Netcapital Inc S-1, filed Feb 14, 2022
Netcapital Inc. (NCPL)
As filed with the Securities and Exchange Commission on February 11, 2022
Registration Statement No. __________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter) |
| 6199 | ||||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
1 Lincoln Street
Boston, MA 02111
Phone: (781) 925-1700
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Coreen Kraysler
Chief Financial Officer
1 Lincoln Street
Boston, MA 02111
Phone: (781) 925-1700
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
Copies to:
Richard A. Friedman, Esq. Greg Carney, Esq. |
Oded Har-Even,
Esq. Angela Gomes, Esq. |
| Sheppard Mullin Richter & Hampton, LLP | Sullivan & Worcester LLP |
| 30 Rockefeller Plaza | 1633 Broadway |
| New York, NY 10112 | New York, NY 10019 |
| Phone: (212) 653-8700 | Phone: (212) 660-5002 |
Approximate date of proposed sale to public: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on the Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering: ☐
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act of 1934, as amended.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a) may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
| PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION | DATED FEBRUARY 11, 2022 |
Shares
Common Stock
Netcapital Inc.
This is a firm commitment public offering of shares of common stock, par value $0.001 per share, or common stock, of Netcapital Inc. We are offering an aggregate of shares of our common stock, $0.001 par value per share, based on an assumed public offering price of $ per share (which is based on the last reported sales price of our common stock on , 2022).
Our common stock is presently quoted on the OTCQX under the symbol “NCPL”. We have applied to have our common stock listed on The Nasdaq Capital Market under the symbol “NCPL”. No assurance can be given that our application will be approved. If our application is not approved, we will not consummate this offering. On February 9, 2021, the last reported sale price for our common stock on the OTCQX was $11.65 per share.
Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 9 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| Per Share | Total | |||||||||||
| Public offering price | $ | $ | ||||||||||
| Underwriting discounts and commissions(1) | $ | $ | ||||||||||
| Proceeds to us, before expenses(2) | $ | $ | ||||||||||
| (1) | Underwriting discounts and commissions do not include a non-accountable expense allowance equal to 1.0% of the gross proceeds initial public offering price payable to the underwriters. We refer you to “Underwriting” beginning on page 54 for additional information regarding underwriters’ compensation. |
| (2) | The amount of offering proceeds to us presented in this table does not give effect to any exercise of the: (i) over-allotment option (if any) we have granted to the Representative as described below or (ii) warrants to purchase shares of our common stock, or the Representative’s Warrants, to be issued to ThinkEquity LLC, or ThinkEquity or the Representative. |
We have granted a 45-day option to the Representative to purchase up to additional shares of our common stock, solely to cover over-allotments, if any.
The underwriters expect to deliver our shares to purchasers in the offering on or about , 2022.
ThinkEquity
The date of this prospectus is , 2022
TABLE OF CONTENTS
| SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | v | ||
| BASIS OF PRESENTATION | v | ||
| PROSPECTUS SUMMARY | 1 | ||
| THE OFFERING | 6 | ||
| RISK FACTORS | 9 | ||
| USE OF PROCEEDS | 20 | ||
| MARKET FOR OUR COMMON STOCK | 20 | ||
| DIVIDEND POLICY | 21 | ||
| CAPITALIZATION | 21 | ||
| DILUTION | 22 | ||
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 23 | ||
| OUR BUSINESS | 28 | ||
| LEGAL PROCEEDINGS | 37 | ||
| MANAGEMENT | 37 | ||
| EXECUTIVE COMPENSATION | 42 | ||
| CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS | 44 | ||
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 46 | ||
| SHARES ELIGIBLE FOR FUTURE SALE | 48 | ||
| DESCRIPTION OF SECURITIES | 50 | ||
| UNDERWRITING | 54 | ||
| LEGAL MATTERS | 61 | ||
| EXPERTS | 61 | ||
| WHERE YOU CAN FIND MORE INFORMATION | 61 | ||
| INDEX TO FINANCIAL STATEMENTS | F-1 |
You should rely only on information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are not making an offer of these securities in any state or other jurisdiction where the offer is not permitted. The information in this prospectus may only be accurate as of the date on the front of this prospectus regardless of time of delivery of this prospectus or any sale of our securities.
No person is authorized in connection with this prospectus to give any information or to make any representations about us, the common stock hereby or any matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy our common stock in any circumstance under which the offer or solicitation is unlawful. Neither the delivery of this prospectus nor any distribution of our common stock in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus.
Neither we nor the Underwriter have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus. |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains express or implied forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations. All statements, other than statements of historical fact, contained in this prospectus and in any related prospectus supplement are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “project,” “continue,” “potential,” “ongoing” or the negative of these terms or other comparable terminology.
Forward-looking statements are subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are difficult to predict and beyond our control, which could cause our actual results to differ materially from the results expressed or implied in such forward-looking statements. These and other risks, uncertainties and contingencies are described elsewhere in this prospectus, including under “Risk Factors,” and in the documents incorporated by reference herein, and include the following factors:
| · | capital requirements and the availability of capital to fund our growth and to service our existing debt; | |
| · | difficulties executing our growth strategy, including attracting new issuers and investors; | |
| · | our anticipated use of the net proceeds from this offering; | |
| · | economic uncertainties and business interruptions resulting from the coronavirus COVID-19 global pandemic and its aftermath; | |
| · | as restrictions related to the coronavirus COVID-19 global pandemic are removed and face-to-face economic activities normalize, it may be difficult for us to maintain the recent sales gains that we have experienced; | |
·
|
all the risks of acquiring one or more complementary businesses, including identifying a suitable target, completing comprehensive due diligence uncovering all information relating to the target, the financial stability of the target, the impact on our financial condition of the debt we may incur in acquiring the target, the ability to integrate the target’s operations with our existing operations, our ability to retain management and key employees of the target, among other factors attendant to acquisitions of small, non-public operating companies; | |
| · | difficulties in increasing revenue per issuer; | |
| · | challenges related to hiring and training fintech employees at competitive wage rates; | |
| · | difficulties in increasing the average number of investments made per investor; | |
| · | shortages or interruptions in the supply of quality issuers; | |
| · | our dependence on a small number of large issuers to generate revenue; | |
| · | negative publicity relating to any one of our issuers; | |
| · | competition from other online capital portals with significantly greater resources than we have; | |
| · | changes in investor tastes and purchasing trends; | |
| · | our inability to manage our growth; | |
| · | our inability to maintain an adequate level of cash flow, or access to capital, to meet growth expectations; | |
| · | changes in senior management, loss of one or more key personnel or an inability to attract, hire, integrate and retain skilled personnel; | |
| · | labor shortages, unionization activities, labor disputes or increased labor costs, including increased labor costs resulting from the demand for qualified employees; | |
| · | our vulnerability to increased costs of running an online portal on Amazon Web Services; | |
| · | our vulnerability to increasing labor costs; | |
| · | the impact of governmental laws and regulation; | |
| · | failure to obtain or maintain required licenses; | |
| · | changes in economic or regulatory conditions and other unforeseen conditions that prevent or delay the development of a secondary trading market for shares of equity that are sold on our online portal; | |
| · | inadequately protecting our intellectual property or breaches of security of confidential user information; and | |
| · | our expectations regarding having our securities listed on The Nasdaq Capital Market. |
These forward-looking statements speak only as of the date of this prospectus. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this prospectus after we distribute this prospectus, whether as a result of any new information, future events or otherwise.
TRADEMARKS AND TRADE NAMES
This prospectus includes trademarks that are protected under applicable intellectual property laws and are the Company’s property [or the property of one of the Company’s subsidiaries. This prospectus also contains trademarks, service marks, trade names and/or copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that the owner will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names.
INDUSTRY AND MARKET DATA
Unless otherwise indicated, information contained in this prospectus concerning the Company’s industry and the markets in which it operates, including market position and market opportunity, is based on information from management’s estimates, as well as from industry publications and research, surveys and studies conducted by third parties. The third-party sources from which the Company has obtained information generally state that the information contained therein has been obtained from sources believed to be reliable, but the Company cannot assure you that this information is accurate or complete. The Company has not independently verified any of the data from third-party sources nor has it verified the underlying economic assumptions relied upon by those third parties. Similarly, internal company surveys, industry forecasts and market research, which the Company believes to be reliable, based upon management’s knowledge of the industry, have not been verified by any independent sources. The Company’s internal surveys are based on data it has collected over the past several years, which it believes to be reliable. Management estimates are derived from publicly available information, its knowledge of the industry, and assumptions based on such information and knowledge, which management believes to be reasonable and appropriate. However, assumptions and estimates of the Company’s future performance, and the future performance of its industry, are subject to numerous known and unknown risks and uncertainties, including those described under the heading “Risk Factors” in this prospectus and those described elsewhere in this prospectus, and the other documents the Company files with the U.S. Securities and Exchange Commission, or SEC, from time to time. These and other important factors could result in its estimates and assumptions being materially different from future results. You should read the information contained in this prospectus completely and with the understanding that future results may be materially different and worse from what the Company expects. See the information included under the heading “Special Note Regarding Forward-Looking Statements.”
v
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and does not contain all the information that you should consider in making your investment decision. Before deciding to invest in our securities, you should read this entire prospectus carefully, including the sections of this prospectus entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes contained elsewhere in this prospectus. Unless the context otherwise requires, references in this prospectus to the “Company,” “we,” “us,” and “our” refer to Netcapital, Inc. and its subsidiaries.
Company Overview
Netcapital Inc. is a fintech company with a scalable technology platform that allows private companies to raise capital online from accredited and non-accredited investors. We give all investors the opportunity to access investments in private companies. Our model is disruptive to traditional private equity investing and is based on Title III, Reg CF of the JOBS Act. We generate fees from listing private companies on our portals. Our consulting group, Netcapital Advisors, provides marketing and strategic advice in exchange for equity positions. The Netcapital funding portal is registered with the SEC, is a member of the Financial Industry Regulatory Authority, or FINRA, a registered national securities association, and provides investors with opportunities to invest in private companies.
Our Business
We provide private company investment access to accredited retail and non-accredited retail investors through our online portal (www.netcapital.com). The Netcapital funding portal charges a $5,000 engagement fee and a 4.9% success fee for capital raised at closing. In addition, the portal generates fees for other ancillary services, such as rolling closes. Netcapital Advisors generates fees and equity stakes from consulting in select portfolio and non-portfolio clients. We generated revenues of $1,825,009 with costs of service of $46,080 in the six months ended October 31, 2021 for a gross profit of $1,778,929 in the six months ended October 31, 2021 as compared to revenues of $2,943,486 with costs of service of $714,224 in the six-months ended October 31, 2020 for a gross profit of $1,779,762 in the six months ended October 31, 2020. We generated revenues of $4,723,001 with costs of service of $759,158 in the year ended April 30, 2021 for a gross profit of $3,961,841 in the year ended April 30, 2021 as compared to revenues of 1,753,558 with costs of service of $11,105 in the year ended April 30, 2020 for a gross profit of $1,742,453 in the year ended April 30, 2020.
Funding Portal
Netcapital.com is an SEC-registered funding portal that enables private companies to raise capital online, while investors are able to invest from anywhere in the world, at any time, with just a few clicks. Securities offerings on the portal are accessible through individual offering pages, where companies include product or service details, market size, competitive advantages, and financial documents. Companies can accept investment from anyone, including friends, family, customers, employees, etc.
In addition to access to the funding portal, Netcapital provides the following services:
● a fully automated onboarding process;
● automated filing of required regulatory documents;
● compliance review;
● custom-built offering page on our portal website;
● third party transfer agent and custodial services;
● email marketing to our proprietary list of investors;
● rolling closes, which provide potential access to liquidity before final close date of offering; and
● assistance with annual filings.
● direct access to our team for ongoing support.
1
Consulting Business
The company's consulting group, Netcapital Advisors helps companies at all stages to raise capital. Netcapital Advisors provides strategic advice, technology consulting and digital marketing services to assist with fundraising campaigns on the Netcapital platform. The company also acts as an incubator and accelerator, taking equity stakes in select disruptive start-ups.
Netcapital Advisors’ services include:
● incubation of technology start-ups;
● investor introductions;
● digital marketing;
● website design, software and software development;
● message crafting, including pitch decks, offering pages, and ad creation;
● strategic advice; and
● technology consulting.
Regulatory Overview
In an effort to enhance economic growth and to democratize access to private investment opportunities, Congress finalized the Jumpstart Our Business Startups Act, or JOBS Act, in 2016. Title III of the JOBS Act enabled early-stage companies to offer and sell securities to the general public for the first time. The SEC then adopted Regulation Crowdfunding, or Reg CF, in order to implement the JOBS Act’s crowdfunding provisions.
Reg CF has several important features that changed the landscape for private capital raising and investment. For the first time, this regulation:
| ● | Allowed the general public to invest in private companies, no longer limiting early-stage investment opportunities to less than 10% of the population; |
| ● | Enabled private companies to advertise their securities offerings to the public (general solicitation); and |
| ● | Conditionally exempted securities sold under Section 4(a)(6) from the registration requirements of the Securities and Exchange Act of 1934, as amended, or the Exchange Act. |
Our Market
Established by the JOBS Act, the funding portal industry remains in its infancy. Title III of the JOBS Act outlines Reg CF, which traditionally allowed private companies to raise up to $1.07 million from all Americans. In March 2021, regulatory enhancements by the SEC went into effect and increased the limit to $5 million. These amendments increased the offering limits for Reg CF, Regulation A and Regulation D, Rule 504 offerings as follows; Reg CF increased to $5 million, Regulation D, Rule 504 moved to $10 million from $5 million; Regulation A Tier 2 rose to $75 million from $50 million.
Reg CF private company investments accounted for approximately $490 million in 2021, according to KingsCrowd, versus $205 million during 2020. We believe a significant opportunity exists to disrupt private capital markets via the Netcapital portal.
Private capital markets reached $7.4 trillion at the end of 2020, per Morgan Stanley, and this number is expected to reach $13 trillion over the next five years. Within this market, private equity represents the largest share, with assets in excess of $3 trillion and a 10-year CAGR of 10%. Since 2000, global private equity, or PE, net asset value has increased almost tenfold, nearly three times faster than the size of the public equity market. Both McKinsey and Boston Consulting Group predict that this strong growth will continue, as investors allocate increasing amounts to private equity, due to historically higher returns and lower volatility than public markets.
2
Our Technology
The Netcapital platform is a scalable, real-time, transaction processing engine that runs without human intervention, 24 hours a day, seven days a week. For companies raising capital, the technology provides fully automated onboarding with integrated regulatory filings. Funds are collected from investors and held in escrow until the offering closes.
For entrepreneurs, the technology facilitates access to capital at low cost. For investors, the platform provides access to investments in private, early-stage companies that were previously unavailable to the general public. Both entrepreneurs and investors can track and view their investments through their dashboard on netcapital.com. The platform currently has almost 100,000 users.
Scalability was demonstrated in November 2021, when the platform processed more than 2,000 investments in less than two hours, totaling more than $2 million.
Our infrastructure is designed in a way that can horizontally scale to meet our capacity needs. Using Ansible playbooks and Amazon AMIs, we are able to automate the creation and launch of our production web and application programming interface, or API, endpoints in order to replicate them as needed behind load balancers (ELBs).
Additionally, all of our public facing endpoints live behind CloudFlare to ensure protection from large scale traffic fluctuations (including DDoS attacks).
Our main database layer is built on Amazon RDS and features a Multi-AZ deployment that can also be easily scaled up or down as needed. General queries are cached in our API layer, and we monitor to optimize very complex database queries that are generated by the API. Additionally, we cache the most complex queries (such as analytics data) in our NoSQL (Mongo) data store for improved performance.
Most of our central processing unit, or CPU, intensive data processing happens asynchronously through a worker/jobs system managed by AWS ElastiCache’s Redis endpoint. This component can be easily fine-tuned for any scale necessary.
We license the technology from our affiliate, Netcapital Systems LLC.
Competitive Advantages
We believe we provide the lowest cost solution for digital capital raising versus our peer group (StartEngine Crowdfunding, Inc., Wefunder Inc. and Republic Core LLC). Our access and onboarding of new clients are superior due to our facilitated technology platforms. Our network is rapidly expanding as a result of our enhanced marketing and broad distribution to reach new investors.
Our competitors include StartEngine Crowdfunding, Inc., Wefunder,Inc. and Republic Core LLC . Given the rapid growth in the industry and its potential to disrupt the multi-billion dollar private capital market, there is sufficient room for multiple players.
Our Strategy
Two major tailwinds are driving accelerated growth in the shift to digital fundraising: the COVID-19 pandemic and the increase in funding limits under Reg CF. The pandemic drove a rapid need to bring as many processes as possible online. With travel restrictions in place and most people in lockdown, entrepreneurs were no longer able to fundraise in person and have increasingly turned to online capital raising through funding portals.
3
There are numerous industry drivers and tailwinds that complement investor demand for access to investments in private companies. To capitalize on these, our strategy is to:
| ● | Generate New Investor Accounts. Growing the number of investor accounts on our platform is a top priority. Investment dollars continue to flow through our platform are the key revenue driver. When issuers advertise their offerings, they are generating new investor accounts for us at no cost to Netcapital. We plan to supplement our issuers' spend on advertising by increasing our digital marketing spend as well, which may include virtual conferences going forward. |
| ● | Hire Additional Business Development Staff. We seek to hire additional business development staff that is technology advanced and financially passionate about capital markets to handle our growing backlog of potential customers. |
| ● | Increase the Number of Companies on Our Platform via Marketing. When a new company lists on our platform, they bring their customers, supporters, and brand ambassadors as new investors to Netcapital. We plan to increase our marketing budget to help grow our portal and advisory clients. |
| ● | Invest in Technology. Technology is critical to everything that we do. We plan to invest in developing innovative technologies that enhance our platform and allow us to pursue additional service offerings. For example, we plan on developing a dedicated mobile app in 2022 to make our platform more accessible. |
| ● | Incubate and accelerate our advisory portfolio clients. The advisory portfolio and our equity interests in select advisory clients represent potential upside for our shareholders. We seek to grow this model of advisory clients. |
| ● | Expand Internationally. We believe there is a significant opportunity to expand into Europe and Asia as an appetite abroad grows for U.S. stocks. |
| ● | Open ATS/Secondary Transfer Feature. Lack of liquidity is a key issue for investors in private companies as private markets lack a liquidity feature in our targeted market. We plan to open a Secondary Transfer Feature to provide potential liquidity to investors who participate in our primary offerings on the Netcapital platform. |
| ● | New Verticals Represent a Compelling Opportunity. We operate in a regulated market supported by the JOBS Act. We may pursue expanding our model to include Regulation A and Regulation D offerings. |
Our Management
Netcapital’s management team is experienced in finance, technology, entrepreneurship, and marketing.
Our Chairman and Chief Executive Officer, or CEO, Dr. Cecilia Lenk, was formerly Vice President of Technology and Digital Design at Decision Resources Inc., a global company serving the biopharmaceutical market, where she oversaw the implementation of new technologies, products, and business processes. Prior to joining Decision Resources, she founded a technology firm that built a patented platform for online research. She has a Ph.D. in Biology from Harvard University and a B.A. (with honors) in Environmental Engineering from Johns Hopkins University.
Coreen Kraysler, CFA, is our Chief Financial Officer, or CFO. With over 30 years of investment experience, she was formerly a Senior Vice President and Principal at Independence Investments, where she managed several 5-star rated mutual funds 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. She received a B.A. in Economics and French, cum laude from Wellesley College and a Master of Science in Management from MIT Sloan.
Jason Frishman is the founder and Chief Executive Officer of our funding portal subsidiary, Netcapital Funding Portal Inc. Mr. Frishman founded netcapital.com to help reduce the systemic inefficiencies early-stage companies face in securing capital. He currently holds advisory positions at leading organizations in the financial technology ecosystem and has spoken as an external expert at Morgan Stanley, University of Michigan, YPO, and others. Mr. Frishman has a background in the life sciences and previously conducted research in medical oncology at the Dana Farber Cancer Institute and cognitive neuroscience at the University of Miami, where he graduated summa cum laude with a B.S. in Neuroscience.
4
Corporate Information
The Company was incorporated in Utah in 1984 as DBS Investments, Inc., or DBS. DBS merged with Valuesetters L.L.C. in December 2003 and changed its name to Valuesetters, Inc. In November 2020, the Company purchased Netcapital Funding Portal Inc. from Netcapital Systems, LLC and changed the name of the Company from Valuesetters, Inc. to Netcapital Inc.
Our principal executive offices are located at State Street Financial Center, One Lincoln Street, Boston, Massachusetts and our telephone number is 781-925-1700. We maintain a website at www.netcapitalinc.com. Information contained on or accessible through our website is not, and should not be considered, part of, or incorporated by reference into, this prospectus and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus in deciding whether to purchase our securities.
Implications of Being a Smaller Reporting Company
We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.
We are a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our common stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. As a smaller reporting company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Recent Developments
February 2022 Private Placement of Convertible Notes
On February 9, 2022, we issued and sold in a private placement $300,000 of unsecured convertible promissory notes, or the February 2022 Notes. These notes bear interest at a rate of 8% per annum and have a maturity date of February 9, 2023. In addition, these February 2022 Notes shall automatically convert simultaneously with the closing of a Qualified Equity Financing (as defined below) into a number of securities sold in the Qualified Equity Financing equal to the quotient obtained by dividing (a) an amount equal to the amount of the February 2022 Notes outstanding on the closing date of such Qualified Equity Financing by (b) a conversion price equal to the lesser of (1) $10.00 and (2) 80% of the price per shares paid for securities sold in such Qualified Equity Financing upon the closing of such Qualified Equity Financing . A “Qualified Equity Financing” means the offer and sale for cash by us of any of our equity securities with the principal purpose of raising capital and that results in aggregate gross proceeds to us of at least $5,000,000 and “Subsequent Round Securities” means the equity securities sold in the Qualified Equity Financing. We intend to use the net proceeds for working capital and general corporate purposes. The February 2022 Notes were issued under the exemption from registration provided by Section 4(a)(2) and/or Rule 506 of the Securities Act of 1933, as amended. Upon the closing of this offering the February 2022 Notes will convert into shares of our Common Stock.
July 2021 Private Placement
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.
5
THE OFFERING
| Securities offered by us: | An aggregate of shares of our common stock at a price of $ per share. |
| Common stock outstanding before the offering | 2,865,610 shares of common stock. |
| Common stock to be outstanding after the offering(1) | shares of common stock. If the Representative’s over-allotment option is exercised in full, the total number of shares of common stock outstanding immediately after this offering would be . |
| Option to purchase additional shares | We have granted the Representative a 45-day option to purchase up to additional shares of our common stock to cover allotments, if any. |
| Use of proceeds | We intend to use the net proceeds of this offering for research and development activities, sales and marketing, and for general working capital purposes and potential acquisitions of other companies, products or technologies, though no such acquisitions are currently contemplated. In addition, we may use up to $1,500,000 for the retirement of indebtedness, of which (i) $1,000,000 constitutes indebtedness having an 8% interest rate and a maturity date of April 30, 2023 and (ii) $500,000 constitutes indebtedness having a 3.75% interest rate and a maturity date of June 2050. See “Use of Proceeds” on page 20. |
| Risk factors | Investing in our securities is highly speculative and involves a high degree of risk. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 9 before deciding to invest in our securities. |
| Trading symbol | Our common stock is currently quoted on the OTCQX under the trading symbol “NCPL”. We have applied to list our common stock on Nasdaq under the same symbol upon our satisfaction of the exchange’s initial listing criteria. No assurance can be given that our listing application will be approved. If our listing application is not approved by Nasdaq, we will not consummate this offering. |
| Lock-up Agreements | We and our directors, officers and holders of 5% or more of our outstanding shares as of the date of this prospectus have agreed with the underwriters not to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible into common stock for a period of six (6) months from the date of the closing date of this offering in the case of the Company’s directors and officers and three (3) months from the date of this offering in the case of the company and 5% or greater holders. See “Underwriting” section on page 54. |
6
| (1) | The number of shares of our common stock to be outstanding after this offering is based on 2,896,844 shares of our common stock outstanding as of February 10, 2022 and excludes the following : |
| · | 28,000 shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan. | |
| · | [ ] shares of common stock issuable upon exercise of warrants with a weighted average exercise price of $[ ] per share; | |
| · | 39,901 shares of common stock issuable upon conversion of $388,642 outstanding liabilities due in conjunction with the acquisition of Netcapital Funding Portal Inc.; | |
| 272,000 shares of common stock issuable upon exercise of outstanding options with an exercise price of $10.50 per share; | ||
| [ ] shares of the Company’s common stock underlying unsecured convertible notes; and | ||
| · | [ ] shares of the Company’s common stock underlying the Warrants and Representative’s Warrants. |
Except as otherwise indicated herein, all information in this prospectus reflects or assumes:
| · | no exercise of the outstanding options or warrants described above; and | |
| · | no exercise of the underwriters’ option to purchase up to an additional shares of common stock to cover over-allotments, if any. |
7
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents our selected historical consolidated financial data for the periods indicated. The selected historical consolidated financial data for the years ended April 30, 2021 and 2020 are derived from our audited financial statements. The summary historical financial data for the three-month periods ended October 31, 2021 and 2020 are derived from our unaudited financial statements.
Historical results are included for illustrative and informational purposes only and are not necessarily indicative of results we expect in future periods, and results of interim periods are not necessarily indicative of results for the entire year. The data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.
| Year Ended | Year Ended | 6 Months Ended | ||||||||||||||
| Income Statement Data: |
April 30, 2021 |
April 30, 2020 |
October 31, 2021 |
October 31, 2020 | ||||||||||||
| Sales | $ | 4,721,003 | $ | 1,753,558 | $ | 1,825,009 | $ | 2,493,486 | ||||||||
| Cost of operations | $ | 5,122,504 | $ | 606,336 | $ | 3,226,328 | $ | 2,386,631 | ||||||||
| Income (loss) from operations | $ | (401,501 | ) | $ | 1,147,222 | $ | (1,401,220 | ) | $ | 106,855 | ||||||
| Interest expense | $ | (87,333 | ) | $ | (18,879 | ) | $ | (70,271 | ) | $ | (23,564 | ) | ||||
| Other income (expense)(4) | $ | 2,571,494 | $ | (175,952 | ) | $ | 3,275,745 | $ | — | |||||||
| Income (loss) before income taxes | $ | 2,082,660 | $ | 424,851 | $ | 1,804,254 | $ | 60,893 | ||||||||
| Benefit (provision) for income taxes | $ | (613,000 | ) | $ | (129,000 | ) | $ | (621,000 | ) | $ | 22,398 | |||||
| Net income (loss) | $ | 1,469,660 | $ | 604,851 | $ | 1,183,254 | $ | 60,893 | ||||||||
| Per Share Data: | ||||||||||||||||
| Net income (loss) per share – basic | 1.18 | 1.50 | 0.48 | 0.15 | ||||||||||||
| Net income (loss) per share – diluted | 0.89 | 1.50 | 0.47 | 0.15 | ||||||||||||
| Weighted average shares outstanding - basic | 1,250,002 | 402,284 | 2,462,251 | 415,726 | ||||||||||||
| Weighted average shares outstanding - diluted | 1,647,295 | 402,284 | 2,497,808 | 415,726 | ||||||||||||
|
Consolidated Statement of Cash Flow Data: |
||||||||||||||||
| Cash (used in) operating activities | $ | (3,250,868 | ) | $ | (3,604 | ) | $ | (1,898,126 | ) | $ | (1,941,012 | ) | ||||
| Net cash provided by (used in) investing activities | $ | 242,025 | $ | — | $ | (247,166 | ) | $ | — | |||||||
| Net cash provided by (used in) financing activities | $ | 5,471,596 | $ | (4,300 | ) | $ | 612,299 | $ | 2,385,800 | |||||||
| Balance Sheet Data: | April 30, 2021 | October 31, 2021 (Actual) |
October 31, 2021 (As Adjusted) | |||||||
| Cash | $ | 2,473,959 | $ | 940,966 | ||||||
| Equity securities at fair value(2) | $ | 6,298,008 | $ | 9,623,753 | ||||||
| Total assets | $ | 25,715,928 | $ | 28,284,919 | ||||||
| Total debt(3) | $ | 5,328,784 | $ | 5,328,784 | ||||||
| Total stockholders’ equity | $ | 25,715,928 | $ | 20,501,783 | ||||||
| (1) | We have an April 30 fiscal year end. |
|
(2) |
Investments are monitored for any changes in observable prices from orderly transactions. |
| (3) | Total debt includes three Small Business Administration, or SBA, loans and a secured loan of $1,000,000 covering substantially all of the Company’s assets. |
| (4) | The result of price changes in the fair value of equity securities is the largest component of other income. |
8
RISK FACTORS
Investing in our securities involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus, before making your decision to invest in our securities. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition and cash flows and, if so, our prospects would likely be materially and adversely affected. If any of such events were to happen, the trading price of our securities in any market that may develop for our securities could decline and you could lose all or part of your investment.
Risks Related to Our Business and Growth Strategy
We have a limited operating history and our profits have been generated primarily by unrealized gains from equity securities we own in other companies. Although we have been profitable, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by a small developing company.
We were incorporated in the State of Utah in April 1984. Although we have reported earnings in the year ended April 30, 2021 and the six months ended October 31, 2021, the majority of our earnings came from unrealized gains in equity securities that we own. These securities have observable prices but are not liquid. Furthermore, the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by a small developing company starting a new business enterprise and the highly competitive environment in which we will operate. Since we have a limited operating history, we cannot assure you that our business will maintain profitability.
We have substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenues.
We currently derive a significant portion of our revenues from a limited number of customers. During the six months ended October 31, 2021, sales to two customers individually totaled approximately $500,000 and $400,000, and approximately $900,000 in the aggregate, or approximately 75% of our total revenues for the period. For the year ended April 30, 2021, we had one customer that constituted 30% of our revenues, a second customer that constituted 15% of our revenues, a third customer that constituted 14% of our revenues, and a fourth customer that accounted for 11% of our revenues. For the year ended April 30, 2020, we had one customer that constituted 47% of our revenues, a second customer that constituted 31% of our revenues, and a third customer that accounted for 13% of our revenues. There are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of customers. It is not possible for us to predict the future level of demand for our services that will be generated by these customers or new customers, or the future demand for the products and services of these customers or new customers. If any of these customers experience declining or delayed sales due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our products which could have an adverse effect on our margins and financial position and could negatively affect our revenues and results of operations and/or trading price of our common stock.
We operate in a regulatory environment that is evolving and uncertain.
The regulatory framework for online capital formation or crowdfunding is very new. The regulations that govern our operations have been in existence for a very few years. Further, there are constant discussions among legislators and regulators with respect to changing the regulatory environment. New laws and regulations could be adopted in the United States and abroad. Further, existing laws and regulations may be interpreted in ways that would impact our operations, including how we communicate and work with investors and the companies that use our services and the types of securities that our clients can offer and sell on our platform.
We operate in a highly regulated industry.
We are subject to extensive regulation and failure to comply with such regulation could have an adverse effect on our business. Further, our subsidiary Netcapital Funding Portal Inc is registered as a funding portal. As a funding portal we have to comply with stringent regulations, and the operation of our funding portal is frequently subject to examination, constraints on its business, and in some cases fines. In addition, some of the restrictions and rules applicable to our subsidiary could adversely affect and limit some of our business plans.
Our funding portal’s service offerings are relatively new in an industry that is still quickly evolving.
The principal securities regulations that we work with, Rule 506(c) and Reg CF, have only been in effect in their current form since 2013 and 2016, respectively. Our ability to continue to penetrate the market remains uncertain as potential issuer companies may choose to use different platforms or providers (including, in the case of Rule 506(c) and Regulation A, using their own online platform), or determine alternative methods of financing. Investors may decide to invest their money elsewhere. Further, our potential market may not be as large, or our industry may not grow as rapidly as anticipated. Success will likely be a factor of investing in the development and implementation of marketing campaigns, repeat business from both issuer companies and investors, and favorable changes in the regulatory environment.
We have an evolving business model.
Our business model is one of innovation, including continuously working to expand our product lines and services to our clients. For example, we are evaluating an expansion into the transfer agent and broker-dealer space as well as our foray into becoming an alternative trading system. It is unclear whether these services will be successful. Further, we continuously try to offer additional types of services, and we cannot offer any assurance that any of them will be successful. From time to time, we may also modify aspects of our business model relating to our service offerings. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to the business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth, and negatively affect our operating results.
9
We may be liable for misstatements made by issuers.
Under the Securities Act and the Securities Exchange Act of 1934 (the “Exchange Act”), issuers making offerings through our funding portal may be liable for inappropriate disclosures, including untrue statements of material facts or for omitting information that could make the statements misleading. This liability may also extend in Reg CF offerings to funding portals, such as our subsidiary. Even though due diligence defenses may be available, there can be no assurance that if we were sued, we would prevail. Further, even if we do succeed, lawsuits are time consuming and expensive, and being a party to such actions may cause us reputational harm that would negatively impact our business. Moreover, even if we are not liable or a party to a lawsuit or enforcement action, some of our clients have been and will be subject to such proceedings. Any involvement we may have, including responding to document production requests, may be time-consuming and expensive as well.
Our compliance is focused on U.S. laws and we have not analyzed foreign laws regarding the participation of non-U.S. residents.
Some of the investment opportunities posted on our platform are open to non-U.S. residents. We have not researched all the applicable foreign laws and regulations, and we have not set up our structure to be compliant with foreign laws. It is possible that we may be deemed in violation of those laws, which could result in fines or penalties as well as reputational harm. Any violation of foreign laws may limit our ability in the future to assist companies in accessing money from those investors, and compliance with those laws and regulations may limit our business operations and plans for future expansion.
Our cash flow is reliant on one main type of service.
Most of our cash-flow generating services are variants on one type of service: providing a platform for online capital formation. Our revenues are therefore dependent upon the market for online capital formation. As such, any downturn in the market could have a material adverse effect of our business and financial condition.
We depend on key personnel and face challenges recruiting needed personnel.
Our future success depends on the efforts of a small number of key personnel, including the founder of our subsidiary, Netcapital Funding Portal Inc. and Chief Executive Officer, and our compliance, engineering and marketing teams. Our software engineer team, as well as our compliance team and our marketing team are critical to continually innovate and improve our products while operating in a highly regulated industry. In addition, due to the specialized expertise required, we may not be able to recruit the individuals needed for our business needs. There can be no assurance that we will be successful in attracting and retaining the personnel we require to operate and be innovative.
We are vulnerable to hackers and cyber attacks.
As an internet-based business, we may be vulnerable to hackers who may access the data of our investors and the issuer companies that utilize our platform. Further, any significant disruption in service on our funding portal platform or in our computer systems could reduce the attractiveness of our platform and result in a loss of investors and companies interested in using our platform. Further, we rely on a third-party technology provider to provide some of our back-up technology as well as act as our escrow agent. Any disruptions of services or cyber-attacks either on our technology provider, escrow agent, or on us could harm our reputation and materially negatively impact our financial condition and business.
Our funding portal relies on one escrow agent to hold investment commitments for issuers.
We currently rely on Boston Private Bank to provide all escrow services related to offerings on our platform. Any change in this relationship will require us to find another escrow agent and escrow bank. This change may cause us delays as well as additional costs in transitioning our technology. We are not allowed to operate our funding portal business without a qualified third-party escrow bank. There are a limited number of banks that provide this service. As such, if our relationship with our escrow agent is terminated, we may have difficulty finding a replacement which could have a material adverse effect on our business and results of operations.
Our strategy to purchase a portion of early-stage companies may provide us with investments that have no liquidity.
It is our strategy to sometimes purchase, at an affordable price, part or all of early-stage companies and cross pollinate the ideas, technology and expertise within these companies to enhance the operations, profits and market share of all the entities. That strategy may result in us diverting management attention and advisory resources to do work for early-stage companies that pay for the work with equity, which becomes impaired in value or never becomes a liquid asset. For all of these early-stage companies, the future liquidity and value of our investments cannot be guaranteed, and no market may exist for us to generate gains from our investments in early-stage companies.
Our business depends on the reliability of the infrastructure that supports the Internet and the viability of the Internet.
The growth of Internet usage has caused frequent interruptions and delays in processing and transmitting data over the Internet. There can be no assurance that the Internet infrastructure or the Company’s own network systems will continue to be able to support the demands placed on it by the continued growth of the Internet, the overall online securities industry or that of our customers.
The Internet’s viability could be affected if the necessary infrastructure is not sufficient, or if other technologies and technological devices eclipse the Internet as a viable channel.
End-users of our software depend on Internet Service Providers (“ISPs”), online service providers and our system infrastructure for access to the Internet sites that we operate. Many of these services have experienced service outages in the past and could experience service outages, delays and other difficulties due to system failures, stability or interruption. As a result, we may not be able to meet a level of service that we have promised to our subscribers, and we may be in breach of our contractual commitments, which could materially adversely affect our business, revenues, operating results and financial condition.
10
We are dependent on general economic conditions.
Our business model is dependent on investors investing in the companies presented on our platforms. Investment dollars are disposable income. Our business model is thus dependent on national and international economic conditions. Adverse national and international economic conditions may reduce the future availability of investment dollars, which would negatively impact our revenues and possibly our ability to continue operations. It is not possible to accurately predict the potential adverse impacts on the Company, if any, of current economic conditions on its financial condition, operating results and cash flow.
We face significant market competition.
We facilitate online capital formation. Though this is a new market, we compete against a variety of entrants in the market as well likely new entrants into the market. Some of these follow a regulatory model that is different from ours and might provide them competitive advantages. New entrants could include those that may already have a foothold in the securities industry, including some established broker-dealers. Further, online capital formation is not the only way to address helping start-ups raise capital, and the Company has to compete with a number of other approaches, including traditional venture capital investments, loans and other traditional methods of raising funds and companies conducting crowdfunding raises on their own websites. Additionally, some competitors and future competitors may be better capitalized than us, which would give them a significant advantage in marketing and operations.
Moreover, as we continue to expand our offerings, including providing administrative services to issuers and transfer agent services, we will continue to face headwinds and compete with companies that are more established and/or have more financial resources than we do and/or new entrants bringing disruptive technologies and/or ideas.
Intense competition could prevent us from increasing our market share and growing our revenues.
We compete with a number of public and private companies and most of our competitors have significant financial resources and occupy entrenched positions in the market with name-brand recognition. We also face challenges from new Internet sites that aim to attract subscribers who seek to play interactive games or invest in public or private securities. Such companies may be able to attract significantly more subscribers because of new marketing ideas and user interface concepts.
Increased competition from current and future competitors may in the future materially adversely affect our business, revenues, operating results and financial condition.
We will require our secured lender to cooperate with us and, among other things, not demand repayments of principal and interest until the business is capable of making such payments.
We owed our secured lender, or the Lender, $1,000,000, or the Loan, as of October 31, 2021. Our Lender holds a term note bearing interest at an annual rate of 8%. We have not paid interest on the note and it accrues each month. We have a loan and security agreement, or the Loan, with the Lender for a maximum amount of $1,250,000. The maturity date of our loan from the Lender is April 30, 2023. We intend to pay off the Loan using a portions of the net proceeds from this offering.
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.
In connection with the Loan, 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. If we default on our loan obligations with the Lender, it could exercise their rights and remedies under the applicable agreements, which could include seizing all of our assets. Any such action would have a material adverse effect on our business and prospects.
The Loan contains numerous restrictive covenants which limit management’s discretion to operate our business.
In order to obtain Loan, we agreed to certain covenants that place significant restrictions on, among other things, our ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments and investments, and to sell or otherwise dispose of assets and merge or consolidate with other entities. Any failure to comply with the covenants included in the Loan could result in an event of default, which could trigger an acceleration of the related debt. If we were unable to repay the debt upon any such acceleration, the Lender could seek to foreclose on our assets in an effort to seek repayment under the loans. If the Lender was successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected.
11
We may require additional financing in the future to fund our operations.
We may need additional capital in the future to continue to execute our business plan. Therefore, we will be dependent upon additional capital in the form of either debt or equity to continue our operations. At the present time, we do not have arrangements to raise all of the needed additional capital, and we will need to identify potential investors and negotiate appropriate arrangements with them. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue our operations.
Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish certain rights.
We may seek additional capital through a combination of equity offerings, debt financings, strategic collaborations and alliances or licensing arrangements. To the extent that we raise additional capital through the sale of equity, convertible debt securities or other equity-based derivative securities, your ownership interest will be diluted and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Any indebtedness we incur could involve restrictive covenants, such as limitations on our ability to incur additional debt, acquire or license intellectual property rights, declare dividends, make capital expenditures and other operating restrictions that could adversely impact our ability to conduct our business. Furthermore, the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline. If we raise additional funds through strategic collaborations and alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to future therapeutic candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects. Adequate additional financing may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our future therapeutic candidates that we would otherwise prefer to develop and market ourselves.
Our debt level could negatively impact our financial condition, results of operations and business prospects.
As of February 9, 2022, we continue to have approximately $5,328,784 of indebtedness outstanding and we have borrowed money on three occasions from the SBA. Our level of debt could have significant consequences to our shareholders, including the following:
- requiring the dedication of a substantial portion of cash flow from operations to make payments on debt, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities;
- requiring a substantial portion of our corporate cash reserves to be held as a reserve for debt service, limiting our ability to invest in new growth opportunities;
- limiting the ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate and other activities;
- limiting the flexibility in planning for, or reacting to, changes in the business and industry in which we operate;
- increasing our vulnerability to both general and industry-specific adverse economic conditions;
- putting us at a competitive disadvantage vs. less leveraged competitors; and
- increasing vulnerability to changes in the prevailing interest rates.
Our ability to make payments of principal and interest, or to refinance our indebtedness, depends on our future performance, which is subject to economic, financial, competitive and other factors. Our business may not generate sufficient cash flow in the future to service our debt because of factors beyond our control, including but not limited to our ability to market our products and expand our operations. If we are unable to generate sufficient cash flows, we may be required to adopt one or more alternatives, such as restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. We intend to repay this indebtedness with the proceeds raised in this offering.
12
We may make acquisitions or form joint ventures that are unsuccessful.
Our ability to grow is partially dependent on our ability to successfully acquire other companies, which creates substantial risk. In order to pursue a growth by acquisition strategy successfully, we must identify suitable candidates for these transactions; however, because of our limited funds, we may not be able to purchase those companies that we have identified as potential acquisition candidates. Additionally, we may have difficulty managing post-closing issues such as the integration into our corporate structure. Integration issues are complex, time consuming and expensive and, without proper planning and implementation, could significantly disrupt our business, including, but not limited to, the diversion of management's attention, the loss of key business and/or personnel from the acquired company, unanticipated events, and legal liabilities.
Our future growth depends on our ability to develop and retain customers.
Our future growth depends to a large extent on our ability to effectively anticipate and adapt to customer requirements and offer services that meet customer demands. If we are unable to attract new customers and/or retain new customers, our business, results of operations and financial condition may be materially adversely affected.
We will need to attract, train and retain additional highly qualified senior executives and technical and managerial personnel in the future.
We continue to seek technical and managerial staff members, although we have limited resources to compensate them until we have raised additional capital or developed a business that generates consistent cash flow from operations. We believe it is important to negotiate with potential candidates and, if appropriate, engage them on a part-time basis or on a project basis and compensate them at least partially, with stock-based compensation, when appropriate. There is a high demand for highly trained and managerial staff members. If we are not able to fill these positions, it may have an adverse effect on our business.
Major health epidemics, such as the outbreak caused by the COVID-19 pandemic, and other outbreaks or unforeseen or catastrophic events could continue to disrupt and adversely affect our operations, financial condition and business.
Public health epidemics or outbreaks could adversely impact our business. In July 2021, the global tally of confirmed cases of the coronavirus-borne illness COVID-19 exceeded 180 million. The extent to which the coronavirus impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the emergence of variants, among others. In particular, the spread and treatment of the coronavirus globally could adversely impact our operations and could have an adverse impact on our business and our financial results. To date, our business has not been impacted by COVID-19 but it could be in the future.
We may make acquisitions or form joint ventures that are unsuccessful.
Our ability to grow is partially dependent on our ability to successfully acquire other companies, which creates substantial risk. In order to pursue a growth by acquisition strategy successfully, we must identify suitable candidates for these transactions; however, because of our limited funds, we may not be able to purchase those companies that we have identified as potential acquisition candidates. Additionally, we may have difficulty managing post-closing issues such as the integration into our corporate structure. Integration issues are complex, time consuming and expensive and, without proper planning and implementation, could significantly disrupt our business, including, but not limited to, the diversion of management's attention, the loss of key business and/or personnel from the acquired company, unanticipated events, and legal liabilities.
We may not be able to protect all of our intellectual property.
Our profitability may depend in part on our ability to effectively protect our proprietary rights, including obtaining trademarks for our brand names, protecting our products and websites, maintaining the secrecy of our internal workings and preserving our trade secrets, as well as our ability to operate without inadvertently infringing on the proprietary rights of others. There can be no assurance that we will be able to obtain future protections for our intellectual property or defend our current trademarks and future trademarks and patents. Further, policing and protecting our intellectual property against unauthorized use by third parties is time-consuming and expensive, and certain countries may not even recognize our intellectual property rights. There can also be no assurance that a third party will not assert infringement claims with respect to our products or technologies. Any litigation for both protecting our intellectual property or defending our use of certain technologies could have material adverse effect on our business, operating results and financial condition, regardless of the outcome of such litigation.
13
Our revenues and profits are subject to fluctuations.
It is difficult to accurately forecast our revenues and operating results, and these could fluctuate in the future due to a number of factors. These factors may include adverse changes in: number of investors and amount of investors’ dollars, the success of world securities markets, general economic conditions, our ability to market our platform to companies and investors, headcount and other operating costs, and general industry and regulatory conditions and requirements. The Company's operating results may fluctuate from year to year due to the factors listed above and others not listed. At times, these fluctuations may be significant and could impact our ability to operate our business.
Natural disasters and other events beyond our control could materially adversely affect us.
Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our services to our customers and could decrease demand for our services. Since the spring of 2020, large segments of the U.S. and global economies were impacted by COVID-19, a significant portion of the U.S. population were subject to “stay at home” or similar requirements. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers (both issuers using our services and investors investing on our platform) and our sales cycles, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain. To date, the COVID-19 outbreak, has significantly impacted global markets, U.S. employment numbers, as well as the business prospects of many small business (our potential clients). A significant part of our business model is based on receiving a percentage of the investments made through our platform and services. Further, we are dependent on investments in our offerings to fund our business. However, to date, other than working remotely, COVID-19 has not had a negative impact on the Company. While our business has not yet been impacted by COVID-19, to the extent COVID-19 continues and limits investment capital or personally impacts any of our key employees, it may have significant impact on our results and operations.
Acquisitions may have unanticipated consequences that could harm our business and our financial condition.
Any acquisition that we pursue, whether successfully completed or not, involves risks, including:
| • | material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition as the acquired restaurants are integrated into our operations; | |
| • | risks associated with entering into markets or conducting operations where we have no or limited prior experience; | |
| • | problems retaining key personnel; | |
| • | potential impairment of tangible and intangible assets and goodwill acquired in the acquisition; | |
| • | potential unknown liabilities; | |
| • | difficulties of integration and failure to realize anticipated synergies; and | |
| • | disruption of our ongoing business, including diversion of management’s attention from other business concerns. |
Future acquisitions may be accomplished through a cash purchase transaction, the issuance of our equity securities or a combination of both, could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm our business and financial condition.
If we do not effectively protect our customers’ credit and debit card data, or other personal information, we could be exposed to data loss, litigation, liability and reputational damage.
In connection with credit and debit card sales, we transmit confidential credit and debit card information by way of secure online networks. Although we use private networks, third parties may have the technology or know-how to breach the security of the customer information transmitted in connection with credit and debit card sales, and our security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information. If a person were able to circumvent these security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation.
14
Failure to recognize, respond to and effectively manage the accelerated impact of social media could adversely impact our business.
In recent years, there has been a marked increase in the use of social media platforms, including blogs, chat platforms, social media websites, and other forms of Internet based communications which allow individuals access to a broad audience of consumers and other interested persons. The rising popularity of social media and other consumer-oriented technologies has increased the speed and accessibility of information dissemination. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests and/or may be inaccurate. The dissemination of information via social media could harm our business, reputation, financial condition, and results of operations, regardless of the information’s accuracy. The damage may be immediate without affording us an opportunity for redress or correction.
In addition, social media is frequently used to communicate with our customers and the public in general. Failure by us to use social media effectively or appropriately, particularly as compared to our brands’ respective competitors, could lead to a decline in brand value, customer visits and revenue. Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our brands, exposure of personally identifiable information, fraud, hoaxes or malicious dissemination of false information. The inappropriate use of social media by our customers or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation and adversely affect our results of operations.
Risks Related to Receipt of Securities for Services
We are not, and do not intend to become, regulated as an investment company under the U.S. Investment Company Act of 1940, as amended, or the 40 Act, (and similar legislation in other jurisdictions) and if we are deemed an “investment company” under the 40 Act applicable restrictions would make it impractical for us to operate as contemplated.
The 40 Act and the rules thereunder (and similar legislation in other jurisdictions) provide certain protections to investors and impose certain restrictions on companies that are registered as investment companies. Among other things, such rules limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities and impose certain governance requirements. We have not been and do not intend to become regulated as an investment company and we intend to conduct our activities so we will not be deemed to be an investment company under the 40 Act (and similar legislation in other jurisdictions). In order to ensure that we are not deemed to be an investment company, we may be required to materially restrict or limit the scope of our operations or plans related to us, we will be limited in the types of acquisitions that we may make and we may need to modify our organizational structure or dispose of assets that we would not otherwise dispose of. Moreover, if anything were to happen which would potentially cause us to be deemed an investment company under the 40 Act, it would be impractical for us to operate as intended pursuant to our platform and our business, financial condition and results of operations would be materially adversely affected. Accordingly, we would be required to take extraordinary steps to address the situation, such as the modification and restructuring of our platform, which would materially adversely affect our ability to derive revenue.
Our consulting and advisory services are primarily paid for in restricted shares of stock of our customers, which are often private companies with no established trading market for their securities.
For our consulting and advisory services, payment is often made through equity securities of customers instead of cash. The securities issued are in private companies with no established trading market for their securities In the absence of a trading market, we may be unable to liquidate our investment, which will result in the loss of our investment.
Risk Factors Related to the Common Stock and the Offering
Concentration of ownership among our majority stockholders may prevent new investors from influencing significant corporate decisions.
As of February 9, 2022, Netcapital Systems, LLC, our majority stockholder, beneficially owned, in the aggregate, approximately 58% of our outstanding shares of common stock and assuming shares are sold in this offering will continue to own %[ of our outstanding shares of common stock following this offering. As a result, this stockholder will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders.
15
Investors in this offering will suffer immediate and substantial dilution.
The assumed public offering price of our common stock [is] substantially higher than the as adjusted net tangible book value per share issued and outstanding immediately after this offering. Investors who purchase common stock in this offering will pay a price per share that substantially exceeds the net tangible book value per share of common stock immediately prior to this offering. If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $ in the as adjusted net tangible book value per share, based upon the public offering price of $ per share. See “Dilution.”
Even if we meet Nasdaq’s initial listing requirements, there can be no assurance that we will be able to comply with Nasdaq’s continued listing standards, a failure of which could result in a de-listing of our common stock.
Our common stock is currently quoted on the OTCQB. We have applied to list our common stock on Nasdaq. There is no assurance that our common stock will ever be listed on Nasdaq or that we will be able to comply with such applicable listing standards. Should our common stock be listed on Nasdaq, in order to maintain that listing, Nasdaq requires that the trading price of a company’s listed stock on Nasdaq remain above one dollar in order for such stock to remain listed. If a listed stock trades below one dollar for more than 30 consecutive trading days, then it is subject to delisting from Nasdaq. In addition, to maintain a listing on Nasdaq, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, and certain corporate governance requirements. If we are unable to satisfy these requirements or standards, we could be subject to delisting, which would have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with the listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the minimum bid price requirement, or prevent future non-compliance with the listing requirements.
We do not expect to pay dividends and investors should not buy our common stock expecting to receive dividends.
We have not paid any dividends on our common stock in the past, and do not anticipate that we will declare or pay any dividends in the foreseeable future. Consequently, you will only realize an economic gain on your investment in our common stock if the price appreciates. You should not purchase our common stock expecting to receive cash dividends. Since we do not pay dividends, and if we are not successful in having our shares listed or quoted on an exchange, then you may have a limited ability to liquidate or receive any payment on your investment. Therefore, our failure to pay dividends may cause you to not see any return on your investment even if we are successful in our business operations. In addition, because we do not pay dividends we may have trouble raising additional funds, which could affect our ability to expand our business operations.
We may conduct future offerings of our common stock and pay debt obligations with our common stock which may diminish our investors’ pro rata ownership and depress our stock price.
We reserve the right to make future offers and sales, either public or private, of our securities, including shares of our common stock or securities convertible into common stock at prices differing from the price of the common stock previously issued. In the event that any such future sales of securities are affected or we use our common stock to pay principal or interest on our debt obligations, an investor’s pro rata ownership interest may be reduced to the extent of any such future sales.
Our management will have immediate and broad discretion over the use of the net proceeds from this offering and we may use the net proceeds in ways with which you disagree.
The net proceeds from this offering will be immediately available to our management to use at their discretion. We intend to use the net proceeds of this offering for research and development activities, sales and marketing, and for general working capital purposes and potential acquisitions of other companies, products or technologies, though no such acquisitions are currently contemplated. In addition, we may use up to $1.5 million for the retirement of indebtedness, of which (i) $1 million constitutes indebtedness having an interest rate of 8% with a maturity date of April 30, 2023 and (ii) $0.5 million constitutes indebtedness having an interest rate of 3.75%with a maturity date of June 2050. See “Use of Proceeds.” Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our securities. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the net proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, financial condition, operating results and cash flow.
16
The market price of our common stock is highly volatile and could be subject to volatility related or unrelated to our operations.
You should consider an investment in our common stock to be risky, and you should invest in our common stock only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause the market price of our common stock to fluctuate, in addition to the other risks mentioned in this “Risk Factors” section and elsewhere in this prospectus, are:
| · | actual or anticipated fluctuations in quarterly funding portal revenues or operating results, whether in our operations or in those of our competitors; | |
| · | changes in financial estimates or opinions by research analysts, either with respect to us or other fintech companies; | |
| · | our failure to accelerate user growth or new issuer growth; | |
| · | any failure to meet investor or analyst expectations; | |
| · | the public’s reaction to our press releases, other public announcements and our filings with the SEC; | |
| · | actual or anticipated changes in domestic or worldwide economic, political or market conditions, such as recessions; | |
| · | changes in the consumer spending environment; | |
| · | terrorist acts; | |
| · | changes in laws or regulations, or new interpretations or applications of laws and regulations, that are applicable to our business; | |
| · | changes in accounting standards, policies, guidance, interpretations or principles; | |
| · | short sales, hedging and other derivative transactions in the shares of our common stock; | |
| · | future sales or issuances of our common stock, including sales or issuances by us, our directors or executive officers and our significant stockholders; | |
| · | our dividend policy; | |
| · | changes in the market valuations of other restaurant companies; | |
| · | actions by stockholders; | |
| · | various market factors or perceived market factors, including rumors, involving us, our vendors and clients, whether accurate or not; | |
| · | announcements by us or our competitors of new locations, menu items, technological advances, significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; and | |
| · | a loss of a key member of management. |
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect the trading price of our common stock in any market that develops for it. In addition, our stock price may be influenced by trading activity in our common stock as a result of market commentary (including commentary that may be unreliable or incomplete in some cases); changes in expectations about our business, our creditworthiness or investor confidence generally; or actions by stockholders and others seeking to influence our business strategies.
In the past, following periods of volatility in the market price of a company’s securities, stockholders have instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and a diversion of management attention and resources, which would significantly harm our profitability and reputation.
Our common stock may be subject to the “penny stock” rules of the SEC and the trading market in the securities is limited, which could make transactions in the stock cumbersome and may reduce the value of an investment in the stock.
Rule 15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
17
FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our securities.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. The FINRA requirements may make it more difficult for broker-dealers to recommend that their customers buy our common stock or our warrants, which may have the effect of reducing the level of trading activity in our securities. As a result, fewer broker-dealers may be willing to make a market in our common stock or our warrants, reducing a stockholder’s ability to resell shares of our common stock and warrants.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our securities adversely, the price of our common stock or warrants and trading volume could decline.
The trading market for our common stock may be influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our securities adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock or warrants would likely decline. If any analyst who may cover us was to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price of our common stock or warrants or trading volume to decline.
Sales of a substantial number of shares of our common stock following this offering may adversely affect the market price of our common stock and the issuance of additional shares will dilute all other stockholders.
Sales of a substantial number of shares of our common stock in the public market or otherwise following this offering, or the perception that such sales could occur, could adversely affect the market price of our common stock. After completion of this offering and the issuance of the common stock there will be shares of our common stock outstanding (without giving effect to the exercise by the Representative of the over-allotment option). In addition, our articles of incorporation permit the issuance of up to 900,000,000 total shares of common stock. Thus, we could issue substantial amounts of common stock in the future, which would dilute the percentage ownership held by the investors who purchase shares of our common stock in this offering.
Our issuance of common stock upon the exercise of options granted under our 2021 Equity Incentive Plan may dilute all other stockholders.
We have issued options to purchase 272,000 shares of common stock under our 2021 Equity Incentive Plan and we expect to issue options to purchase the remaining 28,000 shares of common stock in the future to officers, directors, employees and consultants under our 2021 Equity Incentive Plan. Any such issuances of common stock underlying stock options may cause stockholders to experience dilution of their ownership interests and the per share value of our common stock to decline.
Our compliance with complicated U.S. regulations concerning corporate governance and public disclosure is expensive and diverts management’s attention from our core business, which could adversely affect our business, results of operations, and financial condition.
As a publicly reporting company, we are faced with expensive, complicated and evolving disclosure, governance and compliance laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd-Frank Act, and, following this offering, Nasdaq rules. As a result of the complexity involved in complying with the applicable rules and regulations, our management’s attention may be diverted from other business concerns, which could harm our business, results of operations and financial condition. We may need to hire more personnel in the future or engage outside consultants, which will increase our operating expenses, to assist us in complying with these requirements.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from business operations to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be harmed.
18
Failure to maintain effective internal control over our financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could cause our financial reports to be inaccurate.
We are required pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to maintain internal control over financial reporting and to assess and report on the effectiveness of those controls. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Although we prepare our financial statements in accordance with accounting principles generally accepted in the United States, our internal accounting controls may not meet all standards applicable to companies with publicly traded securities. If we fail to implement any required improvements to our disclosure controls and procedures, we may be obligated to report control deficiencies in which case, we could become subject to regulatory sanction or investigation. Further, these outcomes could damage investor confidence in the accuracy and reliability of our financial statements.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Our articles of incorporation and bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Utah law.
In addition, as permitted by the Utah Business Corporation Act, our bylaws and the indemnification agreements that we have entered into with our directors and officers provide that:
| ● | we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Utah law. Utah law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful; |
| ● | we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law; |
| ● | we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification; |
| ● | we will not be obligated pursuant to our bylaws to indemnify a person with respect to proceedings initiated by that person against us or our other indemnitees, except with respect to proceedings authorized by our board of directors or brought to enforce a right to indemnification; |
| ● | the rights conferred in our bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons; and |
| ● | we may not retroactively amend our bylaw provisions to reduce our indemnification obligations to directors, officers, employees and agents. |
Limitations on liability and indemnification matters.
As permitted by the corporate laws of the state of Utah, our articles of incorporation include a provision to eliminate the personal liability of our directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, subject to certain exceptions. In addition, our bylaws provide that we are required to indemnify our officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and we will be required to advance expenses to our officers and directors as incurred in connection with proceedings against them for which they may be indemnified. If we are required to indemnify, both for the costs of their defense in any action or to pay monetary damages upon a finding of a court or in any settlement, our business and financial condition could be materially and adversely affected.
19
USE OF PROCEEDS
We estimate that the net proceeds from sale of shares of common stock offered by us in this offering will be approximately $ million, after deducting the underwriting discounts and commissions and advisory fee and estimated offering expenses payable by us. If the Representative’s over-allotment is exercised in full, we estimate that our net proceeds will be approximately $ million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds of this offering for research and development activities, sales and marketing, and for general working capital purposes and potential acquisitions of other companies, products or technologies, though no such acquisitions are currently contemplated. In addition, we may use up to $1,500,000 for the retirement of indebtedness, of which: (i) $1,000,000 constitutes indebtedness with an interest rate of 8% and a maturity date of April 30, 2023 and (ii) $500,000 constitutes indebtedness with an interest rate of 3.75% and a maturity date of June 2050.
We believe opportunities may exist from time to time to expand our current business through acquisitions or investments. While we have no current agreements, commitments or understandings for any specific acquisitions or investments, we may use a portion of the net proceeds for these purposes.
We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operating expenses and capital expenditure requirements through at least the next twelve months from the date of this offering.
This expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions. Pending our application of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment grade, interest bearing instruments and U.S. government securities.
MARKET FOR OUR COMMON EQUITY
Market Information
Our common stock is currently quoted on the OTCQX marketplace under the symbol NCPL. We have applied to list our common stock on Nasdaq under the symbol “NCPL”. The approval of our listing of our common stock is a condition of closing this offering. No assurance can be given that our application will be accepted.
Holders
As of February 9, 2022, there were 230 holders of record of our common stock and the last reported sale price of our common stock on the OTCQX was $11.65 per share on February 9, 2022.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Equity Stock Transfer LLC with its business address at 237 W 37th Street, Suite 602, New York, NY 10018. Its telephone number is (212) 575-5757 and its email address is info@equitystock.com.
Securities Authorized for Issuance Under Equity Compensation Plans
We currently have 300,000 shares of common stock reserved for issuances under our 2021 Equity Incentive Plan. As of February 10, 2022, there are 272,000 options outstanding to purchase our common stock. The weighted average exercise price of these options is $10.50, the average term when issued was ten years and the options vest monthly on a straight-line basis over a 48-month period.
20
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain all available funds and any future earnings to fund the development and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. There are currently no restrictions that limit our ability to declare cash dividends on our common stock.
CAPITALIZATION
The following table sets forth our capitalization:
| • | on an actual basis as of October 31, 2021; and | |
| • | on as adjusted basis to give effect to the issuance and sale by us of ____________ shares of common stock at an assumed offering price of $____ per share (assuming no exercise of the Representative’s over-allotment option), after deducting the underwriting discounts and commissions and estimated offering costs payable by us. |
You should read the following table in conjunction with “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Securities” and other financial information contained in this prospectus, including the financial statements and related notes appearing elsewhere in this prospectus.
| As of October 31, 2021 | ||||||||
| Capitalization in U.S. Dollars in thousands | Actual | As Adjusted (1) | ||||||
| Shareholders' Equity | ||||||||
| Common stock, $.001 par value, 900,000,000 authorized, 2,719,310 | ||||||||
| and shares issued and outstanding on an actual and as adjusted basis, respectively | $ | 2,719 | $ | |||||
| Additional paid-in capital | 20,308,432 | |||||||
| Retained earnings | 190,632 | |||||||
| Total shareholders' equity | 20,501,783 | |||||||
| Total liabilities and shareholders' equity | $ | 28,284,919 | $ | |||||
_________
Each $1.00 increase (decrease) in the assumed public offering price of $ per share would increase (decrease) the as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $ , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 100,000 shares in the number of shares offered by us at the assumed public offering price of $[ ] per share would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $ .
| (1) | The number of shares of our common stock to be outstanding after this offering is based on 2,719,310 shares of our common stock outstanding as of October 31, 2021 and excludes the following: |
| · | 28,000 shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan. |
| · | [ ] shares of common stock issuable upon exercise of warrants with a weighted average exercise price of $[ ] per share; |
| · | 39,901 shares of common stock issuable upon conversion of $388,642 outstanding liabilities due in conjunction with the acquisition of Netcapital Funding Portal Inc.; |
| · |
272,000 shares of common stock issuable upon exercise of outstanding options with an exercise price of $10.50 per share;
|
| [ ] shares of the Company’s common stock underlying unsecured convertible notes; and | |
| · | [ ] shares of the Company’s common stock underlying the Warrants and the Representative’s Warrants. |
Except as otherwise indicated herein, all information in this prospectus reflects or assumes:
| · | no exercise of the outstanding options or warrants described above; and | |
| · | no exercise of the underwriters’ option to purchase up to an additional shares of common stock to cover over-allotments, if any. |
21
DILUTION
If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the public offering price per share of common stock and the [pro forma] net tangible book value per share of our common stock immediately after this offering. We calculate net tangible book value per share by dividing our net tangible book value, which is tangible assets less total liabilities, by the number of outstanding shares of our common stock as of October 31, 2021. Our historical net tangible book value as of October 31, 2021, was $5,697,829 or $2.10 per share of our common stock.
After giving effect to our issuance and sale of shares of common stock in this offering at an assumed public offering price of $[●] per share, excluding shares that may be issued upon exercise of the Representative’s over-allotment option and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our [pro forma] net tangible book value as of October 31, 2021 would have been $[●] per share. This represents an immediate increase in net tangible book value of $[●] per share to existing stockholders and an immediate dilution in net tangible book value of $[●] per share to purchasers of common stock in this offering, based on an assumed public offering price of $[●] per share. The following table illustrates this per share dilution:
| Assumed public offering price per share | $ | [●] | ||||||
| Net tangible book value per share as of October 31, 2021 | $ | 2.10 | ||||||
| Increase in net tangible book value per share attributable to new investors | [●] | |||||||
| Less: [pro forma] net tangible book value per share after giving effect to the offering | $ | [●] | ||||||
| Immediate dilution in net tangible book value per share to new investors | $ | [●] | ||||||
Each $1.00 increase (decrease) in the public offering price, would increase (decrease) pro forma as adjusted net tangible book value per share to new investors by $ , and would increase (decrease) dilution per share to new investors in this offering by $ , assuming that the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 100,000 in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted net tangible book value by approximately $ per share and increase (decrease) the dilution to new investors by $ per share, assuming the public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
| (1) | The number of shares of our common stock to be outstanding immediately after this offering is based on 2,719,310 shares of our common stock outstanding as of October 31, 2021 and excludes the following: |
| · | 28,000 shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan. | |
| · | [ ] shares of common stock issuable upon exercise of warrants with a weighted average exercise price of $[ ] per share; | |
| · |
39,901 shares of common stock issuable upon conversion of $388,642 of outstanding liabilities due in conjunction with the acquisition of Netcapital Funding Portal Inc.; | |
| · | 272,000 shares of common stock issuable upon exercise of options with an exercise price of $10.50 per share; | |
| [ ] shares of the Company’s common stock underlying unsecured convertible notes; and | ||
| · | [ ] shares of the Company’s common stock underlying the Warrants and the Representative’s Warrants. |
Except as otherwise indicated herein, all information in this prospectus reflects or assumes:
| · | no exercise of the outstanding options or warrants described above; and | |
| · | no exercise of the underwriters’ option to purchase up to an additional shares of common stock to cover over-allotments, if any. |
22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operation should be read in conjunction with the financial statements and related notes that appear elsewhere in this prospectus. This discussion contains forward-looking statements and information relating to our business that reflect our current views and assumptions with respect to future events and are subject to risks and uncertainties, including the risks in the section entitled Risk Factors beginning on page [15], that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Overview
We are a fintech company that enables private companies to raise capital online and provides private equity investment opportunities to investors. Our consulting group, Netcapital Advisors, provides marketing and strategic advice and takes equity positions in select companies that we believe possess disruptive technologies. Our funding portal, Netcapital Funding Portal Inc., is registered with the SEC and is a member of FINRA.
We sometimes take equity stakes in promising technology start-ups. We play an active role in growing these companies by providing strategic advice, technology consulting, and help with capital raising.
We specialize in Reg CF offerings, under the provisions of Title III of the JOBS Act of 2012. We believe that new capital raising techniques, such as Reg CF, democratize capital raising, similar to the way that social networks democratize broadcast mechanisms that once belonged only to traditional media. We purchased Netcapital Funding Portal Inc., a registered Reg CF funding portal, effective November 5, 2020, and we changed our name to Netcapital Inc. to reflect our commitment to help companies raise capital on the Internet. Reg CF is one of three securities exemptions that enable online capital formation. Reg CF allows issuers to raise up to $5 million from accredited or non-accredited investors every 12 months.
Our limited operating history and the uncertain nature of our future operations and the markets we address or intend to address make predictions of our future results of operations difficult. Our operations may never generate significant revenues, and we may not consistently achieve profitable operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this prospectus. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Results of Operations
Six Months Ended October 31, 2021 Compared to the Six Months Ended October 31, 2020
Our revenues for the six months ended October 31, 2021 decreased by $668,476, or 27%, to $1,825,009, as compared to $2,493,486 reported for the six months ended October 31, 2020. The decrease in revenues is attributable to a decrease of $1,412,358 in non-cash revenue from the receipt of equity, which amounted to $902,174 in the six months ended October 31, 2021, as compared to $2,314,532 in the six months ended October 31, 2020. This decrease was offset by revenues from our funding portal, which we did not have in the six-month period ended October 31, 2020. Funding portal revenues consisted of a listing fee that we charge when an issuer signs an engagement letter to raise capital on our funding portal, and portal fees that are equal to 4.9% of the capital that was raised by the issuers.
23
Costs of revenues decreased by $668,144 to $46,080 for the six-months ended October 31, 2021 from $714,224 reported in the six-months ended October 31, 2020. The decrease is attributable to a decrease in non-cash revenues from the receipt of equity.
Payroll and payroll related expenses increased by $235,413, or 15%, to $1,791,655 for the six months ended October 31, 2021, as compared to $1,556,242 reported for the six months ended October 31, 2020. The increase is attributable to an increase in staff.
Marketing expense increased by $35,044, or 399%, to $43,826 for the six months ended October 31, 2021, as compared to $8,782 reported for the six months ended October 31, 2020. The increase in expense is due to additional marketing outlets that we utilized in the six months ended October 31, 2021.
Rent expense decreased by $4,187, or 16%, to $22,611 for the six months ended October 31, 2021, as compared to $26,798 reported for the six months ended October 31, 2020. The decrease in expense is a result of discounts available to us in fiscal 2022 and our ability to have personnel work from home.
General and administrative expenses increased by $880,992, or 1,167%, to $956,422 for the six months ended October 31, 2021, from $75,500 for the six months ended October 31, 2020. The increase is primarily attributed to additional expenses we incurred in the current fiscal year for our newly acquired funding portal business.
Consulting expense increased by $360,550, to $365,635, or 7,090%, for the six months ended October 31, 2021 from $5,085 reported in the six months ended October 31, 2020. The increase in expense is due to issuance of stock-based compensation to two outside consulting firms. Stock-based consulting compensation amounted to $325,907 in the six-month period ended October 31, 2021, as compared to $0 in the six-month period ended October 31, 2020.
Interest expense increased by $46,707 to $70,271 for the six months ended October 31, 2021, as compared to $23,564 for the six months ended October 31, 2020. The increase in interest expense is attributable to higher debt amounts and a higher interest rate on our secured debt.
Fiscal Year Ended April 30, 2021 Compared to Fiscal Year Ended April 30, 2020
Our revenues for fiscal 2021 increased by $2,967,445, or 169%, to $4,721,003 as compared to $1,753,558 reported for fiscal 2020. The increase in revenues is primarily attributable to our consulting services. We also received additional revenues in fiscal 2021 from our funding portal, which we did not have in fiscal 2020. Funding portal revenues consisted of a listing fee that we charge when an issuer signs an engagement letter to raise capital on our funding portal, and portal fees that are equal to 4.9% of the capital that was raised by the issuers. The components of revenue are as follows:
| Fiscal 2021 | Fiscal 2020 | |||||||
| Receipt of equity from issuers for consulting services | $ | 3,547,032 | $ | 1,538,980 | ||||
| Consulting revenue | 338,990 | 214,578 | ||||||
| Portal fees | 524,991 | — | ||||||
| Listing fees | 301,990 | — | ||||||
| Other funding portal revenue | 8,000 | — | ||||||
| Total revenue | $ | 4,721,003 | $ | 1,753,558 | ||||
Each component of revenue is trending upward when comparing fiscal 2021 revenues with fiscal 2020. Based upon activity in the last two quarters of fiscal 2021, our funding portal revenues are trending upward as portal fees increased by $23,909, or 9.5%, to $274,450 in Q4 of fiscal 2021 from $250,541 in Q3 of fiscal 2021. Listing fees increased by $96,990, or 94.6%, to $199,490 in Q4 of fiscal 2021 from $102,500 in Q3 of fiscal 2021.
Our costs of revenues increased by $748,053, or 6,736%, to $759,158 in fiscal 2021, from $11,105 in fiscal 2020. The increase is primarily attributable to our increased revenues and the change in our strategy of how we accelerate the product development for the companies we invest in.
Stock-based compensation increased by $324,359, or 91%, to $680,611 for fiscal 2021 from $356,252 reported in the prior fiscal year. The increase is primarily attributable to higher values of the price per share of our common stock in fiscal 2021, as compared to fiscal 2020. In addition, two new marketing consultants were hired in fiscal 2021that accounted for $147,654 in stock-based compensation.
Consulting expense decreased by $96,020, or 94%, to $6,580 for fiscal 2021 from $102,600 reported in the prior fiscal year. The decrease is attributed to our increase in wages in fiscal 2021.
24
Payroll and payroll related expenses increased to $3,117,075 in fiscal 2021. In fiscal 2020 compensation was paid through the issuance of common stock grants and cash payments to consultants. Payroll expense also increased in fiscal 2021 due to the acquisition of Netcapital Funding Portal Inc., which had approximately 20 employees.
General and administrative expenses increased by $392,208, or 539%, to $464,955 for the year ended April 30, 2021, as compared to $72,747 for the prior fiscal year. The primary increase in expenses is attributable to legal costs of approximately $224,000 and software usage fees of $100,000.
Interest expense increased by $68,454 to $87,333 for the year ended April 30, 2021, as compared to $18,879 for the prior fiscal year. Our debt balances increased significantly slightly in fiscal 2021 due to $4,271,600 in new borrowings during the year and an increase in the interest rate on our $1,000,000 secured loan, effective October 31, 2020, from 1.25% to 8%.
In fiscal 2020 we incurred a loss on the sale of investments of $527,540. We sold equity we had earned in one of our consulting engagements primarily to take advantage of a realized loss for tax purposes. No realized gains or losses were recognized in fiscal 2021.
In fiscal 2020 we incurred an impairment loss of $185,952, whereas no impairment losses were recognized in fiscal 2021. We monitor all our assets for any changes in observable prices from orderly transactions and we record an impairment expense when appropriate.
Liquidity and Capital Resources
On October 31, 2021, we had cash and cash equivalents of $940,966 and negative working capital of $2,549,669 as compared to cash and cash equivalents of $2,473,959 and negative working capital of $4,666,833 at April 30, 2021. As of April 30, 2021, we had cash and cash equivalents of $2,473,959 and negative working capital of $4,666,833 as compared to cash and cash equivalents of $11,206 and negative working capital of $1,057,581 as of April 30, 2020.
We have been successful in raising capital by selling restricted common stock in private placements and by borrowing funds from the U.S. Small Business Administration. The negative working capital balance as of October 31, 2021 has been significantly reduced by the forgiveness of $1,885,800 in borrowings from the SBA in November 2021, and we anticipate that an additional loan from the SBA, also totaling $1,885,800, will also be forgiven. The negative working capital balance as of April 30, 2021 has been eliminated by converting approximately $5 million in current liabilities into shares of common stock at a price range of $9.00 to $9.74 per share. In addition to the settlement of $5 million in current liabilities, we anticipate a $1.8 million SBA loan will be forgiven this summer and we raised an additional $300,000 from the sale of shares of common stock in May 2021.
We believe that our existing cash investment balances, and our anticipated cash flows from operations will be sufficient to meet our working capital and expenditure requirements for the next 12 months. Although we believe we have adequate sources of liquidity over the next 12 months, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity. Up to this point in time, we believe the pandemic has helped drive people to online investing, as we see regular monthly increases in users and dollars invested, and an increase in issuers seeking to use online fund-raising services in lieu of face-to-face meetings.
Year over Year Changes
Net cash used in operating activities amounted to $1,898,126 and $1,941,012 in the six months ended October 31, 2021 and 2020, respectively. The principal source of cash from operating activities in the six months ended October 31, 2021 was net income of $1,183,254 and a non-cash item, stock-based compensation of $483,067. However, these sources of cash were offset by an unrealized gain on equity securities of $3,275,745, an increase in accounts receivable of $792,742 and a bank receivable of $212,252. The principal source of cash from operating activities in the six months ended October 31, 2020 was net income of $60,893 and a non-cash item, stock-based compensation of $259,909. However, these items were offset by changes in non-cash revenue from the receipt of equity of $2,314,532.
25
Net cash used in operating activities amounted to $3,250,868 in fiscal 2021, as compared to net cash used in operating activities of $3,604 in fiscal 2020. In fiscal 2021, the primary uses of cash were an unrealized gain on equity securities of $2,571,494, non-cash revenue from the receipt of equity of $2,319,532 and an increase in accounts receivable of $1,417,257. These uses of cash were partially offset by net income of $1,469,660, stock-based compensation of $680,611 and an increase in accounts payable and accrued expenses of $172,204. In fiscal 2020, the principal source of cash from operating activities was net income of $604,851, adjusted by stock-based compensation of $356,252, a loss on the sale of investments of $527,540 and asset impairment of $185,952. These sources of cash from operating activities were offset by investments of $1,538,980 because of non-cash contract revenue with major customers.
Net cash used in investing activities amounted to $247,166 in the six months ended October 31, 2021. The use of cash consisted of loans to affiliates of $130,000 and an investment in an affiliate of $117,166. There was no investing activity in the six months ended October 31, 2020. In fiscal 2021, net cash provided by investing activities amounted to $242,025. Proceeds from the purchase of a subsidiary provided cash of $364,939, which was offset by a use of cash of $122,914 as an investment in an affiliate. There was no investing activity in fiscal 2019.
For the six months ended October 31, 2021, cash provided financing activities amounted to $612,299, which consisted of proceeds from stock subscriptions for the sale of common stock. For the six months ended October 31, 2020, cash provided by financing activities amounted to $2,385,800, which consisted of two loans from the U.S. Small Business Administration. Net cash provided by financing activities for the year ended April 30, 2021 totaled $5,471,596. Proceeds from loans amounted to $4,271,600 and proceeds from stock subscriptions totaled $1,199,996. Net cash used in financial activities in fiscal 2020 consisted of principal payments on a related party note totaling $4,300.
In the six months ended October 31, 2021 and 2020, there were no expenditures for capital assets. We do not anticipate any capital expenditures in fiscal 2022. In fiscal 2021 and 2020, there were no expenditures for capital assets. We do not anticipate any capital expenditures in the next fiscal year.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Recent Accounting Pronouncements
There has been no impact to our financial statements and our results of operations and financial condition as the result of the adoption of Recent Accounting Pronouncements, see “Part I, Item 1, Note 1. Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements included in this prospectus.
26
Critical Accounting Policies and Estimates
Our discussion and analysis of operating results and financial condition are based upon our condensed consolidated financial statements. The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
Our critical accounting policies are those that materially affect our financial statements and involve subjective or complex judgments by management. Although these estimates are based on our management’s best knowledge of current events and actions that may impact us in the future, actual results may be materially different from the estimates. All of our significant accounting policies are disclosed in our Form 10-K for the fiscal year ended April 30, 2021.
Revenue Recognition
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.
Allowance for Doubtful Accounts
In order to record the Company’s accounts receivable at their net realizable value, the Company must assess their collectability. A considerable amount of judgment is required in order to make this assessment, including an analysis of historical bad debts and other adjustments, a review of the aging of the Company’s receivables, and the current creditworthiness of the Company’s customers. Generally, when a customer account reaches a certain level of delinquency, the Company provides an allowance for the related amount receivable from the customer. The Company writes off the accounts receivable balance from a customer and the related allowance established when it believes it has exhausted all reasonable collection efforts. Accounts receivable of $1,356,932 and $0 were recorded on April 30, 2021 and 2020, respectively, and an allowance for doubtful accounts of $60,325 and $0 were recorded on April 30, 2021 and 2020, respectively.
Impairment of Long-Lived Assets
Financial Accounting Standards Board (“FASB”) authoritative guidance requires that certain assets be reviewed for impairment and, if impaired, remeasured at fair value whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment loss estimates are primarily based upon our management’s analysis and review of the carrying value of long-lived assets at each balance sheet date, utilizing an undiscounted future cash flow calculation. We recognized an impairment loss of $0 and $185,952 in fiscal 2021 and 2020, respectively, as we concluded the carrying amount of the equity that we owned in an early-stage company was not recoverable and we wrote down the value of our investment.
Income Taxes
We estimate the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such assets will more likely than not go unused. If it becomes more likely than not that a tax asset or loss carry-forward will be used, the related valuation allowance on such assets is reversed. Based upon several profitable quarters over the past two years, and our ability to generate operating income of $1,147,222 and $624,433 in fiscal 2020 and 2019, respectively, and taxable income in both fiscal years, we reversed the valuation allowance from April 30, 2019 and recorded a current deferred tax asset as of April 30, 2020, and a deferred tax liability as of April 30, 2021 .
Information About Market Risk
We are not subject to fluctuations in interest rates, currency exchange rates or other financial market risks. We have not made any sales, purchases or commitments with foreign entities which would expose us to currency risks.
27
OUR BUSINESS
Company Overview
Netcapital Inc. is a fintech company with a scalable technology platform that allows private companies to raise capital online from accredited and non-accredited investors. We give all investors the opportunity to access investments in private companies. Our model is disruptive to traditional private equity investing, which is based on Title III, Reg CF of the JOBS Act. We generate fees from listing private companies on our portals. Our consulting group, Netcapital Advisors, provides marketing and strategic advice in exchange for equity positions. The Netcapital funding portal is registered with the SEC, is a member of FINRA, and provides investors with opportunities to invest in private companies.
Our Business
We provide private company investment access to accredited retail and non-accredited retail investors through our online portal (www.netcapital.com). The Netcapital funding portal charges a $5,000 engagement fee and a 4.9% success fee for capital raised at closing. In addition, the portal generates fees for other ancillary services such as rolling closes. Netcapital Advisors generates fees and equity stakes from consulting in select portfolio and non-portfolio clients. We generated revenues of $1,825,009 with costs of service of $46,080 in the six months ended October 31, 2021 for a gross profit of $1,778,929 in the six months ended October 31, 2021 as compared to revenues of $2,943,486 with costs of service of $714,224 in the six-months ended October 31, 2020 for a gross profit of $1,779,762 in the six months ended October 31, 2020. We generated revenues of $4,723,001 with costs of service of $759,158 in the year ended April 30, 2021 for a gross profit of $3,961,841 in the year ended April 30, 2021 as compared to revenues of 1.753,558 with costs of service of $11,105 in the year ended April 30, 2020 for a gross profit of $1,742,453 in the year ended April 30, 2020.
Funding Portal
Netcapital.com is an SEC-registered funding portal that enables private companies to raise capital online, while investors are able to invest from anywhere in the world, at any time, with just a few clicks. Securities offerings on Netcapital are accessible through individual offering pages, where companies include product or service details, market size, competitive advantages, and financial documents. Companies can accept investment from anyone, including friends, family, customers, employees, etc.
In addition to access to the funding portal, Netcapital provides the following services:
● a fully automated onboarding process;
● automated filing of required regulatory documents;
● compliance review;
● custom-built offering page on our website;
● third party transfer agent and custodial services;
● email marketing to our proprietary list of investors;
● rolling closes, which provide potential access to liquidity before final close date of offering
● assistance with annual filings; and
● direct access to our team for ongoing support.
Consulting Business
The company's consulting group, Netcapital Advisors, helps companies at all stages to raise capital. Advisors provides strategic advice, technology consulting and digital marketing services to assist with fundraising campaigns on the Netcapital platform. The company also acts as an incubator and accelerator, taking equity stakes in select disruptive start-ups.
Netcapital Advisors’ services include:
● incubation of technology start-ups;
● investor introductions;
● digital marketing;
● website design, software and software development;
● message crafting, including pitch decks, offering pages, and ad creation;
● strategic advice; and
● technology consulting
Regulatory Overview
In an effort to enhance economic growth and to democratize access to private investment opportunities, Congress finalized the Jumpstart Our Business Startups Act (JOBS Act) in 2016. Title III of the JOBS Act enabled early-stage companies to offer and sell securities to the general public for the first time. The SEC then adopted Regulation Crowdfunding, or Reg CF, in order to implement the JOBS Act’s crowdfunding provisions.
28
Reg CF has several important features that changed the landscape for private capital raising and investment. For the first time, this regulation:
| ● | Allowed the general public to invest in private companies, no longer limiting early-stage investment opportunities to less than 10% of the population; |
| ● | Enabled private companies to advertise their securities offerings to the public (general solicitation); and |
| ● | Conditionally exempted securities sold under Section 4(a)(6) from the registration requirements of the Securities and Exchange Act of 1934. |
Our Market
Established by the JOBS Act of 2016, the funding portal industry remains in its infancy. Title III of the JOBS Act outlines Reg CF, which traditionally allowed private companies to raise up to $1.07 million from all Americans. In March 2021, regulatory enhancements by the SEC went into effect and increased the limit to $5 million. These amendments increased the offering limits for Reg CF, Regulation A and Regulation D Rule 504 offerings as follows; Reg CF increased to $5 million, Regulation D, Rule 504 moved to $10 million from $5 million; Regulation A Tier 2 rose to $75 million from $50 million.
Reg CF private company investments accounted for approximately $490 million in 2021, according to KingsCrowd, versus $205 million during 2020. We believe a significant opportunity exists to disrupt private capital markets via the Netcapital portal.
Private capital markets reached $7.4 trillion at the end of 2020, per Morgan Stanley, and this number is expected to reach $13 trillion over the next five years. Within this market, private equity represents the largest share, with assets in excess of $3 trillion and a 10-year CAGR of 10%. Since 2000, global PE net asset value has increased almost tenfold, nearly three times faster than the size of the public equity market. Both McKinsey and Boston Consulting Group predict that this strong growth will continue, as investors allocate increasing amounts to private equity, due to historically higher returns and lower volatility than public markets.
Our Technology
The Netcapital platform is a scalable, real-time, transaction processing engine that runs without human intervention, 24 hours a day, seven days a week. For companies raising capital, the technology provides fully automated onboarding with integrated regulatory filings. Funds are collected from investors and held in escrow until the offering closes.
For entrepreneurs, the technology facilitates access to capital at low cost. For investors, the platform provides access to investments in private, early-stage companies that were previously unavailable to the general public. Both entrepreneurs and investors can track and view their investments through their dashboard on netcapital.com. The platform currently has almost 100,000 users.
Scalability was demonstrated in November 2021, when the platform processed more than 2,000 investments in less than two hours, totaling more than $2 million.
Our infrastructure is designed in a way that can horizontally scale to meet our capacity needs. Using Ansible playbooks and Amazon AMIs, we are able to automate the creation and launch of our production web and API endpoints in order to replicate them as needed behind load balancers (ELBs).
Additionally, all of our public facing endpoints live behind CloudFlare to ensure protection from large scale traffic fluctuations (including DDoS attacks).
Our main database layer is built on Amazon RDS and features a Multi-AZ deployment that can also be easily scaled up or down as needed. General queries are cached in our API layer, and we monitor to optimize very complex database queries that are generated by the API. Additionally, we cache the most complex queries (such as analytics data) in our NoSQL (Mongo) data store for improved performance.
Most of our CPU intensive data processing happens asynchronously through a worker/jobs system managed by AWS ElastiCache’s Redis endpoint. This component can be easily fine-tuned for any scale necessary.
We license the technology from our affiliate, Netcapital Systems LLC.
29
Competitive Advantages
We believe we provide the lowest cost solution for digital capital raising versus our peer group (StartEngine Crowdfunding, Inc., Wefunder Inc.and Replublic Core LLC. Our access and onboarding of new clients are superior due to our facilitated technology platforms. Our network is rapidly expanding as a result of our enhanced marketing and broad distribution to reach new investors.
Other competitors include StartEngine Crowdfunding, Inc., Wefunder Inc., and Republic Core LLC. Given the rapid growth in the industry and its potential to disrupt the multi-billion dollar private capital market, there is sufficient room for multiple players.
Our Strategy
Two major tailwinds are driving accelerated growth in the shift to digital fundraising: the COVID-19 pandemic and the increase in funding limits under Reg CF. The pandemic drove a rapid need to bring as many processes as possible online. With travel restrictions in place and most people in lockdown, entrepreneurs were no longer able to fundraise in person and have increasingly turned to online capital raising through funding portals.
There are numerous industry drivers and tailwinds that complement investor demand for access to investments in private companies. To capitalize on these, our strategy is to:
| ● | Generate New Investor Accounts. Growing the number of investor accounts on our platform is a top priority. Investment dollars continue to flow through our platform are the key revenue driver. When issuers advertise their offerings, they are generating new investor accounts for us at no cost to Netcapital. We plan to supplement our issuers' spend on advertising by increasing our digital marketing spend as well, which may include virtual conferences going forward. |
| ● | Hire Additional Business Development Staff. We seek to hire additional business development staff that is technology and financially passionate about capital markets to handle our growing backlog of potential customers. |
| ● | Increase the Number of Companies on Our Platform via Marketing. When a new company lists on our platform, they bring their customers, supporters, and brand ambassadors as new investors to Netcapital. We plan to increase our marketing budget to help grow our portal and advisory clients. |
| ● | Invest in Technology. Technology is critical to everything that we do. We plan to invest in developing innovative technologies that enhance our platform and allow us to pursue additional service offerings. For example, we plan on developing a dedicated mobile app in 2022 to make our platform more accessible. |
| ● | Incubate and Accelerate Our Advisory Portfolio Clients. The advisory portfolio and our equity interests in select advisory clients represent potential upside for our shareholders. We seek to grow this model of advisory clients. |
| ● | Expand Internationally. We believe there is a significant opportunity to expand into Europe and Asia as an appetite abroad grows for U.S. stocks. |
| ● | Open ATS/Secondary Transfer Feature. Lack of liquidity is a key issue for investors in private companies as private markets lack a liquidity feature in our targeted market. We plan to open a Secondary Transfer Feature to provide potential liquidity to investors who participate in our primary offerings on the Netcapital platform. |
| ● | New Verticals Represent a Compelling Opportunity. We operate in a regulated market supported by the JOBS Act. We may pursue expansion to our model to include Regulation A and Regulation D offerings. |
Our Management
Netcapital’s management team is experienced in finance, technology, entrepreneurship, and marketing.
Chairman and CEO, Dr. Cecilia Lenk, was formerly Vice President of Technology and Digital Design at Decision Resources Inc., a global company serving the biopharmaceutical market, where she oversaw the implementation of new technologies, products, and business processes. Prior to joining Decision Resources, she founded a technology firm that built a patented platform for online research. She has a Ph.D. in Biology from Harvard University and a B.A. (with honors) in Environmental Engineering from Johns Hopkins University.
30
Coreen Kraysler, CFA is the company’s Chief Financial Officer. With over 30 years of investment experience, she was formerly a Senior Vice President and Principal at Independence Investments, where she managed several 5-star rated mutual funds 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. She received a B.A. in Economics and French, cum laude from Wellesley College and a Master of Science in Management from MIT Sloan.
Jason Frishman is the founder and CEO of the company’s funding portal subsidiary, Netcapital Funding Portal Inc. to help reduce the systemic inefficiencies early-stage companies face in securing capital. He currently holds advisory positions at leading organizations in the financial technology ecosystem and has spoken as an external expert at Morgan Stanley, University of Michigan, YPO, and others. Jason has a background in the life sciences and previously conducted research in medical oncology at the Dana Farber Cancer Institute and cognitive neuroscience at the University of Miami.
31
Key Metrics of our Funding Portal
The Netcapital funding portal is registered with the SEC and is a member of FINRA.
92,000 investor accounts
247 issuers
$44 million raised through the platform
For the six- and three-month periods ended October 31, 2021, the Company had one customer that constituted 28% and 42% of revenues and a second customer that constituted 22% and 33% of revenues, respectively. For the six- and three-month periods ended October 31, 2020, the Company had one customer that constituted 56% and 48% of its revenues, respectively, and a second customer that constituted 26% and 27% of its revenues, respectively. 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.
*data as of December 27, 2021
Business Model
The Netcapital funding portal charges a 4.9% success fee for capital raised through the platform, as well as engagement and other fees. Netcapital Advisors generates fees from consulting, and the equity stakes we take in select technology companies provide optionality through possible exits, such as a sale or an initial public offering.
ATS Partnership
Netcapital announced an Alternative Trading System, or ATS, partnership with an innovative broker-dealer that applies blockchain technology and blockchain-based smart contracts in the form of digital securities to transform the private capital marketplace.
We expect this partnership (or with another broker-dealer) to provide Netcapital issuers and investors with the potential for greater distribution and liquidity - both primary and secondary - ultimately increasing demand and share prices. We believe the agreement or any similar agreement with another broker-dealer also establishes a path for future monetization.
32
Industry Tailwinds
Two major tailwinds are driving accelerated growth in the shift to digital fundraising: the COVID-19 pandemic and regulatory enhancements to the Jobs Act. The pandemic drove a rapid need to bring as many processes as possible online. With travel restrictions in place and most people in lockdown, entrepreneurs were no longer able to fundraise in person and have increasingly turned to online capital raising through funding portals.
In addition, exempt offering regulatory enhancements proposed by the SEC in 2020 went into effect in March 2021. These amendments increased the offering limits for Reg CF, Regulation A and Rule 504 of Regulation D offerings as follows: the Reg CF limit increased to $5 million from $1.07 million, every twelve months. Rule 504 of Regulation D moved to $10 million from $5 million and Regulation A Tier 2 rose to $75 million from $50 million.
Propelled by this rule change, Reg CF commitments of $56 million in March 2021 were more than five times higher than in March of the previous year. We believe that the recent increase in offering limits in combination with pandemic-driven acceleration in the need for digital fundraising have been the primary drivers of the 161% increase in Reg CF commitments through the first nine months of 2021. We expect these changes to continue to have a significant, positive impact on demand as they increase the attractiveness of digital fundraising options and pave the way for larger companies to utilize the exempt framework. This could also potentially drive higher demand for Netcapital Advisors’ services.
In another important regulatory development, the U.S. Department of Labor, or DOL, recently expressed their support for retail investment in private equity. In 2020, the DOL released an information letter backing private equity as an investment option for defined contribution plans. As a result, large asset managers are working on adding private investment choices to their retirement products, according to a study conducted by BCG.
Investment Portfolio
A key part of our story involves the potential value creation driven by our portfolio companies. In our portfolio, we focus on companies with emerging, disruptive technologies. A partial list of our investment portfolio is described below:
KingsCrowd
Industry: Fintech
Trusted by over 300,000 investors to vet startup investments, KingsCrowd, Inc. is the leader in ratings and analytics for online private markets. The company aggregates, analyzes, and rates companies raising on platforms like Netcapital to help investors make more informed decisions.
ChipBrain
Industry: AI
Effective communicators close more deals. ChipBrain LLC’s emotionally intelligent AI assistant provides real-time emotion, tone, and facial expression feedback in live conversations across text, voice, and video. Taking the guesswork out of identifying conversational cues, the company’s technology enables sales professionals to see at a glance how they are coming across to customers.
Deuce Drone
Industry: Drone Delivery Technology
Deuce Drone LLC solves the last mile delivery problem for “brick and mortar” retailers. The company designs, builds, and operates drone delivery systems, transforming retail stores into customer fulfillment centers. Deuce Drone LLC provides a cost-effective, technology-driven solution for same-day delivery that allows retailers to compete with major e-commerce players.
33
Zelgor
Industry: Mobile Games
Backed by famous venture capitalist Tim Draper, Napster founder, Shawn Fanning, and co-creator of Guitar Hero, Kai Huang, Zelgor Inc. is an interactive entertainment company featuring a new species of rambunctious alien characters called The Noobs. The Noobs are a unique and original intellectual property introduced to the world through mobile games, multimedia content, and strategic partnerships.
MustWatch
Industry: Technology
MustWatch LLC brings your friends and favorite shows together all in one place. The Watch Party app makes it easy to find new shows, see what your friends are watching, and recommend great shows to each other. The company’s platform delivers targeted show recommendations based on the television viewing tastes of users’ friends and family. It’s not a single streaming platform’s media catalog, but a cross-platform television guide, crowdsourced from your friends and family.
C-Reveal Therapeutics
Industry: Cancer Immunotherapy
C-Reveal Therapeutics’s proprietary technology, developed at Massachusetts General Hospital and Harvard University, helps the body's immune system to identify and destroy cancer cells by inhibiting key enzymes that conceal the disease. This patent pending approach is designed to improve the efficacy of treating a broad range of cancers.
The following table summarizes the components of investments as of October 31, 2021 and April 30, 2021:
| October 31, 2021 | April 30, 2021 | |||||||
| Netcapital Systems LLC | $ | 48,128 | $ | 48,128 | ||||
| MustWatch LLC | 235,400 | 235,400 | ||||||
| Zelgor Inc. | 1,400,000 | 1,400,000 | ||||||
| ChipBrain LLC | 1,704,480 | 1,704,480 | ||||||
| Vymedic Inc. | 20,000 | 20,000 | ||||||
| C-Reveal | 50,000 | — | ||||||
| Deuce Drone LLC | 2,350,000 | 2,350,000 | ||||||
| Kingscrowd Inc. | 3,815,745 | 540,000 | ||||||
| Total Investments at cost | $ | 9,623,753 | $ | 6,298,008 | ||||
Investment Portfolio Company Progress
KingsCrowd, Inc., a fintech company that provides ratings and analytics for online private markets, grew their subscriber base to 350,000, generated almost half a million in revenues last year, rated over half a billion dollars in transactions with their proprietary rating algorithm, and just launched a $15 million Reg A+ round at a $45 million pre-money valuation.
Deuce Drone recently secured an exclusive contract for food delivery at the BB&T Center, in Mobile, Alabama. They successfully completed their first food delivery run: Operation Smoothie. The Deuce Drone team was joined by several notable community leaders for the demo, including Representative Jerry Carl, the chief executive officer of the Mobile Chamber of Commerce, staff from Senator Tommy Tuberville’s office, and representatives from Innovation Portal, a local incubator that recently invested in the company. Local Fox 10 News and Alabama.com covered the event. They have also continued to build out their team, including the addition of General Ed Fienga as chief operating officer.
34
MustWatch launched their television show recommendation app in the Apple app store, which has been awarded a 5-star rating by users. They also added acclaimed Hollywood producer and screenwriter Jason Keller to their team. Keller brings nearly two decades of experience in the film and entertainment industry to the MustWatch team. Most recently Keller wrote the Oscar winning film Ford vs. Ferrari (starring Christian Bale and Matt Damon) which was nominated for four Academy Awards, including Best Picture. His other notable writing credits include Mirror, Mirror (starring Julia Roberts), Escape Plan (starring Arnold Schwarzenegger and Sylvester Stallone) and Machine Gun Preacher (starring Gerard Butler), as well as an executive producer for the fifth movie in the Die Hard franchise, A Good Day to Die Hard (starring Bruce Willis).
Zelgor completed a stability test launch of their first mobile game, Noobs in Space, and generated thousands of downloads in the first 48 hours. They sold out their recent offering on the Netcapital platform.
ChipBrain, which develops emotionally intelligent AI, has built out their core machine learning models and performed pilot programs with multiple customers. With the help of Netcapital Advisors, the Company sold out two rounds of financing on Netcapital, and just closed a venture round at a $20 million pre-money valuation.
Working with Netcapital Advisors, C-Reveal raised over $1 million on the Netcapital platform, and then closed a $3 million venture round.
Funding Portal
The Netcapital funding portal showed strong momentum in fiscal 2021, as a number of previous client success stories returned to our platform to leverage the SEC enhancements and raise additional capital. More than $17 million dollars were invested through the platform during the year, six times higher than the previous year. Since the beginning of our fiscal year, the portal’s market share has more than tripled. Growth accelerated into the fourth quarter of fiscal 2021, with dollars invested through the portal up 740% compared to the fourth quarter of fiscal 2020.
Financial Highlights Fiscal 2021
| ● | Net income increased by 143% to $1.5 million, as compared to $0.6 million in fiscal 2020. In addition, net income increased by $1,122,361, or more than 1,800%, to $1,183,254 for the six months ended October 31, 2021, from $60,893 in the six months ended October 31, 2020. |
| ● | Equity securities at fair value rose by 348% to $6.3 million, as compared to $1.4 million in fiscal 2020. In addition, equity securities at fair value increase by $5.9 million or 159%, to $9.6 million as of October 31, 2021, from $3.7 million as of October 31, 2020. |
| ● | Book value rose to $6.51 per share, as compared to $1.63 per share in fiscal 2020. In addition, book value increased by $5.71 per share, or 312%, to $7.54 as of October 31, 2021, from $1.83 as of October 31, 2020. |
Portal Momentum Discussion - First Half Fiscal 2022
$9.9 million dollars were invested through the platform in the first half of fiscal 2022, up 167% from the first half of last year. During the same period, there were more than 970,000 unique visitors to netcapital.com, an increase of 106%, while new investor accounts grew by more than 150%.
Financial Highlights – First Half Fiscal 2022
| ● | Net income increased by$1,122,361, or more than 1,800%, to $1,183,254 for the six months ended October 31, 2021, from $60,893 in the six months ended October 31, 2020. |
| ● |
Equity securities at fair value increased by $5.9 million or 159%, to $9.6 million as of October 31, 2021, from $3.7 million as of October 31, 2020. |
| ● | Book value increased by $5.71 per share, or 312%, to $7.54 as of October 31, 2021, from $1.83 as of October 31, 2020. |
Marketable Securities
We have, from time to time, received equity securities in exchange for consulting work. All investments are initially measured at cost and are evaluated each quarter for changes in estimated fair value.
35
Competition
We compete with a number of public and private companies that provide assistance with capital raising, strategy, technology consulting, and digital marketing. Most of our competitors have significant financial resources and occupy entrenched positions in the market with name-brand recognition. The majority of our capital raising and digital marketing business is on the Internet.
The barriers to entry into most Internet markets are relatively low, making them accessible to a large number of entities and individuals. We believe the principal competitive factors in our industry that create certain barriers to entry include, but are not limited to reputation, technology, financial stability and resources, proven track record of successful operations, critical mass, and independent oversight and transparency of business practices. While these barriers will limit those able to enter or compete effectively in the market, it is likely that new competitors as well as laws and regulations of governmental authority will be established in the future, in addition to our known current competitors.
We face significant competition in every aspect of our business, including from companies that facilitate online capital formation and the sharing of content and information, companies that enable marketers to display advertising, companies that distribute video and other forms of media content, and companies that provide development platforms for applications developers. We compete to attract, engage, and retain customers, to attract and retain marketers, and to attract and retain developers to build compelling applications that integrate with our products.
Increased competition from current and future competitors may in the future materially adversely affect our business, revenues, operating results and financial condition.
Government Regulation
We are subject, both directly and indirectly, to various laws and regulations relating to our business. If any of the laws are amended, compliance could become more expensive and directly affect our income. We intend to comply with such laws, but new restrictions may arise that could materially adversely affect our Company. Specifically, the SEC regulates our funding portal business, and our funding portal is also a member of FINRA and is regulated by FINRA.
Employees
As of February 9, 2022, the Company had three members of its senior corporate personnel. As of February 9, 2022, we had approximately [44] employees, all of which were full time. None of our employees are unionized or covered by collective bargaining agreements, and we consider our current employee relations to be good.
Corporate History and Information
The company was incorporated in Utah in 1984 as DBS Investments, Inc. DBS merged with Valuesetters L.L.C. in December of 2003 and changed its name to Valuesetters, Inc. In November 2010, the company purchased NetGames.com to drive subscription revenue through online games such as chess.net. In the summer of 2017, Dr. Cecilia Lenk and Coreen Kraysler, CFA were hired to bring in consulting and advisory business. In November 2020, the company purchased Netcapital Funding Portal Inc. and changed the name of the parent company from Valuesetters, Inc. to Netcapital Inc., while the name of the consulting business was changed to Netcapital Advisors. In October 2021, the company purchased MSG Development Corp.
Our principal executive offices are located at State Street Financial Center, One Lincoln Street, Boston, Massachusetts and our telephone number is 781-925-1700. We maintain a website at www.netcapitalinc.com. Information contained on or accessible through our website is not, and should not be considered, part of, or incorporated by reference into, this prospectus and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus in deciding whether to purchase our securities.
36
PROPERTIES
We utilize an office at 1 Lincoln Street in Boston, Massachusetts. We currently pay rent of approximately $3,600 a month, and our lease agreement is through March 2022 for approximately 400 square feet in an office-suite location. The majority of our employees work remotely. We believe our current office space is suitable and adequate for its intended purposes and our near-term expansion plans.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding our executive officers and directors as of the date of this prospectus, as well as the Chief Executive Officer of our wholly-owned subsidiary, Netcapital Funding Portal, Inc.:
| Name | Age | Position | ||
| Cecilia Lenk | 66 | Chief Executive Officer and Chairman of the Board of Directors | ||
| Thomas H Carmody | 74 | Director | ||
| Avi Liss | 41 | Director | ||
| Steven Geary | 53 | Director | ||
| Coreen Kraysler | 57 | Chief Financial Officer | ||
| Jason Frishman | 29 | Chief Executive Officer of Netcapital Funding Portal Inc. |
Background Information about our Officers and Directors
Cecilia Lenk, Chairman of the Board and Chief Executive Officer
Cecilia Lenk has served as our Chairman of the Board of Directors and Chief Executive Officer since July 2017. Prior to that, she worked as a self-employed business consultant and a town councilor in Watertown, MA for five years.
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.
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.
37
Thomas Carmody, Director
Thomas Carmody has served as a Director of the Company since August 2010. He has over 40 years of 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.
Jason Frishman, CEO Netcapital Funding Portal Inc.
Jason Frishman is the founder and CEO of Netcapital Funding Portal Inc. and serves as a mentor and advisor for early stage companies in order to help reduce the systemic inefficiencies early-stage companies face in securing capital. He currently holds advisory positions at leading organizations in the financial technology ecosystem and has spoken as an external expert at Morgan Stanley, University of Michigan, YPO, and others. Jason has a background in the life sciences and previously conducted research in medical oncology at the Dana Farber Cancer Institute and cognitive neuroscience at the University of Miami, where he graduated summa cum laude with a B.S. in Neuroscience.
38
Term of Office
All our directors will hold office until their successors have been elected and qualified or appointed or the earlier of their death, resignation or removal. Executive officers are appointed and serve at the discretion of the board of directors.
Family Relationships
There are no family relationships among our directors or officers.
Board Composition
Our bylaws provide that the size of our board of directors will be determined from time to time by resolution of our board of directors. Currently, the board comprises four members, three of whom qualify as “independent” directors under any applicable standard.
Election of Directors
Our bylaws provide that members of our board or directors will be elected by a majority vote of our stockholders.
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 two independent directors, and the Company must have an audit committee, a majority of the members of which are independent directors. Nasdaq Rule 5065(b) requires that “[a] majority of the board of directors must be comprised of Independent Directors as defined in Rule 5605(a)(2).” Pursuant to these requirements, Avi Liss, Thomas Carmody, and Steven Geary are independent members of our Board of Directors.
Arrangements between Officers and Directors
Except as set forth herein, to our knowledge, there is no arrangement or understanding between any of our officers or directors and any other person pursuant to which the officer or director was selected to serve as an officer or director.
Board Meetings and Committees; Management Matters
Board Committees
Effective as of the effective date of the registration statement of which this prospectus forms a part, the Company’s Board will establish three standing Nasdaq compliance committees: Audit, Compensation, and Nominating and Corporate Governance. While we currently have an audit committee, such committee will be reconfigured to be in compliance with the Nasdaq governance standards effective as of the effective date of the registration statement of which this prospectus forms a part requiring that all members of such committee be independent. Currently, Cecelia Lenk serves on our audit committee. Effective as of the effective date of the registration statement of which this prospectus forms a part, our audit committee will consist of Avi Liss, Thomas Carmody, and Steven Geary. Each of the committees will operate pursuant to its charter. The committee charters will be reviewed annually by the Nominating and Corporate Governance Committee. If appropriate, and in consultation with the chairs of the other committees, the Nominating and Corporate Governance Committee may propose revisions to the charters. The responsibilities of each committee are described in more detail below.
Our board of directors took actions by written consent 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
Effective as of the effective date of the registration statement of which this prospectus forms a part, our board of directors will establish a Compensation Committee. Our Compensation Committee will consist of Avi Liss, Thomas Carmody, and Steven Geary.
The Compensation Committee oversees our compensation policies, plans and programs, and to review and determine the compensation to be paid to our executive officers and directors. In addition, the Compensation Committee has the authority to act on behalf of the Board in fulfilling the Board’s responsibilities with respect to compensation-based and related disclosures in filings as required by the Securities and Exchange Commission. This committee had no meetings in fiscal 2021.
39
Nominating and Corporate Governance Committee
Effective as of the effective date of the registration statement of which this prospectus forms a part, our board of directors will establish a Nominating and Governance Committee. Our Nominating and Governance Committee will consist of Avi Liss, Thomas Carmody, and Steven Geary.
The Nominating and Corporate Governance Committee (i) oversees our corporate governance functions on behalf of the Board; (ii) makes recommendations to the Board regarding corporate governance issues; (iii) identify and evaluate candidates to serve as our directors consistent with the criteria approved by the Board and reviews and evaluates the performance of the Board; (iv) serves as a focal point for communication between director candidates, non-committee directors and management; (v) selects or recommends to the Board for selection candidates to the Board, or, to the extent required below, to serve as nominees for director for the annual meeting of shareholders; and (vi) makes other recommendations to the Board regarding affairs relating to our directors. This committee held no meetings in fiscal 2021.
Audit Committee
Effective as of the effective date of the registration statement of which this prospectus forms a part, our Audit Committee members will consist of Thomas Carmody, Avi Liss and Steven Geary. Each of the members of our Audit Committee is an independent director under the Nasdaq listing rules, satisfies the additional independence criteria for Audit Committee members and satisfies the requirements for financial literacy under the Nasdaq listing rules and Rule 10A-3 of the Exchange Act, as applicable.
Our board has also determined that Mr. Liss qualifies as an Audit Committee financial expert within the meaning of the applicable rules and regulations of the SEC and satisfies the financial sophistication requirements of the Nasdaq listing rules.
Our Audit Committee oversees our corporate accounting and financial reporting process and assists our Board in monitoring our financial systems and our legal and regulatory compliance. Our Audit Committee also:
| ● | oversees the work of our independent auditors; |
| ● | approves the hiring, discharging and compensation of our independent auditors; |
| ● | approves engagements of the independent auditors to render any audit or permissible non-audit services; |
| ● | reviews the qualifications, independence and performance of the independent auditors; |
| ● | reviews our financial statements and our critical accounting policies and estimates; |
| ● | reviews the adequacy and effectiveness of our internal controls; |
| ● | reviews our policies with respect to risk assessment and risk management; |
| ● | reviews and monitors our policies and procedures relating to related person transactions; and |
| ● | reviews and discusses with management and the independent auditors the results of our annual audit, our quarterly financial statements and our publicly filed reports. |
As of the effective date of this registration statement, our Audit Committee will operate under a written charter approved by our Board and that satisfies the applicable rules and regulations of the SEC and the listing requirements of Nasdaq. The charter is available on the corporate governance section of our website, which is located at www.netcapitalinc.com
40
Code of Ethics
We have adopted a Code of Ethics and Business Conduct applicable to our directors, officers and employees, in accordance with Section 406 of the Sarbanes-Oxley Act, the rules of the SEC promulgated thereunder, and the Nasdaq listing rules. We have filed a copy of our form of the Code of Ethics and Business Conduct as an exhibit to the registration statement of which this prospectus is a part. You will be able to review this document by accessing our public filings at the SEC’s website at www.sec.gov. In addition, a copy of the Code of Ethics and Business Conduct will be provided without charge upon request from us. See the section of this prospectus entitled “Where You Can Find Additional Information.” If we make any amendments to our Code of Ethics and Business Conduct other than technical, administrative or other non-substantive amendments, or grant any waiver, including any implicit waiver, from a provision of the Code of Ethics and Business Conduct applicable to our principal executive officer, principal financial officer principal accounting officer or controller or persons performing similar functions requiring disclosure under applicable SEC or Nasdaq rules, we will disclose the nature of such amendment or waiver in a Current Report on Form 8-K. We also intend to post any amendments to our Code of Ethics and Business Conduct, or any waivers of its requirements, on our website, www.netcapitalinc.com.
Limitation of liability and indemnification matters
Our articles of incorporation contain provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Utah law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, unless the director engaged in gross negligence, willful misconduct or intentional infliction of harm on the corporation or its shareholders, or an intentional violation of criminal law.
We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. With specified exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these provisions in our articles of incorporation and the indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
The limitation of liability and indemnification provisions included in our articles of incorporation may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and our stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage.
41
EXECUTIVE COMPENSATION
Summary Compensation Table
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 former Chief Marketing Officer, or, collectively, the Named Executive Officers. We have no other executive officers. Also included in the table below is the compensation for the highest paid employee of our wholly-owned subsidiary, Netcapital Funding Portal, Inc., but who is not an executive officer of the Company.
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 | Fiscal 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, former CMO (until January 7, 2022)(2) | 2020 | 0 | 0 | 7,061 | 0 | 0 | 0 | 0 | 7,061 |
| Jason Frishman, CEO Netcapital Funding Portal |
2021 2020 |
114,284 60,000 |
114,284 |
| (1) | Represents the dollar amount of vested equity awards during the fiscal year. |
| (2) | Ms. Murko received severance of $7,384.50 and her 8,885 unvested shares vested upon termination, both pursuant to a separation agreement. |
Director Compensation
We have not paid any cash compensation to our directors in their capacity as such.
On February 9, 2022, we issued to each of our three independent board members, options to purchase 5,000 shares of common stock under the 2021 Equity Incentive Plan which will be exercisable at a per share exercise price of $10.50, that is out-of-the-money at time of issuance and expire ten years after the date of grant.
We issued Avi Liss 10,000 shares of our common stock valued at $7.50 per share on November 18, 2021 in consideration of his services as a director of the Company
Officer Compensation
Beginning in fiscal 2021, we pay each of our Named Executives Officers an annual salary of $96,000 per annum. Each Named Executive Officer has also received varying amounts of equity awards for their services. In addition to base pay, Carole Murko earned commissions on certain transactions.
Outstanding Equity Awards at Fiscal Year-End
On March 10, 2020, 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 remained unvested. These shares were fully vested upon Ms. Murko’s termination pursuant to the terms of a separation agreement.
42
Employment Agreements
We currently do not have any employment agreements with our executive officers. Prior to the termination of Carole Murko on January 7, 2022, we had an employment agreement with her as described below:
Employment Agreement with Carole Murko
We entered into an employment agreement with Carole Murko on March 10, 2020 pursuant to which we employed Ms. Murko as our Director of Busines Development. The agreement was for an initial term of four years. The agreement provided for an annual base salary during the term of the agreement of $1.00 plus a commission of 20% of the cash collected from revenues generated directly by Ms. Murko plus an unvested grant of stock-based compensation of 12,500 shares (after giving effect to the November 2020 1-for-2000 reverse stock split) of restricted stock. The stock vested over a 48 month period in equal installments of 260 shares per month. Ms. Murko is eligible for periodic bonuses or for additional salary in addition to her base salary.
The agreement also contained the following material provisions: eligible to participate in all employee fringe benefits and any pension and/or profit share plans; eligible to participate in any medical and health plans; entitled to up to eight weeks of paid time off; entitled to sick leave, sick pay and disability benefits; entitled to reimbursement for all reasonable and necessary business expenses. If Ms. Murko was to be terminated for any reason other than “cause” prior to the end of her term, then the Company will have no claim on the unvested portion of her 12,500 shares. If Ms. Murko resigned without “good reason” or retired before the end of her term, the unvested shares would have been returned to the Company. Ms. Murko agreed to non-compete and non-solicit terms under her agreement.
Compensation Plans
2021 Equity Incentive Plan
In November 2021, our board of directors adopted the 2021 Equity Incentive Plan, or (the Plan. An aggregate of 300,000 shares of our common stock is reserved for issuance and available for awards under the Plan, including incentive stock options granted under the Plan. The Plan administrator may grant awards to any employee, director, consultant or other person providing services to us or our affiliates. As of February 10, 2022, we had awarded an aggregate of 272,000 options to purchase shares of common stock to directors and there remain 28,000 shares for grant under the Plan.
The Plan is administered by our Board of Directors. The Plan administrator has the authority to determine, within the limits of the express provisions of the Plan, the individuals to whom awards will be granted, the nature, amount and terms of such awards and the objectives and conditions for earning such awards. Our Board of Directors may at any time amend or terminate the Plan, provided that no such action may be taken that adversely affects any rights or obligations with respect to any awards previously made under the Plan without the consent of the recipient. No awards may be made under the Plan after the tenth anniversary of its effective date.
Awards under the Plan may include incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted shares of common stock, restricted stock units, performance share awards, stock bonuses and other stock-based awards and cash-based incentive awards.
Stock Options. The Plan administrator may grant to a participant options to purchase our common stock that qualify as incentive stock options for purposes of Section 422 of the Internal Revenue Code (“incentive stock options”), options that do not qualify as incentive stock options (“non-qualified stock options”) or a combination thereof. The terms and conditions of stock option grants, including the quantity, price, vesting periods, and other conditions on exercise will be determined by the Plan administrator. The exercise price for stock options will be determined by the Plan administrator in its discretion, but non-qualified stock options and incentive stock options may not be less than 100% of the fair market value of one share of our company’s common stock on the date when the stock option is granted. Additionally, in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of our stock on the date of grant, the exercise price may not be less than 110% of the fair market value of one share of common stock on the date the stock option is granted. Stock options must be exercised within a period fixed by the Plan administrator that may not exceed ten years from the date of grant, except that in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of our stock on the date of grant, the exercise period may not exceed five years. At the Plan administrator’s discretion, payment for shares of common stock on the exercise of stock options may be made in cash, shares of our common stock held by the participant or in any other form of consideration acceptable to the Plan administrator (including one or more forms of “cashless” or “net” exercise).
43
Stock Appreciation Rights. The Plan administrator may grant to a participant an award of SARs, which entitles the participant to receive, upon its exercise, a payment equal to (i) the excess of the fair market value of a share of common stock on the exercise date over the SAR exercise price, times (ii) the number of shares of common stock with respect to which the SAR is exercised. The exercise price for a SAR will be determined by the Plan administrator in its discretion; provided, however, that in no event shall the exercise price be less than the fair market value of our common stock on the date of grant.
Restricted Shares and Restricted Units. The Plan administrator may award to a participant shares of common stock subject to specified restrictions (“restricted shares”). Restricted shares are subject to forfeiture if the participant does not meet certain conditions such as continued employment over a specified forfeiture period and/or the attainment of specified performance targets over the forfeiture period. The Plan administrator also may award to a participant units representing the right to receive shares of common stock in the future subject to the achievement of one or more goals relating to the completion of service by the participant and/or the achievement of performance or other objectives (“restricted units”). The terms and conditions of restricted share and restricted unit awards are determined by the Plan administrator.
Stock Bonuses. Stock bonuses may be granted as additional compensation for service or performance and may be settled in the form of common stock, cash or a combination thereof, and may be subject to restrictions, which may vest subject to continued service and/or the achievement of performance conditions.
Performance Awards. The Plan administrator may grant performance awards to participants under such terms and conditions as the Plan administrator deems appropriate. A performance award entitles a participant to receive a payment from us, the amount of which is based upon the attainment of predetermined performance targets over a specified award period. Performance awards may be paid in cash, shares of common stock or a combination thereof, as determined by the Plan administrator.
Other Stock-Based Awards. The Plan administrator may grant equity-based or equity-related awards, referred to as “other stock-based awards,” other than options, SARs, restricted shares, restricted units, or performance awards. The terms and conditions of each other stock-based award will be determined by the Plan administrator. Payment under any other stock-based awards will be made in common stock or cash, as determined by the Plan administrator.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Policies and Procedures for Transactions with Related Parties
Our Chief Executive Officer or our Chief Financial Officer must review and approve certain transactions between us and Related Parties (as defined below). A “Related-Party Transaction” is defined as a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we (including any of our subsidiaries) were, are or will be a participant.
For the purposes of our Related-Party Transactions, a “Related Party” is defined as: any person who is, or at any time since the beginning of our last two fiscal years was, a director or executive officer or a nominee to become a director; any person who is known to be the beneficial owner of more than ten percent of our common stock; any immediate family member of any of the foregoing persons, including any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, and any person (other than a tenant or employee) sharing the household of any of the foregoing persons; and any firm, corporation or other entity in which any of the foregoing persons is a general partner or, for other ownership interests, a limited partner or other owner in which such person has a beneficial ownership interest of 10% or more.
44
Transactions with Related Parties
Below we describe transactions and any series of related transactions to which we were a party, or may be a party, and which we have entered into since April 30, 2019.
The Company’s majority shareholder, Netcapital Systems LLC, owns 1,671,360 shares of common stock, or approximately 58% of the Company as of October 31, 2021. The Company has a demand note payable to Netcapital Systems LLC of $4,660 and a demand note payable to one of its managers of $3,200. In addition, as of April 30, 2021, the Company accrued a payable of $3,817,516 for supplemental consideration owed in conjunction with its purchase of Netcapital Funding Portal Inc., which was reduced to $294,054 as of October 31, 2021, because of the issuance to 361,736 shares of common stock, valued at $3,523,462. In total, the Company owed our largest shareholder $298,714 and $3,822,116 as of October 31, 2021 and April 30, 2021, respectively. The Company paid our majority shareholder $157,429 and $107,429 in the six- and three-month periods ended October 31, 2021, respectively, for use of the software that runs our 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 officers in the six- and three-month periods ended October 31, 2021 consisted of common stock valued at $101,327 and $8,396, respectively, and cash salary of $144,000 and $72,000, respectively. Netcapital Systems entered into an agreement with us on November 5, 2020 pursuant to which they agreed to vote their shares of common stock to support the resolutions of our board of directors on any matters brought to a shareholder vote.
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. Compensation to a related party consultant in the six- and three-month periods ended October 31, 2021 consisted of common stock valued at $25,908 and $6,530 respectively, and cash wages of $30,000 and $15,000, 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 October 31, 2021 and April 30, 2021. 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. This loan is due on demand.
The Company advanced $240,080, as of October 31, 2021, to 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, respectively, 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 a 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.
Coreen Kraysler, our Chief Financial Officer, has personally guaranteed a $500,000 promissory note from the U.S. Small Business Administration.
45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of and percent of the Company’s common stock beneficially owned as of February 10, 2022, by (i) each person (or group of affiliated persons) who is known by us to own more than five percent (5%) of the outstanding shares of our Common Stock, (ii) each director, executive officer and director nominee, and (iii) all of our directors, executive officers and director nominees as a group, immediately prior to this offering, and immediately after the closing of this offering, as adjusted to reflect the assumed sale of the units but without giving effect to the exercise of the warrants forming part of the units or the representative warrants or the exercise of the Representative’s over-allotment option. The percentage of shares beneficially owned before the offering is computed based on 2,896,844 shares of our common stock outstanding as of February 10, 2022.
We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to such securities. In addition, pursuant to such rules, we deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of February 10, 2022. We did not deem such shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the beneficial owners named in the table below have sole voting and investment power with respect to all shares of our common stock that they beneficially own, subject to applicable community property laws. The inclusion in the table below of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares.
46
| Name and Address | |||
| of Beneficial Owner (1) | Number of Shares | Percent of Common Stock* | |
| 5% Stockholders: | |||
| Netcapital Systems LLC (2) | 1,671,360 | 57.7% | |
| Officers and Directors: | |||
| Cecilia Lenk (3) | 22,917 | **% | |
| Coreen Kraysler (4) | 23,333 | **% | |
| Avi Liss (5) | 11,208 | **% | |
| Steven Geary (5) | 10,508 | **% | |
| Tom Carmody (5) | 2,708 | **% | |
| Officers and Directors as a group (5 persons) | 70,675 | 2.4% |
|
* Based on 2,896,844 shares of common stock outstanding as of February 9, 2022. ** 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) | The natural person with investment control over the securities held by Netcapital Systems LLC is Jason Frishman. Voting control over the securities has been given to the board of directors of Netcapital Inc. |
(3) Includes 417 shares of common stock subject to stock options that are presently exercisable or
exercisable within 60 days after February 10, 2022.
(4) Includes 833 shares of common stock subject to stock options that are presently exercisable or
exercisable within 60 days after February 10, 2022.
(5) Includes 208 shares of common stock subject to stock options that are presently exercisable or
exercisable within 60 days after February 10, 2022.
47
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there was a limited public market for our common stock, and a liquid trading market for our common stock may not develop or be sustained after this offering. Future sales of substantial amounts of our common stock in the public market, or the anticipation of such sales, could adversely affect prevailing market prices of our common stock from time to time and could impair our future ability to raise equity capital in the future. Furthermore, when additional shares of our common stock are available for sale shortly after this offering due to certain contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after such restrictions lapse, or the anticipation of such sales, could adversely affect the prevailing market price of our common stock and our ability to raise equity capital in the future.
Prior to the completion of this offering, there were 2,896,844 shares of common stock outstanding. Of the 2,896,844 shares of common stock outstanding, 250,000 shares of common stock previously were registered for resale under the Securities Act.
Upon the completion of this offering, we will have a total of [●] shares of common stock outstanding based upon 2,896,844 shares outstanding and the sale of [●] shares of common stock included in the units and assuming no exercise by the Representative of the over-allotment option to purchase additional units, and no exercise or conversion of outstanding options, warrants, or other securities convertible into or exchangeable for shares of our common stock (including the warrants sold in this offering). Of such outstanding shares:
| · | all of the shares of common stock sold in this offering will be freely tradable, except that any shares purchased in this offering by our affiliates, as that term is defined in Rule 144 under the Securities Act, would only be able to be sold in compliance with the Rule 144 limitations described below; and | |
| · | of the 2,896,844 shares outstanding prior to this offering [●] shares will be subject to the lock-up agreements described below, of which [●] shares are held by non-affiliates of the Company and may be sold immediately upon the expiration of the lock-up agreements, and [●] shares which are held by affiliates of the Company and subject to sale in compliance with the Rule 144. |
48
Sales of substantial amounts of common stock, including shares issued upon the exercise of outstanding options, or the perception that such sales could occur, could materially and adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity or equity-related securities at a time and price that we deem appropriate. See “Risk Factors— Sales of a substantial number of shares of our common stock following this offering may adversely affect the market price of our common stock and the issuance of additional shares will dilute all other stockholders.”
Lock-Up Agreements
We and our directors, officers and certain holders who own in the aggregate 5% or more of the outstanding shares of common stock as of the effective date of the registration statement related to this offering (and all holders of securities exercisable for or convertible into shares of common stock) will enter into customary “lock-up” agreements pursuant to which such persons and entities will agree not to offer, issue, sell, contract to sell, pledge, encumber, grant any option for the sale of or otherwise dispose of any of our securities for a period of six months after the date of this prospectus in the case of our directors and officers, and for a period of three months after the date of this offering in the case of any other 5% or greater holder and the company. The Representatives may, in their discretion, release any of the securities subject to these lock-up agreements at any time. Please see “Underwriting—Lock-Up Agreements” for a discussion of the terms of these agreements.
Rule 144
In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated) who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described above, within any three-month period, a number of shares that does not exceed the greater of:
| • | 1% of the number of the shares of common stock then outstanding, which will equal approximately [●] shares, based on the number of shares of our common stock outstanding upon completion of this offering; or | |
| • | The average weekly trading volume of the shares of common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. |
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
49
DESCRIPTION OF SECURITIES
General
Our articles of incorporation authorize the issuance of up to 900,000,000 shares of common stock, par value of $0.001 per share.
As of February 9, 2022, there were 2,896,844 shares of our common stock outstanding.
Common Stock
The holders of shares of our common stock are entitled to one vote per share. In addition, the holders of our common stock will be entitled to receive ratably such dividends, if any, as may be declared by our board of directors out of legally available funds; however, the current policy of our board of directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our common stock will be entitled to share ratably in all assets that are legally available for distribution. The holders of our common stock will have no preemptive rights.
Other Convertible Securities
As of February 10, 2022, in addition to the securities described above, there are options outstanding to purchase up to 272,000 shares of common stock under the 2021 Incentive Plan, with 28,000 shares available for future issuance.
Anti-Takeover Effects of Utah Law and Our Articles of incorporation and Bylaws
The provisions of Utah law, our articles of incorporation and our bylaws may have the effect of delaying, deferring or discouraging another person from acquiring control of our Company. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.
Articles of Incorporation and Bylaw Provisions
Our articles of incorporation and our bylaws include several provisions that could deter hostile takeovers or delay or prevent changes in control of our management team, including the following:
| • | Board of directors’ vacancies. Our articles of incorporation and bylaws provide that newly created directorships resulting from an increase in the number of directors and vacancies occurring in the board for any reason except the removal of directors without cause may be filled by a vote of the majority of directors then in office, although less than a quorum exists. Vacancies occurring by reason of the removal of directors without cause shall be filled by vote of the stockholders. A director elected to fill a vacancy caused by resignation, death or removal shall be elected to hold office for the unexpired term of his predecessor. In addition, the number of directors constituting our board of directors is permitted to be set only by a resolution adopted by our board of directors. These provisions prevent a stockholder from increasing the size of our board of directors and then gaining control of our board of directors by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our board of directors but promotes continuity of management. | |
| • | Special meeting of stockholders. Our bylaws provide that special meetings of our stockholders may be called only by our president or any two directors, thus prohibiting a stockholder from calling a special meeting. These provisions might delay the ability of our stockholders to force consideration of a proposal or for stockholders controlling a majority of our capital stock to take any action, including the removal of directors. |
50
| • | No cumulative voting. The Utah Business Corporation Act provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporation's articles of incorporation provide otherwise. Our articles of incorporation do not provide for cumulative voting. |
Limitations of Liability and Indemnification Matters
For a discussion of liability and indemnification, please see the section titled “Management—Limitation of Liability and Indemnification.”
Transfer Agent
The transfer agent and registrar for our common stock is Equity Stock Transfer LLC with its business address at 237 W 37th Street, Suite 602, New York, NY 10018. Its telephone number is (212) 575-5757 and its email address is info@equitystock.com.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF THE COMPANY’S COMMON STOCK
The following is a summary of the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the ownership and disposition of the Company’s common stock but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed, possibly retroactively, so as to result in U.S. federal income tax consequences different from those set forth below. No ruling on the U.S. federal, state, or local tax considerations relevant to the Company’s operations or to the purchase, ownership or disposition of its shares, has been requested from the IRS or other tax authority. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
This summary also does not address the tax considerations arising under the laws of any non-U.S., state or local jurisdiction, or under U.S. federal gift and estate tax laws, except to the limited extent set forth below. In addition, this discussion does not address tax considerations applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:
| ● | banks, insurance companies or other financial institutions, regulated investment companies or real estate investment trusts; |
| ● | persons subject to the alternative minimum tax or Medicare contribution tax on net investment income; |
| ● | tax-exempt organizations or governmental organizations; |
| ● | controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid U.S. federal income tax; |
| ● | brokers or dealers in securities or currencies; |
| ● | traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; |
| ● | persons that own, or are deemed to own, more than five percent of the Company’s capital stock (except to the extent specifically set forth below); |
| ● | U.S. expatriates and certain former citizens or long-term residents of the United States; |
51
| ● | partnerships or entities classified as partnerships for U.S. federal income tax purposes or other pass-through entities (and investors therein); |
| ● | persons who hold the Company’s common stock as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction or integrated investment; |
| ● | persons who hold or receive the Company’s common stock pursuant to the exercise of any employee stock option or otherwise as compensation; |
| ● | persons who do not hold the Company’s common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code; or |
| ● | persons deemed to sell the Company’s common stock under the constructive sale provisions of the Internal Revenue Code. |
In addition, if a partnership or entity classified as a partnership for U.S. federal income tax purposes holds the Company’s common stock, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold the Company’s common stock, and partners in such partnerships, should consult their tax advisors.
You are urged to consult your tax advisor with respect to the application of the U.S. federal income tax laws to your particular situation, as well as any tax consequences of the purchase, ownership and disposition of the Company’s common stock arising under the U.S. federal estate or gift tax rules or under the laws of any state, local, non-U.S., or other taxing jurisdiction or under any applicable tax treaty.
Non-U.S. Holder Defined
For purposes of this discussion, you are a non-U.S. holder (other than a partnership) if you are any holder other than:
| ● | an individual citizen or resident of the United States (for U.S. federal income tax purposes); |
| ● | a corporation or other entity taxable as a corporation created or organized in the United States or under the laws of the United States, any state thereof, or the District of Columbia, or other entity treated as such for U.S. federal income tax purposes; |
| ● | an estate whose income is subject to U.S. federal income tax regardless of its source; or |
| ● | a trust (x) whose administration is subject to the primary supervision of a U.S. court and which has one or more “U.S. persons” (within the meaning of Section 7701(a)(30) of the Internal Revenue Code) who have the authority to control all substantial decisions of the trust or (y) which has made a valid election to be treated as a U.S. person. |
Distributions
As described in “Dividend Policy,” the Company has never declared or paid cash dividends on its common stock and do not anticipate paying any dividends on its common stock in the foreseeable future. However, if the Company does make distributions on its common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from the Company’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both the Company’s current and its accumulated earnings and profits, they will constitute a return of capital and will first reduce your basis in the Company’s common stock, but not below zero, and then will be treated as gain from the sale of stock as described below under “— Gain on Disposition of common stock.”
Subject to the discussion below on effectively connected income, backup withholding and foreign accounts, any dividend paid to you generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. In order to receive a reduced treaty rate, you must provide us with an IRS Form W-8BEN, IRS Form W-8BEN-E, or other appropriate version of IRS Form W-8 certifying qualification for the reduced rate. A non-U.S. holder of shares of the Company’s common stock eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the non-U.S. holder’s behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent, which then will be required to provide certification to the Company or its paying agent, either directly or through other intermediaries.
52
Dividends received by you that are effectively connected with your conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, attributable to a permanent establishment maintained by you in the United States) are generally exempt from the withholding tax described above. In order to obtain this exemption, you must provide us with an IRS Form W-8ECI or other applicable IRS Form W-8 properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. In addition, if you are a corporate non-U.S. holder, dividends you receive that are effectively connected with your conduct of a U.S. trade or business may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. You should consult your tax advisor regarding any applicable tax treaties that may provide for different rules.
Gain on Disposition of Common Stock
Subject to the discussion below regarding backup withholding and foreign accounts, you generally will not be required to pay U.S. federal income tax on any gain realized upon the sale or other disposition of the Company’s common stock unless:
| ● | the gain is effectively connected with your conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, the gain is attributable to a permanent establishment maintained by you in the United States); |
| ● | you are a non-resident alien individual who is present in the United States for a period or periods aggregating 183 days or more during the taxable year in which the sale or disposition occurs and certain other conditions are met; or |
| ● | the Company’s common stock constitutes a United States real property interest by reason of its status as a “United States real property holding corporation,” or USRPHC, for U.S. federal income tax purposes at any time within the shorter of (i) the five-year period preceding your disposition of the Company’s common stock, or (ii) your holding period for its common stock. |
The Company believes that it is not currently and will not become a USRPHC for U.S. federal income tax purposes, and the remainder of this discussion so assumes. However, because the determination of whether it is a USRPHC depends on the fair market value of its U.S. real property relative to the fair market value of its other business assets, there can be no assurance that the Company will not become a USRPHC in the future. Even if it becomes a USRPHC, however, as long as the Company’s common stock is regularly traded on an established securities market, such common stock will be treated as U.S. real property interests only if you actually or constructively hold more than five percent of such regularly traded common stock at any time during the shorter of (i) the five-year period preceding your disposition of the Company’s common stock, or (ii) your holding period for the Company’s common stock.
If you are a non-U.S. holder described in the first bullet above, you will be required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates, and a corporate non-U.S. holder described in the first bullet above also may be subject to the branch profits tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty. If you are an individual non-U.S. holder described in the second bullet above, you will be required to pay a flat 30% tax (or such lower rate specified by an applicable income tax treaty) on the gain derived from the sale, which gain may be offset by U.S. source capital losses for the year (provided you have timely filed U.S. federal income tax returns with respect to such losses). You should consult any applicable income tax or other treaties that may provide for different rules.
Backup Withholding and Information Reporting
Generally, the Company must report annually to the IRS, regardless of whether any tax was withheld, the amount of dividends paid to you, your name and address and the amount of tax withheld, if any. A similar report will be sent to you. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in your country of residence.
Payments of dividends or of proceeds on the disposition of stock made to you may be subject to information reporting and backup withholding at a current rate of 24% unless you establish an exemption, for example, by properly certifying your non-U.S. status on an IRS Form W-8BEN, IRS Form W-8BEN-E, or another appropriate version of IRS Form W-8.
Backup withholding is not an additional tax; rather, the U.S. federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance Act, or FATCA, imposes withholding tax at a rate of 30% on dividends on and gross proceeds from the sale or other disposition of the Company’s common stock paid to “foreign financial institutions” (as specially defined under these rules), unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding the U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or otherwise establishes an exemption. FATCA also generally imposes a U.S. federal withholding tax of 30% on dividends on and gross proceeds from the sale or other disposition of the Company’s common stock paid to a “non-financial foreign entity” (as specially defined for purposes of these rules) unless such entity provides the withholding agent with a certification identifying certain substantial direct and indirect U.S. owners of the entity, certifies that there are none or otherwise establishes an exemption. The withholding provisions under FATCA generally apply to dividends on our common stock, and under current transition rules, are expected to apply with respect to the gross proceeds from the sale or other disposition of the Company’s common stock on or after January 1, 2019. An intergovernmental agreement between the United States and an applicable foreign country may modify the requirements described in this paragraph. Non-U.S. holders should consult their own tax advisors regarding the possible implications of this legislation on their investment in the Company’s common stock.
Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, holding and disposing of the Company’s common stock, including the consequences of any proposed change in applicable laws.
53
Underwriting
ThinkEquity LLC is acting as the Representative. On , 2022 we entered into an underwriting agreement with the Representative (the “Underwriting Agreement”). Subject to the terms and conditions of the Underwriting Agreement, we have agreed to sell, and each underwriter named below has severally agreed to purchase, the number of shares of common stock listed next to each underwriter’s name in the following table, at the public offering price less the underwriting discounts set forth on the cover page of this prospectus:
| Underwriters | Number of Shares | ||
| ThinkEquity LLC. | |||
| Total | |||
The underwriters have committed to purchase all of the shares of common stock offered by us in this offering, other than those covered by the over-allotment option described below. The obligations of the underwriters may be terminated upon the occurrence of certain events specified in the Underwriting Agreement. Furthermore, pursuant to the Underwriting Agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties, such as receipt by the underwriters of officers’ certificates and legal opinions.
The underwriters are offering the shares subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
The underwriters propose to offer the shares to the public at the public offering price set forth on the cover of the prospectus. After the shares are released for sale to the public, the underwriters may from time to time change the offering price and other selling terms.
Over-Allotment Option
We have granted to the Representative an option, exercisable for 45 days from the closing date of this offering, to purchase up to __________ additional shares of our common stock (15% of the shares sold in this offering) at the initial public offering price, less the underwriting discounts and commissions. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent that the option is exercised, each underwriter must purchase additional shares of our common stock in an amount that is approximately proportionate to that underwriter’s initial purchase commitment (set forth in the table above). Any shares of our common stock issued or sold under the option will be issued and sold on the same terms and conditions as the other shares of our common stock that are the subject of this offering.
Discounts and Commissions
The Representative has advised that the underwriters propose to offer the shares to the public at the public offering price per share set forth on the cover page of this prospectus. The underwriters may offer the shares to securities dealers at that price less a concession of not more than ________ per share, of which up to ________ may be re-allowed to other dealers.
The following table summarizes the public offering price, underwriting discounts and commissions, and proceeds to us before expenses assuming both no exercise and full exercise by the underwriters of the over-allotment option.
| Per Share | Without Over- Allotment |
With Over- Allotment | |||||||||
| Public offering price | $ | ||||||||||
| Underwriting discount (7.5%) (1) | $ | ||||||||||
| Proceeds, before expenses, to us | $ | ||||||||||
———————
| (1) | We have agreed to pay a non-accountable expense allowance to the Representative equal to 1% of the gross proceeds received in this offering (excluding proceeds received from exercise of the underwriters’ over-allotment option) which is not included in the underwriting discounts and commission. |
54
We have paid an expense deposit of $50,000 to the Representative, which will be applied against the Representative’s accountable out-of-pocket expenses (in compliance with FINRA Rule 5110(f)(2)(C)) that are payable by us in connection with this offering. We have agreed to reimburse the Representative for all expenses relating to the offering, including, without limitation, (a) all filing fees and communication expenses relating to the registration of the Shares to be sold in the offering (including the over-allotment Shares) with the SEC; (b) all filing fees and expenses associated with the review of the offering by FINRA; (c) all fees and expenses relating to the listing of such Shares on Nasdaq, including any fees charged by The Depository Trust Company (DTC) for new securities; (d) all fees, expenses and disbursements relating to background checks of the Company’s officers, directors and entities in an amount not to exceed $15,000 in the aggregate; (e) all fees, expenses and disbursements relating to the registration or qualification of such Shares under the “blue sky” securities laws of such states, if applicable, and other jurisdictions as the Representative may reasonably designate; (f) all fees, expenses and disbursements relating to the registration, qualification or exemption of such Shares under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (g) the costs of all mailing and printing of the underwriting documents (including, without limitation, the underwriting Agreement, any Blue Sky Surveys and, if appropriate, any agreement among Underwriters, selected dealers’ agreement, underwriters’ questionnaire and power of attorney), registration statements, prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final prospectuses as the Representative may reasonably deem necessary; (h) the costs and expenses of the public relations firm; (i) the costs of preparing, printing and delivering certificates representing the Shares; (j) fees and expenses of the transfer agent for the common Stock; (k) stock transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Representative; (l) the costs associated with advertising the offering in the national editions of the Wall Street Journal and New York Times; (m) the costs associated with bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones in such quantities as the Representative may reasonably request, in an amount not to exceed $3,000; (n) the fees and expenses of the Company’s accountants; (o) the fees and expenses of the Company’s legal counsel and other agents and representatives; (p) the fees and expenses of the Underwriter’s legal counsel not to exceed $125,000; (q) the $29,500 cost associated with the use of Ipreo’s book building, prospectus tracking and compliance software for the offering; (r) $10,000 for data services and communications expenses; (s) up to $10,000 of the Representative’s actual accountable “road show” expenses; and (t) up to $10,000 of the Representative’s market making and trading, and clearing firm settlement expenses for the offering.
We expect that the total expenses of the offering payable by us, excluding underwriting discount and commissions, will be approximately $_____.
Representative’s Warrants
We have also agreed to issue to the Representative, at the closing of this offering, Representative’s Warrants to purchase up to an aggregate of ________ shares of our common stock (5% of the shares of common stock sold in the offering, excluding any shares sold upon exercise of the Representative’s over-allotment option). The Representative’s Warrants are exercisable at a per share price equal to 125% of the public offering price per share in this offering (excluding the over-allotment option). The Representative’s Warrants are exercisable at any time and from time to time, in whole or in part, commencing on the six month anniversary of the commencement of sales in this offering and expiring on the date that is four and a half years following the date that such warrants become exercisable. The registration statement of which this prospectus forms a part also registers the Representative’s Warrants and underlying shares of common stock.
The Representative’s Warrants are deemed underwriter compensation by FINRA and are, therefore, subject to a 180-day lock-up pursuant to FINRA Rule 5110(g)(1). The Representative (or permitted assignees under Rule 5110(g)(1)) will not sell, transfer, assign, pledge or hypothecate these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the commencement of sales in this offering. In addition, the Representative’s Warrants provide for registration rights upon request, in certain cases. The demand registration right provided will not be greater than five years from the effective date of this offering in compliance with FINRA Rule 5110(f)(2)(G)(iv). The piggyback registration right provided will not be greater than seven years from the effective date of this offering in compliance with FINRA Rule 5110(f)(2)(G)(v). We will bear all fees and expenses attendant to registering the securities issuable on exercise of the Representative’s Warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the Representative’s Warrants may be adjusted in certain circumstances including in the event of a stock dividend or our recapitalization, reorganization, merger, or consolidation. However, neither the Representative Warrant exercise price, nor the number of shares of common stock underlying such warrants, will be adjusted for issuances of shares of common stock by the Company at a price below the exercise price of the Representative’s Warrants.
55
Discretionary Accounts
The underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.
Lock-Up Agreements
Pursuant to certain “lock-up” agreements, we and holders of 5% or greater of our outstanding shares have agreed, for a period of three (3) months from the closing date of this offering, and with respect to our executive officers and directors, for a period of six (6) months from the closing date of this offering, not to engage in any of the following, whether directly or indirectly, without the Representative’s consent: offer to sell, sell, contract to sell pledge, grant, lend, or otherwise transfer or dispose of our common stock or any securities convertible into or exercisable or exchangeable for our common stock (the “Lock-Up Securities”); enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities; make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any Lock-Up Securities; enter into any transaction, swap, hedge, or other arrangement relating to any Lock-Up Securities subject to customary exceptions; or publicly disclose the intention to do any of the foregoing. Additionally, the Company agrees that for a period of 24 months after the Offering it will not directly or indirectly in any “at-the-market”, continuous equity or variable rate transaction, offer to sell, sell, contract to sell, grant any option to sell or otherwise dispose of shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company, without the prior written consent of the Representative.
Right of First Refusal
We have granted the Representative a right of first refusal, for a period of 24 months from the consummation of this offering, to act as sole investment banker, sole book-runner and/or sole placement agent, at the Representative’s sole discretion, for each and every future public and private equity and debt offering, including all equity linked financings, during such 24 month period, for us, or any successor to or any subsidiary of us, on terms customary for the Representative. The Representative will have the sole right to determine whether any other broker-dealer shall have the right to participate in any such offering and the economic terms of any such participation.
Indemnification
We have agreed to indemnify the underwriters against liabilities relating to this offering that may arise under the Securities Exchange Act of 1934 and from any breach of the representations and warranties contained in the Underwriting Agreement. We have further agreed to contribute to payments that the underwriters may be required to make for these liabilities.
Electronic Offer, Sale and Distribution of Shares
This prospectus in electronic format may be made available on websites or through other online services maintained by one or more of the underwriters, or by their affiliates. Other than this prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors.
Offer Restrictions Outside of the United States
Other than in the United States, no action has been taken that would permit a public offering of our common stock in any jurisdiction where action for the purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that country or jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
56
Australia
This prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the securities under this prospectus is only made to persons to whom it is lawful to offer the securities without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the securities sold to the offeree within 12 months after its transfer to the offeree under this prospectus.
Canada
The shares of common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
China
The information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in the People’s Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan). The securities may not be offered or sold directly or indirectly in the PRC to legal or natural persons other than directly to “qualified domestic institutional investors.”
European Economic Area—Belgium, Germany, Luxembourg and Netherlands
The information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption under the Directive 2003/71/EC (“Prospectus Directive”), as implemented in Member States of the European Economic Area (each, a “Relevant Member State”), from the requirement to produce a prospectus for offers of securities. An offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:
| ● | to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; | |
| ● | to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements) and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements); | |
| ● | to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive) subject to obtaining the prior consent of the Company or any underwriter for any such offer; or | |
| ● | in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by the Company of a prospectus pursuant to Article 3 of the Prospectus Directive. |
57
France
This document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers) in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code Monétaire et Financier) and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.
This document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.
Such offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D.744-1, D.754-1 ;and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle restreint d’investisseurs) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1; and D.764-1 of the French Monetary and Financial Code and any implementing regulation.
Pursuant to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed (directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the French Monetary and Financial Code.
Ireland
The information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations and (ii) fewer than 100 natural or legal persons who are not qualified investors.
Israel
The securities offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (the ISA), nor have such securities been registered for sale in Israel. The shares may not be offered or sold, directly or indirectly, to the public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with the offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the securities being offered. Any resale in Israel, directly or indirectly, to the public of the securities offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.
Italy
The offering of the securities in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale per le Società e la Borsa, or “CONSOB”) pursuant to the Italian securities legislation and, accordingly, no offering material relating to the securities may be distributed in Italy and such securities may not be offered or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No. 58”), other than:
| ● | to Italian qualified investors, as defined in Article 100 of Decree no.58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 1197l”) as amended (“Qualified Investors”); and | |
| ● | in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended. | |
| ● | Any offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be: | |
| ● | made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and | |
| ● | in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws. |
58
Any subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity transferring the securities for any damages suffered by the investors.
Japan
The securities have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948), as amended (the “FIEL”) pursuant to an exemption from the registration requirements applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly, the securities may not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified Institutional Investor who acquires securities may not resell them to any person in Japan that is not a Qualified Institutional Investor, and acquisition by any such person of securities is conditional upon the execution of an agreement to that effect.
Portugal
This document is not being distributed in the context of a public offer of financial securities (oferta pública de valores mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários). The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not be, submitted to the Portuguese Securities Market Commission (Comissăo do Mercado de Valores Mobiliários) for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code. Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors” (as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.
Sweden
This document has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document may not be made available, nor may the securities be offered for sale in Sweden, other than under circumstances that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980) om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are “qualified investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they may not distribute it or the information contained in it to any other person.
Switzerland
The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the securities may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering material relating to the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority (FINMA).
This document is personal to the recipient only and not for general circulation in Switzerland.
59
United Kingdom
Neither the information in this document nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (“FSMA”) has been published or is intended to be published in respect of the securities. This document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the securities may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any other person in the United Kingdom.
Any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the securities has only been communicated or caused to be communicated and will only be communicated or caused to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to the Company.
In the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (“FPO”), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together “relevant persons”). The investments to which this document relates are available only to, and any invitation, offer or agreement to purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts, or NI 33-105, the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Stabilization
In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering transactions, penalty bids and purchases to cover positions created by short sales.
Stabilizing transactions permit bids to purchase shares so long as the stabilizing bids do not exceed a specified maximum, and are engaged in for the purpose of preventing or retarding a decline in the market price of the shares while the offering is in progress.
Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares that the underwriters are obligated to purchase. This creates a syndicate short position which may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that the underwriters purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares that the underwriters purchase in the over-allotment option. The underwriters may close out any short position by exercising their over-allotment option and/or purchasing shares in the open market.
Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared with the price at which they may purchase shares through exercise of the over-allotment option. If the underwriters sell more shares than could be covered by exercise of the over-allotment option and, therefore, have a naked short position, the position can be closed out only by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that after pricing there could be downward pressure on the price of the shares in the open market that could adversely affect investors who purchase in the offering.
Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the shares originally sold by that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of our shares of common stock. As a result, the price of our common stock in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may be effected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.
Passive market making
In connection with this offering, underwriters and selling group members may engage in passive market making transactions in our common stock on the Nasdaq Capital Market in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the shares and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, then that bid must then be lowered when specified purchase limits are exceeded.
Other Relationships
The underwriters and their affiliates have in the past provided, and may in the future provide, various advisory, investment banking and banking and other financial services for us in the ordinary course of business, for which may receive customary fees and commissions. In connection with the Company’s exploration of possible bridge financing, we entered into an agreement with the Representative pursuant to which the Representative will act as placement agent in connection with such possible bridge financing and we will pay the Representative a cash fee of 10% of the aggregate gross proceeds received by the Company in such possible bridge financing and will issue to the Representative one or more warrants to purchase up to an aggregate number of shares of our common stock equal to 10% of the aggregate number of shares underlying any convertible securities issued in such possible bridge financing, which shall be exercisable at any time and from time to time, in whole or in part, during the four and one-half year period commencing 180 days from the commencement of sales of the securities in this offering, and otherwise on the same terms and conditions as such securities issued in such possible bridge financing. Pursuant to such agreement, in connection with the issuance and sale of the February 2022 Notes, the Company paid to the Representative a cash payment equal to $30,000 and $10,000 for expenses and will issue to the Representative at the closing of this offering a warrant to purchase up to 30,000 shares of common stock exercisable at any time and from time to time, in whole or in part, during the four and one-half year period commencing 180 days from the commencement of sales of the securities in this offering, and otherwise on the same terms and conditions as the February 2022 Notes . We have no present arrangements with any of the underwriters for any further services.
60
LEGAL MATTERS
The validity of the shares of common stock offered hereby has been passed upon for us by Sheppard Mullin Richter & Hampton, LLP, New York, New York. Sullivan & Worcester LLP, New York, New York, is acting as counsel to the underwriters.
EXPERTS
Our consolidated financial statements for the fiscal years ended April 30, 2021 and 2020, appearing herein, have been audited by Fruci & Associates II, PLLC, an independent registered public accounting firm, as set forth in its report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the securities offered by this prospectus. This prospectus, which constitutes a part of that registration statement, does not contain all of the information set forth in the registration statement or the accompanying exhibits and schedules. Some items included in the registration statement are omitted from this prospectus in accordance with the rules and regulations of the SEC. For further information with respect to us and the securities offered in this prospectus, we refer you to the registration statement and the accompanying exhibits and schedules. Statements contained in this prospectus regarding the contents of any contract, agreement or any other document are summaries of the material terms of these contracts, agreements or other documents. With respect to each of these contracts, agreements or other documents filed as an exhibit to the registration statement, reference is made to such exhibit for a more complete description of the matter involved.
A copy of the registration statement and the accompanying exhibits and schedules and our annual reports, quarterly reports, current reports, and proxy and information statements any other document we file may be obtained on the website the SEC maintains that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the SEC’s website is http://www.sec.gov. Such filings are also available at our website at http://www.netcapitalinc.com. Website materials are not a part of this prospectus.
61
| NETCAPITAL INC. |
| INDEX TO FINANCIAL STATEMENTS |
| Audited Consolidated Financial Statements | Page No. | ||
| Report of Independent Registered Public Accounting Firm | F-3 | ||
| Consolidated Balance Sheets as of April 30, 2021 and 2020 | F-4 | ||
| Consolidated Statements of Income for the years ended April 30, 2021 and 2020 | F-5 | ||
| Consolidated Statements of Shareholders' Deficit for the years ended April 30, 2021 and 2020 | F-6 | ||
| Consolidated Statements of Cash Flows for the years ended April 30, 2021 and 2020 | F-7 | ||
| Notes to Consolidated Financial Statements | F-8 | ||
| Unaudited Condensed Consolidated Financial Statements | |||
| Condensed Consolidated Balance Sheets as of October 31, 2021 and 2020 | F-18 | ||
| Condensed Consolidated Statements of Income for the Three and Six Months Ended October 31, 2021 and 2020 | F-19 | ||
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 31, 2021 and 2020 | F-21 | ||
| Condensed Consolidated Statements of Stockholders’ Equity Six Months Ended October 31, 2021 and 2020 | F-20 | ||
| Notes to Condensed Consolidated Financial Statements | F-22 |
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 | $ | $ | ||||||
| Accounts receivable net | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Deposits | ||||||||
| Deferred tax assets | ||||||||
| Purchased technology | ||||||||
| Investment in affiliate | ||||||||
| Equity securities at fair value | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Trade | $ | $ | ||||||
| Related party | ||||||||
| Accrued expenses | ||||||||
| Stock subscription payable | ||||||||
| Deferred revenue | ||||||||
| Interest payable | ||||||||
| Deferred tax liability | ||||||||
| Related party debt | ||||||||
| Secured note payable | ||||||||
| Current portion of SBA loans | ||||||||
| Loan payable - bank | ||||||||
| Demand notes payable | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Long-term SBA loans, less current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, $ par value; shares authorized, and shares issued and outstanding | ||||||||
| Capital in excess of par value | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
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 | $ | $ | ||||||
| Costs of services | ||||||||
| Gross profit | ||||||||
| Costs and expenses: | ||||||||
| Stock-based compensation | ||||||||
| Consulting expense | ||||||||
| Marketing | ||||||||
| Rent | ||||||||
| Payroll and payroll related expenses | ||||||||
| General and administrative closts | ||||||||
| Total costs and expenses | ||||||||
| Operating income (loss) | ( | ) | ||||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Realized loss on sale of investments | ( | ) | ||||||
| Unrealized gain on equity securities | ( | ) | ||||||
| Other income | ||||||||
| Total other income (expense) | ( | ) | ||||||
| Net income before taxes | ||||||||
| Net income tax (expense) benefit: | ||||||||
| Income taxes | ( | ) | ( | ) | ||||
| Change in deferred tax assets | ||||||||
| Net income tax (expense) benefit | (613,000 | ) | 180,000 | |||||
| Net income | $ | $ | ||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
| Weighted average number of common shares outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
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 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Q1 stock-based compensation | ||||||||||||||||||||
| Net income, July 31, 2019 | — | |||||||||||||||||||
| Balance, July 31, 2019 | ( | ) | ( | ) | ||||||||||||||||
| Q2 stock-based compensation | ||||||||||||||||||||
| Net income, October 31, 2019 | — | |||||||||||||||||||
| Balance, October 31, 2019 | ( | ) | ||||||||||||||||||
| Q3 stock-based compensation | ||||||||||||||||||||
| Net income, January 31, 2020 | — | |||||||||||||||||||
| Balance, January 31, 2020 | ( | ) | ||||||||||||||||||
| Q4 stock-based compensation | ||||||||||||||||||||
| Net loss, April 30, 2020 | — | ( | ) | ( | ) | |||||||||||||||
| Balance, April 30, 2020 | ( | ) | ||||||||||||||||||
| Q1 stock-based compensation | ||||||||||||||||||||
| Net income, July 31, 2020 | — | |||||||||||||||||||
| Balance, July 31, 2020 | ( | ) | ||||||||||||||||||
| Q2 stock-based compensation | ||||||||||||||||||||
| Net income, October 31, 2020 | — | |||||||||||||||||||
| Balance, October 31, 2020 | ( | ) | ||||||||||||||||||
| Shares issued to acquire funding portal | ||||||||||||||||||||
| Return of shares of common stock | ( | ) | ( | ) | ||||||||||||||||
| Q3 stock-based compensation | ||||||||||||||||||||
| Net income, January 31, 2021 | — | |||||||||||||||||||
| Balance, January 31, 2021 | ( | ) | ||||||||||||||||||
| Q4 stock-based compensation | ||||||||||||||||||||
| Shares issued for debt settlement | ||||||||||||||||||||
| Net income, April 30, 2021 | ||||||||||||||||||||
| Balance, April 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
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 | $ | $ | ||||||
| Adjustment to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Non-cash revenue from the receipt of equity | ( | ) | ( | ) | ||||
| Provision for bad debts | ||||||||
| Impairment of assets | ||||||||
| Unrealized gain on equity securities | ( | ) | ||||||
| Changes in deferred taxes | ( | ) | ||||||
| Changes in non-cash working capital balances: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Contract receivable | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Accrued interest payable | ||||||||
| Related party payable | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Proceeds from purchase of funding portal subsidiary | ||||||||
| Investment in affiliate | ( | ) | ||||||
| Net cash provided by investing activities | ||||||||
| FINANCING ACTIVITIES | ||||||||
| Proceeds from SBA loans | ||||||||
| Proceeds from stock subscriptions | ||||||||
| Payment on related party note | ( | ) | ||||||
| Cash flow provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash and cash equivalents, beginning of the period | ||||||||
| Cash and cash equivalents, end of the period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental Non-Cash Investing and Financing Information: | ||||||||
| Common stock issued as prepaid compensation | $ | $ | ||||||
| Common stock issued to purchase subsidiary | $ | $ | ||||||
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 $
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 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
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 | $ | $ | % | |||||||||
| Notes payable – related parties | % | |||||||||||
| Demand notes payable | % | |||||||||||
| U.S. SBA loan | % | |||||||||||
| U.S. SBA loan | % | |||||||||||
| U.S. SBA loan | % | |||||||||||
| Loan payable – bank | % | |||||||||||
| Total debt | ||||||||||||
| Less: current portion of long-term debt | ||||||||||||
| Total long-term debt | $ | $ | ||||||||||
As of April 30, 2021
and 2020, the Company owed its principal lender (“Lender”) $
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, 2023.
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 $
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 | $ | |||||
| 2023 | ||||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| Thereafter | ||||||
| Minimum future payments of principal | $ | |||||
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 | $ | $ | $ | $ | ||||||||||||
| April 30, 2020 | ||||||||||||||||
| Equity securities at fair value | $ | $ | $ | $ | ||||||||||||
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 $
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 | $ | $ | ||||||
| Bad debt expense | ||||||||
| Stock-based compensation | ||||||||
| Asset impairment loss | ||||||||
| Deferred tax assets | ||||||||
| Deferred tax liability | ||||||||
| Unrealized gain | ||||||||
| Total deferred tax liability | ||||||||
| Total net deferred tax assets (liabilities) | $ | ( | ) | $ | ||||
F-11 |
The valuation allowance is $
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 $and $,
respectively, in stock-based compensation expense. As of April 30, 2021 and 2020, there was $
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 | $ | $ | ||||||
| Chief Financial Officer | ||||||||
| Chief Marketing Officer | ||||||||
| Related party consultant | ||||||||
| Marketing consultant | ||||||||
| Marketing consultant | ||||||||
| Marketing consultant | ||||||||
| Marketing consultant | ||||||||
| Business consultant | ||||||||
| Total | $ | $ | ||||||
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 | ||||||||
| Chief Financial Officer | ||||||||
| Chief Marketing Officer | ||||||||
| Related party consultant | ||||||||
| Business consultant | ||||||||
| Marketing consultant | ||||||||
| Marketing consultant | ||||||||
| Marketing consultant | ||||||||
| Total | ||||||||
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 | $ | $ | ||||||
| Chief Financial Officer | ||||||||
| Related party consultant | ||||||||
| Business consultant | ||||||||
| Marketing consultant | ||||||||
| Marketing consultant | ||||||||
| Total | $ | $ | ||||||
F-12 |
Earnings per common share data was computed as follows:
| Schedule of earnings per share | ||||||||
| 2021 | 2020 | |||||||
| Net income (loss) | $ | $ | ||||||
| Weighted average common shares outstanding | ||||||||
| Effect of dilutive securities | ||||||||
| Weighted average dilutive common shares outstanding | ||||||||
| Earnings per common share – basic | $ | $ | ||||||
| Earnings per common share – diluted | $ | $ | ||||||
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 $
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 $
We owe
Steven Geary, a director, $31,680
as of April 30, 2021 and 2020. This obligation
is not interest bearing. $
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 $
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 corporate name from ValueSetters, Inc. to Netcapital Inc and to amend 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 | $ | |||
| Payment of promissory notes and interest | ||||
| Total consideration | $ | |||
| Recognized amounts of identifiable assets acquired and liabilities assumed: | ||||
| Cash | $ | |||
| Current assets | ||||
| Accounts payable | ( | ) | ||
| Platform users | ||||
| Platform investors | ||||
| Platform issuers | ||||
| Unpatented technology | ||||
| Total identifiable net assets | $ |
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 | $ | $ | ||||||||||
| Supplemental pro forma for 4/1/19 – 11/04/19 | $ | $ | ||||||||||
Included
in the supplemental pro forma information above is revenue earned by the Company from Netcapital Systems LLC of $
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 |
NETCAPITAL INC.
Condensed Consolidated Balance Sheets
|
Assets: |
|
(Unaudited) |
|
|
(Audited) |
|
||
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Accounts receivable net |
|
|
|
|
|
|
|
|
|
Receivable from bank |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
Notes receivable - related parties |
|
|
|
|
|
|
|
|
|
Purchased technology |
|
|
|
|
|
|
|
|
|
Investment in affiliate |
|
|
|
|
|
|
|
|
|
Equity securities at fair value |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
|
|
|
Trade |
|
$ |
|
|
|
$ |
|
|
|
Related party |
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
|
|
|
|
|
|
|
|
Stock subscription payable |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
Interest payable |
|
|
|
|
|
|
|
|
|
Deferred tax liability, net |
|
|
|
|
|
|
|
|
|
Related party debt |
|
|
|
|
|
|
|
|
|
Secured note payable |
|
|
|
|
|
|
|
|
|
Current portion of SBA loans |
|
|
|
|
|
|
|
|
|
Loan payable - bank |
|
|
|
|
|
|
|
|
|
Demand notes payable |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
Long-term SBA loans, less current portion |
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
Common stock, $ par value; shares authorized, and shares issued and outstanding |
|
|
|
|
|
|
|
|
|
Capital in excess of par value |
|
|
|
|
|
|
|
|
|
Retained earnings (deficit) |
|
|
|
|
|
|
( |
) |
|
Total stockholders’ equity |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
|
|
|
$ |
|
|
See Accompanying Notes to the Consolidated Financial Statements
F-16 |
NETCAPITAL INC.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Costs of services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and payroll related expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Unrealized gain on equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net income before taxes |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Income tax provision (benefit) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Diluted earnings per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Consolidated Financial Statements
F-17 |
NETCAPITAL INC.
Statements of Changes in Stockholders’ Equity (Unaudited)
For the Six Months Ended October 31, 2021 and the Years Ended April 30, 2021 and 2020
| Common Stock | Capital in Excess of | Retained Earnings | Total | |||||||||||||||||
|
| Shares |
|
| Amount |
|
| Par Value |
|
| (Deficit) |
|
| Equity |
| |||||
Balance, April 30, 2019 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
Q1 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income, July 31, 2019 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Balance, July 31, 2019 |
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income, October 31, 2019 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Balance, October 31, 2019 |
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income, January 31, 2020 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Balance, January 31, 2020 |
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss, April 30, 2020 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance, April 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income, July 31, 2020 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income, October 31, 2020 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to acquire funding portal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Return of shares of common stock |
|
|
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Q3 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income, January 31, 2021 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares issued for debt settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income, April 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Sale of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares issued to acquire funding portal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net income, July 31, 2021 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss, October 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance, October 31, 2021 |
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
| |
See Accompanying Notes to the Consolidated Financial Statements
F-18 |
NETCAPITAL INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustment to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
Non-cash revenue from the receipt of equity |
|
|
( |
) |
|
|
( |
) |
|
Unrealized gain on equity securities |
|
|
( |
) |
|
|
|
|
|
Changes in deferred taxes |
|
|
|
|
|
|
|
|
|
Changes in non-cash working capital balances: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
|
Receivable from bank |
|
|
( |
) |
|
|
|
|
|
Prepaid expenses |
|
|
|
|
|
|
( |
) |
|
Accounts payable and accrued expenses |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Loans to affiliates |
|
|
( |
) |
|
|
|
|
|
Investment in affiliate |
|
|
( |
) |
|
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Proceeds from SBA loans |
|
|
|
|
|
|
|
|
|
Proceeds from stock subscriptions |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
( |
) |
|
|
|
|
|
Cash and cash equivalents, beginning of the period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
|
|
|
$ |
|
|
|
Cash paid for interest |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Non-Cash Financing Information: |
|
|
|
|
|
|
|
|
|
Common stock issued to reduce related party payable |
|
$ |
|
|
|
$ |
|
|
See Accompanying Notes to the Consolidated Financial Statements
F-19 |
NETCAPITAL INC.
Notes To Condensed Consolidated Financial Statements (Unaudited)
Note 1– Basis of Presentation
The accompanying unaudited condensed financial statements of Netcapital Inc. (the “Company”) 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 six- and three-month periods ended October 31, 2021, are not necessarily indicative of the results that may be expected for the fiscal year ended April 30, 2022. 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, 2021.
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 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 – Concentrations
For the six- and three-month periods ended October 31, 2021, the Company had one customer that constituted
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.
F-20 |
The Company identifies performance obligations in contracts with customers, which primarily are professional services, listing fees on our funding portal, and a success 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.
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 are 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.
F-21 |
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 six- and three-month periods ended October 31, 2021, which amounted to $
Net income (loss) per common and diluted shares were calculated as follows for the six- and three-month periods ended October 31, 2021 and 2020:
|
|
|
Six Months |
|
|
Six Months |
|
|
Three Months |
|
|
Three Months |
|
||||
|
Net income (loss) attributable to common stockholders – basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Adjustments to net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders – diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share - basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Earnings (loss) per common share - diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
35,557 shares that are issuable to satisfy a supplemental consideration liability were included for the calculation of earnings per share for the six months ended October 31, 2021 because their effect is dilutive. 35,557 shares that are issuable to satisfy a supplemental consideration liability were excluded for the calculation of loss per share for the three months ended October 31, 2021 because their effect is antidilutive. No dilutive securities existed for the six- and three-month periods ended October 31, 2020.
F-22 |
Note 5 – Principal Financing Arrangements
The following table summarizes components debt as of October 31, 2021 and April 30, 2021:
Schedule of debt
|
|
|
October 31, |
|
|
April 30, 2021 |
|
|
Interest Rate |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured lender |
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
Notes payable – related parties |
|
|
|
|
|
|
|
|
|
|
|
% |
|
U.S. SBA loan |
|
|
|
|
|
|
|
|
|
|
|
% |
|
U.S. SBA loan |
|
|
|
|
|
|
|
|
|
|
|
% |
|
U.S. SBA loan |
|
|
|
|
|
|
|
|
|
|
|
% |
|
Loan payable – bank |
|
|
|
|
|
|
|
|
|
|
|
% |
|
Total Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion of long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
As of October 31, 2021 and April 30, 2021, 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 until the Company purchased Netcapital Funding Portal Inc. on November 5, 2020. 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, 2023.
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 October 31, 2021 and April 30, 2021, the Company’s related-party unsecured notes payable totaled $22,860.
The Company also owes $34,324 as of October 31, 2021 and April 30, 2021 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”), 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 a U.S. Small Business Administration (“SBA”) loan program.
The May loan bears interest at a rate of 1% per annum and the SBA postponed any installment payments until September 6, 2021. In September and October of 2021, the SBA debited the Company’s bank account for a total of $212,252 even though the Company had applied for forgiveness of the May Loan. In November 2021 the May Loan was forgiven in its entirety, including accrued interest, and the payments of $212,252, which are reflected on the balance sheet as a receivable from the bank, were returned to the Company.
The June Loan required installment payments of $2,594 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.
F-23 |
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 has applied for forgiveness of the February Loan and believes it will be forgiven in its entirety.
Note 6 – Income Taxes
As of October 31, 2021 and April 30, 2021, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $2,010,000 and $890,000, respectively, expiring in the years of 2022 through 2041.
For the six- and three-month periods ended October 31, 2021, the Company recorded income tax expense of $621,000 and a tax benefit of $86,000, respectively. For the six- and three- month periods ended October 31, 2020, the Company recorded income tax expense of $22,398 and $11,057, respectively.
As of October 31, 2021 and April 30, 2021, the Company had net deferred tax assets calculated at an expected federal rate of 21%, and a state rate of 8%, when applicable, or approximately $642,000 and $313,000, respectively. As a result of unrealized book gains on equity securities, the Company also has a deferred tax liability of $1,696,000 and $746,000 as of October 31, 2021 and April 30, 2021, respectively. 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 October 31, 2021 and April 30, 2021 were as follows:
Schedule of income taxes
|
|
|
October 31, 2021 |
|
|
April 30, 2021 |
|
||
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net: |
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
|
|
|
$ |
|
|
|
Bad debt allowance |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability |
|
|
|
|
|
|
|
|
|
Unrealized gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
( |
) |
|
$ |
( |
) |
Note 7 – Related Party Transactions
The Company’s majority shareholder, Netcapital Systems LLC, owns 1,671,360 shares of common stock, or 61.5% of the Company as of October 31, 2021. The Company has a demand note payable to Netcapital Systems LLC of $4,660 and a demand note payable to one of its managers of $3,200. In addition, as of April 30, 2021, the Company accrued a payable of $3,817,516 for supplemental consideration owed in conjunction with its purchase of Netcapital Funding Portal Inc., which was reduced to $294,054 as of October 31, 2021, because of the issuance to 361,736 shares of common stock, valued at $3,523,462. In total, the Company owed its largest shareholder $298,714 and $3,822,116 as of October 31, 2021 and April 30, 2021, respectively. The company paid its majority shareholder $157,429 and $107,429 in the six- and three-month periods ended October 31, 2021, respectively, for use of the software that runs the website www.netcapital.com.
Compensation to officers in the six- and three-month periods ended October 31, 2021 consisted of common stock valued at $101,327 and $8,396, respectively, and cash salary of $144,000 and $72,000, respectively. Compensation to officers in the six- and three-month periods ended October 31, 2020 consisted of common stock valued at $164,885 and $82,263 respectively, and cash wages of $138,462 and $72,000, respectively.
F-24 |
Compensation to a related party consultant in the six- and three-month periods ended October 31, 2021 consisted of common stock valued at $25,908 and $6,530 respectively, and cash wages of $30,000 and $15,000, respectively. Compensation to a related party consultant in the six- and three-month periods ended October 31, 2020 consisted of common stock valued at $38,757 and $19,379 respectively, and cash wages of $46,154 and $24,000, respectively. This consultant is also the controlling shareholder of Zelgor Inc. and $1,400,000 and $350,000 of the Company’s revenues in the six- and three-month periods ended October 31, 2020 were from Zelgor Inc.
Compensation to managers of Netcapital Systems LLC in the six and three-month periods ended October 31, 2021 consisted of common stock valued at $19,378 and $0, respectively, and cash wages of $72,000 and $24,000, respectively. Compensation to managers of Netcapital Systems LLC in the six and three-month periods ended October 31, 2020 consisted of common stock valued at $38,757 and $19,379, respectively, and cash wages of $93,308 and $48,000, respectively.
The Company owes a director $16,680 as of October 31, 2021 and April 30, 2021, which is recorded as accounts payable, plus $15,000 in a non-interest-bearing note payable.
Note 8 – Stockholders’ Equity
The Company is authorized to issue 900,000,000 shares of its common stock, par value $0.001. 2,719,310 and 2,178,766 shares were outstanding as of October 31, 2021 and April 30, 2021, 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 six- and three-month periods ended October 31, 2020 have been adjusted to give effect to the reverse split.
On July 26, 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 LLC. The 361,736 shares of common stock include an aggregate of 35,609 shares of common stock, that paid off liabilities totaling $346,821, that were made to our Chief Executive Officer, a company controlled by a member of the board of managers of Netcapital Systems LLC and to an individual manager.
On July 27, 2021, the Company completed an offering for gross proceeds of $1,592,395 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.
Effective October 31, 2021 and July 31, 2021, the Company issued an aggregate of 937 shares of restricted stock to two employees. The shares were valued at $10,073 and $14,056, respectively.
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. |
F-25 |
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 into consulting agreements to issue common stock and recorded the applicable non-cash expense in accordance with the authoritative guidance of the Financial Accounting Standards Board. For the six- and three-month periods ended October 31, 2021, the Company recorded $483,067 and $186,087, respectively, in stock-based compensation expense and for the six- and three-month periods ended October 31, 2020, the Company recorded $259,909 and $138,531, respectively, in stock-based compensation expense.
As of October 31, 2021 and April 30, 2021, there was $172,939 and $631,878, respectively of prepaid stock-based compensation expense for services. As of October 31, 2021, two consulting agreements are effective, which expire in February 2022.
As of October 31, 2021, an aggregate of 7,607 shares of common stock can be earned by the Company’s employees from unvested stock grants. 157 shares vest quarterly over the next two quarters and 781 shares vest quarterly over the next 9.3 quarters.
The table below presents the components of stock-based compensation expense for the six- and three-month periods ended October 31, 2021 and 2020.
The components of the stock-based compensation expense are presented in the following table:
Schedule of stock based compensation expense
|
Stock-based compensation expense |
|
Six Months |
|
|
Six Months |
|
|
Three Months |
|
|
Three Months |
|
||||
|
Chief Executive Officer |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Chief Marketing Officer |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Related party consultant |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
VP of Digital Strategy |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Marketing consultant |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Marketing consultant |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Business consultant |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The table below presents the prepaid compensation expense as of October 31, 2021 and April 30, 2021:
|
|
|
|
|
|
|
|
||
|
Description |
|
|
Oct. 31, 2021 |
|
|
|
April 30, 2021 |
|
|
Chief Executive Officer |
|
$ |
— |
|
|
$ |
40,608 |
|
|
Chief Financial Officer |
|
|
— |
|
|
|
40,608 |
|
|
Related party consultant |
|
|
— |
|
|
|
25,908 |
|
|
Business consultant |
|
|
— |
|
|
|
25,908 |
|
|
Marketing consultant |
|
|
128,638 |
|
|
|
380,441 |
|
|
Marketing consultant |
|
|
44,301 |
|
|
|
118,405 |
|
|
Total |
|
$ |
|
|
|
$ |
|
|
F-26 |
For the six- and three-month periods ended October 31, 2021, $325,907 and 162,954 of stock-based compensation was recorded as consulting expense, respectively, and $157,160 and 23,133 was recorded as payroll and payroll related expenses. For the six- and three-month periods ended October 31, 2020, all of the stock-based compensation was recorded as a component of payroll and payroll related expenses.
Note 11 – Deposits and Commitments
The Company utilizes office space in Boston, Massachusetts, under a month-to-month lease agreement that allows to company to end its lease by providing 30-day written notice. The lease agreement includes a deposit of $6,300.
Note 12 – 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 corporate name from ValueSetters, Inc. to Netcapital Inc. and to amend 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 shares of common stock 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: |
|
$ |
|
|
|
Payment of promissory notes and interest |
|
|
|
|
|
Total consideration |
|
$ |
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed: |
|
|
|
|
|
Cash |
|
$ |
|
|
|
Current assets |
|
|
|
|
|
Accounts payable |
|
|
( |
) |
|
Platform users |
|
|
|
|
|
Platform investors |
|
|
|
|
|
Platform issuers |
|
|
|
|
|
Unpatented technology |
|
|
|
|
|
Total identifiable net assets |
|
$ |
|
|
F-27 |
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:
Schedule of pro forma and earnings
|
|
|
Revenues |
|
|
Earnings |
|
||
|
Supplemental pro forma for 4/1/20 – 11/04/20 |
|
$ |
|
|
|
$ |
|
|
|
Supplemental pro forma for 4/1/19 – 11/04/19 |
|
$ |
|
|
|
$ |
|
|
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.
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 Company earned 97,500 membership interest units in the quarter ended July 31, 2020. 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 $208,650 for the six- and three-month periods ended October 31, 2020. As of October 31, 2021 and April 30, 2021, the Company owns 110,000 WP units, which are valued at $235,400.
In May 2020, the Company entered a consulting contract with ChipBrain LLC (“Chip”), which allowed the Company to receive up to 710,200 membership interest units of Chip in return for consulting services. The Company earned 500,000 membership interest units in the quarter ended July 31, 2020 and earned the remaining units in the quarter ending October 31, 2020. The Chip units were initially 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 $465,000 and $0 for the six and three-month periods ended October 31, 2020. Subsequently, ChipBrain sold identical units for $2.40 per unit, and as of October 31, 2021 and April 30, 2021, the units owned by the Company are valued at $1,704,480.
In May 2020, the Company entered a consulting contract with 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 earned the remaining 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 $350,000 for the six- and three-month periods ended October 31, 2020. The $1.00 per share valuation continues to be the observable price at which the shares trade and the Zelgor shares are valued at $1,400,000 as of October 31, 2021 and April 30, 2021.
F-28 |
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 were initially 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 and as of October 31, 2021 and April 30, 2021, the units owned by the Company are valued at $2,350,000.
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 initially 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 October 31, 2021 and April 30, 2021, the Company owns 3,815,745 shares of KingsCrowd Inc. In July 2021, KingsCrowd subsequently sold identical shares of common stock for $1.00 per share, and as of October 31, 2021 and April 30, 2021, the units owned by the Company are valued at $3,815,745 and $540,000, respectively.
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 October 31, 2021 and April 30, 2021, the Company owns 528 Netcapital units, at a value of $48,128.
In July 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. As of October 31, 2021 and April 30, 2021, the Company owns 4,000 units, at a value of $20,000.
In August 2020 the Company entered a consulting agreement with C-Reveal Therapeutics LLC (“CRT”). for a $120,000 fee over a 12-month period. $50,000 of the fee is payable in CRT units. The Company earned the units in fiscal 2021 and received them in the first quarter of fiscal 2022. As of October 31, 2021 the Company owns 5,000 units, at a value of $50,000.
The following table summarizes the components of investments as of October 31, 2021 and April 30, 2021:
|
|
|
Oct. 31, 2021 |
|
|
April 30, 2021 |
|
||
|
|
|
|
|
|
|
|
|
|
|
Netcapital Systems LLC |
|
$ |
|
|
|
$ |
|
|
|
Watch Party LLC |
|
|
|
|
|
|
|
|
|
Zelgor Inc. |
|
|
|
|
|
|
|
|
|
ChipBrain LLC |
|
|
|
|
|
|
|
|
|
Vymedic Inc. |
|
|
|
|
|
|
|
|
|
C-Reveal |
|
|
|
|
|
|
|
|
|
Deuce Drone LLC |
|
|
|
|
|
|
|
|
|
Kingscrowd Inc. |
|
|
|
|
|
|
|
|
|
Total Investments at cost |
|
$ |
|
|
|
$ |
|
|
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 changes in estimated fair value. During the six months ended October 31, 2021, the Company identified that one security, Kingscrowd Inc., had an observable price change. The result of the price change was an increase in the fair value of the equity securities totaling $3,275,745 in the six months ended October 31, 2021, which was recorded in the income statement as an unrealized gain on equity securities.
F-29 |
Note 14 – Subsequent Events
On November 2, 2021, the owners of ValuCorp Inc. (“ValuCorp”), a business valuation firm, formed a new company MSG Development Corp. (“MSG”) and transferred most of the assets of ValuCorp to MSG. The Company entered into an exchange agreement (“Agreement”) whereby the Company received 100% of the outstanding shares of MSG in exchange for 75,000 shares of common stock of the Company. 50,000 shares of the Company’s common stock were issued in December 2021 and four annual installments of 6,250 shares are due over the next four years.
MSG’s assets were less than 20% of the value of the Company’s assets and the Company’s investment in MSG is less than 20% of the Company’s market value. Furthermore, the revenue and operating income of MSG’s predecessor, ValuCorp, for the prior two years, is less than 20% of the revenue and operating income of the Company. 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 2022 as a purchase.
The following table summarizes the value of the consideration for MSG and the amounts of the assets acquired in conjunction with the Agreement. MSG had no liabilities.
Schedule of assets acquired
|
|
|
|
|
|
|
Total consideration: 75,000 shares of common stock of the Company |
|
$ |
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired: |
|
|
|
|
|
Professional practice goodwill |
|
$ |
|
|
|
Technology-related intangibles |
|
|
|
|
|
Marketing-related intangibles |
|
|
|
|
|
Computer-related intangibles |
|
|
|
|
|
Customer-related intangibles |
|
|
|
|
|
Contract-related intangibles |
|
|
|
|
|
Human capital and artistic-related intangibles |
|
|
|
|
|
Total identifiable net assets |
|
$ |
|
|
The fair value of the common shares issued as the consideration for MSG 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.
In November 2021, the Company received notice that an SBA loan (see Note 5 the “May Loan”) was forgiven in its entirety.
In November 2021, the Company issued 46,300 shares of its common stock as stock-based compensation.
In December 2021, the company issued 50,000 shares of its common stock in conjunction with the purchase of a ten percent interest in Caesar Media Group, Inc., a marketing and technology solutions provider.
The Company evaluated subsequent events through the date these financial statements were available to be issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements.
F-30 |
Shares of Common Stock
Netcapital Inc.
| PRELIMINARY PROSPECTUS | ||
ThinkEquity
, 2022
Through and including , 2022 (the 25th day after the date of this offering), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
PART II — INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution*
The following table sets forth all expenses to be paid by the Registrant in connection with this offering, other than the underwriting discounts and commissions. All amounts shown are estimates except for the SEC registration fee and the FINRA filing fee. All expenses below are payable by the Registrant and not by the selling stockholders.
| SEC registration fee | $ | 1,333.62 | ||
| FINRA filing fee* | ||||
| Nasdaq filing fee* | ||||
| Legal fees* | ||||
| Accounting fees and expense* | ||||
| Transfer agent fee* | ||||
| Miscellaneous* | ||||
| Total* | $ |
_______
* To be completed by amendment.
2
Item 14. Indemnification of Directors and Officers
The registrant is incorporated under the laws of the State of Utah. Section 16-10a-902 of the Utah Business Corporation Act (“UBCA”) provides that a Utah corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party because he or she was a director of the corporation against reasonable expenses incurred by the director in connection with the proceeding. may indemnify. Section 15-10-902 of the UBCA provides that a corporation may indemnify an individual who is a party to a proceeding because the individual is a director against liability incurred in the proceeding if:(i) the director conducted himself or herself in good faith; and, (ii) he or she reasonably believed that his or her conduct was in or at least not opposed to the corporation's best interests; and (iii) In the case of any criminal proceeding, the director had no reasonable cause to believe his or her conduct was unlawful. In addition, a corporation may indemnify and advance expenses to an officer of the corporation who is a party to a proceeding because he or she is an officer of the corporation: (i) to the same extent as a director; and (ii) if he or she is an officer but not a director, to such further extent as may be provided by the articles of incorporation, the bylaws, a resolution of the board of directors or contract, except for: (A) liability in connection with a proceeding by or in the right of the corporation other than for expenses incurred in connection with the proceeding; or (B) liability arising out of conduct that constitutes: (I) receipt by the officer of a financial benefit to which he is not entitled; (II) an intentional infliction of harm on the corporation or the shareholders; or (III) An intentional violation of criminal law.
The registrant’s articles of incorporation and bylaws include provisions requiring the registrant to indemnify, to the fullest extent permitted by law, any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative, or investigative, by reason that he or she, or his or her testator or intestate, is or was a director or officer of the Corporation, or serves or served at any other enterprise as a director or officer at the request of the Corporation.
Item 15. Recent Sales of Unregistered Securities
The following sets forth information regarding all unregistered securities sold since May 1, 2016. The registrant believes that the transactions were exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act (and Regulation D promulgated thereunder). The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed on the share certificates issued in these transactions. All recipients had adequate access, through their relationships with the registrant, to information about the registrant. The sales of these securities were made without any general solicitation or advertising. Except as otherwise specified, none of the transactions involved any underwriters, underwriting discounts or commissions.
_____________________
In fiscal 2017, 12,000,000 shares were issued for consulting services and 10,000,000 shares were issued to purchase shares and membership units in a total of seven early-stage companies.
In fiscal 2018, 38,416,668 shares were issued for stock-based compensation, 153,277,542 shares were issued for debt settlement transactions and 10,000,000 shares were issued to purchase a 20% interest in software development company.
In fiscal 2019, 17,825,002 shares were issued for stock-based compensation, 2,800,000 shares were issued in conjunction with a private placement memorandum for the private sale of common stock, and 200,000 shares were issued for the purchase of an Internet game company.
In fiscal 2020, 39,375 shares of common stock were issued for stock-based compensation.
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 the Company also issued 1,077 shares of common stock, valued at $15,000, to pay a $15,000 liability.
In fiscal 2022, 48,174 shares of common stock were issued for stock-based compensation, 50,000 shares of common stock were issued to purchase MSG Development Corp., 50,000 shares of common stock were issued in conjunction with an agreement to purchase a 10% equity interest in Caesar Media Group, Inc. 176,934 shares were issued in conjunction with a private placement sale of common shares at a price of $9.00 per share and 361,942 shares were issued as supplemental consideration in conjunction with the purchase of Netcapital Funding Portal Inc.
On February 9, 2022, we completed a private placement of $300,000 of unsecured convertible promissory notes. These notes bear interest at a rate of 8% per annum and have a maturity date of February 9, 2023.
Included in the 48,174 shares of common stock issued as stock-based compensation were 10,000 shares that we issued Avi Liss in November 2021 in consideration of his services as a director of the company
The foregoing are all issuances of securities by the registrant during the past three years which were not registered under the Securities Act. We claim an exemption from registration pursuant to Section 4(a)(2) of the Securities Act, and the rules and regulations promulgated thereunder in connection with the sales and issuances described below since the foregoing issuances and sales did not involve a public offering, the recipients (a) were “accredited investors” and/or had access to similar documentation and information as would be required in a Registration Statement under the Securities Act and (b) represented that they were acquiring the securities for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws. The securities sold are subject to transfer restrictions, and the certificates evidencing the securities are imprinted with an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. No general solicitation or advertising was used in connection with any transaction. No underwriter participated in the transaction and no commissions were paid in connection with the transactions.
3
Item 16. Exhibits and Financial Statement Schedules
| (a) | Exhibits. The following exhibits are filed as part of this registration statement: |
*To be filed by amendment.
| + Indicates a management contract or compensatory plan or arrangement |
4
Item 17. Undertakings
| The undersigned registrant hereby undertakes: |
| (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: |
| (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; |
| (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective Registration Statement; and |
| (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. |
| (2) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
| The undersigned registrant hereby undertakes: |
| (1) that, for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and |
| (2) that, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| (3) to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. |
| Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the Undersigned, thereunto duly authorized, in the City of Boston, Massachusetts on the 11th day of February, 2022.
| NETCAPITAL, INC. | |||
| By: | /s/ Cecilia Lenk | ||
|
Name: Cecilia Lenk Title: Chief Executive Officer (Principal Executive Officer) |
|||
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Cecilia Lenk, his/her true and lawful attorney-in-fact and agent with full power of substitution and re-substitution, for him/her and in his/her name, place and stead, in any and all capacities to sign any or all amendments (including, without limitation, post-effective amendments) to this Registration Statement, any related Registration Statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and any or all pre- or post-effective amendments thereto, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that said attorney-in-fact and agent, or any substitute or substitutes for her, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
| Signature | Capacity | Date | |||
| By: | /s/ Cecilia Lenk | Chief Executive Officer and Director (Principal Executive Officer) | February 11, 2022 | ||
| Cecilia Lenk | |||||
| By: | /s/ Coreen Kraysler | Chief Financial Officer | February 11, 2022 | ||
| Coreen Kraysler | (Principal Financial and Accounting Officer) | ||||
| By: | /s/ Thomas Carmody | Director | February 11, 2022 | ||
| Thomas Carmody | |||||
| By: | /s/ Avi Liss | Director | February 11, 2022 | ||
| Avi Liss | |||||
| By: | /s/ Steve Geary | Director | February 11, 2022 |
6
Exhibit 3.1.3
Exhibit 4.3
THIS UNSECURED CONVERTIBLE PROMISSORY NOTE AND THE SECURITIES THAT MAY BE ACQUIRED PURSUANT TO THIS UNSECURED CONVERTIBLE PROMISSORY NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES OR “BLUE SKY LAWS,” AND MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, HYPOTHECATED, OR OTHERWISE DISPOSED OF (COLLECTIVELY, A “TRANSFER”) UNLESS (I) SUCH SECURITIES HAVE BEEN REGISTERED FOR SALE PURSUANT TO SAID ACT AND SUCH LAWS; OR (II) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE ACT AND SUCH LAWS AND THE RECIPIENT OF SUCH TRANSFER EXECUTES AN AGREEMENT WITH THE COMPANY (IN A FORM REASONABLY SATISFACTORY TO THE COMPANY) OBLIGATING IT TO ABIDE BY COMPARABLE RESTRICTIONS ON TRANSFER.
NETCAPITAL
INC.
UNSECURED CONVERTIBLE PROMISSORY NOTE
$__________________ As of___________________, 2022 (the “Issuance Date”)
FOR VALUE RECEIVED, Netcapital Inc., a Utah corporation (“Borrower” or the “Company”) promises to pay to (“Lender”), or its registered assigns, in lawful money of the United States of America the principal sum of ______________dollars ($__________.00), or such lesser amount as shall equal the outstanding principal amount (the “Principal Amount”) of this Unsecured Convertible Promissory Note, which is one of a duly authorized series of notes of the Company of like tenor and effect (except the variations necessary to express the name of payee, the date, and the principal amount of each Note), each dated on or after____________, 2022 (each a “Note” and collectively the “Notes”). Borrower also promises to pay to Lender, or its registered assigns, in lawful money of the United States of America interest accrued on the unpaid Principal Amount in accordance with Section 2. Unless previously converted into Conversion Securities in accordance with the terms of Section 6, all Note Obligations (as defined below) shall be due and payable on the earlier of (i) the Maturity Date (as defined below) of this Note; or (ii) when, upon or after the occurrence of an Event of Default (as defined below), such amounts are declared due and payable by Lender or made automatically due and payable in accordance with the terms hereof. Borrower and Lender may be individually referred to herein as a “Party” or collectively as the “Parties”. On the date hereof, in exchange for the issuance of this Note, the Purchaser shall pay to the Company the Principal Amount in cash via wire transfer in accordance with the wire instructions attached hereto as Exhibit A.
| 1. | Definitions. |
| (a) | Preamble and Recitals: The terms defined above are incorporated herein. |
| (b) | Other Defined Terms: For purposes of this Note, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa): |
| i) | “Business Day” means any day other than Saturday, Sunday or a day on which banking institutions in the City of New York are permitted or obligated by applicable law to remain closed. |
| ii) | “Change of Control” means any of the following: (i) the sale or disposition of all or substantially all of the assets of Borrower to a third party; (ii) the acquisition by a third party of more than fifty percent (50%) of Borrower’s outstanding voting capital stock; or (iii) the merger or consolidation of Borrower with or into another entity unless the holders of Borrower’s voting capital stock immediately prior to such merger or consolidation hold at least fifty percent (50%) of the ownership of voting capital stock of the acquiring third party or the surviving entity in such merger or consolidation, as the case may be, immediately after the merger or consolidation. Notwithstanding the foregoing, (x) a Change of Control shall not be deemed to occur on account of a Qualified Equity Financing; and (y) any transaction or series of transactions principally for bona fide equity financing purposes shall not be deemed to be a Change of Control of Borrower. Notwithstanding the foregoing, a Change of Control shall not be deemed to occur upon the merger of the Company with and into any of its wholly-owned subsidiaries. |
| iii) | “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price (as the case may be) then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported in the “pink sheets” by OTC Markets Group Inc. (formerly Pink Sheets LLC). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price (as the case may be) of such security on such date shall be the fair market value as mutually determined by the Company and the Lender. If the Company and the Lender are unable to agree upon the fair market value of such security, then such dispute shall be resolved in accordance with the procedures in Section 11. All such determinations shall be appropriately adjusted for any stock splits, stock dividends, stock combinations, recapitalizations or other similar transactions during such period. |
| iv) | “Closing Date” shall have the meaning set forth in Section 6(a). |
| v) | “Common Stock” means the Company’s common stock, par value $0.0001 per share. |
| vi) | “Conversion” shall have the meaning set forth in Section 6(b). |
| vii) | “Conversion Price” shall mean the lesser of (1) $10.00 and (2) 80% of the price paid per share (a) for Subsequent Round Securities by the cash investors in the Qualified Equity Financing (the “Discount Price”), or (b) set forth in the definitive agreement(s) approved by the Company and the Company’s stockholders in connection with such Change of Control; provided, however, in the event Subsequent Round Securities are sold at different prices, the Discount Price shall equal 80% of the weighted average sale price determined by dividing (x) the gross proceeds raised in the Qualified Equity Financing on or prior to the date that the Note Obligations are converted into Conversion Securities in accordance with the terms of Section 6; by (y) the total number of Subsequent Round Securities sold to raise such gross proceeds and provided further, that if the price is not set forth in the definitive agreement(s) referred to above, then such price shall be the Closing Bid Price or Closing Sales Price on the closing date of such transaction. |
| viii) | “Conversion Securities” shall mean the same securities issued in connection with either a Qualified Equity Financing or a Change of Control; provided, that in the event such securities are shares of preferred stock, the Conversion Securities shares shall: |
| (1) | have a per share liquidation preference amount equal to the Conversion Price; |
| (2) | rank pari passu with and have the same or substantially similar rights, preferences, privileges and restrictions as the Subsequent Round Securities; |
| (3) | vote as a class on all matters together with the Subsequent Round Securities; and |
| (4) | be convertible initially into shares of Common Stock at a 1:1 ratio (subject to any anti-dilution adjustments provided for the holders of the Subsequent Round Securities). |
| ix) | “Event of Default” shall have the meaning set forth in Section 4. |
| x) | “Fractional Payment Amount” shall have the meaning set forth in Section 6(e). |
| xi) | “Maturity Date” means the date that is the one year anniversary of the Issuance Date. |
| xii) | “Maximum Rate” shall have the meaning set forth in Section 2. |
| xiii) | “Note Obligations” means, as of the date of measurement, the Company’s obligation to pay the aggregate sum of (i) the outstanding unpaid Principal Amount of this Note; (ii) all accrued and unpaid interest thereon; and (iii) any other amounts payable hereunder with respect to this Note. |
| xiv) | “Principal Market” means the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, whichever is at the time the principal trading exchange or market for such security, or the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg or, if no bid or sale information is reported for such security by Bloomberg, then the average of the bid prices of each of the market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. |
| xv) | “Qualified Equity Financing” means the offer and sale for cash by Borrower of any of its equity securities with the principal purpose of raising capital and that results in aggregate gross proceeds to Borrower of at least $5,000,000 (excluding any portion of the Principal Amount of any of the Notes that shall be converted into Borrower equity securities pursuant to Section 6 of this Note, or any other convertible debt issued by the Company that are exchanged for equity securities of the Company in such financing). |
| xvi) | “Requisite Holders” means the holders of a majority of the outstanding aggregate principal amount under the Notes. |
| xvii) | ”Securities” shall have the meaning set forth in Section 7(c). |
| xviii) | “Securities Act” means the Securities Act of 1933, as amended. |
| xix) | “Subsequent Round Securities” means the equity securities sold in the Qualified Equity Financing. |
| 2. | Interest. Interest on the outstanding portion of the Principal Amount shall accrue at a rate equal to the lesser of eight percent (8%) per annum and the maximum non-usurious interest rate permitted by applicable law (the “Maximum Rate”). Any overdue unpaid Principal Amount shall bear interest, before and after judgment, for each day that such amounts are overdue at a rate equal to the lesser of fifteen percent (15%) per annum and the Maximum Rate. All computations of interest shall be made on the basis of a 360-day year and 30-day month for the actual number of days occurring in the period for which such interest is payable. |
| 3. | Prepayment. Subject to Section 11(d), the Principal Amount shall not be prepaid in whole or in part without the prior written consent of the Requisite Holders. |
| 4. | Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note: |
| (a) | Failure to Pay. Borrower shall fail to pay when due any principal or interest payment on the due date hereunder or any other amount payable hereunder when due, whether at maturity or otherwise, provided that the Company fails to pay such amounts within 30 days of receiving written notice from the Lender that such amounts are due and unpaid; or |
| (b) | Voluntary Bankruptcy or Insolvency Proceedings. Borrower shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property; (ii) admit in writing its inability, to pay its debts generally as they mature; (iii) make a general assignment for the benefit of its or any of its creditors; (iv) be dissolved or liquidated; (v) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it |
| (c) | Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of Borrower or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to Borrower or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 30 days of commencement; or |
| (d) | Other Defaults. Borrower shall fail to pay any obligation in excess of $100,000, either individually or in the aggregate, when the same becomes due and payable and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument giving rise to such obligation or obligations; or |
| (e) | Agreements. Borrower shall fail to perform or observe in all material respects any of its covenants or agreements in this Note and such failure shall continue for ten (10) days after Borrower obtaining knowledge of such failure or receipt by Borrower from Lender of a written notice of such failure. |
| 5. | Rights of Lender upon Default. Upon the occurrence or existence of any Event of Default (other than an Event of Default described in Sections 4(b) or 4(c)) and at any time thereafter during the continuance of such Event of Default, the outstanding Note Obligations payable by Borrower hereunder shall become immediately due and payable upon election of the Requisite Holders without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. Upon the occurrence or existence of any Event of Default described in Sections 4(b) and 4(c), immediately and without notice, all outstanding Note Obligations payable by Borrower hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, Lender may exercise any other right power or remedy granted to it by this Note or otherwise permitted to it by law, either by suit in equity or by action at law, or both. |
| 6. | Automatic Conversion. |
| (a) | Automatic Conversion Upon a Qualified Equity Financing. Subject to the terms and conditions of this Section 6, upon the closing of a Qualified Equity Financing (the date of such closing, the “Closing Date”), an amount equal to the Note Obligations outstanding on the Closing Date shall automatically convert simultaneously with the closing of the Qualified Equity Financing into a number of Conversion Securities equal to the quotient obtained by dividing (a) an amount equal to the Note Obligations outstanding on the Closing Date by (b) the Conversion Price (an “Equity Financing Conversion”), and the Lender shall be entitled to the benefit of such other terms and conditions that may be granted to any investor in such Qualified Equity Financing. |
| (b) | Automatic Conversion Upon a Change of Control. In the event that prior to a Qualified Equity Financing and prior to the Maturity Date, there is a Change of Control, an amount equal to the Note Obligations outstanding on the Closing Date shall automatically convert simultaneously with the Change in Control into a number of Conversion Securities equal to the quotient obtained by dividing (a) an amount equal to the Note Obligations outstanding on the date that the Change in Control occurs by |
| (c) | the Conversion Price (a “Change in Control Conversion”; and together with an Equity Financing Conversion, a “Conversion”). The Company shall provide each Note holder with at least five (5) days prior written notice of the anticipated closing of a Change of Control. |
| (d) | Surrender of Note. Promptly after any Conversion, but in no event more than five (5) Business Days thereafter, Lender shall deliver the original of this Note (or a notice to the effect that the original Note has been lost, stolen or destroyed and an agreement acceptable to Borrower whereby the holder agrees to indemnify Borrower from any loss incurred by it in connection with this Note); provided, however, that upon Borrower’s issuance of all amounts and/or Conversion Securities required under Section 6(a), Section 6(b), and Section 6(e), as applicable, this Note shall be deemed converted and of no further force and effect, whether or not it is delivered for cancellation as set forth in this Section 6(c). |
| (e) | Reservation of Equity Securities. Borrower covenants that all Conversion Securities that shall be so issued shall be duly authorized, validly issued, fully paid, and non-assessable by Borrower, not subject to any preemptive rights, and free from any taxes, liens, and charges with respect to the issue thereof. Borrower shall take all such action as may be necessary to ensure that all such Conversion Securities may be so issued without violation of any applicable law or regulation. |
| (f) | Fractional Securities. No fractional Conversion Securities shall be issued upon conversion of this Note. In lieu of Borrower issuing any fractional Conversion Securities to Lender upon the conversion of this Note, Borrower shall pay to Lender an amount equal to the product obtained by multiplying the Conversion Price or Merger Conversion Price, as applicable, by the fraction of a Conversion Security not issued pursuant to the previous sentence (the “Fractional Payment Amount”). |
| 7. | Representations and Warranties of Lender. Lender represents and warrants to Borrower upon the acquisition of the Note as follows: |
| (a) | Binding Obligation. This Note has been duly executed and delivered by Lender and is a valid and binding obligation of Lender, enforceable against Lender in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors’ rights generally and general principles of equity. |
| (b) | Experience. Lender is an “accredited investor” as that term is defined in Rule 501 under the Securities Act. Lender has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to Borrower so that Lender is capable of evaluating the merits and risks of its investment in Borrower and has the capacity to protect Lender’s own interests. |
| (c) | Investment. Lender is acquiring the Note and, as applicable, the Conversion Securities issuable upon conversion of the Note (collectively, the “Securities”), not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. Lender understands that the Note has not been, and that neither the Note nor the Conversion Securities will be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Lender’s representations as expressed herein and in response to Borrower’s inquiries, if any. |
| (d) | Rule 144. Lender acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. Lender is aware of the provisions of Rule 144 promulgated under the Securities Act, which permit limited resale of securities purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the securities, the availability of certain current public information about Borrower, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sales being effected through a “broker’s transaction” or in transactions directly with a “market maker” and the number of securities being sold during any three-month period not exceeding specified limitations. |
| (e) | No Public Market. Lender understands that no public market now exists for any of the securities issued by Borrower and that Borrower has made no assurances that a public market will ever exist for Borrower’s securities. |
| (f) | Access to Data. Lender acknowledges that Lender has received all the information Lender considers necessary or appropriate for deciding whether to acquire the Securities. Lender further represents that Lender has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities. |
| (g) | Brokers or Finders. ThinkEquity LLC, a U.S.-registered broker-dealer (“ThinkEquity”), will be paid by the Company a referral fee of ten percent (10%) of the aggregate gross Principal Amount of the Notes introduced by them. The Company will also pay certain expenses of ThinkEquity in connection with the Notes, not to exceed $10,000. |
| (h) | Tax Advisors. Lender acknowledges that it has had the opportunity to review with Lender’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Note. |
| 8. | Representations and Warranties of Borrower. Borrower represents and warrants to Lender that Borrower has full legal capacity, power and authority to execute and deliver this Note and to perform its obligations hereunder. This Note has been duly executed and delivered by Borrower and is a valid and binding obligation of Borrower, enforceable against it in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors’ rights generally and general principles of equity. The execution and delivery by Borrower of this Note and the performance of its obligations hereunder will not violate, conflict with, result in a breach of, or constitute a default under the organizational documents of Borrower or any of its subsidiaries. |
| 9. | Assignment. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned by either Party, whether by operation of law or otherwise, without the other Party’s prior written consent, and any purported attempt by a Party to assign this Note or any of the rights, interests or obligations hereunder in violation of this Section 9 shall be null and void. |
| 10. | No Collateral. This Note is unsecured. |
| 11. | Miscellaneous. |
| (a) | Notices. Any notice, request, instruction, or other communication to be given to any other Party shall be in writing. Any notice, request, instruction, or other document hereunder shall be deemed duly given if addressed to the intended recipient at the address provided from time to time. |
| (b) | Survival. The representations, warranties, covenants and agreements made herein shall survive the execution and delivery of this Note. |
| (c) | Severability. If any provision of this Note shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. |
| (d) | Usury. In the event any interest is paid on this Note which is deemed to be in excess of the then Maximum Rate, then that portion of the interest payment representing an amount in excess of the then Maximum Rate shall be deemed a payment of principal and, notwithstanding Section 3, be applied against the principal of this Note. |
| (e) | Waivers. Borrower hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument. |
| (f) | Costs. Each of the Parties hereto shall pay its own fees and expenses (including the fees of any attorneys, accountants or others engaged by such Party) in connection with this Note and the transactions contemplated hereby whether or not the transactions contemplated hereby are consummated. |
| (g) | No Drafting Presumption. The language used in this Note shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction shall be applied against any Party. |
| (h) | Reservation of Rights. No failure on the part of Lender to exercise, and no delay in exercising, any right, power, privilege or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof by Lender preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy of Lender. |
| (i) | CHOICE OF LAW. THIS NOTE AND ALL ACTIONS, CAUSES OF ACTION OR CLAIMS OF ANY KIND (WHETHER AT LAW, IN EQUITY, IN CONTRACT, IN TORT OR OTHERWISE) THAT MAY BE BASED UPON, ARISE OUT OF OR RELATE TO THIS NOTE, OR THE NEGOTIATION, EXECUTION OR PERFORMANCE OF THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, INCLUDING WITHOUT LIMITATION NEW YORK LAWS RELATING TO APPLICABLE STATUTES OF LIMITATION AND BURDENS OF PROOF, AVAILABLE REMEDIES AND APPLICABLE EVIDENTIARY PRIVILEGES. |
| (j) | WAIVER OF JURY TRIAL. THE PARTIES HERETO AGREE THAT ANY SUIT, ACTION, OR PROCEEDING, WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR INSTITUTED BY EITHER A PARTY HERETO OR ANY SUCCESSOR OR ASSIGN ON OR WITH RESPECT TO, ARISING IN CONNECTION WITH, OR RELATED TO THIS NOTE SHALL BE TRIED ONLY BY A COURT AND NOT BY A JURY. THE PARTIES HERETO HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION, OR PROCEEDING. THE PARTIES HERETO ACKNOWLEDGE AND AGREE THAT THIS SECTION 11(j) IS A SPECIFIC AND MATERIAL ASPECT OF THIS NOTE. |
| (k) | INTEGRATION. THIS NOTE REPRESENTS THE FINAL AGREEMENT OF THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. |
| (l) | Amendments and Waivers. Any term of this Note may be amended, modified (including, without limitation, any extension of the Maturity Date, to change the Conversion Price or to cause the Notes to be prepayable) or waived upon the written consent of the Company and the Requisite Holders; provided however, that, any such amendment or waiver must apply to all outstanding Notes. No such waiver or consent in any one instance shall be construed to be a continuing waiver or a waiver in any other instance unless it expressly so provides. The Company shall promptly notify all Note holders of any such change or amendment. |
| (m) | Counterparts. This Note be manually or electronically executed in one or more counterparts (delivery of which may occur via facsimile or electronic transmission, including as an attachment to an electronic mail message in “pdf” or similar format), each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. |
IN WITNESS WHEREOF, the undersigned have executed this Note as of the date first written above.
NETCAPITAL INC. By:_________________________________
| |
ACCEPTED AND AGREED: Lender: By:__________________________________
Name:_______________________________ Title:________________________________
Address:_____________________________
Email:_________________________________ |
EXHIBIT
A
Wire Instructions
Bank:
Account Name:
Routing Number:
Account Number:
Exhibit 10.12
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the Agreement”), dated as of March 10, 2020, by and between VALUESETTERS, INC., a Utah corporation (the “Company ”), and CAROLE MURKO, an individual (the “Employee ”).
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Employee as Director of Business Development of the Company and wishes to acquire and be assured of Employee’s services on the terms and conditions hereinafter set forth; and
WHEREAS, the Employee desires to be employed by the Company and to perform and to serve the Company on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual terms, covenants, agreements and conditions hereinafter set forth, the Company and the Employee hereby agree as follows:
1. Employment. (a) The Company hereby employs the Employee to serve as a full-time employee of the Company, and the Employee hereby accepts such employment with the Company, for the period set forth in Section 2 hereof. The Employee’s principal place of employment shall be at the offices at 745 Atlantic Avenue, Boston MA, 02111, or such other location as determined by the Company, provided however , that the Employee’s principal place of employment shall not be relocated more than 25 miles from its current location without the prior written consent of the Employee.
(b) The Employee affirms and represents that (i) the Employee is under no obligation to any former employer or other party that is in any way inconsistent with, or that imposes any restriction upon, the Employee’s acceptance of employment hereunder with the Company, the employment of the Employee by the Company, or the Employee’s undertakings under this Agreement and (ii) her performance of all the terms of this Agreement and her employment by the Company does not and will not breach any agreement to keep in confidence proprietary information acquired by her in confidence or in trust prior to her employment by the Company.
2. Term. Unless earlier terminated as provided in this Agreement, the term of the Employee’s employment under this Agreement shall be for a period beginning on the date hereof and ending on March 10, 2024 or, if the Employee’s employment hereunder is earlier terminated, such shorter period, being hereinafter called the “Employment Term ”)
1
3. Duties.
(a) The Employee shall be employed as Director of Business Development. The Employee shall faithfully and competently perform such duties at such times and places and in such manner as the Company may from time to time reasonably direct or such other duties appropriate to a senior executive managerial position as the Chief Executive Officer of the Company shall from time to time determine.
(b) Except as may otherwise be approved in writing by the Chief Executive Officer of the Company, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Employee shall devote a minimum of 35 hours per week of time throughout the Employment Term to the services required of Employee hereunder. The Employee shall use her best efforts, judgment and energy to improve and advance the business and interests of the Company and its Affiliates in a manner consistent with the duties of Employee’s position.
4. Salary and Bonus.
(a) Base Salary. In consideration for the services of the Employee rendered hereunder, the Company shall pay the Employee a base salary (the “Base Salary”) at an annual rate of $1.00 during the Employment Term, plus a commission of twenty percent (20%) of the cash collected from revenues generated directly by the Employee, plus an unvested grant of stock-based compensation of Twenty-Five Million (25,000,000) shares of restricted common stock of the Company (OTC:VSTR). The stock shall vest over a 48-month period in 48 equal installments of 520,833 shares per month. The shares will be earned on the last day of every monthly period commencing in March 2020 and will continue to vest on a monthly basis so long as Employee continues to provide services in accordance with this Agreement.
(b) Bonus. Employee shall be eligible for periodic bonuses throughout the year, or for additional salary in excess of the Base Salary.
(c) Withholding, Etc. The payment of any salary or bonus hereunder shall be subject to income tax, social security and other applicable withholdings, as well as such deductions as may be required under the Company’s employee benefit plans.
5. Benefits. (a) During the Employment Term, the Employee shall be:
(i) eligible to participate in all employee fringe benefits and any pension and/or profit sharing plans that may be provided by the Company for its key executive employees in accordance with the provisions of any such plans, as the same may be in effect on and after the date hereof;
(ii) eligible to participate in any medical and health plans or other employee welfare benefit plans that may be provided by the Company for its key executive employees in accordance with the provisions of any such plans, as the same may be in effect on and after the date hereof;
(iii) entitled to up to eight (8) weeks of paid time off (“PTO”) each year, which shall be taken at such time or times as will not unreasonably hinder or interfere with the Company’s business or operations; provided, however, that unused PTO in any 12-month period shall be forfeited and the Employee hereby waives any rights under applicable law or otherwise to be compensated in respect thereof;
2
(iv) entitled to sick leave, sick pay and disability benefits in
accordance with any Company policy that may be applicable on and after the date hereof to key executive employees; and
(v) entitled to reimbursement for all reasonable and necessary
out-of-pocket business expenses incurred by the Employee in the performance of the Employee’s duties hereunder in accordance with the Company’s policies applicable (on and after the date hereof) thereto.
(b) Employee shall cooperate with the Company in the event the Company
wishes to obtain key-woman insurance on the Employee. Such cooperation shall include, but not be limited to taking any physical examinations that may be requested by the insurance company.
6. Inventions and Confidential Information. The Employee hereby covenants, agrees and acknowledges as follows:
(a) The Company is engaged in a continuous program of research, design,d evelopment, production, marketing and servicing with respect to its businesses.
(b) The Employee’s employment hereunder creates a relationship of confidence and trust between the Employee and the Company with respect to certain information pertaining to the business of the Company and its Affiliates (as hereinafter defined) or pertaining to the business of any client or customer of the Company or its Affiliates which may be made known to the Employee by the Company or any of its Affiliates or by any client or customer of the Company or any of its Affiliates or learned by the Employee during the period of Employee’s employment by the Company.
(c) The Company possesses and will continue to possess information that has been created, discovered or developed by, or otherwise become known to it (including, without limitation, information created, discovered or developed by, or made known to, the Employee during the period of Employee’s employment or arising out of Employee’s employment) or in which property rights have been or may be assigned or otherwise conveyed to the Company, which information has commercial value in the business in which the Company is engaged and is treated by the Company as confidential.
(d) Any and all inventions, products, discoveries, improvements, processes, manufacturing, marketing and services methods or techniques, formulae, designs, styles, specifications, data bases, computer programs (whether in source code or object code), know-how, strategies and data, whether or not patentable or registrable under copyright or similar statutes, made, developed or created by the Employee (whether at the request or suggestion of the Company, any of its Affiliates, or otherwise, whether alone or in conjunction with others, and whether during regular hours of work or otherwise) during the period of Employee’s employment by the Company which may pertain to the business, products, or processes of the Company or any of its Affiliates (collectively hereinafter referred to as “Inventions ”), will be promptly and fully disclosed by the Employee to an appropriate executive officer of the Company (other than the Employee) without any additional compensation therefor, all papers, drawings, models, data, documents and other material pertaining to or in any way relating to any Inventions made, developed or created by Employee as aforesaid. For the purposes of this Agreement, the term “Affiliate ” or “ Affiliates ” shall mean any person, corporation or other entity directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. For the purposes of this definition, “control” when used with respect to any person, corporation or other entity means the power to direct the management and policies of such person or entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.
3
(e) The Employee will keep confidential and will hold for the Company’s sole benefit any Invention which is to be the exclusive property of the Company under this Section 6 for which no patent, copyright, trademark or other right or protection is issued.
(f) The Employee also agrees that the Employee will not without the prior written consent of the Board of Directors of the Company (i) use for Employee’s benefit or disclose at any time during Employee’s employment by the Company, or thereafter, except to the extent required by the performance by the Employee of the Employee’s duties as an employee of the Company, any information obtained or developed by Employee while in the employ of the Company with respect to any Inventions or with respect to any customers, clients, suppliers, products, employees, financial affairs, or methods of design, distribution, marketing, service, procurement or manufacture of the Company or any of its Affiliates, or any confidential matter, except information which at the time is generally known to the public other than as a result of disclosure by the Employee not permitted hereunder, or (ii) take with the Employee upon leaving the employ of the Company any document or paper relating to any of the foregoing or any physical property of the Company or any of its Affiliates.
(g) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 6 would be inadequate and, therefore, agrees that the Company and its Affiliates shall be entitled to injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach; provided , however , that nothing contained herein shall be construed as prohibiting the Company or any of its Affiliates from pursuing any other rights and remedies available for any such breach or threatened breach.
(h) The Employee agrees that upon termination of Employee’s employment by the Company for any reason, the Employee shall immediately return to the Company all documents, records and other property in Employee’s possession belonging to the Company or any of its Affiliates.
(i) Without limiting the generality of Section 9 hereof, the Employee hereby expressly agrees that the foregoing provisions of this Section 6 shall be binding upon the Employee’s heirs, successors and legal representatives.
7. Termination. (a) The Employee’s employment hereunder shall be terminated upon the occurrence of any of the following:
(i) death of the Employee;
(ii) termination of the Employee’s employment hereunder byt he Employee at any time for any reason whatsoever (including, without limitation, resignation or retirement) other than for “good reason” as contemplated by clause (v)(B) below;
(iii) termination of the Employee’s employment hereunder byt he Company because of the Employee’s inability to perform Employee’s duties on account of disability or incapacity for a period of ninety (90) or more days, whether or not consecutive, occurring within any period of twelve (12) consecutive months;
(iv) termination of the Employee’s employment hereunder by the Company at any time for “cause” (as hereinafter defined), such termination to take effect immediately upon written notice from the Company to the Employee; and
(v) termination of the Employee’s employment hereunder (A)b y the Company at any time, other than termination by reason of disability or incapacity as contemplated by clause (iii) above or termination by the Company for “cause” as contemplated by clause (iv) above and (B) by the Employee for “good reason” (as hereinafter defined).
4
The following actions, failures or events shall constitute “cause” for termination
within the meaning of clause (iv) above: (i) the Employee’s conviction of, admission of guilt to or plea of nolo contendere or similar plea (which, through lapse of time or otherwise, is not subject to appeal) with respect to any crime or offense that constitutes a felony in the jurisdiction involved; (2) acts of dishonesty or moral turpitude which are materially detrimental to the Company and/or its Affiliates; (3) failure by the Employee to obey the reasonable and lawful orders of the Chief Executive Officer of the Company following written notice of such failure from the Chief Executive Officer of the Company; (4) any act by the Employee in violation of Section 8 hereof, any statement or disclosure by the Employee in violation of Section 6 hereof, or any material breach by the Employee of a representation or warranty contained in Section 1(b) hereof; (5) following written notice from the Chief Executive Officer of the Company of prior similar actions by Employee, excessive absenteeism (other than by reason of disability); (6) following written notice from the Chief Executive Officer of the Company of prior similar actions by Employee, excessive alcoholism or addiction to drugs not prescribed by a qualified physician or (7) gross negligence by the Employee in the performance of, or willful disregard by the Employee of, the Employee’s obligations hereunder.
The following actions, failures or events shall constitute “good reason” within the
meaning of clause (V)(B) above: a material breach by the Company of its obligations under this Agreement or a change in majority control of the Company.
(a) In the event that the Employee’s employment is terminated by the Company prior to March 10, 2024 for any reason other than “cause” or by Employee for “good reason,” then the Company shall have no claims to the unvested portion of the 25 million shares of common stock issued to the Employee and the Company agrees to not hinder and to cooperate with the Employee in depositing those shares in a brokerage account, or selling those shares to a third party.
(b) In the event Employee resigns, without “good reason,” or retires before the end of the Employment Term, the unvested portion of the original 25 million share stock grant shall cease vesting and all unvested shares shall no longer be available for the Employee to earn.
(c) No interest shall accrue on or be paid with respect to any portion of any payments hereunder.
8. Non-Competition. (a) The term “ Non-Compete Term ” shall mean the period during which Employee is employed hereunder and (x) in the event Employee’s employment is terminated by the Company for any reason other than “cause” or by Employee for “good reason,” the three-month period following such termination, (y) in the event Employee’s employment is terminated by the Company for “cause” or by Employee for any reason other than “good reason,” the six-month period following such termination.
During the Non-Compete Term:
(i) the Employee will not make any statement or perform any
act intended to advance an interest of any existing or prospective competitor of the Company or any of its Affiliates in any way that will or may injure an interest of the Company or any of its Affiliates in its relationship and dealings with existing or potential customers or clients, or solicit or encourage any other employee of the Company or any of its Affiliates to do any act that is disloyal to the Company or any of its Affiliates or inconsistent with the interest of the
Company or any of its Affiliate’s interests or in violation of any provision of this Agreement;
(ii) the Employee will not discuss with any existing or potential
customers or clients of the Company or any of its Affiliates the present or future availability of services or products of a business, if the Employee has or expects to acquire a proprietary interest in such business or is or expects to be an employee, officer or director of such business, where such services or products are competitive with services or products which the Company or any of its Affiliates provides;
(iii) the Employee will not make any statement or do any act intended to cause any existing or potential customers or clients of the Company or any of its Affiliates to make use of the services or purchase the products of any competitive business in which the Employee has or expects to acquire a proprietary interest or in which the Employee is or expects to be made an employee, officer or director, if such services or products in any way compete with the services or products sold or provided or expected to be sold or provided by the Company or any of its Affiliates to any existing or potential customer or client; and
5
(iv) the Employee will not directly or indirectly (as a director, officer, employee, manager, consultant, independent contractor, advisor or otherwise) engage in competition with, or own any interest in, perform any services for, participate in or be connected with (i) any business or organization which engages in competition with the Company or any of its Affiliates in any geographical area where any business is presently carried on by the Company or any of its Affiliates, or (ii) any business or organization which engages in competition with the Company or any of its Affiliates in any geographical area where any business shall be hereafter, during the period of the Employee’s employment by the Company, carried on by the Company or any of its Affiliates, if such business is then being carried on by the Company or any of its Affiliates in such geographical area; provided , however , that the provisions of this Section 8(a) shall not be deemed to prohibit the Employee’s ownership of not more than one percent (1%) of the total shares of all classes of stock outstanding of any publicly held company.
(b) During the Non-Compete Term, the Employee will not directly or indirectly hire, engage, send any work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor or other person or firm which rendered manufacturing or other services, or sold any products, to the Company or any of its Affiliates if such action by Employee would have a material adverse effect on the business, assets or financial condition of the Company or any of its Affiliates.
(c) In connection with the foregoing provisions of this Section 8, the Employee represents that Employee’s experience, capabilities and circumstances are such that such provisions will not prevent Employee from earning a livelihood. The Employee further agrees that the limitations set forth in this Section 8 (including, without limitation, any time or territorial limitations) are reasonable and properly required for the adequate protection of the businesses of the Company and its Affiliates. It is understood and agreed that the covenants made by the Employee in this Section 8 (and in Section 6 hereof) shall survive the expiration or termination of this Agreement.
(d) For purposes of this Section 8, proprietary interest in a business is ownership, whether through direct or indirect stock holdings or otherwise, of one percent (1%) or more of such business. The Employee shall be deemed to expect to acquire a proprietary interest in a business or to be made an officer or director of such business if such possibility has been discussed with any officer, director, employee, agent, or promoter of such business.
(e) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 8 would be inadequate and, therefore, agrees that the Company and any of its Affiliates shall be entitled to injunctive relief in addition to any other available rights and remedies in cases of any such breach or threatened breach; provided , however , that nothing contained herein shall be construed as prohibiting the Company or any of its Affiliates from pursuing any other rights and remedies available for any such breach or threatened breach.
9. Non-Assignability. (a) Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee, Employee’s beneficiaries, or legal representatives without the Company’s prior written consent; provided , however , that nothing in this Section 9(a) shall preclude the Employee from designating a beneficiary to receive any benefit payable hereunder upon Employee’s death or incapacity.
6
(b) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to exclusion, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect.
10. Binding Effect. Without limiting or diminishing the effect of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and assigns.
11. Notice. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and either delivered in person or sent by first class certified or registered mail, postage prepaid, if to the Company, at the Company’s principal place of business, and if to the Employee, at Employee’s home address, or, in the case of either party, to such other address or addresses as such party shall have designated in writing to the other party hereto.
12. Severability. The Employee agrees that in the event that any court of competent jurisdiction shall finally hold that any provision of Section 6 or 8 hereof is void or constitutes an unreasonable restriction against the Employee, such provision shall not be rendered void but shall apply with respect to such extent as such court may judicially determine constitutes a reasonable restriction under the circumstances. If any part of this Agreement other than Section 6 or 8 is held by a court of competent jurisdiction to be invalid, illegible or incapable of being enforced in whole or in part by reason of any rule of law or public policy, such part shall be deemed to be severed from the remainder of this Agreement for the purpose only of the particular legal proceedings in question and all other covenants and provisions of this Agreement shall in every other respect continue in full force and effect and no covenant or provision shall be deemed dependent upon any other covenant or provision.
13. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times.
14. Entire Agreement; Modifications. This Agreement constitutes the entire and final expression of the agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter hereof. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereto.
15. Relevant Law. This Agreement shall be construed and enforced in accordance with the internal laws of the State of Massachusetts without regard to the conflicts of law principles thereof.
16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
17. Survival. The termination of Employee’s employment hereunder shall not affect the enforceability of Sections 6 or 8.
18. Further Assurances. The parties agree to execute and deliver all such further instruments and take such other and further action as may be reasonably necessary or appropriate to carry out the provisions of this Agreement.
19. Headings. The Section headings appearing in this Agreement are for purposes of easy reference and shall not be considered a part of this Agreement or in any way modify, amend
7
8
Exhibit 10.13
To: Carole Murko
Terms of Separation Dear Carole:
Dear Carole:
This letter confirms the agreement (“Agreement”) between you and Netcapital Inc. (the
“Company”) concerning the terms of your separation and the termination of the Employment Agreement between the Company and you dated March 10, 2020 (the “Employment Agreement”), in exchange for a mutual general release of claims and covenant not to sue.
| 1. | Separation Date: January 7, 2022 (the “Separation Date”). |
| 2. | Return of Company Property: |
You hereby warrant to the Company that you will have returned to the Company all property or data of the Company of any type whatsoever that has been in your possession or control by the Separation Date.
This includes but is not limited to:
| ● | Keys and badges |
| ● | Any equipment |
| ● | Documents and records |
except for such Company property as the Company’s Chief Technology Officer has given you permission to retain on a temporary basis until requested to return such property to the Company.
| 3. | Vesting of Shares: |
Your remaining balance of 8,855 unvested shares of NCPL will vest upon signing this agreement.
| 4. | Severance Pay: |
You will receive severance pay equal to four week’s salary of $7,384.60 before ordinary tax withholding in a lump sum upon signing this agreement.
| 5. | General Release and Waiver of Claims: |
The payments and promises set forth in this Agreement and the Employment Agreement are in full satisfaction of all accrued compensation to which you may be entitled by virtue of your work with the Company or your separation from the Company.
To the fullest extent permitted by law, you and the Company each hereby release and waive any other claims you may have against the other party and its owners, agents, officers, shareholders, employees, directors, attorneys, subscribers, subsidiaries, affiliates, successors and assigns (collectively “Releasees”), whether known or not known from the beginning of time to the date of execution of this Agreement, including, without limitation, claims under any employment laws, including, but not limited to, claims of unlawful discharge, breach of contract, breach of the covenant of good faith and fair dealing, fraud, violation of public policy, defamation, physical injury, emotional distress, claims for additional compensation or benefits arising out of your employment or your separation of employment, claims under Title VII of the 1964 Civil Rights Act, and any other laws and/or regulations relating to employment or employment discrimination, including, without limitation, claims based on age or under the Age Discrimination in Employment Act or Older Workers Benefit Protection Act, and/or claims based on disability or under the Americans with Disabilities Act.
1
| 6. | Non-disparagement: |
Each party agrees that it will not disparage Releasees or their products, services, agents, representatives, directors, officers, shareholders, attorneys, employees, vendors, affiliates, successors or assigns, or any person acting by, through, under or in concert with any of them, with any written or oral statement. Nothing in this paragraph shall prohibit you and the Company from providing truthful information in response to a subpoena or other legal process.
| 7. | Arbitration: |
Except for any claim for injunctive relief arising out of a breach of a party’s obligations to protect the other’s proprietary information, the parties agree to arbitrate, in Delaware, any and all disputes or claims arising out of or related to the validity, enforceability, interpretation, performance or breach of this Agreement, whether sounding in tort, contract, statutory violation or otherwise, or involving the construction or application or any of the terms, provisions, or conditions of this Agreement.
Any arbitration may be initiated by a written demand to the other party. The arbitrator’s decision shall be final, binding, and conclusive. The parties further agree that this Agreement is intended to be strictly construed to provide for arbitration as the sole and exclusive means for resolution of all disputes hereunder to the fullest extent permitted by law. The parties expressly waive any entitlement to have such controversies decided by a court or a jury.
| 8. | Attorneys’ Fees: |
If any action is brought to enforce the terms of this Agreement, the prevailing party will be entitled to recover its reasonable attorneys’ fees, costs, and expenses from the other party, in addition to any other relief to which the prevailing party may be entitled.
| 9. | Confidentiality: |
The contents, terms, and conditions of this Agreement must be kept confidential by you and may not be disclosed except to your immediate family, accountant, or attorneys or pursuant to subpoena or court order. You agree that if you are asked for information concerning this Agreement, you will state only that you and the Company reached an amicable resolution of any disputes concerning your separation from the Company. Any breach of this confidentiality provision shall be deemed a material breach of this Agreement.
| 10. | No Admission of Liability: |
This Agreement is not and shall not be construed or contended by you to be an admission or evidence of any wrongdoing or liability on the part of Releasees, their representatives, heirs, executors, attorneys, agents, partners, officers, shareholders, directors, employees, subsidiaries, affiliates, divisions, successors or assigns.
| 11. | Complete and Voluntary Agreement: |
This Agreement constitutes the entire agreement between you and Releasees with respect to the subject matter hereof and supersedes all prior negotiations and agreements, whether written or oral, relating to such subject matter. Each party acknowledges that neither Releasees nor their agents or attorneys have made any promise, representation or warranty whatsoever, either express or implied, written or oral, which is not contained in this Agreement for the purpose of inducing the other party to execute the Agreement, and each party acknowledges that it has executed this Agreement in reliance only upon such promises, representations and warranties as are contained herein, and that each party is executing this Agreement voluntarily, free of any duress or coercion.
| 12. | Severability: |
The provisions of this Agreement are severable, and if any part of it is found to be invalid or unenforceable, the other parts shall remain fully valid and enforceable. Specifically, should a court, arbitrator, or government agency conclude that a particular claim may not be released as a matter of law, it is the intention of the parties that the general release, the waiver of unknown claims, and the covenant not to sue above shall otherwise remain effective to release any and all other claims.
2
| 13. | Modification; Counterparts; Facsimile/PDF Signatures: |
It is expressly agreed that this Agreement may not be altered, amended, modified, or otherwise changed in any respect except by another written agreement that specifically refers to this Agreement, executed by authorized representatives of each of the parties to this Agreement. This Agreement may be executed in any number of counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument. Execution of a facsimile or PDF copy shall have the same force and effect as execution of an original, and a copy of a signature will be equally admissible in any legal proceeding as if an original.
| 14. | Governing Law: |
This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.
We
advise you to consult an attorney prior to signing this agreement.
3
Exhibit 10.14
NOTE PURCHASE AGREEMENT
This Note Purchase Agreement (this “Agreement”) is dated as of __________________, 2022 by and between Netcapital Inc., a Utah corporation (the “Company”), and the purchaser identified on the signature pages hereto (the “Purchaser”).
WHEREAS, the Company desires to issue and sell to each Purchaser, and each Purchaser, desires to purchase from the Company, a Note (as defined below) with a principal amount as set forth in the Note (the “Offering”).
WHEREAS, the Notes (as defined below) subscribed for pursuant to this Agreement have not been registered under the Securities Act of 1933, as amended (the “Securities Act”). The Offering is being made on a reasonable best efforts basis to “accredited investors,” as defined in Regulation D under the Securities Act in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D thereunder.
NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Purchaser agree as follows:
ARTICLE
I.
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Note (as defined herein), and (b) the following terms have the meanings set forth in this Section 1.1:
“Action” shall have the meaning ascribed to such term in Section 3.1(j).
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Board of Directors” means the board of directors of the Company.
“Business Day” means any day except Saturday, Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the City of New York are authorized or required by law or other governmental action to close.
“Closing” means the closing of the purchase and sale of the Note pursuant to Section 2.1.
“Closing Date” means the Business Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) the Purchasers’ obligations to pay the Purchase Price and (ii) the Company’s obligations to deliver the Note have been satisfied or waived.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the common stock, par value $0.001 per share, of the Company and any other class of securities into which such securities may hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries that would entitle the holder thereof to acquire at any time shares of Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, shares of Common Stock.
“Company Counsel” means Sheppard, Mullin, Richter & Hampton LLP, with offices located at 30 Rockefeller Plaza, New York, NY 10112.
“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of the Notes.
“Disclosure Schedules” shall have the meaning ascribed to such term in Section 3.1.
“Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(r).
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“FCPA” means the Foreign Corrupt Practices Act of 1977, as amended.
“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).
“Intellectual Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).
“Legend Removal Date” shall have the meaning ascribed to such term in Section 4.1(c).
“Liens” means a lien, charge, pledge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.
“Material Adverse Effect” shall mean (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document.
“Material Permits” shall have the meaning ascribed to such term in Section 3.1(m). “Note” means the unsecured convertible promissory note issued by the Company to the Purchaser hereunder, in the form attached hereto as Exhibit A.
“Offering” shall have the meaning ascribed to such term in the preamble to this Agreement.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.
“Purchaser Party” shall have the meaning ascribed to such term in Section 5.3.
“Purchase Price” means the aggregate amount to be paid for the Note purchased hereunder as specified below Purchaser’s name on the signature page of this Agreement and next to the heading “Purchase Price,” in United States dollars and in immediately available funds.
“Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.
“Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.
“Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.
“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).
“Securities” means the Notes and the Conversion Shares.
“Securities Act” means the Securities Act of 1933, as amended.
“Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Stock).
“Trading Day” means a day on which the principal Trading Market is open for trading.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, the OTC Bulletin Board or the OTC Markets (or any successors to any of the foregoing).
“Transaction Documents” means this Agreement, the Note, all exhibits and schedules hereto and any other documents or agreements executed in connection with the transactions contemplated hereunder.
“Transfer Agent” means Equity Stock Transfer, the current transfer agent of the Company, with a mailing address of 237 W 37th Street, #602, New York, NY 10018, and any successor transfer agent of the Company.
ARTICLE
II.
PURCHASE AND SALE
2.1 Closing. Upon satisfaction of the conditions set forth in Sections 2.2 and 2.3, a Closing shall occur at the offices of Company Counsel or such other location as the parties hereto shall mutually agree.
2.2 Deliveries.
(a) On the Closing Date, the Company shall deliver or cause to be delivered to the Purchaser the following:
(i) this Agreement duly executed by the Company; and
(ii) the Note, registered in the name of such Purchaser, in the form set forth as Exhibit A.
(b) On the Closing Date, the Purchaser shall deliver or cause to be delivered to the Company the following:
(i) this Agreement duly executed by such Purchaser; and
(ii) such Purchaser’s Purchase Price by check or wire transfer to the account as specified in writing by the Company.
(iii) a completed accredited investor questionnaire, in the form attached hereto as Exhibit B.
2.3 Closing Conditions.
(a) The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met:
(i) the accuracy in all material respects on the Closing Date of the representations and warranties of the Purchaser contained herein;
(ii) all obligations, covenants and agreements of the Purchaser required to be performed at or prior to the Closing Date shall have been performed; and
(iii) the delivery by the Purchaser of the items set forth in Section 2.2(b) of this Agreement.
(b) The respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following conditions being met:
(i) the accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Company contained herein;
(ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed;
(iii) the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement; and
(iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof.
ARTICLE
III.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. Except as set forth in the disclosure schedules of the Company delivered to the Purchasers at the initial Closing (the “Disclosure Schedules”), which Disclosure Schedules shall be deemed a part hereof and shall qualify any representation made herein to the extent of the disclosure contained in the corresponding section of the Disclosure Schedules, the Company hereby makes the following representations and warranties to each Purchaser:
(a) Subsidiaries. All of the direct and indirect subsidiaries of the Company are set forth on Schedule 3.1(a). The Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any Liens, and all of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities. If the Company has no subsidiaries, all other references to the Subsidiaries or any of them in the Transaction Documents shall be disregarded.
(b) Organization and Qualification. The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation nor default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in: (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification. Notwithstanding the foregoing, for purposes of this Agreement, “Material Adverse Effect” shall not include any event, occurrence, fact, condition or change, directly or indirectly, arising out of or attributable to: (A) general economic or political conditions; (B) conditions generally affecting the industries in which the Company operates; (C) any changes in financial, banking or securities markets in general, including any disruption thereof and any decline in the price of any security or any market index or any change in prevailing interest rates; (D) acts of war (whether or not declared), armed hostilities or terrorism, or the escalation or worsening thereof; (E) any action required or permitted by this Agreement or any action taken (or omitted to be taken) with the written consent of or at the written request of the Purchasers; (F) any changes in applicable laws or accounting rules (including GAAP (as defined below)) or the enforcement, implementation or interpretation thereof; (G) the announcement, pendency or completion of the transactions contemplated by this Agreement; (H) any natural or man-made disaster or acts of God; or (I) any failure by any Company to meet any internal or published projections, forecasts or revenue or earnings predictions (provided that the underlying causes of such failures (subject to the other provisions of this definition) shall not be excluded).
(c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and each of the other Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and each of the other Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, the Board of Directors or the Company’s stockholders in connection herewith or therewith other than in connection with the Required Approvals. This Agreement and each other Transaction Document to which it is a party has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
(d) No Conflicts. The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to which it is a party, the issuance and sale of the Securities and the consummation by it of the transactions contemplated hereby and thereby do not and will not: (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.
(e) Filings, Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than: (i) the Current Report on Form 8-K filing required by the Commission, (ii) the notice and/or application(s) to each applicable Trading Market for the issuance and sale of the Notes and the listing of the Conversion Shares for trading thereon in the time and manner required thereby, and (iii) the filing of a Form D with the Commission and such filings as are required to be made under applicable state securities laws (collectively, the “Required Approvals”).
(f) Issuance of the Securities. The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Conversion Shares and the Warrant Shares, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents.
(g) Capitalization. The capitalization of the Company is as set forth on Schedule 3.1(g), which Schedule 3.1(g) shall also include the number of shares of Common Stock owned beneficially, and of record, by Affiliates of the Company as of the date hereof. Except as set forth on Schedule 3.1(g), the Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock options under the Company’s stock option plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock purchase plans and pursuant to the conversion and/or exercise of Common Stock Equivalents outstanding as of the date of the most recently filed periodic report under the Exchange Act. No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as set forth on Schedule 3.1(g) and except as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. All of the outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale of the Securities. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.
(h) SEC Reports; Financial Statements. Except as set forth on Schedule 3.1(h), the Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Reports”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Company is not and since its incorporation never has been a “shell” company as defined in Section 405 of the Securities Act. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.
(i) Material Changes; Undisclosed Events, Liabilities or Developments. Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in a subsequent SEC Report filed prior to the date hereof: (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option and restricted stock plans. The Company does not have pending before the Commission any request for confidential treatment of information. Except for the issuance of the Securities contemplated by this Agreement or as set forth on Schedule 3.1(i), no event, liability, fact, circumstance, occurrence or development has occurred or exists or is reasonably expected to occur or exist with respect to the Company or its Subsidiaries or their respective businesses, properties, operations, assets or financial condition, that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made or deemed made that has not been publicly disclosed at least one Trading Day prior to the date that this representation is made.
(j) Litigation. Except as may be disclosed in the SEC Reports, there is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.
(k) Labor Relations. No labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company, which could reasonably be expected to result in a Material Adverse Effect. None of the Company’s or its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company or such Subsidiary, and neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relationships with their employees are good. To the knowledge of the Company, no executive officer of the Company or any Subsidiary, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters. The Company and its Subsidiaries are in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(l) Compliance. Neither the Company nor any Subsidiary: (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any judgment, decree or order of any court, arbitrator or other governmental authority, or (iii) is or has been in violation of any statute, rule, ordinance or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect.
(m) Regulatory Permits. Except as disclosed in the SEC Reports, the Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.
(n) Title to Assets. Except as set forth in Schedule 3.1(n), the Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for (i) Liens as may be disclosed in the SEC Reports, (ii) Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries, and (iii) Liens for the payment of federal, state or other taxes, for which appropriate reserves have been made therefor in accordance with GAAP and, the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in compliance.
(o) Intellectual Property. The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights as described in the SEC Reports as necessary or required for use in connection with their respective businesses and which the failure to so have could have a Material Adverse Effect (collectively, the “Intellectual Property Rights”). None of, and neither the Company nor any Subsidiary has received a notice (written or otherwise) that any of, the Intellectual Property Rights has expired, terminated or been abandoned, or is expected to expire or terminate or be abandoned, within two (2) years from the date of this Agreement. Neither the Company nor any Subsidiary has received, since the date of the latest audited financial statements included within the SEC Reports, a written notice of a claim or otherwise has any knowledge that the Intellectual Property Rights violate or infringe upon the rights of any Person, except as could not have or reasonably be expected to not have a Material Adverse Effect. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights. The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(p) Insurance. Except as set forth on Schedule 3.1(p), the Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged, including, but not limited to, directors and officers insurance coverage. Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.
(q) Transactions With Affiliates and Employees. Except as set forth in the SEC Reports, none of the officers or directors of the Company or any Subsidiary and, to the knowledge of the Company, none of the employees of the Company or any Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, providing for the borrowing of money from or lending of money to or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee, stockholder, member or partner, in each case in excess of $120,000 other than for: (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company, and (iii) other employee benefits, including stock option agreements under any stock option plan of the Company.
(r) Sarbanes-Oxley; Internal Accounting Controls. The Company and the Subsidiaries are in compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any and all applicable rules and regulations promulgated by the Commission thereunder that are effective as of the date hereof and as of the Closing Date. Except as disclosed in the SEC Reports, the Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company and the Subsidiaries have established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and the Subsidiaries and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. The Company’s certifying officers have evaluated the effectiveness of the disclosure controls and procedures of the Company and the Subsidiaries as of the end of the period covered by the most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”). The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no changes in the internal control over financial reporting (as such term is defined in the Exchange Act) of the Company and its Subsidiaries that have materially affected, or is reasonably likely to materially affect, the internal control over financial reporting of the Company and its Subsidiaries.
(s) Certain Fees. Except for fees payable by the Company to ThinkEquity, a division of Fordham Financial Management, Inc., no brokerage or finder’s fees or commissions are or will be payable by the Company or any Subsidiary to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Transaction Documents.
(t) Private Placement. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers as contemplated hereby. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading Market.
(u) No “Bad Actor” Disqualification. The Company has exercised reasonable care to determine whether any Company Covered Person (as defined below) is subject to any of the “bad actor” disqualifications described in Rule 506(d)(1)(i) through (viii), as modified by Rules 506(d)(2) and (d)(3), under the Securities Act (“Disqualification Events”). To the Company’s knowledge, no Company Covered Person is subject to a Disqualification Event. The Company has complied, to the extent required, with any disclosure obligations under Rule 506(e) under the Securities Act. For purposes of this Agreement, “Company Covered Persons” are those persons specified in Rule 506(d)(1) under the Securities Act; provided, however, that Company Covered Persons do not include (a) any Purchaser, or (b) any person or entity that is deemed to be an affiliated issuer of the Company solely as a result of the relationship between the Company and any Purchaser.
(v) Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner so that it will not become an “investment company” subject to registration under the Investment Company Act of 1940, as amended.
(w) Registration Rights. Except as may be disclosed in the SEC Reports, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company or any Subsidiary.
(x) Listing and Maintenance Requirements. The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration. Except as may be disclosed in the SEC Reports, the Company has not, in the 12 months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.
(y) Disclosure. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents and as set forth in Schedule 3.1(y), the Company confirms that neither it nor any other Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that it believes constitutes or might constitute material, non-public information. The Company understands and confirms that the Purchasers will rely on the foregoing representation in effecting transactions in securities of the Company. All of the disclosure furnished by or on behalf of the Company to the Purchasers regarding the Company and its Subsidiaries, their respective businesses and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The press releases disseminated by the Company during the twelve months preceding the date of this Agreement taken as a whole do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made and when made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.
(z) No Integrated Offering. Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of (i) the Securities Act which would require the registration of any such securities under the Securities Act, or (ii) any applicable shareholder approval provisions of any Trading Market on which any of the securities of the Company are listed or designated.
(aa) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and each of its Subsidiaries (i) has made or filed all United States federal, state and local income and all foreign income and franchise tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, whether or not shown or determined to be due on such returns, reports and declarations, and (iii) has set aside on its books provision reasonably adequate for the payment of all material taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company or of any Subsidiary know of no basis for any such claim.
(bb) No General Solicitation. Neither the Company nor any Person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the Purchasers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.
(cc) Foreign Corrupt Practices. Neither the Company nor any Subsidiary, nor any agent or other Person acting on behalf of the Company or any Subsidiary, has: (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company or any Subsidiary (or made by any Person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of FCPA.
(dd) Accountants. The Company’s accounting firm is set forth in the SEC Reports. To the knowledge and belief of the Company, such accounting firm: (i) is a registered public accounting firm as required by the Exchange Act and (ii) shall express its opinion with respect to the financial statements to be included in the Company’s Annual Report for the fiscal year ending April 30, 2022.
(ee) No Disagreements with Accountants and Lawyers. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers which could affect the Company’s ability to perform any of its obligations under any of the Transaction Documents.
(ff) Acknowledgment Regarding Purchasers’ Purchase of Securities. The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchasers’ purchase of the Securities. The Company further represents to each Purchaser that the Company’s decision to enter into this Agreement and the other Transaction Documents has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.
(gg) Acknowledgment Regarding Purchaser’s Trading Activity. Anything in this Agreement or elsewhere herein to the contrary notwithstanding (except for Section 4.5 hereof), it is understood and acknowledged by the Company that: (i) none of the Purchasers has been asked by the Company to agree, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified term, (ii) past or future open market or other transactions by any Purchaser, specifically including, without limitation, Short Sales or “derivative” transactions, before or after a closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities, (iii) any Purchaser, and counter-parties in “derivative” transactions to which any such Purchaser is a party, directly or indirectly, may presently have a “short” position in the Common Stock, and (iv) each Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction. The Company further understands and acknowledges that (y) one or more Purchasers may engage in hedging activities at various times during the period that the Securities are outstanding, including, without limitation, during the periods that the value of the Conversion Shares deliverable with respect to Securities are being determined, and (z) such hedging activities (if any) could reduce the value of the existing stockholders’ equity interests in the Company at and after the time that the hedging activities are being conducted. The Company acknowledges that such aforementioned hedging activities do not constitute a breach of any of the Transaction Documents.
(hh) Regulation M Compliance. The Company has not, and no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Company’s placement agent in connection with the placement of the Securities.
(ii) Stock Option Plans. Except as set forth on Schedule 3.1(ii), the Company does not currently have or maintain any stock option or other equity incentive plan for its directors, employees or consultants.
(jj) Office of Foreign Assets Control. Neither the Company nor any Subsidiary nor any director, officer, agent, employee or affiliate of the Company or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”).
(kk) U.S. Real Property Holding Corporation. The Company is not and has never been a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon Purchaser’s request.
(ll) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries or Affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries or Affiliates owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of any class of voting securities or twenty-five percent or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or Affiliates exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.
(mm) Money Laundering. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial record-keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, applicable money laundering statutes and applicable rules and regulations thereunder (collectively, the “Money Laundering Laws”), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any Subsidiary with respect to the Money Laundering Laws is pending or, to the knowledge of the Company or any Subsidiary, threatened.
3.2 Representations and Warranties of the Purchasers. Each Purchaser, for itself and for no other Purchaser, hereby represents and warrants as of the date hereof and as of the Closing Date to the Company as follows (unless as of a specific date therein):
(a) Organization; Authority. Such Purchaser is either an individual or an entity duly incorporated or formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation with full right, corporate, partnership, limited liability company or similar power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of the Transaction Documents and performance by such Purchaser of the transactions contemplated by the Transaction Documents have been duly authorized by all necessary corporate, partnership, limited liability company or similar action, as applicable, on the part of such Purchaser. Each Transaction Document to which it is a party has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
(b) Own Account. Such Purchaser understands that the Securities are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Securities in violation of the Securities Act or any applicable state securities law (this representation and warranty not limiting such Purchaser’s right to sell the Securities in compliance with applicable federal and state securities laws). Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business.
(c) Purchaser Status. At the time such Purchaser was offered the Securities, it was, and as of the date hereof it is, and on each date on which it converts any Notes or exercises any Warrants, it will be either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act.
(d) Experience of Such Purchaser. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.
(e) General Solicitation. Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.
(f) No “Bad Actor” Disqualification. Neither (A) such Purchaser nor (B) any entity that controls such Purchaser or is under the control of, or under common control with, such Person, is subject to any Disqualification Event, except for Disqualification Events covered by Rule 506(d)(2)(ii) or (iii) or (d)(3) under the Securities Act and disclosed in writing in reasonable detail to the Company. Such Purchaser has exercised reasonable care to determine the accuracy of the representation made by such Purchaser in this paragraph, and agrees to notify the Company if such Purchaser becomes aware of any fact that makes the representation given by such Purchaser hereunder inaccurate.
The Company acknowledges and agrees that the representations contained in this Section 3.2 shall not modify, amend or affect such Purchaser’s right to rely on the Company’s representations and warranties contained in this Agreement or any representations and warranties contained in any other Transaction Document or any other document or instrument executed and/or delivered in connection with this Agreement or the consummation of the transaction contemplated hereby.
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights and obligations of a Purchaser under this Agreement.
(b) The Purchasers agree to the imprinting, so long as is required by this Section 4.1, of a legend on any of the Securities in the following form or a substantially similar form as may be required by the Company’s Transfer Agent:
[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE] [NOR THE SECURITIES FOR WHICH THIS SECURITY MAY BE EXERCISED] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY [AND THE SECURITIES ISSUABLE UPON [CONVERSION/EXERCISE] OF THIS SECURITY] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.
The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the appropriate Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including, if the Securities are registered under a registration statement, the preparation and filing of any required prospectus supplement under Rule 424(b)(3) under the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.
(c) Certificates evidencing the Conversion Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) while a registration statement covering the resale of such security is effective under the Securities Act, (ii) following any sale of such Conversion Shares pursuant to Rule 144, (iii) if such Conversion Shares are eligible for sale under Rule 144, without the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such Conversion Shares and without volume or manner-of-sale restrictions, or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company shall cause its counsel to issue a legal opinion to the Transfer Agent promptly after the events described in clauses (i)-(iv) in the immediately preceding sentence if required by the Transfer Agent to effect the removal of the legend hereunder. If all or any Notes are converted at a time when there is an effective registration statement to cover the resale of the Conversion Shares, or if such Conversion Shares may be sold under Rule 144 and the Company is then in compliance with the current public information required under Rule 144, or if the Conversion Shares may be sold under Rule 144 without the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such Conversion Shares and without volume or manner-of-sale restrictions or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission) then such Conversion Shares shall be issued free of all legends. The Company agrees that following such time as such legend is no longer required under this Section 4.1(c), it will, no later than three Trading Days following the delivery by a Purchaser to the Company or the Transfer Agent of a certificate representing Conversion Shares, as applicable, issued with a restrictive legend (such third Trading Day, the “Legend Removal Date”), deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 4. Certificates for Conversion Shares subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Purchaser by crediting the account of the Purchaser’s prime broker with the Depository Trust Company System as directed by such Purchaser.
4.3 Furnishing of Information; Public Information.
Until the date that no Purchasers own any Notes, the Company agrees to timely file (or obtain extensions in respect thereof and file within the applicable grace period) after the date hereof all reports required to be filed by the Company on the date hereof pursuant to the Exchange Act even if the Company is not then subject to the reporting requirements of the Exchange Act.
4.4 Integration. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Notes or that would be integrated with the offer or sale of the Notes for purposes of the rules and regulations of any Trading Market such that it would require shareholder approval prior to the closing of such other transaction unless shareholder approval is obtained before the closing of such subsequent transaction.
4.5 Certain Transactions and Confidentiality. Each Purchaser, severally and not jointly with the other Purchasers, covenants that neither it, nor any Affiliate acting on its behalf or pursuant to any understanding with it, will (i) execute any Short Sales, of any of the Company’s securities during the period commencing with the execution of this Agreement and ending at such time that the transactions contemplated by this Agreement are first publicly announced pursuant to the initial press release disclosing the transactions contemplated by this Agreement or (ii) from the date hereof until the date that the Notes are no longer outstanding, execute any Short Sales of the Common Stock (provided that this provision shall not prohibit any sales made where a corresponding Notice of Conversion for the Notes is tendered to the Company and the shares received upon such conversion or exercise are used to close out such sale) (a “Prohibited Short Sale”). Each Purchaser, severally and not jointly with the other Purchasers, covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company pursuant to the initial press release as described above, such Purchaser will maintain the confidentiality of the existence and terms of this transaction and the information included in the Transaction Documents and the Disclosure Schedules. Notwithstanding the foregoing, and notwithstanding anything contained in this Agreement to the contrary, the Company expressly acknowledges and agrees that (i) no Purchaser makes any representation, warranty or covenant hereby that it will not engage in effecting transactions in any securities of the Company after the time that the transactions contemplated by this Agreement are first publicly announced pursuant to the initial press release as described above, (ii) except for a Prohibited Short Sale, no Purchaser shall be restricted or prohibited from effecting any transactions in any securities of the Company in accordance with applicable securities laws from and after the time that the transactions contemplated by this Agreement are first publicly announced pursuant to the initial press release as described above, and (iii) no Purchaser shall have any duty of confidentiality to the Company or its Subsidiaries after the issuance of the initial press release as described above. Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser’s assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser’s assets, the covenant set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to purchase the Securities covered by this Agreement.
ARTICLE V.
COVENANTS
5.1 Non-Public Information. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company covenants and agrees that neither it, nor any other Person acting on its behalf, will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that the Purchaser shall be relying on the foregoing covenant in effecting transactions in securities of the Company.
5.2 Use of Proceeds. The Company shall use the net proceeds from the sale of the Note hereunder for general corporate and working capital purposes.
5.3 Indemnification of Purchaser. Subject to the provisions of this Section 5.3, the Company will indemnify and hold the Purchaser and its directors, officers, shareholders, members, partners, employees and agents (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title), each Person who controls such Purchaser (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, members, partners or employees (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title) of such controlling person (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against a Purchaser in any capacity, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of such Purchaser, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Purchaser’s representations, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser may have with any such stockholder or any violations by the Purchaser of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than one such separate counsel. The Company will not be liable to any Purchaser Party under this Agreement (y) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (z) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by such Purchaser Party in this Agreement or in the other Transaction Documents.
ARTICLE
VI.
MISCELLANEOUS
6.1 Expenses. Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all fees, stamp taxes and other taxes and duties levied in connection with the delivery of any Note to the Purchasers.
6.2 Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.
6.3 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30 p.m. (New York City time) on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Business Day or later than 5:30 p.m. (New York City time) on any Business Day, (c) the second Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto.
6.4 Amendments; Waivers. No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Company and the Purchasers holding at least 50% in interest of the Notes then outstanding or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
6.5 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.
6.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchaser (other than by merger). Any Purchaser may assign any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Note, provided that such transferee agrees in writing to be bound, with respect to the transferred Note, by the provisions of the Transaction Documents that apply to the “Purchasers.”
6.7 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.
6.8 Governing Law; Venue. All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. All disputes arising out of or in connection with this Agreement or any of the Transaction Documents shall be submitted to the federal or state courts sitting in the State of New York, County of New York. The parties hereto submit to the jurisdiction of said courts.
6.9 Survival. The representations and warranties of the parties hereto shall survive the Closing and the delivery of the Note for the applicable statute of limitations.
6.10 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.
6.11 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
6.12 Replacement of Note. If the Note purchase hereby is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new Note, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction. The applicant for a Note under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement Note.
6.13 Independent Nature of Purchasers’ Obligations and Rights. The obligations of the Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance or non-performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. The Purchaser shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. The Purchaser has been represented by its own separate legal counsel in their review and negotiation of the Transaction Documents. The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers.
6.14 Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.
6.15 Construction. The parties agree that each of them and/or their respective counsel has reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments hereto.
6.16 WAIVER OF JURY TRIAL. IN ANY ACTION, SUIT, OR PROCEEDING IN ANY JURISDICTION BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY, THE PARTIES EACH KNOWINGLY AND INTENTIONALLY, TO THE GREATEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY ABSOLUTELY, UNCONDITIONALLY, IRREVOCABLY AND EXPRESSLY WAIVES FOREVER TRIAL BY JURY.
6.17 Brokers or Finders. ThinkEquity, a U.S.-registered broker-dealer (“ThinkEquity”), will be paid by the Company a referral fee of ten percent (10%) of the aggregate gross Purchase Price of the Notes introduced by them. The Company will also pay certain expenses of ThinkEquity in connection with the Notes, not to exceed $10,000.
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, the parties hereto have caused this Note Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
NETCAPITAL INC. By: ______________________________________ Name: Title: With a copy to (which shall not constitute notice): Sheppard, Mullin, Richter & Hampton LLP 30 Rockefeller Plaza New York, NY 10112 Attn: Richard Friedman |
Address for Notice: 745 Atlantic Avenue, Suite 1000, Boston, MA, 02111 |
[SIGNATURE PAGE FOR PURCHASER FOLLOWS]
IN WITNESS WHEREOF, the undersigned have caused this Note Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
Purchase Price: $_____________
| If the Purchaser is an INDIVIDUAL, and if purchased as JOINT TENANTS, as TENANTS IN COMMON, or as COMMUNITY PROPERTY: | ||
Purchaser: _________________________ _________________________ Co-Purchaser (if applicable): _________________________ _________________________ |
________________ ________________ |
__________________________ __________________________ __________________________ __________________________ |
If the Purchaser is a PARTNERSHIP, CORPORATION, LIMITED LIABILITY COMPANY or TRUST:
______________________________________ Name: _________________________ |
___________________________________ ___________________________________ ___________________________________ |
EXHIBIT A
FORM OF NOTE
EXHIBIT B
AMESITE INC.
ACCREDITED
INVESTOR CERTIFICATION
For Individual Investors Only
(all Individual Investors must INITIAL where appropriate):
Initial______ I have a net worth of at least US$1 million either individually or through aggregating my individual holdings and those in which I have a joint, community property or other similar shared ownership interest with my spouse. (For purposes of calculating your net worth under this paragraph, (a) your primary residence shall not be included as an asset; (b) indebtedness secured by your primary residence, up to the estimated fair market value of your primary residence at the time of your purchase of the securities, shall not be included as a liability (except that if the amount of such indebtedness outstanding at the time of your purchase of the securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of your primary residence, the amount of such excess shall be included as a liability); and (c) indebtedness that is secured by your primary residence in excess of the estimated fair market value of your primary residence at the time of your purchase of the securities shall be included as a liability.)
Initial______ I have had an annual gross income for the past two years of at least US$200,000 (or US$300,000 jointly with my spouse) and expect my income (or joint income, as appropriate) to reach the same level in the current year.
Initial______ I am a director or executive officer of Amesite Inc.
For
Non-Individual Investors (Entities)
(all Non-Individual Investors must INITIAL where appropriate):
Initial______ The investor certifies that it is a partnership, corporation, limited liability company or business trust that is 100% owned by persons who meet at least one of the criteria for Individual Investors set forth above (in which case each such person must complete the Accreditor Investor Certification for Individuals above as well the remainder of this questionnaire).
Initial______ The investor certifies that it is a partnership, corporation, limited liability company or business trust that has total assets of at least US$5 million and was not formed for the purpose of investing the Company.
Initial______ The investor certifies that it is an employee benefit plan whose investment decision is made by a plan fiduciary (as defined in ERISA §3(21)) that is a bank, savings and loan association, insurance company or registered investment advisor.
Initial______ The investor certifies that it is an employee benefit plan whose total assets exceed US$5,000,000 as of the date of this Agreement.
Initial______ The undersigned certifies that it is a self-directed employee benefit plan whose investment decisions are made solely by persons who meet at least one of the criteria for Individual Investors.
Initial______ The investor certifies that it is a U.S. bank, U.S. savings and loan association or other similar U.S. institution acting in its individual or fiduciary capacity.
Initial______ The undersigned certifies that it is a broker-dealer registered pursuant to §15 of the Securities Exchange Act of 1934.
Initial______ The investor certifies that it is an organization described in §501(c)(3) of the Internal Revenue Code with total assets exceeding US$5,000,000 and not formed for the specific purpose of investing in the Company.
Initial______ The investor certifies that it is a trust with total assets of at least US$5,000,000, not formed for the specific purpose of investing in the Company, and whose purchase is directed by a person with such knowledge and experience in financial and business matters that such person is capable of evaluating the merits and risks of the prospective investment.
Initial______ The investor certifies that it is a plan established and maintained by a state or its political subdivisions, or any agency or instrumentality thereof, for the benefit of its employees, and which has total assets in excess of US$5,000,000.
Initial______ The investor certifies that it is an insurance company as defined in §2(13) of the Securities Act of 1933, or a registered investment company.
Initial______ The investor certifies that it is an investment company registered under the Investment Company Act of 1940, a business development company as defined in section 2(a)(48) of the Securities Act of 1933, as amended or a Small Business Investment Company licensed by the U.S. Small Business Administration Under section 301(c) or (d) of the Small Business Investment Act of 1985.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement on Form S-1 of our audit report dated August 31, 2021, with respect to the consolidated balance sheets of Netcapital Inc. and Subsidiaries 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 to the financial statements. We also consent to the reference to our Firm under the heading “Experts” in the Registration Statement.
Fruci & Associates II, PLLC
February 10, 2022