marketing Officer as compensation. The shares were valued at $1,406. In the second quarter of fiscal 2021, the Company issued an aggregate of 156 shares of restricted stock to its Chief Marketing Officer and 2,084 shares to its Director of Business Development as compensation. The shares were valued at $18,557. In the third quarter of fiscal 2021, the Company issued an aggregate of 156 shares of restricted stock to its former Chief Marketing Officer and 781 shares of restricted stock to its current Chief Marketing Officer as compensation. The shares were valued at $6,240. 12 On November 5, 2020, the Company issued 1,666,360 shares of restricted stock to purchase Netcapital Funding Portal Inc. See Note 14. In the first quarter of fiscal 2020, the Company issued an aggregate of 1,406 shares of restricted stock to its Chief Executive Officer, Chief Financial Officer and Chief Marketing Officer as compensation. The shares were valued at $19,688. On September 9, 2019, the Company signed a stock-based compensation agreement, ending on July 31, 2021, with its Chief Executive Officer. The Company issued 12,500 shares of its common stock in conjunction with this agreement. The shares were valued at $305,000. On September 9, 2019, the Company signed a stock-based compensation agreement with its Chief Financial Officer, ending on July 31, 2021. The Company issued 12,500 shares of its common stock in conjunction with this agreement. The shares were valued at $305,000. On September 9, 2019, the Company signed stock-based compensation agreements with two consultants, ending on July 31, 2021. The Company issued 6,250 shares of its common stock to each consultant in conjunction with these agreements. The total number of shares issued was valued at $305,000. One of the consultants is considered a related party and provides marketing and business development services to the Company. The second consultant provides business services to public companies. On October 31, 2019, the Company recorded the issuance of 156 shares of common stock to its Chief Marketing Officer. The shares were valued at $2,344 and recorded as an expense in the quarter ended October 31, 2019. Note 9 – Fair Value The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1: inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the company has the ability to access at the measurement date. Level 2: inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: inputs are unobservable inputs for the asset or liability. Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, we base fair value on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon management’s own estimates, are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used. Note 10 – Stock-Based Compensation Plans The Company entered consulting agreements to issue common stock and recorded the applicable non-cash expense in accordance with the authoritative guidance of the ASC 718 “Accounting for Stock-Based Compensation.” For the nine- and three-month periods ended January 31, 2021, the Company recorded $386,121 and $126,212, respectively, in stock-based compensation expense. For the nine- and three-month periods ended January 31, 2020, the Company recorded $232,461 and $123,930, respectively, in stock-based compensation expense. 13 As of January 31, 2021, there was $249,092 of prepaid stock-based compensation expense for services that end on August 31, 2021. As of January 31, 2020, an aggregate of 782 and 9,636 shares of common stock can be earned by the Company’s Marketing Manager and Chief Marketing Officer, respectively, from unvested stock grants. For the Marketing Manager, shares vest at a rate of 156 shares per quarter, over the next five quarters. For the Chief Marketing Officer, shares vest at a rate of 260 shares per month, over the next thirty-seven months. The components of the stock-based compensation expense are presented in the following table: Stock-based compensation expense Nine Months Ended January 31, 2021 Nine Months Ended January 31, 2020 Three Months Ended January 31, 2021 Three Months Ended January 31, 2020 Chief Executive Officer $ 121,824 $ 69,827 $ 40,608 $ 38,125 Chief Financial Officer 121,824 69,827 40,608 38,125 Chief Marketing Officer 3,492 6,031 1,039 1,500 Related party consultant 58,135 30,539 19,379 19,063 Director of Business Development 22,711 — 5,201 — Marketing consultant — 25,698 — 8,054 Business consultant 58,135 30,539 19,378 19,063 Total stock-based compensation expense $ 386,121 $ 232,461 $ 126,212 $ 123,930 The table below presents the prepaid compensation expense as of January 31, 2021 and April 30, 2020: Description January 31,2021 April 30, 2020 Chief Executive Officer $ 79,891 $ 201,715 Chief Financial Officer 79,891 201,715 Related party consultant 44,655 102,790 Business consultant 44,655 102,790 Total $ 249,092 $ 609,010 Note 11 – Deposits and Commitments The Company utilizes office space in Boston, Massachusetts, under a month-to-month lease agreement that allows the company to end its lease by providing 30-day written notice. The lease agreement includes a deposit of $6,300. Note 12 – Concentrations For the nine- and three-month periods ended January 31, 2021, the Company had one related party customer that constituted 37% and 0% of its revenues, respectively, a second customer that constituted 18% and 0% of its revenues, a third customer that constituted 13% and 37% of its revenues, respectively and a fourth customer that constituted 9% and 28% of its revenues, respectively. For the Nine- and three-month periods ended January 31, 2020, the Company had one customer that constituted 44% and 92% of its revenues, respectively; a second customer that constituted 34% and 0% of its revenues, respectively; and a third customer that constituted 13% and 8% of its revenues, respectively. Note 13 – Investments In May 2020, the Company entered a consulting contract with Watch Party LLC (“WP”), which allowed the Company to receive up to 110,000 membership interest units of WP in return for consulting services. The WP units are valued at $2.14 per unit based on a sales price of $2.14 per unit on an online funding portal, resulting in revenues of $235,400 and $0 for the nine- and three-months ended January 31, 2021. 14 In May 2020, the Company entered a consulting contract with ChipBrain LLC (“ChipBrain”), which allowed the Company to receive up to 710,200 membership interest units of ChipBrain in return for consulting services. The ChipBrain units are valued at $0.93 per unit based on a sales price of $0.93 per unit on an online funding portal, resulting in revenues of $660,486 and $0 for the nine- and three-months ended January 31, 2021. In May 2020, the Company entered a consulting contract with a related party, Zelgor Inc. (“Zelgor”), which allowed the Company to receive up to 1,400,000 shares of common stock of Zelgor in return for consulting services. The Company earned 1,050,000 shares in the quarter ended July 31, 2020 and 350,000 shares in the quarter ending October 31, 2020. The Zelgor shares are valued at $1.00 per share based on a sales price of $1.00 per share on an online funding portal, resulting in revenues of $1,400,000 and $0 for the nine- and three-months ended January 31, 2021. The $1.00 per share valuation was derived based on a combination of multiple transactions on a secondary trading platform in which shares were purchased at $1.00 per share, and two private offerings of shares, one at a selling price of $0.50 per share and the other at $2.00 per share. On January 2, 2020, the Company entered a consulting contract with Deuce Drone LLC (“Drone”), which allowed the Company to receive up to 2,350,000 membership interest units of Drone in return for consulting services. The Company earned all 2,350,000 membership interest units in fiscal 2020. The Drone units are valued at $0.35 per unit based on a sales price of $0.35 per unit when the units were earned, or $822,500. Drone is currently selling Drone units for $1.00 per unit on an online funding portal. In August 2019, the Company entered a consulting contract with KingsCrowd LLC (“KingsCrowd”), which allowed the Company to receive 300,000 membership interest units of Kingscrowd in return for consulting services. The KingsCrowd units are valued at $1.80 per unit based on a sales price of $1.80 per unit when the units were earned, or $540,000. KingsCrowd units currently trade at a price of $2.75 per unit on a secondary trading platform. During fiscal 2019, the Company entered a consulting contract with NetCapital Systems LLC (“NetCapital”), which allowed the Company to receive up to 1,000 membership interest units of NetCapital in return for consulting services. The Company earned 40 units in the quarter ended July 31, 2020, at a value of $91.15 per unit, or $3,646. The Company earned all 1,000 Netcapital units but sold a portion of the units in fiscal 2020 at a sales price of $91.15 per unit. As of January 31, 2021, the Company owns 528 Netcapital units, at a value of $48,128. On July 20, 2020 the Company entered a consulting agreement with Vymedic, Inc. for a $40,000 fee over a 5-month period. Half the fee is payable in stock and half is payable in cash. As of January 31, 2021, the Company had earned $40,000, including $20,000 worth of stock. The following table summarizes the components of investments as of January 31, 2021 and April 30, 2020: January 31, 2021 April 30, 2020 Netcapital Systems LLC $ 48,128 $ 44,482 Watch Party LLC 235,400 — Zelgor Inc. 1,400,000 — ChipBrain LLC 660,486 — Vymedic, Inc. 20,000 — Deuce Drone LLC 822,500 822,500 KingsCrowd LLC 540,000 540,000 Total Investments at cost $ 3,726,514 $ 1,406,982 15 The above investments do not have a readily determinable fair value, as identified in ASC 321-10-35-2, and all investments are measured at cost less impairment. The Company monitors the investments for any changes in observable prices from orderly transactions. Note 14 – Business Acquisition On August 23, 2020, the Company entered into an Agreement and Plan of Merger (“Agreement”) whereby NetCapital Systems LLC (“Systems”) would become an 80% owner of the Company. Pursuant to the requirements of this agreement, the Company filed a definitive information statement on September 21, 2020 to change the Company’s c orporate name from ValueSetters, Inc. to NetCapital Inc and to a mend the Company’s Articles of Incorporation to effect a stock combination, or reverse stock split, pursuant to which 2,000 shares of the Company’s common stock would be exchanged for one new share of common stock. In conjunction with the merger agreement, the Company issued 1,666,360 to Systems on November 5, 2020. The Agreement is a tax-free merger of Netcapital Funding Portal Inc. (“FP”), a wholly owned subsidiary of Systems, with Netcapital Acquisition Vehicle Inc., an indirect wholly owned subsidiary of the Company, wherein FP was the surviving corporation. This transaction is designed to enhance the Company’s revenues and ability to provide services to democratize the private capital markets while helping companies at all stages to build, grow and fund their businesses with a full range of services from strategic advice to raising capital. As a result of the transaction, the company is expected to be a leading provider of private capital transactions for entrepreneurs seeking to raise money under the exemption provided by section 4(a)(6) of the Securities Act of 1933, which allows private companies to raise up to $5 million every 12 months. ASC 805-10-25-4 requires the identification of one of the combining entities in each business combination as the acquirer. Upon evaluation of the components of the business combination, including the relative voting rights in the combined entity, the composition of the governing body and senior management of the combined entity, the relative size of each entity and the terms of the exchange of equity interests, the Company recorded the transaction in the third quarter of fiscal 2021 as a purchase. In conjunction with the purchase, Systems agreed to vote all of its shares of common stock to support the resolutions of the existing board of directors of the Company. The following table summarizes the value of the consideration for FP and the amounts of the assets acquired and liabilities assumed in conjunction with the Agreement. Consideration: 1,666,360 shares of common stock of the Company $ 11,331,248 Payment of promissory notes and interest 3,817,516 Total consideration $ 15,148,764 Recognized amounts of identifiable assets acquired and liabilities assumed: Cash $ 358,634 Current assets 8,894 Accounts payable (29,023 ) Platform users 7,080,319 Platform investors 6,288,392 Platform issuers 903,125 Unpatented technology 532,118 Total identifiable net assets $ 15,148,764 The fair value of the common shares issued as the consideration for FP was determined by the most recent (the prior day’s) closing price of the Company’s common shares at the time the shares were issued. The fair value of the assets and the liabilities of FP equaled their book value. Four identifiable intangible assets were valued; platform users, platform investors, platform issuers and unpatented technology (collectively the “Intangible Assets”). The estimated market value of the Intangible Assets is approximately $27,800,000. This amount is derived from valuing the IP functionality, brand, and license of FP at $1,000,000; valuing current issuers and pipeline issuers at approximately $14,000 each; valuing platform users at $382 each; and valuing investors at $1,025 each. These values are derived from comparing the FP Intangible Assets to the values recorded by funding portal offerings of FP’s competitors in public filings via Regulations CF and Regulation A. 16 The excess of purchase price over the total identifiable tangible net assets is $344,810, which leaves an aggregate value of $14,803,954 to be assigned to the Intangible Assets. The estimated value of the $27,800,000 of Intangible Assets is allocated on a percentage basis in the above table to equal $14,803,954. None of FP’s revenues and earnings are included in the Company’s consolidated income statements through the day of closing of November 5, 2020. The consolidated income statements for the nine- and three-month periods ended January 31, 2021, include $353,041 in revenues from FP. If the entities had been combined for the two reporting periods, the supplemental pro forma revenues and earnings are as follows: Revenues Earnings Supplemental pro forma for 4/1/20 – 11/04/20 $ 2,866,063 $ 282,264 Supplemental pro forma for 4/1/19 – 11/04/19 $ 1,018,200 $ 680,212 Included in the supplemental pro forma information above is revenue earned by the Company from Netcapital Systems LLC of $18,646 and $152,864 in the six-month periods ended October 31, 2020 and 2019, respectively. Note 15 – Subsequent Events The Company issued 75,000 shares in February 2021 under a one-year consulting agreement. In February 2021, the Company received an additional SBA loan of $1,885,800. The loan has an initial term of two years and an interest rate of 1% per annum. Principal payments are delayed until the Company negotiates with the lender as to the amount of principal that is subject to repayment. If repayment of the loan is required, payments begin after a six-month deferral period, in which interest accrues, and payments are to be made in equal installments of approximately $106,125 over an 18-month period. In March 2021, the Company approved the issuance of approximately 398,000 shares of its common stock to pay the promissory notes and accrued interest payable of $3,817,516 in conjunction with the acquisition of FP. The Company evaluated subsequent events through the date these financial statements were available to be issued. There were no other material subsequent events that required recognition or additional disclosure in these financial statements. 17