Netcapital Inc. 10-K

Item 9A. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures The Company’s management, with the participation of the Principal Executive Officer (the “PEO”) and Principal Financial Officer (the “PFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of April 30, 2021. Based on that evaluation, the PEO and the PFO concluded that, as of April 30, 2021, such controls and procedures were effective. (b) Management’s Assessment of Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of management, including the PEO and the PFO, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of April 30, 2021, based on the criteria established in a report entitled “2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929. Based on this evaluation, the Company’s management has evaluated and concluded that the Company’s internal control over financial reporting was effective as of April 30, 2021. This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. The Company’s registered public accounting firm was not required to issue an attestation on its internal controls over financial reporting pursuant to the rules of the SEC. The Company will continue to evaluate the effectiveness of internal controls and procedures on an ongoing basis. (c) Changes in Internal Control over Financial Reporting There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended April 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None. 15 PART III Item 10. Directors, Executive Officers and Corporate Governance. Directors and Executive Officers The following table and biographical summaries set forth information, including principal occupation and business experience, about our directors and executive officers as of August 31, 2021. Our executive officers and directors are as follows: Officer or Name Age Position Director Since Cecilia Lenk 66 Chairman of the Board and Chief Executive Officer July 2017 Thomas H Carmody 74 Director August 2010 Avi Liss 41 Secretary and Director August 2010 Steven Geary 53 Director June 2006 Coreen Kraysler 57 Chief Financial Officer September 2017 Carole Murko 59 Chief Marketing Officer January 2021 Our directors serve in such capacity until the first annual meeting of our shareholders and until their successors have been elected and qualified. Our officers serve at the discretion of our board of directors, until their death, or until they resign or have been removed from office. Executive Officers and Directors Cecilia Lenk, Chairman of the Board and Chief Executive Officer Cecilia Lenk is the Chairman of the Board and Chief Executive Officer. She accepted the position on July 28, 2017. For the previous five years she worked as a self-employed business consultant and a town councilor in Watertown, MA. Ms. Lenk has specialized in technology and health care. Formerly Vice President of Technology and Digital Design at Decision Resources Inc., a global company serving the biopharmaceutical market, she oversaw the implementation of new technologies, products, and business processes. Prior to joining Decision Resources, Cecilia founded a technology firm that built a patented platform for online research. She has managed large-scale technology projects for leading corporations, universities, government agencies, and major non-profit organizations. 16 Ms. Lenk has a Ph.D. in Biology from Harvard University and a B.A. from Johns Hopkins University in Geography and Environmental Engineering. She has served on a number of non-profit boards, including Chair of the Johns Hopkins Engineering Alumni. She is currently on the Alumni Advisory Board for the Hopkins School of Engineering. Ms. Lenk brings to our board of directors key leadership experience in high-growth technology companies and possesses a strong mix of strategic, finance, and operating skills. Thomas Carmody, Director Thomas Carmody has served as a Director of the Company since August 2010. He has over 40 years experience as a marketing executive. For the past five years he has worked as a self-employed marketing consultant for Summit International LLC. He currently serves on the Board of Directors of Continental Materials Corporation, Chicago, Illinois, and serves on that company’s audit committee. Mr. Carmody also served as the Vice President of U.S. Operations and Vice President of the sports division at Reebok International Inc. from 1988 to 1996. As a long-term marketing expert, Mr. Carmody brings strategic insight and extensive experience with product distribution to our board of directors. He also has significant experience serving on the board of another public company. Avi Liss, Director and Secretary Avi Liss has served as a Director and Secretary of the Company since August 2010. From August 2009 to present, he has served as the President of Liss Law, LLC, a law firm specializing in real estate conveyances. Prior to founding Liss Law, he worked as a judicial law clerk for the Honorable Stephen S. Mitchell, a bankruptcy court judge for the Eastern District of Virginia. Mr. Liss is well qualified to serve as a director of the company due to his knowledge and working experience with legal governance matters. Steven Geary, Director Steven Geary has served as a Director of the Company since June 2006. Since 2009, he has served in several management positions at Statera and is currently the Vice President of Strategy and Business Development. From 2008 to 2009, he was the Chief Executive Officer of ImproveSmart, Inc. From April 2006 to June 2008, he served as our President and Chief Operating Officer, and as our Chief Executive Officer from June 2008 to December 2009. Mr. Geary has significant business development and brand marketing expertise in consumer products and services. Coreen Kraysler, CFA, Chief Financial Officer Coreen Kraysler has served as the Chief Financial Officer of the Company since September 2017. Ms. Kraysler is a Chartered Financial Analyst, with over 30 years of investment experience. Formerly a Senior Vice President and Principal at Independence Investments, she managed several 5-star rated mutual funds as well as institutional accounts and served on the Investment Committee. She also worked at Eaton Vance as a Vice President, Equity Analyst on the Large and Midcap Value teams. A specialist in financial services, household and consumer products, she guest lectures at local colleges and universities. She received a B.A. in Economics and French, Cum Laude, from Wellesley College and a Master of Science in Management from MIT Sloan. 17 Carole Murko, CFA, Chief Marketing Officer Ms. Murko is a Chartered Financial Analyst who spent nearly 20 years in the financial services industry with her primary focus on marketing complex equity and fixed income strategies to the institutional marketplace for PCM International, State Street Global Advisors and Independence Investments. She has an AB in Economics from Smith College and an MA in International Economics from NYU. Ms. Murko’s principal occupation and employment during the past five years was as Membership Director for The Westmoor Club, a private field club on Nantucket. The Westmoor Club is neither a parent, subsidiary or affiliate of the Company. Director Independence Our common stock is currently quoted on the OTCQX market. To be eligible for the OTCQX market, the Company is required to have a board of directors that includes at least 2 independent directors, and the Company must have an audit committee, a majority of the members of which are independent directors. Pursuant to these requirements, Avi Liss, Thomas Carmody, and Steven Geary are independent members of our Board of Directors. Involvement in Certain Legal Proceedings Our directors, executive officers and control persons have not been involved in any of the following events during the past five years: ∙ Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; ∙ Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); ∙ Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and ∙ Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. Board Meetings and Committees; Management Matters Our board of directors took actions on five occasions during the fiscal year ended April 30, 2021. No fees are paid to directors for attendance at meetings or for agreeing to a unanimous consent or the board of directors. Compensation Committee Our board of directors does not have a compensation committee. Nominating Committee Our board of directors does not have a nominating committee. Our entire board of directors is responsible for this function. Due to the relatively small size of our company and the resulting efficiency of a board of directors that is also limited in size, our board of directors has determined that it is not necessary or appropriate at this time to establish a separate nominating committee. Our board of directors intends to review periodically whether such a nominating committee should be established. Our board of directors uses a variety of methods for identifying and evaluating nominees for director. It regularly assesses the appropriate size of the board of directors and whether any vacancies exist or are expected due to retirement or otherwise. If vacancies exist, are anticipated or otherwise arise, our board of directors considers various potential candidates for director. Candidates may come to their attention through current members of our board of directors, shareholders or other persons. These candidates are evaluated at regular or special meetings of our board of directors and may be considered at any point during the year. 18 Qualifications for consideration as a director nominee may vary according to the particular areas of expertise that may be desired in order to complement the qualifications that already exist among our board of directors. Among the factors that our directors consider when evaluating proposed nominees are their independence, financial literacy, business experience, character, judgment and strategic vision. Other considerations would be their knowledge of issues affecting our business, their leadership experience and their time available for meetings and consultation on company matters. Our directors seek a diverse group of candidates who possess the background skills and expertise to make a significant contribution to our board of directors, our company and our shareholders. Audit Committee Our board of directors formed an audit committee in 2021 consisting of two independent directors, Thomas Carmody and Avi Liss, and our Chief Executive Officer, Cecilia Lenk. The audit committee did not meet until after April 30, 2021. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act of 1934, requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities (“10% Shareholders”), to file with the Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and 10% Shareholders are required by Commission regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such reports received by us, we believe that for the fiscal year ended April 30, 2021, that our directors and 10% shareholders did comply with Section 16(a) filing requirements. Code of Ethics We have adopted a code of business conduct and ethics for our directors, officers and employees, including our Chief Executive Officer. The text of our code is posted on our Internet website at www.netcapitalinc.com. Item 11. Executive Compensation. The following table sets forth, for the fiscal years indicated, all compensation awarded to, earned by or paid to Cecilia Lenk, our Chief Executive Officer, Coreen Kraysler, our Chief Financial Officer and Carole Murko, our Chief Marketing Officer (collectively, the “Named Executives”). We have no other executive officers. Summary Executive Compensation Table Non-equity Change in pension value and nonqualified Name incentive deferred and Stock Option plan compensation All other principal Salary Bonus awards awards compensation earnings compensation Total position Year ($) ($) ($)(1) ($) ($) ($) ($) ($) Cecilia 2021 81,431 0 161,107 0 0 0 0 242,538 Lenk, CEO 2020 0 5,000 112,035 0 0 0 0 117,035 Coreen 2021 81,431 0 161,107 0 0 0 0 242,538 Kraysler, CFO 2020 0 15,000 112,035 0 0 0 0 127,035 Carole 2021 88,431 0 31,693 0 0 0 0 120,124 Murko, CMO 2020 0 0 7,061 0 0 0 0 7,061 (1) Represents the dollar amount of vested equity awards during the fiscal year. We have no retirement, pension, profit sharing, stock option or insurance programs or other similar programs for the benefit of our officers and directors. Outstanding Equity Awards at Fiscal Year End Carole Murko received a grant of 12,500 shares of common stock that vests over a 48-month period. As of April 30, 2021, 8,855 shares remain unvested. Stock Option Grants There were no stock option grants or exercises in fiscal 2021 for Named Executives. 19 Compensation of Directors We currently do not compensate our directors for their services as directors. Employment Agreements We currently have an employment agreement in place with our Chief Executive Officer and our Chief Financial Officer. The agreements expire on July 31, 2021 and are incorporated by reference to Exhibit 10.1 and Exhibit 10.2 to our Quarterly Report for the quarterly period ended July 31, 2019. We have an employment agreement in place with our Chief Marketing Officer. The agreement expires on March 10, 2024 and is incorporated by reference to Exhibit 10.1 to our Current Report dated January 7, 2021. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The following table sets forth information with respect to the beneficial ownership of shares of our common stock as of August 31, 2021 by: ● each person whom we know beneficially owns more than 5% of any class of equity security; ● each of our directors individually; ● each of our named executive officers individually; and ● all of our current directors and executive officers as a group. Unless otherwise indicated, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock. Shares of common stock that an individual or group has the right to acquire within 60 days of August 31, 2021, pursuant to the exercise of options or restricted stock are, deemed to be outstanding for the purpose of computing the percentage ownership of such person or group, but are not deemed outstanding for the purpose of calculating the percentage owned by any other person listed. Name and Address Amount of Shares and Nature of Beneficial Owner (1) of Beneficial Ownership Percent of Class* Netcapital Systems LLC 1,671,360 61.5% Cecilia Lenk (3) 22,500 **% Coreen Kraysler 22,500 **% Steven Geary (3) 10,300 **% Tom Carmody (3) 2,500 **% Avi Liss (2,3) 1,000 **% Carole Murko (4) 4,947 **% Officers and Directors as a group (6 persons) 63,747 2.3% _________________ * Based on 2,717,436 shares of common stock outstanding as of August 31, 2021. ** Less than 1% (1) Unless otherwise noted, the business address of each member of our Board of Directors is c/o Netcapital Inc. 1 Lincoln Street, Boston Massachusetts 02111 (2) Mr. Liss is our Secretary. (3) (4) Such individual is a current member of the Board of Directors. Includes 521 shares that vest within 60 days of August 31, 2021. Item 13. Certain Relationships and Related Transactions, and Director Independence. The Company’s majority shareholder, Netcapital Systems LLC, owns 1,671,360 shares of common stock, or 76.7% of the Company as of April 30, 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. In total the Company owed its largest shareholder $3,822,176 as of April 30, 2021. The company paid its majority shareholder $100,000 in fiscal 2021 for use of the software that runs the website www.netcapital.com. Compensation to officers in the years ended April 30, 2021 and 2020 consisted of common stock valued at $353,907 and $231,131, respectively, and cash compensation of $332,724 and $72,000, respectively. Compensation to a related party consultant in the years ended April 30, 2021 and 2020 consisted of common stock valued at $76,882 and $49,711, respectively, and cash compensation of $81,431 and $26,200, respectively. This consultant is also the controlling shareholder of Zelgor Inc. and the Company earned revenues from Zelgor Inc. of $1,400,000 in the year ended April 30, 2021. 20 Compensation to two board members of Netcapital Systems LLC amounted to $162,123 and $0 in the years ended April 30, 2021 and 2020, respectively. One of these board members also received stock-based compensation of $76,882 and $49,711 for the years ended April 30, 2021 and 2020, respectively. We owe Steven Geary, a director, $31,680 as of April 30, 2021 and 2020. This obligation is not interest bearing. $16,680 is recorded as a related party trade accounts payable and $15,000 as a related party note payable. We have no signed agreements for the indebtedness to Mr. Geary. The Company made an investment of $122,914 in an affiliate, 6A Aviation Alaska Consortium, Inc., in conjunction with a land lease in an airport in Alaska. Our Chief Executive Officer is also the Chief Executive Officer of 6A Aviation Alaska Consortium, Inc. As of April 30, 2021 and 2020, we owed $9,490 and $0 to a company controlled by one of our directors. We paid cash compensation of $29,738 and $0 to this director for the years ended April 30, 2021 and 2020, respectively. On April 30, 2020, we sold 722 membership interest units (the "Units") of Netcapital Systems LLC ("Netcapital") to the company controlled by this related party at a price of $91.15 per Unit for a total of $65,823, which paid off all debt and accrued interest payable to the related party as of that date. The price per Unit was similar to an offer to purchase Units directly from Netcapital. We currently have no equity compensation plan either approved or not approved by security holders, and there are no securities currently authorized for issuance under any equity compensation plan. However, our Board of Directors has previously approved share-based compensation in lieu of cash compensation to various consultants and employees. Such share-based compensation is recognized at the time the shares vest. Item 14. Principal Accounting Fees and Services. Fruci & Associates II, PLLC is the Company’s independent registered public accounting firm. The following table presents fees for professional audit services rendered by our independent registered public accounting firm during the past two fiscal years. Fiscal 2021 Fiscal 2020 Audit fees $ 24,000 $ 21,000 Audit related fees Tax fees All other fees Total $ 24,000 $ 21,000 Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors Consistent with SEC policies regarding auditor independence, our board of directors has responsibility for appointing, setting compensation and overseeing the work of the independent auditor. In recognition of this responsibility, the board of directors has established a policy to pre-approve all audit and permissible non-audit services provided by the independent auditor. Prior to engagement of the independent auditor for the next year's audit, management will submit an aggregate of services expected to be rendered during that year for each of four categories of services to the board of directors for approval. 1. Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters and reviews of our financial statements included in our Quarterly Reports on Form 10-Q. 2. Audit-Related services are for assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements. 3. Tax services include all services performed by the independent auditor's tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice. 4. Other services are those associated with services not captured in the other categories. We generally do not request such services from the independent auditor. 21 PART IV ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS. Exhibit Number Description 2.1 Asset Purchase Agreement, dated November 23, 2010, between Valuesetters, Inc. and NetGames.com, incorporated by reference to Exhibit 2.1 to our Form 10/A dated July 25, 2014. 3.1 Articles of Incorporation of Valuesetters, Inc. filed on April 25, 1984, incorporated by reference to Exhibit 3.1 to our Form 10 dated September 3, 2013. 3.2 Amendment to Articles of Incorporation of Valuesetters, Inc. filed on September 7, 1999, incorporated by reference to Exhibit 3.2 to our Form 10 dated September 3, 2013. 3.3 Amendment to Articles of Incorporation of Valuesetters, Inc. filed on December 4, 2003, incorporated by reference to Exhibit 3.3 to our Form 10 dated September 3, 2013. 3.4 By-Laws of Valuesetters, Inc, incorporated by reference to Exhibit 3.4 to our Form 10 dated September 3, 2013. 3.5 Amendment to Articles of Incorporation of Netcapital Inc. filed on September 29, 2020, incorporated by reference to Exhibit 3.1 to our Form 8-K dated November 5, 2020. 10.1 Amended Secured Lending Agreement between Valuesetters, Inc. and Vaxstar LLC incorporated by reference to Exhibit 10.1 to our Form 10/A dated July 25, 2014 and to our Current Report on Form 8-K dated October 31, 2017. 10.2 Agreement and Plan of Merger by and Among Netcapital Funding Portal Inc., ValueSetters, Inc. and Netcapital Acquisition Vehicle Inc. incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated August 23, 2020. 31.1 Certification by the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).* 31.2 Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).* 32.1 Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 32.2 Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* * filed herewith 22 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 31, 2021 NETCAPITAL, INC. By: /s/ Cecilia Lenk Cecilia Lenk Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Coreen Kraysler Coreen Kraysler Chief Financial Officer (Principal Financial Officer) /s/ Avi Liss Secretary and Director August 31, 2021 Avi Liss /s/ Thomas Carmody Director August 31, 2021 Thomas Carmody /s/ Steven Geary Director August 31, 2021 Steven Geary 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of NetCapital Inc. (f/k/a Valuesetters, Inc.) and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of NetCapital Inc. and Subsidiaries (“the Company”) as of April 30, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2021 and 2020, and the results of its operations and its cash flows for the each of the years in the two-year period ended April 30, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Valuation of Investments Description of the Critical Audit Matter As discussed in Note 10 to the consolidated financial statements, the Company has investments in several entities which require the Company to initially value based on offering prices that are not considered observable and to periodically evaluate potential impairment by assessing whether the carrying value of the investments exceeds the estimated fair value, or by monitoring observable price changes from orderly transactions to measure estimated fair value. Auditing management's analysis includes tests that are complex and highly judgmental due to the estimation required to determine the fair value of each of the underlying investees. In particular, fair value estimates are sensitive to significant assumptions and factors such as expectations about future market and economic conditions, revenue growth rates, strategic plans, and historical operating results, among others. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures to evaluate management’s valuation of investments consisted of the following, among others: 1. Obtain and test management assumptions and analysis. 2. Obtain and review third-party market data, public filings, and funding activities of the investee entities. 3. Assess management’s key indicators of the investee operations, including analysis of operational growth, public filings, and future strategic and funding plans. Valuation of Intangibles Description of the Critical Audit Matter As discussed in Note 11 to the consolidated financial statements, the Company recognized $14.8 million of intangibles during November 2020, related to consideration paid for the acquisition of Netcapital Funding Portal Inc. Management's intangible valuation was complex and highly judgmental due to the significant estimation required to determine the fair value of the identifiable intangible assets acquired within the underlying business unit. In particular, the fair value estimate was sensitive to significant assumptions, such as the Company’s financial forecast, revenue growth rate, and operating costs, which are impacted by expectations about future market and economic conditions, along with the Company’s historical operating results. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures to evaluate management’s valuation of intangibles consisted of the following, among others: 1. Obtain and review management’s analysis and projections of future growth rates, including assessing methodologies and testing significant assumptions underlying the data. 2. Obtain and review data used in management’s analysis from third-party and public sources. 3. Assess the historical basis for estimates of future operating results, including data based on our audit results and knowledge of the Company’s historical activity. 4. Test the fair value of consideration exchanged and overall valuation of business combination. We have served as the Company’s auditor since 2017. Spokane, Washington August 31, 2021 F- 1 NETCAPITAL INC. YEARS ENDED APRIL 30, 2021 AND 2020 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Page Consolidated Financial Statements Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 – F-15 F- 2 NETCAPITAL INC. Consolidated Balance Sheets Assets: April 30, 2021 April 30, 2020 Cash and cash equivalents $ 2,473,959 $ 11,206 Accounts receivable net 1,356,932 — Prepaid expenses 653,861 465,555 Total current assets 4,484,752 476,761 Deposits 6,300 6,300 Deferred tax assets — 180,000 Purchased technology 14,803,954 143,455 Investment in affiliate 122,914 — Equity securities at fair value 6,298,008 1,406,982 Total assets $ 25,715,928 $ 2,213,498 Liabilities and Stockholders' Equity Current liabilities: Accounts payable Trade $ 308,506 $ 278,752 Related party 3,843,686 16,680 Accrued expenses 306,308 149,835 Stock subscription payable 1,199,996 — Deferred revenue 622 656 Interest payable 116,483 31,235 Deferred tax liability 433,000 — Related party debt 22,860 15,000 Secured note payable 1,000,000 1,000,000 Current portion of SBA loans 1,885,800 — Loan payable - bank 34,324 34,324 Demand notes payable — 7,860 Total current liabilities 9,151,585 1,534,342 Long-term liabilities: Long-term SBA loans, less current portion 2,385,800 — Total Liabilities 11,537,385 1,534,342 Commitments and contingencies — — Stockholders' equity: Common stock, $ .001 par value; 900,000,000 shares authorized, 2,178,766 and 417,059 shares issued and outstanding 2,178 417 Capital in excess of par value 15,168,987 3,141,021 Accumulated deficit ( 992,622 ) ( 2,462,282 ) Total stockholders' equity 14,178,543 679,156 Total liabilities and stockholders' equity $ 25,715,928 $ 2,213,498 See Accompanying Notes to the Financial Statements F- 3 NETCAPITAL INC. Consolidated Statements of Operations Year Ended Year Ended April 30, 2021 April 30, 2020 Revenues $ 4,721,003 $ 1,753,558 Costs of services 759,158 11,105 Gross profit 3,961,845 1,742,453 Costs and expenses: Stock-based compensation 680,611 356,252 Consulting expense 6,580 102,600 Marketing 44,929 12,863 Rent 49,196 50,769 Payroll and payroll related expenses 3,117,075 — General and administrative closts 464,955 72,747 Total costs and expenses 4,363,346 595,231 Operating income (loss) ( 401,501 ) 1,147,222 Other income (expense): Interest expense ( 87,333 ) ( 18,879 ) Realized loss on sale of investments — ( 527,540 ) Unrealized gain on equity securities 2,571,494 ( 185,952 ) Other income — 10,000 Total other income (expense) 2,484,161 ( 722,371 ) Net income before taxes 2,082,660 424,851 Net income tax (expense) benefit: Income taxes ( 613,000 ) ( 129,000 ) Change in deferred tax assets — 309,000 Net income tax (expense) benefit (613,000 ) 180,000 Net income $ 1,469,660 $ 604,851 Basic earnings per share $ 1.18 $ 1.50 Diluted earnings per share $ 0.89 $ 1.50 Weighted average number of common shares outstanding: Basic 1,250,002 402,284 Diluted 1,647,295 402,284 See Accompanying Notes to the Financial Statements F- 4 NETCAPITAL INC. Consolidated Statements of Stockholders' Equity For the Years Ended April 30, 2021 and 2020 Capial in Common Stock Excess of Accumulated Total Shares Amount Par Value Deficit Equity Balance, April 30, 2019 377,685 $ 378 $ 2,201,497 $ ( 3,067,133 ) $ ( 865,258 ) Q1 stock-based compensation 1,406 1 19,687 — 19,688 Net income, July 31, 2019 — — — 24,475 24,475 Balance, July 31, 2019 379,091 379 2,221,184 ( 3,042,658 ) ( 821,095 ) Q2 stock-based compensation 37,656 38 917,305 — 917,343 Net income, October 31, 2019 — 542,451 542,451 Balance, October 31, 2019 416,747 417 3,138,489 ( 2,500,207 ) 638,699 Q3 stock-based compensation 156 — 1,500 — 1,500 Net income, January 31, 2020 — — — 595,174 595,174 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 Q1 stock-based compensation 156 — 1,406 — 1,406 Net income, July 31, 2020 — — — 30,871 30,871 Balance, July 31, 2020 417,215 417 3,142,427 ( 2,431,411 ) 711,433 Q2 stock-based compensation 2,240 2 18,555 — 18,557 Net income, October 31, 2020 — — — 30,022 30,022 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 Return of shares of common stock ( 5,000 ) ( 5 ) 5 — — Q3 stock-based compensation 937 1 6,239 — 6,240 Net income, January 31, 2021 — — — 42,642 42,642 Balance, January 31, 2021 2,081,752 2,081 14,496,808 ( 2,358,747 ) 12,140,142 Q4 stock-based compensation 95,937 96 657,180 — 657,276 Shares issued for debt settlement 1,077 1 14,999 — 15,000 Net income, April 30, 2021 1,366,125 1,366,125 Balance, April 30, 2021 2,178,766 $ 2,178 $ 15,168,987 $ ( 992,622 ) $ 14,178,543 See Accompanying Notes to the Financial Statements F- 5 NETCAPITAL INC. Consolidated Statements of Cash Flows April 30, 2021 April 30, 2020 OPERATING ACTIVITIES Net income $ 1,469,660 $ 604,851 Adjustment to reconcile net income (loss) to net cash used in operating activities: Stock-based compensation 680,611 356,252 Non-cash revenue from the receipt of equity ( 2,319,532 ) ( 1,538,980 ) Provision for bad debts 60,325 — Impairment of assets — 185,952 Unrealized gain on equity securities ( 2,571,494 ) 527,540 Changes in deferred taxes 613,000 ( 180,000 ) Changes in non-cash working capital balances: Accounts receivable ( 1,417,257 ) 6,000 Contract receivable — 15,000 Prepaid expenses ( 35,913 ) — Accounts payable and accrued expenses 172,204 18,680 Deferred revenue ( 34 ) ( 15,055 ) Accrued interest payable 85,248 — Related party payable 12,314 16,156 Net cash used in operating activities ( 3,250,868 ) ( 3,604 ) INVESTING ACTIVITIES Proceeds from purchase of funding portal subsidiary 364,939 — Investment in affiliate ( 122,914 ) — Net cash provided by investing activities 242,025 — FINANCING ACTIVITIES Proceeds from SBA loans 4,271,600 — Proceeds from stock subscriptions 1,199,996 — Payment on related party note — ( 4,300 ) Cash flow provided by (used in) financing activities 5,471,596 ( 4,300 ) Net increase (decrease) in cash 2,462,753 ( 7,904 ) Cash and cash equivalents, beginning of the period 11,206 19,110 Cash and cash equivalents, end of the period $ 2,473,959 $ 11,206 Supplemental disclosure of cash flow information: Cash paid for taxes $ 4,988 $ — Cash paid for interest $ 2,067 $ 2,723 Supplemental Non-Cash Investing and Financing Information: Common stock issued as prepaid compensation $ 646,500 $ — Common stock issued to purchase subsidiary $ 11,331,248 $ — See Accompanying Notes to the Financial Statements F- 6 NETCAPITAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED APRIL 30, 2021 AND 2020 1. Description of Business and Summary of Accounting Principles Description of Business and Concentrations Netcapital Inc. (“Netcapital,” “we,” “our,” or the “Company”) is a fintech company with a scalable technology platform that allows private companies to raise capital online and provides private equity investment opportunities to investors. The company's consulting group, Netcapital Advisors, provides marketing and strategic advice and takes equity positions in select companies with disruptive technologies. The Netcapital funding portal is registered with the U.S. Securities & Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA), a registered national securities association. The consolidated financial statements are presented in United States dollars and have been prepared in accordance with generally accepted accounting principles in the United States of America. The Company’s fiscal year end is April 30. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of significant intercompany balances and transactions. The wholly owned subsidiaries are Netcapital Funding Portal Inc., an equity-based funding portal registered with the SEC, Netcapital Advisors Inc., which provides marketing and strategic advice to select companies, and AthenaSoft Corp., which has been inactive for the past two years. Income Taxes The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the tax authorities. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in income tax expense. The Company has determined that it had no significant uncertain tax positions requiring recognition or disclosure. Revenue Recognition under ASC 606 The Company recognizes service revenue from its consulting contracts, funding portal and 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 usually bills its customers before it provides any services and begins performing services after the first payment is received. 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. Judgments and Estimates The estimation of variable consideration for each performance obligation requires the Company to make subjective judgments. The Company enters into 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. F- 7 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 assets in the consolidated balance sheets and will be recognized during the succeeding twelve-month period. Deferred Revenue Deferred revenues represent billings or payments received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of annual plan subscription services and professional 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 years ended April 30, 2021 and 2020, which amounted to $ 4,721,003 and $ 1,753,558 , respectively, are considered contract revenues. Contract revenue as of April 30, 2021 and 2020, which has not yet been recognized, amounted to $ 622 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. Costs of Services Costs of services consist of direct costs that we pay to third parties in order to provide the services that generate revenue. Earnings Per Share Earnings per share is computed by dividing net income by the weighted-average number of shares outstanding. The Company has no stock options, warrants or convertible debt, but has a contingent consideration liability that requires it to issue up to 397,293 shares of common stock, and is dilutive. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company did not have any cash equivalents during fiscal 2021 and 2020. The Company uses three financial institutions for its cash balances and has maintained cash balances that exceed federally insured limits. Accounts Receivable The Company extends credit to its customers in the normal course of business and performs ongoing credit evaluations of its customers, maintaining an allowance for potential credit losses. Accounts receivable is reported net of the allowance for doubtful accounts. The allowance is based on management’s estimate of the amount of receivables that will be collected. The Company recorded an allowance for doubtful accounts of $60,325 and $0 as of April 30, 2021 and 2020, respectively. Stock-Based Compensation The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including the vesting of restricted stock grants to employees, to be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation expense and credited to common stock and capital in excess of par value during the period during which services are rendered. The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for common stock issued to consultants and other non-employees. These shares of common stock are issued as compensation for services provided to the Company and are accounted for based upon the fair market value of the common stock. The fair value of the equity instrument is charged directly to compensation expense, or to prepaid expenses in instances where stock was issued under a contractual arrangement to a consultant who agreed to provide services over a period of time. F- 8 Advertising Expenses Advertising and marketing expenses are recorded separately in the Statements of Operations and are expensed as incurred. Equity Securities All investments in equity securities are initially measured at cost. Cost is based upon either the cost of the investment, the fair value of the services provided or the estimated market value of the investment at the time it was acquired, whichever can be more clearly determined. If the Company identifies an observable price change in an orderly transaction for an identical or similar investment of the same issuer, the Company measures the equity security at fair value as of the date that the observable transaction occurred. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimate relates to investments, the allowance for doubtful accounts and the income tax valuation allowance. On a continual basis, management reviews its estimates, utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Determination of Fair Value Cash and cash equivalents, accounts receivable, and accounts payable In general, carrying amounts approximate fair value because of the short maturity of these instruments. Deferred Revenue Deferred Revenue represents revenues collected but not earned as of the year end. The Company renders services, or rights to use its software, over a specific time period and revenues are recognized as earned as time passes. Debt At April 30, 2021 and 2020, the Company’s secured and unsecured debt was carried at its face value plus accrued interest. The Company has no instruments with significant off balance sheet risk. Recent Accounting Pronouncements 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 will be effective for us in the first quarter of fiscal 2022 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new guidance 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. 2. Concentrations For the year ended April 30, 2021, the Company had one customer that constituted 30 % of its revenues, a second customer that constituted 15 % of its revenues, a third customer that constituted 14 % of its revenues and a fourth customer that accounted for 11 % of its revenues. For the year ended April 30, 2020, the Company had one customer that constituted 47 % of its revenues, a second customer that constituted 31 % of its revenues and a third customer that accounted for 13 % of its revenues. F- 9 3. Debt The following table summarizes components debt as of April 30, 2021 and 2020: Schedule of Debt 2021 2020 Interest Rate Secured lender $ 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 1,885,800 — 1.0 % 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 5,328,784 1,057,184 Less: current portion of long-term debt 2,942,984 1,057,184 Total long-term debt $ 2,385,800 $ — As of April 30, 2021 and 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, October 31, 2020, January 31, 2021 and April 30, 2021. The Lender was the largest shareholder of the Company owning 32.6% of the shares issued and outstanding as of April 30, 2020. However, with the purchase of Netcapital Funding Portal Inc., the Lender owns less than 10% of the Company and is no longer considered a related party. The Loan was amended on October 31, 2020 to change the maturity date to January 31, 2021, and increase the interest rate from 1.25% to 8% per annum. The Loan has been further amended to change the maturity date to April 30, 2022. 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 April 30, 2021 and 2020, the Company’s related-party unsecured notes payable totaled $22,860 and $15,000 , respectively. Demand notes payable totaled $ 0 and $ 7,860 as of April 30, 2021 and 2020. The demand notes totaling $ 7,860 were determined to be related party notes as of the date of the acquisition of Netcapital Funding Portal Inc. (“Funding Portal”) because the notes are from a board member of the Funding Portal and the former parent of the Funding Portal, which is now the Company’s largest shareholder, owning 1,671,360 shares of common stock of the Company, or 76.7% as of April 30, 2021. The Company also owes $34,324 as of April 30, 2021 and 2020 to Chase Bank. For the loan from Chase Bank, the Company pays interest only on a monthly basis, which is calculated at a rate of 5.5% per annum. On May 6, 2020, the Company borrowed $1,885,800 (the “May Loan”), on June 17, 2020 the Company borrowed $500,000 (the “June Loan”), and on February 2, 2021, the Company borrowed $1,885,800 (the “February Loan”) from an SBA loan program. The May loan bears interest at a rate of 1% per annum and the SBA has postponed any installment payments until September 6, 2021. The Company is applying for forgiveness of the May Loan and believes it will be forgiven in its entirety. The June Loan requires installment payments of $2,437 monthly, beginning on June 17, 2021, over a term of thirty years. However, the SBA has postponed the first installment payment for 12 months. 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. The February loan bears interest at a rate of 1% per annum and the due date of the first payment is May 22, 2022. The Company plans to apply for forgiveness of the February Loan and believes will be forgiven in its entirety. In fiscal 2020, the Company received a $10,000 advance from the U.S. Small Business Administration (“SBA”) in conjunction with an Economic Injury Disaster Loan application. Based upon SBA information regarding the advance payments that were made to U.S. businesses, the Company considers the $10,000 received as a grant and recorded the $10,000 as other income. As of April 30, 2021 future payments under debt obligations over each of the next five years and thereafter were as follows: Schedule of future payments under short-and long-term debt agreements Twelve months ended April 30: 2022 $ 2,942,984 2023 1,895,950 2024 11,478 2025 11,916 2026 12,370 Thereafter 454,086 Minimum future payments of principal $ 5,328,800 F- 10 4. Fair Value Measurements The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures of financial instruments on a recurring basis. Fair Value Hierarchy 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. Financial assets measured at fair value on a recurring basis are summarized below as of April 30, 2021 and 2020: Schedule of Financial assets measured at fair value on a recurring basis Level 1 Level 2 Level 3 Total April 30, 2021 Equity securities at fair value $ — $ 6,298,008 $ — $ 6,298,008 April 30, 2020 Equity securities at fair value $ — $ 1,406,982 $ — $ 1,406,982 Determination of Fair Value Under the Fair Value Measurements Topic of the FASB Accounting Standards Codification, the Company bases its 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 the Company’s 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, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future value. See Note 1 for a description of valuation methodologies used for assets and liabilities recorded at fair value and for estimating fair value where it is practicable to do so for financial instruments not recorded at fair value (disclosures required by the Fair Value Measurements Topic of the FASB Accounting Standards Codification). 5. Income Taxes 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%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. As a result of the Tax Act, the Company re-measured 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, 2021, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $ 890,000 expiring in the years of 2022 through 2035 . Utilization of the net operating losses may be subject to annual limitations provided by Section 382 of the Internal Revenue Code and similar state provisions. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of April 30, 2021 and 2020 were as follows: Schedule of Income Taxes 2021 2020 Deferred tax assets, net: Net operating loss carryforwards $ 141,000 $ 140,000 Bad debt expense 17,000 — Stock-based compensation 155,000 — Asset impairment loss — 40,000 Deferred tax assets 313,000 180,000 Deferred tax liability Unrealized gain 746,000 — Total deferred tax liability 746,000 — Total net deferred tax assets (liabilities) $ ( 433,000 ) $ 180,000 F- 11 The valuation allowance is $ 0 as of April 30, 2021 and April 30, 2020. . Company management believes that historical, current and expected earnings are sufficient to meet the more likely than not standard to enable the Company to utilize the deferred tax asset. The Company did not have any material unrecognized tax benefits as of April 30, 2021 and 2020. The Company does not expect the unrecognized tax benefits to significantly increase or decrease within the next twelve months. The Company recorded no interest and penalties relating to unrecognized tax benefits as of and during the years ended April 30, 2021 and 2020. The Company is subject to U.S. federal income tax, as well as taxes by various state jurisdictions. The Company is currently open to audit under the statute of limitations by the federal and state jurisdictions for the years ending April 30, 2019 through 2021. 6. Commitments and Contingencies Litigation The Company is subject to legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability, if any, is not likely to have a material effect on the financial condition, results of operations or liquidity of the Company. However, as the outcome of litigation or legal claims is difficult to predict, significant changes in the estimated exposures could occur. There are no known legal complaints or claims against the Company. The Company utilizes office space in Boston, Massachusetts, at a cost of approximately $3,600 per month, one-year membership agreement that ends on March 31, 2022. The membership agreement includes a deposit of $6,300 . A novel strain of coronavirus, or COVID-19, has spread throughout the world and has been declared to be a pandemic by the World Health Organization. As of the date this report was issued, our operations have not been significantly impacted by the COVID-19 outbreak. The number of people establishing accounts on our website Netcapital.com has more than doubled during the pandemic. Most of our employees work remotely from a home office to access our technology, which runs 24 hours a day on the internet. However, we cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on our financial condition, operations, and business plans for fiscal year 2022. Our operations have adapted social distancing practices, and the next expected milestones of our product may be impacted, and we may experience delays in anticipated timelines and milestones. 7. Stockholders’ Equity The Company is authorized to issue 900,000,000 shares of its common stock, par value $0.001. 2,178,766 and 417,059 shares were outstanding as of April 30, 2021 and 2020, 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 for the year ended April 30, 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 fiscal 2021, 99,270 shares of common stock were issued for stock-based compensation, 1,666,360 shares of common stock were issued to purchase Netcapital Funding Portal Inc., and 5,000 shares of common stock were returned to the Company in exchange for a 20% ownership of AthenaSoft Corp. that was acquired by the Company during fiscal 2018. The book value of the AthenaSoft Corp. shares surrendered by the Company was zero dollars, as the Company had recognized an impairment loss in a prior year. The Company also issued 1,077 shares of common stock, valued at $15,000, to pay a $15,000 liability. In fiscal 2020, 39,375 shares of common stock were issued for stock-based compensation. For the years ended April 30, 2021 and 2020, the Company recorded $ 680,611 and $ 356,252 , respectively, in stock-based compensation expense. As of April 30, 2021 and 2020, there was $ 631,878 and $ 609,010 of prepaid stock-based compensation expense. The table below presents the components of stock-based compensation expense for the years ended April 30, 2021 and 2020. Schedule of stock-based compensation expense Description April 30, 2021 April 30, 2020 Chief Executive Officer $ 161,107 $ 112,035 Chief Financial Officer 161,107 112,035 Chief Marketing Officer 31,693 7,061 Related party consultant 76,882 49,711 Marketing consultant 5,286 — Marketing consultant 119,059 — Marketing consultant 20,000 — Marketing consultant 28,595 — Business consultant 76,882 49,711 Total $ 680,611 $ 356,252 The table below presents the shares issued as compensation for the years ended April 30, 2021 and 2020: Year Ended Year Ended Description April 30, 2021 April 30, 2020 Chief Executive Officer — 13,125 Chief Financial Officer — 13,125 Chief Marketing Officer 3,646 625 Related party consultant — 6,250 Business consultant — 6,250 Marketing consultant 625 — Marketing consultant 20,000 — Marketing consultant 75,000 — Total 99,270 39,375 The table below presents the prepaid stock-based compensation expense as of April 30, 2021 and 2020: Year Ended Year Ended Description April 30, 2021 April 30, 2020 Chief Executive Officer $ 40,608 $ 201,715 Chief Financial Officer 40,608 201,715 Related party consultant 25,908 102,790 Business consultant 25,908 102,790 Marketing consultant 380,441 — Marketing consultant 118,405 — Total $ 631,878 $ 609,010 F- 12 8. Earnings Per Common Share Earnings per common share data was computed as follows: Schedule of earnings per share 2021 2020 Net income (loss) $ 1,469,660 $ 604,851 Weighted average common shares outstanding 1,250,002 402,284 Effect of dilutive securities 397,293 — Weighted average dilutive common shares outstanding 1,647,295 402,284 Earnings per common share – basic $ 1.18 $ 1.50 Earnings per common share – diluted $ 0.89 $ 1.50 397,293 shares that are issuable to satisfy a supplemental consideration liability were included for the calculation of earnings per share for the year ended April 30, 2021 because their effect is dilutive. No dilutive securities existed as of April 30, 2020. 9. Related Party Transactions The Company’s majority shareholder, Netcapital Systems LLC, owns 1,671,360 shares of common stock, or 76.7% of the Company as of April 30, 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. See Note 12 for details of an issuance of common stock to pay off $3,461,462 of this liability. In total the Company owed its largest shareholder $3,822,116 as of April 30, 2021. The company paid its majority shareholder $100,000 in fiscal 2021 for use of the software that runs the website www.netcapital.com. Compensation to officers in the years ended April 30, 2021 and 2020 consisted of common stock valued at $353,907 and $ 231,131 , respectively, and cash compensation of $332,724 and $72,000 , respectively. Compensation to a related party consultant in the years ended April 30, 2021 and 2020 consisted of common stock valued at $76,882 and $49,711 , respectively, and cash compensation of $81,431 and $26,200 , respectively. This consultant is also the controlling shareholder of Zelgor Inc. and the Company earned revenues from Zelgor Inc. of $1,400,000 in the year ended April 30, 2021. Compensation to two board members of Netcapital Systems LLC amounted to $162,123 and $0 in the years ended April 30, 2021 and 2020, respectively. One of these board members also received stock-based compensation of $76,882 and $ 49,711 for the years ended April 30, 2021 and 2020, respectively. We owe Steven Geary, a director, $31,680 as of April 30, 2021 and 2020. This obligation is not interest bearing. $ 16,680 is recorded as a related party trade accounts payable and $15,000 as a related party note payable. We have no signed agreements for the indebtedness to Mr. Geary. The Company made an investment of $122,914 in an affiliate, 6A Aviation Alaska Consortium, Inc., in conjunction with a land lease in an airport in Alaska. Our Chief Executive Officer is also the Chief Executive Officer of 6A Aviation Alaska Consortium, Inc. As a result of the investment, the Company is a 10% owner of 6A Aviation Consortium Inc. As of April 30, 2021 and 2020, we owed $9,490 and $0 to a company controlled by one of our directors. We paid cash compensation of $29,738 and $0 to this director for the years ended April 30, 2021 and 2020, respectively. On April 30, 2020, we sold 722 membership interest units (the "Units") of Netcapital Systems LLC ("Netcapital") to the company controlled by this related party at a price of $91.15 per Unit for a total of $65,823, which paid off all debt and accrued interest payable to the related party as of that date. The price per Unit was similar to an offer to purchase Units directly from Netcapital. The carrying amount of the 722 Units was $659,186, and the sale resulted in a realized loss of $593,363. Based upon the price of $91.15 per Unit, for the year ended April 30, 2020, the Company recorded an impairment loss of $185,952, which is not tax deductible, on the remaining Units in its possession. 10. 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 for the year ended April 30, 2021. 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 for the year ended April 30, 2021. ChipBrain subsequently sold identical ChipBrain units for $2.40 per unit on an online funding portal. 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 for the year ended April 30, 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 subsequently sold identical 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 were valued at $1.80 per unit based on a sales price of $1.80 per unit when the units were earned, or $540,000. In December 2020, KingsCrowd converted from a limited liability company to a corporation to facilitate raising capital under Regulation A. KingsCrowd filed a Form 1-A Offering Statement under the Securities Act of 1933. In connection with the conversion to a corporation, each membership interest unit converted into 12.71915 shares of common stock. As of April 30, 2021, the Company owns 3,815,745 shares of KingsCrowd Inc. The selling price of the stock is set at $1.00 per share in the preliminary offering circular. 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 April 30, 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 April 30, 2021, the Company earned $20,000 worth of stock. F- 13 The following table summarizes the components of equity securities as of April 30, 2021 and 2020: Schedule of investments April 30, 2021 April 30, 2020 Netcapital Systems LLC $ 48,128 $ 44,482 Watch Party LLC 235,400 — Zelgor Inc. 1,400,000 — ChipBrain LLC 1,704,480 — Vymedic, Inc. 20,000 — Deuce Drone LLC 2,350,000 822,500 KingsCrowd LLC 540,000 540,000 Total Investments at cost $ 6,298,008 $ 1,406,982 The above investments in equity securities are within the scope of ASC 321. The Company monitors the investments for any changes in observable prices from orderly transactions. All investments are initially measured at cost and evaluated for impairment. Impairment expense of $0 and $185,952 was recognized in the years ended April 30, 2021 and 2020, respectively. The Company identified that two securities, ChipBrain LLC and Deuce Drone LLC, that had an observable price change. The result of these price changes was an increase in the fair value of the equity securities totaling $2,571,494 in the fiscal year ended April 30, 2021, which was recorded in the income statement as an unrealized gain on equity securities. 11. 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. Schedule of Merger 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. The excess of purchase price over the total identifiable tangible net assets of $344,810 , 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 year ended April 30, 2021 include $834,981 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: F- 14 Schedule of Pro forma revenue and earnings 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 periods ended November 4, 2020 and 2019, respectively. 12. Subsequent Events The Company evaluated subsequent events through the date these financial statements were available to be issued. On June 2, 2021, the Company loaned $50,000 to a related party. The unpaid principal balance on the note is subject to an interest rate of 5 % per annum and matures on June 2, 2022 . On June 30, 2021, the Company loaned $50,000 to a related party. The unpaid principal balance on the note is subject to an interest rate of 8 % per annum and matures on June 30, 2022 . In July 2021, the Company issued 361,736 shares of its common stock as payment of $3,523,462 of supplemental consideration that was owed to its affiliate, Netcapital Systems Inc. The 361,736 shares of common stock include an aggregate of 32,458 shares of common stock, that paid off liabilities totaling $316,130, that were made to a company controlled by a member of the board of managers of Netcapital Systems LLC and to an individual manager. In July 2021, the Company completed an offering for gross proceeds of $1,592,400 in conjunction with the sale of restricted shares of common stock at a price of $9.00 per share. A total of 176,934 shares of common stock were issued. F- 15